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Eighty years after Wall Street crashed, what did we learn?

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Paul Mason | 19:26 UK time, Friday, 23 October 2009

The New York Stock Exchange floor is quiet. Little green arrows, pointing upwards, skim along the LED display above the heads of the traders. This space, the high roof obscured by twisting cable ducts, has become so emblematic of recent boom-and-bust events that the very memory of 1929 is obscured. There's a flag to commemorate American POWs still missing from the Vietnam War, a plaque to the fallen of World War Two - but nothing to say: here, once, the folly of a few ruined the lives of millions, shaping every other event that came after.

But modern financial markets have a weird relationship with the past. Every prediction mainstream economists make is based on "data points" from the past; yet for the trader there is no past - only the future concerns them. That's why they've been able to shrug off the cataclysm of September 2008 and get on with making money. Right now, courtesy of the taxpayer and the central bank, they are raking it in.

In fact there is near-euphoria. The Dow Jones Industrial Average - which lost more than half its value in the twelve months to March 2009 has now clawed back half its losses. Goldman Sachs announced a record profit. Bonuses are bigger than ever. Foreign exchange dealers are opening offices and recruiting new staff just as fast as the computer guys can install the terminals. Meanwhile ordinary Americans go on losing their jobs: on one estimate there is 16% unemployment - on the most conservative estimate it stands at one in ten.

So what's happened? How did we avoid a 1929-style collapse into Depression? Have we escaped the peril permanently - and if not, what are the dangers?

When you talk to economists there is one historical parallel that haunts the conversation: in 1929 the Dow lost 40% of its value in the first three months - but by late 1930 it had clawed back half the losses. The sheer scale of intervention now, as compared to non-intervention by the authorities back then, means that no-one expects events to play out exactly. But there are still deep concerns.

To understand why, you can look at four key events of the Depression of the 1930s and compare them to today.

1. The stock market crash itself. In 1929 there'd been an unsustainable bubble. Share prices soared despite a falling money supply, despite a downturn in farm prices. This convinced sensible people that the economy had finally escaped the cycle of boom and bust. Economist Irving Fisher famously said, days before the crash that stock prices had "reached what looks like a permanently high plateau." From October 24 - known as Black Thursday - the real slide began and by mid-November the Dow was 40% off its peak. This time around, the Dow - mirroring the average losses of global stock markets - lost 50%. Now it is back up but buoyed by what?

One measure investors use to work out if stocks are overvalued is the price-to-earnings ratio. Normally it moves within a range of 15-30. Right now, based on Q3 profits of American companies, it stands at 141. That, to me, is an danger alarm.

According to people in the markets, what is driving the stock market resurgence is the slew of cheap money pumped into the economy, both in the USA and UK, in the form of quantitative easing (QE). There is little sign of retail investors putting their money back in. And while there are some signs of an upturn in profitability in the real economy, the stock market recovery looks to almost everybody from the outside to be over-blown - based on cheap money and optimism. So, paradoxically, on the eve of the 80th anniversary of the Wall Street Crash - and as we remember the cataclysmic events of a year ago: one of the most imminent dangers is a stock market correction.

However, what has clearly NOT happened this time is the rapid slide from crash to contraction. And to understand why not you have to look at the central event: the banking crisis.

2. The Banking Crisis: On a gritty street-corner in the Bronx, overshadowed by the rusty elevated railway line, lies a one-storey sandstone building that is now a Laundromat. On the walls you can just make out, beneath 80 years of paint-jobs, the words "Bank of the United States, Bronx Branch".

This is where, on 10 December 1930, a crowd of 20,000 people gathered after a rumour the bank was bust. That night, the great and good of Wall Street held a meeting to try and force through a merger of the bank with three healthy ones. But when they looked at the books most of the bank's collateral was - guess what? - bad mortgages. By morning the bank had failed. Those who turned up to withdraw their savings found they had none. Unlike today there was no deposit insurance. Within a year 300 other banks had failed; by 1933 no fewer than 10,000 banks had gone under - 40% of the total.

In the 1930s it was the bank crisis that turned recession into Depression. The Wall Street Crash had wiped out the savings of millions; now the bank collapse would wipe out tens of millions. Even those who did not lose money directly began to hoard it, take it out of the system. The so called "money multiplier" effect of banking - whereby my $10 deposit can become the surety for maybe $30 of loans - was curtailed.

The domino effect is now well known and legendary: people stopped spending, prices fell. Farm prices halved and consumer prices fell by about 25%. Wages fell too, by an average of 20%. This is deflation - not always a catastrophe but if you have a population deeply in debt, and lots of bad debts, it is a real catastrophe.

The reasons were spelled out by Irving Fisher, who recovered his poise and reputation by coming up with the "debt-deflation" theory: if the value of your debts stays the same, but your income falls, you are forced to sell off your property at knock-down prices to keep repaying your debt, which makes prices fall even further. This spiral forced millions of people into penury in the early 1930s and turned the crash into the crisis that only a decisive, counter-crisis response could have prevented from turning into a Depression. But instead of fighting the crisis, the US authorities made it worse.

3. The Great Contraction. Between 1931 and 32 output collapsed, prices collapsed, the labour market collapsed. One in four people were out of work. None of the traditional remedies had any effect. On the first day of the crash, Wall Street bankers had tried to bid the market up by spending their own money, as they'd done in 1907. It didn't work. Now the policymakers clung to what they though were the great safety mechanisms of economic policy: balanced budgets and money backed by Gold. Incidentally, we are not just talking about conservative politicians. Even Communists in the early 1930s supported balancing the books and defending the value of the currency. Macro-economics, as a discipline, barely existed and was based on a series of intuitions, some of which turned out to be wrong.

So President Herbert Hoover, who did try and ameliorate the crisis, relied on the private sector to solve the problem. That failed. His Treasury secretary, septugenarian Andrew Mellon, thought the crisis was a great opportunity. He urged:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. "

Finally, the Federal Reserve - to stick by the rules demanded by the international Gold Standard - took measures that actually made money harder to come by. By the bottom of the crisis, in the early 1930s, the money supply had fallen by a third.

There is a big debate in economics about whether the Great Depression was inevitable, caused by objective flaws in capitalism, or whether it was all down to human error. The human error school has been aligned with a version of free-market economics built upon the monetarist theories of Milton Friedman.

If there is one reason we have not repeated the 1929-32 scenario it is because, at the time of the collapse, the man in charge of the Federal Reserve was the key proponent of the human error theory. Federal Reserve chairman Ben Bernanke had long held that the modern financial system had reduced risk. But should it ever collapse, his research told him the financial mechanisms would accelerate the crisis. You would have to throw money at the problem, said the theory. And that is what - with many hesitations, mis-steps - he did.

Instead of balancing the books President Obama has run up a 1.6 trillion dollar national debt and allocated 600bn for a fiscal stimulus; meanwhile Bernanke's Fed has printed $1.2 trillion. And the US taxpayer has recapitalised the banking system with $100s of billions worth of guarantees.

But it's left us with a moral paradox and a very sticky situation. The moral paradox is: freemarket capitalism has been bailed out by the state. What American politicians railed against in other countries - state intervention to prop up ailing firms - has become a way of life.

One year on from the September-October 08 crisis my observation is that this has had basically a tactical drag effect on economic decision making: from the Tarp to Quantitative Easing policymakers have always tried a semi-market solution first and then, reluctantly, gone the whole hog for a state-backed solution.

The sticky situation is this: the stimulus measures in America - above all quantitative easing - have benefited mainly the companies and the people that caused the crash. Wall Street is booming, bankers' bonuses have returned. Sure, some people and some banks got wiped out, but the hiring spree here in lower Manhattan means lots of people are effectively "wiping the slate clean". Meanwhile, for ordinary Americans, life is still getting worse.

There are three layers of danger ahead domestically, as put to me by eminent economist Mark Gertler, a long-time collaborator of Ben Bernanke and Professor of Economics at NYU.

First, there is still concern about some banks, particularly those exposed to commercial property. One has to assume the authorities have such banks on watch and will go at them like a Bondi-beach lifesaver goes after a floundering supermodel in the surf at the first opportunity. I.e enthusiastically and with great overkill.

Second, the danger that regulatory reform of the banks falters. The bankers are spending millions of dollars lobbying against the most crucial of the re-regulation measures. As I keep saying, this is macro-prudential - ie systemic - regulation. While more radical commentators think, like Mervyn King, banks too big to be bailed out should be broken up, what the US regulators favour is a sliding scale of capital requirements. So if you are a bank too big to fail you have to hold so much capital that you are penalised for the implicit danger you pose to the taxpayer. The problem is, capital requirements have become a universal panacea: pay big bonuses, you have to hold more capital; adopt risky strategies ditto; become too big, ditto; the economy booms and there's a bubble, ditto, ditto, ditto.

After a certain point it becomes clear that heavy reliance on - theoretical so far - capital requirements is no substitute for actual regulatory intervention. And that means passing rules that allow the state to instruct banks to break up, and which above all pin down specific banking liabilities to specific nation states.

Finally, says the prof, there is a third danger. This is how he puts it: "Class warfare". The whole purpose of bailing out the banks was to save the economy, not the bankers. So if we don't reform the banks, and they simply run away with our money again, we will have failed. Those two words, "class warfare", had a spine-tingling impact here in America. Because the do not mean an American Arthur Scargill leading mass demonstrations of miners from West Virginia. They mean social breakdown and the breakdown of the fundamental American myth that "everyone can make it".

This is the great paradox of the year we've been through. The economy was saved - at massive cost; but we seem to be going through a big ideological change despite that. Hedge fund economist Max Fraad-Wolf put it to me this way:

"There's a belief that some of the fundamentals no longer apply: I will not be richer than my parents; those who obey the rules always lose out; there is no place in America for me."

So what you've got, basically is an economy on life support: 1.2 trillion from quantitative easing and about 700bn of fiscal stimulus. A banking system with a free ride back to profitability. And a stock market that looks based on over-optimism.

And then, on top of that, you've got the international situation.

4. Global trade collapses, and then the global currency system. In 1930 America passed the Smoot Hawley Act, raising the tariffs on selected imports. Other states retaliated and by 1933 US trade was 33% of its pre-crash value. By then the global economy was coming apart.

Smoot Hawley is often cited as a bad thing. Protectionism bad, we've learned from the 1930s. But actually many economists think it hardly affected the US economy and if it did it helped counteract the crisis. Imports were only about 5% of GDP.

Far more important is what happened with the currency system. After World War One the major economies had struggled to re-institute the Gold Standard, pegging their currencies to gold. America above all revered gold.

But to remain within the system, the US Federal Reserve was forced to tighten monetary policy. Meanwhile, rival governments were forced, one by one, to come off Gold. When the 1929-31 Labour government fell, to be replaced by a coaliton that more or less immediately came off gold, one Labour minister respondent with the immortal remark: "We didn't know you could do that".

What are the parallels today? Well global trade collapsed faster than after 1929: on some measures it was off 40% in the first 3 months of the crisis. But now it has stabilised and begun to turn upwards. However this de-globalisation impact was not primarily the result of protectionism - there have been more than 100 protectionist measures, most famously Barack Obama's tariff on Chinese tyres. But the real problem was the collapse of globalised production lines, once credit was withdrawn from the system.

The second parallel is: there is no gold standard, no pegged currency system at all, except the most important one in the world: the informal dollar-RMB peg enforced by the Chinese government. This stands at the heart of the relationship between China and the west and represents, as Paul Krugman points out in today's New York Times, one massive "beggar thy neighbour" policy.

However there are smaller "beggar thy neighbour" policies beginning to emerge too. Many commentators here believe the Obama administration is revelling in a weak dollar. If so, the results speak for themselves. On the latest (August) figures, US imports are down 30% while exports are down only 15%. A weak dollar will allow America to export its way off the bottom of this crisis.

What the experience of the 1930s shows is that, given persistent economic hardships, electorates eventually vote out parties committed to orthodox economics, globalisation and balanced budgets and put in parties committed to national, rather than global, solutions to the crisis. We are not there yet, but the tendency is definitely on the rise rather than the wane. If I were to cite my biggest worry, it is that we begin to get overt national exit strategies.

In summary: if we compare the Wall Street Crash and its aftermath to Lehman and its aftermath, the crucial difference looks like policy. Policy this time was a terrified activism; monetary shock and awe, measured in trillions of dollars. But the results of this massive intervention are not very impressive in the West. The weak recovery - or non-recovery as in the UK's Q3 GDP figures out today - signifies that the exploision of September 2008 was probably bigger than the explosion of 1929.

Given that, all the huff and puff from politicians about how things are looking up has to be tempered with the question: where is the sustainable growth coming from if not driven by debt? Where are the jobs coming from to soak up 7 million jobless in America? Where are the investors coming from who will buy the hundreds of billions of dollars of bad debt the US government is hoding on behalf of the banks.

What you learn by studying economic history is that a crisis is never over until its over; and that the most obvious and orthodox and seemingly permanent economic facts and policies sometimes turn out to be the carcinogen, and that only much later does it become clear.

Watch Newsnight tonight, 2230 GMT, BBC 2, for an hour of reports and discussion on the anniversary of the Wall Street Crash. There'll be economics, but there will also be tapdancing.

Comments

  • Comment number 1.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 2.

    ...there have been more than 100 protectionist measures, most famously Barack Obama's tariff on Chinese tyres....

    the chinese currency should be the strongest in the world but they keep it pegged to the dollar by printing money. as the dollar falls so the chinese keep printing the dollar. which makes the chinese currency weaker than gbp.

    a way to remedy that aggressive imperialism that leaches jobs away from the those countries whose currencies more or less float is by putting taxes on chinese goods to the value where their currency should be. China's economy grew 8.9percent while the uk is contracting. that is a function of the currency manipulation.

    If the chinese [or anyone else] are trying to turn us into beggars should we just let them?


    one point to watch is that as uk and usa currency sinks their stocks are seen as cheap and this is helping fuel this 50percent rise [a bear market is a 20 percent drop so this is a stonking bull] in stocks. But when earnings look dire the link between currency and stocks could break and both could begin to go down together as everyone piles into what is real ie commodities. this will attract the speculators who will drive the price up till the ordinary persons 'pips squeak'.

    new labour are in the hands of the oligarchy and seek to protect their interests. They dismiss Kings idea merely because it would not have stopped northern rock. That is no reason to dismiss the policy it just means northern rock model of business [lending long term borrowing short term] needs a different remedy.

    But no it is in nu labours interest to perpetuate the darkness. The same darkness that thought 'light touch regulation was good' and the same darkness that led Tony Blair to warn off the FSA from regulating. Gordon false market fundamentalism is at the heart of this darkness and maybe someone should be sent up the river to terminate his [and other like him] command?

    do you think tonights NN will be on iplayer? Last night isn't.

  • Comment number 3.

    ...so the chinese keep printing the dollar. ..

    should read yuan

  • Comment number 4.

    Good essay/long blog Paul thanks for that.

    Found it disturbing listening to Brown's dismissal of Kings call for the banks to be broken up. Also found my self asking what will 'Dave' do on this most important issue ?

  • Comment number 5.

    it was not illegal for the banks to trash the uk for a generation. as it stands it is still not illegal.

    the greatest crime you can commit is to put a whole country in jeopardy. So now millions of ordinary people must pay for the actions of a few. and those few have the protection of the political class.

    the city is a net drain on the uk economy.

  • Comment number 6.

    #2 bookhimdano

    Great post...agree with every word!

  • Comment number 7.

    2~ Apocalypse Now ? or Dear Hunter ?

    Do you send the assassin up the river or just bet on who blows their head of first ?

  • Comment number 8.

    ...Goldman Sachs has put out a note on the GDP figures headed "Unbelievable. Literally", which points out the that the early estimates of GDP in the UK have a correlation of just 0.1 with the final data.....

    http://www.economicsuk.com/blog/001016.html

    what is going on at the ONS?

  • Comment number 9.

    7

    ha

    soon the deer hunter scene maybe the only way to make money in the uk.

  • Comment number 10.

    '...for ordinary Americans, life is still getting WORS.' Eh? 24/10/2009

  • Comment number 11.

    only now do we compare what happened in 29 with what has just happened, only some of us have been warning of this mayhem for ten years...only the left have consistently warned of this collapse, Brown was all 'carry on guys, fill yer boots, we don't need no regulation' same with Mandelson, same with Cameron, same with all of them except Vince Cable, the left have been proved right all along....

  • Comment number 12.

    There are 2 other dangerous things going on today, which loosen the nuts on the wheels of the economy.

    No. 1 is high frequency trading.
    Computerised intervention in the markets by the insiders is tickling up the numbers, creating an uncontrolled bubble. It may appear slow and steady, but it is inexorable -only as long as the market is rising.
    HST takes no account of the target company's fundamentals, (you mention illogical P/E ratios above) it treats the deal purely as an abstract insider bet (your computers know which way the market has moved a millisecond or so before the competition (who would be called the regular punters -the mugs), and are able to make a few decimal points of a penny -times millions- with each transaction.
    Remember however, you could make thousands of transactions per minute, raking a tiny slice ahead of each tiny improvement in the share prices.

    Now with HST on a rising market, everyone can fool themselves that they are making some money; but the model doesn't work in a falling market. As soon as the peak is past, -caused by someone losing their bottle- the train gets out of control. A tiny proportion of the HST traders can make a tiny margin on the downward slalom, as long as the graph stutters and bumps a little on the way down the plughole. Everyone else gets wiped out.
    There is no meaningful control over HST Trading. A disaster waiting to happen.

    No. 2 is the crass, selfish stupidity of those operating in the financial markets.
    You would have thought that they would have realised how lucky they are to be still in the game.
    You would have thought that they should have lain low for a few years and not drawn attention to themselves.
    You would have thought that they would have reduced their profit margins and gone 'boring'.

    Not a chance. They can't help themselves.
    Now whether they think the end is nigh, and they better help themselves to as much moolah as they can........... or whether they are just so pathologically greedy that they fail to see that they might become separated from the tribe (and get dumped)..... is difficult to tell.
    As someone once said 'the world has changed, nothing makes sense any more.' Logic, reason, ethics, analysis don't come into decision-making for now.

    We can't print money forever. We are about to fall off a cliff.

    There certainly seems far too few commentators in the mainstream media shining some torchlight into the dark corners of this mess. I don't think I have noticed a single ITV programme on the crisis, and (outside of your own efforts) the BBC seems to only wont to look backwards. Beautiful and thoughtful documentaries have focused on the past year, but nowhere near enough warning bells being sounded on consequences of the actions of the current players in authority with their naive and lily-livered efforts to control the maniacs spending the money and cooking the books.

    Regards,
    and don't wait so long to post next time.
    There has been barely a BBC outlet for us frustrated nay-sayers to vent our anxieties for three weeks now.

  • Comment number 13.

    12.

    unlike the usa few understand the markets in the uk. it is rare to find a uk retail trader in the same way as millions manage their pension pot in the usa. so financial literacy is just not part of the uk experience and even on NN it has been slapped/dumbed down from time to time.

    bbc just closed its last news board despite it being true public service.

    yes agree about the history focus stuff. basically investigative journalism is dead in the uk.

    in the same way journalists don't go after crime lords if they want to live so they don't go after the financial oligarchy if they want a job. look as the recent court injunctions about even reporting what is said in parliament.

    if people want to know where the buccaneers [private pirate outfits semi licensed by the state] of the 16th century went well they dumped the ships and took up desks and computers. Spanish main anyone.

  • Comment number 14.

  • Comment number 15.

    The historical parallels with 1929 and the Great Depression are striking; however, we are in a very different World in 2009, this is a different crash, and the policy reponse has been almost the exact opposite. So, there is no reason to assume that things will play out in exactly the same way.

    That having been said, a crash is a crash and at bottom they are due to the fact that borrowing/debt becomes unsustainable relative to anticipated future income. To rebalance this equation, in one weay or another, two things need to happen. First, the level of debt has to be reduced - either through repayment or through write-offs. The level of anticipated future income needs to rise.

    At present, we appear to have chosen not to reduce the debt. Rather we have transferred it from the private to the public sector which has become the borrower of last resort.

    Logically therefore we can only get out of this mess by increasing the potential future income: and given that it is the government that is borrowing this means tax revenues: and increasing tax revenue means either tax increases or growth in the real economy. Whether tax increases yield more tax revenue will depend on the effect on the real economy - and in its current parlous state that should be a real concern.

    If the real economy doesn't return to "real" (as opposed to QE) growth then these sums are not going to add up.

    Then the choice of policy instrument today versus 1929 becomes irrelevant and the economy will find its own way to a new, depressed steady state by way of either inflation or contraction; or both.

  • Comment number 16.

    Well done Paul, your best post ever I would say. Well researched, unleveraged, realistic and ahead of the curve of mainstream jornalism.

    You nailed it!

    Thank you.


  • Comment number 17.

    Paul,

    I would not want a pedant to belittle such a fine analytical piece, I spotted a couple ot typos you may wish to correct.


    ''life is still getting wors.''

    ''That, to me, is an danger alarm.''

    Thanks again, keep up the good work, what else can one do in the midst of such abject public denial fuelled by massive and powerful self interest, compounded by what is now a 'professional politician' political class.

    I am sure they mean well but they are institutionalised operatives now rather than leaders with any real sense of the people or capacity for grander vision and inspiration, they are products of a system, given time any system can be manipulated by humanities pre-programmed 'self interest effect'if is is not constantly upgraded.

    We are overdue an upgrade, all this is simply consequences of that deeper philosophical position.

    Jericoa

  • Comment number 18.

    Paul

    Your well argued case and conclusions concur with my own sometimes muddled observations. I am too focussed on keeping a business clean and afloat in difficult circumstances to engage in such detail: so you do perform a public service, but don't ask for a rise as it might be refused.

    What does fascinate me is the degree by which the elites that brought us to this pass seem to think that it will all be over soon. They seem to be emulating the elites of late 1914 who argued the war would be over by Christmas. Like all elites their agenda is to stay as the elite despite their apparent unsuitability. We can expect some turnover in elite membership in due course.

    As yet the economic fallout in the real economy remains ill-examined. All that we know is that it continues as the debt implosion eats up both companies, demand and the lives of individuals. The continued evidence of recession in the UK came as no surprise to me as even I can't see the way out of what is in all reality a still burning building. This does not surprise me as all the fire-engines and the entire water supply are focussed on Canary Wharf rather than on Main Street Everywhere.

    The social and political fallout remains decidedly uncertain. The political class seem totally unaware of what is going on at ground level; being more attentive to the condtion of their privileges. How those privileges are to be funded has not yet dawned on them? There is very little money about and what there is seems to be slowly shrinking.

    This crisis is going to run and run. It won't be over for at least another generation; so it will probably see me out.

  • Comment number 19.

    It becomes ever more clear that we need better definition between the banks and the state, who is working in whose interests, and in whose interests the state works - or should be working.

    Clearly the banks are benefitting from state action while people are suffering. Thats why this is in question.

    The big questions around regulation - regulating for what and in whose interests, follow on and must be answered.

    And economic questions should not be considered in isolation. Employment questions should be right up there, alongside, for instance how any stimulus of any sort affects employment.

  • Comment number 20.

    Hi Paul,

    Great post - missed Newsnight ( I'll get it via i-player). In a nutshell we have socialised the credit losses and privatised the credit profits as others have said. Thanks to securitisation these credit losses are cross-border with sovereign governments sharing each country's credit losses on the public balance sheet. QE in the UK has injected central bank money to the tune of 12% of GDP in order to retrieve a growth rate of nominal spending of 5% pa. The BoE cant point to it working and may never be able to do so.The money is being sucked into the great black-hole.

    What might distinguish this crisis from those in the past is the timescale over which these stop-gap measures and practices will unwind and the pain they will bring in the future.It is by no means assured that the banks can refund themselves when their liquidity guarantees from government are withdrawn. I agree currency crises might be part of the fallout.It remains unknown to what extent government balance sheets will deteriorate and to what extent taxes and spending cuts will be needed to rebuild. The negative feedbacks to the real economy combined with aneamic growth will aggravate. So, I think this is a long-burn.

  • Comment number 21.

    19~ Never get off the @@@@@@@ boat !

    Yes we need to look closely - who is the king and who is the pseudo-king a la Fraser and 'The Golden Bough'

    Where does private finance now end and government begin; who and what is the government ? The lines are very blurred.

    Can anyone smell napalm yet ?

  • Comment number 22.

    #20 Shireblogger

    ''In a nutshell we have socialised the credit losses and privatised the credit profits as others have said. ''

    I had not heard that before but it is the closest thing to capturing this 'slow burn' crisis in a single sentence that I have seen.

    I just don't think the penny has dropped with the general populous regarding the sheer horror and truth of that statement.

    The quantum of suffering that imbalance has created is absolutely huge, there may not be any blood on the streets because of it (yet) but it is suffering non the less caused by the imoral behaviour of others protected (even sanctioned in the uk's case) by the state itself!!!

    It is indeed a white collar crime against humanity and in keeping with white collar crime the punishment and deterent to future discretions appears to be on the lines of ' you naughty boy, please don't do it again'.

    I think Mervyn king understands and genuinly cares about this to his credit and the governments shame, I wish he was less soft spoken with a bit of fire in his belly, the public speaking skills of barack obama and a devil may care attitude to his career.

    A little question for you Shirblogger, in terms of mass non violent action what if everybody affected by this crisis refused to pay their debts of any kind until the perpetrators of this are brought to book?

    It is non violent and refusing to pay debt (or any interest on it maybe)would potentially have a flip side of putting some money into the 'real economy' as oppose to boosting Goldmans profits. The peoples version of 'lowering interest rates'

    Just a theoretical question..indulge me :)




  • Comment number 23.

    Jericoa

    You've hit several issues. In this crisis where is the accountability? I agree that wars have been less damaging to us than the burdens created by this financial disaster. The G20 so-called leaders have met in front of the cameras protesting of the failures of the market, but knowing well that their own state-regulators and exchequers partnered the banks and hedge funds in the globalised credit alchemy binge. But, so deep was the black-hole that all savings and deposits were at risk. Response: give the public cheque book to central bankers to do deals with the slickers who built this obscene outcome.This is where the politicians lost the initiative.Its an uncomfortable ransom with no real justice. What strikes me is the undemocratic means used. The October 2008 recapitalisation was the product of hurried deals in corridors struck by bureaucrats and bankers. The politicians were bystanders fearful of the worst-case outcome. The public liquidity lifeboats were of the same genesis and QE. Trillions spent or committed in months -sums so large they assumed an unreal proportion. Even the sophisticated didnt fully understand the complexities or the fallout.

    For the future, concentrate public venom at fall guys and bonuses but repair/reinststate/reinsure instead of deconstruct the entire system. The Bank of International Settlements and the unelected G20 sub groups and the likes of UKFI are dictating the agenda behind closed doors. The politicians and central bankers are hamstrung by the initial intervention. They now rely on the markets to buy the public debt they need to sell and to protect the value of public capital.

    Where is the leadership and the voice going to come from? The G20 is led by need for consensus in sub-groups and fear of unilateralism. I agree Mr King came surprisingly close to articulating the outrage when he could see bankers return to 'business as usual'. Given that he is close to the agenda-setters, maybe he is the type of person to radicalise the process from here. Charisma and oratory would help.

    Paul's posts cry out for public reaction. Maybe this will come when the pain increases from here.








  • Comment number 24.

  • Comment number 25.

    Monday morning crossword............ Nelson had one, but didn't turn it.

    http://www.sysopt.com/forum/showpost.php?p=1469797&postcount=71

  • Comment number 26.

    #23 shireblogger

    Thanks for that response, I guess what I am digging for here are 2 things which really resonated in PM's piece.

    1) This crisis has so far been placated by 'fast money and hope' - undeniably true I think, yet as one of the commentators noted this is exactly the same intangibles that caused the crisis in the first place. You dont cure an alcoholic by giving him free beer.

    2) The potential for class warfare - the rich got richer through this crisis and had their excesses (and pensions in some cases) guaranteed by the taxpayer. The taxpayer's and their future children lost thier jobs, will have public services removed from them in the not too distant future and in all likelyhood higher taxes and a longer working life.....

    A completely diabolical unequitable and undemocratic situation I am sure any rational being would agree and fundamentally at odds with descent society.


    The cornerstone of any society is justice, we can not even begin to build a stable society if there is injustice inherently running through it.

    The biggest mistake made (by labour !!!!)was not to wholesale nationalise the banks while they were on their knees. They bottled the chance to make them accountable to the taxpayers in payment and recognition that it was the taxpayers who saved them, that lack of courage by our leaders means it is business as usual at the banks, who are only accountable to thier shareholders, not society as a whole.

    So what is the answer?


    Step 1 must surely be to nationalise the banks to restore a sense of justice.


    If the politicians dont have the courage for that then the 'class warfare' bit will kick in eventually. The best thing I can think of is to kick the bankers where it hurts their shareholders most i.e. in thier interest rates, the people should refuse to pay any interest on any debt owed by banks, why as taxpayers should we pay 20% interest on credit cards or a high interest rate on a risky mortgage' when if the debt goes bad we pick up the loses anyway as taxpayers?

    The 'cold turkey' the alcoholic needs is as old as the hills, it is the death of high interest rates the death of the credit card and the store card, the personal loan and the 5 times salary mortgage.

    The only trouble with that is it will throw more people out of work because demand will drop, but that will ahve to happen anyway because of peak oil and other non renewable resources.

    It is all too fundamental and hard isnt it, much easier to put faith in 'fast money and hope'.

    The truth is we all need to work less, be happy with less (all this stuff does not make us happy anyway) interact with each other more in smaller communities with the benefit of high technology and in harmony with the environment.

    Noboddy votes for that though, they vote for 'fast money and hope' and politicians respond accordingly.

    What a wonderful thing it would be if a nation actually had the vision to unite a nation behind the transition required to achieve such a thing. Why dont we just do it? What have we got to lose?




  • Comment number 27.

    80 years and what did we learn .....not a lot it seems ,but the brinksmAAArt robbers clearly never stopped learning and earning and yearning and now that they are still turning while the economy is stagnant ,one can only assume their activities and incAAAntAAAAtions were correlated to wealth creation like an inebriAAAted leach in a bloodbank and not causative...surprise surprise.

    400 Years after the enlightenment and the mountain we have climbed has made us paripassu with the mumbo jumbo of AAAfricAAAn witchdoctors ,breach of their intelectual copyright if youy ask me!

  • Comment number 28.

    I really don't understand why the bailout was not conditional on subsequent profits being used to pay back the bailout - how could Gordon not lay that condition down? Can someone explain why there was no requirement to pay back the bailout? - I don't mean in terms of abstract concepts in political science, I mean which members of the cabinet allowed Gordon to not put a condition on the bailout?

  • Comment number 29.

    #28

    Profits and bonuses are not quite the same thing, the banks are paying off the government as fast as thier increased capital requirements allow.

    bonuses are often written into an individuals contract..you achive 'x' you get 'y' as a bonus so they are outside of Gordons direct control and legally are very hard to undo except by some extraordinary act of parliament maybe.

    Given what has gone on £6 billion to be paid in bonuses is morally reprehensible at atime when many will still be losing thier jobs while subsidising the beneficieries of the bonuses by underwriting their risks as taxpayers.

    The £6 billion would be much better spent on the severn barrage to secure 10% of the countries energy needs in a green sustainable way than going towards manshions in provence and Yaghts in monaco.

    It is absolutely scadelous, even more so that there seems to be (PM aside) a media blackout on this. The bonuses can be clawed back and used to good effect if there is political will behind it, but there isnt, politicians attend too many of the same cocktail parties on yaghts on the med in the summer recess as bankers for that to ever happen.

    I cant believe that the country which came up with the magna Carta and the principle of common law is just rolling over and doing nothing in the face of such injustice of past misdemeanours and seloling our childrens future prosperity down the river for abuck and afew votes.

    It stinks so bad I feel sick most days.

    But noboddy does anything, no mainstream media exposes it, no political party has the guts or connection with the people to provide real vision.

    ''Where there is no vision the people perish'' (Old testament).

    I hate the elite political, media, lawyer and banking class for what they have done to this country, not as individuals but the ethos of self interest that has been allowed to develop in their closed ranks.

  • Comment number 30.

    Many thanks for such a comprehensive and clear sighted view of where the economies of the US and copycat UK stand as at today.

    As you point out the US economy can eventually trade its way out of recession because of its manufacturing and technical base although there can be many setbacks in the way. Alternatively the UK is in a much weaker position because of its lack of a strong enough product for export base.

    Already we are hearing noises that fiscul stimulus needs to continue or otherwise we go into depression. Very frightening for they are conceding that the prospect for growth is not there so printing money is the only weapon left to sustain the economy. So depression now or depression later. You pays your money and takes your choice.

  • Comment number 31.

    "I cant believe that the country which came up with the magna Carta and the principle of common law is just rolling over and doing nothing in the face of such injustice"

    it's not as if the working class has been larging it up ever since MC, is it? the working class has really only had a decent quality of life in the post ww2 era, and that seems to be slipping away now. but i can't see that the elite today is any worse than the elite of 18th century was, can you? (but that's not to say that I disagree with your posts, I just sometimes think that the world has created a false image of everyone in the UK living in luxury for the past few centuries)

  • Comment number 32.

    #31

    What was the working class is now the 'unemployment and incapacity benefits class', which we can no longer afford post financial bubble burst.

    I guess what I was trying to evoke was a sense that we have a history of fighting for our freedoms and our constitution and a fairer society, I agree that the elite today are no better than the elite of old, but there are far more of them now and the rich / poor divide has never been so pronounced relative to the times we live in.

    The technology, biotechnology and mechanisation dividend has not been used equitably. Off the back of mechanisation and technology we should all be living less frenetic lives, working less and being happy with less yet with all our basic needs seen to.

    There is a vision to be had out there but it is supressed, the green party are made to look in the media like a bunch of vegan new age tree huggers, all the main parties offer up is various versions of the same impossible recipe of 'restoring perpetual economic growth and increasing prosperity...yet nobody asks what prosperity actually is in a high technology and highly mechanised society!! Prosperity is no longer making more and more stuff more and more efficiently..how can it be there is only one planet earth!

    I just get frustrated with the whole system and the whole lot of them. Why on earth should we be accepting £6 billion in bonus payments to individuals who would not have a job now if the taxpayer had not stepped in to save the banking system?

    Surely society must say that this is not acceptable and offer a grander vision to claw it back and put it into a landmark clean energy project like one of the proposed tidal barrages, generating thousands of jobs in the process and going some way to securing the UK's energy needs in a sustainable way for generations to come.

    Instead the estimated £6 billion in bankers bonuses will be put in dodgy offshore tax havens out of the taxpayers (who allowed them to have any bonus at all) reach with the balance spent on mansions and yachts and blood diamond rings and selling our childrens future ''prosperity' down the river with it. In ten years time if we carry on like this you will be lucky if your kids know what having a reliable power source to thier homes is like.

    Is it only me that is so exasperated by all this?






  • Comment number 33.

    Jericoa (previous post) no, you are not the only one......I have recently discovered the New Economics Foundation website (google to find it)in which economics is considered as if people and the planet matter.

    We need a whole new way of looking at things; GDP will soon be superseded as a measure of how well we're doing as unlimited growth is not sustainable.

  • Comment number 34.

    Paul,

    Thank you for such a profound summary of the current crisis.

    Not sure if this "conspiracy" is getting much press in the UK, so if you are feeling in an investigative mood, follow-up on this one:

    http://www.newdeal20.org/?p=5613

    Rob Johnson's testimony to congress on how ineffective the US Derivatives Reform Bill will be, seems to be getting omitted from official records:

    "I believe that the most important dimension of all of the needed financial reforms is the precise intersection between Too Big to Fail financial institutions and OTC unregulated derivatives. This intersection is the equivalent of the San Andreas Fault of our financial system."

    See also:

    http://www.nakedcapitalism.com/2009/10/bank-favoring-censorship-in-government.html

 

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