Two articles came accross my desk this week – one caused consternation on my part and the other seemed to offer a sanity check. The former concerned the US economy and specifically how there are signs that consumers, and lenders, are returning to the same behavior that led to the financial crisis at the source or our current economic challenges. The latter concerned the hype and over blown concern with Brexit and its impact on Britain’s economy.
In the US print editions of the Wall Stree Journal (Wednesday January 11th) there was an article titled, “New Loans, Same Old Dangers“. This front page article described a government-led initiative (Property Assessed Clean Energy) that provides subsidies loans to encourage homeowners to buy energy saving devices. The article gives an example of a homeowner who is not able to afford the loan is still encouraged to take it out. As is common practice this loan is then sliced up with other loans and sold on as a bond – what is called securitization in the financial industry. This is analogous to the risky mortgage loans offered, and taken up by people who should have known better, and sold on to governments in Iceland as “AAA” opportunities.
The market is very small – the article suggests around $3.4bn of loans have been made so far – but the model is just damning. FIrst you have big government trying to force its policies on a free market. With the housing issues that triggered the financial crisis this was Government demanding ever greater home ownership among poor people and those that could not afford it. Second you have the lowering of standard for the setting up of loans. This is identical to what happened with dubious sales efforts of mortgage brokers during the 1990’s and early 2000s. Finally you have the build up of risky loans and owners of the loans not knowing where the real risk is.
The popular uprising that has brought Trump to the White House would do well to heed these stories. After all people will be people and when offered a bad apple that looks and smells sweet, many will take it. Perhaps we should not fault those that do – or should we expect a stronger moral aptitude? Either way we need to get big government out of the way. It should not seek to foist its social or political wants on you and me – we should be free to do what we want, how we want, when we want, as long as it does not harm our fellow citizen. Innovation and opportunity will drive improvement in the energy sector. And perhaps tax credits would be a safer way to encourage small changes in behavior that do not create risky loans.
The other article, a commentary piece in the US print edition of the Financial Times (Thursday Janary 12th) was titled, “The City has nothing to fear from Brexit“. It was penned by Stanislas Yassukovich who is a former chief executive officer of European Banking Group. The article is a breath of fresh air since it refutes many of the risks and issues that most other “specialists” report in the press. For example we have heard a lot about “passporting” – the idea that a financial institution authorized to trade in one country of the EU can freely trade in another country. It turns out that non-member states can use this capability quite easily – so it’s not even needed as a negotiation. The article goes further.
Passporting was a means to try to level set the complexities of rules across what was meant to be a single market. It turns out that even with passporting there remains complex and different rules that still need to accommodated when trading across the member-states. As such, “core retail financial activities – residential mortgages, deposit and savings products and so on – remain almost entirely national, and highly protected.” This whole think stinks to me.
The recent news that PM Thresa May fired her senior most civil servant who worke with the EU was greeted in the press as bad news. It seems he kept repeating to the PM that it was not going to be possible to complete all negotiations in time before the two year window closed for leaving the EU. Why is this? He may have had a practical view on things but he certainly did not have a positive view on what is possible. I think we need clean out the cupboard and get a fresh new look at everything. Good for PM May to do so. If the author of this article is right, there is little we should fear from Brexit.