Switzerland leapt to the rescue of once-mighty bank UBS with a 60-billion-dollar lifeline on Thursday and Credit Suisse got help from Qatar, as the government admitted that renowned Swiss banking has been hurt by the global financial crisis. The government acknowledged that steps were needed to shore up confidence in Swiss banking, particularly in the biggest bank, UBS, which saw a colossal net outflow of funds reaching 83.7 billion Swiss francs in the third quarter as clients took their assets elsewhere. The emergency help for UBS will see the Swiss state taking a temporary stake of 9.3 percent in the bank and lending a massive 54 billion dollars to isolate its illiquid assets. – Economic Times
Dominant Social Theme: Even the thrifty Swiss need help.
Free-Market Analysis: Being part of a publishing company based in Switzerland, we doubt the average citizen is going to be especially pleased with what is going on in its storied banking business. The Swiss are an industrious people to be sure, but above all what Switzerland provides its citizens is order. The houses are orderly, the trains run on time, even the land itself is organized in neat farms and hamlets. But what is going on with Switzerland's largest banks is downright disorderly, and dishonest to boot.
The Swiss know how to run banks just the way they know how to build watches. It's simple. You back the bank with gold and watch your lending practices. For hundreds of years, the Swiss excelled in banking for just these reasons. They are nothing if not disciplined. So what happened?
Fiat money happened. Fractional banking of the central banking variety happened. The UBS, Credit Suisse mess is an example of what occurs when good practice is perverted by bad advice. On the advice and because of the pressure of the European Union, Switzerland abandoned its gold linked franc and some of its citizens set out to build international banking firms that would mimic the worst excesses of Wall Street and the City, A few years ago, it must have been a giddy time at UBS and Credit Suisse. Those employed there must have looked down on private Swiss banks and congratulated themselves for being on the right side of the emerging global paradigm. Not anymore.
With the benefit of hindsight, we can see the model that Switzerland's biggest banks chose to follow was one that leads straight to ruin and insolvency. Strangely, UBS's staggering losses of tens of billions and a recapitalization of apparently near twice that, has not seemed to spark as fervid debate among the Swiss as one might expect. We are talking of course about the public discourse, which is controlled. The private conversation is a different matter. And we have a feeling that the Swiss, especially the German Swiss are outraged. Their tax dollars are being used to prop up Credit Suisse and UBS, and when you get between the Swiss and their hard-earned dollars, you better have a mighty good reason. In fact, we have a feeling that the Swiss are not nearly so dumbed down, in a group, as their European and American counterparts.
Of course, we must admit it does seem to be a bifurcated society. The republican consensus is not what it was, but given all that it is up against how could it be? On the one hand, bomb shelters dot the countryside alongside federally-mandated family farms while young men in military uniforms play war games in the hills. All these are efforts at insuring prized Swiss independence. On the other hand, there is seemingly a growing strand of political correctness that winds its way through Swiss culture, and is evident both in everyday life and clearly in the moves that Switzerland has made to accommodate the rest of Europe.
Chief among these moves was the removal of the franc from a formal link with gold. Of itself, this was not a good thing, but it presaged worse. Should Switzerland ever become fully entangled in the Anglo-Saxon model of banking, the country will find itself turned inside out just the way European countries have been and America is currently. They are on their way, as the UBS and Credit Suisse debacle shows.
But instead of acknowledging the debacle of fiat-money fractional banking and showing clearly how it has brought UBS low, Switzerland's top money men seem determined to press ahead. UBS is being recapitalized, lending procedures tightened and the amount of "assets" – fiat-debt money actually – that banks including UBS will have to hold is going to be increased.
As we have pointed out many times, none of these moves matter a fig. The root of the problem is the ability of UBS and other large Swiss banks to mimic the worst excesses of Anglo central banking. So long as central banks are able to print money out of nothing, the manias will only grow worse as centralization increases and attracts more capital flows. By definition a mania involves the relaxation of rules and regulations to take advantage of the next sure thing. So all the firewalls that the big Swiss banks are putting in place now will retard lending in general but do nothing to address the fundamental problem – that there will be a next time and that it will be worse.
We've made this suggestion before. Instead of adding safeguards, increasing regulation, a heavier "capitalization" ratio, those who help guide Switzerland's banking industry ought to consider a return to a gold-based franc. This would stop the problem in an instant. It would be an easy thing to do. Effective. Very Swiss. It is not a good sign that the country's mainstream media is avoiding the subject. It tells where Switzerland may be headed in general, and the pervasiveness of the current banking model for the country's largest banks. Too bad.