Over-complexity has turned the financial world topsy-turvy and and Europe is struggling to cope, William O’Brien.
Albert Einstein once quipped that “the hardest thing in the world to understand is income tax” – this from a man who was able to explain one of the most complex principles of physics in a three-lettered equation. If only Einstein were around today he might have a different view.
Turning comprehensible financial terminology into alphabet soup has become a forte of those in the banking and finance industry. Two British comedians, John Bird and John Fortune, have parodied this nonsensical approach. In the world of banking, it seemed ‘debt’ was too simple a word. Instead they came up with structured investment vehicle or SIV and sold it on to unsuspecting buyers.
Liken it if you will to putting wrapping paper around road-kill and playing pass-the-parcel. It seems like a nice enough present but once un-wrapped the subterfuge becomes evident and everyone begins getting sick. That’s essentially what has happened in the global financial system.
Bear Stearns, one of the first investment banks to collapse, began selling packaged debt in the form of high grade structured credit strategy funds and high grade structured credit enhanced leverage funds. Who in their right mind would not want to buy something as lucrative and secure sounding as that?
The answer was very few and now we are all experiencing the whirlwind created by the poetic license of Wall Street. How governments are dealing with this backlash has dominated the news in the last couple of weeks.
Earlier this month, our own government took the unprecedented measure of guaranteeing all of the major banks. They were condemned by European leaders, who, typically procrastinated whilst the financial system crumbled around them.
The German Chancellor, Angela Merkel, was highly critical of the Irish move saying that it was ‘unacceptable’, while the Commission bemoaned that it was creating unfair competition.
Merkel was left eating her words some twenty-four hours later when the German government emulated the actions taken by Messrs Cowen and Lenihan. Ironically, many European countries have now followed the Irish lead with France and its diminutive president leading the charge.
The ‘Road to Damascus’ experience of the European countries in guaranteeing their respective banks, although not to the same extent as the Irish government, is in many ways a retrograde step, already hampered by the Lisbon Treaty rejection, in the ongoing process of European integration.
The financial crisis has shown to the world that when the going gets tough, the E.U. reacts with the impulsiveness of a sedated snail. For the Eurosceptics, there is a Greek tragedy scenario in all of this. States have reverted to economic nationalism rather than wait on Brussels or Frankfurt, who have fiddled while the financial system burned, to come to their rescue.
European Socialists have accused Charlie McCreevy of being an arsonist who has been put in charge of extinguishing this fire when many suspect that he was the one, by reason of being a free market ideologue, with the matches in his pocket.
Recapitalising European banks or simply taking them over has injected some confidence into the system but the sheer pervasiveness of the problem means that such government measures, despite their short-term efficacy, are akin to putting a plaster on a gaping wound – it may stop the blood-flow but wont heal the injury.
The financial crisis has shown to the world that when the going gets tough, the E.U. reacts with the impulsiveness of a sedated snail
But what of poor Iceland? A country with a population the size of Cork, shrouded in perpetual twilight and apparently amongst the happiest people in the world. Not a member of the E.U. and so outside the euro zone, Iceland was simply minding its own business when the financial crisis suddenly popped its ugly head up and caused its once flourishing banking sector to collapse almost overnight.
The Icelandic government has nationalised its banks while its currency, the krona, has effectively collapsed.
Confidence in their currency is so low that many Icelanders are withdrawing vast amounts of their savings in euro which is exacerbating the problem the Icelandic government faces.
Some droll individual put this European recluse up on eBay last week with the description: “located in the mid-Atlantic ridge in the North Atlantic Ocean, Iceland will provide the winning bidder with – a habitable environment, Icelandic horses and admittedly a somewhat sketchy financial situation.”
One bidder simply could not resist asking, “is it possible that my payment will be frozen?” If anything, this whole debacle has provided us with one of the most wonderful headlines of the financial crisis – “Icelandic Meltdown”! The lighter side of the crisis was literally outlined by many in the media. One has argued that with little surplus cash and the fear that the future availability of cash will be severely curtailed, people have become more frugal in their spending habits.
With sales in mocachinos, cappuccinos, frappuccinos and the usual accompaniments to these obscure variants of coffee such as over-priced bagels on the decline, the reasoning goes that we should all be losing weight. Together with the upsurge in the price of petrol and the consequent proclivity to walk to the shop instead of driving, it seems the global banking crisis has resulted in a financially induced form of the Atkins diet.
Oscar Wilde wrote that “anyone who lives within their means suffers from a lack of imagination.” We in the western world, it would seem, have been far too imaginative. The late Charles J. Haughey once famously counseled the Irish people during a similar bout of economic hardship about being over-imaginative when, as we all know, his imagination was running riot.
It was the power of the human imagination coupled with an insatiable appetite for profit that got us into the current mess in the first place. And it will be the power of the human mind that will get us out and save the capitalist system that we have come to love.
Unless, that is, the Government begins calling its bank guarantees a ‘cabinet advanced securely structured enhanced leveraged credit loan’, then you will know that we are in trouble – again.