Green shoots or yellow weeds? This week our diarists reflect on whether or not we are
coming out of recession
, the cycles of
boom and bust
of proposed regulation.
These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.
They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.
Laura (not her real name) works for a commercial bank in London.
Knock knock. Who's there? Green shoots! Green shoots who? Erm, never mind.
No matter how bad the housing slump gets, we will come out of it eventually because people will always need to move for life events
The great thing about economists is that you can give them one set of figures and they will come up with numerous ways in which that data categorically proves wildly different theories. This isn't a bad thing and is not to say that they are wrong, but everything comes down to perspective.
No matter how bad the recession and housing slump get, we will come out of them eventually because people will always need to move for life events like births, deaths and marriages. Some companies will always do well as they take over other less profitable companies, or find a new way to appeal to consumers.
A lot of people are saying that bank lending is the key to the recovery. I'm afraid we are not going to return to early 2007 lending this year. I have touched on the reasons for this in previous diaries - such as the continuing business insolvencies and redundancies. Also, restraints on capital and low interest rates mean that savers are not putting money into banks. And the banks, once they have the money, are not lending at the same levels as before. But consumer spending will increase eventually - if not before then when we reach the 'damn it' moment - when people get fed up with self-restraint and simply splash out. The key then is if this sustains itself.
At the moment there is a sense of national gloom - but that will change. Looking at our sector's hit list, if you are not in property or the automotive industry you will find a bank to lend to you. Business people are more attuned to the reality of lending than earlier in the 'Crunch'. There is now a realisation that accepting a fair price for your borrowing rather than expecting (and getting) a ridiculously cheap rate is the new status quo.
What I don't think we have got to yet is individual responsibility for their own personal financial circumstances and accountability of that.
If you borrowed more than you can now afford to repay that was no one's fault but your own. People have become increasingly infantilised over the last decade, partly down to the nanny state approach to so many aspects of our lives. This personal responsibility about borrowing inevitably comes more into focus in times of economic hardship. My one hope is that when the dust has settled people will consider their own actions much more carefully than they did before.
"Stephen" (not his real name) has worked in the City of London for over a decade.
The bubble in internet stocks popped in March 2000, bottoming over two years later in October 2002. Nine years on, the Nasdaq is still nearer the bottom of that fall, at levels first seen in 1998.
After the Great Crash of 1929, stocks were universally hated and debt was so shameful as to be taboo
Generally the rule of history is that every generation has a financial bubble of some kind and learns from it roughly the same lessons as its forebears - that speculative manias are near-impossible for the inexperienced to spot, but entirely self-evident to old-timers. The bursting of a bubble is part of the tough love through which each generation accrues wisdom and financial sense.
After the Great Crash of 1929, stocks were universally hated and debt was so shameful as to be taboo. Those still with us from that time carry the habits learned in the Great Depression of the 1930s to this day.
After the financial crisis of the 1970s, people were proclaiming "the death of equities" as another generation learned the discipline of money.
There are two striking things about our present financial era. First, when stocks bottomed in the early part of this decade it was shrugged off almost instantly with record numbers continuing to invest in the markets. Second, having blown and popped the internet bubble, we plunged head-long into blowing another, vastly more dangerous bubble in the housing market.
The way that the bailouts work is that the problem is simply distributed across a larger and larger number of people. This guarantees that at some point we will have a crisis so big that there is nobody left to bring into the party. When everyone is loaded with stocks and debt, there's nothing else to be done except push the debts out in time and hope (even pray) that our children agree to pay for them. Some kind of parents WE are, huh?
Will our children view us as wise stewards of our finances and their futures?
There's been much chatter in recent weeks of "green shoots" or "yellow weeds". For my tastes such place is misplaced as it ignores the totality of what we have achieved. Sure, it might be possible to engineer an economic up-swing just as we approach the next general election - but this ignores not just what the next government will deal with (the biggest spending deficit this nation has ever known), but also what we are bequeathing to the next generations.
Will our children view us as wise stewards of our finances and their futures? Or would it be like coming home to find your parents have thrown an almighty party and wrecked the house - and now expect it all to be paid for?
There's also the matter of the statistics we hear about. House prices have, according some reports, picked up in recent months - even as the mortgage famine continues. In others, the economy is "recovering" simply because house prices are "falling less fast". Nonsense in both cases.
When the history of the first decade of the new millennium is written, will we look back on this era with affection or puzzlement? Will it ever again be viewed as normal that we tried to borrow ourselves rich, spend ourselves out of debt or get rich by selling each other ever more expensive houses?
"Anthony" (not his real name) works for an investment bank in the City.
The economy is in the doldrums. The markets are drifting, up one day down the next.
Some think we are still in the recession and others think we are out. Even the Bank of England seems unsure what to do next - announcing last week that it was not extending the quantitative easing programme. I believe it is holding back just in case the second wave of recession hits the economy.
The problem with this so-called recovery is that it does not take account of how sustainable the upturn will be
The government's White Paper on Financial Regulation did not pull the City out of this limbo. It is an inconsequential piece of political window dressing designed to show that the government is doing something about those nasty banks. The Paper advocates increasing the Financial Service Authority's powers and the establishment of a new Council for Financial Stability - but this is just a restatement of the existing arrangement with knobs and whistles added. And how long will it last if the Conservatives win the election? The Tories seem committed to switch power to the Bank of England.
The problem with this so-called recovery is that it does not take account of how sustainable the upturn will be. Companies have cut costs which improve profitability but if there is no sales growth then they will run out of ideas very quickly. It also takes time for people who have been made redundant to run out of money and be added to the dole queue.
The lack of an election is another reason why the economy has begun to drift. People are convinced that the Tories will win. The brakes have been successfully applied but nobody will give the government credit for this. The sooner we have this election, the sooner the economy can move forward.
If we cannot have an election until next year, then the government should bite the bullet and begin cutting public expenditure. The markets understand that cuts need to be achieved in a finely balanced way. Making controlled cuts would at least send a clear signal that the government is tackling the deficit. As long as we are in the position of postponing inevitable cuts then the markets will continue to drift.
City types with their Savile Row suits could be sharing the Swiss Air shuttle to Geneva with McDonalds employees
The City should not be complacent about changes in regulation. This week the EU announced proposals to amend the Capital Requirements Directive - raising the level of funds banks are required to hold. They also want to look at bankers' pay. To quote the EU press release, they wish to, "tackle perverse pay incentives by requiring banks and investment firms to have sound remuneration policies that do not encourage excessive risk taking".
The effect of these changes can be summed up quite simply. Banks will have to take fewer risks and lend less to support higher capital ratios. More high fliers will find ways of getting out of London to earn their huge bonuses.
It is worrying that the EU thinks that the hedge funds are to blame for the credit crunch. This is absolute nonsense. They will be first on the plane to Geneva if this happens and London will no longer be pre-eminent if the EU wins the day.
It is amusing that these City types with their Savile Row suits could be sharing the Swiss Air shuttle from City Airport with McDonalds employees - as the hamburger company is shifting its European headquarters to Geneva.
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