Monthly Archives: February 2009

Either accountancy rules in the UK are generically nuts, or Barclays PLC’s accounting conventions are idiosyncratically nuts, or both are (nuts, that is).

In its report today on Barclays’ Annual results for 2008, the Financial Times writes:

“The bank confirmed it had written down its exposures to complex debt instruments by £8bn in 2008, though the impact was reduced by a £1.66bn gain it booked from the reduced value of its own debt.”

My immediate thought was: surely that report cannot be true.  When your market-traded debt becomes worth less because the market considers you less creditworthy than before, and prices your debt to reflect that perception of increased default risk, this does not add to your profits – it simply makes you a worse credit risk.

This is mark-to-market gone mad.  It ignores the fact that, if there really were any higher current or future profits from the decline in the valuation of the debt because of higher default risk premia, these profits would have to be paid out as debt service: holders of Barclays’ debt have a claim on its resources that is senior to that of its profit claimants (see also the last section of this post).

The truth of a proposition is independent of how many people believe it to be correct. The merits of a proposal are likewise not enhanced by the number of people supporting it or making similar proposals.  Still, humans, like other pack animals, thrive on companionship. It is therefore comforting that the logic behind my proposal (January 29, 2009) for one or more new ‘good banks’ to be established, capitalised with public money and with additional financial support from the state for new lending and new funding, while the toxic assets of the old banks are left with the owners and creditors of the ‘legacy banks’, is being echoed in proposals from Joseph Stiglitz (February 2, 2009), George Soros (February 4, 2009) and Paul Romer (February 6, 2009), to name but a few.  I claim no authorship or originality for the ‘good bank’ proposal.  The idea is obvious and no doubt was floating around the blogosphere and elsewhere as soon as the magnitude of the insolvency disaster in the banking sector became apparent.

Dr Fabrizio Saccomanni, Director General of the Banca d’Italia (the Central Bank of Italia) and I have been engaged in a bit of a ding dong in the ‘Letters to the Editor’ section of the Financial Times.  The issue is whether a recently established collateralised interbank lending scheme (the MIC) promoted by the Banca d’Italia (1) represents a balkanisation of the monetary policy implementation and liquidity management of the Eurosystem (the European Central Bank and the 16 national central banks (NCB’s) of the Eurozone member states), and (2) involves the Banca d’Italia assuming credit risk and therefore potentially implies the need for recourse by the Banca d’Italia to the Italian sovereign, through the Italian Treasury.

On a number of occasions I have cautioned against deficit-financed fiscal stimuli in countries whose governments have weak fiscal credibility, that is, countries where current tax cuts or public spending increases cannot be credibly matched by commitments to future public spending cuts and tax increases of equal present discounted value.  I believe that both the US and the UK fall into this category.

I have spent a good part of my career as a professional economist working on developing countries and emerging markets – in South America, in Central and Eastern Europe and the former Soviet Union and in Asia.  Increasingly, I find it helpful to analyse the crises afflicting the US and the UK as emerging market crises – perhaps they could be called submerging markets crises.

During the decade leading up to the crisis, current account deficits increased steadily and became unsustainable.  Strong domestic investment (much of it in unproductive residential construction) outstripped domestic saving. Government budget discipline dissipated; fiscal policy became pro-cyclical.  Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles.  Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers.

There was a steady erosion in business ethics and moral standards in commerce and trade.  Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place.  Truth-telling and trust became increasingly scarce commodities in politics and in business life.  The choice between telling the truth (the whole truth and nothing but the truth)  and telling a deliberate lie or half-truth became a tactical option.  Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.

I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression.  Now I’m not so sure.

I used to believe that the unavoidable protectionist and mercantilist rhetoric would not be matched by protectionist and mercantilist deeds.  Protectionism was one of the factors that turned a US financial crisis into a global depression in the 1930s.  Protectionism imposes large-scale structural sectoral dislocation, as exporters are ejected from their foreign markets and domestic producers that depend on cheap imported imports suddenly find themselves to no longer be competitive, on top of the global effective demand failure we are already suffering from.

I used to believe that our central bankers would overcome their natural conservatism, caution and timidity to do what it takes to bring to bear the full measure of what the central bank can deliver on a disfunctional financial sector and on a depressed economy, at risk of deflation.  Now I’m not so sure.  While the Fed is turning on most of the taps (albeit in a unnecessary moral hazard-maximising way), the Bank of England and the ECB are falling further and further behind the curve.  What the Bank of Japan does, no-one fully understands, and I will observe a mystified, if not respectful silence.

I used to believe that our fiscal policy makers would, when faced with a combination of national and global disaster, manage to come up with a set of national fiscal packages that would be modulated according to national fiscal spare capacity and that would be designed not only to boost domestic and global demand but also to eliminate or at any rate reduce the underlying global imbalances that are an important part of the story of this global crisis.  Instead we find the US engaged in fiscal policies that will aggravate the underlying global imbalances.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website