By Chan Akya
Three years ago at the height of the liquidity crisis in 2008 I wrote a series of articles on the outcome of various interventions (see "Related Articles"). It is with grim satisfaction that I note many of the predictions have indeed come through; some of which were:
1. Asia would need to focus on physical assets to maintain purchasing power;
2. European sovereign debt would erupt if governments tried to save their banks (See: Europe - into the end game, Asia Times Online, September 15, 2011);
3. Anyone who purchased bank shares at the 2008 "lows" would regret their decision.
Over the past 10 days or so, a number of headlines have popped up which take my "banks are not trustworthy" thesis well past its logical end point and into entirely uncharted territory. That point would be the otherwise-unmentionable notion (and that is all it is
for now) that the global financial system may have reached its breaking point, and perhaps even its sell-by date.
Before delving into that conclusion though let us look at recent developments:
Considering that the ECB accepts all manner of collateral including Greek debt, in effect the Federal Reserve (and ultimately US taxpayers) are now lending money against Greek bonds. If the regulatory and central banking authorities have to resort to such morally bankrupt measures three years after effecting a wide-ranging rescue of the banks, then we all truly have to wonder quite how bad things are below the surface.
When you step back and think this through, it is apparent that the banking system is failing in its basic functions of taking deposits, making loans and even in terms of transferring payments (as happens when Chinese banks no longer want to face their French counterparts) across borders.
So what does a world without a developed financial system look like? It is quite likely that international payments will simply shift back to central banks - so when a transfer needs to be made from Hungary to Thailand, it is not branches of private banks that do the transfer but the two countries' central banks. Similar stuff happens within payment zones, for example within the euro-zone where banks seem most chary of facing each other.
Once the payment functionality is removed from the banks, what remains is the basic lending and deposit taking functions. There isn't a whole lot of evidence that banks can do these functions any better than non-banks; if anything the current evidence is to the contrary. After De-leveraging and significant rises in capital, the consolidated banking system would become a more boring place that is less integral to the global economy. Good thing, that....