The Bankwatch

There is a brilliant collection of essays in the Jan/Feb issue of Foreign Affairs.  There is one lead piece from Francis Fukuyama entitled the Future of History (premium) which borrows from the title of his earlier book The End of History. 

The broad theme is the failure of politics and the problem with the rise of economics over politics that has led (his words) to the end of left wing idealism as a counterweight to the right. 

Foreign Affairs:  He closes with this statement on what is needed:

It would have to have at least two components, political and economic. Politically, the new ideology would need to reassert the supremacy of democratic politics over economics and legitimate anew government as an expression of the public interest. But the agenda it put forward to protect middle-class life could not simply rely on the existing mechanisms of the welfare state. The ideology would need to somehow redesign the public sector, freeing it from its dependence on existing stakeholders and using new, technology-empowered approaches to delivering services. It would have to argue forthrightly for more redistribution and present a realistic route to ending interest groups’ domination of politics.

He got there by reviewing a host of historic movements and how they arrived. 

• the introduction of the rights of property owners
• the concept that government can only tax when voters agree
• the power to vote for non property owners (an American invention – Andrew Jackson)
• that technology carries some of the blame for driving efficiency that requires fewer workers and provides for greater income generation for well educated, something that supported the growth of middle class.

He moves us quickly through the history of democratic movements which he notes fall out of demographic movements.

• socialism and rise of unions
• communism and its failure
• rise of middle class which through passing of relative wealth to people in large numbers that displaced the earlier two movements
• latterly the flattening of middle class incomes over the past 40 years, and finally
• more recently the rise of a new group of culturally disenfranchised (immigrants, gay, less/uneducated, etc) which has itself displaced the power of the middle class, and further displacing the worker power of unions, by creation of a large third franchise.

Even the Arab Spring he notes can be rooted in a new Arab group that is better off, better educated, that can clearly comprehend the Dictators are firmly between them and a better life.  See this in Russia too now.

But he ends on a note of pessimism that with inequality and friction between these broad groups, each of whose opposing needs broadens, the solutions and endgame are not clear.  In the US, the top 1% of families take home 23.5% of income he notes.

Relevance to Bankwatch:

With this backdrop, we can see clues in the political quagmires we see in the Euro zone and in the US.  The governments are torn about which franchise to follow because it is just not clear.  In fact the structures of governments was designed for a different time and place with much different citizen structure.

We have the additional shift from demographic aging in western countries.

These factors exacerbate the mismatch of the structure of government to the requirements of the population.

This blog is not about politics, but I believe requirements for the design of banks is as dependent on the requirements of the population.  One thing we can see from the last 4 years, is that banks’ design are based on a different set of requirements and not around making them inherently useful and of value to the broad base of people.  Unfortunately, all people cannot successfully claim to be in the top 1% that make 23.5% of income.

As a follow up to my ‘Failure of Politics’ post, here is succinct piece from Francis Fukuyama, Stanford Senior Fellow.  In particular this paragraph caught my eye.  We often hear of the divisions of power amongst the various branches, and the immobilising effect of lobbying in US politics.  However this was a new one to me, that any of the 100 Senators can place anonymous holds on work proceeding for entirely selfish purposes. 

Talk about designing a political system to fail!

Oh for a democratic dictatorship and not a vetocracy | ft.com – Francis Fukuyama

In addition to the checks and balances mandated by the constitution, Congress has added a host of further opportunities for legislators to use their veto power to blackmail the system, such as the anonymous holds that any of 100 senators may place on executive branch appointments. A particularly egregious example of this is taking place today. The Obama administration has wanted to appoint Michael McFaul ambassador to Russia, but the foreign relations committee has put off action indefinitely due to the objections of certain unnamed Republican senators. Mr McFaul – formerly a professor at Stanford (and also a longtime friend) – has been senior director for Russian and Eurasian affairs at the National Security Council for the past three years and is widely regarded even by the Republicans as well qualified for the job. Foreign Policy magazine has reported that one of the holds is due to a senator wanting the federal government to build a facility in his state. As a result, the US may not have an ambassador in place in Moscow next March as the Russians vote for a new president.

The banking and economic crisis of 2007 has touched many aspects of our lives and a now a clear trend and fallout, is the failure of politics. 

I am biased but I look at Britain and believe there is still a hardy attempt there to keep things moving.  I watched David Miliband (Left) and Bronwen Maddox (Rightish journalist)  today being interviewed by Fareed Zakaria.  While they commented on the UK economy and the arguments for and against austerity and stimulus aspects to budgets, it was notable that they do not paint themselves into a corner that cannot be exited.

Now lets look at three other countries;  Greece, Italy and US. 

Taking the last first, we hear today that the Congress ‘super committee’ cannot agree on a new budget to get themselves back on track following the rating write down from AAA.  This hot on the heels of the budget decision failure in August.  Members of the committee on todays Sunday talk shows noted that the <insert party name> would not come forward with a <insert party line in the sand on taxes or medical care> therefore it is their <the other guys> fault.

In both Greece and Italy we learned a new word that was previously reserved for communist Chinas government – technocrats.

Italy forms cabinet of technocrats | ft.com

Mr Monti, appointed last week as senator for life, unveiled a cabinet list made up exclusively of un-elected technocrats after the main political parties refused to take up cabinet posts on offer. The new slimmed-down team includes three women and is dominated by academics and civil servants.

Greece is similar with an academic approved by both political parties to run things while the country takes the actions required by the Euro countries to get the support required to avoid sovereign collapse.

Relevance to Bankwatch:

Aside from general interest, this matters here and to banks but perhaps in a good way.  I have written before about how banks survive at the grace of the governments of their respective countries, but don’t listen to me.  This is my review of Taleb’s comments. 

It is clear that US politics have polarised to such an extent that the government is unmanageable. 

This only matters though when a figurative gun is held to the countries head as is the case in Italy and Greece, and in those countries the politicians backed off rather than allow their future be tainted by decisions required to fix the country’s problems.  They backed off to allow ‘technocrats’, unelected officials to make the hard decisions and they will no doubt swoop back in once debt and financial management is back under control.

What happens to America when the inevitable decisions required become inevitable.  Will we see some kind of technocrat intervention in the US so solve the apparent freeze in Washington?

This Europol criminal threat assessment (pdf document – OCTA 2011: EU ORGANISED CRIME THREAT ASSESSMENT) is fascinating.  It covers everything including drugs, smuggling, human trafficking and weapons. 

But the financial section is what caught my eye.  I have been vocal for years that it is time for banks to offer payment cards with only a chip and with no magnetic stripe.  The detainment of the stripe is a classic case of building a compromise product based on the needs of the minority.

First the financial impact:

The EU is the world’s largest market for payment card transactions. In 2009 organised crime groups derived more than 1.5 billion euros from payment card fraud in the EU.

Now that we are almost in 2012, and 3 years later it is a safe bet that number will be higher.  In my view it is unconscionable that banks permitted this to occur while the solution to a large percentage of that crime lies in their hands, while they hide behind regulations created by the card companies (ie themselves).  That cost is a net cost and loss to society in some way, and it has to be covered by consumer and social costs at some point.

Some more statistics that are astounding but not at all surprising.  (non-EMV compliant means countries that have yet to adopt chip cards.)

Since such data cannot be misused in countries in which chips are required, organised crime groups have deployed cells to non-EMV compliant regions. As a result, half the fraudulent withdrawals made with cloned EU payment cards are currently made outside the EU.

Around 80 per cent of non-EU fraud against EU payment cards is committed in the United States.

This means that in effect, Banks are allowing the country that retains miles and gallons to drive their payment card strategy. 

Relevance to Bankwatch:

I want my bank to give me a chip only card.  The implication is that I cannot use it at some (fewer and fewer) merchants and third party ATM’s.  I can live with that inconvenience.

In a quite negative comment Fitch, a ratings agency note that US Banks will suffer from any additional deterioration in Euro sovereign debt circumstances.  This is a classic statement of the obvious.  It is hard to criticize further because it is behind a paywall.

Eurozone Contagion Threatens Outlook for U.S. Banks

Though U.S. banks have manageable direct exposures to the stressed European markets (Greece, Ireland, Italy, Portugal and Spain), further contagion poses a serious risk, according toFitch Ratings in a new report. Fitch believes that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen.

Relevance to Bankwatch:

There is a deeper change occurring here, and it might well be a precursor to what could happen in other countries.

Italy and Greece have passed on the management of the economy from the elected politicians to technocrats.  Technocrats are academics and basically smart people who have the best interests of the country / area in mind.  We are talking here about emergency management.

Emergency management has been deemed necessary because the government cannot agree on an approach to solve the countries solvency problem.  They are spending more than they take in, and the right/left parties cannot agree that income should exceed expenses.  So they back off and agree to allow non elected ‘technocrats’ to run things until it gets resolved.

Political comments aside, this could mean that banks are actually in a better position and can see clear direction based on rational decision making rather than political. 

What is interesting is now that Greece and Italy have been forced into effective bankruptcy, which countries will be next, and how will that affect their banks. 

Now that those countries have taken this approach, it’s a given that others will follow.  How far will the technocratic (non elected, academic) go?

Time will tell and more analysis on this question to come.

As usual the pro and con is somewhat artificial but the opportunity to hear these heavyweights in person is well worthwhile.

The resolution:   Be it resolved North America faces a Japan-style era of economic stagnation.

First reaction; all four managed to get through the entire two hours withought mentioning the U word – unemployment

We heard the usual economist words such as, demand, growth and lack of both.

Only David Rosenberg, who incidentally despite being Canadian, is the only one of the four that I did not know, made the pragmatic point that there is only a de-leveraging effect from US consumers and there is nothing in the works to change that.

Bremner who was introduced by Summers as someone who raised his first 100 million before he could tie a tie, fell into the trap of being an Ameriphobe. No matter the opposition point his response is that America is great, has always been great and always will be. His denigration of Japan, as Summers, was simply a clear miss on what Japan represents.

They made the predictable comments about Japanese insularity but failed to note the Japanese bubble / collapse in 1989 was an asset bubble of enormous proportions, that was Japanese made. It was 100 million people responsible for the up an down of that bubble. Furthermore those people owned the problem an lived with it. There was no foreign influence nor intervention, and are doing just fine since.

The American bubble in the 2000′s was global, and the result was instant contraction on US average people’s ability buy things. The first clue to the US bubble was a French mutual fund collapsing.

Krugman is pragmatic in that the US government shows no signs of embracing dialogue. Summers counters that America is all powerful and will always pull through.

I longed for Niall Ferguson to leap onto the stage to remind people that the true conundrum lies in a reducing employed base that is de-leveraging while massive deployment of jobs takes place permanently to cheaper locations (not US – think China, Vietnam, Thailand etc)

To me this is the final conundrum that neither Summers nor Krugman address.

A fascinating insight to some of the leading thinkers in North America, yet they confirm my long held view that America lives in an opaque bubble that prevents it seeing what is happening beyond its shores.

For me the pro’s won convincingly despite Summers astounding public persona and Krugmans lack thereof.

A brilliant evening!

I have been reading ‘Civilization – the West and the Rest’ by Niall Ferguson.  He analyses that there are 6 core institutions or principles that account for the success of the West over the last 500 years, with the obvious implication that as the West falls, the answer lies in reduced advantage in those 6 institutions.

Eurozone turmoil: Enter the technocrats | ft.com

“If you look at the troubles which have happened in European societies, this is purely because of the accumulated troubles of the worn-out welfare society. The labour laws induce sloth and indolence rather than hard work.”

One of the 6 is the ‘Work Ethic’ that Niall briefly describes as ‘extensive and intensive labor with higher savings rates, permitting sustained capital accumulation.’

It is ironic now that Jin Liqun, supervisory board chairman of China Investment Corporation, a sovereign wealth fund with $410bn, when asked to help out with the $1 trillion needed to bailout Italy’s government and banks: that was his answer.  How the tables are turning.

The ‘Work Ethic’ was one of the 6 institutions that kept the West ahead of the Rest on every measureable metric for 500 years until the 20th Century; until now.

I recommend the book, if you want more help understanding the larger picture unfold, beyond the daily market gyrations.

Once in a while Martin Wolf is on fire.  Economists can appear somewhat dissociated from real life.  This piece is one where he strikes home.  If you have any doubts about skepticism about banks then read this. 

Bob Diamond’s unconvincing defence | ft.com

Did the economy at least benefit from the run-up in leverage? Hardly. We saw huge rises in banks’ exposure to one another, which worsened systemic fragility, and in the prices of – and debt secured against – property. Who thinks these provided durable benefits? Mr Haldane also noted that “The purchaser of a portfolio of global banking stocks in the early 1990s is today sitting on a real loss. So who exactly is it extracting value from these incentive distortions? The answer is twofold: short-term investors and bank management.”

He goes on to make the argument for ring-fencing (separation of retail banking from investment banking), and better capitalised banks.

Relevance to Bankwatch:

All in all, it is not that hard.  When someone of Martins stature gets angry and writes a concise piece like this it all becomes clear.

Banks cannot innovate successfully using financial gymnastics.  Innovation must come from customer focussed innovation, which sadly is nowhere in sight amongst the big banks who are fighting the wrong fight against government, rather than for their customers.

Canada seriously lags other advanced countries in both Internet “supply” or infrastructure.  The important statistic here is that Internet contribution to GDP for Canada is less than half of the leading country (Sweden) and more on a par with Italy and Brazil.

Here is the link to the full McKinsey report on The Impact of the Internet on Economic Growth.

November 5th, 2011 is Bank Transfer Day and no better blog to highlight for that, than Verity.  There is something in this that Credit Unions everywhere could could turn into their own slant on OWS.  The timing is good and US banks have little substance for defense.

https://www.veritycu.com/banktransferday