Adrian Hamilton: Here we go again, back to bank profits and big bonuses

Just as before, the returns are being made in the investment arms
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The Independent Online

Oil prices are back up to $60 a barrel, bank profits are rising, share prices have surged, buyers are coming back to the housing market and retail sales are beginning to show signs of growth. Happy days are here again. Only the bit that everyone is missing in this outbreak of cheeriness (who said that the media was only interested in bad news) is that it all sounds suspiciously like the things that got us into this mess in the first place.

Take bank profits. Politicians, economists and commentators have all been loud in their condemnation of the banks for diving into the wholesale markets at the expense of good old-fashioned deposit-taking and lending against assets. And where are the profits now being made by the banks? Why, in the wholesale markets and in the investment-banking side of their business. Just look at the results of Barclays or the Royal Bank of Scotland.

And what is the result of this renaissance of investment banking? Why large bonuses again as share options rocket in value (RBS's head of global markets, John Hourican, stands to gain as much as £11m, thanks to the rise in the bank's shares). The US authorities move to force the banks to raise their capital base and who profits? The investment-banking divisions of the institutions charged with raising the money – all for fat fees and fatter bonuses.

Turn to the rise in oil prices, alongside other commodities, and what do you find? The very same forces that were behind the catastrophic chasing of prices up to $140 per barrel last year and their even more precipitative decline to less than $30 per barrel. Just as they nearly quadrupled within the space of a couple of years, so they halved and halved again this year, only to double again during the past few weeks.

You can take this as an indication of a reviving world economy. Recent statements from China indicate the Asian economies at least may be picking up speed, raising the demand for imported raw materials. But the more likely explantation, as for the rise in stock markets, is simply that the smart money is moving from boring but safe financial instruments to riskier but potentially much more profitable outlets. In other words, we are back to where we were before the crisis burst.

This is not in itself a bad thing. Part of the purpose of markets is to predict and pre-empt future trends. If markets are now indicating that world growth cannot resume without a strain on resources, we should be grateful to them. This is as much a structural crisis in Western economies as it is in over-stretched financial institutions.

But, of course, markets – as presently constructed – are doing much more than presage the future. They are responding, in highly volatile ways, to the needs of a financial world, where there is a huge disparity between the volume of money building up in parts where savings exceed spending and the parts of the world – led by the US and Britain – where the opposite is true.

The development of shadow banking, the creation of exotic instruments, the whole mad world of excessive risk of the past decade may have been driven by greed but it was also the response of a world where, with low interest rates, those with money were desperately seeking ways of getting a better rate than the traditional investment means provided.

We are now back in exactly the same situation, only the rates of return on savings and investment are no longer small, they are zero. The funds being built up in Asia and the Middle East, the savings being made in domestic pension funds and savings schemes, require an outlet.

Just as in the past years of excess, they will try to find it in the more speculative areas. And they will tend to move as a herd. So an oil price that might reasonably be pushed up 10-20 per cent on future expectations, will be forced up 200-300 per cent as the investors, or speculators if you prefer, pile in to make a turn on the rise. So with stock and commodity exchanges.

It's no way to run a world economy. But then none of the measures being considered by politicians or regulators to curb the excessive gambling of the past are going to do much to solve it. If you want a better global system, then you will have to face up to the problems of currencies and global financial flows. And what's the advantage of that to politicians who see only the value in slamming closed the doors after the horses have bolted?

a.hamilton@independent.co.uk

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