Making banks safe
Let's talk about banks' capital ratios, or the amount of capital banks are forced to hold as a proportion of their assets (or their loans and investments).
Stay awake. This stuff matters to you.
For those who don't know, banks' capital is a buffer against the losses they always face on lending and investing.
It's supposed to be the guarantee to depositors like you and me that we wouldn't be damaged when banks' loans go bad or when banks lose money on trading in securities: the hurt would instead be felt by shareholders and other providers of assorted forms of risk capital.
Now one of the main reasons the global economy is in such a mess is that big banks systematically lent far too much relative to their capital resources - which is mainly their fault but also that of numpty regulators, who allowed banks to drive a coach, horses and an entire wagon train through international rules that were supposed to ensure they kept adequate amounts of capital.
A few banks - such as Royal Bank of Scotland, Switzerland's UBS, Merrill Lynch and Citigroup of the US - took leave of their senses with their manic lending (by the way, the FT's Gillian Tett gives a particularly hair-raising account of their descent into madness in Fools' Gold, her new book).
The way most banks stretched their capital resources in their lending sprees both pumped up a dangerous bubble in asset prices and meant that when the bubble burst they didn't have enough capital to cover the losses.
So taxpayers, all over the world, had to step into the breach.
We taxpayers have pumped hundreds of billions of dollars of new capital into banks - we've nationalised or semi-nationalised loads of them - because the alternative of allowing the banks to fail was too scary for governments to contemplate (there was no desire to see the mobs of anxious depositors which formed outside Northern Rock's branches in September 2007 turn into a rampage outside most other banks).
But to state the bloomin' obvious, this global banking rescue is not something we'd want to repeat in a hurry.
It's quite important therefore that measures are taken to minimise the likelihood that banks will again systematically extend far too much credit relative to their capital resources.
However, closing this particular stable door is by no means simple, for two main reasons:
1) banks are global businesses, so new rules will have to be agreed by governments and regulators all over the world (never easy);
2) if we clumsily implement hastily and crudely devised requirements that all banks have to hold vast amounts of additional capital relative to their assets, there could be a permanent and significant reduction in the availability of credit - which could significantly reduce the potential for future global economic growth (we could all end up poorer from our natural desire to have a safer banking system).
For me, one of the big questions (about which there has been almost no public debate) is whether we should endeavour to make safe the global financial system that developed over the past few years - characterised by massive flows of capital across borders and the packaging of debt into securities for sale to investors - or whether we should give that up as a bad lot and regulate ourselves into a simpler but possibly poorer world, in which credit extended in any particular country is more closely matched by savings in that country.
The efforts of most governments, including our own, appear to be to sanitize the globalised status quo. It's obvious in our case why that's happening: as a nation, we don't save enough to meet households' or businesses' demands for credit (so we have to import credit from abroad).
But our government is doing its best to preserve the structures of financial globalisation, without explicitly making the case for doing so.
By contrast, it's possible to see in the words and deeds of the governor of the Bank of England that he believes some important elements of financial globalisation need to be rolled back (the Bank of England has, for example, been much more cautious about helping to rekindle securitisation - the conversion of debt into tradable securities - than Downing Street would like).
Here's the danger: we'll muddle through and devise yet another sub-optimal regulatory system.
Some of the second order issues were aired yesterday by Adair Turner, chairman of the Financial Services Authority (although he raised one very important question, which is whether financial innovation will always engender instability, and whether it's now clear that the costs of that instability outweigh the benefits of innovation).
Strikingly Turner said he was "open-minded to a [proposal]...that large systemically important 'too-big-to-fail' banks should have to maintain higher capital ratios than applied on average".
This is a nod to an idea that the chancellor is planning to float in a couple of weeks in a white paper on reforming regulation of the banking system (and the US authorities are moving in the same direction).
For what it's worth, there are two reasons why it might make sense to force our biggest and most complex banks to hold more capital than their smaller, simpler peers: if big super-banks have the privilege of knowing that we as taxpayers would always bail them out in a crisis, surely they've got to put in place treble protection against the risk that they'd call on us for such help; also the costs of holding the extra capital might encourage them to slim down and simplify their operations.
That said, such a regime could achieve the precise opposite of what would be intended.
The public imposition of a higher capital requirement on, for example, Barclays than on smaller, simpler banks would be a public declaration that Barclays would never in any circumstances be allowed to collapse.
And, paradoxically, that could give an unfair competitive advantage to Barclays - because safety-conscious depositors might well choose to give Barclays a disproportionate amount of wonga in the belief that there are no circumstances in which that wonga could be lost.
Which is partly why some, like the Liberal Democrats, are in favour of the forced break-up of the likes of Barclays and Royal Bank of Scotland into so-called narrow banks, so that these sorts of competitive distortions are minimised and so that banks don't abuse ordinary depositors' cash by gambling it in the supposed casinos of wholesale markets.
As I've recently noted, the Tories have also come out in favour of dismantling the big banking conglomerates - and Mervyn King, the governor, has said it's an idea he would like explored properly.
Even so, Lord Turner isn't in favour of the prohibition of Barclays-style universal banks, and nor are the chancellor and prime minister. They believe that delineating wholesale banking and retail banking in a clean way is easier said than done.
Certainly what's been striking over the past 20 months is that disaster has not been confined to one kind of bank: there have been egregious losses and humiliation for universal banks, such as Citi, UBS and RBS, as well as for narrower, more specialised banks, including Lehman, Bear Stearns, Washington Mutual and Northern Rock.
Oh, and lest we forget, the single biggest stimulator of the excesses of the banking system wasn't a bank at all: it was AIG, whose crazy insurance of financial products gave banks the lethal confidence to lend to those who could never repay.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~42~RS~)
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The only safe place is in the mountains.
http://moneyistheway.blogspot.com/2008/09/rise-above-risk.html
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What about making tax payers safe Robert?
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I would contend that we are all just realising that this is not so much a Great Depression as a Great Con. And we are all in on it.
We failed to hold our representatives to account. How many of us have trundled into the voting booth to cross a box because of party and not because of person? Our representatives have failed to hold opposition or government to account. How many MPs have voted not on principle but because the party have ordered them to do so? Our governments mismeasure economic indicators and ignore institutional bias for transient gain. How many of our governments put honesty before opportunity? Gain before truth? The ministries, the Bank of England, the FSA have overlooked the reality to concentrate on perceived wisdoms and ideology. How many times have the relevant authorities done other than carry out government policy rather than independently regulate their remits? And this goes on and on and on and on and on.
It is for the same reasons the RBS board didn't rein in Fred Goodwin, the shareholders didn't rein in the board, the FSA didn't rein in the company, the government didn't rein in the FSA, parliament didn't rein in the Government, the people didn't rein in the parliament. We put fiction and an easy life before truth and hard work and this is the result; repeated millions of times over across the world.
This is not a credit crunch nor a US subprime mortgage problem nor an economic downturn and certainly not a banking crisis. It is just in these areas where symptoms have showed.
Fixing the economy is not the solution because the economy is not the problem. It is the philosophy behind our democratic processes that has lead to this, combined with specious policy and slack accountability. This must be fixed, but even now nobody dares mention the failure of all government in this catastrophe - government and opposition - and this is ultimately why this collapse is occurring. The markets are doing what electorates and the media have failed to do for decades: holding the governments of countries to account.
The governments are very keen to bail out the banks because it makes it look like the banks' fault. But it really just shunts a symptom up the ladder. What is worse - RBS going bankrupt or the UK government going "bankrupt".
Unless we start treating the root cause of this - governments wantonly mismanaging their economies and unless we, as a people, start holding governments to account and forcing them to be straight there will be no improvement and there will be no solution.
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"Let's talk about banks' capital ratios..."
Do we have to?
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I'm pretty sure that in some parts of the world if any of these so called captains of banking / finance acted in a similar fashion as per the way a sizable portion have in the so called progressive west. I'm pretty sure we would have a coupla dozen show trials, to make examples out of the Banking / Financial wizards, not forgetting Nom Dom's and the likes, and throw in a coupla major tax exiles, just think of the pre election bounce M'ssr Brown and Co could achieve! The GOULAG's what needed!
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Your first post on reserve bankin, after nearly two years of bloggers asking you to dothis?
And now you say we will be poorer, I see also that protectionism is alive and well. GB et al at the G20's statement was merely not to scare the horses in the stable wasn't it ;-)
A return to the 70's for sure, oh and another OIL crisis!
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Surely a key aspect to this is that the recent economic philosophy permitted private institutions to inflate the money supply by creating structured debt products, and that the central bank's control of this by setting interest rates was grossly inadequate?
In this case the central banks would need to take much stricter control of debt issuance, either by banning derivitive products entirely or by putting strict controls (licences?) on their creation. In other words, the central banks need to control the velocitiy of propagation of credit and debt much more closely than they have done since the big bang.
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I keep seeing and hearing the phrase 'future global economic growth', from economists,prime ministers, presidents, Robert, chancellors etc etc. Anybody who has done O Level Biology can tell you that unlimited growth is not possible whether it is economic or any other sort. So either this is virtual growth achieved by devaluing the currency or it has only been possible up to now because of virtually free energy. Can someone explain where the growth comes from if it is real?
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It was obvious for years that retail banks had seduced/bullied governments and regulators into relaxing capital adequacy requirements, in this Alice-in-Wonderland "world with no risk" that they invented.
Surely some of the more sane media commentators *ahem* could have pointed out that - even if one misguidedly believed that risk had vastly diminished within the banking system - those banks that held vast amounts of the nation's wealth through customer deposits should have a cast iron obligation to safeguard that wealth against unforeseen disasters.
I'm afraid that, once again, this is a classic case of the Emperor's new clothes. Journalists and opposition politicians who could and should have easily seen the potential for meltdown (and pointed it out) remained deafeningly silent, seduced as they were by the slick new paradigm being trumpeted by those oh-so-clever bankers with their corporate boxes at Lord's. Those academics who did question the new rationale were pretty much shouted down as being out of touch in their ivory towers.
It's all very well blogging about how the rules must change now, but the point is that the rules should have been there before all of this. If the major commercial banks had been forced to retain proper capital provisions, the chances are that most or even all of our current problems would have been averted (or, at the very least, vastly diminished).
We hear politicians and journalists parroting the party line that a) nobody could see this coming and b) we're learning from our mistakes. The truth is that plenty of rational risk-aware people could easily see this coming, but they did not hold the levers of power. And, as for learning from our mistakes, I thought that was what we were supposed to have done in 1929, 1987 and various other times....
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"the amount of capital banks are forced to hold as a proportion of their assets (or their loans and investments)."
"Now one of the main reasons the global economy is in such a mess is that big banks systematically lent far too much relative to their capital resources"
I am confused. Did the banks do something illegal? What does "forced" mean? Legally? And if they were forced to hold a specific proportion, how does that square with lending far too much relative to their resources?
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The alternative is for the larger banks to be part, perhaps majority, owned by the state with supervisory NED boards having small shareholder, TU, and consumer representatives among the members.
This way the government could:-
strongly influence lending/investment policies needing less external regulation,
set fair and objective remuneration schemes for employeees,
Ensure T&C's for individual/SME services in the public interest,
generate an income for the state.
Global financial system? Is there a credible business case now? GFS did not benefit the large majority of people in fact the fall out of its inherent instability has ruined the personal finances of thousands of ordinary citizens - good riddance to the innovators and high flyers of the finance world.
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9,
Excellent post, nail, head & hammer!
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Well, it's been a long time coming, but at last we have an article that addresses the key issues.
The alarming thing for me is that there has been no public debate of whether Globalisation is 'a good thing' or not. It is simply assumed to be so.
Currently we have a system where we purchase goods from China, they save the money, which is then lent back to the west, which we then borrow, so that we can buy more goods from China, etc. etc. etc.
This is crazy - it can never work long term. We just get an illusory sense of wealth, but it is all built on sand.
We have to get back to a balanced economy, but with our politicians refusing to debate the issues what chance is there of that?
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VentilatorBlues - very interesting comments.
A question though - how on earth can voters hold government to account over something as complicated as the global economy? Voters don't understand economics (or their own personal finances a lot of the time) and governments certainly don't either. Not even the boys and girls in the City understand!
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RP, I'm concerned at anything that makes the big banks stronger. To nit pick its not a case of not wanting to bail out the banks again in a hurry, we simply cannot, we have not made any inroad at all into the debt the recent bail outs have cause.
To me if the goverment is determining key capital ratios, and the large banks are getting un unfair trading advantage then clearly they should have been nationalised.
If small is beautiful, couldn't we have thought of this before mortaging the countries next 10 years at least.
P.S. personally i don't think its right on a bbc's blog to give a web link to purchase another journalists book.
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Little boys and girls
Come out and play
The world is a stage
The show goes on
We all got riches
We all got interests
Do you want to sit around
Watch your life going by
When you can be anything you want to be
When you can do anything you want to do
Come on don't let it happen to you
The show goes on without you
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Fully awake here recognising the world has changed.
The age of global consumerism failed because it was unsustainable, being driven by greed and an unregulated crazy banking system.
The industrial revolution ended the era, before the greedy period...
The internet revolution starts this new one.
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Thank you for pointing out the fact that the American International Group was probably the main culprit in the
down fall of our Economy in the UK. A very 'special relationship' we have with the sharks on the other side
of the pond. Some of us with half a brain cell had begun to see the obvious. But it always helps to have it
confirmed by an expert.
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A shame we have to reinvent the wheel at enourmous cost (to the taxpayer)
When will we see legal action against those who peddled the overvalued assts. Northern Rock, for one, have simply walked away, with pensions and bonus's.
If their customers had lied about the value of assets to obtain loans they would be doing time now ! WHEN is someone going to have their collar felt ! Ask the Question Robert next time you cosy up to the PM ?
Disgusted
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What about the re-instatement of the the US Glass-Steagall act, but on a global basis?
This act was enabled to separate the risky investment banks from the everyday retail banks.
This was the the main piece of legislation following on from the Great Depression period, that protected the entire US banking system... until it was scrapped earlier this deacade.
Doh!...of course this can't be done...as there would be no mechanism for privatising the profits and socialising the losses!
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"Stay awake. This stuff matters to you."
Sorry, sir.
It's just the hayfever getting to my eyes for a moment, sir.
May I ask Smith Minor if I can borrow his pencil sharpener?
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The more I research the matter the more concerned I become over the continued influence of the 'Quants'. (These are the mathematical 'geniuses' that come up with the theories that underpin the measurement of risk. These are the guys who came out of the universities and elite business schools with PhDs in creating the credit crunch.)
My main concern is that their (The Quants) influence continues and has not yet been expunged from the financial systems of the World. I believe that there is a very good argument that can be made that the false security that these fools gave the management of the banks - that there was little risk in what they were doing - is still being used to evaluate their (The Banks) present underlying relative 'strength'.
It is all very well saying that the basic ratios of banking management should be strengthened but unless and until the flawed mathematical foundations of risk management is tackled at source there is no hope of the value of the banks being properly evaluated hence all of Robert's blog is thrown into question.
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#4 well said the question is why have BBC reporters NOT said that ?
#6 A show trail would include Brown and Bliar too I think.
Therefore we should bring back Glass and Steel with some extra bit'bobs
and break up the banks too (20-30 banks would do nicely) , just like the Pubs.
Then follow with the supermarkets, Farms and other area's too.
Then take a look at the population issues as no one wants to discuss this either from an economic or "global Warming" "climate change" perspective ???????????????
That is the real root of this "POPULATION" growing without any natural restraints. Countries should get back to a pre-1945 figure or even smaller
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Robert, this is the first decent article you have written for a long time, perhaps you need to take more holidays.
I think its fair to say that the FSA can ponder on events and possibly come upwith an idea once a year that is both practical and useful. But giving air to its Chair who only has a knack of stating the obvious and clearly is having his strings pulled by the Government and mores the case No. 10 Downing Street, is nevver going to improve the situation for anybody
Its a shame Vince Cable doesn't chuck in politics and replace the FSA Chair at least them we would see continuity of debate and clear answers that all stack up.
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I suppose that all this extra capital will be held in gilts.
Thats convenient for the Government they have found someone to buy them.
So Darling Gordon lends the banks money, they lend it back, and round and round it goes.
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If a higher proportion of British business and personal credit is to be funded by British savers, then this is not going to happen at the current ridiculous interest rates. Higher interest rates should not be an impediment to our emergence from recession, as the main problem for businesses who need to borrow is the availability of credit, not the price of credit. Business could also help itself by taking advantage of the devalued pound to go for exports. After all we all know it is not true that the UK is best placed to emerge from recession, it is just Brown/Darling spin. Therefore overseas markets for our goods and services should grow before domestic ones do. Domestically, personal credit expanded far to far during the boom (and it was a boom, pace Brown.) Wise UK residents will be repaying debt for some time to come.
The Budget does, of course, give us hope that interest rates will indeed rise. The government's borrowing plans over the next two years are bound to lead to a rise in gilt yields, and the Bank of England could not allow the gulf between gilt yields and its own rate become too wide. (Well, it could indulge in mammoth QE by buying up large quantities of the new gilt issues, but Mervyn King seems to have no plans to go beyond his present targets for QE.)
So, over the next twelve months I predict a gradual rise in Bank rate to about 4 per cent, and maybe some of us will join the Chinese in becoming savers.
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RP: "The efforts of most governments, including our own, appear to be to sanitize the globalised status quo."
Robert - unless you have become an American overnight, the usual observation applies - you'll have more credibility if you get your own area of expertise right, spelling on this occasion, before stirring up feelings amongst others with your usual brand of mindless sensationalism.
Again - nice to see you focussing on Barclays as usual, one of the few who have not been bailed out by the tax payer. You must have sold your holding at 57p or something.
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There is nothing fundamentally wrong with the banking system.
What is wrong is that it is not properly regulated, and that bank executives have been failing in their duty to depositors.
The failure in regulation was occasioned by the government, the treasury, the FSA, and the BoE. They are primarily responsible.
The bankers were able to gamble with depositors money in all kinds of derivatives; they took advantage of lax regulation.
Let us see all the people responsible held to account, let us see proper regulation, and let us see banks do what they are supposed to do.
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I've said it before (As have others) and I'll say it again:
Adair Turner = Merrill Lynch Deputy Chair 2000-2006 (E.g. the Crazy lending years.)
Is this the best person to be in charge of regulating, especially when it seems he's willing to protect the big boys so vigorously.
I haven't heard in either your blog Robert or on the BBC's article about Lord Turners comments what he advises be the fractional reserve ratio changed from and to.
Are we trying to avoid another 'rampage'? Everyone knows we're not going to get any truth out the stress tests in America, and I use the term stress with an extreme amount of irony. The same is going to be true here, breaking up the banks I'd almost be happy with, except of course they'd still be the connections of the central reserve system. Still it's better than letting them get away with fraudulent/irresponsible lending (depending on your POV) nay even paying for it out our children's pockets.
Looking forward to the regulars on here riping this apart.
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Why was my first post moderated out?
All I did was mention the following...
fractional reserve banking
capital ratios
lack of truth
exposure of the above
and
Freemasonry
...all in one sentence.
What could possibly be wrong with that?
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#21, Lord Mandelson was guilty of lying over his income to pbtain a mortgage from the Britannia Building Society - it is one of the reasons why he had to resign from the government previously. If he wasnt sent to jail then for, arguably, fraud, why should anyone else......
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U13794890 wrote:
'Its a shame Vince Cable doesn't chuck in politics and replace the FSA Chair at least them we would see continuity of debate and clear answers that all stack up.'
Seconded.
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Banks...... shisters most of them... I'd much prefer taxpayers money went into helping Donnington race circuit get ready for running the British Formula 1 Grand Prix in 2010.
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Surely the whole central banking system was set up precisely so they can get away with doing this. Mr Bush to his great credit didn't play ball with Merrill Lynch so the rest all threw their toys out of the pram. Austrian Business Cycle theory also states clearly that when interest rates are low reckless lending follows. Do our legislators and senior bankers not read their own manuals? It is all too hard to believe in the form it has been presented to us. At least now we know who actually runs the planet, the bankers do.
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Oh and Robert,
Thank you for your hard work over the last few months, I know a lot of the posters don't agree with everything you say, and I suspect a lot of things you want to say are er, 'moderated'. Still you're better than most 'reporters'.
Also, is there any chance you could go back to China and find out why they are buying all those precious/rare earth metals?
P.s.
To the moderators, grand job.
Far better than the 2 hours + lag times from before. Thanks for doing something about it.
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"securitisation - the conversion of debt into tradable securities"
This reminds me of the sort of thing a dodgy butcher gets up to when he's making sausages - into the mixing bowl goes cheek meat, eyeball, ear gristle, great gobs of fatty flesh, steak that's on the turn, cheap filler, a little sprinkling of sage to disguise the flavour and some food dye to make it all look less green.
Mince it and mix it until you can't recognise any of the individual ingredients, then extrude it into edible plastic skins.
Delicious!
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a decent effort from Mr Peston for a change
clearly a longer-term view was and is needed, with much stricter regulation - having recklessly dismantled what regulatory systems we had built up since the 30s at the end of the 90s we have to pretty much start over; so we need Glass-Steagall tpe rules for the 21st-century but they have to be globalised regulations; this is going to be very very difficult to do but we must try
we also need to 'think out of the box' to use that awful term; along with most people, I did believe that globalisation was, on balance, a good thing, though I had my environmental concerns; but I am no longer convinced; it's like discovering oil fields in Africa - sounds great in theory (at least in the narrow terms of improving GDP and standard of living) but when you look at it in practice it turns out that most LDCs have experienced a FALL in quality of life and INCREASE in corruption, arms imports etc etc as a result of oil/mineral revenues
ahh but perhaps the same can be said about aid, you might say; and you might have a point
I now suspect that globalisation is in fact A BAD THING if allowed to rip; bad for the environment, bad for people, bad for society
For every example of a country that has done well from globalisation I bet that we can name two that have suffered, but of course a lot of this is subjective; from the World Bank or IMF point of view all growth is good, full stop
Which makes me wonder about the very fundamentals of our growth mantra; why is it constantly said that Japan 'suffered a lost decade' in the 90s due to deflation and no-growth? at the end of that so-called lost decade, were not the Japanese wealthy, highly educated and enjoying the longest, healthiest life expectancy of pretty much any nationality?
We should be looking at promoting systems of Fair Trade NOT Free Trade, and I'm not just talking about your purchase of cafetierre coffee at Waitrose once a week!
A globalised, monetised approach is not optimal - as now proven yet again by the despicable and failed system of Carbon Trading
As for AIG, which is often cited as the heart of darkness in the US, might I remind you that their CDS operations were based in Curzon St, Mayfair.......... in what was seen by them as the least regulated financial centre and therefore the best place to be!
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35. At 1:35pm on 28 Apr 2009, Wee-Scamp wrote:
Banks...... shisters most of them... I'd much prefer taxpayers money went into helping Donnington race circuit get ready for running the British Formula 1 Grand Prix in 2010.
Ahem!... I think you may have mistakenly put an 's' instead of a 't' in the word 'shisters'
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We are where we are and in the current circumstances introducing such increased capital requirements would only make the global recession that much worse.
If the world is ever to return to the level of prosperity that it once had, or thought it had, we may be limited to ensuring that future crisis is are handled in a more timely and organized manner. It would seem that we lurch from one banking crisis to another. It is possible that the system is inherently unstable, given the feedbacks between asset values, unemployment rates, economic activity and the banks willingness and ability to lend. There are so many reinforcing feedbacks in fact that it is impossible to list them all here.
Stabilizing the system is not an objective in itself - fostering economic growth capable of meeting our own and the world's aspirations for a decent standard of living is the underlying objective. It may be that to achieve the latter objective governments will have to stand ready to intervene when necessary to save the banking systems.
We live in an interdependent world on one element of our economy depends upon other elements and a problem in one area of the world or in one area of the economy creates problems in other areas of the economy. Breaking the bank's up into smaller units will not eliminate these interdependencies. It will simply create a whole series of smaller shaky financial institutions that are still subject to these interdependencies.
"Regulation if necessary, but not necessarily regulation" Regulation may be one way of mitigating this problem, but maybe there are other approaches that could be more effective. Notably may be governments should negotiate a common set of approaches to be adapted in the face of financial crises. Perhaps, for example, governments need to guarantee all bank deposits. Perhaps there should be a world stabilization fund. Let's put all the options on the table and then choose the best one, rather than seizing on one that is currently popular and may or may not address the real issues and in fact may make the current circumstance worse. Perhaps we need to increase the size of our social safety nets, which act against the direction of economic growth, adding money into the economy when money is needed and reducing the amount of money injected when the economy does not need additional injections. Perhaps we need a set of infrastructure programs on the drawing boards, pre-engineered and preapproved, ready to go when private spending dries up. We could choose those projects so that they contribute to future economic growth and well-being.
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> regulate ourselves into a simpler but possibly poorer world,
I hoped we'd crossed the border out of cloud-cuckoo land. When the "wild lending spree" model collapsed into a mountain of debt, did it make us richer? Nope - unless you are a "Sir Fred". The wild lending spree didn't work, so there is no other option than to regulate ourselves, is there?
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How about we do away with money altogether, if money is the root of the problem?
You don't have to be rich to be happy. No one talks about happiness anymore, it's always the wonga.
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I am fed up with this circular debate, just nationalise the banks and keep them nationalised, most of them are exactly that in finacial terms now anyway but are allowed to keep the same analysts and managers (the same self styled geniuses who got us into this mess)to run them!!
It is clear the banks are too pivotal and the nature of human beings too greedy to ever allow banks to fall out of the control of the people through democracy again.
If they are part of the private sector the nature of their game is profits, therefore the nature of their game is to look for and exploit loopholes in the reulatory framework so they can make lots of short term cash for themselves, that 'innovative' behaviour will always be rewarded, great for science and technology...a disaster for the global system of finance. It is about time governments recognised the difference and acted accordingly. They will not of course because you can not put a cigarette paper between the major political parties and high finance interests.
Strewth do the bloggers here have to point out everything sensible ourselves with no help from the media!!!!
Jericoa
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#10 Peter_t_clarke
"Can someone explain where the growth comes from if it is real?"
An interesting question, and one to which i have struggled on occasion to find answer. I think the answer goes something like this:
I get paid £100 per week. I spend it on rent (£50), food (£30) and clothing (£20). I therefore have no spare cash for anything else. The clothing I buy costs £10 to make and the manufacturer makes £10 profit.
The manufacturer figures out a way to make my clothes more cheaply, so they cost £5 to make, rather than £10. the clothing manufacturer (for the sake of argument) reduces his prices to £15.
Now I have £5 to spend on something else, the seller of which makes profit which previously was not there, whilst the clothing manufacturer still makes £10 profit.
Now I know this is a ludicrous oversimplification, but I think it is where "growth" in a real sense comes from. Hence why the industrial revolution and the advent of mass production led to real "growth" and a huge increase in living standards across the board.
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Great article Robert, there is no argument that the global growth explosion of the last 15 years or so has been bouyed along with what amounts to unlimited personal credit for both companies and individuals. The only way that can continue in the long run is if the taxpayer takes on more of the risk assosiated with some of the banks lending, replacing the mortgage backed securities market for example so that enough mortgage product can be put onto the market to enable house prices to rise in a reliable way forever, without us going through massive crashes in the future.
So, do we want unlimited global economic growth underpinned by the taxpayers, or do we have to try and build a more sustainable economy for the long term at the cost of slower more managable economic expansion?
Well I think that the politicians would like the former, but most of us would prefer the latter. I get the feeling that all this public bailout money is taken for granted by these people and now its in the bank, so to speak, they want to get away with as little regulation as possible.
With more taxpayer guarentees the banks can get away with holding less capital and dish out more credit, but if the have to stand on their own two feet, like the rest of us, our economy will be stronger in the long term, because the alternative is for all of us to underwrite our own borrowing, and when the next downturn comes, just how would the economy cope with that?
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31
precisely why he may be the right man for the job!
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ive followed your analsis of the melt down and understood more or less all of it! I only have one question, who made money out of chaos?
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Take a day off - be a "Business Editor" in the fullest sense. It is evident from many responses to your blog that this is something other readers would welcome. If you happen to read this suggestion (which seems unlikely) then please report on something other than banking - unless of course you are a closet banker in which case maybe it's time to come out!
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This comment was removed because the moderators found it broke the House Rules.
VentilatorBlues
Interesting comments, but it all relies on the idea of holding people accountable. realistically nobody does.
Think about it. You are help accountable by your boss at work because it's normally just one person. Now imagine you have 60 million. You can ignore them all by saying you're doing what the others have asked you to do. I'd like ot see them check!
It's the same with local govt, with pension funds, with the city. There is no true accountability.
We could solve this though. Follow a lead from America. No Prime Minister is allowed to be in power for more than 2 terms (10 years). Theyc an change the leader, but that leader has to be elected. Can you really believe that we'd have Gormless Brown under those circumstances?
Secondly, finance. Stop the current situation with pension funds. Your company picks a pension fund for you and that's that. How fair is that? What if you don't like hte risk profile? Tough. Perhaps a better option would be that the company pays into MY pension fund. I pick where it goes, and if my employer goes bust that's fine because it's MY pension fund. If I have multiple employers I don't leave orphan funds dotted round the economic landscape, they're all in one place.
Admitedly most people don't understand finance. So perhaps they better start to learn!
But imagine a situation where YOU manage your pension fund. If you think things are reckless you can moev your money around to avoid exposure. If enough people move their money then the markets quickly realise what's acceptable. Perhaps as the holder of shares you also get to vote your shares yourself. I bet that would make the boards behave differently. And if the building societies get their act right they could provide pension bonds (simiilar to fixed rate ISA's) to entice fudns from the markets to the safety of fixed returns. It would certainly shake the market up, and in doing so it might bring about a greater sense of accountability.
As to Govt. there's no hope of accountability there.
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48. At 2:10pm on 28 Apr 2009, llubnrut wrote:
ive followed your analsis of the melt down and understood more or less all of it! I only have one question, who made money out of chaos?
Doh!...the banksters of course!... aided by their long snouted political muppet friends.
Seriously though...most of it has just disappeared into (not so pure) thin air i.e. from whence it came.
Read post 9. Cassandretta21 for a beautifully concise explanation.
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43. At 1:55pm on 28 Apr 2009, lukeo1980 wrote:
How about we do away with money altogether, if money is the root of the problem?
You don't have to be rich to be happy. No one talks about happiness anymore, it's always the wonga.
Couldn't agree more, my Nan and Granddad had bugger all and they were the happiest people alive!
I have been reading this blog for the last yr now and it makes me laugh how everyone is always passing the buck onto everyone else for the mess we are in at the moment. I wonder just how many "bank blaming" people on here have mortgages at 5x their salary, maxed out credit cards and the latest gadgets/ designer things that are not exactly nessessary for their everyday existance.
Maybe everyone should go back to being skint, working hard for a living and enjoying the simple things in life!!
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Capital reserve ratios were allowed to be relaxed as a result of the September 11th attacks, to help prevent a global downturn. The IT / Technology sector was already heading for a bust. It was done with the express knowledge and indeed permission of the central bank and government of the US (subsequently UK also). A lot of people were writing about it in 2003. Plenty of academic articles and press cuttings to back it up. Try
[Unsuitable/Broken URL removed by Moderator]
The conclusion from this 2003 paper is a gem
"A key idea that emerges from this study is that disruptions to interbank payment arrangements, whether due to technological impediments or credit quality concerns, have been central to several banking crises and are likely to recur"
In this instance the US government pumped $100 billion into their economy at the drop of a hat and the banks were allowed to reduce their liquidity ratios. The result was that the bombers didn't make a dent on economic performance. The full consequences of what became a permanent relaxation of policy were not thought through at the time.
It's easy to paint the bankers as always being the bad guys. They were presented with new rules (albeit it very lax ones) to play with. Some politicians, too clever by far, thought there was a cure for boom and bust. We weren't booming and bust had been somehow avoided. The rest as they say is history.....
Of course splitting retail banking from the world of international funny and moving away from universal banking should be an imperative, now that the initial crisis is over. The thing that I find the strangest is that the most important thing emanating from the PM recently has been a bizarre video on YouTube discussing his and other MPs expenses. What ever happened to doing what ever it takes to solve the economic problems?
The current muddled set up of half nationalised (or not) banking behemoths needed to be sorted out.
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Robert, I did stay awake through your article....it's a shame that Brown wasn't awake for all those years.
"Swine flu"....considering the greed of our bankers, is that the new name for "yuppie flu"?
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"2) if we clumsily implement hastily and crudely devised requirements that all banks have to hold vast amounts of additional capital relative to their assets, there could be a permanent and significant reduction in the availability of credit - which could significantly reduce the potential for future global economic growth (we could all end up poorer from our natural desire to have a safer banking system)."
But Robert ! As you point out, the only reason we had that 'extra credit' was that banks were not 'buying in' to 'Basle 2' and things like 'Sarbanes-Oxley', so we will never be as 'rich' as we were then, because it was all an illusion built on inverted pyramid of unstable, and wholly unsustainable, debt !!!
The idea that the solution to this problem lies in finding some way to get back to the over-stretched, over-leveraged money supply that existed then is just proof that this hard lesson has taught us nothing.
We ARE going to have to get used to living on less and living within our means, financially AND environmentally.
The party is over, the hangover is kicking in, and those ashtrays, stains on the carpet, cans of half-drunk beer and all that washing up ain't going to clear itself up. Maybe someone has a 'Yellow Pages' ?...
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Warming to my theme above..(#24)
Robert wrote,
"Oh, and lest we forget, the single biggest stimulator of the excesses of the banking system wasn't a bank at all: it was AIG, whose crazy insurance of financial products gave banks the lethal confidence to lend to those who could never repay."
But who justified these risk models - the Quants - the PhDs from the major business schools, funded and paid for by the banks/insurance companies themselves to provide false risk analysis models for the complex finance instruments.
These guys are still assisting the banks to smash and grab their way though the Taxpayers' bail-out money!
So I add them to my list of people that need to go for a recovery to happen - Heads of the institutions (BoE, FSA, Treasury) and all academic institutions that taught and trained these fake mathematical risk management systems - will there be anybody left! If only the risk management evaluation systems had been more sensible then the instruments of financial destruction would not have been created!
We should be drawing up a list of academics (headed by the no regulation bunch Milton Friedman et all), but now also to include all speakers and attendees at any of the Quants conferences! They all need re-education!
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Adair Turner is doing a good job at the FSA (apart from wrongly defending its past mistakes when he wasn't there).
So keep Adair Turner at the FSA but make Vince Cable Chancellor.
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Firstly I don't agree with your statement that if a big bank had been allowed to fail, depositors would be lined up outside. The Govt could have guaranteed all savers deposits, it didn't need to save the bank, The reason it didn't let them go to the wall is to do with the fact that the chinese etc would be unlikely to lend any money in future if their deposits weren't safe, plus the americans would have been mighty miffed if the UK hadn't coughed up for its CDOs and CDSs etc. The UK housing bubble was a blind to cover for this.
As far as banks too big to fail - BREAK THEM UP into smaller units that CAN be allowed to fail. There would then be no need for the huge increase in capital ratios would there?
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#57 John_from_Hendon
Following on from your 'Quant theory'...
I believe it was Warren Buffet that coined the phrase 'Beware of Geeks baring mathematical models'
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#59 BlairWitch - surely the costs of guaranteeing all savers' deposits would have been more expensive than saving the banks themselves?? Sounds like bailing the banks out was the lesser of two evils to me.
And if you break the banks up into smaller units, how do you stop them growing into big ones again? most of them were small to begin with.
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I'm an IT contractor (there I said it !) so wont get much sympathy there as fair enough I've earned some good money in the past...spent most of it though. Had my chat with the team leader last week, very inspiring ! Seems that the bank that we've bailed out with taxpayers money see myself and my buddies as too expensive, balance that against a 99.9% system availability and I'd say that was worth a penny or two ! Anyway he's been given CV's from India and despite him being unable to find even the slightest skill set in the relevant technologies he's been told to hire them. I'm currently working with a bunch that has a wealth of experience from a host of major organisations and we've pretty much seen and done it all. As I said earlier we've earned some good money too but the point is we've also been taxed on that money, we've spent that money down the shops, pubs, restaurants, on holiday, on cars, insurance policies, every week at sainsbury, on conservatories and home improvements, down the bookies but don't tell the other half ! and don't even start me on the kids christmas presents. Where will the boys and girls from Bangalore be spending there hard earnt cash ? here ? I think not... where do these organisations expect me to put my dole money when it eventually arrives ? into their bank ? will my colleagues and I be buying their products without an income, a deflated house price and a pension worth squat.
There I've had my rant an rave and probably not much to do with the blog but I feel better for it.
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I rather fear that the Authorities are going to make a miss the point, complexed up hash of this - the two root cause of the crisis were lax monetary policy from the Fed and the absurd bonus culture in the financial services industry - the Fed has (I would hope) learnt its lesson, and so all we need is a Regulatory curb on bonuses - we can leave all else as is, apart from maybe increasing the minimum capital ratio by a small amount
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Government has abdicated its crucial role of controlling the money supply to private individuals. Capital ratios exist to give some pretence that there is a cap to the amount of money that banks create out of thin air.
Until we make gold and silver the only forms of money we will always be at the mercy of fractional reserve lending.
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Maybe it is time for world leaders to stand back and radically review the way the markets work rather than tinker with them. Since the credit crunch first hit, the flurry of global reactive behaviour has been a necessary rollercoaster ride but also a distraction from addressing the root causes. And it is not just governments that can benefit from stepping back right now. It is easy to lose sight of what is truly important at home and work when you are caught up in a whirlwind of deadlines. The Survivors Guide To The Credit Crunch helps readers to create some slow time, to review priorities and to do some clear thinking. See the articles at http://www.thesurvivorsguide.co.uk/latestblog.html
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The financial system, religion, global drugs policies, war on terror - IT'S ALL COMPLETE MADNESS.
Still never mind eh.
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#33 and that is why we have so many problems, why was maddy not sent to jail or even had a court case ?. That shows how rotten the system has become
#35 perhaps you would like taxpayers money helping me buy a farm.
if not explain the difference please.
smack of pet political policys and more corruption
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Good explanation, Robert.
(Although you do have a bit of competition in being able to explain things simply..... in Post 9).
But the gist of it is that this Labour government is still so desperately in love with the City after all these years, that it is absolutely happy to continue to allow the tens of millions of ordinary people in the UK to be ripped off left, right and centre by the money machine (..... that would be the unreasonable bank charges, the huge spreads between money deposited and money lent, the ridiculously large fund management fees for all investments/pensions/savings, the quite extraordinary levels of opacity in pensions systems, and so on and so forth.....), if this will attract rich people to London to build a so-called "world class" financial centre.
"World class" my.....
It is really is a Faustian bargain Gordon Brown and the rest of the government have signed up to, and for the good of the majority of people in the UK we need to get rid of it.
(Just to add some clear evidence here - one can mention yet again that report by the RSA that you quoted yourself on pensions - which found that pension fund performance for the UK population depended solely on the level of charges imposed on those funds and were influenced not a jot by anything the managers of those funds did, meaning that this would seem to one of those clear occasions when we would do infinitely better by paying peanuts and getting the job done by monkeys).
But thank goodness some people have got the right idea....
"Which is partly why some, like the Liberal Democrats, are in favour of the forced break-up of the likes of Barclays and Royal Bank of Scotland into so-called narrow banks, so that these sorts of competitive distortions are minimised and so that banks don't abuse ordinary depositors' cash by gambling it in the supposed casinos of wholesale markets".
I think Vince Cable should take to the streets......
A lot of us would come along.
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By the way - we don't need banks of course. Nothing a few racks of servers in a secure basement can't deal with... counting credit... easy.
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Sounds brave Robert, but heard it all before. The blog is and always has been, can you get it into legislation? Meanwhile, are investors coming forward to buy out major banks' troubled assets? If not why not. Have we understood the so-called inconsistencies in the asset-backed securities buy out programme. Are we still focussed on neutralizing the cause of the crunch while being focussed at the same time on meeting the challenges of fiscal stimulus. Are there enough engineers for infrastructure spending to the tune of billions? I'm sure not a lot of attention has gone into oversight, it's a grand thing to talk about - you try putting it into practice, and I'm not alone in thinking that a lot of tax-dollar-pound spending will end up wasted.
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#62 totally agree in the same boat well almost, tried to replace with Indian's but they cannot gut the mustard , BUT are cheap.
6 years ago in a pub in cornwall, chatting up 2 girls well talking to them, they were working at a care home But they were from turkey and bulgaria, and so was most of the others too except the top management.
know there was then high unemplyement in cornwall at the time, why were local not doing these jobs ?
You see most people have also swollowed the spin that the mass imigration in to UK was a good thing. Well it was not. put pressure on housing driving the price up.
around the road 12 people share won house all working from abraod . Thats council tax/12 , then there is me and my family council tax/1
and that does not include gas electric etc etc
get the picture ,
I have to earn more just to remain on equall terms.
PS and Council tax has rocket too.
we are not dividing 100/12 its 1400+/12
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International and Global Trade by definition goes worldwide and steps outside of national boundaries and of course National Tax Laws
Companies buy products and servcies cfrom Country One then sell to an Offshore Company. The Offshore company takes a gross margin and sells on to Country Three ( Country 2 being a small Offshore but sovereign island)
Banks and International Corporations have worked in this manner on all major projects and selling of subcontracted goods since the Second World War. What legal steps are we considring if these companies go via a third Party. They sell legally to the Offshore Company who simply sells on with a low tax take. Few IntraGovernmental Tax Rules have been either negotiated or agreed with the Offshore Industry.
Ergo: The Worldwide Trade continues thus so does Global Banking. There is no alternative Financial System to set up as all trade still can be legitimate and legal via Offshore or Low Tax sovereign Countries. That is the nature of Trade, Finance and Capitalism. If each Country nationalises its own banks and China, Japan and Germany sell off their surpluses, global growth is dead in the water and we either stand still or have a Global Depression.
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I would do the opposite of what Turner and Brown want, its obvious from your book, that they are in the pay of the people who want this so that will be their opinion, and besides they cant sell any more peerages
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anything is better than what we have to suffer due mainly to this government's inept regulations and poor leadership in the banking sector.
may be if those incharge of banks were to face criminal charges for negligence if they cause such problems again, we may get honest hard working bankers.
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Robert,
Your logic is incorrect.
I would give it 6 years before banks found a way around this new regime, another 6 after that and they will be bringing in the next financial weapon of mass destruction - by which time most of the lessons of today will have been forgotten and the regulator (which is supposed to be international by this stage) will miss it completely.
"took leave of their senses with their manic lending " - WRONG, they did not take leave of their senses - they simply did what the market expected of them, and in fact what Capitlaism ENCOURAGED them to do.
Here's some previous "triumphs of regulation".
"No more 4 times lending" - Calls after the 88 crash and sadly gone by 2000
"No more short selling without an uptick" - Introduced in 1928 to stop the Great crash, and removed by George Bush and the SEC in 2004.
"No more shorting without holding the underlying (naked short selling)" - Introduced in 2005, promptly ignored by many market participants including many of the big players leading up to the current crisis.
...and some disasters which regulation was SUPPOSED to stop.
- The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government
- The loss of $7.2 Billion by Société Générale in January 2008
- The loss of US$6.4 billion in the failed fund Amaranth Advisors
- The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998
- The bankruptcy of Orange County, CA in 1994
- The loss of Barings bank due to Nick Leeson's actions
...the list is endless and still being added to daily - most of which I cannot comment on as they are ongoing...
You may be happy putting your financial future in the hands of the regulators - but I have no reason to believe that 'it will be different this time'. This is akin to keep giving your junkie son handouts of cash in the hope that 'this time he won't go and get wasted with it' - the BIG difference being that you're related to your son and have a bond, we are NOT related to the financial regulator and have no such bond.
The feeling of 'I told you so' in 10 years time will be no comfort for me - THIS MUST STOP NOW - DO NOT PUT YOUR FAITH IN REGULATORS THAT HAVE FAILED TIME AND TIME AGAIN.
The virus is Capitalism - the cure is not more Capitalism.
Maybe if the 'brains' of this world stopped putting so much effort into fixing this clearly defunct system and started thinking about a better and more radical way forward then it would provide some comfort.
The alternative is social chaos and upheaval following the collapse of Capitalism which will do so much damage. Capitalism will not see out this century - and just like Global warming, it's not good enough for mankind to deal with the consequences when they happen, we MUST tackle the consequences before they start.
We're all wasting our time if we think any slight adjustment to the current system will resolve anything in the long term.
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How appropriate we now have swine flu following all the troughing.
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64. At 3:07pm on 28 Apr 2009, truths33k3r wrote:
Until we make gold and silver the only forms of money we will always be at the mercy of fractional reserve lending.
JFK was the last big cheese to try and re-establish the US dollar to the gold standard...and we all know what happened to him shortly afterwards!
Now you've got me started on the Warren Commission Report!...
I visited Dallas a few years ago and went to the infamous Book Depository building...except it's been converted to a museum now, it's called the Assissination Museum. I think it was named that after JFK was shot. Anyhow...you can go and see the window from where the actual shot was supposed to have been fired from, although it's now screened off with thick plate glass. It's been set up so realistically with the empty crates etc etc...and Oswald ain't there either! The only reason the window has been encased by glass is so that no fat American tourists can look out of the window...cos every single one of 'em would shout out 'No freakin way', 'No freakin way could he have shot JFK....he could've only have done that by hanging from the ledge by his toes, upsidedown and shooting the rifle over his shoulder'!
Acknowledgemnts to the late great US comedian - Bill Hicks RIP
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peter_t_clarke
"I keep seeing and hearing the phrase 'future global economic growth', from economists,prime ministers, presidents, Robert, chancellors etc etc. Anybody who has done O Level Biology can tell you that unlimited growth is not possible whether it is economic or any other sort. So either this is virtual growth achieved by devaluing the currency or it has only been possible up to now because of virtually free energy. Can someone explain where the growth comes from if it is real?"
Peter - I could not agree more, the thirst for growth conveniently covers up the contradictions in the capitalist system. As long as the world grows the periods of over-production that Capitalism causes can be hidden (we give birth to more and more consumers) - however even the rapid pace of world population cannot keep up with the ridiculous demand for Economic growth.
Hence - recession.
It would appear that you have not read this in a book or heard it on the TV / Radio - but have worked it out for yourself with a bit of logic.
Sadly you are a rare breed in that most people are happier to simply take Government hear say and media gossip as their sources of information and not apply the logic of their minds to conclude where the problem lies.
Not once did any of the Bonus bandits ask themselves "WHERE DID THE PROFIT COME FROM" - for if they had they would have realised, like you, that the whole system is completely unsustainable.
My hat is off to you sir.
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"...taxpayers have pumped hundreds of billions of dollars of new capital into banks ... because the alternative of allowing the banks to fail was too scary ..."
Whoah, hold on there! Is the alternative of letting insolvent banks fail really so scary? Talk of long queues of depositors is just a straw man, there would be no problem in the government guarenteeing retail deposits. But bankruptcy, or at least a special resolution regime, would have allowed (would still allow) all those contracts for huge bonuses and obscene pension payments to be renegotiated, and would force bondholders to share the pain of shareholders. As it is, the goverment has saddled future taxpayers with unimaginably huge debts, just to make good bank creditors at 100p in the pound.
This policy of making good on the banksters debts in full (contrast this with the treatment of LDV, or Woolworths, or Visteon) only seems fair if you are a member of the banking elite, or one of their apologists in government or the media. It makes no sense for the good of the country as a whole.
Hand on heart, Robert: Don't you identify your own interest with the bankers'?
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All sounds good but come on - making money is all like the klondike !! When all this regulation is over and a few more years down the line the next younger generation of finance people who want to be 'fat cats' will think of an easy quick way to make money and the herd will follow. This generation of bankers will never own up to those coming through that they were failures and will not understand the next money making scheme anyway.
What goes around comes around sooner or later. The youung will be exploring for the new gold soon.
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24 John_from_hendon
Quants are ppossibly the next financial weapons of mass destruction.
Hugely complicated formulas mean regulators and senior staff look away and don't check under the hood as they should do.
Quant funds have been on the increase for some time - before the crunch came. Watch their rise carefully as you might be able to predict the next big one.
Confuse and confound the opposition, carry on pillaging as before.
The motto of the City.
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So nothing has really changed. The banks are still in a mess propped up by taxpayers who will have to work 'til they drop to pay for it.
The government's in a mess because they're totally out of their depth and still hoping globalisation will save the day.
Europe's in a mess because they are so bureacratic they are unable to modernise efficiently to cope with recession.
The taxpayers have no idea what they are in for for not only are they stuck with billions of debt they also guarantee all the bad loans and mortgages of the banks. How much this will cost can only be determined as the recession progresses.
No real plans to attack this recession are in sight.
To summarise we have to sit it out until it reaches its final conclusion to see what is left. The optimists can only sing the same tune for so long.
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Of course we need to go back to basics and redesign not reform. You say the old system would have left us poorer. Let me turn it round the other way. The wealth we thought we had these past few years, we never really had in the first place. We just spent the future. And we can't put things right by deceiving ourselves that we can go on spending it, because the more of the future we spend, the poorer we'll all find ourselves when we get there. We were never as rich as we thought we were. It was all a con. Now we have to pay it back, go back to the standard of living we really have achieved and build from there.
The point you make about banks big and small and insurance companies too all being prone to the same mistakes is a fair one. But surely the sensible way to approach this is to recreate the old tortoise and hare, retail and investment banking division, revive a version of America's Glass Steagal Act. High street banks should simply be forbidden from certain investment activities. Yes they'll give a lower return. But they will offer safety. For those not content with that, let them chase higher returns with investment banks and their fancy products. But let them understand that, if those banks get into trouble they WILL be allowed to fail. That way banks will not be able to hold us taxpayers to ransom again.
Oh and speaking of cons, has anyone else heard of this South African ponzi scheme that collapsed today leaving loads of British investors bankrupt? The man who ran it has been arrested. Apparently it involved loaning money to the Salvation Army short term at high rates of interest, only the Sally Army were never actually involved and the loans never really took place. A friend just found out he lost everything.
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This financial stuff is getting to complicated. We need to forget credit cards etc and manage our personal affairs more sensibly ( the tin on the mantelpiece for the gas money etc)
I think its called getting back to basics.
I was amazed to read that according to the Chancellors budget the Government will have total receipts of £496 billion and expenditure of £671 billion in the coming year.
If I have an weekly income of £496 and plan to spend £671 each week (on the basis that something will turn-up in the future) my financial advisor would warn me that I was heading for big trouble and my wife would put me in a headlock until I came up with a more sensible plan.
Who is advising the Chancellor ?
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"Here's the danger: we'll muddle through and devise yet another sub-optimal regulatory system."
Bank supervision was taken away from the Bank of England shortly after Labour came to power in 1997. You have to remember that in the 5 years prior to this we'd had negative equity, house prices falling and sluggish economic growth. Taking banking supervision away from the B of E reflected Labour's belief that the B of E was mainly responsible for that situation. Maybe it was, but no doubt Eddie George would have argued he never had enough regulatory fire power to stop banks lending too much into housing and property development in the first place?
Labour's replacement system was utterly hopeless, (proven by the current situation.) The FSA weren't even aware of an impending crisis, even though everyone else had been watching their own homes rocket in value. In some years by 30%, 40% even 50%! Yet no one "up there" either thought to ask, is this going to work out badly or even if it was sustainable?
That's why your comment about whether our politicians are only capable of devising "....yet another sub-optimal regulatory system," is particularly appropriate. The Point being our politicians have a lot of "form" when it comes to implementing bodies and regulations that DON'T work.
Adair Turner isn't sure about what is needed, perhaps because his remit from government means they are loathe to put something in place that drastically reduces economic growth, through the supply of less credit.
But as a taxpayer I don't ever want to come to the aid of a bank again, period! That's simply because this time those who were responsible have NOT been made responsible for the crisis. Some, like Fred Goodwin, have lost their jobs I know, but still they walked away with massive pensions, millions in redundancy etc and a very very comfortable retirement. Whilst the ordinary taxpayer/ Joe public is left to pay for (and suffer) the mistakes made by these people. In other words "we are the ones being made responsible for this banking crisis!"
By the time this happens again, and it will one day if the power and the greed (and useless regulation?) for ever greater profits is allowed to overwhelm the rational, I sincerely hope that Unlimited liability shares has well and truly replaced the Limited Liability of Bank PLC shares. So that next time if it really does happen the people at the top really do pay for their mistakes!
I say if bank shares legally had to be of the UNlimited liability kind, the need for the regulation of credit growth would be minimal.
Instead what bankers are looking for today is Higher Charges, (to cover their losses and restore their balance sheets,) i.e making their customers pay for their incompetence. Trouble is most customers are also taxpayers....it just gets uglier and uglier.
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#71 ps
if I choose to live like that to make myself more competitive then the
CAFCASS and Family Courts would stop me seeing my children.
So its not a level playing field
More simple down to earth reasons for the mess we are in
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#30 - hodgey
Best comment of the day
"There is nothing fundamentally wrong with the banking system"
....errr except nearly every major religion condemns or frowns upon it (Islam, Christianity), it ensures that the ruling class retain their power over the working class and that it continues the effects of colonialism well beyond the last colonist was booted out (Third world debt)
....but apart from that it's fundamentally perfect.
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We don't need more regulation, just better regulation. Problem is who regulates the regulators?
As the Government is so tied to the financial institutions they can no longer be deemed independant, especially as their motives are so similar, i.e. impressive short term results regardless of the long term prospects. So who can be independant AND have the expertese to understand the consequences of action taken AND have the clout to deal with any institution stepping out of line with the regulators guidelines?
Any ideas anyone?
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So whereas some banks were previously only "too big to fail", the implication is that they migth just be "too global to regulate".
Well then I think that leaves people very little alternative other than to do away with them in their current forms.
Why can't we all go back to national level banking - nationally licenced and nationally regulated - and, if necessary, nationalised banks.
(If Barclays, or whoever, wants to do business in USA or Japan, then they get autonomous siste companies licenced in those places and comply with the regulatory regimes in those countries).
Surely, at a basic common sense level, it just has to be crazy to have banks, or other institutions, that are bigger than the structures and systems used to regulate them. Otherwise it would just be like giving them 'sick notes' to allow them off of having to play by any rule book.
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The only thing the governments need to do is make banks smaller, break them up, this crisis and the resulting ill feeling was caused because the world could not handle the pain of a Citibank or RBS going bust, they were too big. The balance sheet requirements kind of do this but I can't help but feel it will make a very conservative industry that ultimately will hurt the public (expensive debt and harsh asset price corrections).
The economy can handle crazy banks that push the envelope on the lending front but they have to be small enough to fail and be a small proportion of the overall industry, then the market will govern them.
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Robert, I feel that I need a diagram that connects flows of money from source, through the system, and back again, starting with £1. Not having majored in economics but logically minded, these circular dependencies in finance are doing my head in. Is there such a thing? However complex surely it can be done. Quite literally, the whole picture.
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Ah #91, I see you have the same problem I, #45 kindly supplied an answer to my question about real growth, but I suspect that the manufacturer on reduced his costs by buying materials or finished goods from some new cheap source so the £5 the customer gainde was simply lost by the original costly supplier.
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Its a difficult balance isn't it. Access to global credit or a poorer Britain. Maybe we should be working towards more saving so that we can be more balanced globallenders and borrowers. I'm surprised at how quickly Gordon Brown has tried to restart securitisation - it just assumes it wasn't really the problem (which after all, he is convinced was in the US). Yes, we need a functioning housing market, but property is still vastly over valued against anything but city salaries.
The response seems to be more about pleasing the voters than a viable long term solution. The same applies to corporte lending. He hasn't tackled the saving /borrowing ratio at all. If he wants more lending, he needs more saving and that means a decent after tax and inflation return on savings. We haven't seen that for years. The whole thing needs a serious re-think with a long term rebalancing. Which party will be prepared to discuss it.?
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45 GBHRich
"The manufacturer figures out a way to make my clothes more cheaply, so they cost ?5 to make, rather than ?10. the clothing manufacturer (for the sake of argument) reduces his prices to ?15."
...and how does he manage to make clothes more cheaply?
The cost of raw materials remains constant (in proportion to the sale price)
Has the clothing manufacturer invested in new technology that reduces the cost? and if so, how long before his competitors have done the same and the saving is gone?
.....or does he reduce the wages he pays to his workers, either by reducing their hours, numbers or by making them work longer and harder in the sweat shop.
ASK WHERE THE PROFIT COMES FROM AND YOU SHALL HAVE YOUR ANSWERS AS TO WHY THIS CRISIS OCCURED.
DON'T LET THE OVERCOMPLICATION OF A SIMPLE SUBJECT DISSUADE YOU FROM THE TRUTH.
The Capitalist chases a diminishing profit, his only option to survive in the market is to diminish the real wages of the worker.
This is common place at the moment, how many times will you hear jobless people proclaim "I will do anything - I just need a job" during this recession as it gets worse and worse. How many people have already taken pay cuts (I know I have), how many people have had their hours reduced?
Fred Goodwin's pension remains intact - the workers who worked for him are either sacked, on short time or had their pay reduced. This is how Capitalism works, this is how it survives - humans are now simply commodities and can be bought and sold as the market dictates.
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The FSA likes to use the word "reasonable" when it states how financial advisers deal with clients. It must therefore be "reasonable" for the public to expect the regulator to do their job properly and "regulate".
Sadly, the FSA failed abominably in what could "reasonably" be expected of them - result? Their failure was the near failure of our entire financial system.
Yet, they still have their jobs!
Every man, woman, and especially child, will not only be paying for the FSA's failure for many years to come, they will also be funding their pensions!
Good question from previous commenter - who regulates the regulator? Who does - I'd like to know.
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#92 peter_t_clarke
"lost by the original costly supplier."
...and how? Suppose the original supplier is a cotton supplier (for clothing) - the cotton industry is fairly manually intensive for a modern industry (people have to pick the cotton in the fields by hand) - and that's where the original supplier cost his costs.
....at the bottom of every cost saving you will find a worker, getting paid less or getting sacked. There is no other way to increase profits. The Capitalists will try to tell you there is, but it's simply not true.
Look around you - see the bankers working in the local newsagents. I met one just the other day who is one of those 'energy certificate bods' the Government set up for rental properties.
Despite what you say about bankers - the man had a degree in Economics and he's doing £50 appointments to check that lagging and insulation is up to standard.
A worthwhile job maybe - but not for his skills and knowledge. It's called the de-skilling of the workforce and it ensures that the workers are constantly kept under the jack boot of the Capitalist.
Why should anyone bother with higher education if this is how the system treats you.
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The simple reality is that we just cannot afford another big bank to fail. The money is not there to bail it out so it will just have to crash and wipe out both depositors and creditors. Maybe this is what we should have done last year but we had all been properly brought up to think that the government is the final guarantor to the citizen.
This actually is where the entire matter resides. What actually is the function and purpose of government?
The UK model is that government is there to protect the citizen, to provide certain services that enhance that protection, and invest in the future development of the country. However, the UK has a management problem in that the citizen does not feel protected, the public services are highly variable in their performance and the future has been very misconceived.
The reality is that traumatic change has taken place and the status quo has been found very wanting. We have to move on.
Banks must become manageable not just by the bankers but also by those responsible for regulating them. This means their size must be reduced and the regulators must be effective: so long as the regulation is effective the regulations do not need to be harsh.
There has to be a separation of functions so that my retail bank is not betting on the commodity market with my life savings. The target driven bonus culture must be outlawed as not only does it not work it carries within itself the seeds of catastrophe.
I will admit to being a fiscal conservative. I do not believe in Big Government, nor Big Business. I feel the latter two have been out of control for a very long time and I blame them both for the mess in which they have placed this country. Individuals should be held responsible before the courts for the decisions they made.
There were insufficient checks and balances in our society to prevent the bank crash from happening which suggests to me that all institutions need to be constrained in size and influence. They have to possess a moral duty not to endanger the rest of society or they cannot be allowed to continue. However, I haven't a clue as to how we are going to do this.
What I do know is that simplicity, transparency and little or no dogma will get us a long way. These are practical issues which are of common concern and nobody should be excluded from the debate for whatever reason.
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UK Output drops by 1.9%
http://www.statistics.gov.uk/cci/nugget.asp?id=192
You don't seem to have picked up on this Mr Preston?
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#92 and #94
it is too simplistic to say that reducing costs is merely the result of cheaper labour. It can be, and usually is, the result of technological innovation. One major way of reducing cost was and is mass production: Henry Ford did it with the model T and sparked real growth.
"Has the clothing manufacturer invested in new technology that reduces the cost? and if so, how long before his competitors have done the same and the saving is gone?"
That completely misses the point - that his competitors do the same does not destroy the saving, it enshrines it. The consumer now gets the same saving whichever manufacturer he buys from - the saving is not gone at all.
Say what you will about capitalism, but it is the only economic model ever to lift the majority out of poverty - just look at China in the last 10 years to see what can be achieved. There are of course major downsides to capitalism, such as imbalances between the haves and have nots and the difficulties in regulation, but until someone comes up with a workable alternative, it is by some distance the best model we've got.
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#84 and in the budget they were trying to get people with 10 year old cars to go and buy new one on tic, as most likely even with the £2K discount they still could not afford one on any sensible measure.
Most normally they would trade up to a 6-8 year old car etc etc.
They are borrowing money or raising taxes (I taking my money that I could do wit hto buy X,Y,Z) to give away to people to go and borrow beyond there own means.
just gooled No 10 and it came back with a lunatic Assylem.
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#84 I agree with what you say about Lord Turner, I also think he was hamstrung when it came to looking into the regulation of mortgage lending for the same reasons! The government had already taken the decision to go ahead with the Crosby Report and if there were to be rules governing the ratio of loan to value, and also multiple of salary, then there would be no benifit in Crosby.
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The media keeps blaming the government and the financial regulators for the cavalier manner in which major banks gambled with depositors money, but is there not a regulatory body called auditors who are meant to review annually, and agree as sound, the accounts of all companies? Has there not been a catastrophic failure of the auditing process world-wide, and what are the connections between financial and auditing institutions.
If I see that a company's accounts have been signed-off by their auditors, as must have been the case for RBS, Northern Rock, UBS, et. al., then the assumption is that all is well with those organisations. Surely there should be a large scale investigation into the practices that have demonstrably failed every tax payer throughtout the world, unless ofcourse you are a wealth bank director with your money in an offshore tax haven. All concerned should be treated as having committed crminal neglect, their wealth in all forms and all locations sequested for reimbursement of tax payer loses.
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Contradictions of the Capitalist.
Last night on Dispatches Barnoess Verda made it clear that 'We had to protect and save the SYSTEM from collapse'
WHY?
Why do we need to save a system that keeps collapsing? Why do we need to save a system that causes so much uncertainty in our lives?
This is my third recession now, and we saved the system on the last 2 occassions - why are we trying to save it again?
With all the effort and production lost when saving the system we could have moved the entire population of the earth to another planet and started again!
Is this where tradition gets in the way of progress?
Do not kid yourself this recession is nearly over, jobs are going hand over fist at the moment and the knock on effects have yet to begin.
Protectionism has started and will balloon and stagnate international trade
The siezing up of the credit markets was simply the catalyst - the recession is just beginning for ordinary people.
...and still we persist with the system....
If it were a dog, it would have been put down by now...
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Still a little woolly in my opinion, Robert. Let us know when you have it all sorted out.
#10. 'Anybody who has done O Level Biology can tell you that unlimited growth is not possible whether it is economic or any other sort ... Can someone explain where the growth comes from if it is real?'
I think I can explain this. It comes from other people, who get less growth for themselves, or it comes from future resources that belong properly to our descendants.
How many more generations of homo sapiens should there be, do you reckon, before the mass extinction or before we return to wearing grass skirts and building mud huts? At present, the answer is about two.
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#94
Has the clothing manufacturer invested in new technology that reduces the cost? and if so, how long before his competitors have done the same and the saving is gone?
crazy talk (again!) if the competitors all did the same (reduce the cost) what do you think would happen to the price? i'll give you a clue - it wouldn't go up
Real economic growth is essentially efficiency leading to greater output vs fixed input, so for example a fridge is now cheaper in real terms than it wa in 1960, a car is now cheaper in real terms than it was in 1930 and so on.
There is an argument that we haven't experienced real growth, we just work harder but its a tricky one to win and ultimately impossible to prove (how much utility does a fridge provide) but I suspect our average standard of living across the globe has increased.
Just so you know you actually can simulate the life i think you are advertising; if you are paid above average wage, give all of your money (above the average wage) to the poor. If you are below average wage, borrow money to simulate the average wage and then default (hurts those above average wage). And lastly regardless of what wage or job you have, you have to live life without envy or hatred of anyone regardless of their position relative to you and you have perform to the best of your abilities to help the country regardless of what you are rewarded to do so. When you have done that you need to convince everyone else to do the same and hey presto you have your socialist world.
By the way, the minute you think that its unfair a London banker is earning 500k and driving a Ferrari you have just taken a step down the road to capitalism, and right now you shouldn't care about Sir Fred just your role in the common good.
Have a look at the standard of living of most people in Venezuela and they are swimming in oil.....
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Hmmm - quite interesting but its still about banks - meanwhile the rest of UK business crumbles away but that isn't even worth a four line blog.
When we have no money left then the banks capital ratios will be a bit irrelevant??
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#103
Why refer to a Capitalist with a capital 'C'? This is 2009, not 1984.
How much would it cost to relocate humanity to another planet? Do you already live on this other planet?
Why, despite the last two recessions, do you still have food on your plate, a roof over your head and a computer from which to spout your nonsense?
If your livelihood depended on your dog, would you put it down even if there was no other dog with which to replace it?
Do you write in one sentence paragraphs because you are unable to justify your nonsensical views?
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GHBRich
"Say what you will about capitalism, but it is the only economic model ever to lift the majority out of poverty "
This is a Capitalist lie - say what you want about failed Communist states but I seem to recall the one thing they achieved was everyone had a home to live in, everyone had a job to go to - I don't see that on the streets of Capitalist countries - far from it.
What Capitalism does is it makes everyone feel richer for a period (the boom) when people can slap themselves on the back about what good it does for poverty - and then when the bust comes and millions fall below the poverty line it's written off as 'one of those things'.
You're also basing this 'fact' on the last 60 years of Capitalism, which has conveniently been a long term boom - we shall see how many people are claiming they've been lifted out of poverty by Capitlaism over the next few years shall we?
The uneven nature of Capitalism also ensures that the poor are all hidden away in Africa and Asia so you can waffle on about 'poverty being reduced' because unlike Victorian times there are no workhouses left in this country - where infact there are millions who live on less than a dollar a day and who's life expectancy is no better than 100 years ago - but that's ok because you can switch off your TV and all those starving children disappear.
Your argument about poverty is also quite convenient as you have nothing to compare it to. To say Capitalism has reduced poverty better than any other system is like the argument that won Camelot the lottery again because 'they were the best at running it before' (having been the only company who ran it before. There is also an argument to say that with technological advances in farming there should be no-one hungry in the world by now - so why big EEC food mountains? - Answer is CAPITALISM. The market won't let you flood it with free food, so you have to restrict it, and if neccessary let it waste rather than feed people that need it - that is the stark reality of Capitalism.
The number of people living on the bread line was something this Government was concerned about before this crash - so what do you think is going to happen to them now?
Capitalism allows the excesses of the city (I know, I work here) where a man can spend £7000 on a lunch, but someone in africa can't get £1000 for a well that produces clean water.
Is that how Capitalism shifts people out of poverty?
You and I both know the argument about technological advances is too deep and complicated to discuss here, but the trend for the Capitalist is always towards the dimishing profit. I have read carefully the arguments from all sides and I came to one conclusion. Most people who throw out the 'technology' argument have only read one side of the argument and are not in a position to make such a statement.
You carry on in your Matrix world where everything is hunky dory and this is just a blip (because Gordon / Tony / David / Vince told me)..
.....me, I took the red pill and got out.
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"how much utility does a fridge provide"
Marginalism is absolute poppycock - how do you work out the utility of something before you have the price.
Work that one out genius.
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You infer that larger banks having to hold larger reserves would provide them with an uncompetitive advantage when securing depositor's investments.
Surely larger banks would have to factor this increased cost of reserves into the prices of the products they are offering leaving a "pays your money, takes your choice" outcome for the consumer?
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GHBRich.
If insults is all you have left - then I have won this argument.
NEXT
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Writingsonthewall
"Capitalism allows the excesses of the city (I know, I work here) where a man can spend ?7000 on a lunch, but someone in africa can't get ?1000 for a well that produces clean water."
No way am I debating the rights and wrongs of marxism vs capitalist with someone who works in the City (you are wrong, and no amount of claiming "I have read both sides of the argument" will convince anyone any different - you exhibited a complete lack of understanding of the way competition reduces prices, claiming that it increases them...) If you truly believed what you are saying, you would not work there.
In fact, you are clearly a wind up merchant.
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#108 Again no mention about how things should be done, nor any past successes, your rants are just that if you don't support them with another idea (although I suspect you might be a little bit of a socialist). Right now you are saying oxygen is bad we should stop breathing. The reason you don't want to say the other c word is because you know people will quote the events in Russia, Romania, Hungary etc etc
And you stats are just plain wrong. Crazy talk.
where infact there are millions who live on less than a dollar a day and who's life expectancy is no better than 100 years ago
Nonsense, firstly what did they live on 100years ago? and secondly average global life expectancy is higher than ever before, simply undeniable. Actually some of the worst progress are in socialist countries, been to Cuba lately? North Korea are flying aswell
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GHBRich-how are you defining poverty?
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No.62 Dear Soontobejobless,
Your rant 'n rave has everything to do with this blog. It's clear from your comment that you are an expert in your field. So of course your former employer will replace you with some cheap second rater to increase
profitability - they hope. That's the idiotic mind-set that's dropped us all into the brown stuff.
Good hunting. Something tells me it won't be long before you need to change your blog signature.
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The amount of capital banks have relative to their total loans must be increased. It should not be too difficult to get international agreement on this since taxpayers in other countries have been burnt in the same way as we have. In any case the banks are likely to be much more cautious, after their recent experiences.
We should accept the consequent reduction in credit, because we now know the full cost, when bubbles caused by allowing excessive credit, inevitably start to burst.
We need to adjust our economy to a lower credit regime. The role of credit is to transfer spending power from those who have a surplus they do not wish to use at the moment, to those who have too little. Generally speaking this is a transfer from rich to poor. To compensate for less credit we will therefore need nationally a tax and public spending system that is more redistributive and internationally to give more financial aid to poorer countries.
Without these, or measures with the same effect, growth will inevitably be slow if not actually negative.
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This blog seems to have gone off track.
The banks can be made safe by proper regulation, adequate reserves, and banning derivative scams.
None of these principles have been adhered to; that is why we are in this mess. The guilty should be held to account immediately.
When we have a government, a treasury, an FSA and a BoE that know what they are doing; when we have bankers that do not gamble with depositors' money; then all will be well.
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LOOKS LIKE THE DEAD CAT BOUNCE IS FINISHED!
http://news.bbc.co.uk/1/hi/business/8023560.stm
http://www.bbc.co.uk/blogs/newsnight/paulmason/2009/04/does_obama_have_a_plan_b.html
http://www.addictinggames.com/kittencannon.html
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The banks have the whole world over a barrel. It's the devisive nature of greed.
The only way forward is for each national government or association of states (e.g. EU) to regulate the financial actitivities on their patch. To trade on their patch then banks need to be licenced on their patch and regulated by them.
Of course, that will be just fine for all of ten minutes, until one country or the other decides to play a bit of brinkmanship and starts a lighter touch approach than all the others. At which point it pretty much all falls to pieces.
Similarly there can never be a truly global approach to regulation - assuming that globalised banking and trading continues - because sooner or later, someone will break rank with the others.
So, one way or another, some country / countries are going to get very miffed off with some other(s) on this planet. And we will just have to see how they then manage to resolve their differences.
So, you really can only rely on what you can personally do about it to minimise the damage for yourself. Not a lot, but there are a few things that might mitigate the situation a bit, like minimise your dealings with banks, do more on a cash basis, put savings into ethical banks or national savings or credit unions, and a pot pouri of other bits and bobs.
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I am just suspicious that nothing much has change in the banking world.
If you look at the lending rates they are currently offering against BBR, they are making fatter profits than they ever have, they maybe just ain't doing the bizarre and suicidal lending they used to.
I don't think those kind of monopoly tactics are going to teach them to be more efficient and more humble, I bet they think it is like taking candy from a baby.
They are being allowed to hoover up as much profit as they can get away with just now, while everyone thinks UKFI (Government control) is keeping them honest.... just so as they can get clear of govt. ownership all the quicker.
Of course a supine government tries to fool us that the intervention 'is working', cos look how good and quick the turnaround has been.
Dumb and Dumber
Once the big banks have got their independence back, it will be business as usual, ripping off the customer.
I don't see any sign of the wholesale reform we were hoping for.
Break 'em up into manageable sized banks, and be quick about it.
But regards anyway,
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"the Quants - the PhDs" who have been mentioned a few times, are not infrequently nuclear physicists whose mathematical modelling techniques (make things so complex that no one understands them then think of a number) are used to prove that the CERN project – the let’s re-create the Sun under Switzerland project – is perfectly safe… because my model says it is !
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#113 banks_what_banks. The "millions living on less than $1 per day" are in fact billions - about 2 billion. They are to be found in parts of Asia and sub saharan Africa. The average life expectancy of an Angolan is about 38 years, I don´t know what it was 100 years ago but would be surprised if it was much lower.
I have spent quite a bit of time in Cuba (average life expectancy 76). It´s not great, but where would be if they had suffered a 50 year embargo by the US? Nonetheless it has high quality health care (more Drs. per head of population than the UK) and high quality education (higher literacy levels than the UK).
North Korea is a red herring as those guys are just bonkers. It is rumoured that the Dear Leader fired a missile over the sea of Japan because he did not like a particular James Bond film. You tell me where in Das Kapital reference is made to structuring your economy around the military so that you can make an immediate response in the event that you find a particular film displeasing.
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35. At 1:35pm on 28 Apr 2009, Wee-Scamp wrote:
Banks...... shisters most of them... I'd much prefer taxpayers money went into helping Donnington race circuit get ready for running the British Formula 1 Grand Prix in 2010.
I would have thought Mr. Ecclestone could fund that with about .001% of his fortune.
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No Robert - Let's talk about something a lot more interesting - the people at the BBC or rather "talent" who are going to pay the new 50% tax or maybe they'll leave the UK or avoid the tax by some cunning loophole.
"Stay awake. This stuff matters to you" - yes, I quite agree.
Here's a first draft list of the people who should be affected, in no particular order:
J. Paxman
J. Humphrys
J. Dimbleby
D. Dimbleby
R. Peston
N. Robinson
S. Flanders
G. Esler
K. Wark
G. Alagiah
E. Maitlis
N. Campbell
A. Anand
A. Neil
H. Pym
S. Raworth
H. Edwards
F. Bruce
B. Turnbull
K. Silverton
C. Stayt
S. Reid
M. Bose
S. Williams
L. Minchin
P. Allen
S. Fogarty
N. Owen
V. Derbyshire
S. Nolan
M. Crick
A. Chiles
M. Urban
I hope HMRC will note these names down and pay special attention to their tax returns. Other readers may also add more names. If these people leave the UK as a result of the higher tax, would it really be a bad thing? Hmmm.....
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Didn't we (the punters) really cause the problem? I don't think it's fair to blame the banks entirely, for their excessive greed. There's 2 sides, at least, to every transaction, and it was really those of us who over-stretched ourselves and found we could not repay our debts who caused the crisis. If a bank is willing to lend money, that's one thing, but a punter commits to paying it back. As long as it's paid back, where's the problem? Therefore, punters are to blame for being unable to resist temptation to take credit they cannot afford. Am I being too simplistic/naive?
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Please believe me, when I say it yet again; the meltdown has nothing whatever to do with capital adequacy. There is no level of capital backing which will cope with the willful making of bad loans. And that is what we have had - the deliberate making of bad, stinking, loans.
This has arisen from a threefold base - diminished regulation, non enforcement of what regulation remained, and the rewarding of lending/selling staff with bonuses. To get the big bonuses, big paper profits had to be made. This required ever expanding lending into a saturated market. The biggest paper rewards came from bad loans. As an example the liar mortgages were the easiest to offload and paid the highest immediate returns.
Bank executives, across the board and across international borders, deliberately agreed loans in the full knowledge that they would never be repaid. This was fraud.
Tinkering with capital ratios can do no good but could well do more harm. We cannot begin to put the banking system right without first prosecuting the fraudsters. But this will not happen. Why? Because we should end up having to prosecute those politicians and bureaucrats who were in it up to their armpits. Hence, the system will not be properly repaired.
If the prosecutions could be carried out, then we would need to re-separate commercial banks, investment banks, and building societies and ban bonuses outright in these three sectors. Believe me, the professional lender dependent on a fixed salary can go a working lifetime without ever DELIBERATELY making a bad loan.
When sickness strikes, the medicine has to be taken. When Northern Rock ran into trouble, it should have been put into administration and the administrator should have made a complaint to the police. This would have made the remaining banks sit up and at least make the attempt to start cleaning up their own affairs.
We are not the victims of bad luck, nor of inadequate ratios. We are the victims of out and out fraud.
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There is a slight problem here - apparently allowing banks to fail was "too scary to contemplate." One consequence of being too afraid to contemplate this prospect is that the UK is now heading toward a fantastical budget imbalance - an imbalance so huge that not much scope exists for increasing it.
According to the IMF the global banking industry is looking at aggregate losses of $4 trillion - of which just $1 trillion has so far been written off.
How is the remaining (and so far undisclosed) 75% of the problem going to be resolved?
No doubt many millions of years ago dinosaurs would have considered themselves too big to fail, when in fact they were too big to exist.
Meltdown is coming - and the governments of the world are busy blocking all escape routes.
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48. At 2:10pm on 28 Apr 2009, llubnrut wrote:
ive followed your analsis of the melt down and understood more or less all of it! I only have one question, who made money out of chaos?
Answered by this post ?
40. At 1:47pm on 28 Apr 2009, BankSlickerminustheR wrote:
35. At 1:35pm on 28 Apr 2009, Wee-Scamp wrote:
Banks...... shisters most of them... I'd much prefer taxpayers money went into helping Donnington race circuit get ready for running the British Formula 1 Grand Prix in 2010.
Ahem!... I think you may have mistakenly put an 's' instead of a 't' in the word 'shisters'
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Writingsonthewall & opponents
It isn't an issue of Capitalism against Communism, it never is.
There are two natural states for homo sapiens –that’s us, that is- to be in.
One is hungry (lean and mean), the other is corpulent (fat and lazy)
Most of us want to 'succeed' in life; this usually means warm, secure, wealthy enough not to worry where the next meal is coming from, and with enough spare time to enjoy leisure or luxury. A nice by-product is that we hope to get some respect from our tribe for the success. Well not if you are selfish...
The problem is, when we get all that, Mother Nature has ensured we tend to get fat and lazy with it. Nature knows that we don't evolve if we get too comfortable, so it likes us to be always on our toes.
The problem with communism is that it tolerates the captive masses doing as little as they can get away with, and passing the buck to the state to look after them. The system might think it is encouraging a collective effort for improvement, but in fact it promotes the opposite, a collective effort to do nothing.
The problem with capitalism is that it tolerates the selfish and greedy. The system might think that it is encouraging those -with the energy to do so- to improve themselves and their status; in the hope that they might pull others up with them.
In one sense this is true, but ultimately the over-achievers get greedy, and steal what is not theirs from the weak, naïve and gullible.
All economic systems have to be unstable. They need to rock back and fro between the free-market on one extreme, and the state-control on the other, the hope is that the mood of the people generates the tilting mechanism nice and gently somewhere in the middle, and no-one gets too much power to over-ride the natural balance.
Problem is, we have had 12 years of laissez-faire government and an self-centred financial sector. Between them they rigged the scales, and boy, are we going to pay for it.
... good men do nothing ...
Regards,
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A basic principle of markets is that for a market to operate efficiently requires that the strong survive and the weak disappear. Interfere with this process and the market becomes irrevocably distorted. If banks are so vital that we cannot afford to let them fail, the question must be asked if they fit into a market model. If not then let's find a different model and maybe treat them like other vital services e.g. health/local services, etc.
Culturally, the banks are broken. Banks management have earned massive compensation for false profits on failed business models. In many ways these banks are as guilty as Maddoff, they conned the system with outrageous lending. What a culture where our taxes pay to keep people who have failed in their jobs because if we don't we would lose their talent to competitors. Personally, it would be a pleasure to take that risk.
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why is it that when -finally- Nick Robinson puts together a serious blog * (Brown's input on MP expenses), it gets closed for comments within a few hours?
Bobby, can you have a word with him; tell him he needn't be afraid.
Most posters try to be sensible and articulate, honest.
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Robert
"We taxpayers have pumped hundreds of billions of dollars of new capital into banks - we've nationalised or semi-nationalised loads of them,"
It is very important that you returned to this subject. The IMF ( Global Stability Outlook April 09) predict US sub prime write downs to 2010 as high as 2.7 trillion dollars which combined with mature loan write downs could reach 4 trillion dollars by the time this crisis is over. Banks' funding gaps, they say, remain large due to diminished access to long term funding. Refinancing needs of the emerging markets could be as high as 1.8 trillion dollars in 2009.Credit growth could turn negative giving long extended pain, they say. The scary bit is when they say UK banks could require total recapitalisation of between 125 - 250 billion dollars worth from governments or private sector. We've injected 37 billion sterling so far into RBS etc. but required them to lend out 40 billion sterling for 09 - 10.
In other words, we'll have to bail them out all over again!No wonder Mervyn warned Alistair and Gordon there would be nothing for more fiscal stimulus.
The IMF call for 1) proper stress tests 2) full and transparent disclosure of impairments - as if there hasnt been such to date 3) clarity that equity boosts should be via ordinary share subscription, not preference capital.Why dont the FSA publish the stress tests they have done? The IMF are a bit dismissive about the HMG asset protection insurance and insist that a Bad Bank is the best way forward.
This is very scary stuff and points to a divide between what our Government tell us is needed and what the IMF calculate and advise. It struck me when reading their solutions that they want to fix the system, not reform it. John Varley's AGM speech warns of more " thunder and lightning" and makes it absolutely clear he wants to see Barclays become a globaI bank - too big to fail no doubt. Do we ever want to see these financial monsters hold nationl economies to ransom ever again?
I agree - break up the banks into smaller entities which can never pose systemic risks to the global financial system again. I am sure that that will create headaches, but so what.....pay the price now and get it over with. Wars have been fought for much less !!I dont agree that securitisation is bad and should be abandoned. It can be made to work.
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Couple who took £61,000 from faulty ATM sentenced
http://www.guardian.co.uk/uk/2009/apr/21/cash-machine-theft-essex
Bankers eh!...old habits die hard.
Taking money that didn't belong to them...please!...someone tell me how this is in anyway different to what the banks have been doing to us over the years.
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Oh Mr Peston ! Over two years, I spoke to many a UK Bank Investor Relations Dept about Capital Ratios....they understood little about Basle (of any number) or Veracity. 'Banking' is about confidence and trust, WHICH are the REAL ratios. The Treasury has been busy these last ten months destroying both, albeit unwittingly.
Please start to report the real story.
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#57 John_from_Hendon
Warming to my theme above..(#24)
Robert wrote,
"Oh, and lest we forget, the single biggest stimulator of the excesses of the banking system ... was AIG, whose crazy insurance of financial products gave banks the lethal confidence to lend to those who could never repay."
"But who justified these risk models - the Quants - "
______________________
The Stupid Quants!
______________
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I am still disturbed by all the rants about the banks on these blogs that seem to put all the banks in the same basket. The government does not have any control over the Barclays model for operating. Nor do they over HSBC or Standard Chartered. They are global and independent of the UK government.
Nationalise what they own maybe but surely the UK Government cannot run roughshod over these businesses and tell them how they should be run? Or have I missed something?
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One question I have in all this is how can any global bank be nationalised?
Diggers
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No.136 sausagesforall. Yes you have missed something. You and I and the banks themselves don't know the extent of their unprovisioned bad debts. They are not independent while they don't know, and, likewise, nor is the British government!
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Not specifically pertinent to this precise blog but something that I would appreciate your various responses to.
There is a shark infested ocean, swarming with all manner of things that would out of hunger, territorial defence or by accident kill you.
You are afloat on that ocean in a boat that is currently afloat but needs constant bailing due to leakages. This is manageable.
There are a 3 dozen of you in the boat, ranging from a few experienced sailors to completely weedy landlubbers with the majority being able bodied and either more or less practical. There are a few whose only talent is entertainment and a very few with a history of crime, there are a couple with physical disabilities and one with severe mental/psychotic tendencies.
There is a long way to go ,the ocean is at the moment choppy but reasonable, you have no way of predicting the weather but know the ocean is capable of severe storms and several boats have recently sunk.
If the boat is lighter there will be less need to bail and it will withstand storms more easily, you are not sure of your final destination or what is the correct course to steer.
Off the top of your head comments, gut reactions, in depth analysis... all would be most welcome. Stream of consciousness "un-thoughts" MOST appreciated as I tend not to have many of those.
Thankyou in advance.
Peston input would be revealing.
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#137 D188ers wrote:
"One question I have in all this is how can any global bank be nationalised?"
I guess on a country by county basis, e.g. the USA nationalises the bit in the US, Germany nationalises the German bit, we nationalise the U.K. bit.
But, see my #119, I'm very dubious as to just what the global result would really be, because even nationalised banks could be allowed to 'let rip' again by some nations if they considered it was to their national gain in some way.
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The government has singularly failed to do anything to rein in the banks.They even siidestep bringing the banks to account over bank charges that hit the most vulnerable members of society. It is often commented that the banks run/own or control the government. We have a Prime Minister who used to be a Chancellor whos' main concern was 'the economy'. Yet as soon as the sacrosanct economy goes into freefall it all seems to be come as a big surprise. They didn't know....come off it. Now the banks carry on as if nothing has happened. Lending taxpayers money to the taxpayer at even higher rates than before and still taking the arrogant position that they took before.
I suppose the next step is phone-in competitins to claw back even more money as they seem to fail as bankers
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If the Government and the banks had not conspired to replace cash with plastic, one for control purposes and the other for profit, we would not have lost the self regulating effect of real money in the economy.
With out cash each loan made by a bank is actualy also accounted for as an asset - that is how the banks grew so quickly and arguably got to big for the real economy.
To use Mr Peston's style of speech; it's obvious isn't it - control + greed = disaster
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120. At 7:38pm on 28 Apr 2009, allmyfault
Could not agree with you more!
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RP: "The efforts of most governments, including our own, appear to be to sanitize the globalised status quo. It's obvious in our case why that's happening: as a nation, we don't save enough to meet households' or businesses' demands for credit (so we have to import credit from abroad)."
Robert why do you say we "import" credit, when you actually mean that Britons borrowed like crazy from abroad because the real economy in this country cannot cope with the expectations of life-standard, creating the biggest personal debt bubble on record. Overall, taking all savings into account, Britons have 800bn Pounds net debt! That is the problem and you know it. And yes I agree, the government does little to help the country against its debt-addiction. It simply has no plans for the real economy.
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do the math
(not that I did)
but it doesn't add up
stupid banks + credit companies
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Something for the almost ecstatic doomsayers to remember.
No gain or loss in the value of an asset is realised until there is a transaction.
Simplest example:
A householder has negative equity of 20% on a £200,000 house, i.e he took out a £250,000 mortgage at 95% LTV on a house worth then, £263,150.
This was only a couple of years ago so he still owes the vast bulk of the mortgage. He is working and can afford the payments, in fact his 2 yr fix is up and he is on the SVR which is lower than his fix and he is actually paying down his debt a little faster.
His loss would only be crystalised if he sold the house. If he does nothing then time will tell if house prises will rise to take him out of N.E or if he loses his job and is forced to take the loss.
An awful lot of the Trillions spoken of as overhanging Doomsday debt will never need to be realised and will be "worked in" to everyday trade as the world recovers, pinching a bit here and "losing" a bit there.
I have worked in many real markets, i.e Smithfied and New Covent Garden and this is how most "Bad Debts" were covered.
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And who's going to pay for the extra capital?
Equity investors in banks (mainly in our pension funds), who have provided the capital, have been largely wiped out due to incompetent regulators, bankers etc, so equity investors will be reluctant to take on the risk of investing more in banks to boost capital ratios unless they see risk lowered e.g. by less and better quality lending, with borrowers paying much more for their loans, so that equity investors receive an adequate return.
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#146 Moncursalion-Monochrome. You provide all the answers as to why you are likely wrong.
Smithfield and New Covent Garden are real markets, but what you are trying to analyse is the new global virtual market - virtual assets and real losses.
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#124
Spot On.
All from the pocket of the licence fee payer.
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I'm getting a little bored of this.
The business editor has no contacts outside of the banks, and only then reports on what Number 10 thinks might serve their purpose.
The only reason people are here is to talk amongst themselves - the journalism and reporting disappeared a long time ago.
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Post 124 how about adding the following to your list.
J Ross
C Moyles
G Norton
Sir T Wogan
G Lineker
C Evans
I would imagine theall chip in more than a retired banker (if adverts and other deals are added in) on top of BBC basic.
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148~ Armagediontimes
I appreciate the point you are making, but would still stand by the assertion that all valuations are effectively virtual until a transaction is completed. i.e a house is "worth £200,000" but it isn't until someone pays that for it. For the purpose of a loan secured on that house, it may be "assessed" as being worth £200,000 but until money changes hands that is only a virtual worth, similar to almost all other means of exchange or assets.
Its all smoke and mirrors grasshopper.
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# 118 BankslickerminustheR
Yes it looks like the cats out of the bag, and needs some more cream from US taxpayer's
They will not admit it though, sadly it looks like the hole is a deep one, time to get into gold and euro's.
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Morning Robert,
the title of your latest thesis is "Making the Banks Safe"
Surely, recent history suggests that this is impossible!
Could it be that the reason for Mr Turner and his FSA cohorts talking about stress testing banks is just a smokescreen to soften up the taxpayers of this country to believe that more taxpayers money MUST be injected into these wretched institutional banks?
I read your "Picks", I enjoy the informed commentary that follows, but I do not believe that anything you repeat here from HM treasury is worth the ink in a full stop.
"We're all doomed,..doomed I tell ya"
Kind Regards to all my fellow bloggers (I really must get out more and make more of what little life there is left).
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150# gj_kingston
It would be much improved if the initiators of the Blos i.e Peston et al, would read them and in suitably terse one liners, smack down the "Pluckers".; those that pull fatuous figures, exagerated statistics and entirely inventented economics out of thin air. A little weeding in the Blog-garden please.
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~153 Averagecit
Why on earth euro's?
The hidebound/corrupt mix of mediteranean scam artists and stiff necked prussians with a facinating admixture of communists, fascists and the French, can not decide on anything, refuse to admit that half the countries in the zone are in a far more advanced state of bankruptcy than the UK and are just praying that the IMF can pump enough into the Easter European countries that owe approx 1.7 trillion euros to keep the whole thing afloat. Euro will be trading at between 76 and 82 for most of the next 6 months and will then fall.
The economics and manufacturing outlook for the eurozone, where it is in most countries almost impossible to flex your workforce and the state take of revenue is approx 50% for ALL, is dire, dreadful and probably the worst basket case o/s of the Baltic and Dubai.
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#108, writingsonthewall wrote:
"GHBRich
"Say what you will about capitalism, but it is the only economic model ever to lift the majority out of poverty "
This is a Capitalist lie - say what you want about failed Communist states but I seem to recall the one thing they achieved was everyone had a home to live in, everyone had a job to go to - I don't see that on the streets of Capitalist countries - far from it."
Writings...
Did you ever spend any time in the "failed communist states"?
I was back and forth to Moscow prior to and post Glastnost.
NOT everybody had a job. NOT everybody had a home. People who had homes frequently couldn't get heating for them. In the summer (when it gets really hot), folk would look at where they were on the list of people hoping to get a fridge. Obviously it was Government people - and extended families - first, then KGB, then Senior local officials, then people in good standing with the party then other party members - then the rest...
Some weeks, there was no soap in Moscow. One week, the wonderfully organised state had decreed that bakeries should upgrade their facilities. It was more "efficient" to do it all at once, so for a while there was no bread.
It got to the point when, before every trip, you'd ask what the people you'd meet needed and pick up some essentials and hope that the customs guys wouldn't snaffle it before you could pass it on...
I got involved with ministerial and executive level people in one critical USSR ministry. These guys/gals would take the windscreen wipers off their cars and put them in the office drawer, knowing that, if they didn't the wipers would be stolen and they could wait weeks for replacements.
When the organisation I worked with invited a party to the USA, some of these senior execs didn't have suitcases (they ranked high enough to get access, but there weren't any in Moscow). So people from an aviation background carried cardboard boxes, tied with string and wrapped in polythene. When invited to take a look at the shops, these senior folk just wouldn't believe that every shop they went into actually had goods on offer in every department. They thought it was a set-up, so insisted on being allowed to direct drivers to random, out-of-town locations, to make "surprise" visits. And were astounded when there were always products on sale - for anyone who came in, not just the "special few".
Don't go all dewy-eyed, Scargill-Benn style, about a communist / hard socialist regime. I can support quite a lot of the philosophical arguments, but I haven't ever seen it deliver benefits in the way you'd expect.
Some communist states got it better than the USSR. Just a bit. When people talk about the tractor figures, you have to understand that many targets were expressed in tonnage. (That applied to lorries as well.) So you'd find massively heavy vehicles trundling around, churning up the roads, because 100,000 10ton trucks were equivalent to 500,000 2ton trucks - which were what the country actually needed.
Even the senior folk I mixed with believed it was a bit of a farce. That's why I'm not too keen on centrally fixed targets...
Orwell's 1984 got it right. Same "we know what's best" mindset, just a different uniform.
Capitalism has many faults. Always has, always will. But most of the things we take for granted were imagined, fought for and delivered by people who just wanted to introduce something they thought could be useful. It's often very wasteful. (That's why there are sales of unsold goods - and why some start-up companies never make it...) It can move points of production to lower-cost areas (although in many cases the people being exploited quickly - and rightly - react and get a better deal if their governments are half-awake).
But, under most communist/ hard socialist governments, products and services are delivered only when a central cabal decides there may be a need. For goodness sake, you don't actually need a mobile phone that allows you to take photos, exchange stuff on the internet, etc. do you? You don't actually need an internet to permit all sorts of rubbish to pop up in your child's room. You don't really need a TV that could expose you to all the world, when you don't even know the neighbour 5 doors down. There's absolutely no reason why you should wear a tie or blouse that's a little bit different from your friend's. Why on earth would you want to eat oranges during the winter?
I'm no philosopher, but to get back to the point of this post, banks need regulation just like any other organisation.
Capitalism (for an ignorant old fogey like me) means that you use cash to create hard assets that you work as hard as you can - using soft assets like people including me - in order to create something of worth to somebody else, so you can sell it. Sometimes the idea and product just fail. Tough. Sometimes it means that electric light changes the whole perspective of a society. I can't find enough useful things "invented" by a centralised government to count on the fingures of one hand. How about you?
This banking nonsense has been allowed to develop because it's post-modern. Bankers have been allowed, by governments and regulators, to dress up debt (which is only a notion - not a hard asset) and trade it between themselves - and to the public - and pretend it had an intrinsic value. It doesn't. Debt is a risk.
As soon as governments accepted that debt was worth as much as a fully-equipped factory we were all in trouble.
I've no idea why the FSA thought that Northern Rock's strategy of borrowing short big-time and lending long was a decent platform for financial stability. They (FSA) knew about it - but did nothing.
If banks are now required to hold sufficient reserves to meet normal fluctuations, it seems like a pretty good idea.
Normal banking - i.e. put money in, hope that nobody fiddles about with it too much and maybe you'll get a bit of interest - is not the same as investment banking.
But whatever type of bank you are engaged with, you do expect that someone in there will run a really careful eye over any "cash asset" they buy. How on earth did nobody realise that "carefully wrapped sub-prime stuff" was very high risk? Where are the law-suits against the credit rating agencies, who apparently thought this was high-grade ore?
What on earth were Treasury, FSA, BoE people doing to run a careful eye over the startling "growth" of profitable financial businesses?
Why was Brown so close a friend of the bankers while they delivered the rediculous amounts of tax take (via their profits and income tax on massive salaries plus the rapid escalation of income through property taxes)?
Then they all became enemies. Naughty bankers. Nobody could have foreseen this problem (even though many people believed and said that you can't run a decent life purely on credit)... Credit boom had nothing to do with me (even though I could have imposed conditions to stop it)...
When, pray, was the most recently commissioned power station (hard asset) brought on-line?
How many of the new schools and hospitals have been directly paid for (i.e. out of current tax) rather than being mortgaged by the government via PFI/PPP or whatever it's called.
How can the government claim any credit for development of the rail infrastructure, when there is a supposedly arm's-length - i.e. not government funded or controlled - authority to manage that?
If either of the above two were included on the public balance sheet, we'd be in an even bigger hole than we realise.
PLCs are obliged to declare the value of the funds held in private pension schemes and project whether they can cover present and future commitments.
When, pray, did the government ever try to establish the notional size of a current fund which would support total public pension exposure? Never did. If that notional sum were added to public (state - i.e. government - eventually tax-payer) on the debt side of the balance sheet, there would be even more chaos than we have now.
You can't run government like a business. There are too many factors that spread way beyond the scope of any normal company. But if you simply ignore the basic economics you do us all a disservice.
If you screw up private pension schemes by withdrawing tax waivers on dividend payments (5BIL per annum over 12 years, compounded?) and stuff the poorest by withdrawing a quite reasonable 10p tax-rate, how can you claim to run an efficient economy?
Man's a fool. Very bright, no doubt. Met plenty of them over a working career, but it just ain't being bright that cuts it.
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~157 FAIRLYOPENMIND
1st visit to USSR in 1972, Berioska shops for hard currency ans the aparatchniks and the rest.
I haven't been visiting these blogs long and yours is one of a handful (5 or less) that have said what they meant in a lucid, reasonable and BALANCED way.
A privilige to read and a credit to yourself, a style and analysis for myself and I hope others to emulate.
Bravo!
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fairly @ 157
good blog, that ... you overestimate the impact of Regulation on bankers' behaviour and underplay the effect of personal remuneration structures (the bonus culture) but, still, very nice piece
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#124 good list, i suspect most of them ,150 grand is loose change.whos worried anyway,we have brown at the helm we are all ok. brownwatch 397 days.
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#35 formula 1!! yawn yawn, i rather taxpayers money go on finding out if the moons made out of green cheese.
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Credit card debt.
It's the dibbuk in the room that no-one talks about.
A great, growing, unstable mountain of a dibbuk.
Does anyone care to do the unthinkable and comment on this
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#158, Moncursalion-Monochrome!
Thank you.
I met lots of very good people struggling with the "equality of under-supply". Also the same folk plus others I didn't like as much, insisting on sharing a (government funded) over-supply of vodka and brandy.
I'm not a particularly good or bright guy and had some difficult times. But got on fairly well after, at a public meeting, I said that I didn't really care what "ism" people supported, as long as they did their best for the organisation they worked for and the people they worked and lived with. Got on OK after that!
I also felt that the USSR never got to grips with logistics and supply chain management. They could make some incredible things (think MIG fighters and space probes) but never got to grips with mass-production and distribution.
Always regret not taking up invitations to visit "home-town" bases in Tashkent and Magadan. That's life!
#159, sagamix
Thank you too!
"... you overestimate the impact of Regulation on bankers' behaviour and underplay the effect of personal remuneration structures (the bonus culture) ..."
Well, the regulators have told banks to increase the level of proven liquid assets to mitigate against fuluctuations. They seem to be doing so. A bit late, but if you are threatened with having licences to trade withdrawn, I guess you jump! Bit late in the day, but then regulation has been poor for a decade.
If the Treasury, BoE and FSA had told finance houses NOT to provide rediculous levels of loan v income or loan v value, they would have paid attention. It didn't happen. The Treasury was too keen to collect tax from profits, bonuses and stanp duty. The BoE had been side-lined and told to focus on CPI inflation. The FSA was less a watchdog and more an interested by-stander.
The bonus culture is a concern. It can be divisive within companies - let alone within society as a whole. People have gained bonuses for decades for selling/producing hard assets or "hard services". If someone gets rewarded for ensuring production (and productive employment), I'm not too upset.
But my simple view is that money is merely a token of exchange. So when you buy a PC, you don't have to take in 2 pigs, a goat and a dozen eggs in exchange. But when money is made by playing around with the tokens themselves, with no reference to the underlying assets, things are bound to go wrong. I think the Chinese called it right - bankers became fixated with "creating" wealth just by playing with the tokens.
I was surprised that some companies took billions via rights issues shortly before declaring massive write-downs. Didn't the board KNOW they were in trouble? If they didn't they should have been fired. Period. No special pension or pay-off arrangements. If they did know - it's fraud. Any sign of prosecutions? Any directors being struck off? Why not?
I can get moved by some well written (or spoken) advocation of several "isms". But, as I've posted before, it's not the fine words, good intentions, laws or regulations that help society.
It's the delivery.
Communism didn't do what it said on the label. Socialism (which tries to moderate the good points of capitalism) has a patchy record. State capitalism is changing China from a massively underperforming country into THE future power. Let's see how well they distribute the benefits across a huge population.
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You say that reducing the availability of credit would reduce the potential for future economic growth.
Well, it would also reduce the potential for future economic collapse.
You also say: "we could all end up poorer from our natural desire to have a safer banking system".
We would only be poorer if the economy went backwards.
And anyway, just how much economic growth do we need or, indeed, can we sustain (availability of energy, natural resources etc)? It might be better to have a slower rate of economic growth but make this planet last a bit longer.
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I'd agree with yukaptya, in the end we will all be richer if we have a banking system we can trust in.
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1) Securitisation is evil and must die
2) "Too big to fail" banks are evil, and must die (by which I mean be broken up into much smaller, perhaps regional, units, and retail split (regardless of practical difficulties) from wholesale. Overall regional banking is probably a better model than national or international, certainly for retail. Leave the risk/venture capital and expopt finance to specialists.
3) Overall, mega businesses have shown themselves to be dinosaurs (exhibit A - General Motors. Businesses generally need to be smaller, more adaptable and more diverse.
4) We need to get away from the thinking that there is a God-given right to growth, and that monetary or fiscal policy should depend on it. Note - the nasty inflation which will follow in due course is probably being waited fro with salivating lips by governmnets who woul dlike their new debts devalued. To Hell with the value of our earnings and savings. Growth because you've hit on a great new idea or product or resource,m fine. Growth for growth's sake bad - especially because (as we have seen) failing any special brilliance on the part of business leaders and innovators, it will be driven by...erm, credit (read debt).
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The entire Banking culture is built around fear.
Fear for the customers that go overdrawn
Fear for the borrowers
Fear for the depositors
Fear for the staff
Fear for the market traders
Fear for the directors
Fear for the share holders
Fear for the Government
Fear for the citizens
Fear for the world
It has been for years
Now fear can be a great motivator in short burst, pumping up the adrenalin, forcing a quick decisive reaction but it is short term and eventually cause people to cower away, to become less competitive, to hide in corners or seek the solace of groups.
That is why we simply cant rebuild the banking model as it has become in the 21st century we either need an old model say 1930 - very backward in every respect I know - but may be the starting point to say if we knowing what we know today had started hear what would we do to create a banking system that is a pleasurable safe and uplifting experience to all the above groups
Because as I keep banging on rebuilding this shattered temple of economic misery that our banks had become is only going to bring us back a little further down the track to here
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stress tests
There is some talk of stress tests above....
It appears that the USA stress tests look something like this:
There are two scenarios Baseline and Adverse.
Baseline = 'Growth' minus 2 percent 2009, followed by plus 2.1 percent in 2010. 8.4 percent unemployment 2009 and 8.8 percent in 2010. House prices down 14 percent in 2009 and down another 4 percent 2010.
Adverse = 'Growth' minus 3.3 percent 2009 and followed by plus 0.5 percent 2010. 8.9 percent unemployment 2009 and then 10.3 percent 2010. House prices down 22 percent in 2009 and down another 7 percent 2010.
Anybody know what the UK versions of these 'tests' are?
[Leaving aside any view on how realistic these figures might be!]
Here is my guess for the UK tests
Baseline = 'Growth' minus 4 percent 2009, followed by plus 0.1 percent in 2010. 6.5 percent unemployment 2009 and 7.0 percent in 2010. House prices down 15 percent in 2009 and down another 8 percent 2010.
Adverse = 'Growth' minus 5 percent 2009 and followed by minus 2 percent 2010. 7 percent unemployment 2009 and then 12 percent 2010. House prices down 25 percent in 2009 and down another 14 percent 2010.
I really do not see how the UK authorities can expect us to have blind faith in these tests unless we know the details?
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I am not particularly knowledgeable in financial matters. I just know how I have been effected by the financial crisis and I appreciate how this column is written, so that it can be understood by people like me. In repect of the viewpoint that big banks like Barclays should be slimmed down, my response is that some of these British Institutions have been around for 700 years or more and have served us well. They have a following of loyal customers, who distrust the new "modern" banks and to cut them down to size, would be like chopping a worm in half. You would end up with possibly 2 banks, but the loyal customers would always follow the main "body" and in time evrything would be back to how it was before. I think banks such as Barclays, should be admired for refusing Government handouts and showing that they are strong enough to weather the storm alone.
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I have to agree with the sound experience and writing of fairlyopenminded and his 157 post.
I too have experienced some character building world trading moments. Our company being bought, debt free by an American organisation in 1998 then forced to carry the £50million purchase price of the takeover (which they borrowed) as debt on our books.
It is this level of malpractice that caused the world credit crunch, the system was organised fraud. The Banks, the Brokers and the Lawyers all knew the rules they also new how to get round them.
I left having advised they will go chapter 11, two years later they took chapter 11, came out and have gone back in, a complete disaster.
Though that was a tragedy of a personal kind, it doesn't compare with the moment the panic light went on for me in 2001. I was looking to buy a new house and not having a mortgage at the time, I was interested to know what the typical interest costs would be and what % of loan to price was available. The bright eyed young man at the estate agents provided the wake up call; he was telling me the system was going to crash though he didn’t know it.
He replied, “what ever you would like, it is very flexible! He was able to offer a borrowing rate below the bank rate, and 120% of the property value. When I suggested this was not possible, he looked at me with a sympathetic air; obviously realising I wasn't up speed with the new way of screwing things up.
The crash took longer than I predicted, clearly this was an achievement of monumental and devastating proportions.
Such an achievement can only be attributed to:-
a. Gordon Brown who devised the battle plan
b. The FSA for being absent from the battlefield and,
c. The BOE for failure to report the bleeding obvious.
As one oft quoted Scot said many times "You Can't Change the laws of Physics".
It's a pity the present crew of Scots manning the bridge of Star Struck Britain, didn't heed his simple truth, before uttering and even worse, believing, in the laughable "No more Boom and Bust".
As every explosives engineer will tell you, "The Bust is proportional to the Boom".
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To bring things down to an every day level. There will always be someone in the financial world willing to give or condone a loan, however absurd the circumstances, in order to personally gain. I used to work in local government in close contact with elderly people and was shocked when I found that one poor lady of 84, was in debt to one of the british "Institutions" for 15,000 pounds, which had been loaned to her to buy a new car. The car, which was being driven by her son, was a shiney red Ford Probe. The lady never enjoyed a trip in this car and had no idea how she had been used! In a way we are all being used.
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#124. I bet they are on personal service contracts and have IR35 friendly ones too. They would not have been hit like the real working
class contractors like myself. Whom actually work for a multitude of companies where there urgh work exclusively for the BBC and for more that 2 years.
No wonder the BBC reporters where friendly to Zanu-labour over the last 13 years.
Actually they shoudl put the tax rate up until the Pip sqeeks lets say 97% for BBC staff. That would produce some interesting analysis.
Is not Johnathan Ross on a £6m a year constract, bet he is outside IR35.
I keep telling you its about IR35 and the reasons behind its implementation, why it was concevied and whom it hit and those that it did not.
it was about the politices on envy, BUT was a sham as it hit the working class contractors NOT the heavy weight earners. It was a swindle and the labour backbenches fell hock line and sinker.
This then feeds into the democratic process and accountability and what MP's actually do and understand what they are voting for they fell for there own spin.
In fact most Zanu-labour spin has actually been luanched against there own backbenchs.
Like the WMD spin and 45 minutes, that was about get the labour MP's on side NOT anybody else.
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...another day....another case of history repeating itself in the cycle of Capitalism.
Protectionism is back (proving you can't trust a world leader)
http://news.bbc.co.uk/1/hi/business/8016210.stm
LDV vans have gone, despite the Governments claim we're at the bottom or on the way back up.
Eastern European countries folding in on themselves (Lithuania contracted by 12% in the first 3 months of this year)
.....but apparently regulation could have stopped all this
....Gordon Brown could have stopped all this
....Bush could have stopped all this
....Thatcher could have stopped all this
....Superman could have stopped all this
"It was his fault, it was her fault, they should have done something about it"
The reality is that no-one could have done something about this, no amount of regulation and no prime minister or president past or present could have stopped this.
It is the design of the system.
While all the finger pointing continues and the blame game enters it most aggressive stage - no one dares accuse the real culprit.
I guess it's because a change to the system would be a change too far for some people. Happy to suffice with 'second best' or 'the best on offer' rather than look for real change - a change to the system.
How will you explain to your kids that we stuck with this system because we were too afraid to even look at alternatives? How do you explain to someone who's graduating this year that 'sorry, all the jobs have gone - looks like you wasted your time educating yourself - all we can offer you is menial manual work' - on the bright side however - I made a killing in the markets last year and I have bought myself a nice big car that I don't need and a big old house that I cannot fill and I consume the commodities of 10 men which is why I'm such a large whale.
I don't have any children, but it doesn't stop me being concerned about the next generation.
I have a job, but it doesn't stop me being concerned about those who don't.
Clearly some people are happy to say 'I'm alright Jack and screw everyone else'
Sad......very very sad...
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Like ABTA why can't banks have their own bail-out fund. No doubt they could work out a formula based on size and risk to calculate fair contributions, but of course they would have to trust each other to do that !
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168 John
If every time you issued an opinion or used a model you had to correct how wildly wrong you had been shortly afterwards my guess is it would dampen your enthusiasm for releasing either - raw data or - model details - or forecasts. Particularly when the perception of whether your opinion is sound or not affects the situation and the pressure is always to be on the upside. It looks a bit like 'pass the parcel' to me, except in this version of the game every time the parcel is passed it gets wrapped instead of unwrapped so the final player really has no idea what is inside. But that is what was going on before. The message is the same wherever you are on the curve, trust us, trust our opinion, trust in growth. It is like - we are best positioned for a downturn, we are best placed for an unturn, we are best placed for swine flu. Amazing how we are always best placed or positioned yet have these problems.
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Everyone now knows the banking system was a huge pyramid scheme that collapsed and was restored with cash generated from the BOE.
This un-earned cash will now create huge inflation and make even a footballers salary look meagre, the good news being everyone can pay off their debts quicker and we have more assets be that cars, houses, roads, hospitals, regenerated towns etc
This is "Boom and Bust" and has been going on for thousands of years and lets face it, it works.
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#136. sausagesforall wrote:
"...but surely the UK Government cannot run roughshod over these businesses and tell them how they should be run?"
Without wanting to sound cynical, but why not?
A) The Government sets the law and regulations by which most activities within the UK are bound, including businesses and banks. One of the biggest problems with our current situation seems to be that the implementation of the laws and regulations in the area of the financial industries has been severely lax due to political decisions to take a "light touch".
B) Banks need to be licenced to trade as banks in this country (and many others) - not dissimilar to the way pubs are licenced, social workers are registered, drivers are licenced, etc., etc.. The Government can therefore set conditions and standards for the issuing of licences and can withdraw licences.
C) Although they don't own the banks you refer to, or have major shareholding interests in them, those banks are subject to A & B above - but those conditions could change at any point in time, courtesy of new legislation or regulation and, indeed, it's not 100% impossible that the entire industry could even be nationalised. Whilst nationalisation of an industry is more commonly associated with the threat of impending war, or other such major national crisis - consider the historical nationalisation of the railways and utilities before they were sold off to private companies - this current economic crisis seems to be increasingly taking on the proportions (in terms of impact upon our GDP and the masses) and the timescales one would associate with such an event.
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#168 john_from_hendon
Stress tests is an area I used to work in (Risk).
The fundamental problem with stress tests is they are generally based on past crises (LTCM failure and Russian default, 9-11, Dot com, 1929, suez crisis etc).
However experience has taught us that no crisis is like any other - they all start in a variety of ways, they are often compounded (or relieved) by unplanned human events and with the interaction of world markets it makes it nearly impossible to make a stress test that contains any accuracy.
For example, there are no industry stress tests that accounted for the unprecedented fall in global trade that we have seen recently.
The real danger is that banks pass these stress tests and then lull themselves into a false sense of security as they have 'passed' and can relax that they are out of danger - and carry on as before. It also gives the regulator less reason to look at their activities as there will be other banks that will require more attention.
You're guesses are probably about right - however as you can see from the US parameters (which I think you have confirmed) the Government treads a line between making the test realistic - and making it impossible to pass - both scenarios could end in disaster.
In my eyes the tests are far too over-optimistic, we're not far off the Adverse (US) from day 1 of the crisis. However this is unsurprising when you listen to the forecasts the Government makes in it's budget statement. It's not going to create a stress test that's too far out of line of it's predictions.
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There is not in this article, or any other I have read here - and indeed, in any post - the faintest hint that anyone sees or knows the real problem. All the suggestions are just tinkering. We need these things:
(1) An economic system responsive to the needs of the planet and not of ourselves;
(2) No inflation;
(3) No market bubbles of any kind;
(4) Stable and assured currency.
All of these things can be achieved very, very simply. All we have to do is realise that it was the worst sort of madness to come off a gold standard in 1971, and return to it right away. At first, and perhaps for a long time, it will mean real hardship, but that is going to happen anyway. It will also mean an end to pretensions to world prominence and wealth. But we will live well and if we are contented with our lot it could usher in an era of real personal contentment. Our economic system will be MUCH smaller, but in time it will be the envy of the world.
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Robert
Change of topic (please): how significant is this news today?
"If administrators are appointed today, Verry would be the most high-profile construction casualty of the recession so far"
http://tinyurl.com/dbdtst
Regards
Moraymint
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#171 astrodoubtful
You're absolutely right. And you can never eliminate 100% from any system the effects of selfishness, greed or personal interest.
(vis a vis MPs expenses and remuneration).
Which is one of the reasons politicians won't really tackle the problem of the banks. Politically and personally, they want banks and bankers and other City high flyers as friends and associates.
Ironically, I've just read that Michael Douglas is to reprise the role of Gordon Gekko from the movie Wall Street.
http://news.bbc.co.uk/1/hi/entertainment/8024187.stm
Isn't that character just about the epitome of how many people see modern bankers and financiers? Not very like Captain Mainwaring is he?
But there are those who believe, in the words of Gordon Gekko, that "Greed is Good". I've never been that clear as to how you legislate to allow for them and their effects on society.
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While bank ratios may be important, of greater concern is the public sector.
IT MUST BE REINED IN or it will certainly bankrupt the country.
“Average weekly earnings fall 6 percent
23 mins ago
Average weekly earnings fell in February at their sharpest annual rate since the series began in 2001, official data showed on Wednesday.
The Office for National Statistics said average weekly earnings fell 5.8 percent in February compared with a year ago. That followed a 1.9 percent drop in January and probably reflected much lower bonuses in the financial sector.
Private sector earnings were down 7.7 percent on the year but workers in the public sector still saw their weekly earnings rise by 3.2 percent on the year.”
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So the end nears for LDV. The Beeb portray this as another victim of the credit crunch etc.
But the real story is somewhat different and very embarassing for the Government, and in particular for one Mr Blair. Shortly after gaining power in 1998 and as a concession to Chirac and the EU for not having joined the Euro, Blair agreed that MOD contracts should be focused towards European firms rather than looking to the US. This article in the Telegraph earlier this year is a good read:
http://www.telegraph.co.uk/comment/columnists/christopherbooker/4886166/How-UK-defence-firms-suffer-for-MoD-Euro-mania.html
In particular:
"One of the MoD's biggest projects was re-equipping the Army with 8,000 new trucks, the largest such contract in the Army's history. Two of the three bidders were US-led consortia: that led by the US truck-maker Stewart & Stevenson also included three British firms, one of which was LDV. On paper the bid looked ideal. The vehicles were battle-proven, met all the MoD's specifications, and the trucks would be built by LDV in Birmingham, creating thousands of new jobs."
"To observers' astonishment, however, in 2004 the contract, then worth £1.6 billion, went instead to a German-owned firm, Man-Nutzfarzheuge (which in 2000 had swallowed up Britain's last major truck manufacturer, ERF). The Man trucks failed to meet the MoD specifications in two crucial respects – as was confirmed by the National Audit Office in 2006 – one being that they were unsuited to hot climate conditions like those in Iraq and Afghanistan. Furthermore, the fact that they were to be assembled in Vienna meant that British taxpayers would be creating thousands of Austrian rather than British jobs. The loss of this contract was a body blow to LDV, which was eventually bought up by the Russian oligarch Oleg Deripaska."
"The Man vehicles, however, were found to be so unsuitable that the MoD had to pay for extensive modifications, costing hundreds of millions of pounds. The exact additional cost has never been revealed, because the MoD says it is subject to "commercial confidentiality". "
It is just so depressing. Take a viable business and grind it into the ground. You can legislate all sorts of regulation for best business practice, but how on earth can legislation prevent acts of vandalism? SIX THOUSAND jobs down the pan...
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2) if we clumsily implement hastily and crudely devised requirements that all banks have to hold vast amounts of additional capital relative to their assets, there could be a permanent and significant reduction in the availability of credit - which could significantly reduce the potential for future global economic growth (we could all end up poorer from our natural desire to have a safer banking system).
Robert,
When is the penny going to drop that the idea of having global economic growth for ever more is complete nonsense? We live in a finite world with finite resources which we have done our best to use up to a large extent.
The cupboard which Mother Nature produced for us over the millions of years before we evolved is rapidly emptying and we continue to withdraw more than can possibly be replenished. The problem is that anybody who thinks about our situation for more than five minutes realises that this is true, but most of us turn a blind eye to the inevitable and prefer to pretend that we don't need to grasp the nettle just yet.
I believe the current financial crisis was a wake-up call to mankind, which will be followed by more frequent crises if we keep pretending that kick starting the growth agenda is the answer.If we think that we should not anything that might hinder continued growth, worrying about becoming poorer will be the least of our worries compared to mass global starvation, which will be an inevitable consequence.
We even have a government sponsored group called the Sustainable Development Commission who have recently published a report with the title "Prosperity Without Growth", which no one in government seems to have read.
If our political leadrs of all persuasions had any real feelings for our future, they should start facing up to reality.
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Mr Peston - #180,182,183,184 - I would actually PAY to read a detailed blog about one of these posts and the posters comments that would ensue.
They are all very interesting and important topics.
How hard would it be for you to just write one article that was about something in the world beyond the City??
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@9
excellent
...and to add, Robert, how does the activity of the banks being forced by the government to buy Treasury bonds to shore up their "assets" affect the whole scheme of things?
What then happens to the banks if UK PLC loses it's AAA rating?
Why won't you tell us what the government is doing in the Bond Market?
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Western governments (particularly US & UK) do not want a modified Glass-Steagal. They are trying to reflate the securitization model. Why?:
In the 'west', economic boom = votes
In particular, house prices = votes
Rising house prices = more votes; falling house prices = less votes
Yes, since the late 1980s at least, it is as simple as that. I wish it wasn't but there it is. All political and regulatory calculations derive from this simple correlation. The 'geeks' with the mathematical models that provide votes (economic boom) are welcome, and the risks ignored, those that do not provide votes (no ecomomic boom) are rejected.
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#173, writingsonthewall wrote:
"...another day....another case of history repeating itself in the cycle of Capitalism.
Protectionism is back (proving you can't trust a world leader)
http://news.bbc.co.uk/1/hi/business/8016210.stm
LDV vans have gone, despite the Governments claim we're at the bottom or on the way back up.
.....
"It was his fault, it was her fault, they should have done something about it"
The reality is that no-one could have done something about this, no amount of regulation and no prime minister or president past or present could have stopped this.
It is the design of the system."
Writings,
I'm sympathetic to any ideas about how "the system" can be redesigned to help more people - and future generations. Every system I've seen needs rules - and some mechanism to "regulate" their management/operation.
I haven't seen one yet that genuinely helps the whole spectrum of society and avoids the accumulation of riches - or other privileges - to an elite.
The arch-capitalist society - the USA - abandonned the basic principles decades ago. (I naively believe those to be "invent something, make it, sell it at a profit, offer a return to your investors and keep on doing it better") At least as far as "the State" was concerned. Presidents ignored massive state debt - indeed encouraged it - rather than cracking down hard on bad practice. Clinton encouraged financiers to provide mortgages to the poorest paid, so they would start to climb the ladder. Regulators could, maybe, have realised that financial products/services were being mis-sold to the most financially vulnerable?
Give us a clue about the system you'd like to see introduced.
I'm old enough to have been taught that debt (unless you were damned sure you understood it and could see an end to it) was not a good place to be. In other words, if you borrow - try to make it for something with a tangible and durable value. Not just for a holiday. Not for a night out. Not even for a wedding! (Amazes me that people don't think they are properly married unless they spend 10-15,000 quid...)
Far as I can tell, no system works unless the people managing it obey the rules along with the other poor schmucks.
GM isn't a basket case because it was a capitalist icon. It had poor management, didn't respond to market changes, cut very expensive deals with its staff, obviously didn't learn enough from Japanese lean-production techniques. If it goes broke - so be it. That's the capitalist model. In the UK, we had BL. Heavily subsidised, rediculous union approaches. Dead. While there were some brilliant engineering skills around. (Still are in my opinion. It's no surprise that so many people in Formula One - of which I'm not a great fan, but occasionally enjoy - are UK based.) In Russia they had ZIL and Lada.
Genuinely intrigued to know which system (or modification of the current one) you advocate.
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186
Loss of AAA status has the POTENTIAL to be the greatest single trigger of UK's bankruptcy.
Massive sales of all types of UK bonds, forced on funds by their governance, collapse of sterling, higher interest rates, rapidly escalating budget edficit, further downgrades (this becomes a self-fulfilling prophecy) mass unemployment, hyperinflation.
ZIMBABWE.
And to those apologists for GB and AD:
the last budget and their REFUSAL to rein in public expenditure will be a catalyst. Don't say these decisions were outside their control. The budget was totally cynical, party before country.
Still, we have what we deserve.
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In reply to some remarks about growth above, i wonder if we are mistaken to think increased growth means increased prosperity. Where I live the poulation has grown by 25% over the last twenty years. Meanwhile the formerly prosperous town centre has collapsed and is like something one might call third world, except the food tends to be more interesting in the third world. What has actually happened is that a couple of big supermarkets and a well known inefficient overpriced DIY store have sucked away all the prosprity and redistributed it to people who mostly live elsewhere I imagine.
We spend too much time looking at the big picture. It's the small ones we should have our eye on. Presumably macro economics is made up of lots of micro economics.
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Can someone please explain the following to me?
1. The banks have been bailed out to the tune of billions of taxpayers' pounds.
2. Interest rates are at all-time low of 0.5% and look set to remain low for the duration.
3. I have been offered to take up the NatWest Black Credit card for which I need to have an income in excess of £75,000 per annum.
4. THE APR ON THIS CARD IS 51.8% - I KID YOU NOT!!
5. All comments/advice gratefully accepted.
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189
I suspect that there is no way the current projected borrowings will stand without leading to a downgrade in credit rating. But I also suspect that the current projected borrowings won't stand at all.
The market appetite for UK debt is going to be much less than for US debt. And what with the oil price going down and the Chinese spending their money at home there isn't going to be any takers for UK bonds, even at silly interest rates.
So if Gordon is going to keep to the spending plans he's going to have to print money like mad. But he can only do this until the next election, which he's probably to lose, at which point the Tories will implement fiscal responsibility.
On the other hand if Gordon wins the next election the amount of borrowing will lead to a default, at which point the IMF will implement fiscal responsibility.
We're going to get cuts whether we vote for them or not.
The market is pricing all this in. It knows that there is no way that budget is going to stand. Otherwise the pound would have gone into free fall after the budget.
Everyone in the marketplace knows that the Budget is pure fantasy. It's what comes after it that the markets are trying to figure out at the moment.
Any guesses ?
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#188 fairlyopenminded
You really are fairly open minded.
"I haven't seen one yet that genuinely helps the whole spectrum of society and avoids the accumulation of riches - or other privileges - to an elite"
I completely agree - but the first question is 'who is even looking at changing this system' - I feel tragically nobody is, certainly not Government as they simply follow what they feel is popular - their ONLY goal is re-election, nothing else matters to them.
I agree that past alternatives have not been successful, but then what ever happened to 'if at first you don't succeed...'.
The world is a changing place and many things have changed since the last time alternatives to Capitlaism were attempted. The free and easy access to information via the internet is a big change, as well as people's maturity about self-governance (i.e. without state control)
The issue of rules is an interesting one, we have all been brought up with rules from childhood. The problem with rules (and this is where regulation will always fail) is that it's an endless task to keep inventing rules to cope with the changing environment. Just look at the law for a prime example - we probably all agree (at least I hope we all do) on fundamentals like Murder, Theft, assault etc. but look at the law as a whole and we have a hugely complicated beast which only lawyers can understand making mankind dependant on the people who do understand the law. I believe the biggest cause of 'rule bloating' comes from tackling the symptoms of the problem and not the causes - a good example being the local council fining the public for throwing away too much waste (this being the symptom, the cause being the over-consumption in the first place)
I completely agree about GM (assuming you mean General Motors) - they didn't react to the changing society - but this for me is simply another balls up by Capitalist tendencies. We know electric cars could have been on the streets for the last 20 years - the big car companies did not want to face turning around their production techniques as it would have been at a huge cost - diminishing profits - so they preferred to simply encourage us to stick with the existing format through advertising and making sure there wer no alternatives.
GM only did what was best for the company - Capitalism cannot take into account the social good that such a move would have had 20 years ago. Market failure is something Capitalists seem happy to live with (mainly because it doesn't affect them)
At the moment I am simply anti-Capitalist, I don't claim to have the answers to the best alternative. I am trying to look at all alternatives to keep my mind open, some which have been tried and others which have not. What I am certain of is that mankind has taken control of nearly every aspect of his life - weather prediction, the cosmos, disease etc. but the one area he still is not in control is the Economic one (as this recession has clearly proved)
If the Government were serious about rectifying the problems of this world then they would round up all the 'real brains' of society (not those fake brains who brought you the financial weapons of mass destruction) - but sociologists, Economists, Pshycologists etc. - lock them in a room and don't let them out until we have consensus on what the best form of society will be. Maybe even starting trials in small areas to see how real life takes to those ideas.
Thankfully attempts in the past have shown us what to look out for, Stalin showed how power must remain shared (even Lenin spotted this was happening before it all went wrong), Ancient tribes show us the importance of retaining some traditions and living with the Earth rather than constantly battling against it, Hitler and Mussollini taught us that Nationalism is simply a device to split human from human into little groups and that the fundamental principle everyone should remember is that we are all human - for better or for worse. Even the Anarchists teach us that just because there is no leader - or leading party - it doesn't mean man falls into total disarray (because they seem to get organised for protests)
Even you yourself recognise that the first issue to legislate for is to ensure that no elite can take advantage over the masses - rule 1 for the new world I believe.
The message I want to get across is that too many people simply shrug their shoulders and say 'well if the answer isn't presented to me then I won't bother looking and I'll simply stick with what I've got' - my suspicions is that these are generally the people who do well (or think they do well) out of the current system.
The fact is that we may not have a choice - if Capitalism doesn't self destruct first then the waste is creates is highly likely to mess the world up so badly we will all be finished anyway. That might not happen in my lifetime - but I don't want future generations to label this one 'The selfish generation' and look back with anger at how we wasted and destroyed their future before it even started.
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#183 right one, and there is a further example underway too the PUMA LEP
contract with jobs going abroad to Canada rather than a British Designed solution.
you we saw it with the Harriers and Jaguars too, these should have had
life extention programmes too.
You can take this further with the JSF , where Eurofighter Thypoon should have been navalised and this would have given us a big say in the whole Eurofighter progromme, this will also come to haunt like LDV.
Zanu-labour have a history of vandilisam in the Defence sector just go looking for TSR2 and that say it all with the cavalier approach that they have.
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I think you should substitute the word "poor" with "realistic". We cannot think in terms of being poor when the only reason we have been rich in the past few years is because banks have lent us money that doesn't exist.
Fractional reserve banking is doomed to failure & I don't know enough about finances to even know what the name is of the correct way for bankers to operate. They only have to keep 20% of their assets in reserve and can lend out the remaining 80%, which in the long term quadruples the amount they are able to lend out.
It's wrong, it's not clever & if this and every government haven't learned it we're all doomed.
Which I think we are anyway - the bankers & governments will continue to screw us until we revolt
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There's no point in discussing interest rates & APR's because they're all a lie.
You might only be paying 4% on your mortgage, but over a term of 20-25yrs you're likely to pay between 80-100% more. How is that 4%?
You're being fleeced
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"All I did was mention the following...
fractional reserve banking
capital ratios
lack of truth
exposure of the above
and
Freemasonry
...all in one sentence.
What could possibly be wrong with that?"
My God, a sensible post at last!!
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Growth is real, from the minute you wake up to the minute you go to bed you are surrounded by advances in quality of life, no-one has ever successfully argued otherwise. That being said the real growth you experience as an individual is purely a matter of taste, a Buddist monk, for example, doesn't care that a plasma tv costs £500.
The 'micro' problem you observe is not actually micro economics (that refers to individuals) but instead it is the result of the free market forcing change upon you and that can be very painful. An extreme example was coal mining in the past; without government sudsidy it made no sense (real price was below the cost of production) and therefore the govt choose to turn the lifesupport off. This caused a huge amount of pain but ultimately can anyone argue that it would have been sensible for us to continue with that model? (I don't wish to start a debate on the methods used to close the mines that's worth a new blog entirely).
The problem we have with capitalism is that we want the goodies(growth, advancement) but not the bad (the change to require the goodies). Pure capitalism would have killed RBS et al (just like the coal mines), that would have brought horrendous pain to many and probably civil unrest so we need the government to prevent that, I would suggest 3 easy steps;
1. Governments should publish key stats on banks and then rate them (this means people will choose where to place savings)
2. Restrict size of banks (trying to do that gently with capital restricitions I think)
3. Make the penalty for default on personal debt very very harsh, with the idea that unless people are sure they can pay it back they won't take it. I think this is the most important point, I never want to hear of the 20year old earning 25k that has a 150k mortgage but sleeps at night because everyone told him that you can't lose if you buy property....
And by the way all the 3 steps are not good news for UK property which is clearly just a huge debt bubble being gently deflated by the government.
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#190 and that how lord sainbury can make a chartitable donation of over
£1,000,000,000 and still have money in the bank, and also make large political donations, wish I could do the same.
The supermakets should be brokenup straight away
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Global financial system my eye - we need it like we need a hole in the head.
If you merged your income & expenditure with the neighbours either side of you, there's every possibility either or both of them could go pear-shaped & drag you down with them.
Where do you go then?
I'll be interested to see if any of my last 4 posts are actually posted..
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# 191. mburstyn wrote:
"Can someone please explain the following to me?
4. THE APR ON THIS CARD IS 51.8% - I KID YOU NOT!!"
The astronomical APR on this card is a statistical anomaly, due to the fact that the card has a £250 annual fee (for which you get a number of benefits such as travel insurance) which must be factored into the interest calculation. Typical interest rate on purchases and cash advances is in fact about 13%, which is actually lower than many cards on the market.
All this is explained quite clearly in the literature that comes with the invitation to apply for the card.
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#196. sthwales wrote:
"There's no point in discussing interest rates & APR's because they're all a lie.
You might only be paying 4% on your mortgage, but over a term of 20-25yrs you're likely to pay between 80-100% more. How is that 4%?"
(Falling about laughing).
Once you get into big school and learn about compound interest it'll all become clear.
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#181 sutara wrote
"You're absolutely right. And you can never eliminate 100% from any system the effects of selfishness, greed or personal interest."
I completely disagree.
I admit in the current environment it's difficult to see anything but selfishness, but this is prevelant in our society as those touted as 'successful' are also incredibly selfish and greedy.
Man adapts to his environment, a selfish and greedy environment creates a selfish a greedy man.
Do you think if the members of this blog had their minds wiped and were all dumped on a desert island their first thoughts would be 'how can I screw over the others to get more than I need'?
Competition is what causes the selfishness and greed - it's fine for areas that don't matter that much (races, sport etc) - but not for real life.
Haven't you ever noticed that during a race the participants are completely self-interested and self-motivated to win above all else, but at the end of the race they shake hands and are all friends again?
The problem with society is that the race never ends - there is no handshake, there is no realisation that the race is over, just a constant battle against everyone else who is participanting.
MP's expenses is simply a form of this - they are competing with the private sector - if they don't, they will find they will fall behind in the race for the biggest house and a banker will be moving in instead.
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fom @ 163
State Capitalism is changing China from a massively underperforming country into THE future power
what do you mean by State Capitalism, please?
scotty @ 184
When is the penny going to drop that the idea of having global economic growth for ever more is complete nonsense?
it's not nonsense - human ingenuity will drive future growth, we just don't know how yet - somebody from a hundred years ago wouldn't have guessed a tiny fraction of the stuff we've come up with - no reason to think that should change ... nothing special about our era
wall @ 193
The world is a changing place and many things have changed since the last time alternatives to Capitalism were attempted
yes, good point ... let's have another go, shall we?
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#193, writingsonthewall
Writings,
I can be really close-minded when that stubborn bit kicks in. Hopefully it doesn't last to long!
I obviously (you gather from my stuff) lean towards a "capitalist" model, as that seems to be where most of the technological advances have come from. Over its lifetime - so we're going back 3 or 4,000 years - it has created a lot and harmed an enormous number of workers who had little protection. Technology without a sensible social framework doesn't make much sense to me.
But, without the technology, we'd still be going to bed when it gets dark and waking at dawn. I remind my children that it is literally within living memory that the supply of "mains" electricity has become commonplace. (Generalised supply across the USA was part of the FDR post-depression revival plan... So I read. I'm not old enough to have been there!)
Building technical solutions - and delivering the core resources they demand - harmed the lives of millions of people.
Corporate management - and governments - don't adapt rapidly enough to "desirable change". Sometimes because of the business school background and sometimes because of a tribal instinct.
I don't despise Robert Mugabe because he's a black guy from one tribe within Zimbabwe, nor because he once espoused communism (but seems to have acquired a lot). I despise him because he's screwed up his nation's people.
I carry no torch for Bill Gates. Some people hate his product range, others use it widely. I admire the fact that he's giving a huge amount (billions) of money to charitable enterprises. His choice - not a sum of money ear-marked by a government from tax we pay in order to assuage a "national conscience".
I have no idea how society could be organised in such a way that everybody grows up wanting to contribute. I do know that there are far too many people who enter an educational cycle with little desire to learn, but with the expectation that "the state" will provide at least a minimal level of support.
Makes me sick. There are kids in Africa who walk/run miles to school in desperate hope of learning stuff that will allow them to do their best.
We pretend that we have educated children? Nah
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wall @ 203
Competition is what causes the selfishness and greed
yep - and it's (on the whole) a male thing - that's why to get more women ... and therefore less men ... in positions of power and influence is the single most important thing we could do to improve our society - way more important than trivia like which Party is in power, or the pc of GDP that Public Spending is running at
so, all together now ...
Down with Toxic Testosterone!
banks @ 198
not good news for UK property which is clearly just a huge debt bubble being gently deflated by the government
no, strongly disagree - if you look at rental yields, supply and demand for housing, long term interest (discount) rates, property in the UK was seriously undervalued for many years - was due a (perfectly rational) upwards correction - just overshot maybe 25 pc or so - a mini boom, sure, but a bubble? ... no way
bet you UK property stabilises at 2005 prices (wiping out the froth of 06 and 07) and then starts rising again - no big deal really
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Hi Robert. Regarding the point you make on bank capital ratios, is it not the case that mortgage related securities - which piled up in so called investment bank 'warehouses' awaiting sale - were increasingly approved for use as bank capital by ratings agencies, thereby making these banks all the more vulnerable to a collapse in valuations? Insane 'Mark to market' accounting rules then completed the perfect storm. The question therefore is what is the point of all these various regulations, which have the intention of creating stability - but whose unwitting actual effect is to cause meltdown?! Congrats to you and Gillian T for being on the money throughout this debacle.
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fairly @ 205
yes, but the BIG achievements in Science have mainly come from academics ... that's more public sector than private sector, is it not?
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#203 writingsonthewall
I think if members of this blog had their minds wiped clean and were dumped upon a desert island that a certain (probably small) percentage of them would be quite ruthless as to how they survived, even to the detriment of the others.
It's a common phenomenon in groups of people. Because teh individuals have different skills and talents and different values, attitudes and beliefs, they won't all follow whatever authority takes the 'leader' role, nor will they all always comply with commonly agreed rules or laws.
No society in history has ever been without some "criminals" who were perceived to have broken the rules for whatever reason.
And also many individuals do this as they travel through life. I'm sure there are things that we have done as comparatively reckless and perhaps even foolish youths, that we now look back on with a tad of embarrassment. Isn't that why there is a whole youth justice system out there?
So, I pretty much agree with what you say, except that I think there would always be some exceptions, hopefully usually a small number, which is why I consider it impossible to totally eliminate those factors from any system be that banking, politics, law, social care, healthcare, traffic control, or whatever.
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189. At 12:03pm on 29 Apr 2009, sosraboc wrote:
186
"Loss of AAA status has the POTENTIAL to be the greatest single trigger of UK's bankruptcy."
+
Agreed.
It is strange that the AAA rating still has credibility anywhere when it was used so much on toxic CDO's.
Presumably it is the same stupid Quants who still do the ratings?
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#204 sagamix wrote:
"human ingenuity will drive future growth".
I can't quite see how, unless other factors are in place too.
A more accurate statement is that 'human ingenuity will help future growth'.
For just one example and ingenious person comes up with a brilliant business idea. He needs more that just ingenuity to make a profit or "growth" from it. He'll need capital, resources, advertising and marketing.
He'll also need to be in the right sort of legislative and taxation regimes to make it possible, etc., etc. (That is, it is possible to legislate in such a way that kills off 'growth' and in the wrong country at the wrong time, that could be insurmountable. Or his new line of business could be taxed into oblivion.)
To create growth you need more that just ingenuity.
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51. At 2:20pm on 28 Apr 2009, the_nutty_dragon wrote:
VentilatorBlues
......... Secondly, finance. Stop the current situation with pension funds. Your company picks a pension fund for you and that's that. How fair is that? What if you don't like hte risk profile? Tough. Perhaps a better option would be that the company pays into MY pension fund. I pick where it goes, and if my employer goes bust that's fine because it's MY pension fund. If I have multiple employers I don't leave orphan funds dotted round the economic landscape, they're all in one place.....
Excellent idea, seems an easy and straightforward solution to a common problem. All UK governments of whatever political persuasion have botched pension provision to the detriment of ordinary people.
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Writings you simply just do not get it.
You have some up with an idea in your head but you have not bothered to understand it or research it.
You talk about economic outcomes but you have no idea about economics.
You talk with conviction but have none (you work in a bank).
You are pretty much the exact opposite of impressive.
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In summary then...
Debt must never again be presented as an asset. It isn't, it's a liability.
Extending from this, credit rating agencies (as I have said before) have shown themselves for what they are - terrified of telling the truth, and collusive with the "institutions they are supposed to be independent-of when assessing.
Governments enjoyed the ride, but were also petrified of getting off.
Why? Because that means stopping the whole carousel. Our good times were financed by recycled Far Eastern trade surplusses, guaranteed against securities which turned out to be liabilities not assets (see above).
The whole was founded on the myth of perpetual growth, financed by those surplusses. That could not be, since Chinese (prinicapally) surpluses will in time diminish as did those of the US through the 60s/70s/80s.
Brown and Darlings bailout packages are essentially the replacement of the Chinese surplus with a lump of state money. This however, is a once only trick, seeking to perpetuate the myth.
In time, therefore, a big and horrible correction is/was inevitable, and only when relative values for goods services and currency become equivalent around the world can some form of long term order emerge.
It really is rethink time, and none of our current political caste will dare acknowledge it.
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#206 sagamix
I have to reluctantly agree (despite being a man) - in fact as a white western male I feel it's 'my kind' which has damaged, maimed, killed and destroyed large parts of this world.
Nearly every conflict in existence today has been born from the behaviour of my ancestors (Africa, Asia - even the demise of the Aboriginies in Australia).
Perhaps the best thing for the world is to make WWM (White western male) and endangered species.
Male dominated society in this country rears it's ugly head whenever someone like Myra Hindley comes along. The furore of 'how can a woman do such a thing' is apparent - whereas men seem to be doing evil things every single day and yet no-one bats an eyelid.
The problem is still the same however, the people that hold all the power are generally men, they do not want to relinquish that power and it is for the rest of us to wrestle it from them.
The meeting when the bankers were called to the treasury last year - did not contain a single female - out of about 30 people (including Government, but not including secretaries and minute takers). Whether your beef is male dominated society or Capitlist society - the enemy remains the same.
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Post 168 & Post 178 much the same applies in insurance in that risk models tend to be based upon past disasters and down turns and they are equally as skewed that way as the banking ones are.
The real problem with stress tests and risk models is that they are by their nature hypothetical in nature and that however many times the model is run the basic issue is the fundamental accuracy of the source data.
Many of the products that went wrong so badly and caused the problems last September were based on a relatively short period of data and too much weight was given to recent data that to be blunt hadn't been allowed to mature.
As such the downside parameters were woefully inadequate and fatally skewed in a positive way. As such when the meltdown happended last September at Lehman Brothers and AIG pretty much everyone in the market didn't see it coming as what happened that week was in their models opinions completely and utterly impossible.
In insurance we use phrases such as Maximum Probable Loss and Maximum Possible Loss. The first being the maximum foreseeable loss within the bounds of reasonable probability the latter a more theoretical figure which is outside of the bounds of likely occurrence but theoretically possible.
The problem for banks and insurers is that if you act and reserve based on the former you are likely to be profitable and successful until the theoretically possible but highly unlikely event happens. Then unless you have been wise and built up reserves against this event you go bust.
If you work on the second hypothesis generally you are undercut on price and struggle to pick up any business. It is a real catch 22 problem.
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Congratulations Cassandretta21
"Surely a key aspect to this is that the recent economic philosophy permitted private institutions to inflate the money supply by creating structured debt products, and that the central bank's control of this by setting interest rates was grossly inadequate?"
I could not have put it better myself. The solution to the problems with banks is not to manipulate the capital ratios; they are generally more than adequate, but to more closely regulate the issuance of structured debt products and associated derivative products which have allowed the banks to "issue" cheap money and circumvent capital adequacy rules.
These products were designed primarily for balance sheet management purposes but instead became "traded" products in themselves but without the underpinning of a tangible asset class. Control these type of products better and one will remove from the banks the ability to take good assets off their balance sheets only to inflate their assets once again by going down into the "sub-prime" sector.
Also by curtailing the banks' ability to print cheap money in a scenario of rising loan demand perhaps central banks will increase interest rates, under that scenario, rather than keeping them on hold or even reducing them!
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210
I think a more interesting question is what agenda do the people who set the ratings actually have ?
Is it wise to set up a budget that leads to such vunerability that a ratings agency can (possibly) bring down the UK financial system ?
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sutara @ 211
To create growth you need more than just ingenuity
indeed so, but what I mean is we will come up with advances in the future that would seem to us now to be simply fantastical, and that will outweigh the point about finite (or so we think) resources
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Only one answer.
Stop securitising Mortgages and Loans !
If Banks kept the Loans they make on their own Books, rather than foisting them off on other Banks, the whole Subprime mess wouldn't have happened or would have happened differently.
Remove Mortgage and Loan Agents from the system.
Leave lending money to Banks and Building Societies (directly to their own Customers only).
Problem solved.
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#156
Why euro's
Once the U.K has its AAA status removed, the Pound will be about as much use as a wooden nickel.
The Great Fatherland is behind the euro, and once the bottom is reached, it has the products that people will want to buy. The best cars in the world, and many more great products of quality.
What will The U.K sell, Europe own's your Power companys the French are building your replacement power stations, the list go's on and on everything has been sold to the rest of the world for a quick buck.
There even going sell the Post Office.
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if, say, there is a 1 in 50 chance of the UK defaulting on a repayment at some point in the next 25 years, does that merit a Triple A rating for long term Gilts? ...
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calm @ 220
no, you just need to stop the silly bonuses ... can leave everything else pretty much as it is
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Can't get through 221 comments, but has nobody mentioned the Rating Agencies who also did their bit to ramp up the lending and the securitisation? They can't simply say that because the paper-issuers had insurance from Mono-line insurers like AIG that everything was fine. And who paid the Rating Agencies? The people issuing the paper. If the rating agencies are not themselves regulated, then any bank or financial institution can justify buying worthless paper on the back of a rating agency rating. My goodness, it reminds me of the heady days of the 80's property boom when valuations were ten a penny...
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See # 126 I'm somewhat surprised that NOTHING has been written to comment on # 126.
For me, this hits the nail on the head.
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One way of "making banks safe" is to make something else unsafe. For example you could stuff the state owned Autrian railroad with $1.3 billion of derivatives losses, and that way it would never show up on Deutsche Banks books.
I know it could never happen in the real world - people are far too sophisticated to fall for such an obvious scam.
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Capital adequacy ratios would not be so important if"all"recipients of loans put up larger deposits [security] to back those loans, as was the case over a decade ago under the conservatives when 20% was the normal deposit on a house.
The Brown Blair [Laurel and hardy]delinkwent adultlesssence caught in a sandstorm, form a virtuass circle caper ,together with the FSA[ Keystone copse that ran out of planktown ]and every market participant , has turned parlamment into the partner in crime with the international blaaanking system sirpants ,together , trying to hide the greatest fraud in the history of ponzi schemes by sweeping it under the carpit or into the pension pots of suckcessfool taxipayers whilst weaveling another bonus out of it ,reasuring the world that it aint over till the fat lady of thread neadle street singks trying to get the cammel through the eye whilst encouraging uncle Sam to play it again one more time before the nickers get dropped for the umteenth time .
They should have thought about safety FROM THE BEGINING and used old rubber inner tubes with knotts in them or practiced coetAAA'S interuptAAA'S
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Mind you why is Mr Peston bothering with Banks, when nearly every other Company is making losses or going bust ?
We all know selling Mortgages is a false way to manage risk.
Selling securitised Mortgages means that the Lender does not bother to check the credentials of the Borrower at all, as it will be somebody elses Problem (see Mortgage Agent).
If the Banks have to keep their own Loans then they HAVE to check their customers.
Of course if your Banks buys securitised Mortgages it can never know just what it is getting !
The American model of banking is renowned for its Collapses and Bankruptcies and now they have exported their bad ideas across the Atlantic !
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As much as banks lent too much, borrowers borrowed too much, and central bankers got it wrong in making the price of capital too low for too long. It is simply not just the banks fault alone. Look at the UK Government and off balance sheet PFI financing, hiding the real level of government debt; what a great role model.
To maintain capital ratios, access to credit for poor quality borrowers should be restricted. The past decade has seen the safer borrower treated in the same way as much lower rated borrowers. After all, it is these ‘sub –prime’ borrowers and their inability to repay, that have been the real cause.
In the UK the average house owner if asked assumed that house prices were a one way bet. On the fair assumption that the bulk of tax revenues are derived from house owners, at some point the asset (house) price depreciation and the tax rises should effectively match the multi-year house price gains, and now, losses. (net of Civil Servant salaries obviously)
The house ownership/ blind greed party seemed to benefit all, that is until common sense pulled the plug.
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I've just discovered the best recesssion/confidence indicator. The Peston Blog Indicator- very simple the fewer blogs posted by Peston the greater the chance of coming out of the recession. As he is so perceptive this is very much a leading indicator. Just look at the data:-
April 2009 (19)
March 2009 (27)
February 2009 (29) (workday adjusted -31)
January 2009 (32)
December 2008 (26) (seasonally adjusted = 31)
November 2008 (33)
October 2008 (49)
September 2008 (48)
August 2008 (11)
July 2008 (17)
June 2008 (13)
May 2008 (14)
So April 2009 (unless Robert goes mad in the next 30 hours) looks like a real turning point. I predict that once the PBI drops below 15 and stays there for at least 3 months then we will be entering a sustained bull market. Robert you know your duty!
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These crises are nothing new
I recommend L'Argent by Emile Zola. The translation I read had a foreword written in 1894. Its pertinent.
Follow it up with the first three chapters of Popular Delusions and the Madness of Crowds, written in the 1841.
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228
There's no point banning securitised mortgages because no one in their right mind is buying them anyway. Hence the reduction in mortgage approvals.
It would be a bit like making drinking weedkiller illegal.
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By the way, I'm not sure that we have pumped 'new capital' into the banks
I believe new units of exchange have been created through borrowing
New capital has not been created, capital has probably been destroyed in the UK. It might have been created somewhere else.
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fairly 205 (following sagamix 208)
I concur with sagamix - and if you think about the strict rules of Capitalism where the market identifies inefficiencies and elimiates them - someone like Stephen Hawking wouldn't have survive as long as he has.
Only because of the care that can be provided by the state has Stephen outlived his life expectancy (by a phenomenal 30 years I believe) - and few would argue he has provided us with amazing advances in physics which we haven't even begun to appreciate.
Some of the greatest advances in technology would have not been made if the market was the decision maker. Most innovation occured without pay and in most cases once the inventor created the invention he still did not benefit.
However history is littered with plagurists whole took the original idea and made a fortune from it - thereby increasing their power and wealth (and handed down to their future generations) whilst the original inventor (who had the real techne) and more importantly his future generations would be more likely to die out through poverty.
So in this scenario Capitalism (or maybe it's competition) actually hinders future technological advances.
There's also the clear argument that collectivisation massively improves technological advances. Whilst I totally disagree with the methods used in 1930's Germany (by Hitler) and Russia (Stalin) the technological advances were unmatchable by Capitalism, the near 100% employment for Germany produced the best roads and railways in Europe and the Russians went from a backward feudal state to space explorers in fraction of the time it would (and did) take Capitalism to achieve it. If we could harness that efficiency without harming the citzens then we would truly be heading towards a environmentally and socially superior state.
Look what happens when the private sector tries to run education, we end up in a situation (as we are now) where kids who want to learn won't get a place at university (due to fees being required now) or local nurseries close because the companies that set them up go bust.
The market is fine to control things that don't really matter to us - but Education, Health and the Economy really do matter and should not be handed over to the beast that is 'market forces'.
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The rules for regulating 'capital' ratios existed.
They just weren't being employed and Basle II changed the playing field
As far as rules go, they have to be 'in use' not just 'in place'.
Anyone can make a rule, making sure they are used is the tricky bit.
This applies to Health and Safety, Environmental Protection, the production of drugs even criminal law.
Our 'auditors' of the rules just didn't monitor 'in use' effectively enough.
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Dear Mr. Peston,
For the sanity of the British Public - please blog about something else.
We know the global economy is in a Bugger's Muggle, because that's all we hear about day in, day out. The trend to verbally castrate the Banks isn't sorting the situation out. I'm not defending them, as an employee recently made redundant from one of the big 4 I have no loyalty to them.
But I don't need you acting like a school master preaching about "banks' capital ratios, or the amount of capital banks are forced to hold as a proportion of their assets (or their loans and investments)."
You're not demonising the real criminals in this affair....our Government!!!!
Messrs Blair and Brown were busy cooking the books, leading us all to believe that we've never had it so good. Allowing the Banks free rein to lend irresponsibly. I don't need you Mr. Peston, to force the issue down my throat.
As a former employee I'm aware of the pressure on Banks to generate income, and don't tell me the Goverment didn't benefit from the profits gained by this glorified game of Roulette the Banks undertook. As for the FSA, what exactly were they employed for? To regulate Banking standards.... they really earned their stripes didn't they???
You're becoming boring now, please blog about the state of the NHS or Taxpayer's money being frittered away on MPs and benefit frauds. The Banks are habitually despised now, leave them to it. Better still, let our elected officials to steer us down the road to ruin. If you feel that strongly Mr. Peston, seek a counsellor and have a lie down.
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#208, sagamix wrote:
"fairly @ 205
yes, but the BIG achievements in Science have mainly come from academics ... that's more public sector than private sector, is it not?"
Saga,
I guess it depends on what you describe by BIG achievements and how you define public sector...
I'd hardly describe Harvard, Yale, MIT as state sector organisations. Would you?
When Newton strutted his stuff, universities may have had support from royal households, but that's hardly "public sector" as we know it.
BIG ideas very often, nowadays, come from a mix of publicly and privately sponsored research. Achievements - which I interpret as actually making something happen with an idea - is, by a huge proportion, sponsored by the private sector.
Having ideas is what academics do. (Even people working for private companies come up with some pretty interesting stuff!!!) Turning ideas into something productive (and sadly, sometimes destructive) depends to a huge extent on a bunch of people deciding they would take a risk with their money, in the hope they'd get a return.
JFK famously said he'd get someone on the moon within a decade. He didn't turn to the public sector - just poured money over private sector folk who developed what turned out to be the one thing I witnessed that my children have never experienced...
That was certainly public money, supported by academics across the USA, that delivered a rather odd achievement and gave us Teflon...
I'm sure that Tata India's GBP2,000 car owes something to academics. But the company made it a reality... Interesting to see whether it will have a major impact on the sub-continent's economy.
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banks_what_banks
Once again, resorting to insults does not help you win any argument.
"You have some up with an idea in your head but you have not bothered to understand it or research it." - Not true, I have gone through Friedman, Mises, Marx and Keynes in detail. True I don't claim to understand every last detail but then I suspect no one does - this is of course after completing the basics of the Marginalists and Classical Economists which I studied at college. What have you read lately?
"You talk about economic outcomes but you have no idea about economics". - I don't know why you think this - but considering I have managed to work in the banking world for 12 years now and even if you're cynical about the industry it would be a bit difficult to survive 'knowing nothing about Economics'
"You talk with conviction but have none (you work in a bank)". - I don't agree with Capitalism - but at the moment it's the only game in town. I can disagree with the game and it's concepts, but it doesn't mean I have to agree with it - in the same way I consider those less fortunate than myself - even though I have a job and my own house and am completely untouched by this recession.
You are I am afraid to say are a classic product of the system. Too afraid to question what you have been told, too nervous to try anything different or understand others points of view and too quick to knock ideas which you don't understand yourself.
You go back to blaming Gordon Brown or any other scapegoat you like for this mess, you can continue to waste your time as you probably have all your life.
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"[O]ne of the main reasons the global economy is in such a mess is that big banks systematically lent far too much relative to their capital resources..."
I beg to differ Robert. That is the main reason, that is the symptom. The main reason is the tendency of the rate of profit to fall. Capitalism works on the basis of profit. Capitalists (big business, e.g banks)tend to accumulate profit and hence growth under capitalism is driven by profit. This occurs through a ferocious competition between capitalists. This competition we'are told is part of human nature hence the ideological commitment to give the private sector the biiger share in the running the economy on a global scale. So, as long as this drive of accumulating capital through profit exist, there will always be crises of different sizes (crises that may even lead to wars such as the ones that preceded WWI and WWII). Otherwise, as you suggest, growth will not occur unless, of course, is built either on bubbles (the .com bubble or the credit bubble) or a previous destruction (war). The working people will always pay in either cases. Sadly, you still unable to question the inherent crisis of the system itself.
Regards
Nadim
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#216 Ian_the_chopper
"The problem for banks and insurers is that if you act and reserve based on the former you are likely to be profitable and successful until the theoretically possible but highly unlikely event happens. Then unless you have been wise and built up reserves against this event you go bust.
"
Spot on - and this is why I then believe that Risk and Competition are at complete odds to each other. Banks that are risk adverse won't survive in the market as the risk takers will eliminate them. Unfortunately if you follow this trend down the line we end up with the biggest and the strongest banks being the ones who took the most risk.
Thank goodness for Standard Charter for example - and it becomes quite clear how we get into the situation where the biggest (RBS) can easily bring the whole thing down.
Inevitabliltiy perhaps? Could you regulate that situation?
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Post 230 I am afraid that your hypothesis is flawed bacause Robert was away for about ten days on holiday earlier this month over Easter and as such he has only been blogging for 18 out of the 28 days so far this month. On a seasonally adjusted basis this would relate to 30 blogs in a full month which is in line with recent figures.
If we knew when he took his holidays last year this would help to see if April 09 was the beginning of a recovery or not?
As you don't have the April 08 figures listed we cannot see whether there is any increase this year compared to last or conversely a reduction in the number of blogs.
Also as Easter last year was in March and this year was in April this may well skew the result further. It is on small samples like this that the banks got it all wrong.
"Lies, damned lies and statistics".
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#201 re post by #191
so the 51.8% APR is an anomaly.... it is still an APR. but ok lets just look at the 13%... the offer me 1% for my savings that they then lend my money to someone else at 13%...a mere margin of 1300%! Can you name any other business that works on such margins?
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post #126 KenHarvey gets my vote as the best post to this blog so far!
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Robert, can't you just sum up all of this in 3 words - Fractional Reserve Banking? FRB is the root issue behind what you've said and the fact that it allows banks to inflate the money supply out of thin air as documented by the Reserve Bank of Chicago in a white paper a few years back. FRB is something that all taxpayers should read up on to better understand that whilst FRB exists in the realms of 10%(ish) then we will never get away from the risks that brought about this crisis. I'm not suggesting we go back to a Gold Standard but FRB ratios at more like 50% can be implemented globally through actions from the Central and World Bank and BIS. Not really an issue unless you're a bank of course. In which case, dilluting FRB squeezes your profits.
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#237 fairlyopenminded
I undertsand what you are saying - but aren't you describing where the private sector has mixed itself in with the public sector (Education) and in fact stifles the technological advancement of society?
If I invent something tomorrow and it's a device that would ensure all the poor people of the world could have clean drinking water - then would you agree this would be a good invention?
If you do, then when I present it to B.I.G. Plc and they realise that there isn't a big profit margin in it because the main customers would be Africa and parts of Asia (who need it most) - then the idea would never go into production.
Despite the invention being socially good - it's not Economincally profitable - and as Marx stated, one day human life will be a commodity to be bought and sold on the market.
I see cases like this every day - where inventions which have huge social good are never taken any further because of the lack off profit. You occassionally see these on Dragon's Den - even to the point where the panel will say what a great idea it is but 'I'm sorry, I just can't see a future profit in it'
That for me is stiffling human progress, if the market wasn't allowed to make these decisions then I am certain we wouldn't be facing the Environmental future that we are.
There is enough food produced in the world every day to feed every man woman and child - and yet people still starve around the world - why? It's the market - it produces food surpluses in one country and shortages in another - the result of that is overweight westerners and starving Africans and no sensible business man simply gives anything away does he?
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#239 Londonadim
Only a fool would argue with that statement - but I'm sure there will be one coming along in a minute...
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Does this now mean "globalisation" and "big thinking" is DEAD?
Small inconspicuous, easily managed, low risk levels are now the future?
I think not, I don’t see our banking system becoming a cottage industry unless it becomes a Global cottage industry if there could be such a thing?
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I would think by now that Banks and Gov't would have accepted that securitised Mortgages and Loans were financially unviable.
Banks can sell Bonds to raise Capital,secured only on themselves, whilst keeping all the risk of Loan default on their own books.
That would make them more careful just who and how much they lend in future.
Securitising Mortgages and Loans has brought down more American Banks over the Years than anything else.
Banks should abandon Fixed Rate Mortgages, and return to variable rate Mortgages.
Much more sensible (boring ) all round.
Of course the Fat Cat Investment Bankers won't then have dodgy securities to sell on, no more Bonuses for them !
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Bradford and Bingleys annual report for 2008 makes interesting reading.
GMAC hang your head in shame !!!!!!
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the end is nigh.....Government has suffered a surprise defeat in the Commons on its policy of restricting the right of former Gurkhas to settle in the UK.
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Surely the answer is to keep it simple- boring banks lend money to us and take our deposits and do not take risks. Investment banks take risks with their shareholders money and that way if they go down- only shareholders lose. It will also be necessary to bring back the old definition of wider and narrow range investments. I want my pension fund to be invested for long term growth not short term gains with high risk. If I want to make risk investments, I will do so but not through a pension policy. What this would mean of course is that we would get smaller returns and the folk who manage our money would get normal pay as they would not be able to deal their way to high bonuses.
This does not mean that high risk hedging and so on should stop. It is worth trying to hedge risks of say wheat prices to encourage farmers to grow it- this will help feed the world. But the risk has to be known and owned- this idea that you can slice and dice and create instruments that somehow pass risk around is nonsense unless you understand what you are doing. Some mathematicians did understand the theory but not the practice and most bankers had no idea whatsoever of the nature and extent of the risks they were taking on- as for AIG, there had to be one who demonstrated criminal stupidity.
So keep it simple- capital in banks can be kept to present requirements and investment banks can take risks with shareholders money. Insurance companies and boring banks must keep investments simple and with long term growth in mind- racy investments should be for those that can lose as well as win. And what about this so called flight of talent- let them go somewhere else and lose a fortune- they have added zero value in the last 10 years so what do we lose if they emigrate. The City can then concentrate on the real challenge of funding trade and finding ways of hedging risk within boundaries that can be both understood and paid for.
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# 248 - 'Of course the Fat Cat Investment Bankers won't then have dodgy securities to sell on, no more Bonuses for them!' - SPOT-ON.
That is the real reason they can't live without securitization.
Ignore all the regulatory PR waffle, the snake-oil investment bankers and their minions have become hooked on the huge bonuses generated by structured finance.
The 'originate distribute' model isn't dead, its just hibernating until conditions are more conducive to its securitized DNA, like a nasty virus really.
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Come on, if you do one good thing today, sign this petition.
You know it makes sense.
http://www.petitiononline.com/BWCF/petition-sign.html
http://blairfoundation.wordpress.com/
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your next blog is 404!
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why has your next blog disappeared?
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#235 mrsbloggs13c2
Absolutely!
It ain't just the rules - it's how they're enforced!
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#244
Reserve ratio at 10%? If it were, then we wouldn't be in this fix.
It is not regulated in the UK, last I knew in the UK it was 3.1%, but it's probably much less than that - nobody knows - I wonder why?
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241 Ian The Chopper,Good point ,the simple fact is that bankerrs create fiat PAPER /ELECTRONIC currency from thin air to lend at interest...
[which becomes their bonus after losses conveniently delayed BY DECADES under exponential capital creation until 'pop' goes the wee sell afterwhich taxipayerrs cover the bonuses]
.... to those who wish to buy into investment bubble ponzi/Gordonzi schemes which inturn creates further opportunities for their bonus producing capital creation FRENZY from thin air scaaam.
The justification for the interest charges was that banks covered the risk of losing the "money" created from thin aaair , with the potential loss of their own tier one capital,that is before they made themselves to big to fail and oversold their position many times TO MAXIMISE bonuses on systemicaly created and hidden losses .
The Irony is that banks now have no tier one capital left to saccrifice, yet claim interest on monies created from thin aaair with the conivance of pollytitians preparing for life after the electoral chop.
This may be many things but it is not capitalism , since it has no capital to justify the privelaged right of capital creation
Why can not any Tom Dick or Harry with equity in property not originate capital and loan it out at interest ?[of course now they can if they have near0 tracker mortgages and further loan facility].
Why do the Faustian political authorities allow the banking canal retentive types a monopoly on capital creation, other than the venal hope of a job for life after the electorate realise that they have been gamed for a laugh and vote in new mperrors looking to make a quick buck out of the latest transparrent fasion accessory before the next generation of the "uneducated" product not of the entitlement cry "balls".
Which brings us to the point you were making , that capital origination should be primarily for a "good" public or social purpose which would require the banksters to be overseen by a theocracy of swingers with an axe to grind.
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Until the mid 1980s, the B of E regulated capital adequacy. It was set at around 9%. Then came Thatcher and deregulation.
All this Brown and Darling, FSA stuff and all, is not new therefore, it's just reverting to more sensible days.
Most of this regulation was set up in the 1930s to make sure that the crash of 1929 (also the bursting of a credit bubble) NEVER happened again.
One has to laugh.
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How about extending the idea of duty of care to bank directors, and defining what constitutes a failure within that duty of care - requiring public money to bail your bank out could be life in prison!
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#245, writingsonthewall wrote:
" #237 fairlyopenminded
I undertsand what you are saying - but aren't you describing where the private sector has mixed itself in with the public sector (Education) and in fact stifles the technological advancement of society?
If I invent something tomorrow and it's a device that would ensure all the poor people of the world could have clean drinking water - then would you agree this would be a good invention?"
Writings,
If there were a good clean drinking water initiative, I'd be 100percent behind it. Don't care if it came from a private, public or school children initiative. (There are some really good ideas that come from young people who don't really care about a market perspective...)
Capitalism used to mean that, when people came up with a great idea and could persuade others, they'd find the money to move it forward, produce a product or service, make some money and pay them back.
Clean water - sounds good. Maybe it would even apply across swathes of the "Western world".
I think you assume that education has always been a "public sector" endeavour. It was only thus in recent history. Previously, it was big-hearted benefactors wanting to improve the opportunities for children from different backgrounds, churches and occasionally inputs from monarchs, that sustained lower and higher education.
Quite frankly, I thought public sector education was a pretty good idea. Until the "education" bit got so distorted that we as a nation claim victory because more than 50 per cent of children can read and write. Then have that group go to university... (That, by the way, is not a class, sex, religious or politically based comment.)
Any decent private sector organisation would never stifle the technological advancement of society. But if it did, then some enterprising bloke or gal would just go off and create another company to develop another way of doing things.
What do you want? Car makers and oil/petroleum companies collude to suppress alternative means of transportation? That just ain't my bag. There have been alternatives for a long time. We just haven't found someone with the big ones to just get on with it - or any governments willing to support them.
This lot talks about wind-power as though it can solve anything. Sure, if the wind blows, thee will be some usable power. I always check the Beeb weather forecast. Changes many times during the day (based on Met Office input). Gonna be windy - oh, no. Gonna be calm. Maybe tomorrow there will be winds to power these eye-wateringly intrusive, over-subsidised windmills. YOU will pay for that, because Gordon has decided to invest even more into wind while a blade manufacturer on the Isle of Wight closes its production...
Tides have never stopped, as far as we know. Where's the government funding for a much more realistic - and less intrusive - off-shore energy supply?
There are plenty of people out there who can deliver decent options compared with the way we currently live.
It just annoys me that this government has wasted so much money, but barely touches the surface of the intellectual and delivery capabilities of the UK populace.
Russia delivered a lot in a short time-frame. Because most of its citizens lived in a way that you would never want to. That's why Reagan won the battle of a non-war. The USSR poured so much resource into armaments that it had nothing left for the citizens.
You brought Saga into this thread.
Do you truly believe that he'd be happy to think that Hitler and Stalin "galvanised" collectivism?
Do you really think that the "collectivism", which really meant subjugation of the population by a bunch of political thugs, was not matched by western reaction?
Come on, man.
We could have 100 percent employment in the UK if everybody claiming any sort of benefit was obliged to sweep the streets or wipe graffiti of the walls.
Collectivism stimulated creative thought, design and delivery? For how long and for how many?
The USSR got a dog - then a man - into space. Incredible. (Especially when most of the population didn't have enough to eat, but who cares about the little folk?...)
The USA popped folk on the moon. Interesting for me as that's one thing I've witnessed that my children haven't.
Hitler and Stalin slaughtered millions of people in the name of progress. If that's what you consider as role models, well good luck.
Don't forget to add Mao and the Pol Pot experiences to your list of "collectivist" advances. How many peasants had their livelihoods destroyed in the name of a "collectivist" society?
Hope your (possibly capitalist) boss is kinder to you than the guys you pray in aid...
What's the point?
You want a cap on the total income or wealth of an individual? Maybe I could go along with that.
Charity? Well, if people don't have enough to believe they can afford to give stuff away, I guess that falls by the wayside.
Back to Brown. Gives OUR money away at the drop of a hat.
Why can't he focus on delivering a decent lifestyle within the UK?
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"You might only be paying 4% on your mortgage, but over a term of 20-25yrs you're likely to pay between 80-100% more. How is that 4%?"
(Falling about laughing).
Once you get into big school and learn about compound interest it'll all become clear."
Somebody calling themselves rbs_temp posted this earlier. If the name implies that s/he has anything to do with RBS, then I'm sitting here laughing my arse off. If not, then I'm laughing my arse off anyway.
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225 Adam
Yes, agreed, 126 is spot on.
Like 206, too.
And also this from 214
"Debt must never again be presented as an asset. It isn't, it's a liability."
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Robert were is the money the pounds shillings and pence that we have all paid in at one time or another, I know we were being forced in to paying with plastic but not all of us took it up nor did we all open banks so there is a push for us all to have ID cards as they are called but they are not cards but mobiles, we will be en slaved if it kills them. Banks have not lost money but taken it it started in the USA remember ENRON showed you how it was done its all numbers, that is why its called the numbers game the USA have always gambled with other peoples money. The Fed is not a real bank but people think it is, like us believing Fred Goodwin was a banker and not at carpetbagger the Americans have good names for men like him we just call him Browns best mate. I get asked to live the room when I say words like Freemason and gold reserves the same family set the gold standard twice a day still. It all blinding people with science and long words so that people glaze over and loose the will to live. We are being set up because the war on terror is not working the money men have lost so they will take what we all hold dear to us because without it we can not live the money, there is no credit crunch there never was. The rich are still very rich and will never leave Blighty because its money laws will always kiss up to them even when they have no one worth fleecing off after all its not real money is it???
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Making banks safe? LOLLLL. Calculated words of spin to protect the hidden loots by tranquillizing the victims of wholesale robbery. "New" regulations will provide new opportunities and deceptions for a repeat performance in a generation's time - 20 years. The least we can do is to disbelieve every word of it.
Very well timed "outbreak" of swine flu ...
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Ken Harvey @ 126
absolutely and precisely spot on!
Kill the Boni in other words, as I've been chanting on here for ages ... thank you for putting it into language that the Grown Ups prefer
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