Stupid bankers

Most just don’t have the abil­ity to do their jobs

Finweek English Edition - - Economic Trends & Analysis - HOWARD PREECE

THE MAIN PUR­POSE of re­crim­i­na­tion, Win­ston Churchill once ob­served, must be to en­sure ef­fec­tive action in the fu­ture. That com­ment ap­plies es­pe­cially to the bank­ing/ fi­nan­cial cri­sis now tak­ing such a heavy toll on the world econ­omy. For­tu­nately, South Africa has less to grieve about di­rectly than many other na­tions. Key rea­sons for that are:

A com­bi­na­tion of ex­change con­trols and rel­a­tively small size by the stan­dards of the global giants kept SA banks largely in­su­lated from the global tur­moil. Vi­tal help in that re­spect was the in­tro­duc­tion in 2007 of the Na­tional Credit Act (NCA).

That over­turned dom­i­nant ANC think­ing in the Nineties by mak­ing it much harder for bor­row­ers to seek loans they couldn’t af­ford – and im­posed se­vere penal­ties on lenders seek­ing to evade the re­straints.

The NCA was a suc­cess­ful throw­back to the past – and it’s a les­son that many other coun­tries are cur­rently re-learn­ing.

How­ever, SA couldn’t pos­si­bly es­cape the fall­out of the fi­nan­cial cri­sis in the global econ­omy. In that cri­sis all the usual sus­pects are in­volved to var­i­ous de­grees. They in­clude: charge cur­rently lev­elled against the man­age­ment is “greed”. I can see that ar­gu­ment well enough. But I think the crit­i­cal fail­ing has been “in­com­pe­tence”. No­body has ever ex­pressed that view more exquisitely than the great econ­o­mist John May­nard Keynes. He wrote in 1931, just be­fore The Great Crash: “Bankers are the most ro­man­tic and the least re­al­is­tic of men. It is so much their stock in trade that their po­si­tion should not be ques­tioned that they don’t even ques­tion it them­selves un­til it is too late.”

Keynes added: “Bankers feel a proper in­dig­na­tion at the perils of the wicked world in which they live – when the perils ma­ture. But they do not fore­see them.”

There re­mains much painful truth, nearly 80 years later, in those mock­ing com­ments by Keynes.

Bankers gen­er­ally aren’t crooks – though there are ex­cep­tions. They mostly just don’t have the abil­ity, though, to do their jobs. run by peo­ple in­her­ently more tal­ented or more hon­ourable than those in charge of mega-cor­po­ra­tions. That’s why vir­tu­ally all such banks in SA went bust in the Sev­en­ties, as later hap­pened with the dereg­u­lated build­ing so­ci­eties. How­ever, that was very much an in­ter­na­tional trend – and the fail­ings have con­tin­ued right into the cur­rent cri­sis. Euro­pean coun­tries orig­i­nally stood smugly aside from the sub-prime mort­gage is­sue, which they briefly thought was “merely a prob­lem for Amer­i­cans”. Then they found a large num­ber of banks, of all types and sizes – in Ger­many, Ja­pan. Bri­tain, Hol­land, France, among oth­ers – had “in­vested” bil­lions in bun­dles of se­cu­ri­tised mortgages from the United States.

That brought more sus­pects to the fore. Where were all the bank reg­u­la­tors and fi­nan­cial over­seers? We’d been as­sured that bank­ing prac­tices in­ter­na­tion­ally were greatly reg­u­lated by the Basle 1 and Basle 2 agree­ments. Those, tech­ni­cally, im­posed ma­jor lim­i­ta­tions on what banks could and could not do.

But in prac­tice it was quite dif­fer­ent. Basle 1 was hugely out of date; and while Basle 2 was for­mally drafted in 2004, few coun­tries ac­tu­ally rat­i­fied it. Many dif­fer­ent na­tions had many dif­fer­ent reser­va­tions.

Also, most coun­tries put great faith in their own reg­u­la­tory au­thor­i­ties – such as the Se­cu­ri­ties and Ex­change Com­mis­sion in the US and the Fi­nan­cial Ser­vice Au­thor­ity in Bri­tain. We know now that none of those au­thor­i­ties had ei­ther the num­bers or the qual­ity of staffing any­where near to man­age their for­mal re­spon­si­bil­i­ties. Then there are the politi­cians. Euro­pean Cen­tral Bank are, in the­ory, supra-na­tional but in re­al­ity are con­stantly sub­ject to a lot of pow­er­ful lob­by­ing by purely na­tional in­ter­ests within the Euro­pean Union. from Con­gres­sional po­lit­i­cal de­mands (pri­mar­ily from Democrats but with many Repub­li­cans climb­ing aboard) that mort­gage lenders be forced to lend in­creas­ingly more to the “un­der­priv­i­leged” – ie, to those who couldn’t se­curely af­ford the loans.

In 2007, Pres­i­dent Ge­orge W Bush sought to im­pose some re­straints on that. But the then Se­na­tor Barack Obama was one of many Democrats who con­ve­niently ab­stained from vot­ing. On the other side, the Repub­li­cans now at­trib­uted many cur­rent bank­ing prob­lems to the re­peal in 1999 by the Clin­ton ad­min­is­tra­tion of the Glass Sea­gal Act, which sep­a­rated com­mer­cial and in­vest­ment bank­ing. But many Repub­li­cans sup­ported that and it was Repub­li­can Se­na­tor Phil Gramm who for­mally pro­posed the mo­tion.

Yes, the en­tire sys­tem has to be re­built: there will be new, or re­newed, reg­u­la­tory changes. How­ever, the global econ­omy has never pros­pered as it did be­tween 1950 and 2006 – and that fact must also never be for­got­ten.

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