March 24, 2008
As the back and forth about the accounting standards applicable to banks continues to rage, I, too should like to add my fiat money two penn’orth.
Firstly, were they ever to be granted the leeway of being allowed to incubate their most rotten eggs at the non-current price, do you suppose that the banks would, in a spirit of fair play, be equally happy thereafter to extend loans to their personal, corporate, and hedge fund clients on the basis of what their collateral used to be worth, too?
Secondly, where bonuses, raises, and employee share-option goodies can be shown to have been paid out solely on the basis of a speciously favourable mark-to-market registered during the upswing, could we expect to see a blizzard of large denomination cheques piling up at corporate HQ as the repentant millionaires remit back to the legions of misled shareholders what was falsely exacted from them in the course of the boom?
No. Didn’t think so.
The fact is that, by some twisted thread of history, banks have been accorded the unjust privilege of being allowed to ignore the crucial distinction between the monies entrusted to them in their wholly beneficial roles as giro, or transmission, agents and virtual safety deposit-box custodians with their equally laudable asset management function of investing people’s term savings in range of creditworthy ventures, knowing all the while that this wholly legal act of embezzlement has a small, but significant, chance of going horribly awry, with devastating consequences not just for those caught in flagrante, but for the majority of their fellow fiduciary philanderers and their hapless customers – not to mention the poor, beleaguered taxpayers who will end up footing the bill for this expensive malfeasance.
Since fractional reserve banking is, in addition, the well-spring of that thoroughly avoidable and widely destructive bipolar disorder we know as the business cycle – i.e., the boom and the bust – rather than consider exempting its practitioners from a genuinely inconvenient truth, we should instead be subjecting them – and them above all other entities – to the most stringent standards of truthfulness it is humanly possible to apply.
Then again, since bankers, as a class, have long shown a reprehensible ingenuity in using fiendishly clever financial innovations to play fast and loose with valuations, both in respect of those of their clients and of what is being carried (even if only contingently) on their own books – from Parmalat to sub-prime, as it were – such an attempt at rigour would probably prove futile, anyway.
Perhaps, then, we may as well let them do whatever they deem is most expedient and simply pull the covers over our heads, trusting to the fact that, by the time we next awaken, the central banks will have bought up all their asbestos-backed securities and that, if our sleep of reason lasts long enough, the resulting currency debasement and inflationary recession will have passed their monstrous worst by the time we begin to stir anew.
I remain, Sir,
Chief Investment Strategist,
Diapason Commodities Management.
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