I guess we can call this Basel III or maybe a souped up Basel II. Who knows? When you have an inherently unstable system any new plan for control is likely to end up in the round filing cabinet before it has a chance to be implemented.

But one thing is clear from the latest global pow-wow: monetary stimulus will remain in place for some time as extra tightening through higher capital requirements sucks in more capital. With all the talk of recovering economies and poistive GDP reads in some countries, it is easy to forget the amount of wealth that has been sucked into the black hole of balance sheet never never land.

Who would be a bean counter these days?

It reminds me of the time I was working on the ticket sales operation for the Brisbane Expo back in 1988. It was a $60m take and I was drafted in to make the numbers balance. It was a lot of fun and eventually I got to the point where I had accounted for everything but there was still a pesky $110 I couldn’t reconcile. It simply didn’t make any sense to me but in the end I just gave up and figured it didn’t matter that much.

Now the numbers seem a bit larger when it comes to bank meltdowns. We have a long way to go before we actually can understand where the money has gone, who owes it, who lost it and what the actual impact on the supply of money is.

So in this case G20 are spot on. Deflationary forces abound. I have no worry about inflation at all. Sure we will keep seeing short term rebounds in some statistics and small sighs of relief. Let’s face it, the markets ahve had an enormous rally in the last 6 months. But do they reflect the underlying reality? Nope.

That’s because the crevasses have been papered over with huge swathes of new paper. But underneath they lie there waiting for some poor fool to fall in again. Slowly it feels like the bankers are starting to understand that they let credit growth go bananas and that their carefully constructed inflation numbers didn’t always tell the truth about asset prices.

We still have major systemic problems to deal with. Tightening credit will cause severe pain but low rates will help ease some of that. But catching the tiger by the tail is the only way forward.

The BBC has provided a platform for Sir Evelyn de Rothschild, one of Britain’s most noted financiers, to express his views on the global financial situation:

All of us – countries, corporations and consumers – have neglected basic principles.

Ethics – we have lost sight of an honest day’s work for an honest day’s pay.

Careful management – we have indulged our wants without the taxes or the prices or the cash to pay for them.

Oversight – public relations and spin have replaced disclosure and transparency; casual yet complex accounting and accommodating rating agencies left us blissfully unaware of the problems, and we revelled in our ignorance.

Hubris has replaced community responsibility as a requirement for executive positions.

American automobile executives and British bankers have been unable to form their lips into an apology.

Yet their institutions lie in ruins and the rest of us are left feeling embarrassed for them.

Their customers worry that their savings or their working capital will just vanish, their mortgage will be transferred to a new institution they have never heard of.

Their employees wonder which of their colleagues – or they themselves – will be unemployed in the coming week, with bleak prospects for working again anytime soon.

Where is the shame of those who only months earlier boasted of ever increasing profits, of ever more clever products, of ever easier loans?

Remaining credit

The US automakers may be the worst of the lot, so far.

Years of incompetence and now manoeuvring in the halls of Congress for a massive bailout.

Management prefers to hold onto private corporate jets rather than push for fuel efficiency standards to make their products more competitive.

Union members would rather hold onto their gold-plated pensions for life than to save their companies.

Why should taxpayers help those who have so frequently refused to accept responsibility themselves?

If the US government uses up its remaining credit to help the auto industry carry on as usual, who will lend the country the money to repair its bridges, build its power stations, clean its water, fuel its navy?

Slow revival

Thirty years ago, New York City found itself in a position similar to GM, Ford and Chrysler today.

They asked Washington for help. The government refused.

The Daily News summed it up in its front page headline – Ford to City: Drop Dead [ed. the president]

Instead New York balanced its budget, taxed itself, reduced hiring, negotiated better labour contracts and gradually worked itself back to fiscal health.

It took more than 10 years.

Take responsibility

This era of struggle may last as long.

Until we can be generous in accepting fault for our predicament, we will have difficulty dropping our suspicions about others so that we can get on with repairing the damage.

Unless action is taken soon, we can only see a long time of difficult and very onerous problems continuing.

Could be one or two years.

It is therefore essential that management must take a firm look at its problems and accept its faults and redeem them.

A lot of talk and a lot of words have been written.

But in the end action has to be taken and action must be taken very soon if we are not going to see this stretched out over many years.

What we have to remember is that the crisis we are in the midst of is a financial one. A crisis of the syntheticism of money.

Like a cancer this is slowly being removed from the system. What is left of the corpse remains to be seen. But the end of the derivatives trade, especially the highly structured piece, cannot come too soon.

The role of interest (unearned income) in our economy needs to be reviewed. We need to refocus on the productive economy and the ability to invest in it i.e. by purchasing shares in companies are receiving dividends or, in the case of new innovative companies, an opportunity for capital gain commensurate with risk.

My own investment philosophy is simple. Buy low and sell high.

When interest rates (here in NZ) were low in 2003 i bought commercial property which was then yielding 9% (against an interest rate of 6.5%). In 2007 when interest looked like they were going higher (over 9%) I sold the properties which were then yielding 7.25-7.5%).

The market kept going for another 9 -12 months and has now fallen heavily.

I didn’t buy shares as dividend yields were lower than interest rates and p/e ratios were too high.

I put the cash in the bank.

Now I have started buying shares. Why? Because dividend yields are sky high (although earnings will continue to fall), p/e ratios are in single digits and interest rates are falling. Shares could keep falling for sure.

But the point I’m making is investment is pretty simple. Ignore the hype and focus on the numbers.

The hardest skill to learn as an investor (and we are all investors to some extent) is knowing when to sell. When the market is flying high its so hard to sell because you worry you’ll miss out on more. When its falling you secretly hope it will somehow bounce back.

As Evelyn reinforces, its all about basics whether values, ethics or simple strategy.

We’ve been living in a fool’s paradise for a while now and its time to get back to reality.