The effective collapse of the Royal Bank of Scotland (RBS) has ushered in another phase of the financial crisis.
Just when things were starting to look a little better and investors were starting to think about re-entering the markets, good old RBS comes along with a result that must have put the fear of God into British Government officials.
The RBS result has reverberated around the world and caused renewed selling in banking stocks.
The British economy is in a precarious state – the result of having a disproportionate component of that economy dedicated to financial services, services that many people no longer have a use for. There is going to be a lot of pain this time around.
One thing that Governments everywhere should understand is that the cycle will run its course regardless of what they do. You can attempt to mitigate the worst effects of what is happening but it’s like standing in front of a freight train with a stop sign.
In Australia we have Prime Minister Kevin Rudd attempting all sorts of rather foolish things in order to stop the economy entering recession – he will fail.
He gave away $10 billion dollars of tax payers’ money so that certain Australians could enjoy a pre-Christmas spending spree – in effect firing a significant amount of his ammunition before the war had even started.
He placed an essentially unlimited guarantee on bank deposits (something his Government would not be able to honour if one of the big four banks were to collapse, the Government doesn’t have the financial resources needed, it’s all just a confidence game).
He now wants to assist commercial property developers with $2 billion of taxpayers’ money. That’s right – commercial property developers, many of whom took on massive levels of debt and completely mismanaged their affairs and now we the taxpayers are being asked to assist them (and the banks that lent to them) – if this wasn’t true it would be very amusing indeed.
The Reserve Bank of Australia is hell bent on reducing interest rates to almost nothing in order to “stimulate economic activity”. Note to the Reserve Bank – it hasn’t worked in Japan, the United States or the UK – it won’t work in Australia either.
It won’t work because once banks decide to tighten lending criteria (as they have done globally), it doesn’t matter what the interest rate is – if they won’t lend to you, they won’t lend to you!
[The Australian residential property market that has stood up remarkably well to date is now showing definite early signs of weakness. I think things on this front may be very interesting in a year or so.]
Of course it was the artificial suppression of interest rates for an extended period by that now maligned central banker Alan Greenspan (and his unthinking global clones) that created the ideal environment for this crisis to take place. How do we solve the crisis? Do the exact same thing that caused it in the first place!
The inauguration of Barack Obama made people around the world feel good, but the market was not so impressed. The novelty value of an African-American president won’t last long if President Obama doesn’t deliver and deliver soon. He is a very intelligent and incredibly articulate person and he has the best wishes of all of us. Let’s hope he can pull a rabbit out of the hat, he is going to have to. The problems he faces are momentous.
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