Tuesday, 19 March 2013 INDEX

There will be blood
A few days ago (March 8, 2013) we were reading about RBS cash machines that had stopped working, apparently because of a hardware glitch. This story in the Daily Mail was fairly typical http://www.dailymail.co.uk/news/article-2289358/Computer-fault-halts-RBS-withdrawals--While-boss-picks-700k-bonus.html. It was the hardware (or according to other stories a software update)? Oh really?

Then we learned that the Cypriot banks are defaulting, possibly because they got too much Greek sovereign debt (they took a punt on Greek government bonds). Coincidence?

Well, the RBS story would once have been thought of as extraordinary. Banks claimed an infallibility for their software/hardware that went far beyond Papal infallibility. The reason for that was that they wanted people to believe it was utterly impossible for their cash machines to make a mistake. These days, of course, we don't believe the Pope's infallible (even if we are entirely sure who holds that esteemed lifetime post) and if we have any feelings about the banks, we probably think they bat for the other side.

So if it wasn't a software/hardware problem, what else could it have been? The current economic crisis dates from August 7, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity". I became conscious that something was going terribly wrong when a friend (Mike Pinkney, now deceased) told me he'd joined lengthy queues outside the privatised building society Northern Rock in September 2007. That was the first run on a British bank in 150 years. These events were caused by an absence of liquidity. What liquidity means is trust, specifically trust between the banks.

If one bank doesn't believe another bank can balance its books, it stops lending it money (or paying out money on its behalf at cashpoints). Banks have to lend each other money because banking is an inherently crazy business. The fundamental economic principle is lend short and borrow long. Banks do just the opposite. They take your money and then let you remove it the next day, but they lend it to borrowers who may finish off repaying their loan a decade or more later. A run on any bank can finish it off, unless it gets government support.

Cash points refusing to pay out can be a sign that the banks are getting nervous. But how could this happen: The UK government owns a controlling stake of 84% of the Royal Bank of Scotland Group (RBS)'s ordinary shares, but the bank remains nominally independent of government. Surely the British government can't go bust?

RBS only had a problem for two hours and that's probably about the length of time you'd expect it to take the chief executive of a nationalised company to track down the responsible Minister and for him (or her, there are some Tory women Ministers) to instruct the Governor of the Bank of England to sort out the problem.

So is the system really seizing up again? The point of austerity, otherwise known as monetarism and in the Great Depression of the 1930s called The Gold System, is beggar your neighbour economics. We cut our costs, become cheaper, and take our neighbours' markets away by selling goods at prices they can't match. This is called export led growth.

The alternative, Keynesianism, is concerted growth in spending designed to restore confidence in the system as a whole. It's hard for one country to do this on its own (though America may be the exception to this rule), because if you grow your economy your competitors sell their products in your market creating a black hole in your trade figures.

In October 2011 in this blog I suggested that the Germans should be asked to leave the euro. See http://jbrind.blogspot.co.uk/2011/10/remarkable.html. By that time it had become absolutely obvious that austerity wasn't going to work and would just create bigger debts. European governments were kicking the can down the road (putting off making a decision) not because they had any real expectation that something would turn up, but simply because they had run out of ideas.

It's now probably too late for the Germans to leave the euro and the only answer is for the Germans to become more like the southern Europeans. European governments need to print money in a concerted attempt to refloat the european economy. Will the Germans do this? Probably not.

In which case, we're in for a bumpy road. There will be blood, or at least bloody revolutions.

Posted by Jonathan Brind at 02:06
Tuesday, 19 March 2013 INDEX