The IMF said today:
[Banking] Supervisors should focus more on the business models of banks to ensure sustainable profitability. We estimate that almost one-third of systemically important banks, with $17 trillion in assets, will struggle to achieve the profitability that's needed to ensure their resilience to shocks.
To put it another way, these banks do not have a sustainable business model, have vulnerable balance sheets, and as a result could be the mechanism to transmit risk through the financial system.
And that's precisely why another global financial crisis is likely.
What is more, a decade after the financial crisis was created by the world's major banks they're still the source of the biggest risk we face. It's not encouraging is it?
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My ‘knowledgeable’ friend keeps frightening me with the prophesies of James G Rickards. The death of money, etc etc
A gold fiend is not the person to listen to, I suggest
I thought this was probably the case. Thanks.
On Jim Rickards ,
I admit that I find his apocalyptic style a bit wearing at times. He does slip readily into the Cassandric mode.
Until the advent of ‘digital gold’ I think his gold-buggery was possibly sound with the proviso that when it comes to the crunch gold is not edible. King Midas, for all he is a proverbial character,
should teach us this.
If I was relying on protecting wealth in an asset likely to survive extreme financial meltdown, (which is not an unlikely scenario from the teetering instability which is the subject of your piece, Richard.) I’d be holding some physical gold and taking advice on digital alternatives. And I’d own a property to house me. I have no assets so I’m fireproof. Almost fireproof.
Two things about Jim Rickards are indisputable. 1) He ain’t stoopid. 2) He circulates amongst some big beasts on the World stage so his perspective is not one most of us will ever have without reading his observations.
My position is that if you aren’t listening to what he says you are missing an informed view of the World we live in.
How you respond to that information is a personal decision. ( but if you don’t know what he’s saying you don’t even have the option to chose) I believe much of his analysis is sound and rationally based – on the sort of maths that goes right over my head, but rather like Richard he explains complex issues in words that don’t hide behind esoteric and possibly meaningless formulae and arcane drivel.
As someone said of Noam Chomsky; ‘Not to have read him is to court genuine ignorance.’ Albeit his canvass is somewhat narrower than Chomsky’s.
(I confess to not making head nor tail of Chomsky in his academic field of linguistics)
The banks like many industries in the past will need to be nationalised during the next big crash to remove there top heavy management structures.
No: the reason to nationalise is to take control of the payment platform. I would then licence their use of it
Quite. That should be on Labour’s agenda. It would also help to change the private/state narrative.
Peter May
” It would also help to change the private/state narrative.”
I think you understate this, Peter.
Without shifting the narrative on the relationship between public and private sectors nothing worth doing will be possible.
Consider electricity generation, as an example. If you believe this is a nice-to-have accessory to the good society it doesn’t matter who has control of any or all of the functions that ensure continuity of supply. If, on the other hand, you can see that without continuity of supply as we take for granted, the country would grind to a halt instantly and dissolve very quickly into utter chaos, then you might consider control to be a significant issue.
How you achieve the required level of control is debatable. At present control is maintained by the profit motive. Is that, or is that not acceptable and adequate control? It seems to work well. How secure is it?
We have options. In theory we can make choices.
The IMF’s latest piece of fiction – lumping together government, business and household debts as though they were all the same . It’s unalloyed obfuscation; the IMF is like all existing financial institutions a zombie ; it has no vision, no idea how to move beyond this pathetic clutching at the straws of a broken system. It almost makes the machinations over Brexit seem trivial by comparison. Of course there will be another financial crisis, but wait a minute we are in one now aren’t we ; it’s the same one that began in 2008 . It never went away . As a very ordinary boy from a very ordinary loving home after the Second World War who benefited from the Welfare State and put some slog in subsequently, and who has come to understand something of the present state of global financial affairs I wonder every day what is going on in our world and come to blogs like this for a bit of enlightenment . Keep at it Richard.
John Hope,
If you assume the IMF is principally a financial institution will come to strange conclusions which do not concur with reality.
The IMF is a global political institution. It uses money (all digital of course) to control international affairs rather in the way the US uses its military strength.
but is there a sustainable model for banking with negative interest rates?
We do not know as yet
Sustainable banking with negative interest rates.?
Crucial word ‘sustainable’.
Richard says, correctly I think that we don’t know.
Next question. Why don’t we know?
Because nobody tried it yet. And academic economists don’t have the brain power, computer power, or inclination to test big complex systems. Note please that I didn’t say complicated systems.
‘Complex systems’ have particular characteristics. Complexity theory relates to them and attempts to understand them. It is an imperfect branch of mathematics – a work in progress. Allied to, but not the same as, chaos theory.
One of the characteristics of complex systems is that they have a high degree of interdependence.
The natural world we live in is a fine example. Too much atmospheric carbon dioxide increases the acidity of rain, and directly or indirectly the acidity of sea water. Coral reefs dissolve in acid seawater. The differences in acidity levels are marginal but the effect may be colossal and extend to the destruction of a finely balanced marine ecostructure of flora and fauna. If this leads to a species becoming extinct it will never reappear. (Probably) Does it matter? Who knows. What will its former predator eat?
National economies are complex systems. Change the interest rate by one quarter of a percentage point and things happen elsewhere in the economy. ‘Forward guidance’ can have the same or similar effect without actually doing anything. (That of course is the point) Suddenly, however two thousand people no longer have a job working for BAE systems. Does it matter? It depends whether you had a job there , or whether you were part of the highly complex ‘multiplier’ economy reliant thereon. (or if you give a toss)
Tie those national economies into a global network and you have a system so big (and also complex) that nobody will be able to anticipate the knock-on consequences until AI or machine learning has developed a lot further than we’ve got so far. A ‘fat finger’ on the wrong keyboard anywhere in the world at a crucial time might be enough to bring the entire virtual edifice to a state of collapse. (See ‘Mary Poppins.’ Dick Van Dyke refuses to give the boy his penny piece and the bank collapses)
For the best bet on surviving negative interest rates and how that might be achieved I suggest start with Kenneth Rogoff and be frightened. Be very frightened. Or not. Hey! it might work. Total removal of (physical) cash from the financial system. ALL transactions digital/electronic.
Makes Bitcoin look like a sensible asset class. More use than gold (as long as the electricity grid is up and running)
I promise you, that though none of this is a given, it’s all on the cards. I’m not making-up any of this. The architecture for Special Drawing Rights is all there at our favourite IMF. And how much of your monthly spend is in cash? Most of it I guess is already in digital form. DD. CC. DC. phone app. BAC. Who needs cash? (Is that a rhetorical question? Or one we need to address before it’s gone)