Well after years of allowing banks to categorise any paper bearing the words “i hope to pay back” as Tier 1 capital, G20 has agreed to a new global framework on bank capital under which “banks will face higher capital requirements”.

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.

2 years seems a long time but feels like yesterday. In that period the NZ$ fell from 0.82 to 0.49 and now is back trading just below 0.68. Wow…talk about currency whiplash.

So back then I suggested the RBNZ should think about selling as much NZ$ as they could. Why? Why go against prevailing market sentiment which is that intervention doesn’t really work and simply provides a target for the speculating hordes which incidentally account for 95% of the volume of daily trades.

That’s a fair sentiment when your currency is falling but when it’s rising? And when you have an eye popping foreign debt of almost 140% of GDP……that’s foreign debt not overall debt.

And yet the punters keep buying the NZ$. Perhaps they know something I don’t. Maybe 50 years worth of oil has been discovered in the Southern Basin. Who knows?

The point is that at some point that money has to be paid back and at the moment, due to the sneaky monster that is compound interest, we can’t even get close to reducing it.

But now is the time to strike.

Again I would like to suggest that the RBNZ starts selling NZ$. When you have a lot of something to sell it’s always best to do it when others are keen to buy. Now is that chance.

By selling NZ$ now and paying back, or at least holding for that same purpose, it will take the pressure off the very precarious dependency we have on overseas lenders.

This doesn’t eliminate the debt but simply transfers it to a domestic situation where it can be managed at lower rates and where there is no threat of having to suddenly repay.

How can the RBNZ do this? Again this is very simple. Print NZ$ and buy US$. There is no change to the actual money supply just how the debt is denominated.

Considering the implosion Iceland experienced and the unfolding disaster that is Ireland (surviving only due to its membership of the Euro), it makes complete sense just to get on with this now.

To allow foreign debt to be run at such a level is financial mismanagement of the highest level.

It also shows a willingness to be dictated to and dependent on overseas interests. This makes no sense at all when the country’s economy security is at stake.

Pretty bubbles in the air.

They fly so high,

Nearly reach the sky,

Then like my dreams,

They fade and die.

Fortune’s always hiding,

I’ve looked everywhere,

I’m forever blowing bubbles,

Pretty bubbles in the air.

Never did I believe the mighty Hammers would have understood the machinations of central banking so well. Maybe they knew?

Reading the recent Fed statement, one may feel that the lessons of the recent crisis have not been fully understood or learnt. That’s the problem with the ability to print new money to replace old. It gives a feeling of relief and so help the markets to recover, in fact recover strongly. But there is nothing here that suggests the policymakers know what they are doing.

Crisis dealt with? For now.

Great piece in the Herald looking at how things might or could have been different if women had been in charge of the financial system. Harriet Harman has floated the idea in the UK of appointing more women to the boards of banks in order to soften the the testosterone fuelled activities of the current lot.

The macho culture of traders has been studied of many occasions focusing primarily on testosterone. Of course this is a popular fall guy for any over the edge activity that men get themselves fired up on. But research shows this to be true.In fact some researchers go as far as to blame the credit crunch on over pumped up Gordon Gekkos.

There is no doubt that this type of beahviour has a strong causative effect on bubbles and general winning of big bets. It’s a natural high…..who hasn’t felt it when winning a bet at the races, or getting something right in a quiz or a great result in an exam.

The good news is that women are no so affected by these grand illusions preferring to focus on the basics like how much money is in the account and other boring details like that.

We’ve yet to read a bout a female “rogue trader” so maybe Harriet is onto something here. But I don’t think it’s an equality issue, it’s more about skills. Women have skills that we need to use in all areas and money is a pretty crucial one as everyone is now finding out.

Imagine banking for the people……the service of providing money. As opposed to banking…….punting huge amounts of cash in the global casino.

Something tells me they are onto something here. Let’s face it…women have run the household budgets forever…they are the true oikonomists.

More and more women are getting into the money business…….how about the ladies at Wokai? i really like their style and approach. As i have noticed before nearly 80% of my loans on Kiva have been to women. Maybe i figure they are more likley to knuckle down and pay it back

I’m sure there are some great examples of women in this line of work or ones up and coming. I invite you all to nominate your favourites and let the bandwagon roll on.

Iceland has become the first country to see its government fall as a result of the global credit crisis. A tragedy of excess has found its way into the heart of the democratic process.

Of course in a case such as this the ending barely surprises. In fact we never seem to be surprised at how excess and gluttony ends in tears. So perhaps its normal like a child who has too much ice cream, sweets or cakes. We know the ending but somehow stand by and watch because ultimately the child has to learn.

Nothing much really changes though.

The financial warriors of the ice nation rampaged through the European bazaars picking up companies like confetti. A sad tale signifying what? Same old, same old.

Th reality is that we always succumb to the bubble. It’s in our nature, it’s part of our make-up: a relentless and cored belief that somehow it’s all going to work out and we will have something for nothing.

And even in the deepest mess that is the US financial system crazy stories still appear. John Thain and his $40k or whatever toilet. Nice.

Nothing is new. Nothing has changed. It’s just bigger and makes a lot more noise.

As Frank Rich mused on Obama and the End of the Gilded Age,

He spoke of those at the economic pinnacle who embraced greed and irresponsibility as well as the rest of us who collaborated in our “collective failure to make hard choices.” He branded as sub-American those who “prefer leisure over work or seek only the pleasures of riches and fame.” And he wasn’t just asking Paris Hilton “to set aside childish things.” As Linda Hirshman astutely pointed out on The New Republic’s Web site, even Obama’s opening salutation — “My fellow citizens,” not “fellow Americans” — invoked the civic responsibilities we’ve misplaced en masse.

Let’s face it we all want to make loadsamoney……on our houses, investments, crazy schemes…..but the truth is it’s just a facade. But like Versailles it will linger on in our minds for years to come.

Whilst all the focus has been on the negotitations around the bailout of the US financial system the biggest bank failure in US history passed without fanfare.

Washington Mutual collapsed on Thursday and had its assets sold to JPMorgan for $1.9bln. Not much to say really.

Over the weekend, Bradford and Bingley, a British insititution, was nationalised by the government.

Next up.

Fortis, The Belgo-Dutch financial services company, received in Eur12bln infusion from Belgium, Dutch and Luxembourg governments his morning. It’s only just out on the wires so you’ll have to keep searching for up to date information.

As credit lines dry up this will only continue. As anyone who has read John Tomlinson’s paper in the research section will know, it’s all about confidence.

If we don’t have confidence in banks then they will fail.

Why? Because our whole financial system is based upon fractional reserve banking.

Less than 3% of the actual money supply is real “cash” money. The rest is just numbers on a spreadsheet. In reality its all the same. But cash will always rank above digital money in a system which loses confidence.

Of course one can then ask what is the value of cash, a bit of paper which simply offers itself as legal tender and will be accepted in return for more of the same.

It’s clear that banks have created money to purchase assets that have fallen in value. That’s the basic issue here.

So the equity on their balance sheets has fallen.

Nothing can change that. Adding to that is the fact that capital ratios are already at historic lows so many banks are operating right on the edge. For banks like Northern Rock and Bradford and Bingley who operate by borrowing from the wholesale market it is the end.

They have no chance at all of acquiring the capital they need to function.

The solution is remarkably simple.

Throw out Basel II which is a crock and raise banks’s capital requirements.

Stablilise the system and create a more stable environment.

As Nancy Pelosi said “the party’s over”.