QUOTE OF THE MONTH
'Given the state of the global economy, the only possible cause of these surging asset prices is the wholesale purchase of financial assets by the Bank, the Federal Reserve and other central banks. This is central banking via asset bubble creation: QE Infinity, a path without exit.
Mr Carney, far from wanting to damp this activity down, seems keen to extend and enlarge it. The assets (and also the liabilities) of the British banking sector are now around four times national income. You only have to look at the destruction wreaked on Ireland and Iceland to understand the risks of running an engine on a chassis too small to bear the load.
But Mr Carney doesn’t care. Noting nonchalantly that, based on current trends, British bank assets would grow to nine times the size of the economy by 2050, he suggested – quoting the former Barclays chief Bob Diamond – that it was time to welcome an industry that can “be both a global good and a national asset”.
You do have to wonder if his departure from the land of hockey pucks, grizzlies and maple syrup has sent the poor man crazy. Yes, of course, the UK cannot simply wish its financial industry away from these shores. And yes, it creates jobs and pays taxes. And yes, the Bank of England is making some genuine efforts to improve both bank capitalisation and bank risk management.
But who is he kidding? No country ever, anywhere, has managed to abolish financial crises. Since the birth of modern banking, there have been regular crises. No sooner is one stable door locked, bolted, watched and guarded, than a new door emerges somewhere in the unlit spaces far from view – somewhere you haven’t even thought to look. Our current financial crisis has already caused the longest depression not only in British but in European history. It’s almost impossible to imagine how bad the next one will be.
The fact, as psychologists have observed, is that humans are prey to both optimism bias – things will turn out better than they do… it’s different this time… hey, I’m smarter now – and anchoring bias – the future probably looks a little like today.
To these two factors add the reality that the “sell side” in financial markets – roughly speaking, Goldman Sachs and its peers – is far better resourced, vocal and politically connected than the poor old “buy side” (roughly speaking: you and your battered old pension fund). The result is that our financial markets are at permanent risk of inflated valuations and irrational exuberance.
We can’t change reality. Greed will always have a tendency to win out over experience. Asset markets will always want to froth. Industries with money will always secure more political influence than they ought to have. The best-regulated markets will always be well protected against the last crisis, but vulnerable to the next one.
These things we can’t alter. They are the financial world’s equivalent of Original Sin – the result of our fallen state. But we don’t have to make things worse. We could tackle excess leverage and poor asset quality instead of just playing “extend and pretend, pray and delay, divert and deflect”. We don’t have to tell bankers that moral hazard no longer applies. We don’t have to use central bank (that is, in effect, taxpayer) money to inflate unsustainable asset bubbles. We don’t have to watch complacently as yet another unsustainable boom is born of yet another unsustainable bubble.
A crisis is unfolding, born of excess debt and excess leverage in toxic combination. That crisis is unfolding now. And neither Mr Carney nor our politicians are doing anything about it.'
- Mitch Feierstein
Mr Carney, far from wanting to damp this activity down, seems keen to extend and enlarge it. The assets (and also the liabilities) of the British banking sector are now around four times national income. You only have to look at the destruction wreaked on Ireland and Iceland to understand the risks of running an engine on a chassis too small to bear the load.
But Mr Carney doesn’t care. Noting nonchalantly that, based on current trends, British bank assets would grow to nine times the size of the economy by 2050, he suggested – quoting the former Barclays chief Bob Diamond – that it was time to welcome an industry that can “be both a global good and a national asset”.
You do have to wonder if his departure from the land of hockey pucks, grizzlies and maple syrup has sent the poor man crazy. Yes, of course, the UK cannot simply wish its financial industry away from these shores. And yes, it creates jobs and pays taxes. And yes, the Bank of England is making some genuine efforts to improve both bank capitalisation and bank risk management.
But who is he kidding? No country ever, anywhere, has managed to abolish financial crises. Since the birth of modern banking, there have been regular crises. No sooner is one stable door locked, bolted, watched and guarded, than a new door emerges somewhere in the unlit spaces far from view – somewhere you haven’t even thought to look. Our current financial crisis has already caused the longest depression not only in British but in European history. It’s almost impossible to imagine how bad the next one will be.
The fact, as psychologists have observed, is that humans are prey to both optimism bias – things will turn out better than they do… it’s different this time… hey, I’m smarter now – and anchoring bias – the future probably looks a little like today.
To these two factors add the reality that the “sell side” in financial markets – roughly speaking, Goldman Sachs and its peers – is far better resourced, vocal and politically connected than the poor old “buy side” (roughly speaking: you and your battered old pension fund). The result is that our financial markets are at permanent risk of inflated valuations and irrational exuberance.
We can’t change reality. Greed will always have a tendency to win out over experience. Asset markets will always want to froth. Industries with money will always secure more political influence than they ought to have. The best-regulated markets will always be well protected against the last crisis, but vulnerable to the next one.
These things we can’t alter. They are the financial world’s equivalent of Original Sin – the result of our fallen state. But we don’t have to make things worse. We could tackle excess leverage and poor asset quality instead of just playing “extend and pretend, pray and delay, divert and deflect”. We don’t have to tell bankers that moral hazard no longer applies. We don’t have to use central bank (that is, in effect, taxpayer) money to inflate unsustainable asset bubbles. We don’t have to watch complacently as yet another unsustainable boom is born of yet another unsustainable bubble.
A crisis is unfolding, born of excess debt and excess leverage in toxic combination. That crisis is unfolding now. And neither Mr Carney nor our politicians are doing anything about it.'
- Mitch Feierstein
posted by erc @ 2:47 pm
