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To: Giraffe who wrote (19044)	9/16/1998 9:25:00 AM
From: Giraffe	Respond to of 116786

BANKS: Hard times, easy money Scared banks create a bad case of credit crunch. We can blame the banks. Economic problems may not always be their fault, but they provide convenient whipping boys. Either the bankers are engaged in dangerous and inflationary lending sprees or - and this is today's problem in many countries - they slink into their parlours, too frightened to lend at all; it is a "credit crunch". Winkling them out again while economies crash all around can be tricky. This week the Bank of Japan decided to cut its target overnight money rate from a minuscule « per cent to a microscopic ¬ per cent, hoping that a flood of liquidity would revive the paralysed banking system. But was this more like desperation than inspiration? Cynical observers simply concluded that the Japanese banks must be in even more trouble than everybody thought. Tokyo shares have tumbled. In Malaysia, meanwhile, the erratic prime minister Mahathir Mohamad, who has ring-fenced his country into a kind of financial siege, has decided that banks must increase their lending by a minimum of 8 per cent a year, willy-nilly. It is their duty to revive the economy. But he is wasting his time: bankers are not all that smart, yet they are certainly wily enough to shuffle artificial loans around in a way that satisfies the rules but does not have an economic impact that would necessarily expose them to that shocking factor - risk. Eastern problems have been building up for more than a year, but until about three months ago there scarcely seemed to be a cloud in the western bankers' sky. When the UK's retail banks sector index peaked in mid-April, it had risen by two-thirds in the preceding 12 months. These mature businesses were earning 25 per cent or more on their shareholders' equity. Had the bankers at last become good at running their businesses or did the high returns mean that they were taking risks not obvious to outsiders - and maybe not even to themselves? Well, the question is now being answered in a succession of bank trading statements. That index has now tumbled by some 30 per cent. Emerging market exposures have proved to be disastrous after the miscalculation that Russia was "too nuclear to fail"; and the enormous amount of credit that has been pumped into the securities markets is now looking ill-secured. Moreover, who knows what horrors lurk in those over-the-counter derivatives books? Closer to home, the UK housing market has stalled and competition for personal banking business is stiffening. On Wall Street the prices of several big US banks with large international exposures, like Citicorp or Bankers Trust, have halved inside two months. Troubled bankers need to be soothed and encouraged by lower interest rates. The Bank of Japan denied on Wednesday that it was leading off an orchestrated programme of cuts around the world, but Wall Street has decided that a reduction will soon feature on the US Federal Reserve's agenda and our own Bank of England Monetary Policy Committee is poised to bring rates down from 7« per cent soon, although it declined to do so at Thursday's meeting. Possibly, too, the euro will be launched in January with a short-term rate even lower than Germany's current 3.3 per cent; the German economy scarcely expanded in the second quarter, and official economic growth forecasts are being pared down right across Europe. In a real credit crunch, though, the cheapness of debt scarcely helps. There is not the confidence to lend and borrow. Using lax monetary policy to revive a stricken economy, said Keynes, can be like "pushing on a string". Japanese rates have already been at « per cent for three years now, and have apparently done nothing to pull Japan out of a slump, although they have helped US hedge funds to leverage their positions in the global financial markets cheaply (though possibly, as we have seen in recent weeks, dangerously). A depression alters market psychology. This week's unexpected cut in Japanese interest rates failed to boost Tokyo share prices because the move to ¬ per cent was seen as a symptom of trouble rather than a harbinger of recovery. In western markets, the coming cuts will still be viewed positively. It is notable, though, that the recent falls in longer-term interest rates have failed to help equities. Since late July long gilts have outperformed UK equities in terms of total return by a remarkable 30 per cent. This is very odd. We have become used to the prices of bonds and equities moving in the same direction (although not to the same degree). In a healthily expanding economy, bond yields influence the prices of all financial assets - the lower the yield, the higher the value. The argument flips, however, when people start to worry about lengthy economic depression and falling prices of goods and services. Then what is good for gilts is definitely not good for equities. So far, however, it is hard to believe that banks in the west face anything much more than a normal cyclical setback, rather than Asia's secular shock. We shall not see Tony Blair ordering British banks to go out and lend as their patriotic duty. That is just as well, because then we could not say the ensuing trouble was all the banks' fault.