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SmithWillcox

Listed below are comments made by SmithWillcox between Friday, 10th October 2008 and Saturday, 17th January 2009.

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A bank insurer, not a toxic bank 2:04pm on 17 Jan 2009 Some sense.

Thank you to John from Hendon, Jericoa, BankruptbritainRIP, Prisionernumber6 and egrid1 for their contributions to this discussion.

If the penny has not dropped yet regarding the extreme gravity of the current worlds predicament then we are truely stuffed.

You just have to have faith in the policy makers - there is no one else!

But they seem to be delaying - going through steps that cannot work, steps that are politically acceptable.

Avoiding the necessary and politically unacceptable.

Hey. These trains to Mars don't seem to run on time. Fix the transport system. Something else for the to do list.
A bank insurer, not a toxic bank 1:20pm on 17 Jan 2009 Insolvency of the Population

The way I see it - banks do not lend their own money, they lend depositors money. They are suppose to keep a cushion of capital to absorb bad debts. That cushion seems to well under 2 percent, given capital rules requiring 4 percent, but fancy off balance sheet financing etc gets the banks down to a much lower capital base in actual substance.

The depositors are the only ones who can pay - after all its their money. Options - negative interest rates (run on the entire system), a wealth tax of some sort, kind write down the bad loans directly against depositors balances, rather than through the reserves and capital side if the balance sheet, a tax payer bailout (taxpayers buy back their own deposits through higher taxation).

Hugh political problem - nothing is acceptable, but there is no other way. The depositors pay.

Ultimately, it'll be done by a stealth tax called inflation. Devaluation of both the debts and the deposits in real terms.

But bailing out the banks does not hit the problem, that of insolvency in the population.

Just taking unsecured personal borrowing. B of E figures suggest the average amount owed on credit cards, store cards, personal loans is £30,000 per household that has debt of this sort - half of all households. At 20% interest, the interest cost is £6,000 per year. They have a morgage on top of this.

Thats why nobodys got any money to spend. Peoples total income and then some is already precommitted to mortgages and debt interest. For the last 10 years people have been living by borrowing for ever more capital to spend and to make the minimum loan repayments. No new borrowing means no more spending.

Then there is corporate debt. Then there is the funding gap. Then there is investment, hedge fund and speculators debt.

Can we please wake up here. The population, as a combined group, is totally insolvent.

How long before all trade credit ceases? How long before money (or the promise to pay tomorrow) is not accepted in exchange for goods and services? How long before there is no food on the shelves?

Get the banks to come clean? We know. The figure will be well over £1 trillion, maybe £2 trillion.

The sooner money is printed helicopter style and given to those in debt the better. You then take it straight back off them to repay their loans - it goes to the banks. Then jack up both liquidity and capital ratios imposed on the banks which means the printed cash goes back to the B of E on deposit.

Then ban all consumer debt.

Mortgages maximum 3 times income.

Banks will then not be able to earn an acceptable return on capital - nationalise the lot.

Having fixed the banks, there'll be inflation like we've not seen before. Oh and then a more normal recession caused by global trade inbalances. A bit of a fib. A big recession. But thats better than a collapse of all economic activity.

Countries with deficits (trade) will have domestic inflation and a trashed currency. Countries with surpluses will have domestic deflation and rapidly appreciating currencies. Thats assuming countries don't fix their exchange rates and make things worse. China and others are standing in the shoes of America in 1930. I think a prolonged trade surplus is more damaging than a trade deficit. ie be wary of getting too rich.

Greed.

A pile of paper dollars is just a pile of paper when all is said and done.

Either way, the balance of payments has to balance. Let it go on for too long and the whole lot crashes.

Given where we are now, the consequences are unavoidedable. The world will have to get use to permanently high levels of unemployment. Technology takes jobs. Yet the population grows.

Me. Ive had enough of ranting on for now. Its best off my chest.

I'm catching the first train to Mars.
See you folks. I'm out of here.
Not enough Cassandras with cojones? 2:04pm on 12 Oct 2008 Didn’t See It Coming

Various commentators and economists did.

Back in 2002 / 2003, when the housing market took off, there was debate about the ratio of the average house price to average earnings going above its long term trend of about 3.5. This resulted in a conviction that because of low interest rates people could afford to borrow more capital. In late 2007, this ratio hit 7. In other words houses are twice what they should be if the 3.5 ratio is the correct one.

What people totally forgot to take note of was low inflation. The real interest rate to consider is the mathematical relationship between inflation and interest rates. That did not change. With high inflation (and rising earnings) it is inflation that repays the capital on a 25 year mortgage. With low inflation we should be borrowing less capital, not more. This off sets the extra capital we can borrow if interests are low. If you like, there was a shift in the burden on mortgages from one of meeting high interest payments to one of repaying the capital, in a low inflation environment.

Oh dear. Just a slight error of judgement.

This was then compounded by remortgaging and equity withdrawals on a massive scale.

Anyone with a mortgage over say £100,000 has no chance of repaying that capital, without prolonged, high, inflation, or prolonged very low interest rates, 2 to 3 percent, maybe lower. But now the banks are bust, they are increasing their profit margins on mortgages back to base rate plus 2 or more percent. It will require regulation or full state ownership to force mortgage lenders to pas on base rate cuts. It looks like we are about there.

One people learn a bit of maths, regulation will not allow mortgages of over 3.5 times earnings. Then house prices will halve at least. Millions will be in negative equity. And that’s assuming they’ll still be in work.

Nationalisation of big chunks of the housing stock is next on the cards. Back to being government tenants instead of council tenants.

When that happens, don’t say we didn’t see it coming. Look very carefully, see it in the line above this one. Given that the mortgage books of Northern Rock and Bradford and Bingley are nationalised, nationalising big chunks of the housing stock is not a big jump. As Paul says, HBOS is as good as bust itself (the Halifax), and the govt looks like taking a majority shareholding. The country will be paying mortgages to the government.

Another piece of maths people need to learn. What is the long run trend rate of inflation? What is the long run trend rate in real growth in GDP? You will find both are between 2.5 and 3. A bit of variance, depending on the dates its calculated between. To a mathematician, the number e screams at you. It’s a bit like pi. A naturally occurring number, the exponential growth constant. The trouble is, we try to manipulate economies to attempt to grow too quickly, at above this rate. By trying to get rich too quick, we end up bust.

We didn’t see it coming?

Of course you didn’t.

We have a mathematically illiterate population. An illiteracy which extends all the way to the top.

Surely, financial and economic journalists have an academic background in maths and economics?

The answer is obviously no. Just as the maths teachers we’ve had in the last twenty years, have no background in maths.

Will it happen again?
Yes.
Yes.
Yes.

Until we understand maths.

But what we need now is action.

Interest rates as close to zero as possible. Regulation of the mortgage market. Fast.
Credit default swaps. All declared null and void. Get real. You’ll bust insurance companies, their creditors and shareholders, who are other banks and pension funds.

The problem is insolvency of private households. The bad debt on mortgages is the root. If people can keep up their mortgage payments, loans get paid off, the pressure on banks balance sheets eases, and the hopefully the banks don’t go under. And yes I think we’ll need a bit of inflation. What worries me is the prospect of deflation. If so, there’s no hope.

Otherwise, it’s my Robin Hood suggestion, which is absurd, but makes kind of sense. (see Friday)
I sit in one of the dives - as a low, dishonest decade goes splat 7:08pm on 10 Oct 2008 Global Economic Systemic Collapse

Oh my God . . .
Make no mistake about it – we are in ‘full on’ economic systemic collapse – and will be far further into this process than anybody actually thinks. It’s a Tsunami situation – inevitable and unstoppable.

The heart of the problem is the abuse of the credit-creation process that has occurred over the last 20 years since deregulation of ‘big bang’. Basically, an abuse and corruption of what the concept of money is for – primarily as a medium of exchange for goods and services. Strictly speaking you have not actually been paid for whatever until you have spent the money on something real in return. Accumulation of money for its own sake is futile – you can’t take it with you.

As mentioned in an earlier comment – money is not real. It is an abstract concept, a figment of our imaginations, created from thin air, to enable economic activity. We needed this system because there just wasn’t enough gold in the world to enable a modern, economical and technological society to function. Accumulating money for its own sake was not what the system was designed for. If this collapse runs out to its full conclusion – all economic activity stops – we starve.

The problem is simply too much debt, too much of which is bad – the capital on too many loans just cannot be repaid. Yes read up on Minsky Moments and so on. But things are different this time. This time it is the general population at large that has been caught up in the speculative frenzy of the property bubble, rather than a few hedge or investment funds. The bubble is like no bubble we’ve seen before – just ever so slightly bigger and affecting just a tad few more people. People who are consumers – the fuel of economic activity.

Too many people in the population at large are insolvent. Their entire income and then some, is going on debt payments – they have no money to spend. Retail sales have gone off a cliff. Retailers cannot survive double digit falls in sales. Stuart Rose (M&S) was on TV with no plan but ‘hope’. He looked like he was ‘passing bricks’. There is carnage to come on the high street – retailers bust, their suppliers bust, their suppliers’ suppliers bust – no jobs.

Consumers are going bankrupt in the thousands per month. They have been surviving by borrowing more and more – that credit has been turned off. Result – mortgage defaults. Property values are coming down by half, at least.

No way in hell can the banks survive this level of bad debt. The banks are insolvent – every bank on the planet is going under. Governments can’t bail them out. As the IMF warns – countries themselves are going to be bankrupted – Iceland is the first. What hope for America, with its national debt? Depositors are going to lose everything.

The cause – abuse and corruption of the credit creation process. It’s Pandora’s Box – we don’t understand what we’ve been playing with. How do we get it back in the box? We know that where there is economic corruption you get economic ruin – the whole world has been at it.

We need a hero, another comment says. His name’s Robin Hood:

Write off the debts by writing down the bank deposits. Consumers remain solvent and the banks remain solvent. Undo the credit creation process – reset the clock to zero.

Whose deposits? – Well money’s not real. You can’t take it with you. Start with the billions in the bankers and traders private accounts. As all the banks go bust, they’ll lose it anyway. Lose it and save the world, or lose it and starve.

I’m sure the public will buy it. How do you get that idea past the worlds politicians? Total global cooperation required.

Oh, read up on ‘The Tragedy of the (unregulated) Commons)’. Economists and those with knowledge of Game Theory will know what I mean. The common of course is the world – a truly global community – ruined.

I will leave you with Einstein – there are two things that are infinite. The universe and human stupidity. If I really think on it, I’m not absolutely certain about the former.

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