The Gold Standard  

After spending a month in Zurich (I had to be based there for two months from mid-May to mid-July), while walking towards the gate to board the flight back to Singapore, my 10-year old daughter summarised years and tomes of research on Euroscelorosis, deteriorating competitiveness with this one sentence: things were not only expensive in Europe but there was no value for money whereas in Asia, things were cheaper and there was value for money too. Europe’s response, as far as I could hear and observe, is to provide diversion to its citizens as Mr. Berlousconi has been doing with his wild parties. On a more serious note, Italian Treasury is proposing to bridge its deficit and public debt by proposing to tax the gains on gold sale by the Bank of Italy (their central bank).

In Switzerland, McDonald’s claims that all the potatoes used in their French fries are from Switzerland. Sandoz takes the battle to generic drug manufacturers by asking the public to buy A-class medicines at B-class prizes from Sandoz.

The onus is clearly on those Europhiles, Europe sympathisers and hopefuls to make the case that somehow Europe would show or lead the way.

In the meantime, Goldman Sachs is the ‘rage’ in blogsphere (pun intended). A good friend sent me the link to this interview in a French television channel (in English). It is very good theatre. Of course, prior to this, the debate was triggered by a good piece by Matt Taibbi (I had commented on it before) in ‘Rolling Stone’. You can find the piece here now. The discussion continues, however, in his blog, well beyond this piece. Even Joe Wiesenthal who did not agree with Matt Taibbi had this to say on the transparency of their quarterly results which were stellar. 

Max Keiser who provides all the theatre in  the French 24 TV Interview (see link above) is not without substance. Would you have imagined the following comments in a Wall Street Journal editorial?

Goldman will surely deny that its risk-taking is subsidized by the taxpayer — but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it’s not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs — or should we say Goldie Mac? — enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.

Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it. [More here]

[Update: See this post by Arianna Huffington on the WSJ editorial - hat tip: Yves Smith's Naked Capitalism.  Paul Krugman weighs in here].

Or, would you have expected ‘Economist’ to write like this?

A NEW hiring frenzy in the City, with bonuses guaranteed for “only” the first year; investment-banking results for the second quarter likely to top those of the first; an innovative securitisation by Barclays to get bank loans off its balance sheet. The term “business as usual” normally delights tradesmen and their customers. Applied to the banks that plunged Britain into economic crisis, it strikes fear to the heart.

Promised reforms to bank regulation, meant to curb the excess before it starts all over again, are in limbo.

…..Stirring in the underbrush, however, is the Bank of England, which is beginning to provide the kind of analytical leadership that might have blunted the crisis had it come earlier. An analysis of the crunch by Andrew Haldane, the director for financial stability, has been described as “brilliant, but two years late”. More recently Paul Tucker, a deputy governor of the Bank of England, has spoken of a new “social contract” between banks and society, which would impose more realistic costs on banks for the taxpayer’s implicit guarantee. Why were those costs not priced in or even considered before? And, given the government’s fear of upsetting the City, are they likely to be priced in now? [More here]

Do not miss this ‘Leader’ article in ‘Economist’ either:

Even as unemployment soars, bankers are talking again of big bonuses and a “war for talent”. The woeful legacy of the crisis could be a supersized banking system gorging on the taxpayers’ tab…..

….Can banks be tamed by capital rules? Nobody really knows. But capital is the only civilised option left in the regulatory toolbox. If it cannot be used to protect taxpayers from losses, or it fails to persuade banks to reform themselves, there will be popular pressure for more violent forms of intervention. Banks greatly underestimate this risk. They are enjoying a free lunch—in the last chance saloon. [More here]

I agree with the ’social contract’ between banks and society. That is missing in the behaviour of big banks on Wall Street and in the ‘City’. Or, in the opposition by JP Morgan to the trading of OTC credit derivatives on the exchange. See Wall Street Journal story here:

The bank’s latest effort to promote its views involves the Obama administration’s plan to step up regulation and transparency in the derivatives market. The bank supports a proposal to send standard derivatives contracts through an industrywide clearinghouse that can be monitored by regulators. J.P. Morgan, however, opposes a requirement that the trades should be moved onto an exchange, in part, because it would inhibit the use of customized derivatives that clients require. [More here]

I am unable to understand why there should be difficulty in moving derivatives trading to an exchange and meeting customers’ needs.

WSJ and Economist were joined by Martin Wolf in his last column before the summer break:

The financial sector that is emerging from the crisis is even more riddled with moral hazard than the one that went into it. Its fundamental weaknesses are not yet redressed. [More here]