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Has the G20 solved the financial crisis?


I was going to leave it at that but ok, I guess I better explain.

The G20 is here.

No more G7 or G8.

Twenty of them now.

Count them.

The big EU players, America, the BRIC economies, Japan.

You’ve got Argentina, Oz, Canada in there.

Indonesia gets a nod, as does Saudi Arabia and South Africa.

Not forgetting Turkey of course.

Twenty of them.

All huddled together working out what to do with the banking system.

France and Germany shout bankers should be hanged and bonuses eradicated.

America and Britain tell them to get lost as the banks would leave America and Britain if they did that.

The Chinese just sit and smile, sit and smile.

Russia got a headache and swigs a little more vodka, whilst the rest look confused.

What to do, what to do.

“Well there’s two big issues at work here”, pipes up someone from the back in a heavy Scottish brogue. “Clean up the banking system so this never happens again and sort out the economy.”

“And ‘ow are we going to do zat?” asks the short Frenchman.

“Well, we’ve all agreed the banks need sorting out and we now have a plan, don’t we Mr. President?” says the Scotsman.

“You talking to me?” the United States of America’s First Black President splutters.

“First, we are going to slap the banks around their cheeky little chops with new regulations that will stop them taking excessive risks,” says the tartan leader.

“Vot do you mean?” asks a stout German lady called Miss Marple.

“Well, we are going to say that if they are taking risks they have to be ‘socially useful’. This means they must be able to explain, in words a ten-year old could understand, what it is they are investing in, why, how much is involved and the possible losses if it all goes wrong.”

“Vot if it goes wrong?” Miss Marple asks again.

“Well”, says Braveheart. “We throw them in jail. This is what we think the bankers want as – and I quote from Mr. Stephen Green, Chairman of HSBC and the British Banker’s Association – when I say that ‘banks have chased short term profits by introducing complex products of no real use to humanity’ and it is clearly a ‘basic failure of corporate governance’. So we are going to make it clear that they can’t do that any more.”

“How are you going to do zat?” asks Inspector Clouseau the short Frenchman.

“Obvious isn’t it Mr. President?” the kilted wonder turns to the United States of America’s First Black President.

“You talking to me?”

The haggis chomper ignores this and continues: “what we are going to do is to tell these banks they have to reserve lots of money to pay for and cover any risks they take in the future.”

“How much?” asks Miss Marple.

“Well, we don’t know. It depends on the size of the risk they are taking,” responds the heather misty eyed Scot.

“And what about ze bonuses?” asks Inspector Clouseau.

“Well, we don’t want to go there, do we now?”

At this point, the Chinese delegate raises a finger and a scurry of activity takes place to translate something.

After five minutes, the interpreter breathlessly says: “President of the People’s Republic kindly asks how Britain and America will repay the $5.8 trillion of money they invented in the last year.”

“Puh, puh, puh … guh, guh, guh … duh, duh, duh …

So there you have it.

The bottom-line of the G20 summit this time around is that yes, they will regulate for bank risks in the future, and ensure that the more risk taken, the more money is placed in reserve. The challenge with this policy is obviously:

  1. how do you measure the risks taken,
  2. how much needs to be placed in reserve, and
  3. how does this impact lending when banks are already being asked to place more capital in reserves than ever before.

But they will work something out.

For me, the key point is the old ten-year old test.

If a banker cannot explain their product in words a ten-year old can comprehend, then they shouldn’t be investing in that product.

Going back through this crisis we have had all sorts of instruments – CDO-Squared, SIVs, MBAs, CDS and more three-letter acronyms than we’ve ever seen before – which even the cleverest banker has found hard to digest, absorb and explain. If they cannot digest, absorb and explain their own products then they shouldn’t be selling or investing in them.

That’s the rule for the future.

But there’s a more fundamental question.

Has Quantitative Easing worked?

Has the Toxic Asset Relief Program solved the issues?

Have the economies stabilised?

Is the future bright or even Orange?

These questions remain to be resolved and my personal view is that we’ll flatline for at least another two years.

Royal Bank of Scotland needs more capital as do many other banks – where are they going to get it from? The USA and China are on the brink of a trade war whilst Europe sees a rocky road of challenges for the foreseeable, with even the most successful economy (Germany) admitting this will be tough for years to come.

We’re not out of this mess yet.

Yes, there are green shoots … but are they growing vibrantly or struggling in rocky soil?

Right now, the latter.

So the soil still needs tending, nurturing and watering and the USA and Britain has little rain to sprinkle on these shoots left.

We’ve already bet our children and grandchildren’s tax burden on getting through the last year … what happens if it doesn’t work?

Now I’m an optimist, which is why I’m saying we will get through this after two years of flat lining …

… but Marc Faber who produces the Gloom Boom Doom Report and often gets these things right, came out this week on Bloomberg and said that the US Government will fail within the next decade on the back-end of this crisis.

Switch US for the UK Government if you believe his words, as the two economies are intimately tied.

All in all, the G20 has challenges and can treat the easy bits – how to regulate banks – but the hard bit is how to detox the global economies to regain stable future growth. And you don’t get that by printing more money to feed the addict.

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About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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