One for the critics (dropping the mask)
So I rarely become annoyed. But I am annoyed . Annoyed by the following comment on Hopi’s blog:
‘You should read what Duncan has to say , in amongst the slavering New Labour lackey-isms he cannot help noticing some inconvenient facts like the fact our debt mountain has nothing to do with a stimulus bit is simply the result of the vast welfare state and its dependents moving out of a boom. Or the fact we cannot abolish the trade cycle . Pity Duncan was not saying such things when it was useful but then I daresay he was parroting the New Labour line that you could then.’
Whilst in my old job, I wrote the following.
The future then, for banks, looks rosy. As long as they can fund increasing lending via capital
markets activity, profits will continue to soar. Funding via customer deposits seems so last century.
Moreover, it would be rather difficult anyway given Britain’s absurdly low savings rate of 5.2%.
The simple problem with this system, elegant though it appears (especially for the bankers), is that
it is built on foundations of sand. It is a model that relies upon risk premiums staying low: a change
in risk appetite or, more likely, a sudden realisation that investors are swallowing a lot more risk
than their appetite requires, could lead to the whole system falling down. If buyers of asset backed
securities start to demand a higher risk premium for owning these securities, then banks will witness
the cost of their funding soar; their ability to generate new loans will be severely restricted – it
could result in a run on the banks without a single deposit being drawn down.
another real worry is that so much of the banking sector’s funding is now short term (see next chart). It
is not too much of a stretch to envisage a situation whereby some unconnected event, perhaps in
land far, far away, causes investors quickly to reassess the risks they are bearing, driving up yields
across various types of debt instrument. When a bank tries to roll over its funding, as many must do
nearly every day, it suddenly finds that it needs to pay out a lot more cash than previously. We then
find ourselves in crisis mode, as a major bank desperately tries to find the cash to keep itself liquid
– with huge knock on effects through both debt and equity markets.
So please Newmania, less personal attacks.