Politics

Everything you want to know about the bank crisis

Published 01 May 2008

As the financial crisis enters what the governor of the Bank of England has called a "new and dangerous phase" Iain Macwhirter has been looking at the big questions

How bad is it?

This is the worst financial crisis in 60 years, and it has shaken the banking system to its foundations. Even the Chancellor, Alistair Darling, has compared the crisis to the Great Depression and he is not given to overstatement. Banks are in the business of lending money they don't have - it is called "fractional reserve banking". But every so often the banks succumb to irrational exuberance, lend too much and find their reserves have been eaten up too fast, forcing them out of business. This is what happened to Northern Rock, and is now happening to all the big banks. That is why they had to be rescued to the tune of £50bn last month by the Bank of England - ie, us. They will be back for more.

Do the banks know what they are doing?

Well, they know now. During the house-price bubble, the banks were lending recklessly to people with no prospects. In the US it was called "sub-prime" lending, and amounted to organised fraud. Loans were knowingly given to "Ninjas" - people with "no income, no job or assets" - who could never hope to repay them. Britain too had sub-prime lending. At the peak of the boom UK banks offered "suicide loans" of up to 120 per cent of the value of the house with only self-certification of income. The mortgage holders were in negative equity as soon as they got the keys. These people are in real trouble as mortgage rates rise and house prices fall. Northern Rock lent out roughly 200,000 of these in the two years before it went bust and had to be nationalised. This makes the government the biggest holder of sub-prime mortgages in Britain.

How could the banks be so stupid?

Partly this was down to the delusion that house prices could only ever go up. But the other reason was a practice called "securitisation". The banks packaged the dodgy loans into interest-bearing bonds and sold these to financial institutions across the world. This took the loans off the banks' balance sheets and allowed them to lend even more money they didn't have. The banks thought, wrongly, that they no longer bore the risk of default on these mortgages because they had been sold on to other people. This was a big mistake. The debts came winging back. Now the entire financial system is in cardiac arrest because banks no longer trust each other.

Didn't the regulators see this coming?

Regulators such as the Financial Services Authority and the Bank of England were asleep at the wheel. The Treasury, Bank and FSA are run by relatively low-paid civil servants who are in awe of financiers and their lifestyles. They believed that the banks were run by masters of the universe who knew what they were doing, with their mathematical formulas and leveraged deals. In fact they were run by bonus-greedy wide boys, who gave no thought to the future and had no concept of social responsibility. The City bonus culture encourages short-termism and risk-taking. It was in these people's interest to pretend the credit boom could go on for ever, and that securitisation had taken the risk out of lending money. They thought they wouldn't be around to clear up the mess. In fact, even when the roof did fall in, those such as Adam Applegarth of Northern Rock still got their pay-offs and bonuses - in his case a "golden goodbye" of £750.000. Shareholders seem unwilling to curb the greed of the new generation of CEOs who run City firms. The regulators don't even try.

Does this affect my savings?

The good news is that the banks want your money, so they are putting savings rates up. The bad news is that most of the banks are in effect insolvent and are posting epic losses on their irresponsible lending. Many are in danger of going out of business, but the Bank of England doesn't admit it for fear of causing panic. However, the collapse in the share prices of banks such as Royal Bank of Scotland and Halifax Bank of Scotland tells you all you need to know. The entire banking system of Britain is now on life support from the state and even the Bank of England's reserves are not unlimited. If your bank goes under, only the first £35,000 of your savings are secure under banking laws. The only bank that gives a 100 per cent guarantee of depositors funds is, paradoxically, Northern Rock, which is government-owned. Perhaps the government will nationalise more banks if they go bust. But maybe it won't be able to.

Is anywhere safe?

At times like these investors reach for so-called "safe havens" - assets that tend to rise as the value of currencies falls and provide a hedge against inflation. Precious metals are the most obvious, which is why gold rose to more than $1,000 (£500) an ounce recently, though it has since fallen back. Oil has become a hedge, which is why its price keeps going higher. Many UK pension funds and investment houses are putting money in commodities such as wheat, rice and other foods in the belief that they can only go up and up. Most of us would think that profiting from starvation is morally reprehensible, but the market doesn't do morality. And be warned: commodity prices can go down as well as up. The safest haven is National Savings and Investments index-linked savings certificates, which everyone should hold.

What else can individuals do?

There's really no way of heading off the debt nemesis. Britain is even more indebted than the US was at the height of the boom. Personal debt here has risen to £1.4trn, and house prices rose by even more absurd multiples than in the US. British property is overvalued by 30 per cent, according to the International Monetary Fund. This could mean another trillion wiped off the total value of British homes, now worth around £3trn. The only way people can protect themselves is to pay off all their debts, fast. People living in houses larger than they need should consider selling before prices fall. First-time buyers should not under any circumstances be encouraged into the market, even if they can find a mortgage. Avoid discretionary spending, such as those silly sandwiches we buy for lunch, because you will need the cash to pay for higher food prices. In most parts of the country it is a lot cheaper to rent. Joining a car club can save thousands.

What is the government doing?

The government thought it could jump-start the mortgage market by giving a £50bn bung to the banks in an attempt to reignite the housing boom. It will regret it. It was irresponsible of the Bank of England to accept the banks' dodgy mortgage bonds in exchange for billions in cast-iron Treasury bonds because the banks know that their mortgage bonds are largely worthless, otherwise they would have offloaded them by now themselves. The banks will be back for more as they post more losses. The governor of the Bank of England has made a point of saying there will be no financial cap on the bonds-for-gilts swap.

Why is the government bailing out the banks?

The default position in the Treasury is that house prices will always go up in the end. It hoped the banks would return to lending to first-time buyers, the housing market would revive and consumers would again be able to use their homes as cash machines. It is not going to happen. Abbey put its rates up even further on the very day the banks left No 10 with £50bn in their back pockets. The banks know that house prices will fall sharply over the next two years and are withdrawing from the home lending business.

If we finance the banks, can't we tell them what to do?

Gordon Brown should be asking that question! The neoliberal thinking that has dominated the Treasury for the past two decades sees no role for state intervention - except to pay the banks when they get into trouble. It is socialism for the banks; capitalism for the rest of us. Moreover, there is a disturbing overlap between the higher levels of government and the big banks because of the privatisation of aspects of the state through mechanisms such as the PFI/PPP. It is no accident that when Tony Blair left office he walked into the Wall Street bank J P Morgan for a reported salary of £2m for a part-time job.

What about the US Federal Reserve?

The Fed was captured by the banks a long time ago, which is why it has pursued reckless policies such as negative interest rates, which benefit Wall Street but not main street. The Federal Reserve became a cheerleader in the creation of the debt society and largely created the house-price bubble that has now burst with spectacular consequences. After the dotcom crash of 2000, the then Fed chairman, Alan Greenspan, held interest rates far too low for too long. The US, like Britain, became a nation of property speculators. Everyone thought that as long as house prices rose, Americans could keep spending, even as middle-class incomes stagnated in the 1990s. Now it has collapsed, Greenspan's successor, Ben Bernanke, has tried to save the banking system by inflating another bubble. But cutting interest rates has not worked. The cost of borrowing has actually increased.

What does it mean for the global economy?

The global dimension is truly worrying. World trade is still fairly buoyant even as the credit crisis deepens, but no one expects this to last. China and India are still heavily dependent on American consumers buying their cheap TVs and toys. If they buy less, these economies will be put under severe strain. What is most worrying is the stability of the global market in financial deri vatives. The market in these exotic financial instruments is now worth some $500trn - nearly ten times the value of all the companies on the world's stock exchanges. The US investment guru Warren Buffett has called these derivatives "financial weapons of mass destruction".

What is to be done?

The days of laissez-faire in international finance are over - or should be. The banks have admitted that they cannot be left to regulate themselves and have had to be bailed out by the state in one of the greatest financial rescues in history. The banks have been given free access to public funds in a way that the British manufacturing industry never enjoyed in the Seventies when the UK still made things. The credit crisis has destroyed the intellectual credibility of neoliberalism. This is a turning point in world affairs and in economic and political thinking. The free-market orthodoxies of the past 30 years have crashed and burned. However, change will not happen of its own accord. If the government had the will do to so, it could emulate the policies of President Franklin D Roosevelt in the 1930s and regulate the economy in the national interest. This will mean tackling social inequality, the bonus culture and the lack of accountability in financial services. Instead of just propping up bankrupt banks, the government should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets and refitting the western economies to combat climate change. It does not have to be like this. But without change, we will just go into another cycle of financial boom and bust.

Iain Macwhirter is an award-winning political columnist for the Herald

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54 comments from readers

Jane Greene
01 May 2008 at 11:11

I'm absolutely fed up with people talking an essentially strong economy down and am very surprised that the New Statesman is signing up to this Daily Mail agenda.

Carl Jones
01 May 2008 at 13:00

Jane; its not a question of talking ourselves down, the fact is, the MSM has being lying for years about the economic costruct now unfolding.

Iain has covered some good points, but has also failed to tell the truth on others. The BofE/FAS were not asleep at the wheel. Greenspan knew exactly what he was doing with US interest rate policy and so did Bush with his tax cuts.

Mr Brummer (NS) wrote an article about 6 months ago and I told him then, that he should stop lying and tell the truth, that we are heading for the mother of all depressions and unlike Iain, I do believe the elite designed this mess....it will lead to wars, it will lead to food genocide. The real losers wil be Chna and India as we move into a period of very high inflation, maybe hyper-inflation which will see the US paper wealth held by China vanish.

The US will need another major war, so lookout for the construct which will bring this about...avoid going to Israel, would be a good start, as I believe this is a prime target.

johannine
01 May 2008 at 15:26

so much negativity

at times like this the only thing to fear is fear itself

to survive this we need to be able to speak truth ,and yes much truth has been put forward in this article ,so i will try to put some of it down ,and let it be rebutted where i go wrong

fractional reserve is an old deception ,money has been created by lenders signing a promise to pay [repay] ;when we sign a mortgauge document for x ,the contract becomes a security ,that is onsold ,that gets ''repaid'' at maturity[20 or 30 years and x plus intrest gets repaid to the holder of the security [ie govt]

the ones who hold the securities have lost ,only part of the money they put up in good faith , safe as houses has proven house prices rise [double about every ten years [ok they have inflated beyond the old formula but essentially will hold a certain value [as well as return rent] so things arnt as dark as it seems for the cause

but there are other dangers , our money essentially has been created by an accounting trick [and for the proffit of privatised banks, owned by certain elites [who took over the banking system in 1930-s [when the worlds fed reserves had their last hickup, now the bankers took all our gold and silver [that according to most nations is the only legal tender]

the fed trick has removed the silver and gold from our currency [they cashed in the old currency which redeemed paper notes by promise to pay in silver coin[sterling sliver , you may have noted that our current coins are made from nickle [not silver]

anyway a lot more shenanigans have gone on , but essentially the banks [private owned banks , were able to create credit by simple book entry [via the old means of fractional reserve lending, knowing they didnt have to buy silver to make the coins and coins cost only a fraction of the worth of silver [but notes cost only pennies]

the thing is nicle now costs almost the weight they hold in nickle [and notes worth only a few cents are yet redeemable in nickle [and in some countries who hold copper coins they are actually worth more for the copper than their face value

thing is govt needs to get the control over the peoples fed reserve banks back ,thus trading mortgage securities for govt bonds securities is a good thing, [the banks need to come back to govt to redeem them]

its that or let the private bankers bankrupt us all completly

it is time that intrest went back to govt [not private bankers] [our income tax derives from when the bankers stole the fed reserves ,because govt had to lend its own currency from the foreign owned bankers we had to pay tax

anyway there is more to the solution [as well as the problem ,but when govt gets control of its own currency again we can be saved by the means of seignorage [printing the equivelent of the trillion dollar [pound note [or by minting a coin each to the bankers for one trillion [or whatever

anyway its a bit more complicated than that but essentially govt needs to take [buy back the bank so it can reissue real national currencies[so people can repay their debt [if you read between the lines , know ouir money has been made by lending [if we stop lending the money to repay loans dries up

[perhaps that is the bankers plan to get us all on credit cards [but some [like me ] dont qualify for a 'credit ' card [yet own my home free and clear] but could get a credit [sorry debit card ]by putting my mortgauge in the hands of the bankers [and that isnt going to happen]

a side note is that bankers seeking to forclose your home need the origonal contract [to pay ] [not a copy] but they dont have it anymore [they sold it as a security] ,so if our courts demand the origonal [not a copy] the bad banks get weeded out because they bundled your mortgauges, now hopefully held by govt.

gajahmerah
01 May 2008 at 16:17

I think there's too little laissez-faire: because banks are so big and everybody's in bed with everybody else (figuratively speaking), then if one bank has a problem, the whole system can crash. Therefore banks should be smaller so that it doesn't really matter if some of them go out of business. We should have savings banks, speculation companies, brokers, etc. and not these huge financial conglomerates.

As for what to do: buy shares! Gold is just as random a currency as paper money. Salt and sea-shells used to be the currency in the stone age. Shares give you a part of 'real' economic activity. And since banks are depressing the stock market now, you can go shopping at a discount!

So don't be gloomy. Instead profit from the stupidity of the bankers. That's what a free market is all about.

robertsgt40
01 May 2008 at 17:33

This is the financial rape of a nation. Here is the US the moneychangers have pulled the same exact scam. Does anyone really this this was not a well thought out plan to transfer wealth from the nation into the hands of a few greedy financiers? If you do, I have some deals for you. That debt was directly tranfered to the taxpayer. The guilty will walk....with their bonuses. Financial history repeats itself. Reap,sow,reap sow. It's just another harvest for the moneychangers of old.

rodmc
01 May 2008 at 22:16

You have to be very careful when using the term sub-prime, while there are ninjas and people with horribly large mortgages this is as much a clever bit of spin as anything else. For the most part these sub-prime people were honest, had income and could pay their mortgage. However the later ended when the investors in those mortgage securities wanted a higher return and hiked up the rate of interest from the normal levels to in some cases around 8-12% - I saw one women in the US who had her rate go up for 4.5 to around 10. With no reason, she had by that stage not missed one single payment. This is at the same time as US rates are around 2%. This for the most part is greed, pure and simple.

The sub prime problem has been created specifically due to two conditions the banks willingness to lend to a group of people with slightly higher risk profiles, and their greed in hiking up the rates later (way beyond the actual real risk, or without basing it on the borrowers record). This has resulted in what would have been ok grade bonds (representing those mortgages) now being next to worthless. The result is the banks greed in both directions has resulted in them being left holding the baby. Where as if they lowered the rates on these loans the problems would not be so severe.

If a bank goes bust or requries bailing out then the executives should by law have to return their bonuses and face investigation for dereliction of duty. After all they are banks and not casinos or pyramid schemes :-) As it is we are rewarding them for failure....

I say this not as a left but as a free market (now ish) person :)

writeon
01 May 2008 at 22:19

But we don't have a 'free market', that is a large untruth, close to a myth, or at least primative, political dogma. We have a controlled market designed to benefit an elite disproportionally compared to the rest of us.

The British economy is anything but 'healthy'. It's sick to the core, unstable and heading for a fall. The last thirty years of Thatcherism have been a disaster, or a party on the deck of the Titanic, with the ruling elite putting the telescope to their drunken right eye and refusing to see the iceberg up ahead. Fundamentally Reaganism/Thatchrism was an attempt by the Right to party on for a few more decades and damn everyone else and the environment. Their economic policies have been a crime against humanity.

Personally I believe there is growing evidence that the Capitalist system is collapsing around our ears. We have wasted thirty priceless years on an economic illusion, unlimited growth in a finite world, instead of preparing for a sustainable future. Now the party is over and the chickens are coming home to roost, unfortunately for lots of people they are going to be vultures.

Instead of a desparate war of all against all for what's left of the planets resources, we should be going in the opposite direction. Military spending is just so wasteful and counter-productive, we should slash it to the bone and divert the resources towards three basic things; a crash programme to develope alternative energy sources, ramping-up basic food production, and eliminating world poverty. Cutting military spending by 90% would easily provide enough money to finance such a reasonable programme of global reform for a better future.

Morally we simply cannot continue to gorge ourselves on the world's limited resources and watch the poor die needlessly. If we recklessly follow our current path not only will millions face a terrible future of destruction, desease and starvation, but our 'civilization' won't really deserve to survive if we just let it happen without really lifting a finger.

The 'free market' is a dangerous illusion. For hundreds of millions of people it's really a 'death market' and the sooner we grab it by the scruff of the neck, shake it hard and take control of it the better off we'll all be. It's not as if we have a choice, not really. We have a stark choice. We can cooperate and share the world's resources fairly and rationally, or we can carry on down the path to disaster.

DBC Reed
02 May 2008 at 00:24

Can't disagree with any of this.As McWhirter says banks control the issue of credit in this country and get paid interest for money they don't have.The sooner

interest rates become a tax-replacing source of state revenue the better ,via nationalising the lot: we're nearly there already.

It is always the interface between credit creation and the housing market that causes trouble.It would n't be difficult to stop cheap money pouring into property by a blocking-measure such as Land value Tax or the old Schedule A which until 1964 taxed the rental value of owner-occupied houses out of income.Would be easier and kinder to the banks, which seems to be the Guv's priority.But I'd nationalise the lot of them as they successively fall off their perches.Or not prolong the agony and get it over with quickly.

barney999
02 May 2008 at 01:32

Why do people not realise that things aren't going really bad. Although they are.

Everything is going according to plan.

It just depends on where you are standing and looking at this situation.

What we are really seeing is a transfer of wealth, from those who can least afford it, to those who have gorged themselves to the point that they, like a junkie, just need more. It cannot be analysed in a rational manner.

So much for the people doing the gorging. How about the people pulling their strings and making them behave in this wholly irrational, and damaging, manner.

That's a whole different story and, at this time, it seems to be one which people, in their semmingly deliberate ignorance, do not care to hear.

barney999
02 May 2008 at 01:49

Sorry, pressed the wrong button - continues below.

Our financial system is being deliberately taken down. The banking system is, already, in a state of insolvency.

Imagine our society, as it is structured at the present time, without a banking system. It ceases to exist, because it has become terribly, and wholly, dependant upon this system in order to function.

Is anyone seriously going to argue the case that this situation came about as the result of an accidental sequence of events?

We have been here before, I think.

This time it's just about to get a whole lot more worse. A hint. Watch the bond market

Depression 2. The mother of all depressions.

moutainhigh
02 May 2008 at 09:30

Jane Greene’s comment about talking the economy down is doltish it denotes that “Words” are the power in this world. Wake up Jane the days of the Spin Doctors are dying, we live in the material world which all of us are about to find out. And it’s not about talking up or down anymore!

Jane Greene
02 May 2008 at 09:44

If you think, moutainhigh, that words have no power then you are an unutterable fool.

Carl Jones
02 May 2008 at 09:47

barney999, I have been laboring this point, but everyone seems to be walking around with squinting eyes. Any recognition that the elite are pulling a fast one, would destaballize their entire belief structure.

Readers and fellow commentators must shake off this idea that the political construct holds some sort of power, they simply don`t.

The Guardian ran a article which supposedly illustrated a funding/support connection between Lord Jacob Rothschild and US presidential candidate....this story is a dummy. Its designed to give interested members of the public, the idea that a seriously elite player (if not, the global top dog) can support a US presidential candidate and have them lose....another example would be the over the top support from the Kennedy`s for Obama....this was the establishment kiss of death. The elite wants you to believe they don`t have their first chioce in the Whitehouse.

Only two prominent people are pointing the finger of responsibility at Greenspan and Bush. Stiglitz and Soros...one has been reported in the MSM and the other has been ignored. As for the rest of the MSM reporting, is has been chasing events and only a couple, including this article, has got somewhere neer the truth.

The one thing everyone is failing to recognise, is that "globalisation" is the real reason why we are in such a mess. Of course, Greenspans sweetning the US economy for war with Iraq, is a factor. But if you like, you should imagin what the US economy would look like now, if $3+ trillion debt money (still to be paid back) hadn`t been injected into the US economy and the same can be said for the UK, but to a lesser extent.

In the UK, first time buyers couldn`t get on the property ladder....this was before the credit crunch. In the US, ridiculous mortgages were given to low earners who were very bad risks....no wonder, with the Fed. printing paper like it was going out of fashion. The elite knows we have nowhere to go...we are like abused childern...we don`t know any different.

There is another aspect which should be considered. When was the US presidential election last hampered by a similar economic prospect. Usually, the 12 months prior to the election is stable?

http://www.propagandamatrix.com/articles/may2008/010508Fake....

Some NS writers have hinted about whats in the above link....maybe there won`t be a US election and this is the reason for the timing of the present economic construct....anything can happen, all options are on the table. LOL

moutainhigh
02 May 2008 at 10:07

Jane you must be in the PR Industry.

What I am saying is the era of “Spinning” is over.

Now cheap money is on the wane the lies of the spin doctors will not stand up.

We as humanity have to start living like adults and not as children.

Mummy is not going to be dishing out the sweeties anymore you will have to eat bread and be satisfied.

Try eating words and you will starve!!

Extradry Martini
02 May 2008 at 11:48

This article is riddled with factual errors, contradictions, hyperbole, biases and prejudice. The New Statesman should be ashamed of itself for printing it: I mean, why have someone writing an article on something so specialised when he clearly knows so little about the subject?

For example:

1. “But every so often the banks succumb to irrational exuberance, lend too much and find their reserves have been eaten up too fast, forcing them out of business. This is what happened to Northern Rock…”

No it wasn’t. (one might think that enough had been written about what happened to Northern Rock over the past months for the writer to find out, but erm…)

2. “The banks thought, wrongly, that they no longer bore the risk of default on these mortgages because they had been sold on to other people. This was a big mistake. The debts came winging back.”

Er, what? Debt which was sold on to other people did not “come winging back” to the banks. By selling the debt on to “other people”, “other people” took the risk (and rewards) of it. It is what “selling” means in investment. The writer appears to be confusing this with the assets in off-balance sheet vehicles, which the banks have had to prop up. But they always knew that they would have to do this if the debts went bad – they just didn’t think this was going to happen.

Amazingly, in this paragraph, titled “How could the banks be so stupid?” (in a piece called “Everything you want to know about the credit crisis”), the writer manages to miss - entirely - the central mistake being made by mortgage investors (!): They based their risk assessment on ratings by ratings agencies who had moved away from measuring creditworthiness to actuarial analysis, there was no longer anyone measuring creditworthiness which led to money being lent to people who were not credit-worthy.

3. “Regulators such as the Financial Services Authority and the Bank of England were asleep at the wheel.”

They were making the same mistakes that the banks (and everyone else) were making, yes. Does the writer think he could have done better? Can he point us to any article of his prior to last July in which he told us that they were making mistakes?

4. “The Treasury, Bank and FSA are run by relatively low-paid civil servants who are in awe of financiers and their lifestyles. They believed that the banks were run by masters of the universe who knew what they were doing, with their mathematical formulas and leveraged deals. In fact they were run by bonus-greedy wide boys, who gave no thought to the future and had no concept of social responsibility.”

I think this bit speaks for itself – childish and prejudiced rubbish.

5. “The City bonus culture encourages short-termism and risk-taking. It was in these people's interest to pretend the credit boom could go on for ever, and that securitisation had taken the risk out of lending money.”

If “these people” knew that these loans would go sour, they would have (still incentivised by bonuses) hedged their positions as the crisis began to unravel early last year. They had plenty of time to do so. The fact that almost none of them did and that banks lost so much money demonstrates that they were behaving out of stupidity, not out of venality. Still, no point letting the truth get in the way of what one wants to believe, eh?

6. “The bad news is that most of the banks are in effect insolvent”

Simply and verifiably incorrect.

7. “The banks know that their mortgage bonds are largely worthless, otherwise they would have offloaded them by now themselves”

What kind of logic is this? The statement starts with the assumption that the loans are worthless and therefore the banks want to sell them. Has the writer not considered that the banks might not want to sell all their loan assets (e.g. because they believe them to be worth more than the price in the currently risk-averse market)?

8. “The market in these exotic financial instruments is now worth some $500trn - nearly ten times the value of all the companies on the world's stock exchanges.”

Schoolboy error. When derivatives positions are closed out at banks, they are done so by writing a new contract (with the opposite characteristics of the original position), thus banks have huge amounts in nominal terms of derivatives contracts, but tiny risk in comparison. More than 95% of derivatives contracts are offset. Of the remainder, the risk is not of the whole nominal amount, but on the price change of the underlying instrument. On top of that, for every long position in a derivative, there is a short position. The writer is also incorrect to say that derivatives are “exotic”. The vast majority are very simple indeed.

9. “The banks have been given free access to public funds in a way that the British manufacturing industry never enjoyed in the Seventies when the UK still made things”

Nonsense. The government was subsidising industry at that time. That means they were actually giving money (rather than lending – big difference) to uncompetitive and badly run organizations.

The rest of the last paragraph is simply absurd, so I am going to leave it, aside from saying that it was the over-mobilisation of banking “assets to stimulate the productive economy” which got the banks into so much trouble in the first place.

Jane Greene
02 May 2008 at 12:08

Well no wonder you despise words so much given the laboured way you use them. The point is not about spin doctors - and no their era isn't over - but rather about the effect ebbing confidence has on markets. An economy may be perfectly sound or reasonably sound but if no-one believes that to be the case then it will decline. So, yes, talking the economy down is hugely damaging. It won't help our overseas aid budgets or anything else if we plunge into recession! If you are trying to say people should spend what they have rather borrowing and betting on an uncertain future - then that's good sense. If the banks had followed this simple economic thought - lend to people who can pay back - they would not be struggling now. Nor would they have had to be bailed out by the taxpayer ending I hope for ever the lie that there is such a thing as a 'free market'.

antelope
02 May 2008 at 12:16

I agree that things are very high risk at this point and that there's good reason to believe not only that a major crisis is imminent but that things will never be quite the same again.

But these aren't certain [assuming that the present banking crisis is temporary]. And I do get fed up with people taking every opportunity to claim what's happening as evidence for some conspiracy theory or other.

Whats happening may well be a crisis of the capitalst system. But I for one know of no other system that has led, or even offered the potetnial of leading us to, utopia. Crisis of capitalism it may be, but not as a consequence of madhat men in pistripes scheming to reduce the world to penury whilst they hide somewhere on yachts.

Whats happened is a consequence of over confidence in one particular dogma. Thats all. Reality is too complex for there to be one political philosophy to fit all. We need a combination of approaches, hence the need for welfare state and publicly funded services in free market economies for example.

What's happening isn't down to some wacky conspiracy, it's down to laxity of control, simplistic belief in dogma, well intentioned over optimism, naivety and a failure to follow a middle road.

The world is facing a number of major crises that all seem to be coming to a head at the same time. And thigs are presumably going to have to change very significantly to accommodate them. But please don't get sidetracked into looney conspiracy theories. Everything cycles...all we're seeing is the bottom of a cycle, unfortunately the bottom of several simultaneously! But there's grounds for optimism as well because change is always opportunity and I'm sure that a much better world will emerge from this in terms of greener technologies, stymied globalisation and a gentler and more universal way of life. The 20th century was an experiment..now we're going to have to step back, consolidate and put together a new approach, hopefully not one based on centralised dictat but one which derives from people, enabled by a more broadly wise government.

antelope
02 May 2008 at 12:37

Woops, I forgot to mention greed in my little list of what 'it's down to'. The greed of bankers, business people, traders, investors..all these people are as guilty of promulgating this current crisis as anyone, governments included. And guess what, most of these people are mere members of the general public, like you and me. And I doubt that there are many people, even in this forum, who would pass up the chance of making two million quid in twelve months if offered the opportunity.

Perhaps it's not the ability to earn such money that's the problem but how we spend it, as individuals. I like to kid myself by thinking how altruistic I'd be if I was rich. And I may be more so than some. But I bet I'd also have a few big money trinkets to enjoy as well. And I'm sure we all would. So doesn't this point the finger at each of us as much as anyone? What a shame that it appears that we need strong government to 'guide' us in what we earn and how we spend it, through taxes and leislation, rather than being able to trust ourselves, the public, to do so well and wisely. It seems we need government to to manage and control our greed like an economic tool. It all goes haywire when we're given the opportunities but are left to our own devices. As we're seeing. I for one certainly wouldn't be so smug as to claim that things would be different if I'd been a big banker.

Carl Jones
02 May 2008 at 12:41

"The 20th century was an experiment"....you are right on the button...two world wars contrived by the elite. Two elite constructs, the IMF and World Bank who spent the best part of 30 years screwing the developing world and a United Nations which can only be described as the largest house of corruption this side of Uranus.

People like Jane and Antelope are the sort that wander throught life leaving a trail of destruction and this is done largely through ignorance.

Antelope, could you expand on these "looney conspiracy theories?

antelope
02 May 2008 at 13:17

Carl...The IMF and the World bank did, as far as I'm aware, indeed make many decisions and take a general approach that with the benefit of hindsight did at least as much harm as any doubtful good. But I was brought up in the developing world and I know that local corruption and incompetence was also to blame. The IMF and WB followed a given dogma and it was too precise. I know people who work for the WB and believe me, they're not bogeymen, they're highly educated in their field [agriculture for example] and mean well but have worked with an institutional approach that was inappropriate to cultures and societies that are way too diverse for a single approach to macr economics to be appropriate to all. And the World Bank funded projects, such as dams for example, before the process of proper environmental or social impact analysis became widely used. Like all big institutions, it was guity of lacking joined up thinking, and divisions worked without regard to the recommendations of each other. I don;t want to defend either organisation, and I dont know enough about either to be able to. But the idea that they were proactively working for the detriment of the developing world in some sort of conspiracy with the chairman of Lloyds bank is laughable. I might give more credence to the idea that the current communist Chinese government sees economic growth as a useful tool with which to finally overpower the west, although only a little credence as a hypothesis, I certainly wouldn't rant about it.

I'm glad you think that Hitler was in cahoots with Churchill...two political elites of the time....allows me to place you well.

Anyway, I've said my piece and am too busy to argue..take it or leave it.

Extradry Martini
02 May 2008 at 13:29

I have to agree with Antelope. Time and again, government intervention in free markets has been a disaster. The point is that governments are made up of human being who make just the same of mistakes that other human beings make. The difference is, of course, that politicians and civil servants know about politics and delivering public services and know much less about the markets in which they intervene than those who use them. If you want any evidence just look at US support for bio-fuel. More than all the World's growth in corn production over the last few years has gone into biofuel with the result that parts of the world are being threatened with famine and biofuel releases just as much carbons as fossil fuel.

Governments are just terrible at intervening. Thank goodness Margaret Thatcher's government did away with those monstruous subsidised industries. The country would be in a sorry state right now if it hadn't.

The reason why the new deal worked and why governments should intervene to stop the financial system collapsing (not a bank bailout) is that what they are doing in both cases is ensuring the survival of the free market, which no longer functions because of irrational risk aversion (which follows irrational risk-ignoring) of those with the capital to make it function.

moutainhigh
02 May 2008 at 13:40

Jane I do not depise words.

But the word I do like is “Truth”

Obviously a word beyond your conception.

Stay in dreamland spinning.... Deary

You will not be writing such silly comments in two years time.

Words will not help you then.

Sorry you hate money so much... you will need it then

when all the credit is gone.

Carl Jones
02 May 2008 at 14:32

Anteolpe...I have also talked with ex World Bank employees and I will stick with my view. Hitler and Churchill are not the elite, just puppets. Not only were the British and Amerikan corporate elite funding the Germany war machine, but the Bush family continued to financially support Hitler until 1943, and against US law. You might want to google "Hitler was a British Agent. There is also an account where Churchill is in his bunker during the wee hours of the war, where he is heard to say "it seems that all of us war time leaders are puppets being guided by hidden hands", or words to that effect. You seem to be locked in a version of history which was wrtten by the winners and that is your chioce.

Extradry Martini.

There you go blathering about "free matkets".....I suppose the PPT`s (plunge protection team) activities are legal? Looks more like a case of elite insider dealing to me.lol

Every business in this country is SUBSIDISED by the government with family tax credit. Mr Ripoff employs workers who rely on the Family Tax Credit, this is just a different method of subsidy and the larger corporations rely on smaller service businesses and suppliers who alse survive by employing workers supported by Family Tax Credit. The only reason why you aren`t whining about it, is because it suits you and your like.

I dare you to support the removal of child benefit and family tax credit....I just dare you.lol Then we might actually see just how well employers perform in a genuinely competative wage market. failure by the so called free market would lead to a swift revolution.lol

Extradry Martini
02 May 2008 at 15:09

What on earth has small scale tinkering with the taxation system got to do with anything?

Jane Greene
02 May 2008 at 15:11

I don't hate money. You just can't eat it - unlike words which I fully expect you to be munching on in two years time. In the meantime just keep regurgitating the cliches you've already swallowed

moutainhigh
02 May 2008 at 17:10

You do Hate Money!

I expect you owe lots of it.

That’s why you are giving this silly emotional response.

If you want to keep on believing the myth... that's your choice don’t expect the rest of us to agree with you!!

Value has to reside somewhere and it’s not the Fed’s printing press!!

Or the Money you have borrowed on your house!

The Games UP!! hahahahahahaha

writeon
02 May 2008 at 21:04

I'm going to try to be very specific as I think I was being rather too general in the above.

The term 'credit crunch' is far to benign to describe the situation we are mired in. It should perhaps be called 'The Great Bank Bust' which is what it really is.

U.S. and British banks are insolvent, they are bust. What's happening now is damage limitation, trying to disguise the true nature and staggering enormity of the crisis we are seeing unfold. Northern Rock isn't an isolated case, rather it's the first case and not the last.

Clearly I'm sticking my neck out here, calling a spade a spade, but I believe we are witnessing the beginings of a financial and economic crisis that could prove worse than the Great Depression.

Take the world's, more or less, largest bank - Citibank in the United States - it's bust, the only thing keeping it afloat is massive injections of cash from the US government and enormous loans from the Chinese and the regimes in the Persian Gulf, notably Abu Dharbi. Abu Dharbi has pupped somewhere between 7 and 8 billion into US banks in recent months, and it still isn't enough, so the Americans are trying to negotiate even bigger loans in a desparate effort to keep their heads above water. It may not work and it may be too late, as the US economy becomes bogged down in deep, deep, recesion; which we may never really get out of, at least not in our lifetimes.

This sounds close to hysterically over-dramatic as we are used to prosperity and a lavish, almost wonderous lifestyle of plenty and excess in all areas, at least those of us lucky enough to live in the West. Unfortunately it's all coming to an end and it's unlikely to return. The Thatcher/Reagan model is as bust as the banks, and good ridance to it. The consumer orgie is over, now the time has come, alas, to pay the bill.

What we now require is an almost total reorganization of society from the top to the bottom. A redistribution of power and wealth on global and massive scale. A kind of Marshall Plan for the world. Unfortunately the ruling elite have no intention of giving up any of their power and wealth, on the contrary they intend to fight tooth and nail to maintain their position and damn the rest of us. The rich countries, lead by the United States is preparing to attack the rest of the world and grab what's left of our legacy of raw materials, using military might to delay the inevitable for a few more decades, but at a tremendous cost in blood and destruction. The irony is that using military force to maintain an unsustainable way of life is futile in the long run and will only lead to an even more violent fall and probably even quicker. It would be far more sensible to divert resources from the military towards building an alternative model of economic and social development. Unfortunately, the United States, the most powerful nation, the key nation, has a ruling elite that is also the most reactionary, greedy, stupid, short-sighted and violent, imaginable. They are going to destroy themselves and America and probably drag the rest of us down with them.

It's all rather sad as we could choose a different path, a better, more civilized path, a path we needn't be ashamed of, a non-criminal path, a sustainable path, a path of hope and change. Only I doubt very much we will make the effort to change course in time to divert disaster. The ruling elites answer to our myriad problems is brutally, stupidly, simplistic - war.

Carl Jones
02 May 2008 at 22:52

writeon; that must be one of the best posts/comments you`ve ever made....even going back to the BBC Radio 4 Taday message boards, which are now totally censored.

I agree with what you say, and I have said it as well, but you have done it with so much emotion, and passion, that readers should take note.

moutainhigh
03 May 2008 at 08:27

Writeon- that was brilliant!

Lets now "Make Hay while the Sun still shines"

Cause we are helpless to stop what's coming!

Brilliant Piece..............

johannine
03 May 2008 at 09:28

It may have escaped peoples attentions so far but the insurance companies [and underwriters ] must be carrying a lot of burden to pay up [judging by the ammount of new life insurance adverts seeking death cover etc ,on tv ;clearly they are seeking a cash injection by getting new custom to pay of their underwritten dealings]

Thing is the principles who underwrite their dealings will have taken some big hits ,and be seeking to unload their own securities and stocks and shares , that is likely to be the second wave.

Many will be forced into putting their mansions and estates on the market ,so expect to see the uber real estate take a hit soon ,possably this would account as well for the fall of gold back from its 1000 us heights.

While the fall in us dollar has made the us stocks cheaper for foreigners to buy , the falling price of real estate [in an ever more impoverished nation [usa inc] is going to have some intresting side affects [what with failing infastructure and roads , the dollar will soon reach parity with the peso , heralding in the amero [trouble is will the amero be owned by the self same banking cartel that owns the privatised fed ,

or will govt 's yet again be able to create [print] their own money ,not have to lend it from the bankers at intrest as they now do [that got us into this mess] due to govt inability to monitor the bankers books [noting the fed bank has never been audited] and likely never will.

writeon
04 May 2008 at 10:07

Thanks. I actually don't particularly relish the role of 'Profit of Doom' or Cassandra. I'd really like to write that everything is going to be fine, that we're entering just another mild recession and soon the economy will bounce back; only, unfortunately, I don't believe this is an accurate discription of where we are heading.

The current 'financial crisis' is far, far, deeper than most people realize, yet many people have an interest in portraying it as something temporary and non-structural in nature. I believe this is a fundamental mistake.

Mervin King, the governor of the Bank of England, was against 'bailing out the banks' because of the collosal expense and the concept of 'moral hazzard' - that the Banks should have to pay for their 'mistakes' as a form of 'deterrent' of 'punishment' for their reckless excesses. One important question that arises is, does the state have the resources to save the financial system without cutting expenditure in other areas of state activity? This is a risk King was also aware of. Why did he back down then? Because of massive pressure from the financial sector and the government. So much for the 'independence' of the Bank of England!

I've heard that King said to one of his chums that he changed his mind not so much because he wanted to 'protect' the banks, as much as he wanted to 'protect' the country from the banks - from the consequences of banks going bust one after another and dragging the economy down into a potentially bottomless pit!

If Northern Rock has been 'bailed-out' to the tune of £100 billion and other financial institutions have received around another £100 billion, how much more will they ask for, £500 billion, £1000 billion, how much is too much, or don't we have a real choice, either we keep the banks afloat or they sink us all?!

Is yet more unlimited credit the real answer to our problems?

Then there's the whole issue of the global derivatives 'market'. This is a highly complex area which almost beggars belief. Derivatives are a form of 'insurance' or 'two way bet' where one can 'buy' insurance or 'hedge' against the 'normal' fluctuations of the so-called 'free market'. Perhaps it's the arkane nature of the 'magical' derivatives market that has led to their massive growth over the last ten years.

What surprised me was the collosal size of the derivatives market, it is the mother of all bubbles, actually dwarfing the US and UK property bubble with ease. The derivatives market/bubble would appear to be 400% bigger than the total value of all goods and services produced on a global basis! So only a contraction of a few percent in this Alladin's Cave of unimaginable wealth can have huge consequences for the world's economy. A meagre fall of less than 10% would result in losses of trillions of dollars and dwarf the current 'credit crunch'!

The global derivatives market is like a huge financial black hole or iceberg looming on the horizon, most of the danger hidden underneath the surface of the water, a danger the vast majority of people are totally unaware of. Derivatives are strange. It's like magic. A way of turning an idea or confidence into real money or gold, almost like alchemy.

What's also strange is how close we were to financial disaster a few weeks ago and how little the mainstream media has dug into this story. Of course it's understandable. The mainstream media aren't a 'watchdog' they are a 'lapdog - or an unofficial Ministry of Propaganda, subservient to the ideology and interests of the ruling elite, which obviously cannot be the same as the interests of the rest of us.

The reasons the Whitehouse and the Federal Reserve acted so quickly to save Bear Stearns was the fear of a stock market crash in Wall Street if Bear Stearns went bust. The knock on effect would probably have been a financial panic across the board and a market crash the like of which has never been seen with disasterous consequences to follow for the real economy, as in the nineteen thirties Great Depression!

But it didn't happen, we were apparently very close, but we got away by the skin of our teeth. This episode only serves to illustrate just how fragile and unstable Capitalism really is. Of course one could argue that the Fed's resolute action shows the opposite. Unfortunately we are not out of the woods yet, in fact we are still moving into the shadows and path ahead is anything but clear. How long will our 'luck' stretch this time?

But after so much pessimism is there no light ahead? What should one do to get us out of this mess?

Well, it's not going to be easy! But one could at least begin to move in the right direction, stop digging oneself deeper into the hole and begin to climb out. We have to start on a programme to stop the Reagan and Thatcher era's 'reforms' and then funadamentally reverse them, recreating a more humane society and issuing in a fundamental redistribution of wealth and power in society. One could substitute the creation of debt without end for a an increase in real wages. In Britain and the United States what's needed is more equality, not less. The process of running down the 'real economy' and industry should be reversed. One could kickstart the economy by transferring resources to the poor and slowly rebuilding civil society and all that's been systematically destroyed during the Reagan/Thatcher era. We need to abandon the last thirty years of Ultra Liberalism and create something far more sustainable, democratic and environmentally defencible.

Unfortunately I don't believe the current model is really reformable or is capable of real change for the better. Too many people in the elite like things the way they are. They live the life of a modern aristocracy isolated in an almost alternative universe compared to most of the world's population. Voting is not going to change society radically. Voting doesn't mean one lives in democratic society. A democratic society cannot exist in anything but name where power and wealth are so grossly and disproportionally distributed. We don't live in a democracy, but rather in a form of gilded, sparkling, gaudy, dictatorship, which up to now has been disguised very effectively. Now that era is coming to an end. The strong state is starting to reveal it's true face and character, as the veil of democracy begins to fray and fall, revealing a one-party dictatorship, and the only real answer to this form of rule should be a Revolution!

taghioff.info
04 May 2008 at 13:15

I hope Ian Mcwirter is right, but I am not 100% sure that the lessons will be learnt. There was revisionism over the Asian crisis, over Argentina, over sub saharan Africa, now they have done it to themselves, but will they learn.

I hope so, I hope this means a root and branch reform of the financial architecture. Maybe we need to look at how money is issued first and foremost, because it is the root of this fractional lending process. Why no re-nationalise the issue of money? And also why not have a designed rather than accidental global currency, geared to reducing carbon emissions?

taghioff.info
04 May 2008 at 13:35

@Extradry Martini

It seems you are shaken rather than stirred by this crisis.

I think the points you raise about the factual content of the article are valid, or at least interesting. But whether the banks acted out of stupidity or venal greed does not really affect the main point of the article.

The banks were under-regulated, have got into trouble as a consequence,and this is hurting all of us, or in other words is against the public interest. Thus they need to be better regulated. If the civil service needs to recruit financial experts in order to do this then so be it, but it needs to happen.

@Carl Jones

As ever I do not buy into conspiracy theories, because I do not believe that the elites are that competent. However

"Any recognition that the elite are pulling a fast one, would destaballize their entire belief structure."

Elites have been pulling a fast one for quite some time. It is called Neo-liberalism. In the 1970s, the share of the top 10% of income earners, as a part of overall income, in the US and UK at least, had fallen dramatically, but after the Neo-Liberal reforms, thay had bounced back to turn of the century levels.

So the biggest success of Neo-Liberalism has been the 'trickle up" effect. David Harvey explains this in "A Brief History of Neo-Liberalism."

Neo-Liberalism has always been a welfare scheme for the Elites, it is just that this crisis makes it obvious.

Carl Jones
04 May 2008 at 23:06

taghioff.info, you contradict yourself in line 10 and 14.

The elite are comforted by your belief system which is based on the above confusion. You come across as the sort of person who is willing to hold breath until documents are released under the 100 year rule, yet you are happy for the NWO to make war based a speculation...or should I say, bare faced lies?

Carl Jones
06 May 2008 at 12:41

Here`s an interesting link.

http://www.thetruthseeker.co.uk/article.asp?ID=8549

taghioff.info
06 May 2008 at 16:17

@ Writeon

I like what you say

"The strong state is starting to reveal it's true face and character, as the veil of democracy begins to fray and fall, revealing a one-party dictatorship, and the only real answer to this form of rule should be a Revolution!"

I am hoping for reform:

http://taghioff.info/dant/?p=66

But failing that (or some other form of reformism with similar aims) I do think there will be a revolution of some sort, because of the impact of such an unequal system on the poor, which is emerging with commodities in general, and food in particular. Take a look at the Burmese cyclone,

http://www.timesonline.co.uk/tol/news/world/asia/article3879...

and consider under climate change the IPCC predicts

1) More extreme weather events

2) Raised sea levels

Think about the impact of salination, as seen in Burma, on agricultural land. Think carefully about the emergence of a rice cartel, and presumably other food cartels, think about the impact on global food prices.

If this is allowed to unfold purely by market forces it spells revolution, violent, bloody nasty ones where lots of people die. I don't want that to happen at all, but it is very slightly preferable to the Genocide by neglect that mass starvation by market forces might produce.

@Carl Jones

"taghioff.info, you contradict yourself in line 10 and 14."

Only on the face of it, you can call me Daniel if you like by the way.

Line 10 " As ever I do not buy into conspiracy theories, because I do not believe that the elites are that competent. "

Line 14 "Elites have been pulling a fast one for quite some time. It is called Neo-liberalism."

Just because they are opportunists out to line their pockets, and pulling a concerted action as an interest group to bring this about does not mean 1) they are in control 2) they have shown any foresight 3) that they are therefore at all competent.

Neo-liberalism makes rich people richer, but also mortgages the future by underinvesting in populations, infrastructure and environmental protection. New Orleans, still a mess, not a sign of competence, just gross short sighted greed and stupidity dressed up in the respectability of an academic discipline gone wrong.

Never underestimate the power of denial.

writeon
06 May 2008 at 19:39

Perhaps I should clarify. The use of the word 'Revolution' on my part doesn't mean I'm advocating the use of violence to overthrow the established political order, but I do believe it's necessary to replace and substitute the current leadership with new people, new ideas and a new direction.

It sounds almost untopian, naive and semi-deranged to adovocate 'Revolution', but I just don't see how we are going to change the road were on, a road leading to disaster, without it.

I simply don't believe the current system is reformable in any meaningful sense. I think we need deep, structural changes and alternatives to the dominant socio/economic/political paradigm. I wish I believed that 'reform' was a realistic or viable option, only I don't. Given the scale of the problems we face and the limited time scale available 'reform' just won't cut it!

Unfortunately we proabably won't get the Revolution we require to sieze the bridge of the ship of state and steer away from the iceberg ahead. The ship isn't a yacht or a sleek schooner. It's a big, bluff, super-tanker; impressive enough and apparently unsinkable, but I don't see it cutting its way through the iceberg unscathed, and it's the collision that worries me!

Another problem is that we may have simply run out of time as a civilization, we may have already gone too far down the road of excess consumption to the -world's resources and have set environmental processes in motion that may be irreversable and civilization threatening. So even if by some miracle it's possible to seize control of the ship of state, and we turn the wheel and attempt to change course, our momentum will carry us inexorably forward towards the iceberg, super-tankers are beasts to turn in a hurry! In reality we should have begun the whole process of 'reforming society' years ago, now the reform window is rapidly closing, leaving us with few options. We can forget it and party on, orgie on, gorge on, and hope we're so drugged that when the end comes we won't even notice it, like a junkie sitting in his own piss and vomit in the gutter, yet gazing up at the stars, stoned and boned; or we can at least make an attempt to change things and hope it's not too late!

Alas, I think the ruling elite are planning for just such an eventuality, a threat to the established order from 'eco terrorists' intent on challenging the very basis of Capitalism and the Free Market as the environment and social consequences become increasingly dire and manifest. As the system begins to falter and become more and more unstable, and millions begin to fall of the gaudy, spinning, ride, they are going to angry and revolt and threaten the rule of the elite. And the elite will defend themselves by any means necessary, when bread and circuses no longer suffice the will send in their legions.

Extradry Martini
07 May 2008 at 10:39

Writeon - you, like the author of the article betray a complete lack of understanding when you talk about the nominal value of outstanding derivatives.

The outstanding amount is irrelevant (see my first post here).

Still, makes you sound good, eh?

KMac
07 May 2008 at 19:06

The comments of Franklin Roosevelt at his inauguration in 1933 seem as apposite now as they were over 70 years ago:

'Faced by a failure of credit, they have proposed only the lending of more money....They only know the rules of a generation of self-seekers. They have no vision and when there is no vision the people perish.'

taghioff.info
08 May 2008 at 07:23

@ Writeon

I think the evidence is that people are very bad at foreseeing trouble but fairly good at getting out of it once they are in it. To put it another way, yes we are probably overshooting on runaway climate change, and we have definitely gone past what is sensible in terms natural resource degradation, but we will also have a fair amount of time to dig ourselves out.

30 years is a long time in terms of human progress, and as long as we don't fall to killing each other over increasingly scarce resources, we may well be able to find ways out of the huge problems we have set up for ourselves.

Remember, as soon as resource scarcity brings instability in China and India, that threatens cuting off the supply of cheap goods and services that keep inflation in check globally. Inflation wipes out the wealth of those in charge rather fast, which becomes a good motivator for changes.

Part of the trick of politics is for those in charge to make it seem like nothing can change. But when you get close to political processes you see how ephemeral and contingent such a false monolith really is.

Things can and will change.

taghioff.info
08 May 2008 at 07:29

By the way, I do not necessarily mean revolution. It may just be a general tightening up in the way resources are administered. But it definitely spells the end of Laissez-Faire.

FA 09 May 2008 at 01:25

This is one of the stupidest and most deeply irresponsible articles I have ever seen published. The author is clearly completley ignorant of banking and has simply misunderstood what the credit crunch is.

This is not the worst financial crisis in 60 years. To say so is a to display a complete lack of perspective. Compare the state of the wider economy with the state in past crises. You know you're dealing with a loon when attacks are made on fractional reserve lending.

Different banks are suffering for different reasons. Most banks have not failed to keep enough in reserve - the problem they face is that assets they have invested in (residential mortgage backed securities) have turned out to be worth less than thought. The banks suffering from this are largely investment banks. Northern Rock was the victim of a 'run' which started for utterly irrational reasons - Northern Rock excercised its legal right to draw from the Bank of England as lender of last resort (which is part of the Bank of England's role) and Northern Rock had paid money to the Bank of England for such right for years (almost like paying for insurance). Everything the author has said about sub-rime is correct - but Northern Rock securitised a vast proportion of its sub-prime mortgages - which means the government, as the owner of Northern Rock IS NOT the owner of the sub-prime mortgages.

The banks were not wrong to think they didn't bear the risk of default on sub-prime loans - NO LENDER HAS A SECURITISED LOAN ON ITS BALANCE SHEET. The person who suffers when a securitised loan defaults is the holder of the mortgage backed bond. In most cases, the holders of these bonds were INVESTMENT BANKS, not retail/commerical banks. That's why Bear Sterns needed to be rescued and UBS have made big losses. Investment banks don't tend to lend mortgages - when was the last time you got a mortgage from Bear Stearns? The sort of banks that lent sub-prime loans haven't made these losses - their loss is that their business has dried up.

The FSA and the Bank of England were not in awe of the lifestyle of the bankers - what a ridiculous comment. To an extent the problem arose because assesing the business risk of the bank's policies as opposed to ensuring legal compliance with regulatory capital requirements WASN'T in the FSA's remit.

Adam Applegarth is not a 'city slicker' - he was the former chief of a regional bank - Northern Rock was engaged in taking deposits and making loans (mainly residential mortgages). It has never been involved in the complex transactions that investment banks in the City are involved in.

The banks ARE NOT insolvent. Insolvency is usually taken to mean being unable to pay your debts AS THEY FALL DUE. In the case of the banks, they clearly can. As mentioned above retail banks also haven't suffered anywhere near as much as investment banks. Hence HSBC increasing mortgage products.

FA 09 May 2008 at 01:32

The comment on insolvency is one of the most deeply irresponsible pieces of journalism I've seen. Savings are NOT unsafe. The description of the Treasury scheme is wildly inaccurate - only AAA rated bonds can be swapped.

Britain has a reasonably high level of regulation of financial services - where it needs more regulation is of mortgage lending, not the City. The mortgage lending side is the weak link. As it happend, the Bank of International Settlements has said the Basle II criteria need to be made stricter - but this is all amending the regulation, not a sea-change. The author doesn't clarify what more "regulation" he wants. I suspect because he doesn't know because he doesn't understand what is going on. In any case the comment about investing in the productive economy suggests the author is too stupid to understand that services are economic activity - the type that Britain does pretty well.

The author seems to be one of the many who don't realise that a dynamic successful economy is a good thing and something we should aim for - in the UK that requires a successful financial services sector.

I simply can't regard the author as a serious journalist after this article.

Extradry Martini
09 May 2008 at 15:19

FA, I can't agree more - this piece is breathtaking in its ignorance. What makes it all worse is its title. The writer appears to have done no research (I mean, whatsoever!) into the subject, and is just ranting based on a set of prejudices. As for regarding this guy as a serious journalist, I hadn't heard of him until this point, which, given his efforts thus far, is not very surprising.

gcarth
10 May 2008 at 14:23

Thank goodness for the good sense of 'Antelope'.

I'm growing heartily sick of armchair conspiracy theorists - the more they rant, the less I am convinced by them. Psychologists have found that certain individuals are overly prone to believe in conspiracies.

I think it is all fundamentally all about greed and the insanity that greed creates in people.

taghioff.info
10 May 2008 at 15:11

@FA

I think you are right to say the article exaggerates the dangers of this crisis, but I am not sure your unshakable faith in the banking system is well placed, I think there is far more need for reform than you are willing to admit:

"You know you're dealing with a loon when attacks are made on fractional reserve lending."

Well, Bernard Liatier, the designer of the Euro and the Author of "The Future of Moner" attacks this system a plenty. One reason is that money is created out of nowhere by bankers fiat and then lent and relent by the banks, on a fractional reserve basis, letting them make money for what is basically nothing.

This acts as a huge tax by banks on the rest of us, a tax that goes into private rather than public accounts. So lets not pretend that everything is right and good with the banking system.

Extradry Martini
12 May 2008 at 09:14

taghioff.info I think that FA's point is that most people who use the phrase "fractional reserve banking" these days believe that money (in the narrow sense) is created out of thin air by banks, when in fact all lending has to be financed. You seem to believe the same. If so, you wrong: commercial banks are no more able to "create money out of nowhere" than you or I.

FA 12 May 2008 at 10:05

One reason is that money is created out of nowhere by bankers fiat and then lent and relent by the banks, on a fractional reserve basis, letting them make money for what is basically nothing.

Taghioff

"This acts as a huge tax by banks on the rest of us, a tax that goes into private rather than public accounts. So lets not pretend that everything is right and good with the banking system."

No, fiat money is created by governments, not banks.

All lending, as Extradry states, has to be financed. As Northern Rock found out, banks still rely on deposits for their liquidity.

What on earth do you mean by "letting them make money for what is basically nothing"? Banks make money on what they lend - I can see how you reached your conclusion as you erroneously think banks create money but even then, the bank has to put some work into lending - it has to set up and maintain systems for keeping records of lending, it has maintain staff to ensure it lends to someone who will pay it back and it has to set up systems to collect payments - so it doesn't get paid for doing nothing - the process of lending is quite laborious. Try and think of lending money as renting out a car - what the person paying for the service gets is the use of the capital (the car) for a period of time, after which they return it and they also pay a fee for their "rental" (interest). And how is that a "tax" on us?!?

taghioff.info
12 May 2008 at 18:33

@FA

"No, fiat money is created by governments, not banks."

Well no, if banks can lend ten times their reserves, it implies that 90% of money is created by commercial banks, the fiat money really acting as a catalyst for this. It is all rather well-explained here:

http://www.feasta.org/documents/moneyecology/chapterone.htm

Well, I am using the word "tax" as a metaphor to illustrate what it is not: It is not a common asset being used for a public good. What it is, to put it more precisely, is rent-seeking, or a massive rentier economy.

Banking, in itself, is not very productive. Yes it facilitates other productive activities, but so does public transport or any other form of infrastructure. But only banks expect to make mega-bucks from it. Banking is a new form of aristocracy, a new rent-seeking class.

"but even then, the bank has to put some work into lending - it has to set up and maintain systems for keeping records of lending, it has maintain staff to ensure it lends to someone who will pay it back and it has to set up systems to collect payments - so it doesn't get paid for doing nothing - the process of lending is quite laborious."

Tell that to a coal miner. The effort that goes into lending out money fractionally bears almost no relation to the revenues generated.

Even the financial regulators see banks as acting as predatorial rent-seekers, hence the recent rulings on overdraft charges and bounced check penalties. City bonuses have not been at record levels because banking is such a hard place to make money.

Your example of a car is daft. Cars depreciate, use up fuel, require a lot of maintenance and are clearly a private good.

Money is in many ways a public good, it is a system we all consent to for our common good. Its value comes from its private usage, but also it is only derived from its character as a publically accepted standard.

To put it another way, money is a form of public infra-structure, which is why central banks exist. and like most forms of privatised infrastructure, the commercial bits constitute a rent-seeking oligopoly.

So it would be better to say the Banks are renting us public transport vehicles, whilst making record profits from it and paying little in the way of maintenance costs. The lengths I have to go to to try and make your car metaphor fit illustrates how naive it is.

FA 12 May 2008 at 19:53

taghioff.info

"Banking is a new form of aristocracy, a new rent-seeking class. " Jesus Christ.

"Tell that to a coal miner." This is pathetic class based politics at its worst.

"The effort that goes into lending out money fractionally bears almost no relation to the revenues generated. " So we're rewarding people based on the physical exertion they engage in now are we?

That website you link to is pathetic and takes Begg's comment out of context. You need to read a good book rather than rely on internet sites.

Tax is something I pay to the government. Not a private asset used for private gain (the opposite of a public asset used for common good).

Apart from the fact that terms like rentier have little meaning in relation to the modern economy apart from to half-baked Marxists, it isn't "rent-seeking" - its service provision.

The reasons the rewards are so lucrative is, on a company wide level, because the companies involved are good at what they do. The reason the rewards for individual investment bankers (most bank emplyees are not paid fortunes) are so high is because very few people are both willing and have the skill-set to do the job - its called demand and supply.

Financial regulators DO NOT see banks as predatorial rent-seekers. What is your evidence for this assertion? The recent rulings on overdrafts have very little to so with City bonuses but in any case you don't appear to understand the case law by the suggestion you make in respec of "rent-seeking".

You appear to suggest nationalisation of the banking sector - bad move if you look at any country with a nationalised banking sector - then it really does fit the picture you suggest of a predatory oligopoly, usually one that provides a bad service. Banks inthe UK provide a pretty good service - I remember what they were like in the 80s and getting anything done was a nightmare back then.

Your oligoply comment illustrates your lack of understanding of the banking sector - compared to other industries e.g. most of retail, banking in most of the developed world is highly competitive, with the leading players having quite low market shares.

Money is produced and maintained by the government - the banks provide financial services, not "money" - you appear to confuse the two. Services for which they charge - most services cost something. You also get lots of services they don't charge for - put some money in an account and don't get overdrawn and you won't pay a thing - you'll even be paid interest - hey presto, free service (depositing), no charge.

In Britain, the companies that provide these services have been pretty good at it - post-credit crunch they're likely to remain so - HSBC has record profits despite sub-prime write-downs. The vast majority of employees of banks are ordinary people on decent but not huge salaries - only a small proportion work in the City and of those most are just well-paid, a very small number get huge bonuses. In any case jobs and wealth-creation are not bad things....

Private companies making a profit is not in itself a bad thing - you'd have to misunderstand economics to the extent that you think its a zero sum game to think that because bank's made a profit they must have stolen it (or to use your words, "taxed" it) from us.

I honestly shudder when I see the abject ignorance in your post. It doesn't warrant any response other than laughter - or perhaps tears, since you and your ilk seem hell-bent on forcing the government down economically damaging and electorally unviable policies all because you're narked off that some people in London earn bonuses.

Carl Jones
12 May 2008 at 20:08

FA, as I said earlier; burn down their "temples" (the stone cutters) and off with their heads. Its the only fear they understand.

PacificGatePost
13 May 2008 at 06:21

Recession and inflation are back. Ignore doom and gloom but face the reality. The economy is or should be job ONE of the next President... the first day in office.

The U.S. economy is being stressed and inflation is back. The challenge for the Next President is to make the economy the foremost priority.

http://pacificgatepost.blogspot.com/2008/05/44th-president-y...

It is being all but ignored by the current administration and Congress.

Carl Jones
13 May 2008 at 19:39

PacificGatePost; you are in fantasy land if you think a new president can some sort of difference.

rodmc
25 May 2008 at 23:35

FA, I agree with some of your comments and indeed the article is gross simplification of many aspects, in particular NR. NR could easily have survived and not been nationalised if the press and indeed opposition had not made the situation worse. They would no doubt have required some funding, but then again nearly all major have banks have in recent weeks and we have not seen a run on RBS which was recently described as one of the most undercapitalised banks in Europe. Had the twin nonsense of the British Media and political opportunism not kicked in, combined with the British inability to think for oneself then the NR debacle would have "cost" the tax payer much less. However I imagine that by the time NR has paid back its debts it will actually have made the treasury a tidy sum. And no I am not Mr Applegarth or even a shareholder in NR, so have not vested interest in saying these things.

As for the actual markets themselves, as someone pointed out the problem stems from failures in risk assessment. Even from my basic university knowledge of economics and market pricing the ability to accurately asses risk is key in asset pricing, and indeed financial planning. In the case of the assets themselves, there was clearly a massive failure to do this. The approach was no doubt fed by the now emerging conflicts of interest i.e. those creating the bonds were paying to have them assessed. The bonus culture probably plays a small part here as well as no one in their right mind would chose to undervalue any assets they are selling as it would no doubt lead to a drop in their own bonus. Both of these approaches no doubt led to price inflation and the markets behaving irrationally (as the information was incorrect). This it would seem makes a small mockery that markets are always efficient and thus correct - although I will leave the discussion on economic theory till another day.

With respect to NR and other institutions it is clear that their own internal risk management procedures were also unsatisfactory, in the case of NR they clearly did not have a plan which would have taken into account the collapse in the wholesale market - or indeed a significant drop in ability to raise funds that way. Again this reflects badly on the management as even school boy business classes teach you to have a diverse enough plan to withstand major changes, especially if (as in the case of NR) there are other sources of funds e.g. retail deposits. I am also surprised that the city investors who seemed to love NR so much did not notice several years ago the inherent risk in the NR business model.

The above perhaps makes me sound like an apologist for the banks. I do favour tougher regulation particularly with respect to how they fund themselves along with banning the practice of using off-balance sheet vehicles to hide liabilities. This practice flies in the face of normal business practice, where accounts are meant to state all potential liabilities that a concern may have - however for some reason the banks seem to have got out of this rule. This must be remedied ASAP, as I gather it was the sudden explosion of potential liabilities batches of liabilities which was a major cause for NR. Had these potential liabilities been more clearly stated years earlier I doubt they would have been allowed to build a model on which around 75% of their funding was derived from wholesale markets and other non-deposit based instruments. Finally, there also has to be much stricter rules on receiving government help, where this is the case all directors should lose bonuses and a chunk of the bank should fall to the state along with the potential forfeiture of previous bonuses if it can be found the directors were negligent. In Sweden for example they were much harder on bank directors and shareholders than we have so far been.

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Everything you want to know about the bank crisis

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How could the banks be so stupid?

Didn't the regulators see this coming?

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Everything you want to know about the bank crisis

How bad is it?

Do the banks know what they are doing?

How could the banks be so stupid?

Didn't the regulators see this coming?

Does this affect my savings?

Is anywhere safe?

What else can individuals do?

What is the government doing?

Why is the government bailing out the banks?

If we finance the banks, can't we tell them what to do?

What about the US Federal Reserve?

What does it mean for the global economy?

What is to be done?

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