So what’s up?

Apart from the nomination of Janet Yellen  ( a lovely, motherly person) to lead the Fed, what has happened since we departed for our summer/autumn long vacation?

As always, the view one takes depends on your perspective. Are you the driver of a car negotiating tricky twists and turns, looking for traffic coming at you round the next bend? If so, the outlook would look better than it was in July – sunnier, with brighter skies and clearer views. You would feel more optimistic. Yet if you looked at a map and saw how far you are from your ultimate destination, you will note with dismay that, despite all the hard driving, your position does not seem to have budged. In fact, perplexingly, you seem to be going round in a circle. It’s enough to drive anyone crazy.

What so many people miss is the pattern. We have been here before.

Result

The state has extended its grip over finance. The independence of central banks has weakened. We observe financial repression and continued state exploitation of central banks to finance budget deficits. At the same time, the financial interest has not yielded its political hold of the organs of the state. They are locked in a mutual embrace. David Stockman has shown how crony capitalism lay at the heart of the crisis in the United States. It has thrived since – everywhere.

So we observe growing financial protectionism in the service of private interests. States preserve existing banking structures and slow down needed changes. Banking nationalism is on the rise (see Nicolas Veron here). The only beneficiaries are the financial and political elites, the same people who have gained most from the stock markets and property booms caused by QE.

I can hear bankers crying, “What are you talking about? We are subject to a maze of new rules, we are scared out of our wits by regulators, we are more risk-conscious than ever, we are responsible citizens!” To which the reply is, “From where you sit, of course that is your view. But many of you would not be in your jobs if it were not for the support of the state. And compared with the average poor sod, whose seen his family wealth and income decline and is facing an uncertain future, you are still very comfortable, aren’t you?”

“Your institution can borrow at very low rates, invest in longer term securities, ask for the interest rate risk to be assumed by the public (again), which you will do if it hurts too much”.

Basically, what has happened is that banks have passed bad debts on to sovereigns. The states cannot shoulder the increased debt obligation arising from social security promise and the bailouts of banks without making sure that the bankers are very profitable for the next ten years, and generate a nice taxable revenue stream without storing up more bad debts for the future. So states are trying to make that happen, keeping banks borrowing rates low and letting them earn a good running yield, so they can “repay” their borrowings – which the media always report as if it confers great pride and prestige on the banks. The last thing that governments want is for bankers to take new risks lending to small businesses.

It’s the same with fines for all the immoral or illegal actions that some bankers have committed. Although the list of guilty banks grows ever longer, regulators have admitted that they cannot fine mega banks too much, even for heinous offences, as that might threaten macro-economy stability. So punishment has to be meted out gently, apologetically, in little dollops. The medicine comes heavily coated in syrup.

The other side of the coin is that, yes, alternatives to traditional banks are making headway. I shall write more about that in a future column. Acute observers such as Robert Jenkins, calls tongue-in-cheek for Jamie Dimon, the go-getting boss of JP Morgan Chase, to do the honourable thing and lead the break-up of the mega banks by dismembering his own.

So the political pressure to go for deeper, structural changes and the rise of alternatives means that, despite all the lobbying to come, there is a better chance now than six months ago that real change will come to banking. But it won’t amount to a sufficient change in the system without accompanying change sin central banking and international money.