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JEAN-PIERRE PATAT’S MONTHLY CHRONICLE. A former central
banker looks at the news.
Each month, Jean-Pierre Patat, Honorary Director-General of the Banque de France
and a TAC advisor, offers his own point of view on the economic and financial
news, with total editorial freedom.
Email : jppatat@tac-financial.com
Latest issue:
Figure of the month: 26% - the proportion of poor globally.
They were 52% in 1981, but there is no decline in sub-Saharan Africa.
The United States of America: delicate management of the
‘moral hazard’ factor.
The ‘moral hazard’ is the risk of encouraging the continuance
of unsound management by going to the rescue of a failing financial
institution.
In this respect, the US authorities have done well over past weeks.
For Fannie Mae and Freddie Mac – on whose survival depends the
financial lot of tens of millions of households – we see what
is to all intent and purpose a process of nationalisation. And this
despite the calamitous management of these organisations, that have
shamelessly profited from their image as state-guaranteed bodies.
Authorities are trying to find an arrangement with a consortium of
banks for Lehman Brothers, a merchant bank funded by the markets and
with a small private clientele. Should this fail, though, there is
no question of using public funds, and the ‘moral hazard’
factor applies. Note that Lehman Brothers, being a merchant bank,
is not under Fed supervision, and this fact probably has something
to do with its downfall. As for AIG, whose survival equally affects
tens of millions of citizens, the tenet of ‘moral hazard’
is quashed; given the institution’s particularly opaque management
with past profits seeming in the main to result from off-shore murky
financial deals, there is no question of having the tax-payer foot
the bill. The outcome, therefore, is a complex funding arrangement
with a Fed loan of 85 billion dollars to AIG for two years at a high
interest rate (libor + 850 base points) and with AIG’s assets
held by the Treasury as security. What is more, since this untimely
injection of central money coming from a Fed loan has to be ‘sterilised’,
the treasury is issuing 85 billion dollars in bonds to the banks and
placing the money in its own account with the Central Bank. Great
footwork!
What sort of provisional conclusion can be reached? That the US authorities
are better at managing crises than avoiding them, and are even better
at managing them than avoiding provoking them.
The latest crisis development is a plan for a gigantic state buy-out
of toxic assets. “Bravo” is the unanimous reaction. Yes,
of course! But when we compare this to the unwillingness to add 2
or 3 billion dollars to the Fund against AIDS and tropical diseases
… Immortality does not guarantee efficiency.
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Euro zone: who is the worst off?
‘France, our country’, chorus economists, analysts and commentators.
Comparing ourselves with Germany (ah, those Germans!!), its growth in
2008 of between 1.5 and 2% leaves us far behind (1%). The GDP is an
average of results over one year; it is true that at the end of the
period, the Germans will have grown richer than us and this is important.
But as a trend, to know where we are headed, which of the two countries
is in the least poor position? Ours! Germany surfs on the ‘gains’
of a magnificent first quarter (1.5%), whilst we grew by only 0.4%.
That early gain was sufficient to give Germany a comfortable result
for the whole of 2008, yet forecasters reckon that its growth will be
negative in the coming quarters. On the other hand, these same forecasters
predict positive (though not brilliant) growth for France for these
matching quarters - quarters whose relative weighting in calculating
the average diminishes as we move from the start of the year. We, therefore,
will show poor performance for the quasi totality of the final result,
weighed down by our weak ‘gains’, even though our trend
is less calamitous.
Oil: an outlook of yet more price hikes.
Each US citizen consumes 25 barrels of oil a year, each Chinese 2, each
Indian 1, each European 14. Allowing a catastrophic hypothesis of China
and India catching up with US consumption, a rise of about 40% in world
demand would ensue. A more moderate scenario, with American, Chinese
and Indian consumption ‘limited’ to the European level,
would result in an increase of 20% in demand - all things being equal
in other respects (Africans will soon number one billion). Conclusion:
barring a technological revolution which will not come tomorrow, surges
in the cost of oil are far from over. We can, hence, ascribe its true
value to G. Soros’ remark (he who always has something to say
to the media) when he translates the present (but fragile) decline in
crude oil prices as a sign of … deflation most definitely requiring
an immediate lowering of interest rates.
Basel 2: are there unwanted outcomes?
Two elements could cause a problem: i) the evaluation, by appraisal
agencies whose present successful actions we are familiar with, of the
quality of bank assets, and ii) risk estimation by the banks’
own internal models. Experience has shown that these models take too
much notice of the past (as models do), and that bank managers are reluctant
to admit that what used to happen every thousand years might well henceforward
occur every decade.
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| Is a new Bretton Wood needed?
That a global consensus is required to bring about various reforms is
clear: no fuss needed to implement concrete measures such as plugging
the giant holes in regulations (merchant banks, hedge funds etc.); introducing
competition and improving ethics in the running of appraisal agencies;
polishing the new accountancy norms; and supervising the introduction
of securities. Do we, in effect, want to totally revise the present
financial system? To reverse the liberation of the movement of capital?
And above all, do we want to return to the wholesale interventionism
of the 1950s and 60s, when almost all financing came from banks, whilst,
since their liberalisation, the money markets have shown their worth?
Some may dream of going back. But, to use a well known expression, do
we want to throw out the baby with the bath water?
The (swear) words of the month: ‘those responsible’.
This expression was used in front of the United Nations Assembly
by the President of the Republic, saying that those responsible should
be found and punished. From skepticism to derision, all reactions are
negative. ‘We are all guilty’, is the response from the
abominable politically correct. Everyone is guilty - the managers of
Fannie and Freddie, bosses of hedge funds, and let us not forget those
modest savers who buy securities hoping for an adequate return. If that
is so, why seek out those responsible for a plane crash, since passengers
who choose to travel on a budget airline are also ‘responsible’?
Examples of this sort abound. It’s the system’s fault, they
tell you. Well, it isn’t!!! Finding those responsible and analysing
what they did is indispensable if we really want to understand what
started the crisis, and at last fine tune measures which could bring
order to the financial system.
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