10 August 2007

Mediocracy in banking



The Financial Times Lex column:

The European Central Bank might have called it “fine-tuning” but its decision to inject nearly €95bn into the eurozone banking system, the largest such intervention since the September 11 2001 attacks, is anything but. ...

The real question ... is not what the ECB knows, but what the 49 banks participating in Thursday’s operation know — or fear. In a few cases they may have been suddenly keen for cash in anticipation of their own losses. Most, however, may have simply anticipated losses somewhere else in the system. ... the fact that banks could suffer such a collective loss of nerve says a huge amount about their own view of how far lending standards and transparency have deteriorated.
How could lending standards have deteriorated? Easy, in a culture where old-fashioned bourgeois ethics — such as deciding responsibly for yourself what is the right thing to do — are no longer fashionable. Instead, the criterion is: if your peers are doing it, or if a committee of 'experts' decides it's okay, it must be okay.

And how about 'transparency'? Transparency, as practised in a mediocracy, is a mechanistic way of trying to compensate for the fact that people are liable to behave less responsibly. However: (a) it can't compensate, because it wrongly assumes that the (dumbed down) audience will use the data thoughtfully, rather than just assuming the 'experts' have got it right, (b) it is largely phoney, because the data given out is often doctored and manipulated, making things worse than if it wasn't given out in the first place.

8 comments:

Graf von Straf Hindenburg said...

...How could lending standards have deteriorated?...

Because they were designed to do so. When I read the Fed's Oct 06 report, the alarm bells rang because Morgan are not unrelated to certain European banks and it was clear that there was going to be induced turbulence in the markets first.

The credit squeeze to follow I never tumbled to but others did and it certainly would seem to follow. Plus another factor CityUnslicker referred to - dangerous incompetence.

It's like 7/7. Very hard to sheet home culpability for the event except in the slight delays here, the sluggish response to the Israeli warning there and so on. Most effective policy - failure to prevent.

I have consistently been citing 2012 at my site and continue to do so now. 2010 sees the interest rate shift in the U.S. and 2011 would apper to be the big one. This stuff now is the trial run.

Ignotum Per Ignotius said...

Fabian, if my memory serves (I don't intend to trawl through the Mediocracy archives for the links)...

1) You've pointed out that New Labour isn't averse to redistributing wealth through the printing of fiat money.

2) You have (I think) opined that "there's way too much credit out there" (apologies if I paraphrase, but you get the gist).

3) You've posted about how the gold price has climbed over the past decade --- a decade of increasing economic technocracy.

...And now a thread reporting "a collective loss of nerve" among the banks. You also mention 'experts' --- who, as far as one can tell, appear to believe that concerns about fractional reserve banking are the province of economically illiterate paranoiacs. What say you? Are bank runs really a thing of the past? Or have we simply found a way of postponing (and possibly exacerbating) the inevitable?

Might we even see the pound or dollar go the way of the Papiermark? And what role is China likely to play in all of this?

I know economists hate making anything like a prediction, but these are very interesting times, and you tend to cut through the usual obfuscatory flim-flam, so please, humour me. ;)

Graf von Straf Hindenburg said...

There simply were no lending standards in the first place in real terms but merely an agenda, addressed here:

http://nourishingobscurity.blogspot.com/2007/08/crunch-cat-toying-with-mice.html

Fabian Tassano said...

Ignotum: "Are bank runs really a thing of the past? Or have we simply found a way of postponing (and possibly exacerbating) the inevitable?"

I think it's a bit early to be predicting bank runs, though I wouldn't rule it out. Anything which governments can directly control, such as the banking system, is more likely to suffer later rather than sooner, in my opinion.

Of more immediate concern are areas that governments find it harder to control:
1) Inflation may rise if confidence in paper currencies starts to suffer. Once it rises, it can rise quite quickly because of feedback in expectations.
2) If inflation rises, interest rates will follow, leading to a rash of foreclosures and bankruptcies given the over-borrowing. This could lead to serious recession.
3) Capital markets could be seriously destabilised if confidence in paper assets is compromised.

In the event that these problems materialise, countries like China, which appear to have run their economies more soundly, should be okay, and ultimately benefit from our woes. However, they would be liable to suffer in the short run as appetite for their exports diminishes.

James: "no standards but merely an agenda" - rather a useful phrase, which could be applied in many other areas, esp. education/academia.

Graf von Straf Hindenburg said...

Fabian - your comments:

...I think it's a bit early to be predicting bank runs, though I wouldn't rule it out...

No, they must be induced. They're always induced by policy and turmoil. Now where does the trumoil come from? Certainly from neither the businessman nor the common man. so it must be another agency.

Government. But using the U.S.A. as a model for now, it is neither the executive nor the legislature who determine policy. They implement it, yes but the advisors are the ones who are listened to - both permanent heads and NGOs.

Who are they? Look at the SPPNA issue which had Bush meeting Martin and the Mexican. In other words, the CFR and TLC have inordiante influence. Rice, Kissinger, Cheney, Rumsfeld, Clintons both,Fred Thompson, Giuliani and on and on.

You may well say that membership or close proximity does not confer coercion but in the case of this body, as Senator Jenner said, it does.

In the 60s it was referred to as the military-industrial complex. for an index as to the miindset of these people, look at the post on state paedophilia.

The 12 Feds, as you well know, Fabian, has zero to do with government except in it's brief to maintain economic stability within the country, sort of like having 12 wolves, the chief wolf named Morgan, to look after the sheep.

So, in the end, it comes down to policy by the financiers, in whose interests it is to have a run sooner or later. Plus there is an agenda to both tighten constraints on society, turn the common populace into debtors and then to blackmail them into compliance on pain of foreclosure.

In other words, people's big eyes have landed them in penury.

...is more likely to suffer later rather than sooner, in my opinion...

2011 to be precise. That's when the mandatory reserve deposits cease.

...Inflation may rise if confidence in paper currencies starts to suffer...

Considering that it is fiat money to start with and that the Chinese are now flexing their muscles due to U.S. provocation [related to Tibet peripherally and African seaports but that's another issue], this drop in confidence in the greenback is being carefully stage-managed.

...China, which appear to have run their economies more soundly...

Then why the U.S. pressure to devalue the yuan?

My conclusion is that there is indeed an agenda, the reins are in the hands of what CityUnslicker called the kooks and there is coming a credit squeeze, societal unrest and then war.

This is only as much as Merkel has stated and she should know - she's in conference with the Bruderheist in Bavaria. As John Buchan MP said: "It's been booked."

Ignotum Per Ignotius said...

Thanks for the reply, Fabian.

"I think it's a bit early to be predicting bank runs, though I wouldn't rule it out. Anything which governments can directly control, such as the banking system, is more likely to suffer later rather than sooner, in my opinion."

I quite agree, although I'm not sure that such government manipulation would necessarily be beneficial (not that you imply it would) --- I think that if there is a serious problem in the making, then having the state bail out some of the culprits is apt only to prolong its resolution and simply worsen matters. ...And governments don't generally have a glorious track record when dealing with big financial crises.

"In the event that these problems materialise, countries like China, which appear to have run their economies more soundly, should be okay, and ultimately benefit from our woes. However, they would be liable to suffer in the short run as appetite for their exports diminishes."

Yes. The vast Chinese dollar reserve would become rather a liability too --- unless they somehow managed to offload it before the deluge. But then might such offloading not itself precipitate the deluge?

CityUnslicker said...

I am not a pure economist by training and only a tiny peice of the jigsaw in the financial services world.

What troubles me is the truly massive lending put into the system last week. it must be so carfeully planned and yet as FT says will lead to ramapnt inflation.

Why is this allowed to happen? I note that the BoE did not enage thus so and that gives me some heart that our monetarists have some small grasp on the reality of printing money and what it will do.

Perhaps the US does seek the huge devaluation as a way of long-term getting out of its enourmous debt obligations?

Ignotum Per Ignotius said...

...Just stumbled across this.

Oh dear.