The political dimension of the banking crisis is broadening as it feeds into the real economy. The US recession – what legendary investor Warren Buffett calls a “common sense” recession as opposed to a technical definition – and the UK slow-down are already evident, while EU growth forecasts have been scaled back. As people see the value of their homes fall, find banks less willing to lend money and feel the effect of rising inflation allied to average wage growth that has already not kept pace during the boom years, the calls by bankers and regulators to avoid knee-jerk reactions are sounding ever fainter in the ears of the politicians, while those of their voters and the popular press seem ever louder.
Add in to this mix the headline effect of bank bail-outs and huge pay-outs for failure to the likes of Merrill Lynch’s former CEO and chairman Stan O’Neal and the words of the apprehensive chief executive of a London-headquartered bank ring true: “You have the makings of a Pavlovian reaction – the “something must be done [effect],” he says, noting that regulators, many of whom believe the crisis needs to be studied further before any actions are taken, will not be able to resist the pressure: “Politicians may push them into it.”
