Easy Money Won't Help Economies Weather This Global Banking Crisis
McRAE, Hamish, The Independent (London, England)
The turning point for the banks but the beginnings of a deeper slide for the real economy? This week has been extraordinary. We were talking yesterday with some senior bankers and they agreed that the only similar time in terms of the febrile mood in London was the collapse of Burmah Oil and the plunge of equities at the beginning of 1975. For New York, well, what has been happening there is surely bigger than anything since the 1930s.
So those of us who thought that this period of financial stress was not as bad as that of several others post war have been proved wrong as far as the banking industry is concerned. Leave aside the Lehman Brothers business; what has happened to HBOS is seismic. If anyone had said in 2001 when the former great building society, the Halifax, merged with the proud Bank of Scotland (founded in 1695) that the two would within seven years be contemplating a forced marriage to save their skins - well it would have seemed absurd. So for bankers this has been a terrifying time.
But if you look more widely at the totality of financial markets it is still surely right that this is less serious than the 1970s or the 1980s. In terms of share price movements this is much less serious not just than in the 1970s but also than the early 2000s, at least so far. Currencies' movements have been relatively modest; inflation numbers not too bad when compared with the past; the interest rates on government bonds have remained extremely low. But banking matters because it is a servant to the real economy. Just as too much credit makes economies have speculative bubbles, so too little credit squeezes the life out of them. That is the danger now.
This is a global issue because banking is a global industry but let's focus on the UK. The question is whether the commercial sector will suffer in the same way as the housing sector has done. Some companies, particularly many large companies, have plenty of cash and are in a position to bully their bankers. They don't need to borrow and can screw the banks for the highest rate on their spare cash. I realised something was up at Bank of Scotland a month ago when I saw the rates of interest it was prepared to pay businesses for big deposits: a clear 1 percentage point more than rival Royal Bank. The Bank of England's special liquidity scheme, now wisely extended, helps all the banks but some banks have remained under more pressure than others.
Thus any company (or indeed individual) who has cash gets red- carpet treatment. By contrast many smaller companies are finding that the banks are putting pressure on them to cut back their overdrafts. It is not that money is too expensive; it simply is not available. So companies, even well-capitalised and profitable ones, are going into survival mode. Any unnecessary investment is postponed; any unnecessary costs chopped; hiring freezes imposed. We all hear little snippets: earlier this week I was told by a property adviser that he had just had a tussle with his fellow directors to give permanent jobs to the graduate trainees who had been promised them. In this instance they did get the jobs because that was the right thing to do, but other companies will be less scrupulous.
For the moment, however, there is still work around. You may have to go to Dubai or Abuja to get it but the world economy as a whole has continued to grow. The problem in the developed countries is the speed at which domestic demand is fading, for the …
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Publication information: Article title: Easy Money Won't Help Economies Weather This Global Banking Crisis. Contributors: McRAE, Hamish - Author. Newspaper title: The Independent (London, England). Publication date: September 18, 2008. Page number: 40. © 2009 The Independent - London. Provided by ProQuest LLC. All Rights Reserved.
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