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Ben Chu
Ben Chu has been a leader writer at The Independent since 2004. Before that he worked at the paper on the comment desk, letters department and the personal finance pages. He studied history at Jesus College, Oxford between 1997 and 2000.
"True wit is nature to advantage dress'd/ What oft was thought, but ne'er so well express'd". Pope's lines sprang to mind when I read this extract from Roger Bootle's new book in the Telegraph today. His concise rebuttal of the arguments of the "free-market vigilantes", who claim that governments are to blame for the economic chaos of the recent past and that the solution is not less freedom for markets but more, is magnificent:
"Their defence is based on one or other of three arguments. First, the market solution is to let failing financial firms fail. If the state intervenes to stop this, the blame for the resulting mess cannot be laid at the door of the market system. Second, banking has been a heavily regulated activity. The regulators have failed in their job. Third, the monetary policy authorities should have paid more attention to the growth of money and credit and the resulting inflation of the property market bubble. In this way, they try to argue that what seems on the face of it to be a failure of markets is in fact a failure of government. So the solution, they say, is not less freedom for markets but more. These people are dangerous. The idea of letting the financial system implode and then waiting for the market to bring spontaneous, healthy revival out of the wreckage might read well on the pages of a book, but in the real world it would bring human misery on a gigantic scale. In today's society, people simply will not tolerate it. If that is what the market system is about then they will have none of it; and rightly so. Certainly there were mistakes made over regulation, but the answer surely involves not lighter regulation but for it to be tougher and tighter (although not more extensive). Similarly, on monetary policy major mistakes were made, but that was because not enough allowance was given for the ability of the markets and private financial institutions to get things horrendously wrong. That redoubles, not reduces, the weakness of unfettered financial markets."
Here's Republican presidential hopeful Mitt Romney at a speech this month on President Obama's deficit spending to fight the recession: "Putting such a spirit-crushing, back-breaking debt burden on our children is unworthy of our national character. That is why I believe that this spending and borrowing is not just economically irresponsible, it is morally wrong." Sound familiar?
Here's the Tory shadow chancellor George Osborne in a speech in August: "Where is the fairness in saddling future generations with our own soaring debts? It may have been that most Conservative of thinkers, Edmund Burke, who said that society is 'a partnership not only between those who are living but between those who are living, those who are dead, and those who are to be born'. But there is nothing remotely progressive about tearing up that partnership and borrowing one pound in every four you spend, as Britain is currently doing." Both the Tories and the Republicans are singing the same hysterical, pseudo-moralising, tune about government borrowing in this terrible economic slump.
Last November David Cameron welcomed Barack Obama's election victory noting that "America has made history and proved to the world that it is a nation eager for change" . Indeed. But let's be very clear. When it comes to economic policy (despite the knots in which the Tories tie themselves trying to avoid criticising Obama) they find themselves ideologically wedded to the forces that so strenuously oppose the change that has taken place in America.
Here's the Tory shadow chancellor George Osborne in a speech in August: "Where is the fairness in saddling future generations with our own soaring debts? It may have been that most Conservative of thinkers, Edmund Burke, who said that society is 'a partnership not only between those who are living but between those who are living, those who are dead, and those who are to be born'. But there is nothing remotely progressive about tearing up that partnership and borrowing one pound in every four you spend, as Britain is currently doing." Both the Tories and the Republicans are singing the same hysterical, pseudo-moralising, tune about government borrowing in this terrible economic slump.
Last November David Cameron welcomed Barack Obama's election victory noting that "America has made history and proved to the world that it is a nation eager for change" . Indeed. But let's be very clear. When it comes to economic policy (despite the knots in which the Tories tie themselves trying to avoid criticising Obama) they find themselves ideologically wedded to the forces that so strenuously oppose the change that has taken place in America.
Say what you like about the Conservatives' economic policy, at least it's clear. Right? Well, not judging by George Osborne's speech today.
Here's what the Shadow Chancellor had to say about deficits early on in his address: "The Conservatives have consistently argued that, in those countries that could afford it because of the budget surpluses or small deficits with which they began the crisis, a well targeted fiscal stimulus could be a sensible part of the policy response to the recession."
But then towards the end of his speech he seemed to be trying to debunk this very point: "What about the argument that cutting spending risks undermining the recovery by reducing demand in the economy? Not only does this argument ignore the risks of a loss of confidence and higher interest rates, it is also too simplistic."
He then went on to quote approvingly a Goldman Sachs economist who believes that fiscal tightening in an open economy “has little appreciable impact on aggregate output” because, in Osborne's words, "it tends to rebalance demand away from non-traded goods and services and towards the traded sector". Never mind, for a moment, the various macro-economic arguments. What's worrying is that the man who could be Chancellor in a matter of months can describe the same policy - deficit financing - as both "sensible" and "simplistic" in the same speech.
Here's what the Shadow Chancellor had to say about deficits early on in his address: "The Conservatives have consistently argued that, in those countries that could afford it because of the budget surpluses or small deficits with which they began the crisis, a well targeted fiscal stimulus could be a sensible part of the policy response to the recession."
But then towards the end of his speech he seemed to be trying to debunk this very point: "What about the argument that cutting spending risks undermining the recovery by reducing demand in the economy? Not only does this argument ignore the risks of a loss of confidence and higher interest rates, it is also too simplistic."
He then went on to quote approvingly a Goldman Sachs economist who believes that fiscal tightening in an open economy “has little appreciable impact on aggregate output” because, in Osborne's words, "it tends to rebalance demand away from non-traded goods and services and towards the traded sector". Never mind, for a moment, the various macro-economic arguments. What's worrying is that the man who could be Chancellor in a matter of months can describe the same policy - deficit financing - as both "sensible" and "simplistic" in the same speech.
Imagine that there had been a great global conflagration which began when boilers with faulty designs around the world simultaneously exploded. Imagine, then, that a politician from a country that had a large market share in the manufacture of those boilers began to lobby against a global effort to make their design safer. How would we regard such behaviour?
Now consider that the London Mayor, Boris Johnson, yesterday went to Brussels to lobby against European Commission plans to impose regulation on the effectively unregulated hedge fund sector, much of which operates from London.
Of course, Johnson and others would take issue with the faulty boiler analogy. Hedge funds, they say, were not responsible for the credit collapse. And the EU directive to bring them under the regulatory umbrella is little more than a sly Franco-German effort to undermine the City of London. We must, they argue, stand up for a successful national industry which brings in considerable revenues to the British Exchequer.
It is true that hedge funds bear less responsibility than the international banks for the credit crash. But the collapse of the Long-Term Capital Management hedge fund in the US in 1998 shows that circumstances can arise in which governments need to rescue failed hedge funds, just like banks. This is why the US government has plans, henceforth, to regulate any financial entity which is large enough to be a systemic risk. In light of last year's disaster, the EU can - and should - follow.
The trouble with Johnson's lobbying is that it is fired by the old belief that the City of London is the goose that lays the golden eggs for the British economy and must not be interfered with under any circumstances. Never mind the costly bank rescues. Never mind the fact that Britain's over-reliance on the financial sector has made our slump especially painful. Never mind the catastrophic failure of the regulatory regime. Some of our political representatives appear to have learnt nothing from the past 12 months.
Obviously, there is no case for legislation that would vindictively kill off hedge funds (although the sector's performance last year ought to cause investors to be sceptical of the self-proclaimed genius of its managers and baulk at the ludicrous fees they charge). But proper and effective regulation of hedge funds, which do have the potential to contribute to a future credit crash, is as much in Britain's interests as it is in the interests of the rest of the world. Perhaps Johnson ought to start thinking less like a boiler salesman and more like a fire safety officer.
Now consider that the London Mayor, Boris Johnson, yesterday went to Brussels to lobby against European Commission plans to impose regulation on the effectively unregulated hedge fund sector, much of which operates from London.
Of course, Johnson and others would take issue with the faulty boiler analogy. Hedge funds, they say, were not responsible for the credit collapse. And the EU directive to bring them under the regulatory umbrella is little more than a sly Franco-German effort to undermine the City of London. We must, they argue, stand up for a successful national industry which brings in considerable revenues to the British Exchequer.
It is true that hedge funds bear less responsibility than the international banks for the credit crash. But the collapse of the Long-Term Capital Management hedge fund in the US in 1998 shows that circumstances can arise in which governments need to rescue failed hedge funds, just like banks. This is why the US government has plans, henceforth, to regulate any financial entity which is large enough to be a systemic risk. In light of last year's disaster, the EU can - and should - follow.
The trouble with Johnson's lobbying is that it is fired by the old belief that the City of London is the goose that lays the golden eggs for the British economy and must not be interfered with under any circumstances. Never mind the costly bank rescues. Never mind the fact that Britain's over-reliance on the financial sector has made our slump especially painful. Never mind the catastrophic failure of the regulatory regime. Some of our political representatives appear to have learnt nothing from the past 12 months.
Obviously, there is no case for legislation that would vindictively kill off hedge funds (although the sector's performance last year ought to cause investors to be sceptical of the self-proclaimed genius of its managers and baulk at the ludicrous fees they charge). But proper and effective regulation of hedge funds, which do have the potential to contribute to a future credit crash, is as much in Britain's interests as it is in the interests of the rest of the world. Perhaps Johnson ought to start thinking less like a boiler salesman and more like a fire safety officer.
Here in Britain the banks have been starving viable small businesses of the credit they need. It would seen from this story (which comes from The New York Times, via Yves Smith on Naked Capitalism) that the banks in the US are up to the same thing. Smith nails the stupidity of this continued credit squeeze by bailed out institutions:
"The banks say the loans are too small and too much trouble to be worth the bother, even with a Federal subsidy. I gather it doesn't occur to them if banks don't lend to small businesses, which have been the only engine of job growth, we won't have much improvement in unemployment, and if unemployment doesn't fall, we won't have a much in the way of recovery, and if we don't have much of a recovery, they won't have much of a business. The banks want to be a free riders on someone else doing whatever it takes to get the economy back in gear."
The banks say it is unfair to accuse them of credit crunching their customers, arguing that the amount of lending in the economy is falling, in large part, because demand for it is weak. Business, they say, simply don't want to borrow.
But what the banks don't mention is that one of the reasons demand for credit is falling is that they have jacked up their interest and overdraft arrangement charges. This research from Moebs Services shows that US banks have turned overdraft fees into a considerable revenue stream. Is a similar thing going on here in Britain? Judging from the complaints of many small businesses I would guess that it is.
But what the banks don't mention is that one of the reasons demand for credit is falling is that they have jacked up their interest and overdraft arrangement charges. This research from Moebs Services shows that US banks have turned overdraft fees into a considerable revenue stream. Is a similar thing going on here in Britain? Judging from the complaints of many small businesses I would guess that it is.
An insightful and informativeanalysis by Robert Peston on quantitative easing on the BBC website. Why is all that money that the Bank of England is putting into the economy not increasing the money supply? Peston's theory is that the banks are essentially soaking it all up and using the funds to stabilise their balance sheets.
The banks, he says, are determined to reduce their loan to deposit ratios. So when a saver who has sold some of their gilts to the Bank of England deposits the proceeds in their private bank account, that bank sits on the funds, rather than lending it out as they normally would.
Peston also reckons that pension funds and insurers which sell their gilts to the Bank are using the proceeds to buy the short-term debt securities issued by the likes of Lloyds and RBS (securities which are insured by the Treasury's credit guarantee scheme). The banks, says Peston, regard the income from sales of these short-term securities as unreliable wholesale funding (something they want to reduce their dependence on). The result, again, is that they sit on the money, rather than lending it out.
Finally, the banks are also using the fresh income from depositors and institutional lenders to buy more gilts themselves in order to build up their capital reserves. So some of the money that quantitative easing pumps into the system goes out again in the form of lending to the Government,
The solution would seem to me to be for ministers to tell the banks, in no uncertain terms, that the process of restructuring their balance sheets must be put on hold until the recovery is unambiguously underway and that that the money created by Bank of England gilt purchases must reach those credit-worthy businesses in the wider economy that sorely need it. The Government, having saved the entire banking sector with taxpayers' money last autumn, has the leverage to make such a demand. What it seems to lack is the political will to exert it.
The banks, he says, are determined to reduce their loan to deposit ratios. So when a saver who has sold some of their gilts to the Bank of England deposits the proceeds in their private bank account, that bank sits on the funds, rather than lending it out as they normally would.
Peston also reckons that pension funds and insurers which sell their gilts to the Bank are using the proceeds to buy the short-term debt securities issued by the likes of Lloyds and RBS (securities which are insured by the Treasury's credit guarantee scheme). The banks, says Peston, regard the income from sales of these short-term securities as unreliable wholesale funding (something they want to reduce their dependence on). The result, again, is that they sit on the money, rather than lending it out.
Finally, the banks are also using the fresh income from depositors and institutional lenders to buy more gilts themselves in order to build up their capital reserves. So some of the money that quantitative easing pumps into the system goes out again in the form of lending to the Government,
The solution would seem to me to be for ministers to tell the banks, in no uncertain terms, that the process of restructuring their balance sheets must be put on hold until the recovery is unambiguously underway and that that the money created by Bank of England gilt purchases must reach those credit-worthy businesses in the wider economy that sorely need it. The Government, having saved the entire banking sector with taxpayers' money last autumn, has the leverage to make such a demand. What it seems to lack is the political will to exert it.
It has been remarked upon that one of the peculiar features of modern high finance is that firms seem to be run not in the interests of their customers, nor even their shareholders, but their employees. That reality is beautifully demonstrated by this story. The managers of the publicly-listed hedge fund, Och-Ziff have decided to increase the bonuses paid to their traders, despite the fact that the fund has just registered an $88.3m loss. Indeed, the money set aside for these bonuses is responsible for an astonishing $25.4m of Och-Ziff's losses.
Now, one might argue that if Och-Ziff's investors and shareholders are stupid enough to allow the employees of the fund to plunder it in this way then that's their lookout. Fine. But my problem is with banks that were rescued by taxpayers, and in which taxpayers still have a significant stake, employing the same lunatic remuneration policies.The managers of these banks bleat about the need to pay the market rate for top talent. But the "talent" which seems to be most admired these days in Wall Street and the City of London appears to be the ability to take the money of customers, investors and taxpayers and transform it into bonuses, regardless of performance.
Now, one might argue that if Och-Ziff's investors and shareholders are stupid enough to allow the employees of the fund to plunder it in this way then that's their lookout. Fine. But my problem is with banks that were rescued by taxpayers, and in which taxpayers still have a significant stake, employing the same lunatic remuneration policies.The managers of these banks bleat about the need to pay the market rate for top talent. But the "talent" which seems to be most admired these days in Wall Street and the City of London appears to be the ability to take the money of customers, investors and taxpayers and transform it into bonuses, regardless of performance.
You don't hear a great deal from the private equity buyout merchants at the moment. At the height of the boom they were gobbling up stock market listed firms like Billy Bunter attacking the dessert trolley. Boots, EMI, AA. They even tried to get their paws on Sainsbury's. Now that cheap credit from the banks has dried up, their plans for world domination have been put on hold.
But at least they're riding out the downturn well enough, aren't they? This report in the Sunday Telegraph suggests there is likely to be pain to come. One buyout house, Oak Hill Capital Partners, has just refinanced with its creditors on one deal, after the company, Sheffield-based manufacturer Firth Rixon, breached its loan covenants. And the terms are, apparently, a lot more painful than the buyout boys expected. They've been told to inject more equity and the interest rate on the loans has shot up.
A source described as "close to the situation" told the Sunday Telegraph: "This deal will be the one to follow. Private equity firms that pitch up and expect to walk away with a new lending deal for free will get a shock. They'll be told to look at Firth Rixson and come back with a similar offer."
But at least they're riding out the downturn well enough, aren't they? This report in the Sunday Telegraph suggests there is likely to be pain to come. One buyout house, Oak Hill Capital Partners, has just refinanced with its creditors on one deal, after the company, Sheffield-based manufacturer Firth Rixon, breached its loan covenants. And the terms are, apparently, a lot more painful than the buyout boys expected. They've been told to inject more equity and the interest rate on the loans has shot up.
A source described as "close to the situation" told the Sunday Telegraph: "This deal will be the one to follow. Private equity firms that pitch up and expect to walk away with a new lending deal for free will get a shock. They'll be told to look at Firth Rixson and come back with a similar offer."
Read it and weep. We already knew that ridiculous bonuses had returned to Wall Street for those banks that had returned to profitability, like Goldman Sachs. But now, according to a report by the New York attorney-general, Andrew Cuomo, even those banks which are still making losses are paying out bonuses. Apparently, Citigroup and Merrill Lynch paid bonuses of $5.33bn and $3.6bn in 2008 respectively while seeing losses of more than $27bn each.
It's an outrage that banks like Goldman - which are benefiting from huge hidden subsidies from the US taxpayer (see a good explanation from Eliot Spitzer here) - are continuing to pay out bonuses. But for firms which are losing money to do so is simply a bad joke.
Of course, in the amoral world of investment banking it is also perfectly rational. Once one firm starts paying bonuses, others have an excuse to start doing it themselves, even if they are still losing money, or relying on government support to survive. "If we don't pay bonuses", they say, "all our talent will migrate to the banks that do". And that's why the bonus culture has crept back into Britain's bombed-out banks too. The bankers believe in the iron laws of the free market - except, of course, when they need taxpayers' cash to bail them out.
When popular anger exploded in the US about bonuses paid to AIG employees and in the UK over Fred Goodwin's pension I dared to hope that our politicians would finally be emboldened to stand up to the self-serving cant of the bankers. Now, I fear that the moment has gone and that the tireless financial services lobby has prevailed.
The conventional view on the re-running of the Irish referendum on the Lisbon Treaty is that it is a democratic disgrace. "You delivered the wrong answer the first time - try again" etc. You'll hear that view from both the left and the right, pro-European Union and anti. But the conventional view, as so often, is wrong.
The democratic disgrace is not the repeat of the referendum, but the practice of putting simple yes/no questions to an electorate in the first place. And two excellent articles have explained precisely why. The first is by Peter Kellner in last month's Prospect here (unfortunately not free). The other is by John Kay in the Financial Times this morning here. Both talk sweet reason. But can reason overcome the populist force of the cry "let the people have their say"?
The democratic disgrace is not the repeat of the referendum, but the practice of putting simple yes/no questions to an electorate in the first place. And two excellent articles have explained precisely why. The first is by Peter Kellner in last month's Prospect here (unfortunately not free). The other is by John Kay in the Financial Times this morning here. Both talk sweet reason. But can reason overcome the populist force of the cry "let the people have their say"?
The BBC news website's blog has given some of the Corporation's more thoughtful journalists an outlet for their talents which simply didn't exist before. (How much insight can you squeeze into a one minute two-way on the 10 o'clock news?)
I'm mightily impressed by this impassioned and acute posting by the BBC home editor Mark Easton on the "poisonous" gang culture in parts of this country, pegged to the murder of Shakilus Townsend.
As Easton puts it: "When fighting al-Qaeda-inspired terror, the focus is not on the weapons but the ideology. When fighting murderous gang-culture, it seems to me, the focus is not on the ideology but the weapons. Politicians obsess about knives and guns but do far less to counteract the values which inspire the behaviour."
I also agree entirely with this point: "There are examples of brave individuals who are working hard to fight against the preachers of gangsterism. But too often they are shouting into the wind. The billions spent on marketing gang culture, by businesses who deny responsibility, blow away the counter messages."
Linking advertising to gang violence is controversial stuff. So is Easton's rejection of the idea that a police crackdown is the answer. The first will not please some powerful commercial interests. The second will annoy the law and order lobby. Some will question whether it is wise for a BBC journalist to step into such treacherous waters. Bring it on, I say.
Alistair Darling yesterday defended Stephen Hester's £9.6m bonus package at Royal Bank of Scotland on the grounds that, if the chief executive meets his performance targets, the taxpayer's stake in the business will have grown in value.
There is a flaw in this argument a mile wide. Would Hester do a worse job if these colossal incentives were not on offer? Would he make less effort to stabilise the business if he had to struggle by on his £1.2m annual salary?
It strikes me that if the answer to either of these questions is yes, he is the wrong person to be in charge of a bank which is majority owned by the British taxpayer. The Government makes disapproving noises about pay levels in the banking sector, but it won’t even intervene to impose sanity where it has a clear opportunity to do so. Pathetic.
Like Israel's nuclear weapons, the links between the Pakistani security services and the terrorist groups which operate in that country have long been public knowledge but never officially admitted. Until now, that is.
The Pakistani President, Asif Ali Zardari, this week had this to say: "Let us be truthful to ourselves and make a candid admission of the realities. The terrorists of today were the heroes of yesteryear until 9/11 occurred and they began to haunt us as well."
This is a significant moment. It is the strongest indication yet that Pakistan is waking up to the reality that the sponsorship of Islamist terror groups is against its own national interest. The question now is whether President Zardari's views are shared by the powerful security establishment in Pakistan.
This matters to us in Britain too. According to our Prime Minister, 75 per cent of all serious UK terror plots under investigation are linked to Pakistan. For our sake, as well as that of Pakistan, we must hope that this conversion is genuine.
The banking lobby, in response to the Government's latest White Paper, has mobilised the usual battalions. Screw the regulatory clamp down too hard, they say, and you'll kill the City of London goose which lays the golden eggs.
Why do we take this seriously? All the evidence suggests we would be more prosperous with a properly regulated financial sector. Spain forced their banks to hold more capital in the boom years. Canada had tight regulation of its financial sector. Both countries have weathered the credit implosion significantly better than the US and Britain where we pretty much left the banks to their own devices.
Their banks might have produced less tax revenue for their treasuries in the credit mania, but they didn't need bailing out, at vast public expense, when the bubble burst.
As even Adair Turner, the head of the FSA, has conceded, many of the boom profits of our reckless banks were illusory. Those golden eggs weren't real. Isn't an untamed City of London less like a beneficent goose than a cuckoo in the nest, greedily sucking up resources and forcing the rest of us to submit to its will?
There was some comforting news from the British Bankers' Association this month. It released a press release claiming that lending to small businesses by the high street banks rose by £287 million in April. It included this cheery quote from BBA statistics director, David Dooks: “The high street banks’ support for the small business sector continues to rise". Credit crunch, what credit crunch?
Strange then that the latest Trends in Lending report from the Bank of England paints a rather different picture: "April official data showed the weakest flow of net lending to business since June 2000. The major UK lenders reported that net lending remained very weak in May. Much of the gross lending reflected the refinancing of existing loans."
They can't both be right. So who to believe? The independent researchers of the Bank of England? Or the researchers paid by a banking lobby group? Tough one.
UPDATE: The BBA has replied with a defence below. I accept that the two surveys are measuring slightly different things, with the Bank of England including larger companies. But there is surely still a significant discrepancy. And consider the Bank of England's May Lending Trends which included a specific section on lending to small and medium-sized enterprises. Here is its conclusion: "The...data set has provided a picture for SME lending that is broadly consistent with the conclusions on lending to businesses presented elsewhere...The demand for bank lending by SMEs has fallen since 2007and credit conditions have tightened. Spreads over reference rates charged for new and renewed facilities have increased." In other words, small business are being credit crunched.
Strange then that the latest Trends in Lending report from the Bank of England paints a rather different picture: "April official data showed the weakest flow of net lending to business since June 2000. The major UK lenders reported that net lending remained very weak in May. Much of the gross lending reflected the refinancing of existing loans."
They can't both be right. So who to believe? The independent researchers of the Bank of England? Or the researchers paid by a banking lobby group? Tough one.
UPDATE: The BBA has replied with a defence below. I accept that the two surveys are measuring slightly different things, with the Bank of England including larger companies. But there is surely still a significant discrepancy. And consider the Bank of England's May Lending Trends which included a specific section on lending to small and medium-sized enterprises. Here is its conclusion: "The...data set has provided a picture for SME lending that is broadly consistent with the conclusions on lending to businesses presented elsewhere...The demand for bank lending by SMEs has fallen since 2007and credit conditions have tightened. Spreads over reference rates charged for new and renewed facilities have increased." In other words, small business are being credit crunched.
A sobering line in Mervyn King's Mansion House speech last night: "Stress tests designed to assess the viability of banks are very different from tests of the capacity of the banking system to finance a recovery".
This echoes my own doubts, expressed here, about the true health of the banking sector. The markets seem to have interpreted the fact that US and UK banks have passed the stress tests set by our financial authorities as an indication that the economic party is due to restart.
But even leaving aside the doubts about the rigour of these exercises (listed here by the admirable Yves Smith on the Naked Capitalism site) what these tests show is that the banks will survive a deep recession - not that they will provide the credit that a strong recovery would require.
The Governor also delivered what I thought was quite a good joke: “ 'My word is my bond' are old words, but they were important. 'My word is my CDO-squared' will never catch on."
This echoes my own doubts, expressed here, about the true health of the banking sector. The markets seem to have interpreted the fact that US and UK banks have passed the stress tests set by our financial authorities as an indication that the economic party is due to restart.
But even leaving aside the doubts about the rigour of these exercises (listed here by the admirable Yves Smith on the Naked Capitalism site) what these tests show is that the banks will survive a deep recession - not that they will provide the credit that a strong recovery would require.
The Governor also delivered what I thought was quite a good joke: “ 'My word is my bond' are old words, but they were important. 'My word is my CDO-squared' will never catch on."
We are all, to some degree, prisoners of our personal experience when it comes to making judgements on economic policy. And, when it comes to prices, most people who live in Western economies have personal experience of inflation, not deflation. So despite the existence of strong deflationary forces at work in the world - spare capacity in the global economy, rising unemployment, high household debt constricting spending - a great many people simply do not believe that a period of falling prices can possibly happen. They witness all the government spending and the central bank money printing taking place and assume that it can only result in massive inflation.
Thanks to the drastic measures from economic policymakers around the world in the past year the chances of the world experiencing a damaging hit of deflation have, thankfully, receded. But the threat has not yet disappeared. And inflation? Despite the substantial injections of liquidity, I can't see the upward pressures on price overwhelming the massive downward ones; at least not in the near term.
And I'm not alone. Paul Volcker knows a thing or two about economic price levels. He was the chairman of the US Federal Reserve credited with crushing inflation out of the American economy in the 1980s. He is quoted in the Wall Street Journal saying that the current economic situation “is not an environment in which inflationary pressures are at all likely for some time to come.”
Interestingly, Volcker also makes the case for a world currency on the grounds that: "The theoretical premise that a system of floating exchange rates would promote swift and efficient adjustment has not been borne out in practice.” I suspect a global currency, logical though it might be, would be an even harder sell than the danger of deflation.
There's a fascinating debate raging on the pages of the Financial Times and the New York Times at the moment between the economist Paul Krugman and the historian Niall Ferguson, the latest stage of which has been set off by a recent upturn in US Treasury bond yields.
Personally, I find Martin Wolf's case here, interpreting the yield rise as a return to normality rather than an incipient strike by investors, convincing. I also share Wolf's view that US government spending - at the moment at least - is more likely to be crowding investment in, rather than out.
Almost as interesting as the substance of the debate is its resonance for British politics. Ferguson argues that the Obama administration's spending plans threaten to plunge the US into fiscal ruin. Krugman argues that if the US government failed to stimulate depressed demand, the downturn would grow far worse. In other words, cutting spending now would be penny wise, pound foolish.
Now consider the focus of the political/economic debate in Westminster. David Cameron accuses Gordon Brown of bringing Britain "to the brink of bankruptcy". The Government argues that the Tories' zeal to cut public spending risks adding serious insult to grave economic injury. The protagonists are different, but the essential dispute is the same.
Personally, I find Martin Wolf's case here, interpreting the yield rise as a return to normality rather than an incipient strike by investors, convincing. I also share Wolf's view that US government spending - at the moment at least - is more likely to be crowding investment in, rather than out.
Almost as interesting as the substance of the debate is its resonance for British politics. Ferguson argues that the Obama administration's spending plans threaten to plunge the US into fiscal ruin. Krugman argues that if the US government failed to stimulate depressed demand, the downturn would grow far worse. In other words, cutting spending now would be penny wise, pound foolish.
Now consider the focus of the political/economic debate in Westminster. David Cameron accuses Gordon Brown of bringing Britain "to the brink of bankruptcy". The Government argues that the Tories' zeal to cut public spending risks adding serious insult to grave economic injury. The protagonists are different, but the essential dispute is the same.
Remember the Obama Administration's $1trillion plan to rescue the banks in March? Cheap US government financing was to encourage private investors to take the banks' toxic assets off their hands. Well the banks haven't been biting. One might have expected this to cause alarm in markets. But because of all the green shoots supposedly springing up no one is really worrying.
But we should consider what the refusal of the banks to take part in the scheme means. Have they decided that these securitised assets are worth holding on to after all? This would be an extraordinary reversal considering the market for these things collapsed entirely last year. It also seems unlikely since one would expect the banks to be trading the assets between themselves if they truly believed they had value. And yet no business is being done on that front.More likely, as some analysts are pointing out, the banks are unwilling to sell because it would mean registering big losses. And with private investors beginning to trust the banks once again, that's the last thing they want.
But if those assets do turn out to be bad - and the IMF estimates potential global losses resulting from these assets of $2.7trillion - it will have to come out eventually. The conclusion I draw is that the banks are trying to putting off the pain in the hope of earning their way out of the hole they have dug for themselves. A similar thing is taking place in banks in Britain and Europe.
So the crucial question becomes: is a banking sector that is still sitting on potentially several trillion dollars of bad loans going to expand its lending to the global economy on the scale needed to sustain a recovery? Still feel optimistic about those green shoots?
But we should consider what the refusal of the banks to take part in the scheme means. Have they decided that these securitised assets are worth holding on to after all? This would be an extraordinary reversal considering the market for these things collapsed entirely last year. It also seems unlikely since one would expect the banks to be trading the assets between themselves if they truly believed they had value. And yet no business is being done on that front.More likely, as some analysts are pointing out, the banks are unwilling to sell because it would mean registering big losses. And with private investors beginning to trust the banks once again, that's the last thing they want.
But if those assets do turn out to be bad - and the IMF estimates potential global losses resulting from these assets of $2.7trillion - it will have to come out eventually. The conclusion I draw is that the banks are trying to putting off the pain in the hope of earning their way out of the hole they have dug for themselves. A similar thing is taking place in banks in Britain and Europe.
So the crucial question becomes: is a banking sector that is still sitting on potentially several trillion dollars of bad loans going to expand its lending to the global economy on the scale needed to sustain a recovery? Still feel optimistic about those green shoots?
