Credit crunch and raising capital

At this morning’s Michael Gove Parliamentary Breakfast Club one questioner asked about the difficulty of sizeable businesses from obtaining credit from banks – suggesting another credit crunch is looming.

From reading financial snippets I’ve concluded that there are signs of a major shift in where businesses can now raise capital and credit. With banks becoming ever more tightly regulated and with their need to up their capital ratio, sucking cash out of the system, meaning they’ve less to lend, businesses are looking elsewhere to raise funds.

They appear to be going directly to hedge funds, and a wide variety of non banking sources, even to their customers or suppliers. So while the focus is on the big banks, there are new ways to raise capital, which presents by opportunities and dangers.

This is the capitalist system working. We should acknowledge what’s happening and help businesses gain access to these new sources of credit and capital. I’ve as yet not worked out in my own mind how we should do this, maybe through a new form of exchange, perhaps like the coffee shops of old.

Have a strong cup of coffee at the ready …

…. because after reading the This is going to hurt article, by renowned editor of City am newspaper, in The Spectator, you’ll certainly need it.

The bottom line is that most Western countries have been living beyond their means for years, and the day of reckoning is approaching about their addiction to borrowing to pay for it. I’ve written a lot about our debt, Our Economic Health: Part 1 National Debt is a useful primer.

The most important story remains largely unreported

The TV media, and the press seem fixated on the phone hacking story and all of its myriad of ramifications. How the media love talking about themselves, and how the right-wing and left-wing media seek to disadvantage each other.

Important and shocking though it is, it’s not the most important story of the moment. The fate of the Euro currency along with sovereign debt reduction should be the top story. This is what I’ll be blogging about in my spare moments for a while.

Banking Commission notes 1: Gordon Brown’s mistakes

The Independent Commission on Banking produced its interim report on 11th April. Solving the problems with the banking system remains one of the most important issues facing our nation. Rather than providing an over-long blog post on the report, I’ve decided to break my thoughts into smaller blog posts.

But, before I do that, it’s worth reminding ourselves of one of the architects of the banking crisis – one Gordon Brown. Last Saturday Gordon was speaking at an event organised by the Institute for New Economic Thinking in Bretton Woods, New Hampshire – you can watch his speech HERE. I don’t recommend it, as it will bring about a shoe throwing at your computer.

In his talk Gordon admitted, finally, mistakes in regulating the banks, neatly forgetting that it was he who removed banking regulation from the Bank of England, and handed it to a bunch of inexperienced regulators in the Financial Services Agency. See earlier comments HERE. Here’s the Press Association report on what Gordon said,

Mr Brown said that in the 1990s and the years up to 2007, when he was chancellor, he was under “relentless pressure” from the City not to over-regulate.

“We know in retrospect what we missed. We set up the Financial Services Authority believing that the problem would come from the failure of an individual institution,” he said.

Mr Brown said the economic problem had been seen in terms of inflation rather than financial stability. He went on: “So we created a monitoring system which was looking at individual institutions. That was the big mistake.

“We didn’t understand how risk was spread across the system, we didn’t understand the entanglements of different institutions with the other and we didn’t understand even though we talked about it just how global things were, including a shadow banking system as well as a banking system.

“That was our mistake but I’m afraid it was a mistake made by just about everybody who was in the regulatory business.”

Yeah, right Gordon. We remember when you said that the UK, and specifically you, led the world in solving the financial crisis. But now everyone else is to blame.

All roped together in the Euro

There’s much talk of Ireland in financial extremis.  Should we help our near neighbour by lending them money? Tough question. Possibly, but would they want it from us, all that shared history about their gaining freedom from us.

The problem for many countries in Europe is the single currency. Those in the Eurozone are, like mountaineers, all roped together. If one falls, they all fall as Herman Van Rompuy has said. That’s unless they cut the rope and cast some adrift, which the EU seem unlikely to do. I see a fudge coming.

The debt problems and hidden banking toxic debt of many European countries are huge, possibly insurmountable. Let’s review the list with the help of the wonderful FT Alphaville blog and others:

And that’s not including problems of the other smaller and newer nations in Europe, such as Hungary. Gloomy stuff I know. 

Now where’s my favourite economist, Liam Halligan, when I need him?

An under educated economist

I’ve often wished I could’ve been an economist. Without a university education, and also lacking the intellectual firepower and mental toughness, I know I couldn’t be one. Doesn’t stop me wishing though.

It’s quite pleasing to see that my simple brain has come to the same conclusion as three of the countries leading economists. I share their view that the Bank of England’s quantitative easing should be directed to support the private sector – buying corporate bonds and commercial paper, rather than the public sector, through buying government bonds. Edmund Conway’s – Daily Telegraph economics editor – blog post, Will the bank soon be buying houses? reports on Fathom Consulting’s quarterly press conference, where there’s some sensible discussion on what to do to get our economy back to full health.

In this way lies madness

Dilatory posting today is a direct result of reading some troubling news about the sate of the UK. Particularly on the economy, and the policies advocated by the respected economist Roger Bootle of Capital Economics in today’s Daily Telegraph. More than a few cups of tea were needed to regain a semblance of personal balance.

The essence of his article is that we need more quantitative easing [QE], and that while Bootle recognises that it’s a dangerous policy, which also carries inflationary risk, it’s better than doing nothing. I’m not sure who he thinks is advocating doing nothing. I know of no one.

My view is that QE is a tactical policy, to finance our horrible debts, and to let the banks off the hook. What we need is a strategic policy. Having successfully transformed our economy from manufacturing to financial management, we should do all we can to press home that advantage, both for economic and employment reasons. The managers of wealth, whether national or private, were shaken to the core by the credit crunch crisis. They need to learn to trust financial markets and professional advice – that’s the market the UK needs to be, trusted.

The credit crunch has ‘gummed up’ the gears of enterprise. It needs freeing up. Credit needs to flow to the productive sector, not to support government profligacy. The UK’s entrepreneurial spirit and brain-power is being drained by over reliance on state funding. Just look at the excessive salaries of the many managers our ineffectual quango’s.  We should force the banks to ‘front up’ on their bad debts, introduce a ‘Glass-Steagall’ law that splits banks into ‘boring’ banks and ‘exciting’ banks, and direct QE ‘money’ directly to the private sector by buying corporate bonds, not government bonds.

I agree with Liam Halligan, time we, as a nation, took the lead in banking regulation, and fiscal responsibility.

Gordon’s exculpatory tosh, piffle, and bunkum

What a contrast between Gordon Brown’s exculpatory tosh to be found in the government website Real Help Now, and the revelations by the chief of the FSA that Gordon Brown’s ‘light touch regulation’ was  key part of the reason for the credit crunch and banking failures.

I simply give you two quotes, firstly Gordon, in the part of theReal Help Now website on The Failure of Regulation, and then Robert Peston:

[Financial Services] Regulation to date has focused at the bank level and at the country level, but what we saw was not the failure of banks in isolation but the failure of global markets themselves. This has led to many lessons on regulation and on how to coordinate regulatory efforts across countries to supervise the global financial system itself.

I’ve been saying for the last ten years that we need better regulation and global coordination – after forming the unified regulator for Britain, the FSA, we arranged the Financial Stability Forum for the world  ……. it’s only really when things reach a crisis point that people are ready to take bold action together.

Britain’s ideas for how we rebuild the financial system so it works in the interests of ordinary people and not financiers are getting a global hearing and other countries are following our lead.

Now Robert Peston, in his blog post FSA admits huge mistakes on the head of the FSA being grilled by the  House of Commons Treasury Select Committee:

“But it also implies that – again – the FSA got it wrong to a mindboggling extent in another absolutely core area of its regulatory responsibilities.”

Gordon is surely delusional if he thinks that the failed regulatory model for financial services he created is admired by the rest of the world. 

Like Robert Peston, I’m speechless. But, I’ll come back to this fiasco later. I liked the first commentor on Robert’s blog

Blimey.

Talk your way out of THAT Prime Minister!

Redwood spots 10 errors leading to the financial crisis

I’m happy to see John Redwood has given us his ten errors leading to the UK’s financial crisis. This follows my earlier post on how a US professor spots six errors that led to the US financial crisis.

John Redwood’s article – Who’s to blame – provides the information needed to understand what caused our financial crisis. John Redwood’s blog is essential reading, penetrating stuff, if sometimes a little dense in its prose. Anyway, here’s his summary of the ten worst mistakes of the UK authorities so far: 

  1. The government was wrong to take powers of daily bank supervision and the duty to raise money for the government away from the Bank of England. This made it difficult for the Bank to conduct a sensible monetary policy.
  2. The government was wrong to change the inflation target at the end of 2003, leading to lower interest rates than were safe.
  3. The government was wrong not to chair decisive meetings in August 2007 with the Bank and [the Financial Services Authority] to make the markets more liquid to prevent the run on the [Northern] Rock.
  4. The government was wrong not to find a banking solution to the problems of the Rock, relying instead on an expensive and damaging nationalisation.
  5. The authorities were wrong to scupper a private sector deal for the Rock, partly owing to their interpretation of EU rules.
  6. The authorities were wrong to keep interest rates relatively high for as long as they did.
  7. The authorities were wrong to tighten capital requirements last autumn and to propose tightening liquidity requirements at the turn of the year when the crunch was well advanced.
  8. The authorities were wrong to put equity capital into banks towards the end of 2008, without doing proper due diligence and without demanding prior write downs of bad and doubtful debts.
  9. The government was wrong to cut VAT, adding needlessly to the government deficit.
  10. The government was wrong to follow a policy of benign neglect of sterling, and to make the last cut in interest rates.

 There, it’s on record now. For me, one telling error was wasting time after the Northern Rock collapse in August 2007 – heck that seems an age ago now – and not to have looked more deeply into the finances of our major banks at the time.

Graphics and the credit crunch

I’ve been a marketer for the last 20 years, with US and UK computer software companies and as an independent marketer. I’m keen on getting a message across and doing it as effectively as possible, which is why I think it’s always more powerful to combine text and graphics.

You know the phrase, “a picture is equal to a thousand words”.

And so it is with the credit crunch. I’ve read a lot of articles in the press and online, but none have shown the horror in quite such detail as these two articles in BBC News Online  THE US SUB-PRIME CRISIS IN GRAPHICS’ and ‘FORECLOSURE WAVE SWEEPS AMERICA’.

 sub_prime.gif

I particularly liked the combination of grahics in the article, and top marks go the Sub-prime Crisis in Cleveland graphic, in which are four choices, sub-prime lending, black areas, foreclosures, Deutche Bank properties. Shown on the right is the one on foreclosures:

NOTE: I have to say, I’m surprised at the lack of racial integration in the US, and how areas can be so clearly defined as ‘black’ areas. I’m pleased we don’t have the same concept here in the UK.