The American way to fail
The breathtaking rises in the price of bank shares this morning are symptomatic of a stock market that is bereft of reason and is being driven almost purely by hysteria and momentum.
They are surging in part because of the FSA's crackdown on short-sellers but mostly because of the overnight news that the US Treasury Secretary, Hank Paulson, and the Chairman of the Federal Reserve, Ben Bernanke, are preparing a bold - or possibly impetuous - plan to tackle what can now be classified as the most severe and intractable malfunction of the banking system since the late 1920s.
As I put it on the Ten O'Clock News last night, yesterday's co-ordinated intervention by central banks, led by the US Federal Reserve, to pump an additional $180bn of short-term loans into the banking system treats only a symptom, not the cause, of banks' reluctance to lend to each other and to us.
It's a stopgap, while Paulson prepares to absolve many of the world's biggest banks of their idiocy during the boom years, by nationalising their bad debts.
To understand the pros and cons of what's being considered by Paulson, it's worth reminding ourselves of what created the latest terrifying phase of the credit crunch.
The ultimate cause is the chronic downturn in the US housing market. The proximate causes are the rotten loans to US homeowners sitting on banks' and other financial institutions' balance sheets that has mullered their capacity to make new loans.
The recent trigger has been the crises at Lehman, AIG, Fannie Mae and so on, which have created a climate of fear, in which bankers and managers of money appear to believe that almost any bank could collapse.
One important new stress has been a significant withdrawal of investors' cash from US money-market funds, because of the perception that the funds aren't as safe as was widely thought - which has in turn deprived banks of an important source of wholesale deposits (this sudden rise in the perceived riskiness of these funds was sparked by the announcement of a loss at the Reserve Primary Fund).
The drying-up of liquidity from money-market funds is in part what drove HBOS to acknowledge that the game was up, and that a rescue takeover by Lloyds TSB was the best form of protection for its savers and shareholders.
To reiterate, the big point is that Paulson is working with Congress on a package of measures that - he hopes - will attack the roots of the crisis.
It would involve buying many hundreds of billions of the banks' bad loans to overstretched US homeowners.
And it would also attempt to re-establish confidence in money-market funds by insuring them, in the way that retail bank deposits are insured against loss.
This would be the mother of all bailouts. It would certainly involve the deployment of hundreds of billions of US taxpayers' money, possibly more than a trillion dollars.
And it comes on top of the $300bn commitment of public money already made by Paulson to the rescue of Fannie, Freddie and AIG.
It all represents a massive humiliation for Wall Street, the giant US financial services industry and bankers supposed to be the canniest on the planet.
Paulson, himself, was one of their ilk, as the former boss of Goldman Sachs.
There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
The American way of capitalism doesn't seem all that brilliant right now.
In that sense, a degree of moral authority - as well as financial clout - will shift east.
It'll also damage the robustness of the US public finances.
Possibly the biggest risk for the US is that in bailing out the finances of the private sector, Paulson would dent international investors' confidence in the American government's balance sheet - which could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities.
Maybe the US is still big enough and powerful enough to persuade the rest of the world to pay for the mistakes of its financial sector - which is broadly what's being proposed.
But, as I mentioned here yesterday, surely it would be more rational for the Chinese to own the American financial system itself, rather than lend to the US Government (and in that context, it's resonant that Morgan Stanley may well be close to selling almost half of itself to CIC, China's state investment fund).
In this game of Wall Street Monopoly, there's no "get-out-of-jail-free" card.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~13~RS~)
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The credit crunch has cause a massive reduction in the money supply as banks are forced to deleverage. On the other hand you have the US Govt creating billions of dollars to enable it to bail out these failing institutions. What is the overall impact of these to adjustments to the money supply and how will it impact inflation into the future?
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With HBOS shares rising above the 232p offer price following the ban on short selling, can we just cancel the proposed merger and get back to normal.
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The FSA have banned short selling, but have they also banned writing of call options? Buying put options? Selling futures?
Have they stopped people backing a falling price? In no way whatsoever. So why all the hoo haa about banning short selling? It changes nothing.
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It seems that the authorities are trying to solve this problem in the usual way of throwing newly minted money at it. By creating inflation it will bail out the banks and other feckless borrowers by expropriating (that is, stealing) the savings of those who try to look after themselves without expecting state handouts.
'Twas ever thus from Roman times to now.
Sell cash buy gold.
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Mrs. Thatcher, please take note: this is what happens when too many yuppies sit about in London drinking coffee with each other for twenty five years. They have finally forced us to stamp out their nonsense with a command economy. Even the Americans are at it, and that speaks volumes.
Some yuppies might even realise that the world expects them to actually do something useful in return for their wages. What a novel idea, eh? We sacked the welsh miners, but at least they produced some fuel. The yuppies have ruined the economy and forced us all in negative equity!
What a bunch of chumps they have been. But instead of being thrown out on their ears, some of them will get millions in compo. If this is what it takes to make the City "great", then we could do with another bout of the Black Death.
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Just how much is the US debt standing now? So the taxpayer has to be pay a trillion dollars for this bad debt, this is just crazy.
With rising costs of the Iraq/Afghan war, financial system next to collapse, spiralling debt, the American dream is turning into an American nightmare.
Whoever becomes the next president of the US will have a huge task of reducing the debt headache imposed on the general populace.
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When the patient is losing blood then it makes sense to inject fluidity - but it doesn't staunch the wound does it? If a trillion doesn't work then try two trillion or four? this is going somewhere isn't it?
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If this goes through then the days of the dollar as the world's reserve currency will well and truly be over. There's surely no way this will get Congressional backing.
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Peston is extraordinarily cautious and appears to be betting both ways.
There comes a time when governments have to step in with the tools they have available to cool the market and restore some order. Afterwards they need a considered approach to see if any changes in the system are required to prevent a recurrence. The whole of life is like that and Peston is talking with 20/20 hindsight.
His depressingly pessimistic approach is both frightening to the mortgagor and encouraging to the speculators. If people in the UK are worried about their mortgages they should remember that only 6 months ago it was said there are far too few houses being built. There are a lot less now! So watch the prices rise again in due course - rapidly.
Cool it Mr Peston!
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While trying not to shake my head at the desperation of the US to put its finger in the coastline of economic warning I am still baffled by the short selling myth.
If short selling is the problem with the market at the moment than either
a) People have been lending shares and saying go and devalue my stock. I dont think so?
b) Fund managers have been lending my pension fund out for someone else to devalue. In which case they should be strung up for all to see.
Can we expect to see a lot of criminal cases coming or is this just a myth to try and cover the leverage bubble bursting at long last.
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Why is there no debate about the alternatives to a fractional reserve currency?
Would it not be better for the US and Europe to issue their own currency rather than creating it through the balance sheets of private companies?
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The short selling ban is welcome.It is only one part of the problem. There needs to be a change in accounting rules as well,for mortgage loans.Also the mortgage rate needs to be much lower 3-4% to help people pay their mortgage.
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If the UK is "well placed to weather this economic storm", as voiced by GB and AD many times, why of the five recipients of the Feds ?100bn "loan", is the UK receiving an equal share to the European Central Bank, covering the whole of the rest of Euroland?
Surely if ?20bn covers the whole of Europe, we don't need the same? It looks like Switzerland is the only other Eurozone country in serious strife?!
Where are France in all this? Do they just need a proportion of European CB cash? Weve been lied to by our PM and it's time he left - By choice or not!
Bank Of England
European Central Bank
Swiss National Bank
Bank Of Japan
Bank Of Canada
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Hurray! Several months of reading this blog has finally made me capable of understanding the news. I feel so proud at understanding that what is being speculated about is a nationalisation of the debt, and of being able to see some of the risks on either side (financial crisis vs huge taxpayer debt and risk of it all happening again). Yay. As a non-economist in almost every possible way, I am pleased.
But I am scared of the repercussions of this. How can it possibly be sensible, especially in the American version of capitalism, to privatise profits but socialise losses? It seems crazy.
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Commentators seem surprised that banking shares in the UK stock market are rising. This is a simple reaction to the FSA ban on short selling of financial shares. Hedge funds and their ilk make their money through the opaqueness of their trading activities. The threat to publish names from next Tuesday is bad for business, hence a rush today to cover these positions and exit stage left - unnamed.
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Can I propose to max out all my credit cards, they apply to the US Fed to bail me out by taking all my bad debt off my hands? ...
Anybody know where I can apply to do this?
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Why do we still use the stock market as a thermometer for instant appraisal of all measures - these people are headless chickens! Someone says "I have a cunning plan" and they all rush into BUY mode, then when the plan is announced they will decide it isn't adequate after all and rush to the other corner of the hen house and the whole thing will crash again to record lows.
The stock market is inextricably part of the problem and should not be treated as an independent barometer of whether measures are good or bad. The only rescue package that will please them is one that carries on making them fat, and who pays for that?
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"The American way of capitalism doesn't seem all that brilliant right now."
The reason that capitalism has rightfully had such success in my view is the opportunity it affords the man in the street and the reduced likelyhood of individual corrupt control exhibited by totalitarian communist regimes. These are however extremes and there are many good examples of successful moderate "middle ways".
It seems to fall down due to the partitioning of risk and reward between individuals, organisations and society - mr smiths invisible hand is not always beneficial to everyone in society, it is an axiom that economic darwinism is not egalitarian.
RP is right in saying some of our canniest people were in banking but sadly their talents were turned to inventing and selling innapropriate and increasingly complex instruments and products that confused laymen, politicians and other bankers for the benefit of their organisations. At the heart of this is the idea that the risk for your actions is externalised to a company or other portion of society that does not affect you - this must be addressed at a fundamental level in the economy in my view to limit such wildly irrational bubbles forming in the future.
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Whilst Robert Peston's comments are all very interesting, am I alone in not undersatnding the term "mullered"?
Is it some esoteric term used in the financial services industry, or is my general eductaion somewhat lacking?
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'Moral authority will shift east'.
Are you refering to that communist dictatorship which has left it's idealogy at the back door whilst it embraces a corrupt form of capitilism?
If you have such high regard for that country why don't you go and try to ply your trade over there and see how long it would be before you lost your liberty and possibly your life!
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The irony that the banks which all indulge in the practice of short selling are now suffering as a result is not lost on me. However, preventing traders from taking short positions per se does not seem to be the right solution - what next, will invetors be prevented from selling shares in a particular stock because they believe the price will go down? This focus on investor behaviour deflects emphasis from the fundamentals - banks have lent irresponsibly and banking systems have become more fragile as their complexity has grown. We recently saw "speculators" being blamed for high oil prices, now they're being blamed for low bank stock prices - in both cases this prevents clarity being gained on the real issues.
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Hi Robert,
The truth is Paulson does not care. He made his $500M from the sale of his GS stock. (Which was also tax free because the US government asked him to take the role.)
He has also admitted that the problem will be for the next US government to deal with.
All he cares about is bailing out his buddies on Wall Street who made very dubious investment decisions. It's called privatising profits and socialising losses and it stinks.
I am exceptionally cross that it is 'Jo Taxpayer' who is being told (not even asked) to foot the bill.
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The words "Temporary respite" and National and International financial crisis in the US" together with "spiralling inflation" spring to mind as some that will be used in the near future.
Erstwhile economic journalist Chris Filde's words that "inflation is a disease of money" also seem worryingly appropriate as the US attempts to, in effect, write off their banks casually and possibly criminally acquired debts by essentially printing money to throw at the problem. They obviously hope that the rest of the world will continue to underwrite this administration's error in allowing, and possibly encouraging, the whole situation to arise.
This is not the end of the story as the emerging goliath financial economies may well be extremely cautious about lending to a country whose regulatory policies, or lack of them, got us up this particular creek in the first place.
Would you?
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Concerning short selling: There is much talk about the necessity for short selling to balanced markets. I disagree and would expose this argument as what it is: lobbying by those who profit from excessive
market influence and only need comparatively limited funds for scandalous gains. Short sellers are sellling what they don't own. They are selling shares, which pension funds and others, who should be trustees of these share, have lent to them. Pension funds and other funds should be ashamed of themselves. They are making a small proft when lending shares, whilst at the same time, it seems, they are ruining the value of the shares they hold, robbing both shareholders and pensioners.
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the creation of a consolidation agency was a favoured tactic in the post-communist east european countries. many of them experienced banking crises after the initial rounds of privatisations in the early 90s because of concentrated bad debts to failed communist-era industry, and were forced in some cases to effectively renationalise the banks, moving the bad debts to such an agency and then to resell the cleaned up banks to some of the big west european commercial banks.
it looks like the us is trying to do the same thing, except without the renationalisation step. in effect, this is just an enormous subsidy to the banking sector (so much for "moral hazard"). as i understand it, the us government is saying to the banks "that loan on your book you are marking at $100 but that is really only worth $60, you sell that to us at $100 and let us work it out." i.e. the bank gets an effective subsidy of $40 and doesn't need to write down any more losses. little wonder confidence has been restored in the banking sector.
as robert rightly points out though, this just adds to the stack of debts and the ongoing deficit of the us federal government. in our case, the government has to issue $100 of treasuries to fund the loan purchase, and will eventually have to show the $40 loss in its deficit as it works out the bad debts. another point to be aware of is that, based on the experience of the post-communist countries, the debts in such a consolidation agency can take literally a decade for the government to work out.
the increase in the supply of treasuries will be very significant. the total stock of us public debt before the crisis was about usd 9 trillion (of which usd 4.7bn is us treasuries - i.e. federal government bonds). the total value of all additional debts being taken on by the us (including fnma/fhlc) could be another usd 1 trillion. this is a staggering increase and would take us government debt/gdp ratio to around the 75% mark (not that the us has any intention of joining the euro). when japanese govt debts started mounting in the last decade, the rating agencies had no compunction in downgrading it below aaa. however, i expect the us govt is in a much better position to get favourable treatment from the ratings agencies right now. any such downgrade could be catastrophic for foreign portfolio investment in the us and therefore on the usd. even without such a downgrade, the increase in supply of treasuries will definitely weigh on the market.
i personally also agree with robert that the usd is likely to get hammered in the coming months. we have already seen the usd lose its primacy in the last few years as the base currency for non-us private sector investors. but that still leaves a lot of governments living in the old world of the dollar standard.
the rationale for east asian economies to hold so much usd is based on its historic importance as a major export market (although the combined eurozone is now a bigger one). buy usd and keep your exports cheap to the us consumer. but if that export market is in recession and not buying anyway, then it makes sense for those countries to start diversifying their reserves. moreover, i think that if the dollar starts trading through 1.60/eur level again, then it will put a lot of pressure back on middle eastern countries to break their dollar link as well, creating a kind of cascade effect on the dollar's weakness.
interesting times.
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You wrote: "more rational for the Chinese to own the American financial system itself."
Fascinating idea. However, would that mean the Chinese could charge whatever Interest they liked on any debt they took on?
Maybe Marx was right, and economies evolve with technology - but not in the way he thought...
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I am assuming we are looking at a massive tax payer handout to the financial institutions. This will mean vastly increasing the money supply and therefore risk a large increase in inflation. Inflation is already a problem, and this is only going to make it worse. But this is the classic way for governments to write off their debts - just let inflation rise and gradually devalue the debts. The US gov is solving two problems *for itself* here. Keeping the bankers and financial system solven, and at the same time, ensuring that inflation will rise to wipe out the collosal budget deficit. What people are failing to realise in all this is that the US as a country could well be heading towards default itself, leaving China, Russia, and the far east to move in and snaffle up cheap assets.
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And the capitalism doesn't work?
Genius Mr Preston. And the Chinese phenomena is built on? Cheap manufacturing and ridiculous property speculation. Walk around any city in China and there's monolithic sky scrapers/appartment blocks that have never been filled and probably never will be. Then go to a minor town in the middle of nowhere and you guessed it there's another skyscraper doing erm very little. China owns massive ammounts of US debt as to their wasteful investment in the third world how much has it lost?
Yes there probably will be a readjustment of financial power to the Chinese but if you want you have your institutions run by Chinese then let's just wait for the most monumental crash ever seen. Dotcoms can operate on a new business model where profit just goes up. Property is due to rise for erm forever. China is so big it can drive it's own growth and never go into recession????? When consumption goes down China's ridiculous ammount of bad investment will be uncovered. Hence China can not afford to let recession hit too deep to the US. The US drives the world as seen by Paulson's recent solution.
Mistakes they've had a few but China there's too many to mention. God help us when China hit the wall like Japan in the 80's, and that will happen.
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So Paulson, as you say - "the former boss of Goldman Sachs", has saved the world !
How convenient for ... err ... Goldman Sachs.
Actually, let's watch and see. There's a good case for the 'temporary respite' tag, per #23 above.
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Robert is right in the assumptions made regarding future positions. The writing was on the wall some years ago about unethical practices in brokerage houses. Instruments based on algorithms and complex computer modelling enabled this - along with a raft of 20 something traders who were risk averse.
Mostly young men who bent the rules, moved the goal posts and generally pushed
the envelope of legality in order to make huge profits on the back of someone elses loss. Rogue traders brought down banks - and they got caught - but the sheer values they were dealing with was a recipe for disaster. Now the financial tsunami is washing around us. We will survive but there must be more regulation - we cannot afford this form of unbridled capitalism. My prefdictions: The Euro will become the dominant currency; The Australian bank 'Macquarie' will go bust; more rogue traders will be named, shamed and sent down.
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There was a time when building societies (and maybe banks?) would only lend money for mortgages on satisfactory evidence that one had been saving with them for a period . There was often a queue to apply for mortgages.
They would also only the lend money which investors had lodged as savings, rather than borrow money from elsewhere to lend on.
Why has it taken such a severe crash in the financial markets to return to what ordinary people would regard as common sense lending?
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If blame is to be apportioned for our current financial wreck, then we need a root and branch investigation of the banking system and its methods. The time for incremental tinkerings around the edges has passed.
If any other industry caused so much havoc, there would be criminal investigatons and quick legislation to either ban the industry and/or its practices.
Instead, we have politicians and central bankers talking banally about "stability" i.e. lets just settle down to business as usual as quickly as possible.
All these banks should have been allowed to fail. Their management have permitted and rewarded incredibly stupid decisions. They should fold. Instead we, the taxpayer, without our permission even being asked, are now propping up the very companies that caused the problem.
What is wrong with this picture???
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I am starting to change my mind about shorting. I think the interesting thing about short selling is that because the assets (shares) end up where they were to start with, you can quite happily carry out something almost identical to shorts without any change in ownership of the shares, it is effectively a bet linked to the movement of a companies share price. (which would interestingly also have the correctional advantages already noted about shorting). So why don't they just do that (bet) rather than actually "lending, selling and buying" the stock?
Answer: The "betting" price gets mangled up with the starting prices of the shares and make it darn difficult for investors to know whats going on and they are more likely to spook - split the two out (somehow - by banning shorting) and you solve the problem. Funds can gamble on index linked betting, and investors can see the price of shares reflected by long term investors.
Also maybe you get taxed more on betting than you do on buying and seeling shares, and the systems are not in place to handle this at the moment, surely this could be sorted?
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a few words on inflation:
the injections of several trillion usd by the world's central banks into the money markets this week will not be inflationary. these are short term loans extended to counter the collapse in interbank liquidity. without these loans there would be a total collapse of the global banking system which would be extremely DIS-inflationary. once confidence in the interbank market is restored, the central bank loans will be repaid (with interest) and the influx of money will be taken back out of the system.
the nationalisation of bad debts by the us treasury is also unlikely to be inflationary. they would be very stupid to fund it by simply printing more usd bills. one of the few things that milton friedman was right about is that this leads directly to hyper inflation. instead it will be financed by issuing a heck of a lot of us federal debt, which will have a neutral impact on inflation, as all it represents is the coversion of existing private debt into public debt.
things that may cause an increase in inflation however are the following:
- the fed keeping interest rates below the inflation rate in order to avoid a recession
- loss of confidence in the usd, which would lead to a rise in the price of imports
- the debt relief that will undoubtedly be offered by the us government to the borrowers they are taking on as they work out all those bad debts over the next few years
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Short selling is a GOOD mechanism.
If a fund has millions of pounds in a company, and they believe the price is going to drop, they can either sell those shares (actually *causing the price to drop*), and then have to find a new investment... buying millions of pounds worth of different shares and actually pushing up their price artificially (so costing more than it should)...
Fees, Stamp duty, Tax etc all to be paid on top.
Alternatively they can lend the shares to someone who wants to sell short - they receive a fee (that covers the expected drop), eventually get their shares back and keep the fee to cover the drop.
Even if short selling is blocked, there will be plenty of derivitive products that *should* provide the same protection - however being more complicated are likely to incur additional fees, and be open to error and abuse.
FSA said HBOS was absolutely fine immediately afterwards Darling said he had known about the problems for weeks -- someone has been lying to the market...
Who was it ? surely something for a real journalist to follow up...
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My first reaction to this is: how can a $180bn taxpayer lifeboat rescue markets from a supposedly multi-trillion-dollar wave of bad debts? Presumably the US taxpayer has to take on board the entire difference between the dubious mortgages and the underlying value of the assets against which they are 'secured'. At $180bn, it just doesn't add up.
To be really effective, this plan would need to be much bigger, and would by implication be inflationary. Perhaps that's the plan; reduce the real value of the debt black hole by devaluing through inflation? If that's the plan, it involves penalising the prudent in order to bail out the feckless.
Shorter term, this looks like a classic 'bull-trap' - during a downward spiral, you get an up-tick which is just big enough to sucker in the bulls before the next downwards lurch begins.
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Mullered = Smacked, beaten, hammered, etc!!
Does stand out as a bit of a colloquialism in his BBC speak, doesn't it!
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Fully agree with #2.
Given the HBOS takeover is so disasterous for competition......
Could the ban on short selling not have been announced first?
Maybe just maybe that might have been enough. Maybe not but at least just see.
This might sound basic but my expectations on competence are rock bottom after witnessing the bank run last year.
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Woe betide any central banker who tries in the future, should this diasasterous plan be implemented, to weild the stick of moral hazard. Every financial institution will simply quote the Paulson Plan, pass off all that is toxic on us the tax paying public and start again... immune from the threat of failure.
Furthermore, don't think that we in the UK wont be asked to pay a price for this American bailout of American banks... we already are. When you create that much additional cash it has to find a home somewhere. It will...it has already... begun to chase exsisting goods and services. Take a look at oil, up $7 dollars yesterday. The downward trend of that commodity is now reversed and so, to help our American friends, oil will fly past $200pb by Christmas with the obvious consequences at the pumps. But don't worry. With a loaf of bread costing £3 a loaf for example, you'll be too worried about affording your next meal to be worrying about the fact you no longer can afford to drive a car. Inflation? You ain't seen nothing yet!
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I look forward to ending of all derivative trading in stocks and shares.
Owners of shares, particularly pension funds, should be prevented from lending their stock for such purposes as falls in price directly oppose the interests of their members.
All hedge funds should be closed down.
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Well, this all just goes to show that if you want to save (long term) for your future, or for your retirement, you are best advised to invest in GOLD....and keep it in a safety deposit box somewhere. The wholesale bail-out of the US and UK banking sectors, thereby socialising the banks' huge losses, is greatest attack on personal wealth ever since tax was invented.
PUT YOUR MONEY INTO GOLD..... as gold (or rather the lack of it) is why the banks got themselves (er, I really mean us) into trouble in the first place.
The fractional reserve banking system has allowed them to get away with recklessly expanding their lines of credit (by giving anyone with pulse huge loans that they could never repay)....is the real root cause of the problem. It is nothing short of legalised fraud.
Quote from US president - Woodrow Wilson (1913-1921) made shortly after signing the Federal Reserve into existence.
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."
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Talking about the core of the problem; does this have anything to do with the sizeable chunk of US population which bought into sub-prime products? Where would these people live without this market segment? Is not it, at least, partly about the US government shutting its eyes in front of a potentially major social/poverty issue and letting the financial system handle the problem on its own way? At that time, it has probably seemed a cheap solution from budgetary point of view, has not it?
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The news from America is awful.
If we are buying the debts of the idiot financial crooks that got us into this mess ,so that we can pretend to reinflate the artificial balloon we call our economy , then we are condemned to 3 to 5 years of paying both the interest on the debt as well as I surmise , an intention to somehow get the general population to accept approx a 20 percent reduction in real wealth/earnings while the effects of globalisation are played out...this is a horror story with big political implications but perhaps worth it to save the financial system from totally failing
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friendlycard @ 36
the 180bn is no cost to the taxpayer. it is a loan by central banks to the banking sector that will be repaid by the banking sector.
btw you made me realise in post 25 i said "trillions" instead of "billions". an easy slip in this crisis. the reason why the loans are only billions is because it is to ease a liquidity squeeze being faced by all banks (good and bad). the money will be used by them for their day-to-day operations. this is basically like replenishing a company's kitty with a short term loan.
the big paulson-bernanke proposal to consolidate the banking sectors bad debts however IS something that runs into 13 figures and WILL cost the taxpayer (though the cost to the taxpayer will only be the value of the debt relief offered to the defaulted borrowers, so should be a lot less than usd 1 trillion).
this definitely proves that saving the system is more important to the us government than imposing moral hazard. like it or not, no economy can survive without banks. so saving the financial sector has to be first priority. however, i expect there will be some very strict regulation coming to deal with the moral hazard issue. i foresee higher disclosure requirements, much more conservative accounting on treatment of "off balance sheet" items, limits on bank's market vs deposit leverage ratios and a reform of the bonus system for paying bank employees.
a more philosophical point: all economies require a financial system to allocate capital. all such systems are subject to period crises. a major advantage of capitalism is that markets highlight these crises much earlier on, make them more urgent and give a clear signal of when they have been successfully dealt with. eastern europe had their crisis in the 70s. it only got worked out in the 90s.
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This is the worst of all possible outcomes. I am ashamed of our cowardly politicians.
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So are we talking about soaking up just the debt associated with the toxic mortgages or does this include the vastly larger potential debts associated with credit derivatives? I'm guessing not as these total up more than the world's GDP. These seem to have been calculated based on even more wildly optimistic assumptions than mortgage debt. And they are so huge they make the toxic mortgage issue seem trivial. Of course they won't all go bad at once unless there's a major recession. So that's OK the isn't it?
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The weeds have out grown the crop. The Governments have to do some serious digging out of the weed roots. When that's done use weed killer. Regulate these SoB's
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This is the end of the US dollar's dominance. No doubt about it.
But this crisis isn't over. The joker here surely is the Chinese and their reaction. What happens if S and P downgrades the US government's rating as a consequence of the 'rescue'? US government stock and the dollar are going to be viewed as less safe. Now the Chinese own about $1.7 trillion of US government stock and dollars. Understandably they will want to move their money out of this into something more attractive and safe asap.
Now think back to 7/11/7 when a rumour started to circulate that the Chinese govt was thinking of diversifying its holdings out of US assets. The Dow Jones dived and with it the Dollar.
Next time there will be no lifeboat....
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I totally agree with your analysis Robert. Banning short-selling, is the ultimate reward to cynical and incompetent bankers who have been licenced to gamble with everybody's lives with no downside to them.
If not a single one of these financial wizards could not foresee the result of lending to people who could not repay their loans was going to be, it's their problem and why are they in the positions they are in? Banning short-selling only insures the position of failed bankers. They cannot lose. Tommy Cooper could not have come up with a bigger joke at our expense. The only answer is to hold the bankers accountable and relieve them of their positions. They are criminals or as thick as two planks.
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A failure of regulation (banks have to set aside little or no capital for assets held on trading account whereas the same assets held on the banking book attract 8% to 12% capital) is at the root of this problem.
When the US housing market turned down the instruments based on it became untradeable. Banks could have held the assets to term and accepted relatively modest losses over a pro-longed period except the capital requirements prevented moving the assets to the banking book. Result: forced selling and artificially high losses, followed by a collapse of confidence.
What has been needed for 12 months is a source of long term funding that would enable the tainted assets to be held and worked out. Having torpedoed the banks' ability to raise long term funding (equity being the ultimate in long term funding) by his handling of Fannie, Freddie and Lehmans, Paulsen left no alternative to the government providing that funding.
The only real question is what price the assets are bought in at. At current market prices the buyer should make a huge profit.
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Paulson's bailout plan is about liquidity and only indirectly about value.
Value of a mortgage is the present value of repayments. What is not known is morgagees ability to repay and this coupled with collapse of underlying property collateral causes the mortgage assets to loose liquidity.
Paulson plans to take on the credit risk of the morgagees and pay banks cash thus freeing the banks from illiquid assets and liquifying the system.
If this new cash is taken up by credit-worthy borrowers and used to jump-start the property market again then the pre-existing mortgages will become liquid again as property collateral will have known value. This in turn will get the pre-existing mortgages held by US government repaid and everyone will become happy.
But all this assumes that there are CREDIT-WORTHY BORROWERS WILLING TO PROP UP THE PROPERTY MARKET. If this assumption turns out to be wrong - and I believe it is - then Paulson's bet will cause massive inflation and devaluation of dollar.
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Blaming short sellers for the run on banks is like blaming the undertaker when someone dies. If a financially healthy company is subject to short selling, then those shorters will ultimately get their fingers burnt. The shorters knew what was happening in Northern Rock. As a result the share price gradually fell. Imagine if the news of this company had come out with the share price above £10! The innocent investor would have lost even more. If HBOS was not in danger the directors could have sat tight.
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The lunatics have taken over the asylum.
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Robert you're right to be cautious about what's going on in the US. I suspect we'll all be back here wondering what's wrong again in the next week or so. Stocks are rising, sure, but as you point out are we really seeing the underlying problems being addressed? I don't think so. As for the idea that some institutions are simply too big to fail: rubbish. If we really believe this then these institutions ought to become a part of the state. Not that I'm advocating this as a solution, all I'm saying is that we can't have it both ways we either have a market system or we don't. These institutions shouldn't be bailed out, full stop. There has to be a severe price for failure not a generous reward.
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Does this mean that the HBOS takeover will now not be approived by shareholders - who would selkl when the share price is higher than the bid price? Alternatively, if the take-over fails, but the reasons for shorting (i.e. liquidity) are sound, what happens when six months down the road the bank fails because it cannot borrow to repay its market obligations? Is the FSA now responsible for the bank failure by influencing the market?
There are rules to prevent abusive behaviour by users, and I'm left wondering why they appear not to apply to 'regulators', who seem free to meddle whenever they like?
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To #3:
Writing calls, buying puts and buying futures does not drive down prices of underlying securities like short selling can.
As you know, the above are only derivatives and as such are an indirect punt on the underlying doing something, but they do not directly affect its price.
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Isn't the financial problem at the heart of the mortgage and credit derivative crises that we allow financial institutions to pass on the RISK associated with debt? It means that they pass on the duty to assess the dangers to a third party and absolve themselves of due dilligence. If the loan seems risky, you can always share out the actual debt (and potential profit ) with other institutions. Being able to sell the risk separately to the debt seems fundamentally flawed. If you have so little faith in the loan that you have to insure out the risk, should you really be making the loan in the first place?
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Banning short selling is just a way for the City to appear to be doing something. Short selling in itself is not a problem - markets are just big communication networks, and short selling is the most powerful negative message available; removing this capabilty just reinforces the delusional optimistic tendencies that the market tends to embrace most of the time. If some people are manipulating markets using shorts then it means 1) traders are just sheep and base their decisions on deals rather than analysis, and/or 2) traders are just sheep and base their decisions on deals rather than analysis. The use of rumour has nothing to do with selling short, it is breaking the rules and should be treated as such. The failure to regulate the City adequately in the name of liquidity and enterprise has led to a degree of lawlessness in the financial markets that would be intolerable elsewhere.
As far as the banks go, they are reaping what they have sown - offering unaffordable debt helped to create the house price bubble, and a cycle was created that gave the appearance of economic growth, while being totally artificial. The bubble had to burst some time: once people started defaulting then credit would start to dry up, prices fall and the banks find themselves with debts worth less than the collateral, owners have negative equity which prevents resale, everyone loses. The cause was greed on the banks' part, stupidity on the borrowers' part. The difference is that borrowers end up homeless while the bankers made their bonuses. Once again. adequate regulation could have curbed the problem much sooner.
When will we realise that the city's self regulation (because whatever the bodies we have, they are all staffed by bankers) is never going to result in a system with the integrity required?
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Stocks are not rallying in response to the "rescue" plan.
It's the shortsellers leaving the market in disgust!!
A ban on short sales:
http://sec.gov/news/press/2008/2008-211.htm
Once they are gone, guess what then happens: There are no buyers anymore.
Next selling will be banned, like in Pakistan.
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RP is on the right lines in the last part of this blog entry. If the US Government assumes liability for all the bad debt that has been incurred in the recent bubble, as seems to be the mooted slution, the result will simply be a dollar collapse.
The US has a trade deficit of ~$60bn PER MONTH - which translates to ~$700bn on an annual basis - and an anual budget deficit of several hundred billion dollars (only a couple of weeks ago it was projected that the US budget deficit would hit a record $438bn for 2009 - see http://news.bbc.co.uk/1/hi/business/7607872.stm ). In other words, EVERY YEAR the US is spending something of the order of a trillion dollars more than it has.
By any definition, America is effectively bankrupt. The world has tolerated its "banana economy" for years as I have already pointed out on a previous Peston blog (see here). Where the US dollar is concerned, it's all very The Emperors New Clothes - the question is who will be the little boy that points out that the Emperor is in fact naked?
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What I find a little strange about the FSA psoition on trying to control short selling is why no one has drawn attention to the fundamentals involved? Most importantly why lend the stock to a hedge fund in the first place (okay maybe for the fee but..) as, if you as the owner of the stock as a fund manager etc surely knowing that these guys take short positions, your own fund is going to get a hit.
It works ok the other way,even if it does over value, but maybe thats why we get the trade, hedge funds take very short term positions and the fund managers take long, so it all works out in the end, except of course for the guy who has to take his pension benefits now.
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Am I the only one to have noticed that the concerns about the Large Hadron Collider have all been realised?
The black holes and strangelets have arrived and are manifesting themselves in the Stock Market.
Switch it off now I say.
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These investments by central banks/governments only solves the problem short term.
What is needed is some sort of "stick" to punish those who have caused this situation. After all they are rewarded with many many carrots on bonus day for having got it right should they not loose money for getting it wrong?
I seem to recall any person being made bankrupt has their finances examined going back some 6 months or more to see if there has been any misuse of funds. Surely the senior management of these banks and financial corporations recently bankrupt must carry the responsibility for their bank being in the state it is and should have to return all bonuses for the current year and previous year to the banks creditors, after all they made the bad judgement which has landed their corporation in the position where they are susceptible to the mistakes of others.
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Ref 34 from benagyerek
all you panicky bloggers should read 34 and its words of wisdom that explain the sensible measures being taken to cure the costly errors of a deregulated finance industry. Many of the trillions of dollars of unwise investment have not been "lost" in the sense of wartime losses on burning buildings and sunken shipping. The point is that some of the losses are not real because the gains they are measured from were never real!
True, wealth has been redistributed, - not only in excess bonuses but in future commitments. There are winners and losers and longer term economic change will reveal these. In the meantime the injection of liquidity and purchase of bad debts are being used to restore a balance and give confidence (but hopefully not overconfidence). Runaway inflation and dollar collapse are not a direct consequence of temporary intervention.
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50. Defeased;
Absolutely correct. The Wheat is being valued at Chaff prices because someone mixed them up. The system needs time and stability to work it all through. Some people are estimating $2 trillion of US mortgage losses. Have they stopped to think how many bad mortgages that implies? It's nonsense.
Paulson is playing a blinder so far and my money is on him, not with the shorts. I'll put some money into "Bad assetco." if I get the chance.
It is also absolutely right to ban the shorting of financials whilst this is happening. The market does not know the true value of bank shares at all and shorters have been taking advantage of this vacuum to make money and threaten all our hard earned deposits. A wider fix cannot be made in that environment. Full marks to the FSA on that one - better late than never.
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THOMAS FEFFERSON: "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
ALAN GREENSPAN: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
PRESIDENT THOMAS JEFFERSON: "The system of banking [is] a blot left in all our Constitutions, which, if not covered, will end in their destruction... I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity... is but swindling futurity on a large scale."
PRESIDENT JAMES A. GARFIELD: "Whoever controls the volume of money in any country is absolute master of all industry and commerce".
CONGRESSMAN LOUIS McFADDEN: "The Federal Reserve(Banks) are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this Nation is run by the International Bankers".
HORACE GREELEY: "While boasting of our noble deeds were careful to conceal the ugly fact that by an iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.
THOMAS A. EDISON: "People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest ...But here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People."
PRESIDENT WOODROW WILSON: "A great industrial Nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nation and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world - no longer a Government of free opinion no longer a Government by conviction and vote of the majority, but a Government by the opinion and duress of small groups of dominant men". (Just before he died, Wilson is reported to have stated to friends that he had been "deceived" and that "I have betrayed my Country". He referred to the Federal Reserve Act passed during his Presidency.)
SIR JOSIAH STAMP,(President of the Bank of England in the 1920's, the second richest man in Britain): "Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits".
MAJOR L .L. B. ANGUS: "The modern Banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint and unmint the modern ledger-entry currency".
RALPH M. HAWTREY (Former Secretary of the British Treasury): "Banks lend by creating credit. They create the means of payment out of nothing".
ROBERT HEMPHILL (Credit Manager of Federal Reserve Bank, Atlanta, Ga.): "This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon".
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THOMAS JEFFERSON: "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
ALAN GREENSPAN: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
PRESIDENT THOMAS JEFFERSON: "The system of banking [is] a blot left in all our Constitutions, which, if not covered, will end in their destruction... I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity... is but swindling futurity on a large scale."
PRESIDENT JAMES A. GARFIELD: "Whoever controls the volume of money in any country is absolute master of all industry and commerce".
CONGRESSMAN LOUIS McFADDEN: "The Federal Reserve(Banks) are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this Nation is run by the International Bankers".
HORACE GREELEY: "While boasting of our noble deeds were careful to conceal the ugly fact that by an iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.
THOMAS A. EDISON: "People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest ...But here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People."
PRESIDENT WOODROW WILSON: "A great industrial Nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nation and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world - no longer a Government of free opinion no longer a Government by conviction and vote of the majority, but a Government by the opinion and duress of small groups of dominant men". (Just before he died, Wilson is reported to have stated to friends that he had been "deceived" and that "I have betrayed my Country". He referred to the Federal Reserve Act passed during his Presidency.)
SIR JOSIAH STAMP,(President of the Bank of England in the 1920's, the second richest man in Britain): "Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits".
MAJOR L .L. B. ANGUS: "The modern Banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint and unmint the modern ledger-entry currency".
RALPH M. HAWTREY (Former Secretary of the British Treasury): "Banks lend by creating credit. They create the means of payment out of nothing".
ROBERT HEMPHILL (Credit Manager of Federal Reserve Bank, Atlanta, Ga.): "This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon".
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"The breathtaking rises in the price of bank shares this morning are symptomatic of a stock market that is bereft of reason and is being driven almost purely by hysteria and momentum."
I disagree. The huge swings have fundamental foundations. It only takes modest swings in the value of assets to massively impact the equity of a bank when that equity is geared up 30 or 40 times.
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'absolve many of the world's biggest banks of their idiocy during the boom years, by nationalising their bad debts.' and on top of that make the investing in shares a one way bet as you can't sell short .. absolutely brilliant ! we as taxpayers take on ALL the risk and the bankers get to start again - where is the logic in that? Or more to the point the downside to the bankers failure ? None - unless its governments using our money to tacitly accept responsibility for ineffectual regulation over the last 10 years ?
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Just more socialism for the rich, free market economics for the rest of us.
The taxpayer loses out big time by this nationalisation of existing bad debt, while the city financiers are left to make money out of creating more of the same bad debt in the markets.
Have no lessons being learnt here.
The city whizz kids are still able to pocket huge sums of money by risking all of our jobs, our deposits and our assets.
Lets have no more talk about how these financial centres are the powerhouses of our economies. These institutions are simply parasites.
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Brilliant article,Mr Peston.
But why didnt they think of it earlier?
Just give all the banks failures, debts and losses to...............THE PUBLIC!
BRILLIANT!
Are we about to get the biggest tax hike in history?
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The US is effectively looking to communism to resolve the problems.
However unlike Russia and China where the poor peasants revolted and got the state to provide for them, in the US its the super-rich bankers who have control of the system - the government is now bailing them out with money raised in taxes from your average Joe.
Ordinary Americans who are losing their jobs and their houses are seeing the super-rich bailed out with tax payers funds when after many years of wins they've suffered a devastating loss at the financial roulette wheel.
Uncle Sam is now taking money from companies who are still making money, and then giving enormous piles of it to companies that have a proven track record of losing it. Not a good way to run a successful economy.
None of this is good for ordinary Americans. Only the super-rich bankers will be better off. Mr Average will continue to see his earnings freeze as inflation takes off and his house is repossessed.
And whats more he'll be watching Fox News, be told its all a great idea (by the super-rich who own the station) and he'll vote for more of the same and rant about how bad communism is as the US state takes over ever larger chunks of the ailing US economy.
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Before the PM and the Chancellor over-indulge in self- congratulation at the steps they took yesterday to ban 'short selling' could not the takeover of HBOS been avoided had they taken action a week earlier? Another example of their dithering? The Scottish Nation won't forgive them!!
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Nick Leeson lost 800 million.
He was prosecuted.
Our bankers have lost 200 billion.
Is anyone being prosecuted?
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Well, now the artificial effects of shortselling are being stripped out of the market, we can get to see what real investors feel the Shares are worth.
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All the Kings horses and all the Kings men.
Couldn't put Humpty together again.
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In reply to 10 B is the correct answer.
Fund Managers lend shares at a profit, not risking their own money just their clients who own the Shares and do not get paid for them being lent out.
This also happens with Shares held in a Nominee account.
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The problem seen with shortselling recently has been down to the shear scale on which the Hedge funds have acted, in concert, in order to control the Market prices of certain target institutions.
This is thusly an artificial market, a market being rigged against the Pension Funds and small investors.
I have been saying this since the begining of this year but it has taken major crisis for people to take it seriously.
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I question if root cause analysis would state that mortgage defaults were the cause of this. An analysis might lay the blame on US deregulation laws passed in 1997/98 and subsequent laws in 2001 and subsequent skirting of insurance laws by inventing credit default swaps. If one wants to go further, the deregulation was an attempt to allow US financial institutions to better compete in a global market (GB being one that was worth emulating). But if one wants to go back even further, one would see the bailout of farmers in 1922/23 and responses to banking failures in the mid 1920's as similarities. I suppose one can go back to earlier governments attempts to control economics and find all the failings of this current situation. It's just human condition.
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Mr Peston says the Bank share rises are breathtaking.
Well no.
The share prices are just returning to the levels they should have been at had the market not been manipulated by shortsellers.
Shortsellers whose antics will cost the Staff of Hbos a considerable number of jobs.
Needlessly.
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Short selling stopped until January.
It should be outlawed for ever and all other morally corrupt practices.
It's time to name and shame the short sellers. If I find out my pension company is loaning out shares I am taking my business elsewhere.
Best place for your money now is under the mattress or in property abroad.
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China is way ahead of the USA, in that the state already bankrolls unprofitable businesses in order to maintain employment, or allow low productivity and competitive pricing.
The banking culture in China is less gung-ho, but more oh-well.
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Governments should be aware of the attitude of bankers the world over, their greed knows no bounds, our governments have failed us all.
Instead of letting them have their own way for the last few decades we should have been regulating and watching very closely.
It's the greatest shift of wealth we have ever seen and it certainly is not over yet by a long chalk.
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#34, you are wrong about inflation. A rise in government debt is inevitably linked to a rise in inflation, no matter what they spend it on, even buying private debt. After all, those creditors will have more money to spend after the bailout than they did before but output in terms of goods and services will not have increased, so, whoops! you've got inflation.
Of course, if the US government ever gets round to reducing that debt, there will be a serious deflationary effect. But I wouldn't hold my breath.
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Robert
The ultimate cause is the chronic downturn in the housing market....
The actual cause is surely the crazy upturn in the housing market over the last number of years helped by 125% mortgages to anyone, relaxing of buy to let etc... Inflated prices caused by debt society.
The BBC amongst others would regularly broadcast "good news for homeowners, prices have increased by xx%". Now it’s bad news as prices falling at 2% per month but this is function of crazy increases before (which were never bad news)
Brown takes credit on the way up but now blames world events for the downturn. Ok exacerbated because banks were buying and selling products and had no real idea what they were but real fault lies at Governments door in poor regulation of basics – you can’t borrow than you can afford to pay back.
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Please note the loophole that somebody pointed out yesterday....
#128. At 7:00pm on 18 Sep 2008, stigmondo wrote:
"Don't get your hopes up (re FSA announcement about retsrictions on short selling).........It's based on disclosure of net positions at market close - what about intraday shorts (naked)? I'm going to bet there were plenty of those that attacked HBOS. What about short CFDs? What about sector CFDs?
Too little, too late, wrong target and all for puff."
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We're in baby and bathwater mode. Yes, banks create capital by multiplying the deposits they take (according to a government agreed ratio) and the government (lender of last resort) prints the money via bond issues "gilts" that allows them to do it. Without this process no new firm could get started, no public sector project undertaken. The secret lies in prudence on the part of the bankers and skilful management and regulation on the part of the government. Securitisation created a process very few people understood and even fewer were able to control. What we need is a greater, and better, appreciation of risk so that capital allocation is better managed. (Have a few dodgy US trailer park mortgages - but not too many).
The idea or notion that financial market makers, bankers, actuaries, statisticians, accountants etc know all there is to know is fanciful. As new ways of doing business are developed we have to learn how to use them to best advantage (trailer owners need mortgages too). Sometimes these lessons are extremely expensive. Ask 17th century tulip growers, 18th century merchant adventurers, 19th century railway builders and Weimar Germans and Japanese housewives in the 20th century.
The key thing is that the US government does not pay for this bail-out by releasing a burst of inflation but by skilful, long term management of repayment and the inevitable defaulters. Who knows, given that they will be buying this debt at knock-down prices, they might even turn a profit.
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I still think and have always thought that the underlying problem here was that that loans to people who could not pay them back were sold on and were highly rated by the rating agencies and banks bought and sold these loans on the assumption that as they are good loans.
The rating agencies got away with murder as they pretty much lied.
Did we not learn from Enron and it's auditors????
Funny how people forget things on order to try and make money.......
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The perspective of the Chinese middle classes on all this has been enlightening to me; many of my colleagues, including people in finance, seem to think that all western Banks are about to crash unless bailed out by Governments. Mind you, many of them also think that the Incredible Shrinking Dollar is a cunning plot by the CIA.
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This is, of course, a great big joke.
And it's at YOUR expense.
These bail-outs do not make the problem go away - and the problem is that quite simply the banks created thousands of times too much money, allowing your house price to inflate, allowing you to buy plasmas and BMW's with money you hadn't earned (unless you were a banker earning excessive amounts from the fools you lent money to).
And now all that money has evaporated into thin air, the respective govt's are piling the liability for it onto YOUR shoulders. The bankers will still be sitting pretty at the end of this - YOUR house may be sold and YOUR cars taken away.
Moral hazard has been thrown out the window to allow the banks, (who already hold far too much power in our lives) to continue their stranglehold on our everyday existence.
And so we all sit at our PC's scared witless about the collapse of the banks.
We allowed this and we have to face the consequences. Say a fond farewell to the UK as we know it.
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How far are we away now from an 'unthinkable' downgrade of the USA sovereign rating? And if the cherished AAA is lost, as happened in Japan and Canada in the past, can any institutions based in the US still maintain theirs?
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So the American governmnent bails out the corporate guys and the Ordinary Joes end up picking up the tab. The financial services sector is then free to continue to make money and the same mistakes again with no hint of punishment for their contribution towards the current mess. Naomi Klein's "The Shock Doctrine" highlighted the potential for the business elite to profit from a crisis using taxpayers' money and yet again she has been shown to be spot-on...
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The fractional reserve banking system is in complete collapse.
As expected, all the usual apologists and beneficiaries of this system are going out of their way to prop it up with bits of chewing gum and worthless paper, when, in fact the only cure would be to completely change the system, go back to hundred percent reserve banking, backed by a gold standard, where there would be no 'liquidity' crisis, and no 'funny' fiat money, floating about.
The technicalities of managing this transition are explained very simply succinctly by the economist Murray Rothbard in the conclusion to his excellent book, The Case Against the Fed.
The only downside would be that the cityboy snake oil salesmen would all be out of work. But since this crisis is all of their own making, I doubt any real people would shed many tears.
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What a turnaround we are now seeing. The American idea of globalisation which they assumed would be of utmost benefit to themselves has been completely turned on its head.
Instead we are finding an undemocratic country like China in the position of being able to call all the shots.
It would take a very clever person to find a way out of this one.
I hope the war mongering coming out of Washington at the moment is not their answer.
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Guys, I think it's magnificent the way you are debating and analysign what's going on.
The trouble is that it's all political. The great champions of the free market model really have absolutely no idea what to do.
They are throwing money at it to go away, but when other gpovernments over the last 30 years have wanted to do this, the US and IMF have said 'NO'. The markets have to sort themselves out leaving the weak, the reckless and the unsustainable to go to the wall.
Why can't they do this here? Because of the US elections, and because we have a weak, directionless government who don't understand the system.
The 2 big western economies sold their soul to the financial services industry and don't know how to get it back.
They can't of course, but in trying to do so they will pile up debts that will weigh us down for generations.
There is no easy way out, but all that is happening at the moment is that oil is being poured on the flames, and the fire's gonna get a whole lot worse.
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We will be saddled with debt for generations and will fall back in real terms.
The future growth for the plutocrats in UK and US is not the hoime markets but the foreign markets. London's postion as some kind of epicentre for the world's financial services industry was never going to last.
What we have to watch is what kind of laws / regulations / cutbacks they make on us. Pretty soon people are going to be so scared about the houses, jobs and pensions that they will accept anything o0ffered if it looks like stabilising the situation.
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It occurs to me that Hank Paulson may still have a very significant amount of Goldman Sachs equity. Is it therefore possible that, as well as preserving the US financial system, he is using the government's funds to ensure that his own former employer can survive without being sold at a "knock-down" price? If this is the case, the taxpayer's resources are being used to preserve his own wealth. Surely a huge conflict of interest.
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The desperate hedge funds left in the short selling market are having to buy back the HBOS stock! Stop them from voraciously buying back bank stock. I demand my share prices not be raised by such amoral short sellers. It is wrong.
All this moral and amoral rubbish is a load of tosh. We'll be here again in another seven-eight years in a different industry. Wealth creation is morally ambiguous as everyone decrying it would be if offered the riches of boom time. As for put your money into foreign property oh please. A contraction in the money supply around the world and the resultant recession. When do emerging economies and oil economies do well in that time? Dubai's not too overbuilt and prime for a property bust?
An interesting point being Mr Peston when did 6% of a stock determine a companies shareprice and collapse? If as you said 6% of stock in recent history was being covered by short sellers how does that force a stock to collapse by almost 90%? They can only influence terribly over rated stock. At some point an economy has to pay back it's debt and that goes for all of us.
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This unmitigated disaster has been caused by greedy, irresponsible banks and their employees, on both sides of the Atlantic, who were interested only in their bonuses, commissions and enormous salaries.
These people and the institutions they work for lent inappropriately large sums of money at inappropriately low interest rates to people who have no hope in hell of meeting their repayments.
This system that relies on short term gains that has now created so much stress and pain must be scrapped forever. The irresponsible people should be sacked with NO payouts.
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Even with all the toxic loans etc, I guess the main problem is with institutions who have a liquidity problem. Even with sound core business Northern Rock, AIG, ML etc these companies depend on short term funding but are invested in long term assets. With the "credit crunch" lenders are not willing to roll over these short term loans.
Why are all the central banks supplying huge amounts of "short term" liquidity to the market? How does this help solve the problem? Everytime the amount of money supplied just has to be increased.
In my opinion, the central banks should provide medium to long term funding against quality collateral.. not any worthless collateral offered by the institutions. It should be offered at higher than market rates with heavy penalties for pre payment.
I think with this move, Asset - Liability mismatch in the system would start to get corrected. And as this improves, the credit profile of these institutions would also improve leading to access to required (limited) short term funding.
This is better than letting Lehman sized companies go down the drain as well as nationalising the institutions at tax payer's cost.
It would be upto the shareholders to make sure that the management takes action (before maturity of the long term govt loans) to put in place proper ALM policies and move away from reliance on short term funding.
This could be by way of disposing assets or tying up alternative long term funding. It will probably mean Northern Rock kind of business models would not work in such a scenario and the growth rates of asset portfolios will not be so high. But thats exactly the point. It will help cooling down the market.
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I think that the FSA and SEC were slow off the mark. They have been enjoying champagne with the city bosses for far too long, from my recent degree in economics (which seems to mean nothing in the labour market now) I believe this is called Regulatory capture. I am quiet surprised how many commentators have seemed to overlook this, im not saying its is entirely the SEC/FSA's fault but surely they have had some part to play in allowing it to get to accelerate uncontrollably to the state it has.
My Macroeconomics lecturer from Brunel will be happy i remember this, here's a study from Kaminsky and Carmen Reinhart 03
Financial turbulence in countries only spreads globally when they affect asset markets in one or more of the world's financial centers (i.e New York,
London, Berlin, and Tokyo). Otherwise, spillovers are confined to countries in the same region. Fragility in institutions in the financial centers is at the core of global spillovers while economic and monetary policy news contributes to regional spillovers.
If anyone wants to read the paper its called; The Center and the Periphery: The Globalization of Financial Turmoil
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Three cheers for the American bail out strategy. It's really encouraging to hear of them doing something positive in the world with their money rather than using it to fund invasions of small countries at massive cost to life. All of it just to impose their reactionary ideologies on nations that led world civilisation when today's American morals weren't even a bad dream in the dour imaginations of 17th century planter puritans.
Pay the financial institutions 80 cents in the dollar and everyone's happy. It will only cost a trillion or so which the nuke / invasion budget can easily stand and Iran can breathe easy (you did know they were next - didn't you?).
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We all seem to forget that this crisis stems exclusively from the mortgage issue.
If anybody is to blame it is those bond rating agencies who gave these securitised mortgage packages a rating that simply was not reflecting the quality of the underlying assets. Why do we not hear criticism of these agencies?
Furthermore, who were the staff in the financial institutions who authorised the purchase of such products without satisfying themselves as to the rating - or if they did - examine the rating method and validity?
The banks are currently headed up by bankers who grew up in the 80's when the present free for all started and they have none of the inherent prudence of real bankers nor their sense of both corporate and shareholder responsibiity.
You can forget about short selling - very few bank shares were loaned during the crisis - but I would like to hear from those responsible in Lehmans etc who approved the purchase and re-sale of the mortgage packages. They are the ones who should be held responsible together with the executives who permitted this conduct.
In addition, offering absurd multiples of earnings and up to 125% of asset value to a borrower is criminal use of clients/shareholders funds. These financial institutions are the guilty parties and don't blame the traders who merely sold what they were told or permitted to sell.
Would that footballers were paid the same way - almost exclusively by results. Now there's a thought!
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#13
pollo_mcqueen wrote:
Where are France in all this? Do they just need a proportion of European CB cash? Weve been lied to by our PM and it's time he left - By choice or not!
Bank Of England
European Central Bank
Swiss National Bank
Bank Of Japan
Bank Of Canada
....................................
Where do you expect France to be?
Where they always are?
Looking after No 1 and seeing if they can make a profit ( remember Exocet )
Overall, if you sweep all the **** under the carpet. It is still there!
Do not disturb or lift the carpet at any time in the next ten years.
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Supercalmdown
Several very good points in your various posts. (Sorry to patronise).
I was only speculating with a colleague this morning whether shares held in nominee accounts could be lent for short selling. (ie.; without the consent of the beneficial owner).
Can you confirm that that is the case? If so, that is the first thing that should be made illegal. I don't want my shares lent to anyone wanting to drive their price down.
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It's now becoming clear the state will do anything it takes to preserve the current doctrine of market capitalism.
The credit crunch and the ensuing market collapse are the natural solution to the problems created by overlending and greed.
Very painful, and possibly disastrous to the doctrine we seem to be attempting to save.
Whilst the immediate benefits of a publicly funded bailout will go to those in power, and in government. A disproportionate cost may find itself ultimately resting upon the ordinary citizens of countries affected.
However I suspect the state would prefer to gamble tax payers cash on preserving the status quo, rather than admitting it flawed and seaking a better, more equitable alternative
Are the benefits of our current version of capitalism worth the costs ? Since the era of Thatcher these costs include :
Increases in housing costs, working hours and job insecurity. Increases in crime, immigration and overcrowding.
Decreases in spiritual well being, personal freedom, life expectancy, educational opportunity and social homogenity.
I would predict the outcome of bailing out banks and insurance companies will end in a morass of long term inflation, unemployment and increased social dysfunction. I hope not.
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Hoooooly Moly.
The US government has a proposal to buy ALL Toxic mortgage debt on the balance sheet of US banks!!!!!!
It's difficult to kow how to respond. Its great for the banks - they can off load the consequences of their colossal stupidity on to the American tax payer.
Its probably going to be good for the financial markets and improve the chances of recovery.
Its likely to be good for hard pressed home owners as (one suspects) the government will be less likelt to put them on the street.
Good all round then - not quite.
Once again it shows that bad judgement in banking is excusable. In my view any bank that sells its toxic debt this way should have the entire board dismissed.
It's not likely to be good for the American economy.
I suspect taxpayers who are sensible and prudent might not be too keen on bailing out reckless banker and borrowers.
The other question is .... what are they going to do with all these debts. Is the American government going to end up as a social landlord? it's a helluva gamble which ever way you look at it. As I understand it one of the reasons for the continued uncertainty is that no-one knows what these securities are worth. Suppose the government buy a trillion dollars worth of debt and its only worth 250Million how will the public finances (already in a parlous state deal with it?
Lord... these are strange times.
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Surely this represents a form of corruption, Paulson from Goldman Sachs comes up with measure day after Goldman Sachs falls 26%, and now taxpayers have to pay for mistakes made by bankers who will keep all those years of bonuses?
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Mmmmm........
I'll bet there are an awful lot of smug socialists at the moment.
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Mull can mean "To powder; to pulverize.". So if they're mullered, they're hammered.
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Re #86. I posted that last night, after the press release/announcement just after 6.00 p.m, but before the FSA published the full rules and regulations overnight. I was wrong. On close inspection, they have covered all the bases. Intraday/CFDs the lot, all banned. For those interested, on the FSA website you can see the rules in detail, but the best summary is the FAQ.
Still go with my "Too little, too late, wrong target and all for puff", though..
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basically it is the tax payer bailing out Wall Street. i am not sure i want to save the skins of these guys who make more money in a year than most ordinary workers make in a lifetime without something in return. I want guarantees that no one is remunerated by these ridiculous bonuses, that no one is given a huge pay off for failing, that every financial company is totally transparent, i want banks to go back to the core banking business and get rid of these fancy derivatives that even the inventors dont understand. I want all the money that is given to these companies to be loans at a fair rate of interest to be repaid over a fixed period....etc etc
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It seems to me that the big question at this point is whether the aim now is 'business as usual' or a complete overhaul of the system. All the indications, unfortunately, are that the intention is to restore 'business as usual'. The taxpayer funds a recovery plan, and then when things settle down a bit the financial market can go back to its previous practices.
Electorates need to ensure that this is not what happens. Governments now need to impose sound financial rules. The first should be greater transparency. For example, all short-selling positions should be listed, in real time, so regulators know who is doing what, and when and at what price, and can look for patterns.
Since mortgage finance is the initial culprit here, we need to impose strict rules on mortgage providers. For example, no more than 90 percent LTV, no more than 3.5x earnings, all earnings to be proved (no more self-cert), and no mortgage provider should be allowed to use wholesale funding for more than half of their mortgage book.
And please don't anyone tell me that this is unenforceable. If this became law, sure, some people would cheat at the margins - but that's just like any other law, there will always be a few transgressors but most people obey the law.
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Fractional reserve banking is the main problem, because banks can create huge amounts of money out of nothing by lending it into existence. UK money supply has grown by more than 100 X since 1963, but the population has grown by only 13% in the same period. No mortgage should be given above 2 times verified income and a deposit should also be required, so house prices grow at a slow rate or not at all. Governments, not private banks, should create new money by spending it into existence. The present system rewards debtors and gamblers, causes inflation and does not create real wealth for the good of society. Those with savings or on low incomes are punished because of the resulting inflation.
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The way to stop speculative shorting is for the central banks to play chicken.
Instead of wasting taxpayers money on bailouts they should select a worthy institution being brought down by shorters and buy their shares. Thus driving those share prices up.
With luck the shorters would lose their shirts.
Once they have lost their shirts then they would not be in a position to try it on again. The central banks would of course have to buy loads of shares, costing billions, but they are having to spend billions anyway without stuffing the shorters.
If it all fails then we are into plan X.
As I proposed a year ago, we need a saviour. Somebody we all know and trust. Somebody instantly recognisable the world over that can put his imprimatur onto a world currency.
Who better than Tony Blair?
A new world order, a new world currency.
Guaranteed by his smile..
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I have no problem with governments rescuing falling banks, but banning shorts, but not buys simultaneously, is a total embarrassment. When the dust settles you will find that the short-selling gains is small compared to the gains made from other activities in the market in recent years.
The recent real problem is simple. Traders were marking down shares because simply, THERE WAS A LACK OF BUYERS.
Funny how during the boom of the dot.coms, nobody was complaining on MARK UP ON 50 PENCE SHARES WITH NO '000's OF VOLUME QUOTED IN THE FT THE NEXT MORNING.
As for the balance sheet problems,the market would have rejigged/dealt with the banking problems through interest rates, abeit eventually. It seems ,for the banks, they don't want to pay the market rates.
Maybe house-owning consumers should do the same thing. Demand a direct remortgage through the BOE at a better deal.
Instead, we now have a prejudiced,corrupt and rigged stock market.
Never again will one be able to say ''that's how the market works'' to one's children.
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84 - yes you are right. the freeing up of banks balance sheets would also be a significant contributor to inflation, although i suspect the banks will not (be allowed to) lend anywhere near as liberally as they have been doing the last five years, not for a good few years to come at least.
here is my list of root causes of the crisis. i try to distinguish between systemic failures and triggering events - a bit like distinguishing between the poor design of a building and the earthquake that caused it to collapse.
systemic failures:
- bonus system that encourages traders to favour short term profit over long term risk management; i think bonuses need to be paid out over several years to encourage loyalty to the employer
- separation of relationship with borrower from ownership of credit risk via credit derivatives; lenders/managers of credit risk should be required to retain a significant share (20%?) of that risk unhedged so interests are aligned with the people they sold the credit risk to
- the poor/untimely disclosure by banks of their exposures and losses, and the inability to identify quickly where ultimate loss is held through the credit derivatives market; much higher disclosure standards required including some kind of centralised registry (open to the regulators, not the public) for all bilateral derivatives
- poor oversight by rating agencies (nb imo, just as big as the "conflict of interests" problem is the fact that anyone talented working for a rating agency gets poached by one of the banks); some kind of regulation of their fee structure is needed so they are not dependent on borrowers / deal-makers for their income
- excessive complexity of some credit products that less sophisticated institutions (classic example being ikb in germany) bought because they were "sexy" and somehow produced a very high return whilst receiving a good credit rating; no regulation needed as i suspect nobody in the market will make that mistake again for a long time
- excess leverage of the banking sector generally (which amplified the affect of losses on both equity value and banks' solvency), encouraged by the artificially low interest rate environment; i think this ties in with the lack of capital provisioning against the trading book (good point from defeased @ 50) as well as the overly generous accounting rules for "off balance sheet" items sold to spvs (that were promptly brought back on balance sheet when the spvs were about to go insolvent)
- ..leading to inappropriate lending and bad due diligence on borrowers; i like some of the suggestions by other posters about setting limits on lending multiples, though crudely worded limits can create their own injustices for individual cases; there may be a case for saying some lenders have been
criminally negligent in the lending they have done
trigger factors:
- high oil prices and other factors contributing to the general economic slowdown that has weakened all borrowers' ability to pay their debts
- the subprime fiasco, which started the whole cascade of losses - basically the first domino to fall
- the liquidity crisis in the interbank market (banks knew there were big losses out there, but not who was sitting on them, so they stopped lending to each other), which led to to the well known credit crunch for all other borrowers
- falling house prices (which was fuelled by all of the previous three factors and feeds back into the liquidity crisis)
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....and also, is there any election game playing, behind the rationale?
By giving such costly reassurances to the US and global public, mightn't this administration be intent on: (a) convincing the voters that leaving such critical financial matters to the Democrats would be dangerous (haven't the US public tended to vote Republican when nervous?)...or (b)worse still, creating such a disastrous financial legacy for the incoming Democrats would make the next 4 years extremely difficult ones for them, an especially in the hands of a leader with such youth and inexperience...or is this thought just conspiratorial?
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Why did the governments and regulatory bodies wait for a crisis to reach breaking point before doing something positive about it?
If the main problem is the banks not wanting to lend to each other, why didn't someone ask them “what do we (the government/regulators) need to do to get you (the banks) lending again?”
Maybe, the banks did tell them what they needed to do, but the government weren’t/aren't prepared to do it?
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Great stuff [66. --- lsi-92 (quotes from notables railing against central banks)]
I always say we are slaves to the machine, only the rich have any kind of freedom.
What is the solution?
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With this big buy out of the mortgages in US, and all the money that has been pumped into the banking system, I guess the massive bonuses will still continue, Hey bank person, we don't trust each other but thats ok, can't pay back what we owe you but hey we still get massive bonuses, and our huge salaries...Just like last year.... So what have we learned? Do a bad job and the governments around the world will bail you out! How does that work??
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Politicians and economists have seemingly not seen this coming ...or so we are led to believe ...And I believe them .When a pm says "gold is irrelevant "..or that "what we are doing is to avoid the cycle of boom and bust"...then I believe ...they never saw it coming .
To see it coming you have to be able to recognise it .Some of us have seen this coming for many years ,and watched the underlying motion of the real principles involved.
Economists have merely " described" events when they are under the illusion they are "explaining" them. The problem being that any "explanation " at the level of surface appearances is merely description. Explanation lies at the level of essence ,and this is more tricky to unearth as idealogy is very suseptible to the pressures of "interest".
As humans we tend more to our faculties of opportunism as opposed to our faculty for reason and truth.
The essence of this crisis has yet really to be explained . when the essence has been grasped then a general prediction can be made about what will follow, and what needs to be done to safeguard the hole ...not the part.
Until then we will just stumble reactively to events as they emerge . Under the illusion we are "now in control" we will merely become" effect into cause ."
As with global warming which has a synchronic relationship with what is happening in the economy ...there appears to be no negative feedbacks on the horizon.
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#105 – morebalanceplease
If you have shares in a nominee account, particularly if designated and solely yours, then the answer is no. Even if you hold your shares via a Private Client Brokers pooled nominee i.e. you are all in there together, I would still say that is highly unlikely. The traditional lenders of shares are going to be the long investment managers, large pension funds etc. And more fool them for not keeping a close eye on it (it might surprise you to know that it’s fairly common for the actual fund manager not to be aware his assets are out on loan - its normally the custodian, admittedly acting on long term agreements with the manager, who has organised the loan). Why they don't keep an eye on their assets in time of crisis is a complete mystery. Anyway, as I've said elsewhere, I don't believe the majority of the shorting was based on borrowed stock, I think it was intraday. But I've been wrong before (see above) so don’t take my word for it..
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104# unhelpful and xenophobic, as if all coutries are not essentially motivated by self interest.
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Hurray! More debt for the American taxpayers who are already drowning in it as it is. With the government spending and creating money out of thin air, is it any wonder that our citizens are in such a pickle? The government bails out their friends and leaves the average American to make his or her own way.
Why am I working again? Surely it's not to better my station as all my money is going to taxes, gas, food, and rent. It's getting to the point where I feel the average American worker is only working to support the government and business, not themselves. How sad.
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"The ultimate cause is the chronic downturn in the US housing market."
sorry robert but you've got it all wrong!
the ultimate cause is the central bank itself - aka the federal reserve here in the good old usa.
it is MONETARY POLICY that is at fault.
the CONSTITUTION is not being followed. there is nothing in it about a cental bank.
this IS the responsiblity of congress to uphold the constitution which has not been done since 1913 with the creation of the fed.
it's too bad hardly ANYONE understand this...most people are just too dumbed down about economics AND the constitution.
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"The ultimate cause is the chronic downturn in the US housing market."
sorry robert but you've got it all wrong!
the ultimate cause is the central bank itself - aka the federal reserve here in the good old usa.
it is MONETARY POLICY that is at fault.
the CONSTITUTION is not being followed. there is nothing in it about a cental bank.
this IS the responsiblity of congress to uphold the constitution which has not been done since 1913 with the creation of the fed.
it's too bad hardly ANYONE understand this...most people are just too dumbed down about economics AND the constitution.
people need to LISTEN to dr. ron paul!
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At the annual meeting of Berkshire Hathaway in 2007 Warren Buffet said "I don't see the problem with shorting stocks, but it's a tough way to make a living". And, "If anyone wants to naked short Berkshire they can do it till the cows come home. In fact, we'll hold a special meeting for them"!
How many people really see how much or not of a problem short selling is? I think he Buffet might have some idea.
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Mervyn King worries a lot about moral hazard. Messrs. Paulson and Bernanke seem not to give it a thought. Why the difference?
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excuse_me @ 100
sorry my friend, but your proposal makes no sense at all. what high quality assets do you have in mind? us treasuries? then basically the us fed would be indirectly providing long-term finance to the us treasury. where is the sense in that?
central banks use short term loans backed by treasuries as the most effective instrument to control interest rates / the money supply, and thereby to manage inflation expectations, which is the central bank's main purpose.
the central bank does not normally accept lower quality collateral because it is not in the job of assessing and taking on credit risk. that is the banks' job (when they don't completely mess it up).
but when there is a crisis that threatens to bring down the whole banking sector, then the central bank must lower its standards and do whatever is needed to save the system. the problem faced by banks is a temporary collapse in interbank liquidity. therefore a temporary loan is needed from the fed to remedy this. once interbank liquidity is restored, the fed's role ends.
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Why cannot we have people in the cabinet like Mr. Paulson, we only have idiots who hasn't got a clue. On economy, it looks like even Bush is better than Brown.
In UK and EU nothing much has been done by the governments; if they take similar bold steps we will be out of this mess by now.
In US the central bank and the government are working together; in EU and UK its not the case. Even our BOE governor hasn't got any practical experience of how the markets work.
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Post 105
I believe if you read your Nominee account terms and conditions it will say something like:
'All investments held are pooled together under the name of the nominee company, and so will not be individually indentifiable on the company's register.'
And more to the point
'The nominee company may at its discretion trade such investments to maintain the stability of the market'
Or words to that effect.
The second clause allows the Nominee company to use the pooled investments ie lend them should they so wish.
I must locate the terms of the firm I am signed up with so I can find the jargon they used, (it was years ago however! Safely filed away....)
Every Nominee provider has slightly different wordings but it basicaly boils down to the same thing.
Should a Nominee account provider fail to be able to provide your investments when required, you are covered for up to 48000 pounds I believe.
Again read the small print !
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#127 itsmesunny
I don't think RP has got it wrong. He just has to be very careful about how he reports all of this cr@p. I think he gave a hint in the title of yesterdays blog 'New World Order' - I suspect he's well aware of Dr. Ron Paul's wisdom on this subject.
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If you went to a street market and a trader you had known for years put a shopping bag full of fruit and veg in your hand and assured you that the ones underneath were as pristine as the ones on top, you'd probably take him at face value, pay for the goods and toddle off home. If, on arriving home, you found that underneath the top layer of perfectly formed, fresh, firm apples, sprouts etc. there was nothing but a mushy mess of potato peelings, how likely would you be to trust that market trader ever again, no matter how many years you had dealt with him and no matter if, during all that time, he had treated you fair and square until this occurrence? Yet that is precisely what the dealers in subprime mortgages have done - put relationships built up over years into meltdown for the sake of their annual bonuses. In the case of the street market trader, at least it's just a situation between him and his customer. The subprime mortgage scammers have screwed it all up with our money so we all suffer. The Stock Exchange Council should have got hold of every financial institution quoted on the LSE as soon as this situation reared its ugly head and made them divulge their level of exposure to the US subprime mortgage situation. That way, everyone would have known what every institution's situation was and made reasonably rational decisions accordingly. Any institution which didn't know its level of exposure should have had its shares suspended until it found out and revealed the information to investors. As things are, no-one knows what a particular institution's situation is and pessimistic views are therefore being taken. On top of this, trust has gone. Result:- disaster. I'm as worried about today's surge on the stock markets as I was about the falls.
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What all of this shows is that pure free market ideology cannot produce a stable world. Equally it shows that unbridled regulation doesn't help.
What we need are political pragmatists that know some regulation is essential and that the bankers' views are not objective. They also know that trying to prevent all risks in the market causes it to stagnate.
Oh look! A flying pig.
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I've skimmed through some of the comments... Clearly a lot are from informed people, so thanks for that input.
There's a lot of banking terminology in there too, which many of us mere mortals (I'm a physicist) don't really get. One example is "fractional reserve banking"... However I look at it however, the only conclusion I can reach is that banks have been operating at least partly in the economic environment of cloud cuckooland.
Any system which allows a bank to create money where effectively none existed before, raises my physicist's eyebrows. If the bank is then called on to make good its position, clearly if there is a vacuum where there is supposed to be real monetary value, the system implodes.
Doesn't it? Isn't that what just happened?
I'd been saying to (for example) my MP for a while before this all happened, that a crash in prices was inevitable as (for example) first-time buyers would be unable to find N times (where N is large) their annual income for a small house. Surely every economist, banker and estate agent, on whichever side of the Atlantic, also knew that? It's simply a consequence of the "dark side" of the exponential function?
Whatever happens next, I hope at the very least that some common sense is imposed on banking systems, and if that has to be done in a regulatory way, then so be it!
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129:
Good point, though they did let Lehmans go, so I guess they would say that they have delivered one salutory lesson and that will be enough.
When the choice is between imposing moral hazard and watching the system implode, the latter is always going to be their first priority.
Your general point is right. Bankers know that they will ultimately be bailed out - by us taxpayers! They always knew that, but now it has been confirmed.
Personally, I think we should demand that, for every dollar of dodgy debt that the taxpayer takes on board, we want a dollar of equity as well. If the state gets enough voting equity that way, we could change the bonus and remuneration policy.
That way we could prevent implosion but make sure bankers and their shareholders suffer.
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There should be legislation requiring all UK Banks to be run by Scots. HSBC, Standard Chartered both mighty institutions with immense Scottish influence throughout their history. Royal Bank marches on remorselessly, Bank of Scotland joins up with an English Bank, and disappears.
(I'm English)
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America- What a laugh, i have just spent a year working as a manager for a vermont snowboard school that is part of intrawest and part of Fortress Investment (FIG), i was 32% above the corperations budget and i got the boot because i made them look stupid, this is america all over, to many EGOS, so my answer is would you want to invest in any companys or BANKS that is ran through egos, We have more to offer than America could ever offer to us it is about time that we left them to it?
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Watch the video "Money as Debt" (Google it). Virtually all money is current debt, created by banks under license from government. When debt is repaid, the money literally disappears again. But since interest is added to debt by banks, there cannot be enough money in the world to pay off all bank debt, so by definition the problem grows every year because the only way money can be created to pay interest is by issuing yet more interest bearing debt. Unrepayable indebtedness to bankers grows in perpetuity. In a crisis of confidence, new debt is unavailable. With no other source of money to pay off old debt, defaults and foreclosures expand without limit. Our financial system is literally founded on unsustainable serfdom to a banking system which in turn depends on perpetual growth in debt for its very existence.
Hence the demand for "economic growth", or at least inflation, so that money debt can grow without limit to pay off old debt. When we approach limits to growth on a finite planet, by definition the current financial system fails, unless inflation is forcibly fed into the system at the same rate as the bank interest charges. But in that case the banks have no margin for real profit. This huge but simple truth ought to be common knowledge, but isn't. Fractional reserve banking is unsustainable as the foundation of a stable money system, even without greed and dishonesty among the bankers.
Rules were in place to delay (politicianspeak: "prevent") this inevitable crisis. But the banks were allowed to bypass those rules off balance sheet. This gross failure of regulation may, paradoxically, be a good thing in view of the flawed basic design of the money system. We need a new way to create and destroy money.
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138: mywalnuts
I think you might well get what you want, because there will be lots of suitable Scots, with financial experience, looking for new employment quite soon.
These admirably qualified persons go by names such as Brown, Darling, etc.
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So HBOS and more importantly historic company presence in Edinburgh and Halifax, and even more importantly the tens of thousands of jobs involved have all gone....and yet another bonus-fest no doubt triggered for a swathe of Lloyds TSB executives and Directors in a few years------because of less than 24 hours in deciding to put a temporary halt to short selling???
As #2 highlighted.....the seems the most utterly bonkers episode of the lot recently.
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The private sector makes the profits and the public sector (the taxpayer) picks up the losses!
Capitalism just does not work as a way of distributing wealth. All it seems to do is to take the wealth of the poor and pass it to the rich - the exact opposite of what 'they' tell you it does. 'Trickle down' my foot, 'trickle up' more like it.
Fundamentally making things - where labour and capital are put together to produce some good makes a real profit (if you do it right and are lucky). Banks and financial institutions are not (or should not be) the be all and end all of wealth creation.
Money is a means of exchange. The problem is that the banks have messed things up so badly that the danger is that trade will be hindered and that is the reason for action by Hank Poulson.
The risk is that banks and financial institutions will see the scheme as a way of offloading, at no cost, their mistakes. (Some may say it is an absolute certainty that this will happen and that is why the markets have risen like a rocket today.)
No matter what schemes are constructed to fix the problem of highly unwise lending to finance homes in the USA (and, please note the UK) the same level of lending will not return within a decade or more. This will mean that moving house will remain very difficult and prices will drop quite regularly every year for a number of years, perhaps a decade. This is the new reality. It is possible that wage inflation may cut-in and limit the problem, but the fact is that houses are today twice the price that they should be in the USA and UK.
The last time the US government did this it took from 1933 to 1951 to resolve the problem, and a world war. I see no reason to think that the resolution of this disaster will be any speedier this time round as it relies on the passing of time and the passing-on (death) of householders / borrowers for a final resolution.
It is also an absolute pre-requisite that regulation and accounting are tightened. I could even see the need for the imposition of exchange control to stop the free flow of hot money about the world - money should only move in exchange for goods.
In accounting there should be an absolute cessation of all off-balance sheet assets and liabilities - this should also apply to governments (i.e. PPP PFI must stop!). This is also a critical condition for the resumption of trust - balance sheets must be trusted.
Credit ratings agencies should be closed down - I see no way of reforming them that will work.
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Oh, wow, the American taxpayer has got to fork out the dollars again to save all those poor banks, who were there making big bucks for the rich (I have interviewed some of the managers, believe me... when they forget the microphone, they say the truth: it's for the rich, and I don't mean the wealthy). Then the rich support the GOP and McCain who will make tax cuts permanent ... for the rich, who will somehow get the message through that Obama wants to raise taxes, but he did say: for the rich.
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USInterpreter you are mistaken if you believe that there is a magic wand solution to this problem.
The problem has noly been moved NOT removed. It may well be that asian central banks who have bank rolled the US for some time now decide they don't want such an exposure to the US housing market.
I think Pestons piece was well written and highlights the dangers accurately.
As for UK house prices the fundamental fuel for the rises we have seen was ludicrously loose credit that aint going ot return any time soon.
Even if your logic was correct, then housebuilders would reopond by starting to build houses again.
Indeed it is likely this is what will happen anyway as prices eventually start to stabilise (what else are house builders gonna do?)
But don't expect to see house prices rise at anything like the pace they were before the easy money is gone for now.
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We have moved from the sublime to the ridiculous. The fact is that no one will, as yet, acknowledge that the system is broken, dead, kaput.
Instead, what we are now seeing is the US Government making up the rules as they are going along in the futile hope that everything will soon go back to 'normal' and the phantom economic growth of the last few decades will simply continue as before.
It won't.
What is clear is that no one really quite understands what is happening and that we are facing a whole new world, since the ramifications of what has been happening have not yet seeped into peoples lives, but they soon will and it will be catastrophic.
Toxic debt is still toxic whether it is owned by the banks or by the taxpayer. If the economists and politicians want to delude themselves that this solves the problem then that is their right, though sadly, events will soon prove otherwise.
They can't just hide away the trillions in debt and pretend it doesn't exist. It does and has to be dealt with, but more than that the banks will not have any more money to lend. Indeed, this is another myth that abounds, i.e. that the banks are merely fearful of lending more cash to each other, but soon will when confidence returns. This is absurd. They don't have any more money to lend because they are insolvent.
Since the UK (like the US) economy has only been sustained on ever more exotic forms of credit without that everything will come to a shuddering halt. Next in line is retail and leisure and considering that 90% of our employment is in the service sector - that means mass unemployment, bankruptcies, house repossessions and so forth - indeed, property, like what happened with tulip mania in the 17th C will soon be worthless. Yes that's another myth, i.e. we never had a housing shortage only a shortfall in properties for sale since the buy to lets froze many people out. The market will thus be flooded with unsellable properties going for a song.
As I said at the start the system is broken. The only question now is what replaces it?
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What I find most interesting are Robert's negative comments regarding the US:
>There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
>The American way of capitalism doesn't seem all that brilliant right now.
>In that sense, a degree of moral authority - as well as financial clout - will shift east.
>...surely it would be more rational for the Chinese to own the American financial system itself, rather than lend to the US Government ...
And Britain does not have the same problems? From what I recall, the first bank to cave was one in England, no (Northern Rock)? And the Chinese "owing" America? How is that different from various OPEC countries, and India "owning" much of Britain?
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Mullered? What sort of a word is that? It'd never heard of it and it's not not in my 1960 Concise Oxford Dictionary. However it is in my 2007 version and means destroyed or blind drunk.
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To friendlycard post 137:
You are following Robert's lead in misusing the term 'moral hazard'. It is not something to be 'imposed', it is something to be avoided.
Moral hazard arises when a party that is insulated from risk behaves differently from the way it would behave if it were fully exposed to the risk. By not being asked to bear the full consequences of their actions, parties (in this case, banks) have a tendency to act less carefully than they otherwise would. Classic example is of folks taking less care of their belongings once fully insured (that is why we have excesses and no claims clauses on insurance policies- to OVERCOME moral hazard).
But don't worry, Robert doesn't know what it means either, but that doesn't stop him using it.
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It just gets worse and worse.
The dozey and weak FSA are asleep at the helm, too many excessive lunches paid for by bankers who have been delinquent and mind bogglingly incompetent not to mention greedy.
We now see the FED bailing out the banks with tax payers money with amounts that make your eyes water.
The bankers will be laughing themselves silly (behind closed doors) if these plans are pushed through, doubtless leaving them to ride off into the sunset in their Ferrari's and Rollers with our money.
Not to mention the huge payouts they will pay themselves for the large rises in share price they will generate in next years balance sheets after all the write downs of bad loans sold off to the Govt have.
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When you can play with funny money, be it from short selling of shares or 200:1 margins on FX, be sure that someone will do it and many people will suffer.
All markets are fundamentally unstable - they suffer from positive feedback. Start selling in large numbers and prices will drop.
Ditto a currency - you want to ruin a country? Just get a sufficiently large position in their currency - amplified by the margin - and start short selling. The lemmings will soon start, you will make a killing, and the innocent citizens of the country in question will not be able to put food on their tables.
Individuals or institutions should not be allowed to do this. It is a form of fraud. For those fraudsters that have perpetrated the recent runs on banks and currencies, an example should be made with massive fines and jail sentences. Only the risk of total ruin will bring home to such people that making money out of money itself is a scam and does nothing. They understand nothing less.
There is a good case for stopping all short selling of financial institutions, which are a special case. Otherwise it is dancing on fire - OK while you can keep moving but your feet get badly burned if you stop.
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The Paulson Plan will bury the USA in a sea of dollars that no one else will want. All this has done is stick a finger in the dyke.
Banks leveraging has been systemically out of kilter for years and if they don't trust each other why should we trust them.
Unless the market continues to rally for the next 5 trading days we can see it return to the lower levels again.
This may be the mother of all dead cat bounces but that doesn't mean we are out of the woods and safe.
The public has lost faith in politicians and only understands good house-keeping te actions of the last days will show how little politicians and regulators understand markets.
As for short selling, they are a necessary trading vehicle and grey markets will appear in days and bookies will just take away business from usual market makers.
Bush is a lame duck and on his way out so his comments mean sweet nothing, and GB should take the lonng term decision and pack his bags quietly, prudently, before they are slung out of Downing Street by a populace sick of more tax and inept management.
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So the Masters of the Universe have managed to create enough of a panic to get the US government to transfer their losses to the US taxpayer. Wonderful results for a few days of acting like headless chickens. They will be able to start paying themselves big bonuses again shortly. Maybe they are as clever as they claim to be. Goes to prove that they really are the Masters.
Now, how are they going to get Gordon Brown to do the same thing (dump the losses on the taxpayer) here? Its almost inevitable that they will. Any guesses as to what the mechanism will be? (We will have a good whinge about it when they do of course but to no effect.)
Incidentally, if you had invested GBP10000 in each of Lloyds and HBOS 5 years ago which would have paid out more and now be worth more? I don't know the answer but if the answer is HBOS it shows that the relative prudence of Lloyds has not benefitted its shareholders.
The lessons of much of this seem to be stuff engineering, get a job in the City and be wreckless with other peoples' money. Which is of course what many of our brightest people do. And they become rich as a result.
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Any-one know if our beloved war criminal ex-leader Tony Blair will still be holding down his (reported) five million pound a year job at Goldman Sachs after all this, or whether he'll be for the chop when the eventual jobs bloodbath begins?
I mean, it's not as if he does any real work for them, does he?
Think how many secretaries and clerks and cleaners they could save, if they culled just this one man.
It would almost make the credit crunch worthwhile.
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154: maroon3
Great post. However bad GB may seem as PM, at least Bliar's gone.
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Perhaps Robert could investigate as to what,
if any controls will be put in place as a result
of the new RTC. It would be so extremely
comforting to know that this sort of irresponsible
investment and lending could never, ever, happen
again!
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These actions by the US Treasury, SEC, FSA central banks et all are a travesty and a smokescreen. Not one single thing has changed in the markets to justify the euphoria now being displayed. Banning short selling won't fix the problem. Just a quick fix to sell to the public. The banks are still in the same mess they were last monday and will be next week but they'll be laughing all the way....to the bank, those who have still got jobs. There is still a lot of bad news to come out of the markets, particularly once the next wave of corporate earnings come out, profits really start to tumble and job losses increase. I feel sorry for the US taxpayer getting all this debt added onto their balance sheet. How long before the rest of the world stops supporting the Dollar.
This has catastrophe written all over it.
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I can tell you China can't be trusted. You are right there are so many reckless bankers in US, but it does not mean China should own the American financial system. Chinese are so corrupted that you Peston can't imagine. You should study the History of China before you made such reckless decision.
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Capitalism is the all-embracing term for the use in economic financial and social activity of such prime forces of evolution as acquisitveness, contempt, envy, greed, pride and selfishness. As with other evolutionary forces like lust and violence, a civilised society needs simple but stringent laws to control and sometimes direct them. When such controls are not in place, gangster capitalism -a form of licensed criminality- takes over. Some activities -communications, defence, education, energy, health, justice and security- need the guarantees of civilised States as competition does not protect the weak. Otherwise well regulated capitalism advances progress.
In a well-regulated capitalist society it is the fundamental duty of all national and international financial authorities to protect individuals, enterprises and society in general from recklessness and fraud as well as from gangster capitalism by regulating markets and business practises. This duty began to fail in the 1960s with the licensing of ever-less limited credit with credit cards. Then in the 1980s Premier Thatcher and President Reagan enthusiastically plunged into the theory of monetarism whereupon all governments, all national banks, and all international banks and financial institutions on earth, instead of dutifully regulating gangster capitalism went completely mad with the unbridled greed it licensed. They 'balanced' their own books -and approved the 'book balancing' by all the leading private financial institutions in the world- by creating and compounding a gigantic morass of real debts with fictitious money which is the present crisis. As the direct, eminently predictable and widely predicted result, global debts are already three times bigger than all real assets on the planet and rising and every lender/seller on earth is now chasing everyone else's money hoping to survive.
All this week's hastily-cobbled 'solutions' to the global financial crisis are just street conmens' three egg cup tricks. The 'purchases' and 'mergers' are 'financed' with yet more fictitious money 'guaranteed' by yet more real debts. They don't fix anything. They delay the problem slightly while making it much worse. In former centuries governments debased silver coinage with lead and wondered why inflation followed. In the years following the American and French Revolutions the financing of government debt with paper promissory notes also led to gthe same result. Ditto post-First-World-War Germany and Hungary. The outcome of our present crisis which nature will impose will be Zimbabwean-scale inflation throughout the world. In effect everything -assets and debts- will become worthless. The authorities need to pre-empt this by nationalising everything without compensation, cancelling all debts and imposing an economic freeze while a new Bretton Woods Conference creates new global rules for markets, currencies and business.
Then we can start again.
All other measures will be but futile half-measures that -at the very best- will merely prolong the ever-deepening agony and lead to the same result. The longer they delay, the graver will be the threat to global law and order. National economic breakdown leads to the breakdown of national civil order. Global economic breakdown.will lead to the breakdown of global civil order.
There is no time to lose.
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now the tax payer has come to the rescue could we receive any benifits such as acheaper mortgage rate with nortern rock. Also will the city wonderboys still be issueing themselves huge bonuses this year out of the public purse being used to sort out this mess.
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There is an alternative possible outcome, of course.
Perhaps these assets aren't as tainted as everyone thinks.
Paulson - with the help of his old Goldmans buddies - creates the mother of all hedge funds, hoovers up a boatload of assets at a fraction of their ultimate value (courtesy of some ridiculous mark to non-existent market rules) and sells them down the line at a huge profit. Large portion of the US budget deficit eliminated. Tax cuts all round.
Genius.
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I don't really understand the offer of a guarantee to money market funds.
1. What is the problem? If investors withdraw money from them, where does it go? It comes as a credit to their bank account. And then what do they do with it? If they buy treasury bills, but then what does the treasury bill seller do with the cash? Somewhere it gets left on deposit with a bank.
2. Aren't money market funds part of the problem? Banks have both retail deposits (good) and wholesale deposits (bad - ask HBOS). And wholesale deposits concentrated in money market fund managers are even more volatile than when held by individual institutions and companies. People advocate that banks should only make loans out of retail deposits, but that would mean this element of savings balances could be recycled only into short term investments, which is not much good for those borrowers (whether mortgage holders or industrial companies) who need to make long term investments.
3. Isn't the promise of returns (above those on bank deposits (Libor)) that these funds make part of the problem? This drove the appetite for high yielding short term paper. Now fear and herd behaviour leads to all the funds being held at very short notice (overnight or up to one week): even very high OID/3 month Libor spreads can't overcome the liquidity preference. Central banks' (the ECB AND BoE) fear of inflation is such that they don't recognise the overwhelming desire for liquidity. Short term rates need to be cut while this continues, to incentivise investors away from overnight money.
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maroon3 #154
Just a small (and inconsequential for us) correction........ '6 houses' Blair was employed by JP Morgan earlier this year (for a reputed GBP2.5Mn p/a for a part time 'job') and only seven months after leaving office. You can be sure that he won't be struggling to pay the mortgage(s)!
Reference:
http://news.bbc.co.uk/1/hi/business/7180846.stm
Note: JPMorgan.....one of the founding fathers of the Federal Reserve.
(The compliant are well rewarded after their tenures in office)
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Call me paranoid, or deluded, but it is entirely possible this situation was engineered. It would suit the empire-building Bush-associated powerhouse to a tee.
The Fed now owns, to all intents and purposes, the majority of mortgages and loans in the US, and certainly has control of trillions of dollars in these areas.
As it has milked American tax-dollars and siphoned them intio it's own coffers through the Iraq and Afghanistan "war on terror", via the military-industrial complex, Halliburton, Blackwater, and the like, so it will use the financial institutions to rob the American people still further to consolidate those gains.
I fear Bush(es) and his/their associates are unstoppable, and will keep the populace of America, and much else of the world, in a constant state of indebtedness or war to further their aims to build the world's greatest empire.
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I think one way thro this mess is for both the us govmt and the uk govmt to take legal ownership of all properties on which the morgagee has defaulted ,to repay the bank or bldng soc the outstanding morgage and to offer the occupants a fair rental agreement to remain in the property.In this way the taxpayer will at least own some assets, the bank or building soc will get an infow of funds and the occupier will not be thrown out.In effect we would be recreating a coucil housing stock of wildly varying values styles and geographical distribution.The administration of rent collecting etc could be delegatedto local councils or private agents
At least we would have something to show for the hundreds of millons being poured into banking black holes
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If someone who is deeply indebted announces a great plan for the future, that is the scariest thing I can think of. Someone who has nothing but debt can't loose, but everybody else can. So lets hope and pray it will be another failure.
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'Moral authority will shift east'.
Are you refering to that communist dictatorship which has left it's idealogy at the back door whilst it embraces a corrupt form of capitilism?
If you have such high regard for that country why don't you go and try to ply your trade over there and see how long it would be before you lost your liberty and possibly your life!
--------------------------------------------------------
Such a post as above is a direct result of Western propaganda and biased reporting.
It is steeped in ignorance and stereotyping -which is prevalent in the West and are the root causes of racism.
Many corporations and businesses have set up shop in "that country". I myself have lived and worked there - and cherish the experience!
Talking about liberties, let's see...
There is corruption in the East. In the UK, for example, it's "cash for honours". Or a "scandal", such as that of the (lovingly called) Keating Five. "Corruption" does not exist in the West.
The East have unfair laws that suppress freedom. Here, there's the "Terrorism Act", which allows for arrests and detentions based on "intelligence" (I will not comment further on this bit for fear of being
"arrested based on intelligence").
The West can take "pre-emptive" measures, e.g. obliterating a nation as seen fit.
Yes, moral authority has shifted East. Any nation that brings hundreds of millions out of poverty is deserving of praise. Of course, more can be done - Rome was not built in a day. Again, more can also be done in the West.
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#20 needafilip - I dare say that Mr. Preston will survive a lot longer wandering around the streets of Shanghai with the constant overwatch of the Public Security Bureau (Police) that some of London where some kindly gentleman will donate several inches of steel straight through his kidney !!
And the fact that you can post on this blog shows that you are aiding and abetting "that regime" by buying its cheap products !! Unless, of course, you are typing your comments on a VT100 dumb terminal attached to a warehouse-sized mainframe with the astoundingly large memory of 64Kb !! (yes, I've done that in my youth but that was 40+ years ago !!).
And dare I say that the"Birds' Nest" and the "Water Cube" are far more high-tech, practical and useful than the O2 Arena (nee Millennium Dome) and built without the scandals involved !!
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Many years ago I was chatting to a senior colleague around the coffee machine during a break.
He told me that his son, an "Oxbridge" graduate, had just started work for a big financial organisation and was going to be a city trader.
Intrigued, I asked him what his son had studied at University. He replied "Theology".
I promptly closed my company pension scheme and set up my own diversified investments in PEPS, TESSAs, ISAs even premium bonds.
The shorting of shares ultimately is a self fulfilling prophecy. To predict a share is going to fall and then sell off huge volumes is obviously going to drive the share price down.
As Mr Peston acknowledges the Chinese and oil exporting government funds are the ones with the cash at the moment. They should not be foolish enough to buy these dead duck financial institutions. What they want to buy is the US assets with value that can be realised. i.e oil majors, technology, manufacturers.
However, the US government will obviously resist these moves. But the question is, how long can they hold off.
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#165 - Aren't you forgetting the difference between the value of the mortgage and the actual value of the property it is secured on ?? It is that very thing that's being charged to the tax-payers regardless of who "owns" the property !!
#164 - Not if the East Asians start dumping their US$ debt instruments, several $trillions worth !! All that happens is that they become junk bonds and the US$ will equal the Zimbabwean Kwacha !!
#163 - But, of course, corruption cannot possible happen in the West !!
#162 - what you say only happens in a closed system. In an open, global system, the money flows in an ever-increasing tsunami to safer shores, particularly those in East Asia, Brazil and India !!
#161 - If Poulson hoovers up those "toxic assets" at a fraction of the price, the whole US economy goes kechunk-whooosh down the tubes immediately. It is this very thing that Poulson is trying very hard to avoid !! They do say that the genius and the fool meet at the extremities !!
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Robert
What I don't understand is the lack of accountability with the people concerned at these banks?
I know nothing about the banking system so writing as just a customer and a business owner, how can the employees of a bank be allowed to get away with this?
I'm staggered that the bonus bill last year at Lehman Bros was around 8 billion. Was that correct? I'm sure that this is the case at other banks too.
Yet we're left with a situation that means the bad business is being written off by the tax payer and these bankers stil have their huge bonuses stashed away for a rainy day.
These so called business men and women have total lack of regard of whose money they are playing/betting with, a lack of regard that they would not be able to get away with in the normal business world!
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Her is an interesting spin on the whole sad story of the WS Meltdown, the Faux Texan White House Cabal and the so called PATRUIOT Act. Homeland Security Head Honcho Chertoff points ou that it is a little known part of the PATRIOT Act that it is an act of sedition for depositors to withdraw their money from a financial institution if the US Treasury or Federal Reserve deems that such an action would cause it to fail. So depositors withdrawing their own money from corporate heavyweights are now seen as enemies of the state!
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#172 - Hence the barbarians within the gates....
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American "investment bankers'" behaviour over the past years in the real world would be called fraud and theft. But then , as Stalin said: "one death is a tragedy, a million is just a statistic". In the same way they are getting away with their massive misdeeds because their actions are tolerated by the regulating authorities who themselves are recruited from the same establishment, plundering taxpayers' monies to pay for their own speculations. Is it a classic case of "Set a thief to catch a thief" failing? If so, much tougher regulations need to be put in place and enforced, short selling made permanently illegal and hedge funds put under serious regulatory control. Bailing out investment bankers , if that is what they really are, by lending them taxpayers' money to effectively allow the merry gambling casino to continue should be made illegal.
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Ref: 163. BankRSlicker
Thanks for the correction. Still, £2.5 million for a part time job eh?
Blair must have kept all the right backs scratched for that reward.
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Can anyone put me straight? There is much talk of HBoS being above "the 232p bid price" - the BBC did it all Fridaay - but I though the 'bid price' was 0.83 Lloyds shares.
Which is correct? If it is the latter, then HBoS has never exceeded the bid price because the market held its shares at around 75% of Lloyds price throughout Friday.
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It is truly a shame that us Americans can not pay for social medicine but do pay for the greed of the rich.
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I survived Nam and everything else that has been thrown around I am Canadian raised in the States my father was a hard working ex-soldier from WW2 era my strong willed mother was a War Bride she survived the blitz scree and the rough life of war. we where not rich as children but well provided when are folks broke up we took off into the world half of us and it was not easy and still it isn't. folks whom have still have those who do not are a little better of now some chased the buck and got it some of us just decide to live and take life as it came. what i want you all to understand is nothing will change much now or for many years to come and when it does it is like nature it just has to be. it will be good for some and bad for others it is life in general. This is not a cop out it just the truth nobody can stop change it comes with people and generations. so just be good to each other and take only what you need and we will make it like it or not. understand the people who say i am losing mean they are not getting more then the barrel of money they already have the folks who say i cant make it are working to pay the bills and get (by) the ones who say i have nothing just don't have anything to lose. Not one is in risk of life or limb (except for maybe in States where they don't have health care which is a big crime in itself. but outside of that it is true.
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First, thanks to all contributors since Friday morning. Reading this thread has been like following Anatole Kaletsky's giant flip-flops between optimism and pessimism in The Times in six articles in twelve days. Somehow I don't trust many who sound certain what's going on.
Two people here though (#127, #133) say we should be listening to US Congressman and libertarian candidate for the Republican presidential nomination Ron Paul. I guess anyone that knows Dr Paul knows that he's not enamoured of fractional reserve banking in the first place. But his achievement is greater than that. In a speech to Congress in July 2002 he criticized the Bush regime's measures to try to stimulate the mortgage market, as follows:
"Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.
"One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.
"The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.
"Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
"However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
"Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.
"No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.
"Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act."
If Dr Paul was right, it was not the Bush administration's commitment to free market principles that led to disaster but its inept, though hopefully well-intentioned intervention in the name of the less well-off (the people that nandorfi in #42 was rightly asking questions about). Put that together with interest rates set too low by the Fed (and the ECB and other central banks) for many years and the sub-prime disaster was easy to foresee.
For one man anyway.
Perhaps he should be listened to a little bit more in the future?
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Ref 141 Friendlycard: Brown and Darling may be potential jobseekers but they have been infected by English profligacy. Running up a public debt of perhaps £100billion this year does not exactly sit well with the Scots' reputation for financial prudence and certainly does not make them suitable potential bank chairmen, re my legislation forcing all UK banks to be run by Scots.
Och here's aye the odd exception to a rule.
(Repeat I'm English)
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Hi Robert, I wanted to get your opinion on my view and radical idea social changing policy suggestion.
I should say I am not an economist or anyway tied to or profess to understand the intricacies of markets and finance.
What I do have experience in is watch or observing human behavior as do all of us as humans.
I myself am a chemical engineer by profession in the manufacturing operations software space. I sell software which assist companies in improving their manufacturing operations key performance indicies and competive advantage.
First Topic Who is to Blame?
I actually lay the blame at Bush feet.
The reason why is because I believe what we are seeing is the volatility in commodoties having a knock on effect in bad dedt.
This volatility is largely to do with the sustained wars going on in the ME and lack on concensus globally on how we manage energy consumption (Kyoto Accord etc.) which the Bush administration has not given adequate attention to.
Let me explain: We will always have some bad dedt, how we prevent excess bad dedt has to do with how we eliminate volatility in our commodities (energy=~oil) thus creating a conducive environment for marginal bad or highly leveraged dedtors at this time in history (our major energy raw material at this time is Oil/Gas). So the sustain wars etc. combined with lack of significant growing reserves have created volatility in energy/oil prices.
This volatility and increase energy cost are hitting consumers from all directions thus putting significant pressure on the marginal bad dedtors and highly leverage interim dedtors.
What we need to do...get out of these wars, create fast policies to change our energy mix and dependencies and how we tax (indirectly govern) as a society which undestands what we are doing to ourselves globally.
Now the Radical Idea-or is it Radical?
Governments have tried and are trying to do this but have been in effective. The reason why is their policies/laws have been unequally apply. My idea would entail a longterm policy and systems change over the next 5-10 years. My idea is to assign every product we consume a carbon unit, and I mean everything. The carbon unit assigned to anything will be determine by an independent board of economist/scientist/engineers and other relevant professional. The purpose of this carbon unit assestment would be to provide an additional factor in how ones individual tax to society is calculated. You will be taxed on two factors for simplistic argument. How much you make and how much you consume. The more you consume the high the tax rate shall be on what you make.
Scenario
The larger your house the higher your consumption of carbon units. The greater you consumption of energy the higher your consumption of carbon units (the more the energy is based around carbon usage the higher your consumption of carbon units).
Everyone is on the same equitable playing field. You can still make a lot of money but you have a chance of alleviating your tax burden by how efficiently you consume carbon units.
How will it work...this is my first guess...but this requires thought by our economist/scientist/engineers/policy makers and ultimately national/global referrendum.
All humans will be required to carry a ICTN (Individual Carbon Tracking Number ID)...the only thing this ID will serve to record is the amount of Carbon Units you consumed in a year. This will be linked to your National identity number. If you do not have an ICTN you can not buy anything that has a carbon number (Radical). The items we purchase shall never be tracked ...we need to have a seperate organisation for oversight to make sure carbon unit tracking is not exploited by government or scrupulous individuals or organisation.
Yup I know what you might say this is carbon taxing...I call it efficiency taxing....Carbon Tax only goes 10% of the way there, ICTN goes the hole other 9 yards.
Forget car tax ...ICTN accounts for this, forget Council tax, ICTN accounts for this, forget VAT, ICTN accounts for it. Forget airport tax, ICTN accounts for it...every tax you can think about is encompassed in the ICTN.
This is a simple idea, the devil is in the details but these can be worked out.
Talk about a just society and world...
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I've just read the NYT article
http://www.nytimes.com/2008/09/28/business/28melt.html
which seems to suggest that it was the activities of a small UK operation within AIG that brought them to their knees. Is this correct, or are the Americans trying to blame someone else for some of their woes? If it is correct, then perhaps what we are seeing is as much a British way to fail. The figures for the proportions of the 'profits' in the UK that went in salaries are phenomenal. I wonder how much tax was paid on these amounts, and how much will be available to contribute to the bailout?
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