Home > Economics, Finance and money > The break of dawn

The break of dawn

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”:

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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!

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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.

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