Tuesday 25 November 2008

A Foggy Day (in London Town)

Fog helps me play golf better. When I can’t see the threats of gorse, bunkers, rough etc I worry less. I swing more smoothly. The ball is more inclined to go where I want it to.

The same thing cannot be said for driving a car. You need to see where you are going. Otherwise you have to go slowly and everything jams up.

And I think there is a connection here with what’s wrong with the banking system. Banks hold lots of assets – mainly loans and investments they have made.

In the “good times” it didn’t really matter if the values were a bit foggy and unclear because everything went well and business grew. The ball, in their terms, went where they wanted it to.

Now, however, it does matter. The lack of knowledge about the value of assets banks hold worries other banks and investors because they don’t know just how big losses will be, whether the banks can repay their debts and more relevantly how likely a default will be. The assets (loans and investments) of most banks are much bigger than their customer deposits (which are mostly Government guaranteed), so they need money from other banks and investors. And the price of money (the interest rate) depends in part on how likely it is you will get it back. And if you can’t price it, people won’t lend. This is the main reason the banking system is jammed up.

So far Governments and regulators have done almost nothing to sort this fundamental problem of a lack of clarity. I may be missing something, but it’s obvious to me that until they do the financial system won’t be able to support the economy properly.

Yes, they have pumped liquidity in. Yes, they have said they will put our money into recapitalising the banks. Others have commented - this link is to Robert Peston - on why this so far hasn’t stopped banks from being nasty to small businesses and householders.

But almost no effort has been put into trying to create asset values for all the dodgy loans and investments so everyone can see just how bad the problem really is. Until there is a cross industry initiative – it could be a “I’ll show you mine if you show me yours exercise; it could be an auction; it could be Governments buying them (as the US originally intended to do last month) – the problem won’t get fixed. I’m not opposed to the other stuff – at worst it’s harmless, at best, helpful. But this is core. I’m surprised more comment isn’t made about it.

Until the fog lifts we’ll be stuck.

PS Since writing the above, the US has announced a further $800bn package which seems primarily aimed at this problem. Good, if it is implemented in this way.


Anonymous said...

To be honest, John, these amounts are way beyond our comprehension. The British public need to have confidence in their leader aswell as their banks. As this is not the case, I would strongly recommend our government clear off into the Fog.

CJ xx

occasional northerner said...

I agree. Should there not have been men from The Treasury wandering all over these banks' balance sheets before committing them our ownership or at the very least doing so now so that we can get to the bottom of this, or is it a case of not actually wanting to see it?

Arthur Clewley said...

this 'I was playing golf and I thought the international economy's a bit like a golf course' sounds a bit 'thought for the day' my friend - are you rabbi lionel blue in disguise? I think we should be told

John Woodman said...

CJ: Wishful thinking.

ON: Exactly: until it happens we'll be in a mess.

AC: It was a bit corny, sorry; and I never believe contrived links when I read them, only when I write them.

Sarah said...

Yes, very clever, but, pull a Wii plug out while its still on..?
Tsk tsk

Troy said...

I keep coming back to see what interesting things you are doing. Have you stopped climbing ladders?