It’s easy to criticize Mitt Romney. The former Massachusetts governor and erstwhile runaway leader in the Republican nomination race has had a bad two weeks. First Romney learnt that, having “won” the opening Iowa caucus, he actually lost on a re-count. In the South Carolina primary, he was trounced by Newt Gingrich after a lackluster debate performance.
Romney then bungled his personal tax return, insisting he wouldn’t make it public for months, then releasing it anyway. This is bad timing for the man seeking to be the first Mormon President. The still-fluid Florida primary is this week. There’s just a month before “Super-Tuesday” – when Republicans in 10 states pick their candidate – and the Presidential election itself is only nine months away.
Despite this losing streak, I want to record that, while campaigning in Florida last Monday, Romney made an extremely significant statement on the causes of the world’s on-going financial angst. His words showed more honesty and insight on this subject than anything I’ve heard from any senior politician, on either side of the Atlantic. Barely reported amid the “primary razzmatazz”, Romney’s analysis should be known to a broader audience. This time next year, he could be running the most powerful country on earth.
The biggest financial problem the West faces isn’t low growth, or unemployment. The issue isn’t, as some would have it, that over-indebted governments are “cutting too far and too fast”. They’re barely cutting spending, if at all. But let’s leave that for another week.
The most significant financial problem, in both Europe and the US, is that the banking system remains grid-locked, with banks doing everything possible to conceal tens of billions of euros, pounds and dollars of losses. All those non-performing loans, and toxic debts, many of them linked to the housing sector, haven’t gone away. We don’t know their precise scale, of course, because the banks still won’t publish full sets of accounts, including their “off balance sheet vehicles”. And, disgracefully, governments and regulators won’t force them.
So banks are petrified of lending to each other, as they know very little about each others’ solvency. Investors, too, are worried about recapitalizing banks, or even holding bank shares in most cases, as they don’t know what they’re buying.
The result is that interbank lending, the wholesale market for loans, has seized-up. This, in turn, has led to a drought of finance for solvent households and firms. So, investment suffers, housing markets suffer, and economic life stagnates. With the credit channel “blocked”, the wheels of Western finance have stopped turning and commercial stasis has ensued.
That’s why growth is so slow, with some countries now re-entering recession – because insolvent banks, pretending they’re still viable, are hoarding cash in a desperate bid to survive. Meanwhile, legitimate demands for credit, not least from firms wanting to maintain or expand their operations, are denied or granted only at usurious rates. Ergo, the West isn’t recovering and unemployment is rising – and the core of the problem is a group of opaque, moribund banks.
Attempts to keep these banks afloat, extending the lives of what are commercially “dead” institutions, have hammered sovereign balance sheets. Several of the most advanced nations on earth are now only keeping their government debt markets afloat by ordering central banks to “print” electronic credits, then buying back blocks of their own paper.
Over the last two decades, Western governments have anyway borrowed and spent irresponsibly. Cleaning-up after the banks, though, has pushed several financially stable nations to the brink of insolvency and, if we’re honest, beyond. In Western Europe, of course, this evil brew is even more ghastly given the policy incoherence, and conflicting incentives, imposed by the economic madness that is the euro.
Breaking this deadlock and restoring growth and stability isn’t about “big bazookas” or “quantitative easing”. These “solutions” merely buy time, albeit at untold cost to our children and grandchildren. Above all, though, QE and the other “special measures” have allowed badly-run banks to keep pretending they can avoid facing-up to their massive investment errors, while allowing politicians to dodge the really tough decisions. Given the powerful interests it serves, no wonder QE is set to continue.
“Bank transparency” – genuine transparency, like FDR imposed to break the Great Depression, or as Sweden used to escape its banking mess in the 1990s – has been the “third rail” of the West’s response to sub-prime. Many politicians know it’s ultimately needed, but they’ve refrained from discussing it for fear of enduring an almighty shock.
The power of the banking lobby, its campaign dollars, and concerns about being seen to provoke a crash, have meant our leaders keep avoiding the central issue – that many of our banks are insolvent and need to write-off their losses and close. Were that to happen, powerful financiers would look stupid. Having assumed their crazy schemes had implicit government backing, they would end up losing cash. Yet upheaval is needed, to purge a rotten system and let commerce start anew. Confessions need to be forced and, if we’re serious, significant criminal behavior needs to see the light of day. “Full disclosure” must happen, if we’re to free ourselves from this torpor and get the Western world back on an even financial keel.
“We’re just so overleveraged,” said Romney, during an otherwise routine campaign stop in Florida. “There’s so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake … and that we need to write those losses down and start over”.
“They keep on trying to harangue and pretend what they have on their books is still what it’s worth,” Romney continued. “The banks are scared to death that if they write all these loans off, they’re going to go broke …”
“So they just pretend all of this is going to get paid someday so they don’t have to write it off and potentially go out of business … This is now cascading through our system and in some respects government are trying to just hold things in place, hoping things get better…”
“My own view,” Romney concluded, “is that you recognize the distress, you take the loss and let people reset. Banks that are prudent will be able to restart, those that aren’t will go out of business”.
I don’t particularly want Mitt Romney to be President. Were he to win the White House, he may even back-track on these Florida words. Yet this is a man with perhaps more financial acumen than anyone who has ever gotten close to becoming President. And in arguing for “full disclosure”, Romney is totally correct.
He is also far from alone. A growing number of policy experts now talk along these lines. America’s SEC, in fact, just issued “guidance” that US banks should provide “detailed information” about their European debt exposure so investors can make more informed decisions about which banks should survive. “Guidance”, though, isn’t a requirement, more an attempt by compromised regulators to fend-off an idea whose time has come.
Last week saw a great deal of back-slapping at Davos, as Eurozone politicians, and their banking chums, pushed Germany ever closer to full-scale money-printing. Banking stocks predictably rallied. The bankers should know, though, that the logic of “full disclosure” is irresistible, the historic evidence clear. Romney’s outburst may have been unconscious, perhaps even unintended. But he has tipped the first political domino, in my view, in a process that will ultimately prevail.