Well, it’s been a pretty busy week, hasn’t it? The press is chock full of words like ‘unprecendented’ and ‘landmark’ in relation to the current spate of bank takeovers and nationalisations. Hold on a minute – did you really say that dirty word ‘Nationalisation’? Just a month or two ago I commented that this was something that most western governments were strenuously trying to avoid as it could be seen to highlight their political failure. Yet here we today talking about it as if it were perfectly normal! It underlines the amazing changes that are currently underway in both structure, and more importantly in our perception of all our financial institutions.
After bailing out the first failure, virtually all western governments have come to the same conclusion – that they cannot afford to bail out any more, especially as there are likely more in the pipeline. What we’re likely to see is more banks fold or be bought out as the financial tectonic plates shift toward a ‘big is beautiful’ school of thought.
The role of governments themselves has changed markedly. No more are they making the pretence of being simple an impartial regulator, almost overnight they have become brokers of financial institutions – essentially middlemen in a huge car boot sale. They have all but abandoned any pretence at long-term consumer benefit, their only goal now is to protect the fabric of the system at any cost.
Tax-payer, beware
What does this mean in practice? Well, on both sides of the Atlantic governments are simply taking the bad stuff off the hands of the banks and onto the public balance sheet. The tax-payer gets all the risk whilst the banks get left with the stable ‘non-toxic’ stuff. In the case of the US, this is being done on a truly epic scale and we will feel its effects for a generation.
Big is best…?
The changes in the market are working on the premise that the bigger the bank, the better its chances of survival. But is that a rational one? We’ve seen the near collapse of some pretty massive entities over the last few weeks so I don’t see any evidence that this is true at all – in the current climate it appears that nobody is safe.
The more subtle strategy at work here appears to be the government working to rebuild a new stable core at the heart of the financial system. This is composed of a few ’super-banks’ that are well funded and stable. In some cases the government has helped ‘clean’ and stabilise them by taking away the nasty bits of their liabilities so they start with a clean slate. The hope is that these ‘white-knight’ banks will form a stable core and support the rest of their less stable kin.
Whether this will work remains to be seen. One should note that when the dust settles in the long term we will be left with a very anti-competitive market – the sort of market that the government was so keen to avoid in the past. Lloyds alone now has 30% of the mortgage market. Why bother with good rates when you have that kind of market share?
Will the $700bn US bail-out work?
Nobody knows. You were expecting something a little more enlightening weren’t you? The fact is that this has never been done before and we are in completely uncharted waters here. This is effectively a massive last-ditch gamble by the US government. My best guess is that it will work to stabilise the system medium-term, but at some considerable cost – any economists out there care to comment on what effect bringing such a vast amount of debt onto the US balance sheet will have?
So where next?
OK, strap yourselves in, we’re going back to my crystal ball for some rollercoaster ride predictions:
Saving rates: With the drop in consumer choice and banks wanting to rebuild balance sheets, savings rates are likely to get less competitive and stay that way for some time.
Mortgage rates: Difficult to call, but I’m going to go for ‘likely to stay the same’. I still think they will fall in the medium term, but short-term frankly you may as well roll the dice…
Mortgage choice: Will recover somewhat in the medium term, but not to the levels we saw before.
Your savings: The chances that any government will allow savers to lose money is very, very small – almost zero. Such a failure could cause runs on other banks and cause a wider collapse in confidence, the consequences of which would be disastrous.
The banking sector: Consolidation will likely continue for some time yet – even between banks who are notionally solvent. Size is being seen as key to survival.
