Uncertainty Crippling Bank Stocks, Killing M&A
"Confidence was so shattered that banks were holding vast unlent sums, and businesses did not want to invest in new capital even though interest rates were at abnormally low levels…The general loss in confidence was the main cause of the low demand, and thus the low level of employment."
Does that describe the situation right now, in 2012?
Maybe. But that quote (from Nobel-Prize economist George Akerlof and Robert Shiller in their book Animal Spirits) refers to conditions that prevailed throughout the Great Depression, the 1930s. They quote a prominent CEO, Lamont DuPont, from a Washington Post interview in 1938 about the reasons for the Depression—when it had already raged for eight years: "There is uncertainty about the future level of taxation…the spending policies of the Government, the legal restrictions applicable to industry—all matters affecting computations of profit and loss."
Loss of confidence is why businesses do not invest (and consumers do not buy). Loss of confidence means exceptionally high uncertainty, specifically as to what our government will do.
Radical and unprecedented actions by the Roosevelt administrations beginning in 1933 did not end the Depression. Rather, Government thrashing prolonged the Depression endlessly by generating chronic uncertainty about what rules would prevail and their effects on investment and return. Japan finally ended our Depression with a terribly destructive war, provoked by Roosevelt’s policies.
An often-remarked feature of the 1930s depression was that several times, for instance in 1933 and 1937, indicators seemed finally to show improvement—but the up trends ended and successive waves of optimistic investors were ruined, as the interventionist Government again sowed more uncertainty and reaped repeated loss of confidence. Will this happen now?
The financial industry faces exceptional uncertainties. These range from the Volcker Rule, which remains largely undefined; unknown but drastically increased future capital requirements for financial institutions; hundreds of other new rules which the CFPB and other regulators have been empowered to formulate but which remain unknown; the proposed elimination of money funds as we have known them; and a credible threat of substantial new levels and even new kinds of taxation should Obama be reelected, including the $60 billion "bank tax." Plus the expectation that, as Charles Schwab recently pointed out, increasing numbers of retirees will have to live on drastically reduced interest income for years to come.
One can read in this newspaper a drumbeat of articles about the low level of M&A activity and stock prices for banks, to which various causes are successively attributed. But isn’t the most important, pervasive reason why banks and bank stocks are not bought that no one can have confidence what rules banks will have to follow, and hence what they will earn or be worth, one year or five years from now? The Fed was uniquely interventionist in 2008. Its monetary policy in 2012 is uniquely interventionist in novel ways, as it seems to tie its hands for three years ahead.
What appears to have sustained Roosevelt in power for four presidential terms of sustained domestic economic failure was not just a loud propaganda war against "the rich" and "Wall St." but radical legislative and administrative action which in fact crushed any resurgence of business and consumer confidence. We can feel grateful, I suppose, that the term limit which directly resulted will prevent Obama from keeping this up for more than four additional years. But that’s a very long time. Particularly when accompanied by incompetent political meddling in the European economies, beggaring anything perpetrated in the 1920s and '30s.
Can we muddle through, as our grandparents did? Maybe. This might not be Armageddon, though the political economic mess has been rendered more toxic by a resurgence of nuclear bluffing. If the U.S. can pass a law that ejects Iran from the international payment system, from SWIFT—then who will be next? North Korea? Egypt? Pakistan? And how will they respond?
Another national debate about "inequality" and "greed" is not going to bring health to the financial industry and restore sound investment and spending flows. Rather, we need to eliminate uncertainties much faster. Any possible Volcker Rule, or none, would be less harmful than an unknown Volcker rule. Likewise for new capital requirements. Likewise for inventive consumer regulations. Likewise for taxes. Likewise for housing. Let's establish a uniform legislative sunset date, a truce on as many of these revolutionary battlefields as possible. Whatever isn’t done by then—leave it for "next time,” if there is one. Maybe in another 80 years.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.