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Maybe Mum does know best

Delegates to the Brussels Global ABS Conference should perhaps have turned to a local octogenarian for advice as they appeared stumped as to why Europe is being forced to balance its books while the US rests on its safe-haven laurels

My mother is a wonderful person – she is in her eighties and still going strong. I stayed with her recently in Brussels, where she lives, while I was in town attending the Global ABS Conference 2012.

My time with her kicked off with the usual catching-up banter about family and friends but quickly turned to current events. At that point, she seemed to forget that I had been a banker, and I thought an ethical one, for more than 25 years.

She held forth on how the credit crisis and all resulting problems were directly attributable to greedy bankers – a bucket in which she seems to include anyone who has ever worked at a bank or other financial institution, unethical politicians and big business in general.

Many have made similar arguments since Northern Rock had to be bailed out but hearing them from my mother gave me pause for thought.

We are now into the fifth year of a crisis to which there appears to be no end. First it was the credit crunch, now the eurozone crisis and soon to come, courtesy of the US, the debt ceiling and fiscal cliff fiasco now being conveniently ignored by the government.

For the public, the inability of governments and central banks to deal definitively with the massive overhang of a decade of excess has been frustrating, particularly given the massive amount of taxpayer funds thrown at it and the severe deterioration of living standards experienced.

In Europe, the frustration has translated into government changes across the Continent.

In the US, it looks as if the outcome of the upcoming elections will be a lot closer than would have been expected only a few months ago. But what more can be done?

Both in Europe and the US, the issues are political. For Europe, it is about more integration. One can debate what that means and what form it needs to take.

But a blueprint for meaningful integration with the full backing of all eurozone members and a clear path with defined, concrete and substantial milestones needs to be found in short order or the market will force the issue.

That is easier said than done. Europe is still mostly a motley collection of countries, rather than a true union. But the euro has been a unifying force, even as its flawed concept risks tearing the union apart.

The advantage of the common currency and of building an alternative to the dollar means that doing what it takes to save the euro should be a no-brainer.

Unfortunately, those advantages are more difficult to quantify to the electorate than the tremendous cost for some countries of remaining in the euro or others of supporting the European construct.

Whether the Greek vote partly endorsing austerity and the euro is a step in the right direction will be determined by how much flexibility the eurozone will allow Greece to meet deficit reduction targets and other measures, and how much more pain the Greek population is willing to accept.

The UK, with its half in/half out status in relation to Europe, has implemented austerity and held the line despite a double-dip recession. There are signs, however, that the government may be wavering in its resolve as it looks to add growth to its menu of crisis-resolution tools.

Separately, the Bank of England has recently announced a package of measures aimed at providing the economy with £300bn of cheap funds available for banks to lend.

The conundrums are these – do banks have any appetite to resume lending in very uncertain times and are consumers and small to medium sized enterprises willing and able to take on debt in such times?

Cheap funds are not really the constraint – excessive uncertainty and a poor economy result in businesses and people putting investments on hold.

It is therefore unlikely the Bank’s most recent initiatives will make much difference. The UK’s lot is inextricably tied to what happens in the eurozone.

As for the US, it has shown in ’debt ceiling part one’ how poorly its politicians perform under pressure. Nonetheless, owning the deepest capital markets in the world, a good legal system and the mighty US dollar has meant that despite the politicians, in the current environment the world has no other credible alternative to run to in times of increased uncertainty than US dollar denominated assets.

Hence, while US debt went from $5.7 trillion at the end of 2000 to $15.2 trillion at the end of 2011, an increase of 2.7 times, interest expense only increased 1.3 times from $362bn to $454bn.

While there is no other safe-haven alternative, funding costs will not reflect how weak the US recovery really is and the market will not force on to the US the wrenching adjustments it is asking of Europe.

All these issues dominated discussions during the Global ABS conference, where the mood was decidedly subdued.

As for my mother, it all came down to the pain the man in the street is suffering for the misdeeds of bankers and lax government supervision.

She firmly believes fixing it requires a world with less income inequalities, higher taxes on the rich, a world in which bankers help the economy as opposed to themselves and governments work for the good of the nation. She may have a point.

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