Banks bounce back

A few days ago, exactly on March 27, and last Thursday, two very important articles appeared in The Times. One was by Prof. Martin Feldstein, a former chairman of President Ronald Reagan's council of economic advisors, and the other was a report compiled by the marketing department of HSBC Malta plc on the basis of economic research and financial information produced by HSBC International Bank.

These articles are of high intrinsic interest. Readers must know that there are local quality articles, although not many, which help us to understand that we are in the middle of a bank crisis unmatched since the Depression. It is time for all to think how the present world bank crisis is affecting our own banking system. Is there any banker in Malta who dares be indifferent to what is happening to banking in the international sphere? It is not enough that our bankers have heard of the words 'subprime loans'; they must also know that the key to the present trouble is a universal catastrophic fall in trust which we in Malta will have to fight back.

The reason why we are using these unkind words for our bankers is because the international banking fraternity has disgraced itself prodigiously where the 'subprime' earthquake is concerned. Subprime loans are those mortgage loans which were made to clients with deficient collateral. They were not against proper banking ethics, but they were subjected to massive errors of judgment. Only one major bank - HSBC - has behaved reasonably in this subprime crisis. HSBC admitted its 'subprime' losses a year ago. This was evidence of self-confidence in its vast resources, human and financial. It pulled itself out of its loss in money and prestige satisfactorily, as it did not go cap-in-hand to any central bank asking for taxpayers' money.

After taking a pounding, its share price has been recovering slowly but surely. We all look forward to its great money machine days. The situation sounds ominously similar to that in the 1930s, which saw a tumbling over of half of the US banks and a consequent 30 per cent drop in that economy's productivity.

The first reason why bankers are reliving the 1930s experience is because they are 'frightened' of each other's intentions and this is preventing inter-bank lending. There is lack of trust generated by the Basel regulation of 'off balance sheet risks'. This has had the effect of making it impossible for anybody, including the greatest of banking analysts, to judge the solvency of any bank. The Economist said last August that there was a big bank hiding some big hole somewhere. Let us build up a cultural 'bagatelle', or the right body of fundamental facts to prevent such a contagion from endangering our pockets.

The Feldstein article is damned by the unacceptable assertion that the dollar, which is so important to the world economy, is mainly determined by market forces. It is not. This is seen by historical events such as those of Roosevelt in 1932 and Nixon in August 1971, when the dollar decisions of the US presidents were imposed on a surprised market.

The HSBC article in The Times is extremely important as it seeks to develop the Bernanke 'Helicopter' money theory.

Banks will probably bounce back if we are to believe the words of The Economist last week. Work-to-rule central bankers cannot match the knowledge of the world banking fraternity, whose knowhow has been tested by trial and error in the practice of banking that will always behave, as it had in the last 500 years, with its booms and bust.

This article is cultural and not advisory. John Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P; johnazzopardivella@hotmail.com.