Financial Blueprint

In the light of today’s (18/3/09) FSA/Government proposals for the UK from Lord Turner, I offer my pennyworth of thoughts on what we should be doing about the financial services industry.

Lord Turner. Probably predictably - has come up with some outline proposals that are more or less on the lines I would suggest. I generally agree with him - but not entirely. As I thought, there is going to be far more interest in what the banks are up to from now on. Well about time! But I am concerned that there we my find ourselves in a less dynamic investment climate as a nee jerk reaction.

Some people are confusing a heavy-handed regulatory approach with the need to keep a close eye on the banks and any institution who has the potential to destabilise the whole economic system. We can still have a light-handed approach without being cumbersome or inelegant about protecting the system, Joe public, et al. If the FSA and the Bank of England had done their job properly in the first place, we quite honestly wouldn’t be in this mess.

It is true to say, as one commentator said today, that there was a time when all the governor of the Bank of England had to do was raise his eyebrow, and it gave a banker the collywobbles if the gov thought the bank in questionable mode might be contemplating or doing anything untoward or just too plain too risky in his wise eyes. Any banker considered taking leave of his common senses would have be given short shrift and would have hurried back to tarnished ivory tower with his tail between his legs. But of course in this climate of less deference, and where he who risks has been king - if not governor, almost anything goes - and quite honestly actually everything nearly has gone! The ship may have only just been saved from sinking just in time.

My sense is we just have to make sure the BoE and the FSA, indeed any state regulatory body, does its work, unimpeded and with adequate resources. The lesson has to be that the watchman must be at the gate and not sleeping. I suggest a Government inspectorate checks up on the FSA, to make sure it is doing its work. Such an inspectorate would perhaps also drop in on a number of Government sponsored bodies, just so systems are checked to be sufficiently robust, and that even the FSA isn’t sleeping, or neglecting its duties, and is adequately resourced for any future onging or pressing needs, and that in this way, it ensures a cosy relationship is not allowed to develop between the watchdog and any of the dogs it is supposed to be watching. I suspect this is all too easily possible, and probably had some bearing on why we are where we are today.

It does seem entirely sensible to me to separate the commercial banks from high risk investment activity, ostensibly to protect the economy from collapse! If the two areas of activity were to be seperated, then overburdensome regulation can be avoided, and the risky investment ventures can almost do what they like, as long as they themselves make their strategies clear and accessible to the potential or actual investor. But if this is not feasible - and there is differing opinion here on this point which needs airing as soon as possible - then I would suggest some pointers here.

To be succinct, and for now, only in outline proposal, here is my list of suggestions for what should happen next …

1. Closer scrutiny of the banks, financial institutions and lending vehicles.
2. Punitive and preventative powers over banks from using high-risk strategies, or from using investment vehicles that are too complex and opaque (lack of clarity breeds instability and lack of confidence).
3. Establish an international watchdog that meets regularly and has powers to adequately scrutinise the loans and investment industry.
4. Bolster-up the FSA and make sure all financial watchdogs in every country are adequately resourced (money and staff)and meet universally agreed best practice standards, to ensure robust and effective regulation that protects both investors and borrowers and protects the industry form itself.
5. Implement minimum cash reserves to ensure loan do not exceed reserves.
6. Spot checks on banks to make sure of the following:-
   - Sufficient cash reserves are in place
   - Maintaining loan to cash ratios
   - Banks not getting involved in too complex investment vehicles or strategies that
   leave bank over-exposed.
7. Strengthen standards of rating agencies, including spot checks and most importantly that business is not conducted on a commission fee basis which could lead to a conflict of interest between client and agency.
8. Eliminate commissions fees for selling loans, including mortgages (which has led to inflated property prices and unwarranted lending in the past).
9. Ensure greater clarity of accounts in banks
10. Have banks publish data more frequently - at least limited to BoE and FSA.
11. Banks should not be strangled or stifled, but the eye and breath of the watchdog should be felt by banks so they know they cannot get away with unwarranted behaviour. This will do away with the high risk competition between banks that has played a key part in destabilising the system.
12. Separate commercial and investment banking where possible.
13. Government should ensure local government receives adequate financial planning and investment guidance and supervision, so that local government capital is adequately protected and sensibly invested, with an emphasis on best practice.

More IQ & Less QE

Today’s introduction of Quantitative Easing by the UK Government in my view is a mistake. I am very concerned that we are building up yet more problems for the near future. Again, this Quantitative Easing or QE - printing huge amounts of new money for circulation one way or another - is clumsy and does not address the core issue, namely, the access to finance via the banks by individuals and businesses. This in my view will follow when the unknown quantities or the extent of debt that the ‘problem securities’ products represent, are known, and more importantly, are taken out of the system.

This is the cancer that is eating the economic body of most every country around the world. These highly dangerous products have to be taken out of the system. Yes, this will mean institutions get hurt along the way, and it may even mean cancelling huge volumes of mortgage debt, which after all is being partly addressed by the US strategy of committing a part of its own form of QE to relieve mortgage debtors who might otherwise suffer foreclosure and end up relying on the state. But, it cannot be any worse than what we have now - which, if left to fester, will only worsen the situation.

But the huge amounts of money that QE represents is not necessarily going to reach the people and businesses that need it anyway. It is perhaps better to place this new money directly into the hands of people who actually need it and aren’t getting anywhere with the banks. Throwing bundles of cash from helicopters amounts to roughly the same thing, but would of course lead to chaos and even incite violence and accidents in the mad scramble that would inevitably follow form such stunts.

To be serious though, pumping huge amounts of extra new money into the system is like trying to bring a patient around by pumping him up with excess blood, when the system or economic body can only stand and function so much before major repercussions develop. Surely we are more intelligent than this! Intelligence is a funny thing. Perhaps the real intelligence abounds in the common sense after all.

Most people I speak to agree that the government have got it wrong, at least here in the UK, and that the sensible thing to do would be to do just about the opposite from what the current government are doing right now. I say current, because I cannot imagine, come the next general election, that the saving population - chiefly the older generation - are going to tick a Labour box, but would rather, given half a chance - tick off Messers Brown and Darling for effectively ‘robbing’ them of their life savings and leaving them with mounting problems and worries as to how they are going to pay care home fees for either their own parents or themselves in the near future.
For many people, the money they have saved is not only not growing now that interest rates are slashed to 0.5% but their savings are dwindling to the point that they cannot afford to pay for their family’s basic care needs, medical bills and energy bills, never mind live comfortably off.
And if the resources of the saving population dry up, they will have no alternative than to sell up their houses - in this property slump? And even if they do manage to sell their property - their homes - their life’s work, where would they go? Would they be able to afford the rent and pay the bills? I’m sure the stress this is all causing many people will also have a knock-on effect on their health and consequently the National Health Service bill to the exchequer.

But medical issues aside, it is inflation that is the next bugbear now QE is a reality from today in the UK. We now need cheap energy and transport solutions more than ever if we are to ride the inflation storm soon to come - if and when the patient has been re-inflated. Can we please think ahead with a head, rather than blindly and dangerously squirting money willy nilly into an already dangerously ill patient.

Hopefully, and probably, the patient will survive, but at what cost? Quantitative Easing sounds like one of those sophisticated phrases that is designed to assure people that someone knows what they’re doing. Didn’t all those other sophisticated securitized products also have clever and sophisticated names? Weren’t they also pumped into the system with as much gusto and smugness?

I really feel we have lost a grip of the weapons of finesse, and are shooting from the hip with a bazooka - at an enemy we can’t see - in a greenhouse! Ah yes, the delicte balance of the green economy. Now doesn’t Nature get a look in anymore? Now there’s a thought - a self regulating system that seems to have lasted how long? Nearly 4 billion years. Now there’s a number we’re getting very used to these days.

Don’t worry, I’m sure all this mess will be over by the time of the next Olympiad - the one they’ll have to cancel due to inaffordablility, after this next one we can ill afford either. I am actually more of an optimistic pragmatist than a pessimist. I just can’t stand waste, whether its £2bn squandered from VAT, or £75bn - or more no doubt yet to come from Quantitative Easing. But then I’m not that sophisticated.

In the current system as we know it - which is not necessarily the only workable system, but the system we have and for whom most are comfortable with, money is the lifeblood of the economic system. Whether its a government or a Central Bank, it is their job to maintain a balanced system of money flow, and to ensure that that money does flow in and around the system without impediment, getting to all the organs of the system without impediment, so that the system is healthy.

I believe by and large, the system will look after itself, as long as there is adequate supervision and monitoring, and this can be done partly through self-regulation, and a light touch from the powers that be - the government and the central banks essentially.