A Wikileak cable dated May 6th, 2009 (Reference ID: 09LONDON1069) reveals that the Royal Bank of Scotland's chief risk analyst had a pessimistic economic outlook and that signs of recovery were "delusory."
The cable outlined plans by the Royal Bank of Scotland (RBS) to focus primarily on reducing costs, primarily by cutting thousands of jobs worldwide and reducing its scope of operations. The cable also showed that RBS officials believed that banks would naturally return to "narrow banking" and more conservative lending practices with high capital reserves in response to the financial crisis. This highlights an important point made by free market economists: if it weren't for bailouts, subsidized deposit insurance, and lender of last resort actions, then banks would naturally regulate themselves and lend in a more conservative manner, without the need for government regulation.
Most interestingly, Peter Nathaniel, RBS's senior risk analyst, noted that global economic recovery was going to be weak, due to the level of sovereign indebtedness and the cost of government borrowing. This emphasizes an important point made by former Federal Reserve Chairman, Alan Greenspan: rising government deficits cause uncertainty about future government tax policies, which cause investors to hold back. This process slows economic growth and recovery. You can read about Greenspan's statements here.
It's also important to note that government deficits necessarily raise the cost of borrowing for private investors. In other words, because government deficits increase the demand for credit, interest rates must necessarily rise, thereby crowding out private investment. The end result is lower long-run economic growth due to less investment.
No comments:
Post a Comment