I noted last month that the record of auditors’ ability to assess the worth of banks’ loan portfolios is singularly uninspiring. In the US the Securities and Exchange Commission is actively pursuing auditors who issued clean opinions after accepting management’s assurances of worth, followed by massive bailouts.
Yet any meaningful audit is impossible when supposed collateral is a bundle of domestic mortgages, resold in the mortgage-backed security market so many times that it’s impossible to legally determine who actually owns it when foreclosure becomes inescapable.
A perfect illustration of moral hazard in action: heads, bank wins; tails, taxpayers lose.
In Europe, notably Ireland and Spain, banks churned out domestic mortgages like sausages on an assembly line without any serious attempt to assess creditworthiness. At their height housing completions in Ireland were, per capita, four times as high as in the USA. When the banks met their predictable nemesis they were bailed out – a perfect illustration of moral hazard in action: heads, bank wins; tails, taxpayers lose.
Ireland still has 1,300 “ghost” estates with hundreds of thousands of unoccupied new houses, erected with as much regard for building standards as Irish banks had shown for the principles of diligent lending. Many are fire hazards, without drainage or foundations, or are sinking in bogs. All are now being torn down in a demolition programme scheduled to continue for years – the clearest possible demonstration of the falsity of the notion that an economy can be revived by paying workers to dig holes, only to fill them up again.
In a nutshell: the central bank’s money machine creates a mountain of government debt, carrying near-zero interest rates. This bubbles into a mortgage-led building boom and, when the music stops, the bulldozers come in to flatten houses that should never have been built. “But”, say the Keynesians, “just look at the growth in GDP!” – a comment that reveals more about misreading statistics than the state of the world. As the saying goes, those who cannot learn from history are doomed to repeat it.
Attrition of bank assets is of great concern, not only to auditors. In another cunning EU unification trick, the European Central Bank, despite its own catastrophic record, will have a bailout fund of 55 billion euros and oversight of every bank in the eurozone. This is in flagrant breach of Article 125 of the EU Treaty itself, which explicitly forbids the EU from taking on any liability whatsoever for the commitments of other EU governments or institutions – a prohibition that alone secured Germany’s agreement to abandon the Deutschmark in the first place.
Anticipating currency destruction
As for the EU’s founding principle of free trade, governments are getting round it by debasing their own currency, artificially to boost exports. Yet this merely gives subsidies to foreign purchasers and pushes up costs of imported goods.
Nation after nation is actively seeking repatriation of its gold reserves, signaling its anticipation of currency war. Finland and Australia have now joined Germany, Venezuela, Ecuador, Romania, Poland, Netherlands and Switzerland in recognising that their gold, supposedly held for safekeeping in vaults and bullion banks, notably in London and the US, may have been lent or sold.
Repatriationists in all these countries are alert to (i) the creaking instability of the global fiat currency system; (ii) the fact that there is simply not enough physical gold in the world to support the “paper gold” in contracts that are floating around; and (iii) the fact that the only way to eliminate counter-party risk is to have their gold within their borders – and keep watch over it.
At last – a job that can safely be left to auditors?