You, me, and the recession ...
So, what's it to be? Would you rather I wrote about George Osborne and the £50,000 he didn't ask for from the richest Russian on the planet - or the gazillions of pounds, dollars, and euros that the bankers did ask for, and got?
Frankly, I think we can leave Mr Osborne alone. He'll live to fight another day, I'm sure, a bit bruised maybe, but having at least learned a valuable lesson: that it's not very clever to spin against a spin-meister and expect to emerge unscathed.
As for the bankers, why is it, I ask myself, that having dug deep into my pocket to lend them the £37 billion they apparently needed, I now hear the Prime Minister and the governor of the Bank of England warning that we're about to plunge into a nasty economic recession anyway?
After all, we're being told that - although you may not have noticed it yet - the banks are beginning to get back into the lending business again. And that's good news, because banks that don't lend aren't doing what banks are designed for: looking after our money and using it to oil the wheels of commerce.
But don't blame me if they're not ready just yet to lend any to you, or if the terms they're offering make your eyes water. Bankers scare easily, it seems, and they've just had a very nasty fright. So they're still being very, very careful before they emerge from beneath the blankets.
Which leaves the question I started with: why the recession? Well, remember how you borrowed that extra £50,000 when you realised your home was worth twice what you paid for it? Remember how you used the cash to buy a bigger car, a humungous plasma screen TV, and installed a tasteful water feature in your redesigned back garden?
Now ask yourself this: are you ready to do it all again? What's your home worth now, by the way? So maybe there'll be no new car next year, no new electronic toys, and no more juicy contracts for the local builder/garden-designer/loft extender. Multiply that by the sum of your neighbours, and hey presto, there's your recession.
And if, because you've all stopped spending, your local builder runs into cash-flow problems, his friendly bank manager may not be as friendly as he was last time. That essential loan to keep the business afloat for the next few months may not be forthcoming. The business may go bust. His 15 or 20 employees will be looking for jobs. They won't be spending much, that's for sure. And so it goes on.
But as you know, I like to look for silver linings where I can. Oil prices have plummeted - which means that you can probably fill up your car now for less than a pound per litre of unleaded. And the haulage companies that deliver the food to your local supermarket can breathe a bit easier as well. Which means food prices may stop rising.
And the pound is slipping against the dollar - which is good news for British exporters who've been having a rotten time over the last several months (although admittedly it's less good news if you were planning to do your Christmas shopping in New York this year.)
Oh, and inflation is unlikely to be much of a problem now, which is good news for those on fixed incomes (like pensions, for example). Yes, the stock market is a mess, which makes your pension fund a bit unhappy - but I think we have to assume that at some point the sellers will become buyers again, and share prices will resume their upward progression.
You're going to be reading a lot about the recession over the coming days, but take my advice: don't let it get you down too much. Yes, it'll be tough - especially, of course, for those who lose their jobs or their businesses. And yes, there may still be some nasty surprises waiting to jump out of some banker's woodwork.
But if we keep our heads - and if governments and bankers keep theirs - I reckon we'll be able to see it through. Mind you, I don't think I'd want to be a Porsche dealer in Canary Wharf at the moment ...
© MMIX~RS~q~RS~~RS~z~RS~27~RS~)
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Good piece, well said.
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At last...some calm sense instead of the headless chicken impressions we've been seeing everywhere. Currently I'm happy as at last my exports to North and South America - more or less static for 3 years - can grow more!
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Spoken like a true muddler. Unfortunately, the facts speak to a much gloomier outlook. The sub prime mortgage default time bomb is still exploding and will continue to explode for some time to come. The web of credit default swaps continues to spiral outward as these insane insurance policies will be forced to pay up in the tens of trillions. Your number was 55 trillion. These are only a small fraction of the 300 to 650 trillion in derivitives also out there. And all of this was unregulated. In fact nobody knows what they all exactly are, how much of it there is, or what the consequences of them will be. All we know is the numbers are staggering.
The former Chairman of the Federal Reserve Alan Greenspan said in testimony before congress earlier this week that this is a once in a century tsunami and was in part created because of his flawed understanding of how markets work. In fact he admitted that his concepts were based on a mathematical model and political dogma about the perfection of free markets to regulate themselves. His model utterly failed to take the psychology component into account and the fact that the markets will test the limits of what regulators can and will tolerate. And in this case they tolerated just about anything and everything the financial whiz guys tried. One thing they tried which worked to a remarkable degree was to invent loans on houses which were virtually guaranteed to go into default, to bundle them and sell them to other people who would reap the whirlwind when they did. Add to this the credit default swaps, the huge leveraging, and the other instruments and we have an entire world that isn't merely in recession but bankrupt.
The interdependence of the world's economies, so often denied in good times by those who want to see their own nation as independent and secure is once again proven to be a myth and the old addage when the US sneezes, the rest of the world catches cold can now be restated as when the US catches pneumonia, the rest of the world will die of respiratory failure.
I really don't know what people in the rest of the world can do except wring their hands, pray a lot, and hope that somehow the same minds which got the world into this mess can figure out how to get out of it.
My opinion is that this will not happen until the United States government prints and distributes trillions of dollars it does not have so that Americans can pay down debt with cheap easy to acquire currency. This will of course devalue the US dollar. But before that happens, there will be so much pain that many companies including very large ones and even nations will go bankrupt.
It is not true that nobody saw this coming. More than a few saw it and those who protested the conditions which made this depression inevitable were brushed aside. And there is plenty of blame to go around to Republicans, Democrats, Congress, the President, the Federal Reserve, The Treasury, their counterparts in other nations, and bankers and other financeers all over the world. So much for their MBAs, their accolades, and the huge salaries they claim the deserved.
Having seen this coming myself, I was prepared. I refinanced my house to get the largest mortgage I could and kept what I got in cash in guaranteed bank accounts. It will sit there earning almost no interest until it is time to pounce on the stock market with avengence. That may not be any time soon. But when it comes, it may be the fire sale buying opportunity of a lifetime. I'm ready but I'm patient. I will get only one chance to be right.
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#3 Marcus
Robin is not entirely a muddler. Have sympathy with him for he is just a confused man nearing 60 ish who has just seen the lifetime certainties of his economic universe crumble.
He, like most commentators, is struggling with the understanding the first depression of the first decades of the twenty-first century. (The numbers guys will predict another long after we are all gone in the last decades of the century but that does not matter now.)
In am reasonable sure that you have taken the appropriate action in getting out of equities and into cash. (I am less sure about the mortgaging your house to do so as I have a morbid fear of debt of any sort.)
I do not support your politics, nor your view of the USA's condition and continuance as a 'super power', but I share your view of Alan Greenspan's comment, and in a sense you have to applaud a sinner reformed even though you may wish that he had not sinned in the first place!
also see
(On the problem of policy-makers and the policy paradigm shift.)
http://www.bbc.co.uk/blogs/newsnight/paulmason/2008/10/a_slump_in_confidence_in_polic.html#comment2
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This may be relevant to your blog, although it is really a comment on the television coverage of recent economic events, which has been almost hysterical.
Since it is now impossible for anyone in the country not to be aware of the dire effects of the credit crunch and ensuing economic downturn (not yet an official recession, we have been informed), can the BBC turn its attention to other news. Unless we have time to search the internet, we have very little information about what is going on elsewhere in the world. The World Service is excellent at giving a balanced view of events but I would like to be able to tap into some of these stories on a visual medium at a time which has a significant impact, and also to highlight less known aspects of our own society. We all have the message about tightening the belt – and not before time, but can we move on and look to the future. Let governments do their job of managing economies and give the rest of us some inspiration for how we could be involved in a new better future, based on real values.
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#3 - MarcusAureliusII
At heart, Greenspan is an academic who now admits that he naively thought the banks could be trusted to do the right thing. All Paulson has to do is look himself in the mirror and ask 'Could I have been trusted to do the right thing in my previous incarnation?' More regulation is now inevitable. It is to be hoped that his background will ensure that it is of the right kind.
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threnodio
The US economy is like a powerful sports car like a porsche which has been scaled up in size and power to that of a semi truck. What Greenspan, Paulson, Clinton, Franks, Dodd, and others did was to remove the speed governor that limited it speed and acceleration, the slewing governor on the steering which prevented it from swerving wildly, removed most restrictions of the traffic laws and made it clear that those left would not be enforced. Then he gave the keys to sixteen year olds who had passed a beginner's driving instruction course. Now they look on in astonished horror as this thing has crashed at very high speed destroying all of its precious cargo, the sum total of the world's financial assets. During the joyride, those in other countries went along with it, jumping on to share the exhilleration of it. Now they are even more badly injured than the drivers.
The fools who engineered this disaster have been congratulating themselves on the bailout but in reality, the two trillion dollars or so injected into the system a few weeks ago was a transfusion in the emergency room as the victims were comatose on the verge of death. It is not clear how long it will take or even if this treatement will be the beginning of a recovery or will merely delay death. IMO it is just the beginning of a long hard climb back which will leave permanent scars.
The question of why these geniuses removed all of the safety features put in place after the last such disaster 80 years ago is that their hubris caused them to believe that they understood what would happen relying on the drivers' good judgement to handle all of that power responsibly seeing what the consequences would be if they didn't. They were wrong, dead wrong and now the entire world will pay a heavy price for their mistake.
I saw the disaster of the sub prime mortgage fiasco coming. That was obvious. What I didn't know was that Paribas and Northern Rock were not exceptions of foreign banks making the same mistakes but were the rule and that other banks in foreign countries were even more highly leveraged than American banks. I also didn't know about the credit default swaps. I therefore judged that the US economy would implode crashing the US dollar first which would in effect cause a worldwide economic recessionary crisis and as a secondary effect exascerbated by wholesale printing of more dollars. Then when the US economy recovered, it would strengthen very strongly ahead of the pack again. But the effect of exporting of the credit risk so extensively to foreign banks and the existance of the CDSs has not only cushioned the US currency, it has made it a haven since the immediate impact on foreign economies has been even greater than on America's.
The idea of the US treasury printing money to get the American economy out of serious recession and write down debt is nothing new. It has been the method of choice since the lessons of the great depression when the prior economic theory said that a return to frugality would correct the markets and so the Fed drained liquidity by keeping money tight to avoid further speculation. This intuitive notion turned out to be dead wrong and the fed rarely makes that mistake again. It did to a degree in the downturn of the early 1990s after the Gulf War. The recession and Greenspan's refusal to lower interest rates to stimulate the economy soon enough was the reason given by many for the first President Bush not getting re-elected. McCain seems to have the same mindset. For this reason alone, he will not be elected.
Normally when the government is fiscally irresponsible or the economy is overheating or slowing down, the fed can usually make adjustements to monetary policy, that is small incremental changes to short term interest rates to fine tune the economy. This time, given the enormity of the problem, even a cut to zero percent as Japan had will not be sufficient, the Fed is just about out of gas. From here on out it is the Treasury which will decide what will happen. The push they can give to the throttle is limitless. At its extreme they can turn the US into Zimbabwe. Doing nothing they will insure a long and deep depression which could last for decades. 700 billion as a bail out and another 100 billion or so as a stimulus will not be enough. The Treasury will of course have to print that money because the government is already out of cash and 9 to 10 trillion in debt adding about 500 billion more per year. The rate of creation of currency will determine how fast the depression ends. Obama seems far more willing to advance the throttle on the presses. But don't expect the world to recover uniformly. China and Europe are still in for a very rough ride as are the emerging markets. And because of the logistics of moving adequate quantities of natural gas around by ship, Russia still has enormous leverage on Europe and could charge much higher than world prices for it if it wants to.
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Robin
Have you noticed we have the very rare situation where the public are probably to the left of a Labour government?
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#8 Richard_SM
very rare situation ... the public are probably to the left ... of the government
I think it is probable that all citizens everywhere are always to the 'left' of the government.
My argument goes like this:
Individual people are mostly poor and are therefore closest to the issues that challenge the poor.
The 'left' (rather more then the 'right') is generally characterised as taking the position of the poor.
However when in power, or close to power, political parties are themselves closer to the rich, further from the poor and therefore closer to the 'right'.
Hence in general the people will be to the 'left' of the government. And I think that your assertion that it is a 'rare condition' is open to question!
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#7 - MarcusAureliusII
Fascinating stuff and I agree completely. Just one question. A lot of so called experts are keen to promote interest rates as the weapon of choice when seeking to adjust fiscal policy. Would you agree with me that this argument tends to disregard the fact that interest rate adjustments take anything from 6 to 9 months to filter through to the real economy and the the situation is somewhat more urgent?
I have also posted elsewhere that some observers seem to have neglected the fact that executive decisions of the kind made by Paulson, Brown, Sarkozy and others go from their desks into a massive 'black hole' called the civil service and it will take months for them to exorcise their passion for paperwork and do something
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#9 - John_from_Hendon
It also seems to me, have watched several Labour governments in office over the past 50 odd years that they start of full of left wing inspired ideas and drift to the right when in office. It has been suggested that the left wing ideology is useful only as a vote winner and has to be abandoned when they emerge into the real world.
I am a little more charitable than that. I think that the good intent to which the road to power is paved is real enough. I simply think that each new generation discovers that they simply don't work. This is not to dismiss left wing ideology altogether. It works quite well in some other political environments. But it does seem to me that there is something about the cultural or societal structure of the UK which makes left wing policies virtually impossible to implement.
If you agree with me, perhaps you have a theory as to why this may be the case. I, for one, have never been able to work it out.
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#11 threnodio
wrote:
"But it does seem to me that there is something about the cultural or societal structure of the UK which makes left wing policies virtually impossible to implement"
Just a couple of thoughts - not quite a theory - Have you considered the Civil Service? They after all run the country no matter who is in "power"!
Or perhaps it is the corrupting proximity to vested interests with lots of money - in for example - the Tobacco and Formula 1 problem suffered by Mr Blair!
Culturally we are the home of Marx (as a guest and researcher in the British Library), John Wesley, William Morris, the Levellers and Magna Carta etc. so we must have something going for us - perhaps our weather!
The greatest achievement of left wing politics is the universal health care free at the time of need - the NHS (with all its faults) - that left wing idea got implemented, notwithstanding the Tory, former Liberal, Winston Churchill trying to subsequently abolish it, - so not all left wing ideas fail to be implemented - so nil desperandum!
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#12 - John_from_Hendon
I think there was an historic inevitability about the NHS and the greatest astonishment to me is that the pressure for universal health care free of charge is not greater in the States.
However, it is worth a thought that, while Socialism seems to be something of a dirty word these days, there is not a single European country and many elsewhere which do not take free health care, education, benefits support and an element of social housing for granted. In fact, we are all socialists now. Only the rhetoric changes.
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threnodio;
Actually the adjustment of interest rates by the fed is monetary policy. Fiscal policy relates to the spending habits and tax policies of Congress and the President. Yes it can take 6 to 18 months for a change in short term interest rates which is what the fed can adjust to have a measurable effect on the economy. In the past, because this didn't happen right away, the fed would keep making changes and overshoot its mark. Interest rate cuts intended to stimulate the economy would ultimately cause excessive inflation. Economists express the frustration of not being able to adjust long term rates but only short term rates by using the analogy of saying "it's like pushing on a string." Under Greenspan the Fed was usually much more cautious, slow and in small increments of 1/4 point at a time. In testimony before Congress this week, it was pointed out that the US federal government has the most powerful teams of financial analysts anywhere in the world and they have any and all analylitical tools known to mankind. Greenspan's error was that the model of the economy he insisted on using did not take into account that people would not act rationally in many circumstances. As a result, his predictions were grossly out of step with what was happening. Congressman Dennis Kucinich grilled him mercilessly in his Committe testimony this week. He demanded to know when Greenspan first became aware of the housing market bubble. Others found Greenspan's testimony that the economy's behaviour couldn't be predicted unacceptable. Too bad Greenspan bet the farm on his rational self regulating market theory...and lost.
There are more drastic steps that can be taken to exercise direct control over the economy. But these have powerful consequences, some of them potentially unanticipated and even dire. The 700 billion dollar bailout of the banks was one such step. This was supposed to stimulate the banks to start making credit available again. It has only worked to a limited extent so far, in part because of the way the bailout was structured. Bernanke and others have said that because these funds are being used to purchase assets meaning preferred shares of stock in banks and possibly ownership of houses through assuming mortgages, this will not be inflationary. It is not clear that this is true at all. After all, until those assets appreciate in value, the government will get no return on them and will have to pay for them short term by printing money. Right now we are in a deflationary period. Prices of everything are dropping. Inflation is exactly what is needed to counteract this trend. The money that was squandered is gone. Punishing the markets for their past stupidity is pointless, in fact it is counterproductive. This is what the fed did after the stock market crash in 1929. Crying over spilled milk will not bring it back. There is no way for the banks to recoup their losses until at best in some dim distant future. Meanwhile the losses have been spread thoughout the economy and around the world. In the meantime, restoring credit to keep the economy from shrinking drastically can only be done by creating more money. This, the only remedy that will work is the one thing the Federal Reserve and the Treasury are most loathe to do. Ultimately they will have no choice. Congress will do it for them under extreme political pressure from its bankrupt constituencies. And what are the banks doing with the money they've been given? Sitting on a lot of it. They are also buying other banks. Just what we needed, bigger banks.
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#14 MarcusAureliusII
wrote:
"... This (increase regulation) is what the fed did after the stock market crash in 1929...
Sadly, yes I have to agree with you in this point that our governments seem to doing very similar things now to those that they did in 1929 (and earlier slumps.) It is quite interesting to wonder why?
What is it about the control and feedback mechanisms in society and economics that seems to push reasonably well informed and knowledgeable men and women to repeat the same or similar economic errors that give rise to both bubbles and busts?
Will regulation make any difference? Or will the regulation that we seem destined to suffer now be relaxed in ten or twenty years time ready to generate the next boom and bust cycle?
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#15 - John_from_Hendon
It depends on who is doing the regulating.
If the regulation comes from within - people with an insight into the real world of banking and finance, the temptation will be to tweek sufficiently to satisfy public opinion but leaving enough rope for the next hanging. If it comes from the body politic, it will be done with one eye on the Mori polls and the next bye election.
Time to give the academics a crack of the whip maybe?
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#16. threnodio
wrote:
"Time to give the academics a crack of the whip"
Please god no - the few 'professors' I have seen on the box recently are just spouting the same claptrap as the government, which is not surprising as they owe their jobs to the government!
The people who are needed to fix these problems, in so far as they can be fixed, perhaps ameliorated would be a better aim, are not presently employed as academics or in the Treasury machine. This is part of the problem - outsiders are now needed.
The paradigm shift from boom to bust requires an independence of thought that is recruited 'out' of both academia and the Treasury. Contrary thinkers are excluded by the system, but now there is a desperate need for them - even some one the inside are becoming aware of this.
The treasury mandarin mind set is I think, and hope, becoming aware of the need - however it will take a number of years for the right people to be incorporated into the system I fear.
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John_from_Henodon
The regulations Congress put in place were the door that barred the economy from having another depression for 80 years. It did not help the recovery though. That actually came with WWII when a struggle for survival of America and of human civilization required throwing away all economic norms and government spending huge sums of money on credit, money it didn't have. This will be the solution again. The mistake the entire US government made despite some notable dissenting views was not only not to create new regulations to control new financial investments which were lending instruments that circumvented existing regulated instruments but to remove most of those which had previously existed and not enforce those which were left. This opened the gate for some infinitely inventive minds to devise a way to make money out of creating loans where they would not assume the risk even though these loans would almost certainly never be paid back. They relied on another human trait, laziness because neither the bond rating agencies nor those who bought those loans ever checked their quality or thought about what would happen if they did default or the housing market collapsed. The phenomenon was worldwide and the suckers were the highly esteemed, highly educated, highly paid bankers and financeers who supposedly work so hard every day they deserved their six and seven figure salaries.
In a way, Greenspan's model was right. The market is correcting itself now through the oncoming depression. It was the inevitable consequence of what they did even though they didn't see it coming. What he and they also failed to take into account is that the economy is only one part of a larger model which includes society at large, a social model. The consequence of this correction which may take a long time will have an enormous adverse impact on billions of lives including their economic ruin, mass starvation, lack of employment, and even revolution and civil war is also part of that model. Now it is the social system which will correct itself. And it is so severe that many are questioning the validity of capitalism itself. So why not compound the mistake further and use this as a pretext to create totalitarian societies like the ones which nearly destroyed humanity in the 20th century? An irrational response to a problem which was created through irrational hubris by "experts." Some experts they turned out to be.
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#17 -John_from_Hendon
#18 - MarcusAureliusII
So if it is not to be the academics ('spouting . . .claptrap', John) or bankers and financeers 'Some experts they turned out to be', Marcus), then who?
Joe the Plumber, maybe?
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#19 threnodio
wrote: "Joe the Plumber, maybe?"
I think the point Marcus was making and I know I was making was that the way things work in the market and recruitment is that organisations self-select like minded and (intellectually) idle people who take the easy way out when challenged.
Marcus's point included the fact that I would agree with (and I hate agreeing with Marcus) - We allowed the regulatory and market mechanisms to get so complex that nobody and no organisation had any clue or ability to judge or manage the risks. Perhaps this was the ultimate free market system, but I have not seen any economic theory that says that total ignorance will produce a stable market, in fact the reverse, as it has proven.
So I would not let 'Joe the plumber' out from under my sink where his expertise would be suitable to the task.
Somehow we need a mechanism that both allows financial product development, but also provides that at least someone actually understands the products, unlike the present situation. (I favour the idea that nobody planned this slump!)
I would still advocate a system of the recruitment of outsiders who are recruited because they challenge the status-quo - a very problematic and difficult recruitment policy to manage! (Hiring Iconoclasts!)
I can see the job interview:-
interviewer: 'know anything about the Job?' (or anyone in the business)
interviewee: 'Yes'
interviewer: 'Wrong answer - goodbye'
Tricky!
But without some mechanism like this the incestuous insider relationships seem inevitability to lead to the destruction we are living through today (and our forebears lived through in 1929 etc. and theirs previously).
Any better ideas, anyone?
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threnodio, not everyone in the business of banking and finance had idle minds. There are people who stay up all night thinking up ideas like sub prime mortgages, structured notes, credit default swaps, all kinds of derivitives. You can bet they tested them very carefully before they rolled them out in full measure. It was those they sold them to who were the dupes. The fact that this infection want clear around the world shows that a relative handful of really inventive minds can fool all of the people some of the time. In fact they would have fooled them all of the time but inevitably, the chickens came home to roost as they always must. In other words, the time bomb timers began reaching zero and they began to explode. Imagine the surprise and horror on bankers' faces when they began to realize that their entire portfolios were probably worthless. Naturally they didn't want this to get out right away because it not only looked like they alone were stupid and irresponsible but when word reached "the street" their company stocks and their own investments would become worthless too. The probably also feared being fired. So many of them sold out what they could, some even shorted their own employer's company. This may have been illegal insider trading. Some actually had parties celebrating the fall of their stock when they made far more on their short sales than in their salaries or bonuses. The SEC, FBI and others will be looking into it for criminal prosecution but I'll bet a lot of it was perfectly legal. How do you legislate against stupidity and carelessness?
In all fairness, many of these mortgages were what came to be known as NINJA loans, "no income, no job or assets." It is not illegal for lenders not associated with regulated banks to make such loans or to sell them. It is illegal to misrepresent them. It may be illegal for bankers to buy such loans if their banks are regulated. The practice was so widespread that if all of those bankers who bought them were put in jail, the banks would have to recruit brand new employees and start over again. Maybe that's not such a bad idea.
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Here's an idea. The world could agree to cauterize the crisis restricting it to the sub prime mortgage component by agreeing that all Credit Default Swap contracts are null and void. This would be a strong signal to the financial markets that potential liabilities are limited to a mere few trillion dollars.
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#21,#23 MarcusAureliusII
Thinking like a true Socialist again - isn't the whole basis of the free market system that people and firms should be allowed to get away with the things that you now want to imprison them for?
I am perhaps overstating the position a bit - but the point is that if you start constraining the market's inventiveness are you not having also to consider pro-actively regulate the market?
I you require that all financial instruments are type pre-approved are we not in real danger of deepening the present depression? If we are we need to recognise the fact and its consequences.
On CDS I agree, that some balancing off and nullifying should be attempted - they are, as I understand it, at present untradable anyway.
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John_from_Hendon
Regulating markets is not socialism. Socialism is a system where the government owns the means of production and distribution. We've been regulating markets in the US for nearly 80 years. Those who would like the market to be unregulated can stick a name on regulation calling it socialism but that is not what socialism is. Taxing business profits is to a degree socialism because in effect the government becomes part owner of the business. We've been doing that in the US for a very long time. None of us in most countries live in purely capitalist or socialist societies but in mixed economy societies. The social consequences of pure capitalism are no more acceptable than the economic consequences of pure socialism. It's only the degree and details of regulation and taxation which differentiate one society from another.
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Just a simple question, Robin: why haven't I heard you or any of your political and economic colleagues and commentators explain that if so many billions of our tax monies have been used to bail out the lending institutions, and with the announcement that the government will be borrowing more billions for its operations, exactly whom is it borrowing from? What form does this borrowing take? How much does it put us in debt for and on what terms?
Is the BBC witholding this information? Are you [collectively] under some kind of ban to reveal it? Can't you even pose the questions.
I'm probably not clever enough to understand such things, but it seems a simple question to me. And no one I know seems to know the answer.
Why isn't anyone on the BBC helping the public to understand?
Thanks for your attention.
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NewsMaiden 25:
I would refer you to my colleague Robert Peston's blog (there's a link in the right hand column). He explains these things much better than I ever could. I can assure you we are witholding nothing, and there is no ban.
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NewsMaiden @ #25
Robert Peston's Picks is good but there is a lot of high-falutin spin and spam in the comments.
My advice is read in here MarcusAureliusII's comments, inwardly digest them, take a spattering of John_from_Hendon's rebuttal comments for flavour, mix in some of threnodio's common sense comments for taste and you have a fine mixture of realism, aspiration and common sense analysis of the issues regarding the current financial catastrophe.
I read it and and take it all in - and with a small pinch of salt this thread gives you a much better understanding of the whole problem than Robert's drip-by-drip, panic-by-panic blogline that epitomises the global financial sector's problem as it happens and the band-aid solutions that the world's governments come up with as the world lurches from last weeks problems to this weeks problems.
It is also much more fun to read the comments here!
My other advice would be to get a hard hat or crash helmet. That definitely helps. ;=)
I am guessing the next topic will be the effect upon the world's Hedge Funds. I'm just waiting for the German VW and Porche battle over Hedge Fund investment to get explained here. ;o)
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NewsMaiden; I am surprised the answer to your question isn't obvious. I thought it was a rhetorical question. They are borrowing it from you...and every citizen of the UK who pays taxes or holds currency in pounds sterling. Normally if the sums were managable, it would simply issue bonds which it would sell on the open market and then over time pay back bondholders by raising taxes on anything and everything you do or make or sell. But given the dire straits the economy is in, draining money through increased taxes now would simply slow the economy down further and faster so the government uses the only other alternative it has, it prints money. (If the UK had adpoted the Euro, it couldn't do this and would be at the mercy of the EU Central Bank instead.) When the amount of money in circulation increases faster than the total amount of real wealth you can buy with it in a society that accepts that currency, , the value of each unit of currency decreases. Since those who have goods and services to sell are reluctant to accept reduced buying power for what they have, their natural tendency is to raise prices if they can. But at the moment, the total amount of money is decreasing so rapidly and greatly that they often can't. When I say the total amount of money, I'm also including the value of shares of stock people hold which could be sold for cash, the likelihood that they will get paid back for bonds and other loans they've made in cash on demand. In other words, the currency is in an otherwise upvaluing trend domestically. In a recession or depression, cash becomes king. People sell what they have including their labor for whatever they can get. This tends to go down because there are more goods and services for sale than there is demand for them. In the short run, printing currency will tend to slow the recession but in the long run, it will lead to inflation. Your pounds will simply be worth less. For this and other reasons, money is moving away from the Pound and Euro towards the Yen and US dollar. While the US is also printing lots of money, relative to the size of its economy and total worth, it is not doing it to quite the same degree...yet. There are also large debts in the UK and around the world which have to be paid in US dollars and the US is considered the ultimate safe haven for money. That's what these credit default swaps you may have heard about are all about. This all tends to push down the value (buying power) of the pound. You will discover this when you shop for imported goods. Expect the price of Japanese made TV sets and Chinese made clothing to increase over the long run once a short term inventory glut is depleted.
Why did the UK government do this? What is this crisis really about? We woke up one morning to discover that many if not most of the largest banks in the world had made incredibly stupid loans with ALL of their money and they were broke. They couldn't hide it anymore. In fact they loaned out far more money than they actually had. As a result, unless governments found a way to get more money to them in a hurry, lots more money, they would go bankrupt. This would serve them right of course but the consequences for all of the rest of us is that if there are no more banks in business, none of us will be able to carry on our own non banking business affairs. Think of the government bail out of the banks as spreading the pain of all the bad loans to society as a whole instead of confining it to the banks. (this is why so many Americans are so angry at their own government's bail out of the US banks.) All of the UK will pay for the blunders of the people who managed the Northern Rocks and their like. Like it or not, in this terrible situation, it appears to be the lesser of the evils. During the great depression, the US government tried it the other way and the consequences for society were even worse. While we forgot the lessons of history about what to do to avoid a depression, at least the governnments didn't forget the lessons of how not to deal with one.
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#28 MarcusAureliusII
"at least the governments didn't forget the lessons of how not to deal with one"
I am not so sure about that, nor am I so sanguine as you about policy-makers actually knowing what to do!
It seems to me that if the only implemented solution is to print money and have zero interest rates there is the almost absolute certainly of 'moral hazard'! (as the bankers put it.)
At some point there has to be a seismic shift to a proper value for money ( i.e. higher real interest rates and all that follows), if not the next bubble will be far more terrible than this one, and very close at hand!
In short they need a plan! (not just zero interest rates.)
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Bankers and "moral hazard?" Now that is funny, an oxymoron for sure. And after what they've just done. Not only do bankers and financial markets have nothing to do with morality (never did) but you don't even hear them using one of their favorite mantras anymore "due dilligence."
The instinctive reaction to their irresponsibiliity is to take their money away by draining liquidity, raising taxes, effectively making it harder to acquire money since they obviously don't know how to use it. It's like taking the keys away from a teenage driver who drove drunk and got into an accident. Unfortunately, that driver is the only one who can get us to work every day and without him, we can't earn a living. But that is exactly what the US government did after the stock market crash in 1929 and the result was a far deeper and longer depression than was likely necessary. The US government has never made that mistake again. It's not making it now either. The solution is to repair that car, put the driver on a curfew, and watch every move he makes so that he can't do it again. What the cost of those repairs will be and how long it will take nobody knows yet but in the end, we will all share the burden. The driver is in no position to repair the car himself. Right now he is in the emergency room on life support.
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NewsMaiden
The British government's Darling is trying as we speak to figure out the answer to your question. It's being discussed on Peston's Picks now.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/how_will_the_chancellor_repay.html
In the end, when all other avenues are blocked, I'd say it's a safe bet that at least one major element will be printing more currency than is allowed under the present rules. It's hard to see what other avenues are open. This may be overt or it may be disguised as something else but in the end that is what it will amount to IMO.
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Financial Addiction
The global spasms that are contorting the financial markets and the body politic of the entire world are the consequences of the disease of addiction as it has ravaged individual's lives whose occupations impact globally. These small numbers of people who have been so work addicted and dysfunctional show in a graphic manner the spiritual ferocity of a condition that Moses encountered in the society of his day - the 'golden calf' syndrome will destroy a society.
How do we resolve the situation? First step is for everyone to accept their complicity. A society is a collection of individuals. The bankers have not got that much power that they could destroy a civilisation. We are the civilisation, every single individual. The balance of the number of individuals who are financially and materially sick has reached a tipping point that is being exposed by banking failures. It is no use blaming the leaders - those who have been mislead need to ask themselves why they empowered the misleaders in the first place. Was it not personal disorientation in the first place that looked to solve problems with erroneous solutions?
Money is like oil in an engine. It is not even the fuel for the engine of the world. People and their intelligence are the fuel. Money is simply the lubrication. You would not pour oil onto the driving seat of your car and then try to drive it by taking a back seat.
The way forward is to engage again locally with life in understandable small units of influence that fit together with a global harmony only because they are lived locally - in other words by not taking a back seat in your local affairs - service, recovery, unity, as they say in Alcoholics Anonymous.
Accountants should be servants not masters. Money is not a commodity, it lubricates the commodities markets. Money is not a product, it facilitates the production process. Money is akin to feelings - feelings are not facts. Feelings lubricate the human instincts to provide the pressure for emotions to move human creativity and expression. Money should lubricate the machinery of service and utility in the material linkages of human emotion - money should not pretend to be the machinery.
Feelings pretending to be emotions are adulterations of the system. Money pretending to be a thing in itself adulterates the system and distorts value and worth. It is like the oil pretending to be the gauge on the dashboard.
Simple spiritual principles are required to restore trust and confidence once the mess and spillage has been cleared. The mess is akin to an oil tanker hitting the rocks. Vast amounts of detergent are needed to contain the spill. What is the detergent?
Truth ... as it says in the Qur'an, 'we made this world with nothing but water and truth.'
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It makes you wonder: is capitalism just a veneer? Is every state essentially a nationalising entity, when push finally comes to shove???
Is capitalism an extra?
Is it the first thing to get jettisoned when the credit dries up?
Was Marx even left-wing, or just describing a system that works when it works!
We seem to be retreating - to a not very nice place.
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I'm listening to the item about people without skills or education finding difficulty getting jobs.
The old argument that if they could only get the requisite bits of paper everything in the garden will be rosy is being trotted out yet again.
Yes - acquiring useful skills is a good thing and people SHOULD try to gain skills in order to give themselves a better chance to get a decent job, but forgive me if I sound rather cynical after my own experiences in this line.
After leaving my ninth school with no academic qualifications at all (my father was in the armed forces and so was my ex husband, so I didn't work for 15 years after I was married), I embarked on six years of study in 1988.
Now, every time I go for an interview - despite having gained a BA in English, twoCity & Guilds certificates to say I can not only USE computers but programme them too and also several recent high level secretarial qualifications - I'm constantly told either that I'm "over-qualified" or that I don't have "enough experience". So at present I'm an unemployed office agency temp, cast adrift on a small raft in the rough sea of the recession. I have temped for over 15 years in every sector, size and type of business. I have had to be flexible and adaptable - qualities which are supposed to be in short supply and which, supposedly, employers prize above their immortal souls - but still I'm not able to get a permanent job.
Silly me. I forgot. OF COURSE I can't get a job - I'm 58 years old with a long history of clinical depression and a recent gap of 3 years while I was on Incapacity Benefit following a back injury! Roll on March 2011 and retirement so that I won't get even more depressed every time I get yet another "thanks, but no thanks" notification after my latest interview!
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Dianthus - you mustn't get down about it. The way I see it, you either think 'it's all downhill from now on' (I'm 48) or 'it's an uphill challenge/new adventure'. If youth is wasted on the young, experience/savvy/shrewdness/time management mustn't be wasted on the rest of us. It's a choice of perspective.
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