Why I don’t think we’re heading for a re-run of 2008-09

The return of Banking fears! The news that the mighty Deutsche Bank is under suspicion takes us back to the psychology of seven years ago when most us, including central bank chairmen, realised that we had banking crisis and disaster on our hands. This article attempts to differentiate between the circumstances then and the circumstances now. Whatever is or is not up with Deutsche Bank, we are most certainly not, thank the Lord, back to the conditions of 2008.

Did the onset of the global banking crisis really make itself apparent seven to eight years ago in 2008? That makes it remarkable because we are still living with its economic consequences; or at least its principle consequence of changed economics and more slowly, a changing politics.

I refer to the electorate’s much greater mistrust of ‘establishment’ politicians on both sides of the Atlantic and probably, across Europe. The realisation that the next generation will be worse off than the preceding generation – even in the USA whose citizens were brought up to believe that succeeding generations get better off as a result of free enterprise and the American Constitution, under God. In Arizona we see the triumph of anti-establishment politicians. Donald Trump, who worryingly refers to himself in the third person, and whose every fourth or fifth word is ‘great’. And then we have Bernie Sanders, the ‘socialist’ democratic candidate. Had he described himself as a ‘socialist’ several decades ago, he would have probably ended up before Senator Joe McArthy’s notorious committee charged with un-American activities as a fellow traveller in Communism.

Even the British in their fatalistic way got it into their heads that things would get better for each succeeding generation. Perhaps it will. Maybe the great banking crisis and its implications will prove a temporary intermission in a longer term trend of economic progress. It is, after all, arguable that quantitative easing, which promoted the value of assets above the value of money – the stuff that most people live on, called wages or salaries – is a passing phenomenon; something that will be reversed in due course, with wages and salaries once again having the ability, from time to time, to rise faster than profits and financial assets.

But I return to the banks in contention. They clearly brought about the conditions which significantly undermined the cohesion of a progressive kind of society that had existed in the West since the nineteen forties, in the case of America and the nineteen fifties, in the case of the UK. Another banking crisis would be fatal to such hopes. The latest concerns about bank lending, in light of the huge decline in energy and mineral prices, have summoned up fresh fears about banks’ capital adequacy and liquidity. However, there are some differences between the situation that emerged in 2008 and the situation now. Those differences need to be widely understood if we are to avoid a repetition of the total collapse in confidence in all bank balance sheets and assets that occurred in and after 2008. Most importantly, banks need to demonstrate a discriminating belief in themselves as a commercial species.

The first difference between 2008 and now, is the evidently much greater capital adequacy of bank capital supporting its lending. The Basel III reforms that were enacted after the banking collapse have greatly improved bank capital both in quantity – it is now typically around eleven to twelve per cent of bank liabilities – and hopefully quality. The parameters of what constituted capital in the years running up to 2008 were wide enough, so it was reported, to actually defy the very definition of capital. It was reported that some bank balance sheet definitions of what constituted capital were stretched wide enough to go beyond professional integrity to near fraud and criminality. Nor do we have, one trusts, the vast quantity of off balance sheet liabilities hidden, as they were in the early years of the first decade of this century in so called “conduits”

When it comes to the quality of capital, we are much dependent on the work of regulators inspecting the stuff. I take it that there has been insufficient time since 2008 for inspectors to be “captured” by commercial banks; that is to say too little time in which regulators are talked into too much laxity of supervision, by banks themselves. The problem is still one of definition when you have a ‘risk weighted’ capital gearing system. That is why others urge, plain vanilla, total balance sheet leverage measures. For the taste of many banking analysts, the figure of around four percent leverage was far too modest.

Whatever the caveats and reservations about capital and how it is measured, one may at least have a much greater level of confidence in the current situation compared to the one that obtained seven to eight years ago. The banks in the US and UK have been significantly recapitalised since then. However, we do not yet seem to have yet ring-fenced the deposit taking areas of investment banking activity. Nor do those ‘living wills’ yet seem to have been signed, sealed and delivered in the UK.

From what I understand of the situation, the European banks seem to be less well advanced in the recapitalisation of their balance sheets. That may be the reason why Deutsche Bank is now the focus of concern. The crucial thing this time is that we have grounds for hoping that the interbank lending market will keep functioning and not pack up in the way it did in 2008. One may reasonably hope that US and UK banks will hold up well, along with the big Swiss banks; Switzerland reportedly took early and strong action in demanding high levels of capital in bank balance sheets.

But can we blame it all on the consequences of the great global banking crisis? There has also been a cultural change in political discourse which has its origins in the application of business methods to politics in the latter years of the of the twentieth century; first in the USA and then in the UK when words like ‘moderniser’ and ‘reformer’ came into vogue on all sides of the political spectrum. Most particularly, this manifested itself in ‘presentation’ moulded by ‘spin doctors’ and PR practitioners camouflaging and manipulating inconvenient truths.

I am not suggesting that there was once a ‘golden age’ of decent politics; Lincoln and Disraeli were political to their finger tips and capable of bowling the low ball and hitting below the belt. But I do suggest that their gloriously inefficient politics was a richer mix; less processed, unlike those foods we conveniently buy from supermarkets. I guess there are few politicians who have not read Machiavelli’s ‘The Prince’ in the hope of learning a trick or two. But I observe that the term ‘statesmanship’ – the surrendering of some political advantage for the greater public good – is no longer in use. When did you last hear of a politician promoted to the standing of a ‘statesman’?

It’s an unhealthy and dismal scene! We seem to have efficiently wrung all virtue out of politics; politicians who are no longer idealistically spoken of individually, as the people’s representatives but as the ‘political class’, with whom, by implication, the rest of us have to struggle for true democratic expression. Even Abraham Lincoln observed: ‘You can kid some of the people some of the time, and some of the people all of the time; but you cannot kid all of the people all of the time.’ If the eighteenth century was the age of enlightenment and political revolution, the nineteenth century the age of empires, industry and nationalism, and the twentieth century the age of totalitarianism and triumphant democracy, what age are we in now? The age of discontinuity? The age of disenchantment? The age of public relations and disinformation?

It is easy to curse politics, society and politicians and wish them gone. But they are a necessary factor to the existence of representative democracy itself. You cannot have the latter without the former. If politicians are killing democracy by smothering the democratic spirit of the people, then that has to change. We need another blend of politics and another version of politicians. They need to be men and women who do not see party political activity as something not much higher than the loyalty to a football club.