Either banking adapts to the post-bubble world or the world will by-pass the banks...
READ ANY LEADING US newspaper and you'll see that "banker" has become an unpleasant word, notes Julian Phillips of the GoldForecaster.com, as banks take in tax-payers money and give nothing out.
Then you have the endless blame game ("We didn't force you to borrow!"..."Oh yes you did, through pushy adverts and peddling real estate...") as everybody loves to blame someone else for the global banking system continuing to teeter on collapse. Central bankers need to raise vast amounts to save the banks from going under, incurring fresh blame for debtors, lenders and government.
But why do the banks need saving? Because the banking system in the last 50 years has gone from a source of loans in a cash society to the very financial artery of the developed world. The banks have their hands on every single transaction everybody makes anywhere, and they take a fee for doing it. Cash costs a lot to access now, and as part of our modern culture we have accepted that cash is risky and a little Neanderthal.
Take banking out of our lives now and economies just can't function. Without the banks – the arteries and veins of our economic life – the system can't work. Maybe the solution is that they retreat from this role. But until then, their business culture will continue to come under attack until, like veins and arteries, they allow the lifeblood of the economy, money, to flow unrestricted.
The credit crunch started in the banks. It turned nasty when the Fed decided that if they were allowed to fail then the heart of the economy would be in danger of stopping. Along came Treasury Secretary Paulson and TARP.
The Troubled Asset Relief Program (TARP) was directed at re-capitalizing the US banks in the belief that a clean-up of their balance sheets would prompt them to return to lending easily in a receding economy. But little of that has happened. And so our forecast of a clash between government and bank has now been reached.
"We're not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans," says one leading banker. But the purpose of the bailout was to precipitate lending by the banks. The first objective of TARP bailouts clearly failed!
An overwhelming majority of banking executives saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future. But Treasury secretary, Henry M. Paulson Jnr, said in October that banks should "deploy, not hoard" the money to build confidence and increase lending. He added: "We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure."
Yet a Congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures. Why not? Are the banks simply taking opportunistic positions, ready to plunder the economy of businesses failing solely because of a shortage of working capital? Isn't their job to keep the economy going? Bankers would argue that that is a secondary function contingent on their primary objectives being reached – profit after prudence!
In itself, this adds yet more uncertainty to the future.
Why aren't the banks willing to lend easily to take everybody out of recession? The answer is that they were not designed to act as arteries and veins allowing the unrestricted flow of money through the system, a role that they have persistently attempted to evolve into over the last 50 years. Their first priority is to be profitable. After all, banks are corporations and committed to making profits as wisely as possible. Not now, we answer. Profits and prudence may well be the guiding principles of bankers in the true capitalist fashion but they have moved on from being simple corporations. They affect the very fabric of all developed societies on this earth.
As the banks have seeped into every single transaction or payment we make, they have become a vital part of the infrastructure, just as electricity or water are in our lives. That changes things dramatically. Particularly so, in that banks have invisibly integrated themselves into each other through syndications, interbank lending and the like. With this role, like our blood system comes new responsibilities and duties that bring them closer to government. Now with the support of the government and the taxpayer behind them they must adjust or continue to earn the Shylock title?
The major US banks are no longer parochial corporations, but part of a national framework in most parts of this world, but particularly the United States themselves. In many regions they walk hand in hand with central banks. Central banks themselves, although deemed independent, are also a direct influence on the economy, on consumers, or put another way, voters/taxpayers (who are saving their bacon right now). Hence they have, of necessity, come under the 'pale' of government (part of the domain of government) whether they admit to it or not.
No matter how much bellowing of capitalist principles we hear, nothing will alter that beyond a shrinkage of banking's role and a return to cash transactions. After all, banks have to adjust to the wide role they play in the economy particularly now that taxpayers have invested in them without receiving the usual equity that comes with such rescues. Taxpayers invested in them to help them to lend and for no other reason except to keep them going. Banks now affect every single money transaction made and have to work in synch with the broad economy and government, now. Solely isolating prudence and profit, as guiding principles, won't cut it any more.
The banks may well bleat that they don't lend because as deflation sets in, risk rises in our deflating economy. But of course, risks rise and the economy deflates further because the banks won't lend – a classic Catch-22.
This alarms us, as the banks profit in such an environment taking assets under management to be sold as conditions improve. After all, that is business, they say. But the taxpayer is helping them, ostensibly, so that they may well lend into the economy to stave off deflation and turn the economy back to growth. Or is government just being gullible? We doubt that!
No, government is now losing patience and calling on the banks to lend or else. Governments in Europe and the United States are moving more forcefully to assure that bailed-out banks lend more money to offset the depression that is about to engulf both continents. A day after officials of the incoming Obama administration promised to take steps to force banks to lend, Britain outlined details of a new £100 billion ($147.5bn) plan to limit banks' losses from troubled assets in exchange for their pledge to increase the flow of credit in the UK.
This will be legally binding, the British prime minister said.
In France the "Or else" from President Sarkozy says the banks must lend or be seized. The French have a new plan that would require banks receiving new capital injections to make "precise commitments" – including giving up bonuses this year.
Denmark also announced an $18 billion aid plan for its banks, saying it would inject the funds on the condition that the recipients increase lending. And late last month, the Irish government nationalized the Anglo Irish Bank, rendering equity stakes worthless.
Even private equity groups – a source of huge amounts of capital to the economy – are now seeking ways to by-pass the banks and go direct to clients for capital and for its distribution. Is this the beginning of the move away from banks? Unless banks make some fundamental adjustments to their underlying business cultures they will diminish in importance.
In the fast-changing US and developed world, banks are now being deemed to have an economic role fused with that of government, whether they like it or not. Bankers will claim that political interference into the banking industry will be the biggest risk facing them. Bankers can continue to restrain capital flows based on risk measurement and refuse to accept that they also have to serve the economic good of the nations, but this will be self-destructive.
This is a major departure from capitalist and US cultural principles in the banking industry, never to be seen again. They can choose to tow the line or be steamrollered by government in the days to come. The transition to their new role will be accompanied by doubts and fears that make markets dependent on the free flow of money through the system, subject to the volatility that comes with fear and uncertainty.
With such a jolt to monetary confidence, it is now a matter of prudence as well as profit to be well invested in gold and silver as insurance against what has been shown to be a faulty system. Certainly until the risks of another major credit crunch passes, expect the precious metals to reclaim their position in global portfolios.