So Gordon Brown swans off to Europe and agrees to virtually assure the closure of Hedge Funds in London and then adds to it by stating that Banks should ‘get back to basics’.

Every utterance of this man seems to sum up his lack of knowledge of the businesses of which he talks and regulates. For Banks to ‘get back to basics’ (by which he presumably means only lend out what you have on deposit) would cripple growth in this country and across the planet.

Like it or lump it the world requires liquidity and derivatives deliver that. Yes they have gotten out of hand, aided by what appears to be fraud on a massive scale in Middle America.

The repackaging of Mortgage debt will require much more serious credit analysis but if we rein in the ability of lenders to off-load debt from their balance sheets the availability of money will be permanently impaired. Or more likely international finance will disappear off to the Middle and Far East where regulators are still in the process of building a financial sector. To gain “European Harmony” Mr Brown seems happy to sell the City down the river.

Banning 100% mortgages sounds great when making populist laws but in reality not many banks are offering them now anyway. The 100% (and more) mortgage always sounded odd but there were clear reasons for it. First time buyers just could not get a leg in the door when you considered the cost of Legal / Surveys / Furnishing the new homestead. And, yes, the governments own little slice of joy, Stamp Duty.

Banks realised that many people just loaded up their credit cards for much of this extra cost at nearly 20% borrowing rates. They reasoned that it was much better to lend the full amount at the much lower rates and longer time scales of a mortgage loan. Now they are pilloried for it as the housing market has now turned but this does not mean the reasoning was false.

There was much news in the weekend press about state intervention in a growing array of markets. While an argument can be found for some Government aid the current ‘slap it on all over’ risks a far longer term problem.

Imagine how you would feel if you had built a really strong business, low borrowing, low cost base, profitable operation etc and you are now in the situation where your more laxly run competitors are in trouble and unlikely to survive.

Suddenly these competitors receive Government aid and they start undercutting your prices on the back of it. Result, both companies are too weak when the upturn arrives to invest in new plant/development. Unfortunately, of course, letting business go bust means higher unemployment now rather than reduced growth in three or four years’ time. Politicians decry the short-termism in others but are (in my experience) the very worst proponents of the practice. They would rather spend vast sums of other people’s money than risk a bad news story.

Article by Simon Denham, read his take on today’s markets >> >> Spread Trading.

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Good Luck!

DB

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