Lesson Number One: We've all learned (or remembered?) that some mortgages are built on even less solid foundations than this curious wee house that sits IN the river Rhine (see picture) -- but which, solid foundation or nay, HAS been sitting there for neigh on 600 years -- quite mortgage free! LOL
Back to our anniversary. How have we dealt with the subprime debacle this past year?
Well, banks, both in America and Europe, have vigorously cleaned up their balance sheets, with the detrimental effects to their bottom line, to evaluations and market capitalization as we have seen. Estimates vary, but we might be heading into "trillion" territory with writeoffs as we speak.
Central banks are STILL pumping money into their respective money markets as if there were no tomorrow (and the way the banks still refuse to part with any of their money and lend it out, which IS after all what banks are meant to do, one might think THEY at least fear there might be no tomorrow!)
And as bank revaluations and refinancing are passed down the financial food chain into the so-called REAL economy, both consumers and corporations are beginning to feel the credit pinch.
And, let us face it, nothing -- repeat NAAAWTHNG -- has really been done yet to tackle the root of the problem: too much money at too low rates. On the contrary, in order to fill the holes in the banking dyke, the Fed punched a few more holes into it, so to speak. So in order to ease the short-term tensions in the banking system (and for fear the markets, the consumer AND the global economy might well get shipwrecked along with the banks), the Fed -- and to a lesser extent some other central banks -- pumped more easy money into the system and sowed the seeds for the next "easy money" disaster.
The logic of giving a heroine addict more heroine rather than risking him to die of withdrawal symptoms. But, like with your regular junkie, such treatment does not cure the addiction or the patient.
So how CAN the "patient," the banking system, be cured? Or maybe more to the point: CAN it be cured at all?
When the crisis first broke, I talked with then Commerzbank CEO and President of the German Banking Association Klaus-Peter Müller. KPM, never a man to mince words, said with a grim smile: "Simple. Banks and bankers have to start understanding and knowing again, what exactly they have in their books. A bit less fanciful financial engineering and a bit more solid banking. In other words: Back to the roots!"
Couldn't have put it any better, KPM! But, well, there is always a BUT, isn't there?
Telling 21st century banks to return to the roots is a bit like telling Porsche to abandon turbo fuel-injection race cars and return to hay-injection horse carriages.
Just an example: When I started reporting about the banks and monetary policy ... oh, in the mid-80s (yep! THAT long ago), Deutsche Bank was top banking dog in Germany. OK, no change here! But, in the mid-80s, "Deutsche" was ... well, DEUTSCH for starters. It was a German bank and 80 percent of it business was either based in Germany or in direct connection with German exports and/or German industry. It was a so-called UNIVERSALBANK, investment and retail banking under one roof, with a strong income base in classical banking -- i.e. retail banking and general lending.
Now, Deutsche is A) no longer German (from their shareholder structure or their business plan); and B) essentially an investment bank with retail banking attached to it. The same transformation happened with many other international banks, especially in Europe and especially in Germany and Switzerland, which have a similar banking history.
Of course, many of these "high-tech" banks are now trying to re-invent themselves and beef up their (low-margin, but steady) retail banking business again. Cynically speaking, one could say, they're scrambling to become UNIVERSALBANKS again. Back to the roots indeed!
Will it work? I doubt it. Why? Simple: when the shocks to the system (like now with subprime) are digested, they will soon be forgotten. And when the markets take off again, the lure of higher yields from fancy structured product or other fanciful financial toys of the future will be all too ALLURING again. And the next financial crisis of unheard of proportions will descend on us like one of the biblical plagues on a reticent pharaoh.
But, careful! Remember what happened to aforementioned reticent pharaoh? He drowned with his mighty army in the floods of the Red Sea. Ok, o need to get biblical on you -- agreed. All I am saying is: plagues -- biblical or others -- should serve as a warning.
Ignore them at your own peril! Or, in this case, at the peril of the global financial system and indeed the global economy.
Mind you, if history is anything to go by, bankers will heed these warnings even less than aforementioned pharaoh heeded Moses. Too bad!
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