The Queen’s question about the credit crisis was wonderfully simple: “If these things were so big, why did no one see them coming?” The answer given by Mervyn King, governor of the Bank of England, in his recent interview is that many people did see the crisis coming, but no one knew when.
The same could be said of Japanese earthquakes, except that the fault-lines which trigger disaster are natural phenomena whose impact we can merely ameliorate.
The fault-line that set off the banking crisis was, by contrast, eminently avoidable since it was created under the very noses of droves of dozy regulators, rating agencies and auditors. Read the report of the Select Committee on Economic Affairs on auditors’ dereliction of duty in vetting bank accounting before the crisis. They were all deluded by the patently flawed accounting that portrayed Northern Rock, RBS and Bradford & Bingley as pillars of financial probity moments before they were stripped bare by the ultimate default regulator – a blinding dose of reality.
The Ponzi-style credit boom lent credibility to wealth that is now known to have been a mirage.
Governments seek respite from the pain by applying familiar quantitative easing measures. Any respite will be temporary. The Ponzi-style credit boom lent credibility to wealth that is now known to have been a mirage. This is the whole story of what happened with property speculation in Ireland and Spain. Yet central banks everywhere are “solving” the resulting crisis by re-inflating the artificially created credit boom by recourse to the good old printing press.
Clients of Bernard Madoff pleaded losses exceeding $160 billion. They cried that Bernie must have stashed it away because the prosecutors couldn’t find it. What central banks are now doing is equivalent to asking Bernie to replace the non-existent billions with another great dollop of non-existent billions, so that everything can be OK again. The downside? Alan Greenspan said it in 2005: “We can guarantee cash benefits at whatever size you like, but we cannot guarantee their purchasing power.”
What began in Britain is being pursued with vigour by the European Central Bank, desperate to repair the finances of the eurozone currency bloc, whose collapse was described by Warren Buffet last month as “far from unthinkable”. The ECB money-pump is being primed to meet the stratospheric agreed bailout capability of “lending” 500 billion euros. Yet despite all that support, there are no buyers for Portugal’s latest bond offerings, hardly a surprise when the credit default insurance market indicates a near-40% chance of defaulting on its sovereign debt.
Governmental posturing cannot counter the irresistible force of economic law. Credit creation, not backed by wealth creation, generates inflation: Keynes spoke wisely when he said that the process of currency debauchery “engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Having been forced to nationalise their domestic banks, European governments are still missing the most basic lesson of the crisis: lending is sound only if based on an assessment of the loan’s productive purpose – its ability to add value. It is unsound if based solely on the value of “security”, which by its nature is always volatile. Thus seen, there is actually no bailout “fund” – only the ephemeral stuff conjured up by the ECB printing press, and no one actually believes that these “bonds” (note the debasement of language as well as currency) will ever be honoured, even at face value.
The entire chimerical exercise is the hidden means of providing the profligate Southern EU countries and Ireland with the revenue they cannot raise themselves through taxes or borrowings. The principal donors, whose own taxpayers are being fleeced, are, as usual, Germany, France, Holland and the Scandinavian countries, where the level of resentment will build up and eventually topple governments.
The medicine cannot be dodged: fiscal restraint and the short-term pain of shared losses. And it is preferable to the endless contortions and pretences that never work anyway.