In the early days of satellite TV in the UK there was a battle going on between Sky and British Satellite Broadcasting (BSB). There probably wasn’t much room for two competitors in such a narrow market, so a great battle ensued in the late 1980s. With lower operating costs Sky was able to cut its prices hard to gain an upper edge. Both companies bled profits on a frightening scale. Ultimately BSB surrendered. Sky had bled itself hard, but the pain paid off. Thus began the emergence of the beggar thyself strategy.
Listening to the following Michael Hudson interview, one gets a clear sense of how the current international economic warfare is playing out in an eerily similar manner:
He describes how the USA is prepared to squeeze US standards of living to protect the dollar and the US economy. A very clear example of beggar thyself. Those countries that can reduce the living standards of its citizens without provoking rebellion among the hoi polloi are the ones that will survive this 21st century economic warfare.
If the Kleptocracy is blatant, and living standards are low and declining then for sure revolt is likely (e.g. Egypt, Tunisia & Libya). Other Middle East countries may be able to protect themselves as much by reasonable standards of living (say an average income of over $10-12k) as they can through Autocratic regimes. Ireland is a case in point in that people are broadly aware of the Kleptocracy, but fortunately they still have a reasonably comfortable lifestyle, so the friction is moderated.
In the UK we still have (the illusion of) a comfortable lifestyle and very little awareness of the fraud. As in the US (and Japan beforehand), we are bending over the barrel and taking the economic shafting (Austerity & Inflation) without much of a whimper.
Perhaps by showing that we can bleed, and bleed heavily but not collapse, we can in fact hang on long enough to break our opponents. Unrest in China is probably more likely than than in the UK or the US, as the population may not yet have graduated in to the category of docile Kleptocracy tolerators.
In a bizarre and masochistic sort of way, this could indeed be our saviour.
But at what cost?
In 2009 Reinhart & Rogoff wrote a mighty tome of a book called “This time is different” based on 800 years of data on financial crises covering more than 90 countries. It was a thorough and objective assessment of sovereign and banking crises, especially detailed on the last 200 years.
The book puts forward a causal model showing how regulatory conditions (of private credit creation) relate to the occurrence of banking crises and potential knock-on effects . Adapting their model (p. 271) we get a succession of crisis phases:
1) Financial liberalisation
2) Asset speculation
3) Banking crisis
4) Currency crash
5) Rising inflation
6) Sovereign Default
7) High inflation / currency collapse
For argument’s sake, let’s call this the Reinoff scale. Here’s an approximation of the course of events for the UK economy:
1) Financial liberalisation: 1997-2000
2) Asset speculation: 1999-2008
3) Banking crisis: 2007/8
4) Currency crash: 2008/9
5) Rising inflation: 2010-2011
6) Sovereign Default: 2012?
7) High inflation / currency collapse: 2013?
I’d place our current score on the Reinoff scale at about 5.1, Inflation is picking up momentum, and the Gvt is certainly making inroads to covertly “default” on various obligations (c.f. public sector pensions).
For chart lovers amongst you I’ll put this in to a time-line graph and publish shortly. I’ll also aim to track the UK, and maybe a few other countries too on an ongoing basis.
If there has been some very bad lending practices going on, who should bare the brunt of this? The borrower alone, the lender alone, or a shared responsibility?
This is THE public debate that should be taking place, but is dodged or quashed at every opportunity.
I saw a good lecture at the LSE by George Magnus on Wednesday. He had briefly mentioned about debt re-negotiation and destruction at the start of his talk, but then never really discussed it further. I raised this with him during the Q&A, that bank bailouts and austerity measures are not permitting debt destruction, in fact quite the opposite, protecting the lending class at the expense of the public at large.
Mr Magnus guardedly admitted that there was some justifcation for “an Austrian prescription”, and that (with hindsight!) debt re-negotiation may have been a better solution than bailouts.
But we need foresight, not apologetic hindsight. As I’ve asked before, are we really all in this together?
Austerity assures that the lender bears no responsibilty whatsoever for their faulty judgement in lending out in the first place. It is not debt destruction but instead debt maintenance by any means necessary. I didn’t get myself stupidly in to debt, so why should I, or students, or public sector workers pay the price of private debts gone bad? It is taxation without representation.
This situation is compounded by the evidence that the banks have potentially been mis-representing the cost of borrowing, and then when it goes wrong to shift the burden on to the tax payer *.
It is nothing less than Collective Punishment deliberately engineered in, or as Michael Hudson calls it: “a post-modern neoserfdom that threatens to return Europe to its pre-modern state.”
Update 16/2/11: Mervyn King asserts that tolerating higher inflation is preferable to raising interest rates. This is further evidence of Collective Punishment, in that savers and low / middle income wage earners are being punished regardless of whether they took out excessive loans.
* This is the “crime” angle referenced in the title – see recent release of the film “Inside Job”, and this excellent inside view from a former Fraud Squad detective on how oversight of fraud has been neutered:
The Independent Commission on Banking has recently published the 150 submissions received from academics, banking institutions and members of the general public. One key point in their summary stands out:
“There was considerable interest, both positive and negative, in the question of splitting retail and investment banks…..It was also argued by some that a split would not increase financial stability.”
Not increase financial stability? I’m curious to know both who has declared this, and on what basis they are arguing that stability would not be increased by splitting the banks. Regulars to this site will be aware of the following key points argued in my ICB submission that the conjoining of retail & investment banks unleashed the Securitisation genie, creating the following key concerns:
1) Securitisation awakens deep rooted concerns about the exploitation of asymmetric information, namely Adverse Selection and Moral Hazard
2) The expectation of market operations to effectively regulate credit risk is shown to be unfounded, instead resulting in ill-conceived and excessive lending practices
3) The recent growth in debt levels therefore may be masking a more fundamental issue of declining debt quality
4) Risk transfer practices mean that poor credit risk judgements are increasingly likely to be borne by unsuspecting counter-parties such as central banks enjoying Government support
It is not so much about whether institutions are primarily Retail or Investment banks, this distinction is currently irrelevant, as the issue is actually about the way that they operate. My ICB submission chose to analyse banking through a functional perspective (i.e. what banks actually do), not their notional institutional form (i.e. what they say they are).To defend the current situation means that the banks have to contest each and every one of these clear pieces of evidence of major flaws of Securitisation:
– Academic theory suggesting that Securitisation would lead to Moral Hazard, Adverse Selection and poor loan supervision
– The implementation of Glass Steagal regulations post the 1930s crash as a direct consequence of unstable financial structures
– The fact that banks who suffered most during the 2007/8 crisis were those most exposed to Securitised loans (Nothern Rock, Lehman Bros, Bear Stearns, Countrywide etc.), irrespective of which side of the Retail / Investment fence they sat
– Clear academic evidence (Berndt & Gupta 2008) demonstrating that loans handled through the “originate-to-distribute” (securitization) model underperformed compared with those under the traditional “originate-to-hold” process
The case against Securitisation is laid out clearly and one might say convincingly. For the banks to deny that any evidence against the model exists is at best misleading, and at worst an outright lie. Given the seriousness of the allegations laid out in the article, the burden of proof for challenging these points must rest with the banks. The case for the prosecution rests. We have yet to see any defense counsel re-buff these points, instead chaff and obfuscation reigns.
To continue to ignore these issues is of grave national concern. If we have unilateral responsibility to underwrite the banks liabilities, then we must exercise unilateral discretion to monitor and regulate them. Anything other than this leaves us completely exposed to assymetric risk and rewards – Privatised profits and socialised losses.
The Reuters take on the ICB publication shows the outright bias and deception of the media on this subject:
“The combination of retail and wholesale banking never materially contributed to the crisis in the first place; making such an issue out of it was doing nothing more than pandering to populist opposition to an exaggerated notion of investment banking as casino banking.”
So we have a so-called financial journalist writing a prominent report which is factually incorrect, biased, and resorting to patronising and lame rhetoric rather than cogent argument. Oh dear. And the FT article wasn’t much better either.
I’ve just had a guest post published on David Malone’s excellent blog site (Golem XIV – Debt Generation) called Sell freedom, buy control.
This was inspired by a quote from Neil Postman’s “Amusing ourselves to death” in which he makes the case that the modern world is closer to Huxley’s dystopia than Orwell’s.
In the article, I make the case that we have in fact adopted a most pernicious combination of idealogies:
“far from a free culture, we are in fact in the grip of a highly controlling one; it’s just that we don’t recognise its form.
The late 20th century would best be characterised as the overt promotion of individual freedom, mobility and opportunity, yet the covert exertion of behaviourist control methods.
We are seeing the omnipresent spectre of debt, a modern Feudalism enacted through state sponsored loan sharking.
The gap between rhetoric and reality is just getting wider and wider. It is in effect little more than ‘sell freedom, buy control’.
Orwell foresaw an Autocracy, whereas Huxley a Technocracy. However, both were Dystopian visions of a future which were intrinsically neither two-faced nor intentionally destructive. Instead the greatest risk facing us in the 21st century is the duplicitous trap unfolding every day; the worrying trend of an emboldened Kleptocracy.”
The current uber strategy for protecting the status quo in this crisis is to prevent debts from being reneged on.
Only Iceland has truly revolted, throwing out the EU/IMF, and it’s strategy has worked:
“Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks……
Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future. With the economy projected to grow 3 percent this year, Iceland’s decision to let the banks fail is looking smart – and may prove to be a model for others.”
I can’t see a way to resolve the “privatised profits and socialised losses” asymmetry that the UK, Ireland and the US etc are still mired in, without first restoring “privatised losses”. The longer the status quo remains, the longer the imbalance is in place.
To (partially) borrow from Michael Hudson: “Debts that can’t be paid, shouldn’t be paid”.
Without making debt holders “share the pain”, we’re not quite “all in this together” are we?