Friday, March 27, 2009


Not long into the Credit Crunch and as recession beckoned, UK Prime Minister, Gordon Brown, announced an end to the "Age of Irresponsibility". This became his global statesman theme, his G20 and his Davos theme. Brown’s speech at the Davos World Forum was superb and head and shoulders above other leading politicians, and that included his technical as well as his policy grasp of the origins and necessary solutions for both the Credit Crunch and global recession. Of all political leaders, Brown found the best Churchillian-style phrases to both express the public mood and show that he can command the bigger picture. But, responsibility has to extend to politicians, and politics being politics and politicians being what they are, any big ideas, right or wrong are sniped at, argued against, and horse-traded. G20 in Washington produced a strong agenda. G20 in London should show progress in building on that and should by evidencing global agreements help enormously to restore confidence in the prospects of recovery and thereby hasten that recovery. Economies can operate relatively freely of government intervention and control when employment is low and growth is positive. With record rising unemployment and negative growth all responsibility to steer the economy falls entirely to government. But to be effective politically, financially, technocratically it needs authority and confidence. Essential to confidence is belief in the expertise of government to “do the right thing”, “to do whatever it takes” and to make a reality of “Yes, we can”! But, who is there who can validate the expertise of government when bankers, economists, regulators, accountants are all variously discredited. Not the journalists or the internet bloggers constantly seeking after sensation and scandal. Government politicians today have no-one to turn to validate their polices except other governments. Only the clearest evidence of the world’s leading governments, the G20 governments, who are in charge of 80% of the world economy, agreeing to a common set of principles, policies and priority actions, can restore confidence, provide something for everyone to place their trust in to face down the crisis.Given the seriousness of the global crisis (truly global) it is dangerously wrong therefore, not just pathetic or malapropos, of opposition parties in the UK (and USA and elsewhere) to use this crisis for domestic political point-scoring to damage the credibility of government or to put the outcome of the next election before the question of solving the global crisis. Martin Wolf in the FT made a very valuable point, which is that we need to do more than enough. The risk of doing too little is too important to economise on; the chances of doing just enough, not too much, not too little, are too remote. Jamie Dimon, CEO of JP Morgan Chase, has very valuably said, the time for new ideas is over. We have the means and the tools, maybe not the most perfect, but definitely good enough to do the job and that is all we should focus on. We can undo some of it later or worry about analysis of all the blame-game, fault-finding, engine-repair and fine-tuning later. Therefore, when the Prime Minister Mirek Topolanek of the Czech Republic, half-way through his 6 month presidency of the European Union, lost a vote of no-confidence on Thursday, and resigned, and then attacked US policy of spending trillions of dollars (and by implication UK policy seeking a $2 trillion fiscal boost to world GDP) as “the road to hell” (implying one paved with ‘good intentions’) that all EU government must avoid, he was damaging all governments. President Obama will visit Prague next week after the G20 Summit in London. White House spokesman said, "I think the Czech people and the American people can stand assured that the President of the United States of America is going to do all and everything in his power to get our economy moving again and to restore confidence in that economy."
At the G20, the USA and the UK want to push for concerted fiscal deficit spending along Keynesian economic theory lines of 8% ratio to GDP. Europeans leaders want to the USA to emphasise more measures to tighten regulatory oversight over the global financial system. The UK wants to do both. The US has some traditional concern about agreeing to international or non-US laws on anything except some basic UN rights and accountancy standards. Why there is resistence to regulatory rules and laws that it was in process of acceding to anyway i.e. Basel II, is unclear? The USA is focusing on economic stimulus, with a $US787billion spending plan, as well as the $US1trillion it plans to pump into the financial system to revive lending. Some other countries are traditionally resistent to giving up Monetarism and embracing Keynesianism, so it appears. In reality, the problem for Euro Area economies is that government do have political control of money market interventions.
Mr Topolanek said, "All of these steps, these combinations and permanency is the road to hell. The biggest success of the (EU) is the refusal to go this way. Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the liquidity of the global financial market." His views are eminently disputable. Martin Schulz, leader of the Socialists in the European parliament said his comments were "not the level on which the EU ought to be operating with the US"… "You (Topolanek) have not understood what the task of the EU Presidency is." EU Commission President, Jose Manuel Barroso, said it is "not helpful ... to try to suggest that Americans and Europeans are coming with very different approaches to the crisis". Within the EU 8% budget deficits is a break with the Maastricht Agreement criteria. Several leaders, notable Germany’s Angela Merkel, are saying they will not be dictated to as to how much money to borrow and spend. Ireland may however have to embrace a 10% fiscal deficit. The ECB could do more but it is also constitutionally constrained. The structure and framework of the Euro single currency is under great strain alongside the problems for the Lisbon Treaty, the Lamafussey Framework and the Single Market in financial services. Governments are also stressed by their governance of big banks, most notably the Benelux countries re. Fortis and ABN AMRO and Ireland and its four biggest banks. Spain, Greece, Italy and all others have comparable problems. The equivalent in the USA would be if all states had to bale out their banks and negotiate for this with the regional Federal Reserves and liaise with all other states affected. I don't think the rest of the world entirely appreciates how big the US economy is, albeit Europe is just as big but in many economic power aspects much less so. Here are two views of this:- The technical issues, policy agreements and political problems, are all so complex that on these matters, and beyond them the global dimensions of the crisis, we need governments to collectively retain their credibility to work together in unison. Only agreement between governments across the world is left to validate the measures needed to get the banks working properly and for fiscal boosts to gain economy recovery soon. The best resolve therefore is simply to take the lead from whichever country appears to be managing most successfully, and it is probably the UK. And, therefore, Gordon Brown, might for perfectly commonsensical and practical reasons expect that how he has defined the problems and the solutions, working closely with the USA, should be the template for all, the common agenda. The continental Europeans cannot continue to eke political capital out of the idea that this is essentially an American or Anglo-American problem and that they, the Europeans, can diverge onto another way forward, a European way. In the globalised world all have hitherto bought into there is no American or European way, only a global one-way forward, one-way off the blocked freeway, or from Recession, next stop Depression.
The global version right now is Gordon Brown and what will survive and hopefully prosper of the moral and ethical dimensions of the G20 Agenda. Gordon Brown this week touched down in three continents. On Wednesday he faced down American scepticism over his (and that of the G20) proposals for tighter regulation of the banks, telling a Wall Street audience the financial sector had to rediscover moral principles. There was meanwhile dissenting voices in Europe from Germany and the Czech Republic about long term consequences of sharply higher government spending. It is not just that some Euro Area political leaders are doubting their political capacity to sell state imprudence as a response to the imprudence of bankers, they have another problem in that they do not have direct control over money market interventions. Issuing government bills is in the exclusive control of the quasi-politically-independent European Central Bank (ECB). Yet it is only at the treasury bill end of money markets where the US and UK have been able to leverage trillions. The Euro Area governments lost that direct off-balance-sheet financial firepower when they joined the single currency. When Mervyn King Governor of the Bank of England (BoE) said publicly that we have to be cautious about how far to go in fiscal deficit-spending, he was only referring to the Government's on-balance-sheet budget. Off-budget he (with the Debt Management Office of HM Treasury) has grown the financial balances of the BoE to $4 trillions, which is more than the ECB and even slightly more right now that the US Federal Reserve!
(Note: Moral rectitude in government finance is fine for politicians, but arguably too much of it was what allowed the private sector households, corporations and banks to grow their borrowing to over three times that of the government in only 10 years! Moral rectitude if taken to fundamentally at face value, to woodenly, is also a mask behind which there is 'can of worms'. For example, one unreported irony of moral rectitude in finance is that Bernie Madoff since his time as Chairman of Nasdaq, before he was found out to be among the most unethical practitioners of all, presided over a host of new ethical reforms to do with protecting against conflicts of interest, series 7 investment advice examinations, other such regulatory certifications and the independence of analysts and probably aspects of Sarbanes-Oxley. He was the epitome of rectitude and moral authority. He was the moral paragon deferred to when rapping miscreants and exam failures over the knuckles. "Bernie wouldn't approve of that" etc.)
Macro-economics is about seeing the world in three dimensions, not two. In two dimensions, hypocrisy and paradox are inevitable, even natural, or let's just say the aliens we all know. And, indeed, moving on to the G20 idea of a global executive on the flight-deck of the world, how these grand meetings are stageed can appear like some inter-planetary science fiction government. Do people believe in fine words and a good show, or will they now jaded and dispairing only believe in practical proven results. Will the public have the patience to wait and see? For that they need to feel confidence in governments. If national political leaders squabble in public that confidence is blown. Let's expect that the London G20 (at London's Ex-cel Centre, which looks like a large airport style sea-terminal) is less stage-designed and has more of that moral and ethical down-to-earth goodness that should persuade all participants that their collective credibility is on the line if they do not all "do whatever it takes" (DWIT) to get out of the global recession sooner than later. DWIT is the political phrase of choice by the whole of the UK (economic peace?) Cabinet and has become the phrase too of the Obama administration, the businesslike end of the 'end of the age of irresponsibility' dogtag that should be inscribed in latin somewhere. Maybe we could have medals issues for good service in this cause inscribed on the back of the ones we usually wear. The more genuine article is undoubtedly the UK Prime Minister saying clearly “We have to clean up the banking system,” ...“We must give people confidence that the principles that guide their daily lives are those that also guide the markets. I know people are angry at what they see in banking bonuses.” In the US after the S&L crisis, Enron and Worldcom scandals, and the collapse of LTCM, Sarbanes-Oxley is a powerful attempt to do that - could SarBox now go global? How can such moral principles be translated into regulations, standards, financial practise laws? In all respects Basel II covers the same ground in finance but goes much further, perhaps too far only insofar as there is so much to learn and so much also to innovate to comply fully. SarBox possibly delayed the US banks from embracing Basel II by 1-2 years.
Mr Brown delivered his uncompromising viewsin the grand ballroom of New York’s five-star Plaza Hotel. As any investment banker knows this hotel is the eponymous meeting place for corporate finance deal-making. The London equivalent might be the Savoy grill-room or the Cafe Royal. Last time I was at the Plaze it was for a conference of the biggest NY hedge funds. Attendees at Gordon Brown's speech included the presidents of Citibank, Nasdaq and Goldman Sachs. The PM warned them they could not operate in a moral vacuum ruled by “avarice”. In some ways his speech, while echoed too in the view of President Obama, also had a comparable version a week earlier in the speech by Jamie Dimon, the JP Morgan Chase CEO (see 11 March blog below).
Gordon Brown said, “The principles and values we apply in our everyday lives, you have got to ask did we apply them to the running of our financial institutions?” said Mr Brown. There is a sense that the global economy was outside these standards that we applied in our everyday lives.” It might be arguable that the whole of banking finance is being tarred and with the same brush that of structured product proprietary trading desk types. But, of course, we all know that the Gordon Gekko greed is good types became very over-dominating in banking generally - the worst sorts were attracted to and corrupted by the diea of making easy money, lots of it, fast. The culture defined the 80s, 90s and noughties, but was also defined by it, by the cult of entrpreneurial individualism that for too many card-sharps in business and politics seemed to be the only worthwhile and purest essence of capitalism and then too of neo-conservatism in politics that for now have been binned. Gordon Brown is a bruiser of a politican according to some, and a brilliant genius according to others, and ego-driven and moralistic, and in truth something of all of these, and yet also a finely-honed politician with all the understanding about timing and horse-trading that requires. He knows this is the time to head for the high ground and step severely on modern banking culture to get there. His perception is that banks were operating in a value-free hinterland, failing to adhere to basic principles of honesty and hard work, and had damaged the entire system, “Markets depend on morals in the end. A world without standards is going to be a world without stability.”
Mr Brown used the NY leg of a 5-day diplomatic tour ahead of next week’s G20 summit in London to confront American pressure for protectionist measures and scepticism about supranational financial regulation, which is the most European part of the G20 agenda. It was expected that the USA under President Obama would shift in this direction. But, clearly, there are problems for him to do so in the Senate and somewhat in Congress. If the US attitude remains reluctant to overtly abandon any protectionism or to embrace globally-overseen regulations, what is left is US insistence on all countries applying domestic fiscal measures to boost their domestic spending and consumer demand, which for many means giving up their trade surpluses and for the poorest going cap in hand to the IMF? World trade is in any case re-orientating so fast and unreliably that protectionism is a total non-issue in the short term when no-one knows how their external trading account is working out.
The PM signalled hopes that the London summit would impose a “name and shame” system to police governments that put up barriers to trade. “We will agree at the G20 to monitor any protectionism ... and report it.” This idea is easily attacked in terms of how are barriers to trade to be defined, narrowly or very broadly, and either way both US and EU could be named and shamed too? Policy makers despite the GATT and Doha and other global trade agreement negotiations operate on the basis of a narrow definition of trade barriers to do with quotas, import and export duties, government contracts, and producer subsidies. But, looking at the whole matter broadly, globally, macro-economically, then trade and protection issues can look very different. It would be a nice hope that new thinking will emerge, but the rush to decisions may not allow for that. The extreme world trade balances increasingly had to be financed by 'net acquisition of financial assets' in the trade deficit countries to be sold to the trade surplus countries. To calm fears that America would have to cede control of Wall Street under a new international regime, Mr Brown dismissed as “ridiculous” the idea the G20 would seek to impose a single global financial regulator (the IMF is planned to sit in the centre of a global network of regulatory authorities). The US doesn't want an equivalent of the International Court in the Hague for financial regulation i.e. the USA won't acknowledge a regulatory legal authority above that of its own national regulators, hence one reason why it preferred the IMF to BIS or other bodies to lead in this area. The IMF may not therefore be able to declare Basel II (or something akin to a Basel III) as a worldwide legal standard like we already have worldwide accounting standards? Why global standards for accounting but not with the same legal force for banking risk management regulations is potentially an anomaly here? Also, it probably means the global regulatory oversight of IMF becomes more of a forum of regulators but the BIS is that already, except it has more limited membership compared to the IMF. So, could the IMF membership be persuaded to sign on to Basel II as a condition of access to the IMF funding support?
One problem with Basel II is that the jury of public opinion is still out on whether it contributed to the problem or is the solution to the problem. The general assumption has been that Basel II was already in place and should have prevented the crisis, either that or its prudential capital rules meant that banks have been forced to deleverage just when the world needs them to keep their lending up? The truth is that Basel II was not even half implemented, and the half not properly implemented at all was precisely those parts that would have mitigated the crisis, liqudity risk, economic capitla model stress-testing, integrating all risks to forecast economic capital requirements etc. stuff that the vast majority of bankers don't understand, don't have the tools for, and couldn't be bothered unless there are bonuses in it for them.
It was partly to get banks to embrace Basel II that the mantra they were all told was "do this well, and you can save on your capital requirement and therefore do lots more business" (i.e. more bonus). The opposite was true. But, this shows the problem of how to incentivise banks to be more prudential and ethical and so on. The answer is, of course, there is no incentive (or not much of one unless as a bank you believe it serves to win customer loyalty) and therefore it is stick not carrot time! 'Name and shame' is not a big stick unless it means next stop nationalisation or loss of some banking licenses, or being broken up, or ordered to stop certain lines of business. The Credit Crunch Crisis has shown governments rediscovering that they have all these powers. Systemically important banks and their shareholdersnow know that their ultimate owners are national governments, whether they are wholly, partly, or not at all govern-owned in % share-holding terms. Brown stressed the “remarkable consensus” developing about the regulation of hedge funds and other shadow banks. This sounds clearly as if transparency reporting laws will be passed. The SEC under its new Director will try again to get laws passed that the Supreme Court last time rejected. New laws will probably be coordinated internationally all at the same time so that hedge funds cannot jump from one jurisdiction to another - and that means also coming down firmly on tax havens?
Brown cautioned against trying to reform America’s regulatory system in isolation, stressing the extent to which the US subprime crisis had infected European banks. It is also codespeak for the problem of Citigroup, which has most of its assets outside USA, much of them in Europe, and which seems most likely to be nationalised in the USA if only the complexity can be sorted out. And in a separate but potentially related development the prime minister revealed that Britain was in talks with Germany to agree a system for managing the withdrawal of banks, including the state-owned Royal Bank of Scotland, to their home markets. This sounds like the Single Market for Financial services going into reverse, which would be contrary to EU law and ethos! It is therefore surely about making it easier to nationalise banks when they are active in many jurisdictions - including US banks e.g. Citigroup - but also RBS giving up its AAB interests and non-core businesses outside of UK and USA. Gordon Brown called for a series of such bilateral agreements to try to prevent the exodus of banks from overseas markets exacerbating the global financial crisis.
For the FT's moving-talking graphic on the Geithner PPIP Plan see:

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