Random thoughts on the financial crisis

I don’t usually comment in depth on the financial crisis, because the business pages are full of commentators (my favourite is Ambrose, you may have noticed) who understand it a great deal better than I do. But I have a few points to make.

First, though, a caveat. This column does not take responsibility for financial advice. Indeed, would you trust financial advice from a politician in the first place? Investors should seek professional advice. Prices may go down as well as up, and the past is not necessarily a guide to the future (especially now). Terms and conditions apply.

To start with, let’s challenge the conventional wisdom. “It’s all the fault of the bankers”. Or the hedge funds. Or the venture capitalists. No it’s not. On the whole, the hedge funds and the venture capitalists do a good job. The banks have certainly been irresponsible, and have had perverse incentive structures, but they worked within the rules laid down by politicians, central bankers and regulators (Gordon Brown’s triple-headed regulatory structure didn’t help).

It all started way back, with Jimmy Carter and Bill Clinton, good redistributive Democrats, who wanted to extend home ownership to disadvantaged homes owners who were unlikely to repay their mortgages. And they pressed America’s big lenders, Fannie Mae and Freddie Mac, to do so, throwing out any idea of prudence on the way. Hence the infamous “Ninja” mortgages. Then the Central Bankers, starting with Alan Greenspan, kept interest rates way too low for way too long, arguing that asset bubbles would take care of themselves. They did, of course, eventually, and now we see the consequences.

OK. I admit it. I was a great fan of Greenspan. Now, with the benefit of 20/20 hindsight, I see the flaw in his logic.

Bizarrely, the rating agencies are also in the frame. Yes, they made the same false assumptions as everyone else. But they remain the canary in the mine, and there’s no percentage in shooting the messenger.

So where are we now? The EU’s massive Greek bail-out is under a cloud. The Germans hate it — and they’ll have to pay for it. The funds may never materialise, and if they do, they may not be enough. They’d keep Greece out of hock for a year or two, but if they have to cover Portugal or Spain as well, they’ll soon run out. The Greek bail-out is contingent on an austerity programme which may prove politically undeliverable. Now we see suggestions that the fund could also bail out Europe’s major banks. We’ve already spent it several times over, and we don’t even have it in the bank yet.

Then there are the question marks over European banks, many of which have large holdings of government and other debt from ….. well, from Greece, and Portugal, and Spain. The EU is running stress tests on the banks. Results are due later in July. But it’s already clear that they’ll assume that government debt is good, because if they apply (say) a 30% haircut to dodgy sovereign debt, the banks will fail and confidence, what’s left of it, will evaporate. So let’s be clear: we’re going to assume that everything will be OK, and this will lead to the conclusion that ….. everything is OK. Rubbish in, rubbish out.

Of course the left are correct to point out that significant cuts in government spending will have a negative impact on recovery and growth. But excessive government debt will spook the bond markets and drive interest rates sky-high — which will also impact recovery and growth. We are between the Scylla of stimulus withdrawn, and the Charybdis of a sovereign debt crisis. We just have to hope that there is enough clear blue water between the rocks on either side to enable the Ship of State to navigate a middle way. In the UK, I think our coalition has it about right.

So where should you put your nest-egg (if you have a nest-egg)? The old assumption was that banks and building societies and government bonds were boring and low-return, but safe. We can’t count on that any longer. House property has the advantage that bricks and mortar generally don’t melt away (and you can live in your investment), and my own view is that there will be no further substantial falls in house prices. But I could be wrong.

One piece of good advice is to pay down debt. Another that still applies is to have a spread of investments, and not to put all your nest-eggs in one basket. More than one bank, more than one unit trust, maybe more than one currency and more than one national economy. Remember to take professional advice on which bank, which unit trust, which currency and which countries.

One of my very distinguished and well-known colleagues last night suggested — in all seriousness — that it was no longer daft to think of keeping a suitcase of cash under the bed. But which currency, and which bed?

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4 Responses to Random thoughts on the financial crisis

  1. Hugh Davis says:

    “The EU’s massive Greek bail-out is under a cloud. The Germans hate it”.

    Roger, you seem to be understating the gravity of the situation somewhat.
    The highly respected Ambrose Evans-Pritchard in today’s Telegraph states that “Germany’s eurosceptic professors have not abandoned their legal efforts to block the EU rescues for European banks exposed to Greek debt, ….. and should they succeed, the eurozone risks disintegration within days, and perhaps hours.

    See http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006843/legal-noose-tightens-on-europes-monetary-union/

    The article describes in detail the total illegality of the EU’s attempts to bail out the PIGS with EU money.

  2. Pingback: Understanding The Financial Crisis–For Kids and Grownups-Market

  3. I’m not sure, Hugh, but I think we’re singing off roughly the same hymn-sheet.

  4. John Waters says:

    A lot of the problem is because the USA repealed the Glass-Steagall Act, which separated investment banking from retail banking. And the UK followed suit. We need to reinstate this separation.

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