Oh what night, late September back in... 2007
Jaqui Lane
Book coach and adviser to business leaders. Self publishing expert. Author. Increase your impact, recognition and visibility. Write, publish and successfully sell your business book. I can show you how. Ask me now.
Readers of The Fast Lane might detect a pattern in the titles of my posts. They are definitely not written with SEO engines in mind…and I am rather surprised that my first one was on 25 June 2016 and was titled ‘We’re definitely not there yet!’
I could reprise this, but there’s a sound reason for the one I’ve chosen and now I can’t get the song out of my head.
The current title, Oh what a night, of course, comes from that great pop classic by Frankie Valli and Four Seasons, Oh what night, circa 1975.
Reviewing the world in December 2017, with a firm focus on the world financial system, central banks, quantitative easing, low interest rates, low growth but with a equities, VC, investment banking party going on – and in Australia a property bubble that would have to so close to stretching the biggest bubble-gum bubble any of us ever made – I’m comfortable to share my unconventional view of world banking and finance.
And it’s not pretty.
In fact, it’s not pretty because most of us have just rolled over and let the system, structures, central bankers, linked institutions and apathy do what they do best, use the structure of government to legislate to make us ‘feel’ safer but in fact, bank (pun intended) on our apathy to act.
So, where are we now?
When I wrote that first blog, We’re definitely not there yet, it was a personal perspective about what I was reading and researching given just started researching and writing two bank histories.
This research led me into one of those wonderful byways that researching often does, the operation, functioning and structure of the world’s banking and finance system.
Over the past two years those of us watching, listening and reading about global finance have seen that Germany is in strife, not so much because of it’s hubris around economic success but because it has ‘mistaken a confluence of exceptional events fore permanent ascendency.’[1]
In a book by Olaf Gersemann, The Germany Bubble: the last hurrah if a great economic Nation, he argues that the seemed economic miracle from 2005 onwards had ‘gone to Germany’s head. Germany considers itself the model for the world, but pride comes before a fall.’
This resonates for me because Australians think they are economically bullet-proof. Our unbroken record of 103 quarters since Australia had a technical recession, (defined as two consecutive quarters of negative growth) has made most Australians conceited, lazy and drunk on debt. [2]
While low wage growth has put a bit of a dampener on how Australian’s feel, its clear that most have an exaggerated sense of wealth and a deep cultural sense of entitlement.
It is also a function of deliberate power politics. As Michael Seccombe so eloquently outlines in his essay, It’s all John Howard’s Fault, quoting Judith Brett he summarises:
‘Howard was first and foremost a class warrior…he made a play for the un- unionised blue-collar worker. Howard called them the ‘aspirational’ class.
‘Economic conservatism was hurting a lot of people. Social conservatism presented a deflection strategy.’ [3]
Pluto-populism in Australia
This strategy drew out social insecurities, gave them form and politicised them. As Seccombe explains: ‘The Americans have coined a term for this kind of conservatism, they call it pluto-populism. It means distracting people from the fact that they are being disadvantaged economically by dividing them on social issues.’
We’ve had this in truck-loads in Australia mainly directed at Muslims and asylum seekers. (I do have to recognise the result of the postal survey on same-sex marriage, the one bright spot of the year).
Overlay Australia’s debt frenzy with the farcical and very serious situation Australia has endured as a result the dual citizenship pantomime, and you have a populous who is completely distracted from what’s happening in the world of global finance and banking, not that most people would even spare a seconds thought about this. Other than, of course the politically-driven bank tax and now a Royal Commission into the financial system.
Politicians playing with the populous because of social media campaigns and a disgruntled group of people who have, in some cases quite clearly been duded by some of the banks. But a Royal Commission?
And this my point.
Australians are distracted while decisions about their future are being made through the unelected, international network of central banks and international financial regulatory bodies.
Just who is really running the banking and financial system?
Stephen Roach, a former fellow at Yale and former Morgan Stanley Asia Chairman, noted in November that:
‘US politicians and central bankers have not heeded the lessons of the GFC, with mooted tax cuts and late-cycle rate rises heightening the risk of a sharp economic correction.
‘The banks have learned a lot of lessons but I am not sure our politicians and central bankers have truly learned these lessons. [4]
Same here, I thought as I read this.
Australia's Complacency
27 years of uninterrupted economic growth – have accustomed this country’s political class and the electorate to thinking that everything is economically affordable and that the consequences of policy mistakes don’t matter. Not even the GFC shook Australia out of its complacency.
Many of the current generation of political and business leaders weren’t in politics or business in 1987, and many wouldn’t remember the 1992 recession. I was here for both.
I remember standing on the floor of the then Brisbane Stock Exchange watching the board go red… this after an interview I was conducting with one of Australia’s leading entrepreneurs at the time was cut short as he was clearly distracted by what he was seeing on his computer screen.
20 years on the GFC did much worse than the ’87 crash, it damaged confidence in and legitimacy of financial and policymaking elites, or so it appeared at the time.
Their collective response – let me be clear, the central banks of the developed world (the US, UK, ECB and others) flooded the world with cheap debt and made most people, especially Australian’s with the ability to borrow off an existing property with the benefit of a superannuation, capital gains tax and property investment structure that encourages property speculation, even more wealthy.
The $900 cash injection was a joke. My brother who wasn’t even an Australian citizen got a baby bonus and left to go back to NZ before it could be paid. I refused to act as the conduit for this profligate helicopter cash splash.
All the while there seems to be a collective amnesia about who created the GFC and the fact that no-one, other than in Kareem Serageldin, a senior trader at Credit Suisse, has been jailed or called to account (large fines to some of the world’s largest banks and financial institutions don’t really count as they are a corporate expense – no personal accountability here).
But at what cost to Australia’s financial sovereignty, and at what cost to any nation’s financial sovereignty?
Adam Tooze, author of The Deluge, summarises what happened post the GFC way better than I could so I’ve paraphrased one of his articles here.
‘The spectacular, globe-straddling dimensions of 2007-08 took Bernanke by surprise. The expert on the Great Depression didn’t think American subprime mortgages could bring down the house.
‘What made this downturn so different, so sharp and sudden and so systemic was the implosion of a new system of bank funding.
‘The global fix is still with us today and remains largely out of sight. The hidden rewriting of the global monetary system provides reassurance to those in the know but it has no public or political standing, no resources with which to fight back if attacked.
‘Since GFC monetary authorities have entwined themselves more closely than ever before, and they have done so in order to provide life support to that bank funding model that caused such trouble ten years ago.
‘Banks borrow money short term at low interest and lend long at marginally higher rates. Conventional model, short term funding comes from deposits from ordinary savers.’ [5]
Banks can also borrow from other banks and other institutional investors. The money markets offer funds overnight, for a day, week, months.
‘In the 1990s commercial banks and mortgage lenders began to operate on a similar model. This ‘new form’ of market-based banking combined with securitisation of mortgages that enabled the huge expansion of European and US banking that started the 2007 crash.’
This freed banks and other finance institutions from the need of a large, bricks-and-mortar branch network traditionally used to attract deposits. Banks could source funding from around the world.
Central banks stepped in to provide the liquidity previous provided by the money markets.
But, this wasn’t enough, so the Federal Reserve’s ‘most radical innovation of the crisis was to devise a system to allow a select group of central banks to funnel dollars to their banks.’ The Federal Reserve reinstituted swap-lines, agreements between central banks to trade their currencies in a given quantity for a given period of time. The aim was to stabilise a banking system that was faltering – too big to fail.
Initiated in September 2007 they were rapidly expanded and by September 2008 – all major European Central banks were included. In October 2008 the network expanded to Brazil, Australia South Korea, Mexico, NZ and Singapore.
And yes, Australian banks availed themselves of the swap lines.
The sums of liquidity were huge: US$10 trillion to ECB, BoE, National Bank of Switzerland.
The Federal Reserve, the world's lender of last resort
As Tooze comments: ‘The Federal Reserve was now the lender of last resort to the entire global financial system.’ This helped the banks, their staff and shareholders. Of course, many would say it helped everyone, the SMEs, the ‘average Australian’, the average worker as a repeat of the Great Depression was averted.
But, what if a global reset on unsustainable debt levels, micro-second algorithmic trading, takeovers funded by debt, IPOs leveraged to an inch of their ‘user base’ where unsustainable businesses and should have been left to fail with economies faltering because of clearly unsustainable financial voodoo?
Yes, it would have had significant impact on world economic growth, on specific country’s growth, or lack thereof. But, it would have reset global financial systems.
I’ve seen this before, in 1987 and again in 1990-1992. It’s difficult. People lose their jobs, companies collapse, economies falter…that’s life. It’s happened to me and it was tough.
The world economy and each country in ‘the BIS/Fed Reserve tent’ has been on life-support for too long, and that life support has totally protected the more wealthy…that’s why ‘populations’ are angry now.
With the global financial system so intertwined, perhaps a catastrophic reset was needed. QE and all its permutations has fuelled an asset/price boom that’s bigger than pre-2007.
While the swap lines provided by the Federal Reserve were repaid in full, the story of the swap lines is not over. In 2013 the Federal Reserve turned the ‘temporary’ global dollar swap facility into a standing facility…now it's a permanent feature of the global monetary system.
So, the foundation of the world’s de-facto currency system is no longer a public institution but the private, dollar-based global banking system.
‘The introduction of the swap lines gives this system unprecedented state support.
‘The new central bank network, along with the new networks for stress- testing and regulating the world’s systemically important banks, now oversees, regulates and acts on an interlocking, transnational matrix of bank balance sheets.’ [6]
Think about that the next time you deposit your money into a bank, go to transfer some money through an App, look at a fintech start-up to link up with to fund your mortgage.
It’s not only an Australian financial institution, broker, fintech, App that you are entrusting your hard earned money to. It’s the cohort of developed world central banks (primarily the Federal Reserve, Bank of England and European Central Bank) representing themselves and also represented through the Bank for International Settlements whose public face is numerous Basel Committees.
None of the people in these organisations are elected officials.
How, back to the history link in all this.
To me there seems to be a focus on the here and now, on what’s next. I get that, we’re fed this diet of ‘now’, ‘fomo’, being trendy (well that’s always existed but now everyone sees it, every day).
My concern is that because of the focus on the here and now and tomorrow, people (voters) can’t think in any other way. The past (and that could be a week ago) is a burden, out of date, out of style, ‘so old’, that must be shed in order that a new kind of life can come into being…even if that’s just for a fleeting Facebook moment or the possibility of creating a following an becoming a social media phenomena.
Knowledge, context, dare I say it a sense and understanding of history – and by history I mean 50, 100, 200, 1,000 years and longer – is seen by most as irrelevant, un-useable and totally useless for an AI, data analytics, App-based, connected world.
These thoughts have been well presented by John Grey in his of Francis O’Gorman’s new book, Making the Modern Culture of Amnesia. I was captivated by the following excerpt.
‘Capitalist modernity’s breathless desire is to forget. It is to draw a veil over histories, cultural narratives from the past, artefacts and achievements bequeathed to us by predecessors and identities shaped by time, in preference for unknown material and ideological prosperities allegedly to come.’
‘Mobility, fluidity and ceaseless innovation are the ruling imperatives in the turbo-charged economy that shapes our lives.
‘Anyone who is unduly attached to a particular place or occupation or identifies themselves with a specific community, risks being left mouldering in a derelict zone that will soon be forgotten.’[7]
Gray goes on to reference William Morris, a Victorian era dissenter quoting from his book, News from Nowhere (1890).
‘The great achievement of the 19th century’ as ‘the production of measureless quantities if worthless makeshifts.’[8]
‘The current disassociation from the past has the effect of making the present permanently provisional’, says Gray.
‘The future to which all activity is directed becomes more indeterminate and eventually indefinable. Any clear idea of a destination fades away, and all that is left is a sensation of movement.’
‘Any reminder of past achievements can only be an obstacle to a society that defines itself by an image of the future.’
This is the point at which I connect the world’s current financial system . . . do populations, societies, the comfortable executive class, the central bankers, Basel committees, the mere depositor (you and me) give even a moments’ thought to this?
With inequality increasing in the world, with pluto-populism being played out in Trump’s America and an underlying part of Australia’s political compact with the aspirational class, do you care enough to explore what’s actually happening?
Or are you comfortable because you’ve ridden the baby-boomer wave and it’s your children and grandchildren who will reap the now quite intended consequences of this short-sited 30-year party.
[1] A Napoleonic ascent there for the taking, Ambrose Evans-Pritchard, SMH 20 May 2017, page 5
[2] As of June 2017
[3] The Saturday Paper, 22 December, 2017, page 4
[4] Stephen Roach hits out at Federal Reserve, Trump tax cuts, AFR, 19 November, 2017
[5] Secret Saviors, Adam Tooze, AFR Review, 11 August 2017
[6] Secret Saviors, Adam Tooze, AFR Review, 11 August 2017
[7] Spotless minds, John Grey, AFR 22-26 Dec 2017, page 35
[8] Ibid