“Politicians are pre-eminent exponents of Murphy’s Law; anything that can go wrong will go wrong. Together with central banks they represent the greatest threat to the global economic recovery. These politicians have thrown so much money at the global economy, in order to protect it from the consequences of the Minsky Moment, credit crunch and the potential systemic collapse of the financial system that it is unlikely to keel over of its own accord. Governments and central banks spent 2007 and 2008 helping the banks to survive. Bankers spent 2009 helping themselves to massive bonuses, leading to a popular backlash against the current financial system.
“In the wake of the unprecedented 43% swing against the Democrats in the Massachusetts Senatorial election, Barack Obama has joined this bandwagon rather than justifying the essential role of banks in the economic system. The reforms proposed by Paul Volker seek to separate government insured banks from risky activities such as propriety trading, owning hedge funds and private equity. This is a major step toward reintroducing narrow banking and while there are clear merits to these proposals, it is absolutely the wrong timing.
“The global recovery is too fragile for the Administration to be imposing restrictions and regulations that are likely to increase uncertainty in the initial instance and accelerate global deleveraging over the medium term. We have always believed that it would be central banks that made the policy error of tightening liquidity too soon and it is disheartening to see politicians eager to compound this error.
“The bright promise of President Obama’s election to combine the rhetorical tour de force of FDR, with the vigour of JFK, has given way to the dawning recognition that he is more like Herbert Hoover. Hoover relaxed fiscal policy throughout his time in office but he presided over a tightening of monetary conditions. Bankers have made a convenient scapegoat in this mid-term election year, but the ultimate expression of political knavery is protectionism and blaming foreigners. The willingness to impose draconian conditions on banks bodes ill for trade policy in the second half of the year.
“The President is not the only exponent of foot and mouth disease, we heard this week of a Bank of England official who expects banks to solve their intractable wholesale funding gap this year, as well as from the head of the DMO, whose comments on the prospective ending of QE, were positively Ratner-esque. Temporary suspension of QE will add to macroeconomic volatility and in the near-term, the resulting competition for capital is likely to cause bear flattening before slower activity in the second half gives way to bull flattening.”
For Stuart’s full commentary please see his blog at www.ratesviews.com.
These are the views of the author and do not necessarily reflect those of Ignis Asset Management.