It’s been two and a half years since the financial crisis reached its zenith. Below is a copy of my first foray into blogging on the subject, on Paul Mason’s post “Dawn breaks on a socialised banking system”:
08:25am on 13 Oct 2008
Just a quick recap before deciding whether it is wise to invest in the banks……
So, a widespread collapsing of confidence has occurred among many national and international banks. The lack of confidence stems from the fact that there are concerns and / or confusion over the quality of assets bought and sold on the wholesale money markets. Aside from some domestic sources of capital to substantiate these assets, it does somewhat appear that a major source of inflows (i.e. debt) has been coming from:
1. Those countries and institutions willing to lend to us, so that we can buy their goods.
2. Our ‘efforts’ in generating money from money (leveraging seemingly compounded on leveraging)
At the crux of both of these was probably a self-reinforcing speculation: one that us, our Government and our supplier countries were happy to perpetuate. Let’s admit that almost all of us were deluded into thinking that the growth, stability and prosperity of the last 20-30 years was predicated on our shrewd management of (and fundamental belief in) the following macroeconomic principles:
1. get someone else to make it for you if it costs them less to do so (the Ricardo theory of comparative advantage)
2. borrowing money up to your eyeballs is a good thing
The “lack of confidence” in the wholesale money markets is surely an unwinding of these two interlinked issues. Not only could there be panic by our creditors that we may struggle to pay them back (for monies already borrowed), but worse still they are also frightened that we may not buy as much next time round!
In one form or other we have all either speculated on our economy ourselves (e.g. pushing house prices up and taking out huge loans), or endorsed the speculation of others on our behalf (e.g. private pensions). The high growth in house prices and stock market shares is about to collapse. Indeed then we could be witnessing a major collapse of that speculation.
If it looks like a bubble, and bursts like a bubble, then IT IS a bubble.
Is it wise to borrow even more money to try and prop up a speculative bubble? Isn’t that the same as throwing good money at bad? To restore confidence in the banking system is an attempt to restore confidence in the above predicates. Yet they are the conditions which created the mess we are now in. It’s clear then that the economic world view for the last few decades is at best a delusion, and at worst a lie!
I don’t think that my assessment has changed much in 30 months, I’ve just been busy wading through various sources on finance, economics, history and futurology to help enrich my understanding.
One thing that is clear, is that it’s only a matter of time now for another escalation of the crisis, as very little has changed of the fundamental underpinnings.
The global economy can’t keep growing indefinitely, and so the battle ground is shaping up for an epic fight over the remaining limited resources of the world.
It’s going to be a bumpy ride.
We live in era of “Debt and delusion”. The debt hangs around our heads, whether through the direct and conscious actions we made ourselves (such as credit card debt or a mortgage), or through being foisted upon us by our Gvts (see post “Crime and Collective Punishment”). The delusion is that this situation is just a temporary blip for which the good ship of global economic enterprise will right itself soon enough, i.e. that we can somehow grow our way out of the crisis.
If you have not heard of Peter Warburton’s book “Debt and Delusion” I strongly urge you to obtain a copy. Written in 1999 it contains such a prescient overview of modern finance that it still makes for a gripping read today. Not overly technical, but sufficiently powerful, subversive and ultimately critical of the complete lack of banking and credit creation supervision undertaken in recent decades.
The analysis contained within it, along with some choice quotes, were the back bone of the article “Securitise This” and my ICB submission.
As the book is out of print, I aim to provide a summary in the coming weeks. In the meantime here is a notable quote from one of the regular economic forecasts that Peter issues:
“I believe: that the economic progress and financial stability of the past 10 years are largely illusory by-products of reckless indebtedness and the pervasive influence of complex and illiquid financial instruments; that the drastic shift of focus towards investment banking and debt securities is eminently reversible; and that the credit and derivatives infrastructure of recent years will be partly dismantled as a result of the prevailing crisis. My judgement is that the policy framework installed in 1997 will not stand the test of time”
History is slowly proving Peter to be correct. Only the media and policitians appear to bury these truths. To echo his final words on the subject:
“BOTTOM LINE: Please can we have the return of prudential banking.“
Over on David Malone’s Debt Generation blog, there is another guest post of mine, based on a blog here from a few weeks back:
The blog highlights how it takes two to tango in the lending / borrowing relationship. But if the borrowing was excessive, why should only the borrower take the responsibility?
Unlike corporate and personal bankruptcy (where the lending party gets partially burned for its failure of diligence), austerity & inflation merely ensure the protection of debt contracts by any means necessary. Not only that, but innocent bystanders are taking the hit, not the guilty.
Even Mervyn King agrees with me on this:
It is 21st Century asymmetric warfare. Otherwise known as: Crime and Collective Punishment.
The last month or so has seen some overt posturing over the likely outcomes of the Independent Commission on Banking’s report:
“In the red corner, we have the entire ICB, Bank of England Chairman Mervyn King, BoE Deputy Chairman Paul Tucker, BoE Director Andrew Haldane, and FSA Chairman Adair Turner all calling for radical moves in bank regulation.
In the blue corner, we have George Osborne and some banks.”
Courtesy of an excellent article on the Naked Capitalism website. The article reports how the ICB is leaning towards the separation of retail & Investment banking (as in a recent speech by the ICB chairman Sir John Vickers), and that they are not alone in this. They have also sought counsel from Paul Volker, former US Fed Chairman and no fan of modern financial gerrymandering. The red corner has quite a formidable intellectual pedigree.
What is quite surprising is that the UK Gvt in trying to negotiate bonus restraint from the banks (Project Merlin), appeared to be asking concessions from the ICB. The blue corner bites back, then. Not through intellectual argument, but political bullying. Confronted with this, apparently the whole ICB panel threatened to resign! Let’s hope they can hold their nerve for a bit longer:
“The ICB reports in September, so unless the battle really flares up and goes public before then, there will be plenty more ferrets-in-a-sack action to come.”
Indeed, an interim report is due in April, and this will be a chance to clearly see which way the ICB is leaning, and also to observe whether underhand pressure points are being applied from the blue corner again.
Without an honest and open intellectual debate, we cannot profess to be a free and open democracy, ruled through technical & intellectual competence. But instead a cowering populace, once again brow-beaten by bluster and thinly veiled threats from the banks.
The coming year will be a true test of our nation’s integrity and honesty. I hope it ends well.
Simon Johnson has joined in on this subject:
“Just when it seemed that the debate over banking was winding down …. two of the biggest name policy heavyweights have entered the arena.
In Mr. (Mervyn) King’s view, casino-type banking caused the crisis of 2007-08.
According to Mr. de Larosière, new regulations more broadly and the capital requirements of Basel III specifically will have negative effects on the European economy.
………..on the merits of the argument, King wins hands down”