As the BIS noted in Part I of its annual report, the major banks' lack of transparency (the BIS did not mention outright frauds, but anyone with half a neuron to spare can deduce that it also meant to include outright fraud in its conclusions) has created a vicious cycle. Investors cannot trust the banks' books and thus do not invest in them, and in fact sell their positions. This naturally makes it harder for banks to raise capital. They thus turn to their countries’ governments for funding, pressuring sovereign finances which of course results in the banks getting weakened. Contagion results - lather, rinse, repeat.
No secret that Part I was called Vicious Cycles for this reason.
Trust is created by transparency and honesty. It is easily lost. There have been numerous reasons for investors to lose their trust in banks in the last decade. They continue to this day, viz, LIBOR.
The BIS did a brilliant job of showing how breaching trust has concrete consequences.
It takes a long time to regain trust and to convince investors that the books are what they say they are.
The BIS forgot one small item - when trust is breached, laws are usually broken. This means that massive lawsuits follow. These suits generally result in substantial settlements, which also weaken the banks' balance sheets, which in turn drives them to the sovereigns for capital which in turn weakens sovereigns, which in turn weakens banks, lather rinse repeat.
But the weakening of sovereigns also leads to low interest rate policies, which are also deadly. The BIS on low interest rates:
near zero policy rates, combined with abundant and nearly unconditional liquidity support, weaken incentives for the private sector to repair balance sheets and for fiscal authorities to limit their borrowing requirements. They distort the financial system and in turn place added burdens on supervisors.
It seems likely that low interest rates will continue and that they will result in unintended consequences.
It's the trust, stupid. It can be measure by looking at the spreads on bank credit default swaps. They are quite high. The market in a word doesn't trust them. And when this happens, investors won't invest in banks, and when this happens, banks go begging to their sovereigns, lather rinse repeat.
Bankers long ago knew this. They were general partners in their firms, showing the world that they would go down with the ship if they screwed up. Trust was thus not a function of personality or anything else but of cold hard economic rationality. If I put my fortune at stake, you will trust me because I will not do anything that might jeopardize me.
For the individual investor, the answer is obvious: Get gold and leverage it via good miners. |
