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The Crisis Caravan Moves On

Friday, 9 Sep 2011 | 8:13 AM ET

Brussels, Jackson Hole, Berlin, Paris, Marseille, Wroclaw ... one crisis meeting is hot on the heels of the other and our policy makers - central bankers, ministers, heads of state and government - jet stream around the globe, trying to "manage" the crisis.

Given their busy travel and conference schedules one may wonder where they could possibly find time to manage anything at all.

Mind you, given the ever more apocalyptic state of the crisis, one could come to the fatalistic conclusion: they don't!

Too cynical? - Oh, really? Let's just recap: Four years ago, the global financial system slithered into something that was - with the usual euphemism of military operations or covert marketing - called "the subprime crisis" (what it should have been called was of course rather: "we've tried to turn every piece of real estate that was worth something into profit, now we sell you the real dogs!").

The cause of the afore-mentioned crisis was - and here "experts" agree - too much, too cheap money desperately chasing yield.

As a consequence, ever more desperate yield chasers went into higher risk investments in order to maintain their performance record (and their bonuses!).

So cheap money was the problem, right? And what do you do to fix that problem? Simple: you make money more expensive. Right? ...Ah, too simple.

No, first you make money even cheaper, print lots more of it, give lots of it to the banks who used it unwisely (and that's an euphemism and a half if ever I've seen one!) and hope that everybody forgets about the whole nasty business and lives happily ever after.

That is something that doesn't even happen in the fairytales of old.

There is always a wolf, an ugly sister, an evil stepmother who has to pay, who has to dance in hot iron shoes until she dies.

Only this time, the wolf, the ugly sisters and the evil stepmother have all ganged up on Cinderella and decided she should do all the atoning there needs to be done.

I mean, four years ago we started with a banking crisis, a whole herd of clever global banks and bankers believing that pigs could fly (and that house prices would only go up while interest rates would always stay low ...Never happened before in the history of man, but, hey, why not this once?).

'Pass the Buck'

Because governments around the globe were then scared to let these banks die or at least face the music, as they would have and have done in the past with any other industrial company that maneuvered itself into bankruptcy, these banks were kept artificially afloat by lots and lots of more cheap money.

The governments that saved them, of course, were henceforth left with mountains of bad investments in their books.

With this simple game of "pass the buck" we turned the banking crisis into a sovereign debt crisis. That was no surprise at all; at least it should not have been.

But as the banks were so smoothly relieved of chunks of their bad investments and as money was still cheap and yields painfully low, banks once again chased high yield at perceivably low risk (again: and pigs will fly!).

And they bought euro-denominated bonds with higher yields - such as Greece, Ireland, Portugal ... I let you in on an old secret here: high yield usually means high risk. Old rule of thumb of investment since the days of Ramses the great and his building projects.

And, once again, when these investments went sour, the banks started banging at the gates of their respective governments and demanded from them to solve the problem.

Oh, they were and are full of bright and wonderful ideas how this might be done: break up the euro, print drachmas, issue Eurobonds, guarantee all bad debt ... And they want it NOW!!!

Far be it from me to see any of our governments or policy makers as an innocent and pretty Cinderella that just lost her glass shoe on the way home from the ball (more like the slightly befuddled old king that has lost the plot).

But it seems to me that the ugly stepsisters are very much asking to get the fair prince and the key to the kingdom.

In more plain speak: if as we know only too well, the markets, the banks and the bankers got it all so fabulously wrong for years on end (and seem to be getting it wrong still), why do they even presume they can tell governments what to do? And, maybe more to the point: why do government still allow themselves to be intimidated? Well, maybe because it's not like in the fairytales of old: the evil stepmother doesn't always get punished.

And even Julius Caesar could not run for elections without the help of his bankers or Richard the Lionheart march on the holy land without adequate funding.

Money made and makes the world go around; and until money has decided that it "goes round" again, our policy makers will tour from crisis meeting to crisis meeting ...

While what is being decided there or not might — sadly — be less relevant that everybody is trying to make us believe.

Too cynical? - Think about it: has any policy decision - good, bad, or indifferent - interested the market for longer than a couple of hours or an afternoon? I recall none.

Events have lastingly turned markets ....9/11, the end of Cold War, German unification ... But not decisions about bailout funds and austerity package.

Pick up your glass shoes, Cinderella, and run a mile! There ain't no prince out there...

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