Seems to be the hardest word

“..banks have done more injury to the religion, morality, tranquility, prosperity and even wealth of the nation, than they.. ever will do good. Our whole banking system, I ever abhorred, I continue to abhor, and shall die abhorring.. every bank of discount, every bank by which interest is to be paid or profit of any kind made by the deponent, is downright corruption.”

-          US President John Adams, 1799.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."  

-          Henry Ford.

A moment comes while you’re watching Ron Howard’s outstanding ‘Frost / Nixon’ when you suddenly realise that director Ron Howard has crafted pure entertainment gold out of some ostensibly unpromising material. A televisual battle of wills between a glib showman and a disgraced politician ? But ‘Frost / Nixon’, boiled down to its essentials, is about just one thing: a bilked nation craving an apology.

So its relevance to the current financial débacle speaks for itself. The scale of the banking crisis is so huge, and the dislocating damage wrought across all financial assets so extensive, it challenges language and thought just to try and articulate it. But one response has been almost universal: having been monumentally cheated, we demand an apology. Yet answer comes there none.

The lack of contrition may have something to do with the breadth and diffusion of the guilt.

We can justifiably start with the politicians. The Gramm-Leach-Bliley Act of November 1999 repealed enough of 1933’s Glass-Steagall Act to allow commercial and investment banks to play in the same sandpit. (At the risk of appearing parochial or partisan, all of the proponents of Gramm-Leach-Bliley happened to be Republicans.) The regulators played their part, not least the SEC in its decision to outsource its regulatory function in overseeing the credit markets in the 1970s to three for-profit companies, the ratings agencies Standard & Poor’s, Moody’s and Fitch. The decision to require issuers of debt to pay for their own ratings, leaving credit ratings as a “freely provided” public good, it no longer requires noting, created monstrous conflicts of interest for the ratings agencies. And the role in the crisis played by fraudulent mortgage originators, and the ethical vacuum of the “originate to distribute” model, and deal-hungry bankers divorced from true accountability, has been widely discussed. But since a housing and credit bubble also requires the willing participation of a greedy and credulous public, there are really few people who emerge entirely untainted from the wreckage. By and large, we are all complicit. What matters is how we reach resolution.

And that is where the problems start piling up, because there is no broad agreement on how to solve the crisis, and perhaps there cannot be. Jeremy Grantham expresses it nicely: “even the near-consensus case for great stimulus is lacking in historical certainties or intellectual vigour”. By citing the work of Murray Rothbard last week, we expressed our scepticism of government bank support. But a completely non-interventionist approach would be politically unacceptable in every country groaning under the weight of the banking crisis. Perhaps the most ominous development in a rolling saga of gloom has been the sudden weakness of the Chinese economy: the recession is now confirmed as a global phenomenon.

In the face of an avalanche of worsening economic news, it is easy to become fatalistic or depressed, or both. But Grantham also makes a valid observation at least as regards the ailing property market: we have not lost real housing wealth, so much as the illusion of wealth. One could make the same point about the stock market: except for the lucky or uniquely gifted few who bailed out at the highs in 2007, the stock market values – before the Crash – were never real either, they were just the illusion of wealth. And investors either lucky or gifted to be sitting on significant cash reserves now have the luxury of picking up high quality stocks at huge discounts from their 2007 and 2008 prices. But outside a necessarily selective list of stock market investments, it is difficult to see compelling value in a number of asset types, either because there is still great anticipation of future waves of forced selling (for example in hedge funds, private equity and housing) or because the government has badly distorted free markets and left confusion and opacity in its wake (in the outlook for, and assessment of value within, both the government and corporate bond markets). Outside selective pockets of the equity market, then, the only really compelling investment – and portfolio insurance – opportunities now on offer would seem to be in precious metals and, at some later stage, in inflation-protected government bonds.

Because as Grantham points out, there is simply too much private debt clogging the markets (he suggests to the order of between $10 trillion and $15 trillion), and there are only three ways of making it go away. We can write it down (which would appear to be unpalatable politically – and that may have to change); we can let a combination of time and increased saving do the heavy lifting, as the Japanese have largely done; or we can inflate the hell out of this private debt mountain and collapse its real value. But as Grantham suggests,

“Each of the three realistic possibilities listed above would be extremely painful, each is loaded with uncertainties, and even the quickest of them would take several years. Our path this time is likely to involve a hybrid approach: we will certainly take some painful debt liquidations; this crisis will almost certainly take far longer than normal to play out; and probably, before a new equilibrium is reached, we will see inflation rates that are well above normal.”

Determined not to be overcome by gloom, Grantham also points out that “real wealth lies not in debt but in educated people, laws and work ethic, as well as in the quality and quantity of fixed assets and the effectiveness of corporate organisation”. In a 24/7 news culture that seems to venerate bad economic news, it is also worth taking the perspective of “economists of happiness” such as Warwick University’s Andrew Oswald, who has pointed out that our sense of well-being does not rise hand in hand with real national income: we seek economic growth without questioning its desirability relative to less tangible accomplishments, such as well-being itself. In a 1997 report (“Happiness and Economic Performance”), he suggests that given the significant role played by unemployment in causing unhappiness, governments might well choose to prioritize job creation over maintaining largely spurious economic growth:

“In a country that is already rich, policy aimed instead at raising economic growth may be of comparatively little value.”

And for readers wondering how best to deal with that constant flow of recession coverage and bad news, our best advice: just turn it off.