It adds insult to injury when those who caused this economic mess give out platitudes while maintaining their perks, writes TONY KINSELLA
A SMALL minority still clings to a belief that our planetary society is merely undergoing one of its occasional blips. The rest of us know we face something much more transformational. Temporary measures are fine for brief tremors. The problem is we face a continuing global earthquake.
Optimists on the US Federal Reserve’s Open Market Committee hope employment will begin to pick up “at the end of 2011”.
Pessimist members “indicated that more than five to six years would be needed”, according to minutes published last week.
So are we dealing with a “bank run” or the death of banking as we had come to know it?
The question is vital for we know how to deal with the former, while the latter poses unprecedented challenges.
Banks traditionally hold on to about 10 per cent of their deposits, investing or lending the other 90 per cent. If all a bank’s depositors seek to withdraw their money simultaneously (think Northern Rock), the bank faces collapse. Central and other banks rush to provide cash to staunch the panic, and the system survives. Theory and practice show that depositors with bundles of banknotes at home will quickly deposit them in other banks. Equilibrium thus returns to the banking system within a few days.
There is little theory, and no precedent, to cover a situation where many have little in the way of deposits and most banks are probably technically insolvent. We are literally into a whole new ball game.
Don’t take my word for it.
Finma, the Swiss financial services authority, has obliged UBS to hand over details of US clients to Washington.
Republican senator Lindsey Graham says that nationalisation of some US banks should be "on the table". He told the Financial Timeslast Tuesday: "You should not get caught up on a word [nationalisation], but we can't keep on funding these zombie banks [without gaining public control]."
The Vänersborg district court in southwest Sweden bore witness to the possible death throes of General Motors last Friday morning when Saab filed for protective bankruptcy.
A week ago GM told Washington that it would need $30 billion to survive. A tab that size indicates that the company is not simply experiencing a liquidity crisis but that its very survival is in question.
The Obama administration must now decide how best to invest the public’s money. Does it provide another $17 billion to keep GM afloat, maintaining production of a range of mediocre fuel-inefficient vehicles, or could it spend that money more effectively?
All of this takes place against a background of plunging vehicle sales and massive vehicle stocks. Industry experts reckon that it would take almost four months of 2007-level sales in the US to dispose of the current inventory.
Irish car sales fell by 66 per cent in 2008.
Watching the Taoiseach and Ministers scurry around Dublin these past days revealed their limited horizons. We can all imagine a local builder, bank manager and estate agent pooling skills and knowledge to make money out of developing say 20 new houses in a country town. They might cut a few corners and make a few extra euro, but the houses would be built and sold, and all would be content.
The harsh reality is that what might have worked at a local level in better days did not work at a national level as financial markets melted. Worse, it provides no clues about rescuing an economy in the middle of a global meltdown.
Brian Cowen may draw some solace from the fate of his Japanese counterpart.
Taro Aso’s poll ratings have now fallen to single digits, but his Liberal Democratic Party (LDP) must face Japanese electors by next October at the latest. The LDP has governed Japan, with one nine-month exception in 1993, since the end of the second World War. The centre-left Democratic Party of Japan is now solidly ahead in the polls.
According to a professor of politics at Tokyo’s Nihon University, Tomoaki Iwai, “the party itself has grown obsolete”.
Masazumi Gotoda, a Liberal Democratic member of the parliament, added: “The prime minister no longer has the ability, trust or integrity to manage the current political crisis.”
Sound familiar?
On our neighbouring island, polls are beginning to hint at dramatic changes as the Liberal Democrats advance to 22 per cent in some polls. Their shadow chancellor, Vincent Cable, appears to be the only British politician who has grasped the scale of the challenges the UK faces.
France’s Nicolas Sarkozy shares the Federal Reserve’s timetable appreciation. As he steadily shifts his helm towards a social agenda light years removed from his neo-liberal campaign platform, his eyes are increasingly fixed on 2012. This, it must be admitted, is much more driven by the next French presidential contest than by any great economic clairvoyance.
Although it is galling enough that those who caused this sorry mess in the first place are still in office, it really adds insult to injury when their prescriptions consist exclusively of platitudes, reduced social spending and the maintenance of their salaries and perks.
Roy C Smith, a former Goldman Sachs partner, recently wrote in the Wall Street Journalthat bonuses are "an important and necessary part of the fast-moving, high-pressure industry".
Over just two decades, Wall Street bank bonuses grew by 1,695 per cent, from €1.46 billion in 1985 to €26.2 billion in 2006.
I’m with Michael Kinsley who wrote in last Monday’s Washington Post that “. . . the people at or near the top of the banks . . . are the ones who have established better than anyone else that they aren’t qualified to run a bank”.
As Shelley wrote in his poem Ozymandias back in 1818: “Look on my works. Ye Mighty, and despair!”