Enigma Variations

Banking on uncertainty

November 6th, 2008

So it seems that a recession is upon us. It must be true if the astoundingly cautious Bank of England cuts interest rates by 1.5%. Funny how just a few weeks ago everything was fine, the economy was sailing along without any really major problems, all that was wrong was a soaring oil price that was supposedly causing a knock on to gas and electricity prices and a suggestion that the housing boom was over. The problem taxing everyone’s mind was global warming. There was a small difficulty about “sub-prime” mortgages in the USA, nothing to worry about.

Now our banking system is in ruins; HBOS, which was a combination of one of the most conservative banks and the largest building society in the UK has lost over 90% of its stock market value and is apparently so short of liquidity that it needs to be taken over by Lloyds-TSB, and all the other major banks need shedloads of public money to carry on. So the man in the street is seeing his savings and investments reduce in value and his taxes going to prop up banks that seems unable to handle money despite giving us a poor service and high charges.

Meanwhile those gas prices that went up are noticeably not coming down despite a major fall in the oil prices that they were supposed to be connected to. Ever get the feeling you’ve been had?

The fact IMHO is that the people who run the money markets are generally pretty clueless apart from the speculators and the occasional guy like George Soros who can see trends before they happen. Most of them are there because of who they know rather than what they know. How many times have we seen competitions where a bunch of schoolkids manage to outperform the advice of all the “best” financial pundits and advisors. And as was shown some time ago the financial system is an almost perfect example of Chaos Theory in action. With the modern inter-connectedness that has been built into the international trading systems chaotic behaviour is a predictable (if that isn’t a contradiction in terms) outcome. A downward trend once started is almost impossible to stop. (As I write this I’m looking at the stock markets continuing to fall despite the 1.5.% cut)

Unfortunately the banks and building societies, once the bastions of safe conservative advice, have been sucked into the constant drive for more and more growth and as a result they have tended to dive into markets that would previously have been seen as far too dangerous, simply because to be seen to be lagging behind had become unacceptable when others were forging ahead, no matter how ill-advised such sectors might be.

Sadly there is very little indication that governments are willing to impose any real constraints on the banks or the markets. Maybe they’ve become so international as to be unmanageable, yet if so how come it’s national funds that are bailing them out? Maybe neither politicians or civil servants have the experience to operate in this field. Or maybe the theory of economics and monetary matters just showed once again how incomplete a theory it really is and no-one dares tinker with something that they’ve realised they don’t understand.

(The link at the top of this post is to a post on Robert Peston’s excellent BBC blog which is becoming a must-read for market watchers.)

Entry Filed under: Personal,Social/Political