Skip to main content

The Financial become Economic Crisis now turns into a Leadership crisis

The fact is that the financial crisis was rooted in a failure of politics in the first place.  The changes to mortgage regulation under President Clinton forced US banks to enter the "sub-Prime" Market in the first place. The Banks, attempting to improve- as they hoped- the riskiness of these loans, bundled them with safer loans in order to try to insure themselves.


Meanwhile, the monetary management by the global central banks was very loose: interest rates were historically low for a prolonged period. The implication was that there had, under the influence of new technology, been a significant improvement in capacity. In fact as we now know, both low rates and nominally higher growth were being maintained by a dramatic expansion of bank balance sheets. The innovation was simply in finding ways to expand global liquidity. Finally the banking system imploded. The next- disastrous- decision was political: to take the banks into public ownership. This transferred a private sector crisis into a sovereign debt crisis.


Now the markets are on the edge of another nervous breakdown: there is not enough growth to finance the debts. Either the taxpayer has to take the whole hit, or banks have to write down their sovereign liabilities- requiring another painful recapitalization of the banking system. The Governments have reached the end of the borrowing road- and yet, the process of de-leveraging- unmitigated- will plunge nations into a long and deep depression that will take at least a decade to work through.


The political choices are all toxic. Reducing sovereign debt is a must, but if there is no growth, then the need to continue to take money out of the economy in order to reduce debt means painful real spending cuts and risks destroying any signs of recovery. A vicious circle of of debt payments reducing growth, requiring bigger debt repayments, reducing growth faster then ensues.


The problem is that the political leadership across the world remains paralysed. The failure of leadership is terrifying the markets. The politically dysfunctional United States remains locked in a deadlock ahead of the next stage in the electoral cycle. The Germans make occasional radical gestures without adequate thought as to the consequences- and yet at other times, are dangerously inert. The Japanese are in a perma-crisis, France in elections, Italy has no credibility. All of this leadership vacuum adds to uncertainty in the global financial markets.


Yet, although the markets are jittery, the crisis has also exposed their limitations: The once all powerful bond market no longer sets the weather in quite the same way as once it did. After all the market was not so efficient: it permitted the unsustainable explosion of credit in the first place- without questioning whether the quantum of debt was repayable or not. Ironically, for the first time since the Bretton Woods agreement, policy makers have a free reign to reshape the global economy. Yet the failure of leadership is so total that no coherence - indeed few actual decisions at all- are emerging as the basis for a new consensus.


A new financial architecture is now needed- a new Bretton Woods.


Yet our leaders can not understand the new situation- and unless the Western leaders rediscover their mojo pretty soon, then the new financial architecture will be dictated by Beijing- to the permanent discomfort of the West.


It is not that China is such a giant- their economy is still much smaller that the US or the EU- but the are used to creating plans and sticking to them, and this is giving them an edge in the current turmoil. They can provide leadership by default. Yet it is time for leadership in the West- who can provide it?

Comments

Popular posts from this blog

Cicero ReDux

By Special Request of Baroness Scott and Mark Valladares... Cicero's Songs returns: bigger, longer and uncut.
October 1st marked the half way point of the Estonian Presidency of the European Union.  Perhaps for many people such an anniversary is of passing interest at best.  Yet the conduct of the Estonian Presidency is reinforcing just how forward looking and innovative the most northerly of the Baltic States has become.
Estonia is a country that wants to live in the future, and with its openness and innovation, that future seems a lot closer than almost anywhere else in Europe
It is not that Estonia does not “do” the past: the picturesque cobbled streets of old Tallinn have tourist crowds a-plenty enjoying the mediaeval architecture in an Indian summer of sunshine and blue skies.  The real point is that Estonia refuses to be a prisoner of its past. Lennart Meri, Estonia’s President in the 1990s- who spent years of his childhood in Siberia- once told me that the country had to conc…

The American National nightmare becomes a global nightmare

It is a basic contention of this blog that Donald J Trump is not fit for office.

A crooked real estate developer with a dubious past and highly questionable finances. he has systematically lied his way into financial or other advantage. His personal qualities include vulgarity, sexual assault allegations and fraudulent statements on almost every subject. 

He lost the popular vote by nearly three million votes.

He has, of course, been under criminal investigation practically since before he took the oath of office. The indictment of some of closest advisers is just the beginning. His track record suggests that in due course there is no action he will not take, whether illegal or unconstitutional in order to derail his own inevitable impeachment and the indictments that must surely follow the successful investigation of Robert Mueller into his connections with Russia.

However, all of that is a matter for the American people. 

It is also a matter for the American people that Trump is cheating…

In praise of off-shore tax havens

The last few years has seen a spate of "scandals" about the use of off-shore tax havens. The hacking and subsequent leaking of data about who does and does not hold assets in off-shore jurisdictions has become an old perennial in the British press, rather like the "COLD weather happens in winter and QUITE HOT weather happens in summer", whose alarmist capital letter laced headlines are such a lazy part of contemporary "journalism". 

The increasing sophistication of the hackers, whether Russian-inspired or not, has resulted in a steady trickle of information becoming a torrent. After the relatively filleted release of data in the so-called "Panama Papers", the data release of the "Paradise Papers" is even larger.  Of course, just natural curiosity dictates that the off-shore ownership, or even just "ownership", of assets is of general public interest.  Celebrities, from the Royal family to the cast of Mrs Brown's Boys, are …