The moral hazard from a different angle
Only governments can save us.
This was the press headline covering the unfolding drama in the financial services sector. Just recently a British mortgage bank (Bradford & Bingley), a European bank (Fortis) and two American banks (WAMU and Wachovia) lost their independence. Forty eight was all it took for governments in the G7 to nationalise the banks or orchestrate rescues.
It continues to roll on with volatility and the $1 trillion bail out package in the US. So what does the impact going forward begin to look like and what are the effects?
1. Tax payers are footing the bill, but they were also the beneficiaries of the bubble. This is inflationary of course as countries now start printing free money.
2. Nationalising the losses through increased taxation is equitable and desirable but will push up interest rates in the long term, another factor re-inforcing (1) above.
3. Helping the banking system, helps the victims. They are the ones who will not be able to access credit. But when a large industrial conglomerate employing 100,000 workers/voters appeals for cash can the government say no? I don’t think so. They bailed out the bankers they have no choice but to bail out companies which are "national champions". They are all safe for now.
4. Wall Street didn’t have the monopoly on greed, buy-to-let schemes and property speculation was classless and borderless.
5. The Euro effect is to protect weaker countries (Ireland, Belgium, Greece) with stronger German French and Dutch balance sheets. This will ultimately make the case for entry into the Euro much stronger or the Euro currency may fall apart completely. Its an either or but we wont know until its over.
6. Iceland has no safety net because its outside the Euro and outside the European Union. Its guarantees are worthless unlike Ireland in a similar position, but who’s guarantees are backed up implicitly by the European Commission and the European Union. Ireland will have no choice but to vote YES in the next referendum I think.
7. Elements of the US congress were trying to stop the bailout being available abroad. The rest of the world has already written off billions in US sub prime losses so excluding European and other countries from the rescue package is morally unthinkable.
8. The flight to quality means that the US dollar will most likely strengthen at the expense of emerging markets.
9. Wall Street loses out again to the City of London as British Prime Minister Gordon Brown leads the world by being the first to address the re-capitalisation of the banking sector, which is the only solution.
10. The accountants and auditors who have signed off on the going concern issue in all the large banks and brokers must be concerned, this also presents a major crossroad in the next reporting round.
September 29, 2008 01:55 PM | Permalink
