By Ron Robins
Like their counterparts elsewhere, US bankers and politicians regularly speak untruths. American bankers are unlikely to be truthful if it impacts negatively on the economy, their businesses—and especially their bonuses. And American politicians will rarely be honest if it inflicts damage on their poll numbers. Thus, are we dreaming to expect truthfulness from American bankers and politicians?
By 2006, it was clear that the US Federal Reserve′s (the Fed′s) own figures on mortgage and other consumer debt were demonstrably flashing red. And yet, Ben Bernanke, chairman of the Fed′s board of governors and thus arguably America′s most important banker, did not issue a warning about them.
Was Mr. Bernanke afraid to tell the truth about America′s mortgage/consumer debt problem? Perhaps he felt that given his position he could not provide such a warning as financial markets might react badly to such comments and thus he would be labelled as the instigator of a financial-economic slowdown.
Regardless, he appeared to offer even further encouragement in the promotion of mortgage/consumer debt.
On February 15, 2006, Mr. Bernanke said “our expectation is that the decline in [housing] activity or the slowing in activity will be moderate, that house prices will probably continue to rise, but not at the pace that they had been rising.” Then, just as the sub-prime mess was starting to unfold, on March 28, 2007, Mr. Bernanke said, “at this juncture, however, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.” Only a few days later on April 2, 2007, one of the largest sub-prime lenders, New Century Financial, filed for bankruptcy, and the sub-prime mortgage panic began to engulf America and the world.
By contrast, perhaps having learned the lesson of the US, Mark Carney, the governor of Canada′s central bank, the Bank of Canada, together with the heads of Canada′s major banks this past December 16, openly expressed the desire to slowing the growth in Canadian mortgage/consumer debt. Canadian consumer debt levels are now close to those prevailing in the US before the credit markets there imploded.
At least in Canada we are seeing some truthfulness from top bankers. But as we know such truths by American bankers were virtually non-existent prior to its financial debacle.
At the heart of the US financial crises were bank balance sheets that were crippled with ‘toxic′ assets—mostly, but not exclusively, mortgaged-backed securities (MBS) where markets were largely non-functional and prices distressed. This led to massive losses on bank income statements and balance sheets.
Now a balance sheet is supposed to show the true financial condition and net worth of an entity on a given date. But this fundamental rule of honesty in accounting has been squelched to make banks′ balance sheets (and income statements, etc.) look much better in the wake of the 2008 financial collapse. It was claimed that continuing to value assets on the balance sheets at distressed prices accentuated the financial turmoil.
Hence, under extraordinary pressure from the US government and the banks in the spring of 2009, the American Financial Accounting Standards Board (FASB) relaxed its requirement that banks value applicable assets at real life market values. FASB now allowed banks to price difficult to value, thinly traded securities or those in distressed markets, to a self-proscribed bank computer ‘model.′ Magically, banks were suddenly profitable again and balance sheets improved! Here the belief is clearly that the “end justified the means.” Truth in basic accounting values got sacrificed.
Perhaps bankers, who purportedly espouse honesty and integrity, should have their banks issue two sets of audited public financial statements: one which accounts for assets and liabilities being valued, where possible, at market prices (so called ‘mark to market′ or ‘fair value′), and the other set of statements using the current FASB′s directives. Then let investors and stakeholders draw their own conclusions about the banks′ financial condition!
Just as US bankers are found lacking in truthfulness, so are American politicians. Martin Jay, a history professor at the University of California-Berkeley, discusses the honesty of politicians in his recent book, The Virtues of Mendacity: On Lying in Politics. In an interview with US News & World Report on May 6, he said, “I′m not urging governments to lie, and I’m not urging the citizenry to be complacent about mendacity. But what I’m trying to say is that it’s more important to focus on the issues, on the policies, and on the effects these have on people’s lives, than to constantly look for discrepancies in promises and performance, or to look for inconsistencies in a person’s career.”
So perhaps the electorate should be more interested in the issues and policies than about the politicians′ honesty. But if a person is seen as knowingly speaking lies or hiding truths, we believe they cannot be trusted. It is probably this dilemma that results in politicians almost everywhere being held in such low regard by their electorates.
But possibly, Americans do want to know more of the truth concerning the state of their economy, its unfunded liabilities, and so on. And if politicians were more truthful, then, perhaps, the respect the public has for them will improve. And maybe those politicians speaking more honestly will get elected. This yearning for truthfulness seems partly responsible for the growth of the US Tea Party Movement.
American history is replete with bankers and politicians telling lies and misleading the public. Maybe sometimes the consumer, the public, is not ready to hear the truth. But perhaps the only way for bankers and politicians to regain the confidence of their respective public is for them to be more honest. However, does the public not also share in the blame of the pervasive untruthfulness of bankers by allowing them inordinate power, and for continually electing politicians who disrespect or hide truths?
January 6, 2011