Friday, January 30, 2009
Cull the Banks
My pal Nassim (thanks to the incomparable Dave Lull for the links) has been upsetting people. I like his remark, 'I hate traders' and his view that the only function of derivatives is to rip off clients. I sort of gathered this when various City types used to tell me they were essential to 'smooth' markets, a construction obviously designed simultaneously to soothe and baffle. Nassim also says the banks have to be nationalised, an idea that upsets Frank. Frank and many others mistrust the competence of governments, reasonably enough in view of the postwar history of nationalisation. But I think Nassim is saying this because he believes banking is an industry that has gone entirely rogue. It cannot be trusted to redeem itself. The best evidence for this was (is?) their continued use of risk models that, outside banking, have been discredited for at least 20 years. Further evidence in recent days has come from the bankers who have started actually talking. They so plainly still don't get the enormity of what they have done that an enforced cull of all bank boardrooms may well be the only option. They are, as I suspected they would, behaving like Hitler in his bunker. He blamed the German people for not being good enough; they're blaming the entire non-banking world and then tossing us the condescending admission that they did 'make a few mistakes'. We may have to move quickly with this cull - Dick Fuld flogged a house to his wife for $100 to protect his assets from the assorted law suits flying his way. God knows what the others are up to.
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A blog about, among other things, imaginary ideas - What ifs? and Imagine thats. What if photographs looked nothing like what we see with our eyes? Imagine that the Berlin Wall had never come down. What if we were the punchline of an interminable joke? All contributions welcome.
Yes, that $100 house takes the biscuit - and another "friend" who mailed all his and his wife's valuables to his friends and relations while under house arrest awaiting trial for massive unprecedented fraud.
ReplyDeleteNot fit for purpose is too right- can they at least all send their obscene bonuses and golden goodbyes and handshakes back to us taxpayers?
I think you are right that they just cannot see the enormity and crap of it all. A bit like the various industries that did not realise they were redundant until the world had moved on (eg music industry).
Or we could set up some new ones, banks that is, not hard to do in this inter web age.
ReplyDeleteI'm not sure of the final answer for banking, except that it should be based on the ideas of Professor Antal Fekete, which are in turn based on the Real Bills Doctrine of Adam Smith and the exemplary way the Bank of England presided over the benign growth in world trade 1815-1914. Use something solid that's been proven to work.
ReplyDeleteI agree with Taleb that “We should not trust these bankers; look at their track record. They know we’re going to bail them out. They hold us as hostages.” I agree with him that we should be prepared to let banks go bust. At least some of the time.
I'm not sure about depositor protection and how far it can extend without bankrupting countries.
I agree with Frank Wilson when he says "Fannie Mae and Freddie Mac are government entities, Nassim, remember?"
As for honouring those that foresaw the problem I continue to salute not so much Nouriel Roubini but Ron Paul, who spotted in 2002 that Carter and Clinton government interference in the mortgage market was bound to make much worse an asset bubble caused by lax monetary policy by the Federal Reserve. Add to that Roubini's prescience over 'shadow banking' - though it seems clear that by far the main problem was CDOs with subprime mortgages as the poison inside, not Credit Default Swaps and other derivatives. I'm not as down on derivatives as a whole as Nassim now is. But he knows more than I do. I agree with him about Basel II and Value at Risk. Having such faux standardisation was to create a drastically stupid single point of failure for the whole banking system. Robust systems are not built that way, as Vint Cerf will tell you.
The conspiracy-minded person might want to ask if such an elementary mistake was merely stupidity. In the light of Basel II being under the aegis of the BIS. The history of which in the 30s and 40s was not whiter than white, to put it mildly. Not that that proves evil intent today. What it does prove is that not all central bankers are saints all the time. A discussion for another time perhaps.
What to do about it? I gave two simple answers earlier. Sorry can be hardest thing and could do some real good. And tax cuts are always fun to try.
Chasing the likes of Fuld for his ill-gotten gains is fine, if there's a legal basis for it. But don't let's kid ourselves that it's at all material. The key outflow that should never have happened was as dividends. Such money has gone. The smart shareholders moved on long ago. Trying to exact revenge on a few ex-CEOs that are annoyingly richer than us, who have of course always done an honest day's work for ridiculously low pay, is just another form of denial.
We have a problem. Over-demonising a few more obvious culprits isn't the smart way to go. It's good that the likes of Taleb and Niall Ferguson are chatting it over. Back in the UK there's a lot to learn from two prescient women, Ann Pettifor and Gillian Tett. For the rest of us there's always prayer. You may not think I'm joking before this is over.
Unfortunately, "the others" you are wondering about will end up running any nationalized banks. Despite the Obama Administration pledge not to hire any lobbyists, the new US Secretary of the Treasury just named a Goldman Sachs lobbyist as his chief-of-staff. Plus ça change...
ReplyDelete(BTW, the $100 house sale dodge won't work these days. Fuld definitely needs more up-to-date attorneys.)
The problem, however, is that the banks and the government are already in bed with each other. The financing debacle was caused by the two working in consort. I have worked for both the U.S. federal government and a large corporation. Government and corporations are both enemoes of free enterprise. Add to that their general incompetence and neither is worth trusting with your money. I don't what the situation is like elsewhere, but two politicians over here - Chris Dodd and Barney Frank - ought to be headed to jail, not chairing Congressional committees.
ReplyDeleteHere in the United States, gun sales have never been higher as the benighted populace arms itself
ReplyDeleteagainst imagined home invasions by boogie men who will rape, pillage, and steal the flat screen TV's. Meanwhile, these fools are being robbed blind by genuine thieves in pin-striped suits who are looting retirement plans and pension funds through their greed and ineptitude.
"Mr. Ferguson was only slightly more sympathetic. He suggested that the crisis was bound to happen, in part, as a result of “stupidity” by so many. He also suggested that we are about to enter what he calls a “global lost decade.” It will be worst in he United States, he said, marking “the twilight of the American hegemony.”
ReplyDeleteFerguson has done a U turn. Just two months ago he was saying that America would fare better than Europe.