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Dig a hole. Fill it with debt. Mark the spot. Your kids will find it...

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Paul Mason | 04:59 UK time, Friday, 19 September 2008

It is Friday, Day Five of the Wall Street meltdown. I have just reported on BBC World News America (10pm Eastern) that Democrat lawmakers plus Paulson and Bernanke have agreed in principle a massive deal to get rid of the bad debt in the US banking system. There will be a "power" rather than an institution but essentially as with the Resolution Trust Corporation in the 80s, and the Home Owners Loans Corporation in 1933, a government backed "bad bank" will be created and all the bad debt poured in.

So far about $500bn of bad debt has been declared. Expect this now to double as banks rush to dump their nuclear waste into the Federal Reserve's landfill site.

Is it a good thing? Well it will do two good things: it will prevent homeowners in America, and beyond, from being repossessed; and it will stop a 1929 stock market crash. But it is testimony to the fact that nothing else the Fed/SEC/Treasury did actually worked. The decision to sacrifice Lehman, bail out AIG, pump 180bn into the banking system, take junk bonds as collateral for AAA gilts etc, the banning of short selling - none of it actually staved off the threat of a retail bank collapsing or spillover into the world of airlines, departments stores and car factories.

Once it is clear the state is taking on the bad debt, bank shares will soar. There will be immediate and tangible private gain in return for the public nationalising the risk.

So what is the quid pro quo. First, it's possible that the taxpayer will make money: this happened when Norway nationalised two major banks and I am told also happened with the Home Owners Loans Corporation, set up by Franklin Delano Roosevelt in 1933. Maverick bank analyst Bruce Packard of Pali International should feel vindicated: he put out a note predicting this, more or less, four weeks ago, and kept on reminding the world that HBOS was the riskiest bank in town.

Second, I am guessing the Fed has assured Congress that it will get to categorise the debt, and put a price on it, not the busted banks offloading it. This will ensure the best possible deal for the taxpayer, though it is still a bum deal.

Third there has to be some kind of regulatory price. This is what nobody knows right now: has the Fed/Treasury got the bottle to impose on the investment banks some kind of separation of powers deal as in the 1933 Glass Steagall Act, which effectively banned investment banking as we know it by preventing deposit takers from market speculation?

There is only one problem. The last of HOLC's debt was paid off in 1951: these solutions impose a stagnant, effectively state capitalist solution, on the finance sector.

We will know by Monday if it has worked. Only our kids will know if it was the signal for a decisive regulatory turn that killed off speculative bubbles and stabilised the system long enough for the politicians to regain control of the economy from the investment bankers.

I am off to bed and to catch a plane, hoping that British Airways' credit is still good at the airfuel pumps so I can be on Newsnight tomorrow night to update you on this. For now, on the last night of my American Journey, I can only leave you with the immortal words of the late, great Judy Garland: "Toto. We're not in Kansas anymore".

Comments

  • Comment number 1.

    enjoy your flight, Paul. You have been getting stick lately on these blogs, don't know why, maybe you haver rattled a few cages or some vested interests. You are good financial reporter who goes straight to the chase. If you do have an in-flight nap when you awake the pound will have made ground on the Euro and the dollar will continue it's slide... along with Gordon.

  • Comment number 2.

    Great reporting, mate !

    The idea that the 'corporation' can operate outside the boundaries and framework of the state, and control by some form of regulation has now been shown up for the fallacy it is by this farce.

    Harnessing capitalism relies on some checks and balances by those democratically elected, and with so much shareholder capital being held by other institutions and short-term investors, there is not enough 'democratic' control and veto on actions in the boardroom.

    I guess the next question is 'When will the US realise that the environment is not some form of 'externality' which can safely be ignored by 'big business' because that is a buck which can safely be passed to the state.

    Why don't you ask for your articles to be posted on the front page on the site ?? Much as I like Robert Peston, and he does have his finger on the pulse, your articles are much more informative of the future financial weather and storm clouds we will have to encounter.

  • Comment number 3.

    As the gunsmoke lifts from the OK Corral there are a few bodies on the ground? Has Dodge City been cleaned up? Or is the silence just people reloading?

    When UK house prices were fuelled by up to 50% with easy credit what happens now that credit is gone unlikely to return any time in perhaps a generation?

    Now, in effect, we have a monopoly law breaking mortgage market which is unlikely to be fixed any time soon. Unemployment trend up [boosted by the civilian fall out from the banks].

    So what next? Given the 100s of billions pumped into the economy somewhere out there hiding in the hills is the gang of inflation.

    The West has been wounded. At the moment its on life support.



  • Comment number 4.

    HOLC ran from 1933 to 1951 some 18 years - that about fits with the views of a number of people about this slump, but there was a world war which took about five years out so lest say about 13 years end to end.

    This implies that the last of the this slump will be over by 2020 ish - a reasonable estimate. I do however wonder how this timing is already being seen in news that the house builders confederation today announced that it was its opinion that the government stated requirement for 3 million new homes in the UK would not be met until 2029.

    'Moral Hazard' may be a justification for central bankers not to act, but like so many justifications it is today being turned on its head. Capitalism has survived when it has directly contradicted itself several times before but today with the internet and far improved information flows I do fear that it is damaging itself, if not mortally, but severely.

    There is usually a rise in extreme politics in these times and the justifiable fear is that the posturing of one group or another (c.f. USA/NATO/Georgia) will not cause a very major war as has happened in the past on a number of occasions during the process of recovery from one of these major slumps.

  • Comment number 5.

    DOUBLE NEGATIVE

    If a hole is an absence of material (earth) and you fill it with debt (an absence of money) is it not STILL a hole?

    When Douglas Adams' computer declared: '42', it said to the horrified listeners, who could not understand the answer (to the ultimate question of L, the U and E): "Perhaps you don't understand the question?"

    To repeat myself (again, again) I believe there is a 'black hole of absent logic' eating Planet Earth. We apply no philosophy to problems arising, only mechanisms.

    I am rubbish at history, but is it not possible to chart a decay in attitude to money, from 'handle with care' to today's absolute worship?
    This is surely in parallel to my regular theme of a rise in cleverness (cunning?) at the expense of wisdom?

    In my view, it's not the economy, it's the management of the man/money interface that defeats us. In short: 'it's the philosophy stupid.'

  • Comment number 6.

    Does the US government taking on the debt just add to the risk of the US government defaulting?

    Isn't there still the underlying issue of paper titles to wealth exceeding the real productive wealth of the economy?

    Capital has to be devalued one way or another, doesn't it?

  • Comment number 7.


    Paul ... we are having many experts on air now saying that "short-selling" is not the culprit and shorts are not the villains!

    Well they might not be ... but this does not mean, despite it's advantages, that it is ethically right.

    Naked short selling is like me selling a Van Gogh for 5 million to a buyer unseen on Ebay. I pocket the money and then tell the buyer that I have actually not got a Van Gogh but I hope to have one in future. This is just wrong.

    OK I use the 5 million to expand my cardboard box business, I do well, my new employees can buy houses. A critically ill employee can have private treatment. I become rich, I buy the Van Gogh and give it back. The world is definitely a better and happier place.

    But what happens if the bottom falls out of the cardboard box business, I go bust, bankrupt?

    Well in fact this to me is irrelevant. Whether I do well or badly, short selling is simply wrong, and any good consequences do not justify it.


  • Comment number 8.

    There must be a cracking opportunity to make a fortune out of a book on the whole debacle. Pity i'm awful at english and naive about the money markets!

    Fortune favours the financial journalist it would seem!

    Lend me a tenner Paul!

  • Comment number 9.

    If the US govt takes on these "toxic" debts (rooted directly or indirectly it seems in housing) will the US state become de facto landlord to millions of US defaulting home owners? A trillion dollar liability was mentioned. That kind of figure on the US books would surely have enormous economic consequences especially for public spending.

  • Comment number 10.

    With a leap and a bound we and the banks are free? Everything has focused on those poor banks, and their even poorer executives! Solve their cash problems and all our problems will be solved.

    It sticks in my craw that the self-same bankers who have spent years demanding that we leave them alone now demand that we buy their bad debts. Vince Cable not so long ago voiced the opinion that we were nationalising losses whilst privatising profits; and indeed, despite the City shouting him down, that is exactly what we are now being asked to do. Yet, even if the banks’ credit crisis is sorted out (and no doubt they will soon be back asking for subsidies as well), the underlying problems are still there.

    The credit problem is not just about the pathetic cash-flow crises the banks have brought upon themselves by their appalling commercial judgment. It is much more about the credit crisis they, and their craven governments, have brought to the rest of us. It is about personal debt, and commercial debt (especially amongst those private equity organisations who, not so long a go, were applauded for their entrepreneurship in leveraging their miniscule investments with the massive bank loans which are yet to come home to roost), but above all mortgage debt.

    Do you remember that great American, Alan Greenspan, who single-handedly solved the problem of the last crisis; the dot.com bust. He solved this by reducing US interest rates to ridiculously low levels; such that they were eventually negative in terms of real values. He then went on to persuade US banks and individuals to use this cheap money to fund a massive boom in house prices; especially in the sub-prime markets. This kept economic growth going, exactly as he intended, but it landed us with the problems we now have.

    There are vast amounts of debt which have to be paid down before we can once more start another economic boom. Maybe we will even have to go through another (1930s style) depression before this can happen.

    Can we, therefore, ditch the image of the city trader as the hero of our age; and more realistically see his as a charlatan – or perhaps, more likely, the idiot shaman we have all loved to follow. After all the City, and its kept politicians, did tell us exactly what we wanted to hear. Perhaps we should now be less gullible and recognise that if the offer is too good to believe we shouldn’t believe it!

  • Comment number 11.

    SELLING PEOPLE SHORT

    Throughout the media you will find people telling everyone that short-selling is fine, an essential part of the system (a legacy from when settlement periods were long(er), i.e. one could sell shares one didn't 'have' because it took a few days to get one's share certificates to the stockbroker just as it might take a few days for one's invoice to come and be settled when one bought shares), but when one also considers that large pension funds and trustees of other people's investments held in nominee accounts can, and regulary do, lend out their client's stock so they can make a fee from doing so, and that the borrower (e.g. a hedge fund) then goes and dumps large trenches of said stock on the market knowing full well that this will drive the stock's price down, the fact that they then return the stock to the pension fund manager and the stock often recovers (in time), strikes me as more than bad for those with the future pensions etc as they will be hoping for steady capital growth.

    If one looks at the FTSE100 (see the less risky major retail banks) over recent years it's been up and down like the proverbial tart's....but not a lot of linear capital growth in share value. Is this why? Great for hedge fund managers and traders' bonuses no doubt, but what about the people who actually own the shares? Is this not the real exploitation/cost of electronic stock registration and especially the nominee system?

  • Comment number 12.

    the main adjustment is that the us is finally going to deal with its enormous current account deficit and start exporting more. what does this mean?
    - persistently weaker dollar, and final death of the era of the "dollar standard" in financial markets
    - a much weaker "consumer" economy; i.e. less consumer finance, stricter mortgage lending, weaker housing markets
    - eventually, a stronger export economy; i.e. more investment in export industry and the international service sector (such as i.t.)

    i don't think we are about to start a 10-year depression, unless we have a big round of protectionism around the globe. global energy and food prices will remain high by historic standards, but nowhere near their recent peaks, and not high enough to stop global growth.

    i expect the uk will follow a similar pattern, to the us and there will be renewed interest in the uk joining the euro over the next few years.

    meanwhile, the more advanced east asian export-led economies, especially china, need to do the opposite adjustment. and they also may have their own banking crises coming in the next few months, particularly in china (meaning that in the short term i wouldn't be surprised if there is a run on cny).

  • Comment number 13.

    BUT MORE AND MORE PEOPLE CAN'T HELP IT

    mercerdavids (#10) "Perhaps we should now be less gullible and recognise that if the offer is too good to believe we shouldn't believe it!"

    But we've all been told that elitism is very bad and that everyone can live the good life if they just knuckle under, get an education and, well, be enteprising and ambitious and most important of all, take on lots and lots of debt. What they don't let anyone know (because it's highly politically incorect and will encourage those with a penchant for genocide and goose-stepping, allegedly) is that the heritability of intelligence is about 80% (with the rest being down to environmental damage like clouts round the head probably), or that we are clearly dumbing down (and shrinking in numbers overall) through our skewed birthrate and 'compensatory' high level of low skilled immigration. So for the 'clever' financiers this is of course all manna from Africa/S. Asia and the ever breeding/swelling underclass), as this means even more gullible consumers to indebt which is 'good for (their) economy (read pockets). The clever(ish) clogs who reckon they can see what's been going on don't matter very much as they're a minority, shrinking and don't get invite to twiddle Frank's knobs. What matters is the majority, i.e the uncritically consuming cash cows (and they'll consume just about anything these days - just look at what's on TV - pentapeptides and elsewhere: face creams which 'recharge the skin whilst you sleep' at £104 per 100g...).

  • Comment number 14.

    Given the amount of domestic debt that families have voluntarily taken on perhaps we all might understand better that countries are rather more complex to run than households and that services need to be paid for.
    If Gordon Brown has forced people to get into unwanted debt and upset the world financial systems he is going to be a big act to follow.

  • Comment number 15.

    got2write (#24) But surely, Gordon Brown is just a figurehead, a party fuhrer? After all, this is a 'Liberal-Democracy' ruled by a party not a fuhrer surely? Have people forgotten this? The people who used to run this country were the 'elitist' nomenklatura - sorry, I mean Civil Servants, aka Gosplan/Gosbank.

    Not anymore. These were the very 'elitist' (aka clever) people whom 'Thatcher' (and then 'Blair's' lot) knobbled in furtherance of their 'panacea of' (aka assert stripping) free-market anarchism, and the NUTS of the EU (Lisbon Treaty). Think: no more UK, or Great Britain...just NUTS.

    In other words, people (Frank's knob twiddlers and note his nod to Miliband) have been voting for less and less government.....which is rather like chosing to go to worse dentists or doctors knowing that they are more motivated by pay than by care, on principle, is it not?

    Spinmeisters eh?

    These are the progeny of the 60s parents though (the media conditioned 'me' i.e. the arrested development/anarchistic generation).

    Now how smart is that kiddies? Got your anti-stab vest yet? Ever heard about subversion and the money that was poured into it?

    Bottom line: De-regulation is just anarchism + PR. People need to think about this if they want security, and they will if they want a stable family life.

    Childless women, please note (although oddly, given that high verbal is a female skill, it appears that most contributors here are male?).

  • Comment number 16.

    THE OTHER SHOE

    Ah! You got my attention there JJ!
    For various reasons I didn't 'get' the 60s, and although occasionally I hear talk of the ethos, I have not considered the impact on a generation. I AM, of course, aware just how much WWII and post-war austerity impacted on me - both physically and psychologically, no doubt informing MY parenting 'skills' - so your comment strikes home.
    Is there a 'definitive work' (not too many specialist terms and technicalities please!) on impact of 60s progeny on our society TODAY - and governance?


  • Comment number 17.

    Barrie (#16) "Is there a 'definitive work'" I don't know Barrie, 'I just make it up as I go along'.

    The PDs (personality disorders) especially Cluster B of Axis II in DSM-IV have received a lot of attention, especially since 1980 when Narcissistic Personality Disorder found its way into the American (psychiatric) Diagnostic Statistical Manual (it's not in our WHO ICD-10, NPD just comes under other PDs). Nobody ever has a perfect childhood or adolescence as no parent is omniscient, but a) the months leading to individuation and 'the terrible twos' and the self-conscious post-puberty years are critical risk periods for pathological narcissism. Bearing in mind that female 'emancipation' took off in the 1960s (which is when the birth rate started falling and family values began changing) I'd look into Axis II, Cluster B PDs given your interest in politicians and their personalities, but a word to the wise... lots of people in the media and so-called 'helping professions have more than their fair share of narcissism ... they need an audience, they need to be needed. My concern is that they rarely deliver anything of value to those they claim to serve.

  • Comment number 18.

    WILL YOU STOP THAT!?

    Thanks JJ. I understood some of it. Bit worried that I post on here . . . I will try to be more Axis Alpha - cluster-postive (and a bit less flippant when I don't understand).

    Hello Newsnight friends! I think you are wonderful. Can you get me on the telly?

  • Comment number 19.

    Isn't it about time that the Stock Exchange was given a more sutable name? Such as "Tortuga"? The pirates were certainly whooping it up last night. The grog started to flow freely again and, sacks of Dubloons, Pieces of Eight and Gold Moidors were delivered courtesy of IBM and Microsoft! And where were ex-pirate Henry Morgan's F.S.A?
    It really is time that this shower were put to flight. Without their ill-gotten gains, of course!

  • Comment number 20.

    There has been much discussion about the short-term outcomes of the credit crunch; and almost everyone has now heaved a sigh of relief that we have been saved by the Fed. What few are asking is ‘how has this impacted the future of economics?’

    In this context the method of salvation is almost as destructive of the market economics myth as the original problem. Wall Street banking, the pinnacle of the western capitalist system, has had to be nationalised! Something similar happened in the 1930s; when Keynesian economics kick-started the socialist approaches to government intervention which ruled for the next half century. It was only when sufficient time had elapsed that Reaganomics took over. Running down the infra-structural investments, and building up government debt, meant that people – with more to spend – felt they were enjoying a much better life. This was compounded by the exhortations to live on credit, backed up by all the new credit offerings which ‘Big-Bang’ deregulation allowed. It is no surprise that the genuine excitement of living beyond our means attracted new supporters to market economics all round the world.

    Bill Clinton, and to a lesser extent Tony Blair, may have extended the life of Reaganomics by going back to more conservative practices but Bush and Brown returned to the pursuit of the good life on tick. Economic growth was what it was all about and, when the dot.com boom burst prematurely, Alan Greenspan switched the emphasis to pure risk; extending the housing boom way beyond those who could afford to participate in it. We all now know how dangerous that was. Market capitalism is, by association, another bubble which has burst. So where now?

    It is fair to say that the recent model of market capitalism has been a gross distortion of what even neo-classical economists would expect; but that will not stop the wider population judging capitalism harshly. The experience of privatised profit and nationalised debt will remind people of those cartoons, so often favoured by Marxists, featuring the ugly capitalist.

    The result of the collapse of market economics may, I hope, lead to a re-examination of the alternatives. Although Marxist economics provides some interesting insights into the structures of capitalism, I suspect it will not return to the top table; even in China. European social democratic approaches which favour mix and match models may, however, be taken more seriously. The most publicised version of this, Tony Blair’s ‘Third Way’, may even re-emerge; especially where – against all the odds - China has shown that an extreme version of this can work remarkably well.

    Whichever way we now go, thank god we are no longer to be smothered by the US ‘end of history’; which demanded that we worship the only true economic system - the US business hegemony.

 

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