The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘economist

The Economist Special Report on the World Economy coins the term ‘Gandhian Banking’

Under the heading ‘Gandhian Banking’ The Economist reveals the extent of worldwide government injection into banks at $432 billion by this spring and guaranteed bank debts at $4.65 trillion. Of perhaps even greater significance is the implicit guarantee that now exists for all banks.

By this summer 33 American banks had repaid the capital the government had injected into them. The new era of state ownership seemed to be passing almost as quickly as it had arrived. But the state still has a large stake in the financial system beyond its explicit ownership of shares. It now owns the risk of any of the bigger institutions failing. Governments will do their utmost to avoid a repeat of anything like the bankruptcy of Lehman Brothers and the ensuing chaos.

The piece is part of the Special Report on the World Economy. The broad theme of the report is one that has taken the media some time to catch up with, and that is the meaning of recovery and getting back to normal, or as they call in the ‘new normal’ and ‘normalcy’.

Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’ balance-sheets, but the underlying problems remain. In America and other former bubble economies, household debts are worryingly high, and banks need to bolster their capital. That suggests consumer spending will be lower and the cost of capital higher than before the crunch. The world economy may see a few quarters of respectable growth, but it will not bounce back to where it would have been had the crisis never happened.

The reality of the new normal is that it does require significantly different planning and strategies and continuing with the pre 2008 strategies will not succeed. Again, and as noted yesterday (To Big to Fail and How Little the Concept is Misunderstood) it will be fascinating to see where the innovation in consumer banking products and channels comes from in banking.

Going back to my earlier ramblings on the future of banking lying in two camps:

  1. financial utilities
  2. innovators

… I remain even more convinced of this evolution. At the moment, the majority or all of TBTF’s (Too Big to Fail) are or will be in the financial utility category based on their fiddle while Rome is burning approach.

Written by Colin Henderson

October 5, 2009 at 22:16

Posted in Uncategorized

Tagged with , , ,

Bank capital, economy, debt, and the true meaning of Jubilee

On the topic of Bank capital this chart embedded in Greenspans article shows just how much banks business model has evolved.  In economic terms this is the corollary to extreme business and personal debt.

In the years following 1840 when bank capital was approaching 60%, as banks made loans, the borrower bought things that resulted in bank deposits which can then be lent again, and again.  The velocity of capital as it is know increased dramatically until 1940 and largely remained there – till now.  As banks re-capitalise the preachings of government to lend more is the ultimate paradox.

Banks need more capital | Alan Greenspan | The Economist


On the other hand this piece from Niall Ferguson takes the opposite view that we may have reached a point with consumer debt that is irreversible, requiring a Jubilee (debt forgiveness).  Niall writes:


Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest recession since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 356 per cent by the middle of this year.

With estimates of total losses on risky assets now ranging from $2,800bn (£1,850bn, €1,960bn) to $6,000bn, a chain reaction is under way that will leave no sector of the world economy untouched. The American economy is contracting at an annualised rate of 5 per cent. Commercial property is following the residential market into freefall. The Standard & Poor’s 500 index is down 43 per cent since its peak in October last year. The market for credit default swaps is pointing to a surge in defaults on corporate bonds. The automotive industry is already (against the will of Congress and the original intention of the Treasury) on life support. The US is at the centre of the crisis but Europe and Japan may suffer even larger aftershocks. As for the much feted emerging market “Brics” – Brazil, Russia, India and China – their stock markets have been dropping like, well, bricks.

He develops the case for debt forgiveness as the only way to break the logjam. He mentions this option:

….  as recently suggested by Harvard’s Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years.

The Greenspan article is generally positive while the Ferguson one is more pragmatic.    More and more it is clear that the state of the economy, GDP and the matters of recession/ depression/ growth/ inflation/ deflation lie in Government hands.

Relevance to Bankwatch:

Despite all this, Banks have an opportunity to get creative and innovative in how they participate in the development of the new economy.  They must do more than merely become financial conduits funnelling government policy to the proletariat.  The opportunity lies in development of new models of service that are more reflective of the new economy as we dither between welfare state (old and unaffordable) and market state. (my latest study)

Written by Colin Henderson

December 20, 2008 at 14:25

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