Commodities - another way for hapless banks to lose billions?

By John Cranage on Jul 28, 08 09:24 PM in Economics

Have the banks - still reeling from the sub-prime fiasco - got another money-losing trick up their sleeves?

Quite possibly, according to Roger Bootle, the MD of Capital Economics and the man who acts as adviser to Deloittes.

He was writing in The Daily Telegraph on the theory that commodities, including oil, have come to resemble yet another speculative bubble that is now about to burst.

The era of what Bootle calls "free-for-all finance and low interest rates" has seen rampant speculation in emerging markets ("which burst with the East Asian crisis of 1997-98"), dotcoms, property and complex financial instruments.

"Commodities are the market to which the bubble-blowing machine which is the modern financial system turned its attention to once the property bubble looked like bursting," he said.

"If I am right, then the potential size of the fall in commodity prices will be greater and it could come soon."

A good thing, surely. Well, not entirely, argues Bootle. True, lower commodity prices, not least oil, would reduce headline inflation rates and leave more cash in consumers' pockets. That wouldn't necessarily mean lower interest rates because putting cash back into the system can itself be inflationary.

Of course those who have bet the ranch on sharply rising prices will be under water.

"Would some banks find themselves nursing substantial losses on commodities?" Bootle asks. "If there's a way of losing money lying out there somewhere, they will find it."

Ah, those banks. Their ability to generate turmoil in the rarified air of the financial markets and bring trouble down on the heads of ordinary people is limitless.

Even with commentators queuing up to declare they can see light at the end of the credit crunch tunnel they are still able to drag everything down.

European equity markets closed down again yesterday on concerns over credit ratings at the big US mortgage lenders after it looked as though Washington is giving those sickly siblings Fannie Mae and Freddie Mac an unlimited credit line.

On top of that, Citigroup, which itself has taken a massive hit from the sub-prime toxin, cut its stance on European banks from neutral to underweight.

UBS promptly fell by 5.5 per cent, Royal Bank of Scotland lost 4.7 per cent and Barclays went 5.3 per cent down.

In London, David Buik of Cantor Index put the market sentiment into words.

"There is a deep seated problem with many of these banks," he was quoted as saying. "To call the bottom of the market without the odd little swerve is probably precipitous." August, he added, is "going to be quite a negative month".

Back on the oil front, the AA has said there were signs that many drivers are cutting the number of car journeys they make. But Roger Bootle claims UK oil consumption has "barely risen in 20 years despite a 70 per cent rise in GDP".

The reason, he says, is that previous price spikes have already spurred attempts to make the country more energy efficient. That's something for the doom-mongers to chew on. It's a shame the banks aren't so good at learning lessons.

This post was originally published as a Business View.