..Running out of yesterday’s ammunition in a financial world shrinking today at electronic speed
I dreamed I went to dinner at the St Regis wearing just the silver amethyst earrings the Seows gave me from Grosse, the shop which counts stars like Michelle Yeoh, Lucille Liu, Zhang Ziyi et al as customers — or so I hear.
Actually I had no such dream, scary tho that might have been. (I used to think those ads promoting Maiden Form bras in the London Underground with the tagline “I dreamt I went to Buckingham Palace in my Maiden Form bra” were most nightmarish).
Instead, like the rest of the world comprising anyone with assets worth at least a bob or two, I’ve been having nightmares about the damage to my personal balance sheet as the global financial markets lurched around like a drunken sailor trying to find footing in a boat on the rough seas.
What would happen if the banks which hold my savings should wobble? Out of superstition, I daren’t write the five-letter word.
It didn’t help that the woman called Erin Burnett who co-anchors the CNBC “Squawk on the Street” program referred almost nightly to a comment she claimed a seasoned trader made to her: “He said he was thinking of withdrawing some cash to put into his safe deposit box.”
This was particularly unnerving when her anecdote was invariably paired with the market taking another large bite off the Dow.
After all this devastation, the fat cats can still go from cavair n champagne to beer and bratwurst. For leaner meows like me, we may have to make food courts our permanent places for eating out. But what abt those for whom a food court meal is a treat?
Almost everywhere, lenders of last resort, probably thinking of their bottom 20% earners (?), have pulled out all stops to prop up the drunk and stabilise the heaving boat.
To date, these are the measures undertaken, though not necessarily in chronological order:
- central banks have cut lending rates hoping the effect will trickle down and banks will be more generous with borrowers and borrowers would bite and thus defrost the frozen credit markets
- US is using USD700 billion to recapitalise banks most critical to its (and the world’s?) banking system and take off from banks’ balance sheets debts which tho nicknamed “toxic” have a decent chance of recovery
- Deposit guarantees: kicked off by Ireland, where they believe in faeries, elves and the good luck shamrock, now everyone and his uncle (almost) from the UK to the US, parts of Europe to the Antipodes and Hongkong are offering full guarantees to some or all of their depositors
In my view, recapitalisation of the banks is the only helpful bullet to date. The other concurrent bullets merely provide windows of opportunities for the quick to get out and waste real opportunities to sort out the mess.
- co-ordinated rate cuts to unfreeze the market merely spooked the markets as even the mole in his deepest mole-hole suddenly realises that the problems are serious with a capital “S”. Given this, few would make fresh investments, let alone borrow to make them and perhaps see the company in which they’ve bought shares go under. Few would open new commitments, such as buying a property or starting a business even if they are eligible for loans. Few lenders would give new loans, especially with the lower rates and the recessionary dowpour already on us. Worse, lenders’ earnings will be affected by the lower rates even as their costs rise, having to pay more for capital (given their parlous status) and deposits (insuring deposits at 100% can’t come cheap, even if it’s the Govt providing cover).
- Recapitalisation and purchase of toxic assets: these are the better moves but they take time to implement and alas, in an electronic era, even be4 one medicine has time to work, other events develop and could dull or neutralise the first medicine’s efficacy.
- Which is the 100% deposit insurance scheme first offered by Ireland to its domestic banks and then to all banks operating on the emerald isle. While I think it’s moral hazard writ large to provide 100% deposit guarantee (which in effect tells depositors that even if u put money in a junk bank, u’ll still be safe), it didn’t take long for other countries to do the same. Because in a world of free flowing funds, banks that enjoy the blanket of Govt guarantee will draw funds from those that don’t. The irony is that if some Govts stand firm and say “I won’t join because my own banking system is sound”, such a contrarian stand could see the deposit base of perfectly sound banks eroded, as depositors move funds to take advantage of those with guarantee. It’s no use having the last laugh on those depositors who find too late that some government guarantees could be just so much Irish mist when push comes to shove.
Besides recapitalisation, rate cuts and deposit insurance, what’s left in the financial regulators’ arsenal are forex control (heaven’s forbid!), curbing the rating agencies which act like fire-fighters who help burn down the house whenever there’s a fire and putting marked-2-market where it belongs: the bean counter’s bag.
Hopefully governments would have the wisdom to quilt together some long term effective solutions so that no one already very poor be4 this global financial crisis will be down to eating just 10 peanuts a day– an anecdote I recall hearing from one sage of Singapore who lived thru the Great Depression and lived on to tell his cautionary tales.