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knoseykneel

Listed below are comments made by knoseykneel between Saturday, 27th September 2008 and Monday, 13th October 2008.

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Banks should be boring 6:18pm on 13 Oct 2008 Robert, I agree with much of what you say. As the banking industry is commoditised it will shrink of its own accord.

The same applies to life insurance. It should comprise only whole life and term. Endowment policies are a con to earn commission.

The same applies to pension schemes. It is a disgrace that pension contributions are placed in equities instead of gilts. It came about in the sixties, when inflation started to erode cash values. Once inflation was under control, equity-linked pensions continued because the entire financial services industry was now on the gravy train.

The same applies to the share market. The gambling is a smoke and mirrors device behind which it is possible to cream as much as legally possible in fees and otherwise.

Each is a method to confiscate cash surpluses accruing to the working and middle classes after they have seen to basic needs for food and shelter. People do not think they know enough to take personal responsibility so they entrust their surplus to third parties under the delusion it will be invested in their interests.

Once all these activities are commoditised, there will be a big reduction in employment in the financial services sector. Unfortunately, government will lose a major portion of its revenue stream.

Also, a political party stands behind any government, making the laws. Unfortunately it cannot guarantee the longer term interests of its constituents because it is only temporarily in power.

For these reasons I cannot see change coming from the top. The whole edifice is comprised of thousands of hands all washing each other.

Instead, it is a bottom up, evolutionary process. Bubbles depend on gullibility.

Perhaps before the end of the century individuals will start putting their own surplus money to proper use. Just like 500 years ago when many western people eventually got fed up at not being allowed to deal with their god direct but had to go through a priest. Many people decided to deal direct and, lo, the reformation happened, and the heavens did not cave in.

This process of disintermediation – getting rid of the middleman – at that time was helped by the invention of the printing press, which enabled rapid diffusion of knowledge and information. People made up their own mind once they realised they had one. So, too, today, it is possible that the internet may serve the same purpose. Five hundred years ago, self-determination related to ones subjective internal world and religion; now it relates to the objective outside world and money.

When will people start caring about their own money? After which big recession? Who knows.
We own the banks 3:24pm on 13 Oct 2008 #94 RuariJM, as you correctly pointed out recently, Adam Smith lambasted the irresponsibility of uncontrolled and unsupervised managers over 200 years ago. What we have observed in banking in the last couple of decades is not free-market competition but its antithesis: anarchism. It happened because here and elsewhere business and government cosied up to each other, when they should be in opposite corners. The invisible hand has helped implode this little monopoly. See comment #37 in momentous monday.

Keep up the rants, just read more slowly next time.
Momentous Monday 09:31am on 13 Oct 2008 Momentous shomentous. The main purpose of regulation in the financial economy is to be eternally vigilant in preventing vested interests from creating obstacles to free-market competition. Artificial and politically created barriers-to-entry result in oligopolies and monopolies, giving rise to the kind of crisis we see today.

The most stupid trap of the last fifty years was the way in which well-meaning regulators – useful idiots – were conned into thinking freedom means anarchy. Philosophy studies tell us that there can be no freedom without responsibility: so clear rules and sanctions are essential to ensure that playing fields remain level and competitive.

Management studies tell us there can be no responsibility without accountability. This issue has not been properly addressed in corporate governance – where it is known as the agency question – or in national governance, where corruption in the process of wielding power always seems inevitable.

If we find in the next half century that it is not possible to create structures for one party to act in the interests of another without corruption of purpose, then we will have to disband the corporation – the separation of ownership and control – and try something else.
We own the banks 08:21am on 13 Oct 2008 The free-market competition principles described by Smith and elucidated by Hayek, Schumpeter and Friedman are being vindicated at each step of this amazing drama.

First we saw the invisible hand, through globalisation in the second half of the twentieth century, propelling many undeveloped and poverty stricken countries to a standard of living that would otherwise have taken hundreds of years.

Now we are seeing the invisible hand sweep away crony capitalist economies (to which much of the western world has degenerated) with a similar flick of contempt as it did to the USSR economy in the nineties.

And in the UK, particularly, the futile efforts by government to shelter the banks behind the too-big-to-fail mantra have simply shifted the lack of trust onto its own shoulders.

When will it become clear that free-market competition is a descriptive, not a prescriptive, framework? It is how the world works. Smith did not invent it, nor was he the first to discover it, but he articulated his observations better than anyone else had. One job of government is to learn how the economy can synchronise with this reality: its only weapons are tight rules and regulations, properly enforced.

Any attempt to actually hold back the propensity of markets to be freely competitive, rather than facilitate it, causes great hardship. Attempts to command and control the use of productive resources fail, whether by way of crony capitalist dreams, socialist fantasies or communist nightmares: the difference between them lies in the number of unnecessary deaths.

Thatcherism and Reagonomics, were the first serious attempts to address some of these free competition principles. Although their efforts have since been dismantled, others will follow: the free-market-competition genie is out of the bottle, and if the western democracies do not adapt by choice they will by competition.
Humbling of our banks 6:49pm on 12 Oct 2008 Schadenfrade is an unacceptable response to the ignominy of any banker who falls from grace. We must not forget it was the regulators at fault, one hundred percent. They created gaps for shysters to enter the portals of banking.

For any shysters who happen to have got away with it, boys will be boys.

Instead, our regulatory environment should be changed so it will not happen again. We also know that moral suasion is the most important device to get ordinary people to pay tax. Therefore, our regulatory environment must ensure that shysters are tracked down and punished, and seen to be punished, or else moral suasion and tax receipts will diminish. This will reduce the funds we will need to replenish banking losses.

So we simply have to take a leaf out of our American friends, and nail any shysters. Put them in jail. Not the junior ones, who were acting under orders, and who will be seen as scapegoats. People need to see real culprits punished according to the law.

So the Treasury must send in the accountants with their fine toothcombs. Whatever it takes. They will find something. And remember, no schadenfrade, only justice.
Humbling of our banks 6:10pm on 12 Oct 2008 Momentarily, I forget exactly why Sir Fred had the nickname, Fred the Shred. Anyway, it will be such a relief to stop walking around the office, clicking fingers, and singing to that tune which I cannot get out of my mind, Jambalaya:

Good-bye Fred, yer gonna shred, me oh my oh
Yer gotta go pole the pirogue down the bayou

Please, powers that be, confirm tomorrow that you have let him go, let me forget this tune!
B&B collapse to cost City £9bn 2:16pm on 29 Sep 2008 #28 footnote

The ftalphaville article referred to is called Around the world in bail-out parallels and why the US should look to SWFs, and it came out at 11h05. Definitely worth a coffee break for ten or fifteen minutes. Like a handrail to the coming rollercoaster.
B&B collapse to cost City £9bn 12:57pm on 29 Sep 2008 With a series of bold moves our regulators have put us onto a new path and confirmed that things will not be the same again. No doubt this is because of instructions from the regulators in the USA but it is a good thing that efforts are being co-ordinated.

Clearly, the regulators have signalled that the money to pay for the banking failures will come from the coffers of the banking industry. This will happen by a combination of the bigger banks absorbing the smaller ones, and nationalisation. It is a case of eat or be eaten. At the end of it, some banks may remain as independents.

Thus the banks themselves, which means the shareholders of the banks, will be last in the queue to collect any proceeds.

Under the circumstances this at last is an appropriate free-competition solution, where the state is fulfilling its appropriate role of facilitating the Darwinian process. It will help offset the anarchic and failed processes of the last two decades, which have moved nearly as far away from free competition as a full-on socialist model.

Of course, this will not prevent the recession or depression or whatever is on store for us. But the main objective for some time has been to avoid a Mad Max scenario.

The immediate effect is for shareholders in other banks to consider their options. Some people think, sell for something now rather than for nothing later. Others stay for the ride. This is just the market in action. You pays your money you takes your choice. Right now I see that the RBS share price is testing new lows, as they say.

The regulators have made their moves in full knowledge that banking shares may suffer. Thank goodness for the rest of us they have found a mechanism, a strategy, for the orderly unwinding of an equity-challenged industry.

One of the articles today in ftalphaville gives an excellent rundown of the Swedish and Japanese precedents. It is a short must-read.

This wondering what will happen next brings to mind a little ditty that I found somewhere, sung to one of my favourite tunes, a tale of high aspirations and lost opportunities:

Good-bye Fred, yer gonna shred, me oh my oh
Yer gotta go pole the pirogue down the bayou
Guess yerll be eatin crawfish pie and a filet gumbo
Son of a gun, yer gonna have big fun on the bayou.
How will B&B be rescued? 5:10pm on 27 Sep 2008 #52 GrouchoMarxist1: yes. Your comment should be prescribed reading at the beginning of every post by Robert. As a reminder of what we are facing and why.

However, your last paragraph is not really relevant.
How will B&B be rescued? 5:02pm on 27 Sep 2008 #48 fireyshandy, I beg to differ.

Borrowing short and lending or investing long is 100 percent recipe for disaster.

An example in the case of the individual business is buying fixed property by stretching creditors. When creditors tighten their terms the business folds. No liquidity. Panic stricken behaviour followed by terrible consequences.

The solution is to talk to creditors and restructure the balance sheet. Long term application of funds, that is, investment in assets, must be matched by long term sources of funds, that is, equity or debt. This needs time and credibility.

Sometimes it is possible. It is easier if the business is trading profitably.

Not for one second is borrowing short and lending or investing long sound practice in any business. For a bank I would think the matching discipline would be a useful adjunct to the capital ratio anyway. A low capital ratio is bad enough, but to further expose by mismatching ones assets and liabilities would be lunacy.

HBOS went for this very reason did it not?

If this were a common business model with banks, no wonder they are so clueless. For regulators in the future it is clear that they cannot rely on the banks applying good business practice. They should make failure to match long and short a criminal offence.

In the meantime, it would be amusing if bank shareholders could win class actions against directors of failed banks in their personal capacity on the grounds of gross negligence.

On the other hand, were these common banking practices, what a laugh. As it is 100 percent recipe for business failure, not only the entire community of bankers but also that of regulators would have made of themselves a laughing stock. (Pause until we are over the current hurdles.) Ask any smart accountant in industry.

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