I’ve just recently stumbled across this blog, offering a lucid and sobering overview of our economic and financial situation:
Sad to see such a cogent communicator hand in the towel. On a brighter note, I’ve just watched a recent lecture by David Malone, author of Debt Generation:
Hopefully, David will get chance to portray his views on finance and the current crisis on the BBC at some point, as it is leaps and bounds more cogent than the standard fayre on our TV.
I was intrigued by Stephanie Flanders recent post on the UK Inflation figures.
The piece doesn’t really seem to be addressing the bigger picture on the recent dynamic in the UK economy. For at least a year, if not two, we have had the following situation occuring in UK household incomes & outgoings in price change terms:
– Interest rates on savings at 0.5%
– Wage increases at ~1%
– Headline inflation at ~3%
– Inflation on food, fuels and other essentials over 5%
– Credit card & other unsecured debt at 10-25%
So we have costs going up, but incomes stagnant. This looks a lot like the symptoms of stagflation, yet very few mainstream media outlets dare use this term.
My apologies to Peter Warburton for contorting the title of his prescient article from 2001:
“What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies.”
As a dutiful UK taxpayer, I have ignored the mainstream media tittle-tattle and spent the last year or two doing due diligence on the banking sector.
The recent obsession of stoking competition by policy makers has been at the heart of the debate, but also at the heart of the confusion.
Like the UK, Australia is also undertaking formal (& informal) investigations in to the nature of banking competition. Attached is a recent submission I’ve made to the Son of Wallis Challenge, entitled Securitise This!
The paper aims to address the merits of securitisation, and asserts that this has been more a contributor to instability & financial speculation.
Instead of the panacea of comsumer choice, freedom and lowered costs in banking, we effectively have zombie banks propped up by Gvt guarantees. Securitisation creates the appearance of risk taming (i.e. low interest rates) but is in fact risk transfer to an unsuspecting (irrational or ignorant) counterparty (hmmm.. taxpayers??). It is tantamount to state sponsored fraud.
The article is a much more condensed version of my recent ICB submission, dissecting the very arguments put forward by de-regulators that liberalisation is a good thing and has created lasting prosperity.
This could not be further from the truth.
Now, when one economist named Micheal Hudson, starts to warn us of impending woes, we should be concerned.
But when there are two Micheal Hudsons handing out warnings, then we really ought to sit up and listen!
After initially falling for the confusion myself, I was delighted to stumble across this recent piece where the clarification is laid to rest as the two Hudsons exchange views, putting across the rationale for our current economic woes in plain simple language:
Michael W. Hudson, reporter, and author of The Monster (release date today 6/12/10):
“Getting people to load up on debt required not only crooked tactics, but also changing their attitudes about debt. First, the finance industry stopped calling it debt. Debt meant you were in the hole. You owed. Calling it credit removed the stigma of going into deficit and instead replaced it with a sense that you were being conferred an admirable distinction.”
Michael Hudson, (veteran) economist and author of SuperImperialism:
“Your articles showed how the mortgage brokers and other pilot fish for Wall Street increased debt pyramiding by outright fraud. These sleight-of-hand lending practices at the local level were enabled by junk economics at the highest level.
This wealth creation really was debt creation. That’s what was bidding up real estate prices — just as was the case with leveraged buyouts bidding up stock prices during the takeover wave. And a rising proportion of this debt was ’empty’ debt, without any corresponding real value.”
According to Wikipedia: fraud is an intentional deception made for personal gain or to damage another individual. Fraud is a crime, and also a civil law violation.
This recent submission to the Independent Commission on Banking makes some quite bold claims about the potential for fraud to occur, such that some recent feedback I received asked me to explain why I thought that Securitisation of loans was fraudulent.
I don’t necessarily argue that it is in itself fraudulent, merely that the likelihood for fraud is substantially increased. The argument goes like this:
If securitisation of loans creates a false impression of credit quality, such that the handling parties (e.g. the originator of the loan) mislead investors in the level of associated risk (which clearly seems to have happened with subprime mortgages), then there is ample suspicion for fraud. The pre-conditions are ripe, and the fingerprints of fraud are all over the subprime crisis.
Here’s William K Black, the former regulator who put more than 1,000 bankers in jail in the US Savings & Loan crisis (yes, that’s right, the biggest white collar crime that no-one’s ever heard of):
“Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.”
Unfortunately, it seems that we can be blind to fraudulent conduct, if the means are subtle and they are undertaken by parties whom we (and say, our Gvt) already have great trust & respect for.
Until we can see through the veneer, and judge companies and people purely by their actions and the consequences, we may be unwittingly blind to the banking sector fraud before our eyes.