91Èȱ¬

Any chance of the web dept filtering out Microsoft's "embraced and extended" apostrophe and replacing it (and the normal one) with the correct html replacement?

It makes this article difficult to read and unnecessarily amateurish.

Try looking at the article with firefox on a linux box if you are wondering what on earth I am talking about.

Charles Goodhart of the Financial Markets Group and John Kay of Oxford had a good academic chat with the Treasury committee on this.

They focused on the banking structural issues and capital / liquidity restraints. Do we allow some financial risks to build up to fan growth or do we step hard on the brake with tight regulation and narrower banks/financial institutions and accept lower growth. Oligopoly versus smaller more numerous competing banks. I even heard Mr Goodhart suggest that more competition could lead to tighter margins and more risk-taking. He favoured a nice comfortable oligopoly.I dont.

I think Summers is right and Darling is wrong. Darling is fighting yesterday's war.Obama sees the ransom that huge banks and institutions trading across borders hold on sovereign governments.I think Summers is wrong by suggesting US action can be different without consequences for everyone else.If Wall Street is broken down, it will have consequences for every player.Thanks Stephanie.

1. At 10:30am on 30 Jan 2010, BloggsandCo wrote:

Any chance of the web dept filtering out Microsoft's "embraced and extended" apostrophe

I second that!

Ask summers why GS and JPMorgan are HFTing each other. manipulating and destroying the market ? ask why Summers Geithner and ex TS Paulson are ex GS and Volker ex JP think they really are fooling anyone with all this talk, the smart folk know the big two are really running the US government, who do you think paid for Obama ? noting will be achieved at Davos ,not for the mere mortals anyway.

Both the bonus issue and the panic bail out of the banks shows that no free and competitive is effective. Regulation will never keep up and breaking up the banks will be only temporary because they will conglomerate again. Substantial public ownership and supervision is necessary to avoid a future threat to economic stability (and return to a professional utility service to businesses and individuals). Davos is boring - thank god for the Tony Blair spectacular.

Larry Summers has been involved with some of the worst financial policy decisions over the past two decades and was a contributor to the boom dynamics that inevitably led to the current crises. He is instinctively an anti-regulator. Only those who are easily seduced by access to power would take his statements uncritically at face value without analysing Larry Summer's agenda, his track record and his failed economic doctrines.

There have been a few posts over the last week stating the banks paid for Obama. I was under the impression he funded himself via millions of small donations from voters over the web etc. Or was this just more media garbage at the time?

#1. BloggsandCo wrote:

"Any chance of the web dept filtering out Microsoft's "embraced and extended" apostrophe and replacing it (and the normal one) with the correct html replacement?

It makes this article difficult to read and unnecessarily amateurish.

Try looking at the article with firefox on a linux box if you are wondering what on earth I am talking about."

The blog looks fine to me (as do all the 91Èȱ¬'s blogs - if you want to see irritating formatting you should visit the Guardian's 'Comment is Free' pages!).

Why not try looking at the article with Internet Explorer - or even Firefox - on a Windows box? :-)

Re the IMF

I wonder if the IMF will not only be insisting on budgetary restraint(i.e cuts in public spending) and interest rates increase, but also on a restructuring of the banking regulation in the UK when we have to go begging for support shortly after the upcoming election?

7. ScottyC81

sure he raised lots from public donations,but they have to get in place to start with , who heard of Obama 10 years ago ?

there is an article here which gives a brief article
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What strikes me about this is that the same time the government is talking about regulating the banks in the US, the supreme court is lifting the limit on corporations making donations.

While Obama seems to dislike this, note his comments at start of the state of the union address, it seems to fit with his close relationship with Goldman Sachs and the financial houses on Wall Street. For example, Rahm Emanuel, his Chief of Staff earned 16 million, in the two years before he ran for Congress as an investment banker. (I wonder if that was a war chest to get him elected, but that is a topic for another day (nice way around election financial controls :)) [He worked on 8 deals over 2 years and received 16 million dollars. Not bad for a man with no financial or managerial experience whatsoever (although he was an excellent political fundraiser]

During his time before being elected to congress he was on the board of Freddie Mac, the Federal mortgage company that was in crisis. As a board member he was responsible for the oversight and regulation of that market, which collapsed so spectacularly.

Yet, this is a man central to the Obama efforts and directing the daily agenda for Obama. Summer's financial record speaks for itself regarding regulation. I think Summers is telling the bankers that Obama and company are playing the populist games but that they, the bankers, need not worry because he understands their position.

Geither and AIG is a case in point of this failed regulatory approach and how the administration sees its future developments in these areas. Geither was harangued and attacked, but he has not been sacked. What does this tell us about how the administration works? They will court the populist facade, but continue to operate as normal behind the scenes. If the administration were serious about regulatory approach, it would have fired Geither. Put it another way, if Darling or Brown had done this type of deal, would they still be in office?

What happened is that Goldman Sachs was able to rid itself of a major rival. I wonder if the situation would have been reversed if ex Lehman Brother officers were in the Treasury. The other financial houses have taken note and will either be recruiting from coming administrations or sending their people to "do their public service".

The final point to all of this rhetoric about regulatory behaviour is that the same officer who ran the banks in the past are now in the treasury so they will be overseeing the changes. Once they leave office, they return to the same sector that they once regulated. Therein lies the structural problem that needs to be resolved and more regulation is not going to change it.

Take note of where the central officers inolved in this situation reside in a few years. Most, if not all, will be involved with investment banks and the financial sector.

We don't want or need a world financial government. What we need is an understanding/agreement that each government will introduce measures and taxes that will ensure that perverse incentives for Bankers' Gambling and bail-outs will be removed. And agreement that banks that wobble under their foolish debts are able to be bankrupted without dragging the rest of the Banks down too. And a Basel 3 agreement of higher minimum capital ratios that's closely supervised.
OK. I know that both Brown and Obama have suggested different solutions for parallel financial controls. But a firm & flexible understanding where each country does whatever solution works effectively in their economy doesn't mean it's not policy co-operation.

"Relax. That was Larry Summers' basic advice to the bankers and officials at Davos when he spoke to me last night."

That's what most economists said two years ago, remember? They said there wasn't going to be a recession. Anyone remember back that far? But the storm clouds were already on the horizon and very visible. These people have a track record for getting it wrong and the only thing that keeps them employed is our track record for short memories.

Putting America's banks and economy back where they were 30 years ago will be no easy task. To do that, the US will have to re-zero all of the variables by restoring all of the laws, all of the regulations it dismembered, institute new ones precluding the new disasterous finanancial "instruments" of self destruction that have been invented since, and printing enough money to make up for the vast wealth that these instruments vaporized.

We're not fighting the last war, we're suffering the consequences of this one, the war the banks fought against all prudence, restraint, and common sense to maximize their short term profits at the cost of long term catastrophe. And who is more deserving of being the ones to absorb the pain than the banks themselves. Goverment's job is to see that the financial system continues to function through the transition even if that means the government must become the bank itself while the ones which blew themselves up are allowed to die and we await the chartering of new banks that will not have those time bombs around their necks.

The idea that the trillions of stimulus having an initial impact means that we are heading out of the woods seems more than dubious to me. When that money runs out, we'll see if the economic engine will continue to run or sputter out and die. Indications right now where I sit look far from encouraging no matter what the economists say. Remember they got it wrong before.

It doesn't matter what laws are enacted if government isn't going to enforce them the way the US government hasn't for the last decade. So called transparency is politicalspeak for not lying, for not stealing people's money based on lies, for not perpetrating fraud. That's what it boils down to, fraud on so massive a scale the mind boggles. Borrowers lying about their ability to pay back loans. Lenders lying about what will happen when initial teaser rates expire. Lenders repackaging bad loans to disguise just how bad they know they are. Rating services telling investors these loans are good investments. Fannaymae and Freddymac being somehow touted as being backed by the Federal Government. Insurance companies insuring defective loans because their employees failed to do their jobs by investigating them thoroughly. And now the spector of incompetent bankers getting large bonuses at taxpayer expense while most people's personal finances are crumbling. Those bonuses on the pretext that if unpaid these bankers would quit and work elsewhere as though anyone would be stupid enough to hire them. And transparency means that when you do commit fraud, they catch you every time because they keep a sharp eye on what is going on and you do lots of hard time in prison for breaking the law.

America is very angry at its government right now. Is President Obama fraudulently pretending he and his political party along with their policies aren't the target of that anger or is it that he just doesn't see what is staring him right in the face?

The world banking cabal rejects the idea that they should not be able to create bubbles for the sole purpose of them making money and risk depositors money at their self-made casinos. What fun is responsible banking and ethical behavior? The bailout was a naked abuse of power and their success in that makes this a minor flexing of muscle with the spineless politicians.

Whisper it quietly but I agree with MarcusAureliusII! I can't find fault with his analysis,

Please, Mrs. Flanders, find out the reactions of the French, German, Russian, Chinese and Indian ministers of finance to what President Obama/Summers propose for the banking industry. My wish was that President Obama would have taken strong drastic action similar to the currently proposed efforts when he immediately took office a year ago! If the banks get off Wall St., and stick to pure banking, I believe that would be better off for the world economy!

Isn't Davos just passed its sell-by date? (rather like Davros with the Daleks?)

Davos = Hot air = name-dropping = must-go for media wannabees = self-importance = staid thinking masquerading as innovation = being there rather than making a difference = wasting taxpayer's money.

Haven't we got better things to do?

Biggest non-event of the year after The Oscars...........

Stephanie - really glad you personally spoke with Larry - Good for you - who cares?

As for the Banking never-ending blah - blah. Glass-Steagall ( shown to be away ahead of its time despite the negative self-serving comments against.

But still needed vigilance at the regulator wheel (US and UK epicentres). To quote a senator 'asleep at the wheel"? comes to mind...

'Nuff said........

oh no don't relax grumble instead.

13 MKII

''America is very angry at its government right now. Is President Obama fraudulently pretending he and his political party along with their policies aren't the target of that anger or is it that he just doesn't see what is staring him right in the face?''

No, it is that the turn-around process cannot occur quickly enough to placate voters. The process was the banks got in trouble and had to be bailed, there was no way around it. The politicans postured initially because enough voters where outraged. So it was left to get worse, financial terror was unleased, then the politicans grandstanded and said look we are rescuing you the voters - by bailing the banks - to the voters. Short term promises where made or at least implied which were never going to be kept. Faith was lost by the voters and dull realisation has crept in that there is no bounce back. It was always going to happen. Anger - fear, up a notch to terror, promises, promises not kept, sullen anger at being 'cheated' being sold a lie. The honeymoon is over but Obama is in the seat, that was his first objective. He was voted in on the simple issue of change and he cannot provide it quickly enough, nobody can. Decades of future debt has to be dissipated. It doesnt matter what you do - decades of future debt has to be digested, and it cannot be done overnight. So Obama knows, he's bright enough to know that he couldnt sort it quick enough, but he probably wasnt expecting a backlash as quickly as it came. Hes in the killing field but those sending the bullets are not bothered who they hit they just want to hit something.

The situation in the US looks worse than here property is in real problems compared with the UK, at the moment. Nothing appears to be going anywhere fast. Similar problem brewing here. Its gonna take time. The only way to get the economy going quickly is to reintroduce debt and that is dodgey.

The game is being played out along foreseeable lines and there is little room to maneuvore. It remains a wealth trickle down economy just the wealth is negative. It points to the likelyhood that the key GE is not the one this year but the one after.

There is a big difference between the States and us and the rest of Europe in the security with the currency. Not rocking the boat with the banks seems to me to be the strategy used by Darling. This is unlikely to be openly discussed so therefore arguments put forward to justify the position as to why we do not follow Obama's plan are a natural smoke screen.

The boat rocks whether you want it to or not.

riverside;

I don't know what gallery you're in watching the action but it's not the one I'm in. Following events on C-SPAN you could see the anger in the Congressional committee member's faces, hear it in their words and voices when they took testimony from Bernanke in his hearing to be kept on as Fed Chairman and when they brought Geitner in front of them for a grilling. He danced like a whirling dervish evading questions about what he knew and why he didn't stop execs at AIG from getting bonuses at taxpayer expense. Geitner may be on his way out. These Congressmen know their constuents are furious and the Democrats are running very scared. Senator Dodd bailed out on the old "personal affairs to take care of" pretext. Senator Arlen Specter a long time member of congress who switched from Republican to Democrat is also running scared. Lots of them are. The Democrat's theory is that the anger is directed at all incumbents but the Republicans say it is directed specifically at the Democrats. Everyone in America knows that for the past year the Democrats have had complete control over both houses of congress and the White House. The only obstruction President Obama could possibly have been referring to in his State of the Union address was from his own party. It doesn't work in the US the way it does in the UK. Party loyalty is far from 100% even on important issues and the government doesn't fall if the majority party loses a critical vote in Congress. The US mid-term elections look to be humdingers, a possible bloodbath if the economy doesn't start picking up on Main Street quickly.

The stimulus money was taken by state and local governments, hardly the Presidents fault that your other governments found themselves more worthy of employment. The Republicans fail to accept responsibility for the cause and effect...Bush handed out the first round of funding,voted by Republicans and it wasn't to create jobs. Weasels coming to wish the chickens Happy New year. The stimulus funds impact will be seen in the Spring as it takes about two years for state and local governments to get anything done.

23. ghostofsichuan
State and local governments did indeed hoover up the stimulus money, but they are using it primarily to fill their own gaping budget deficits. Forget any new projects - they are using it to delay the inevitable public employee layoffs.

Those congressional hearings are Kabuki theater. Bernake was re-appointed as Fed chairman, and Larry Summers is pontificating at Davos and telling his banking buddies not to worry. That tells me all I need to know about how serious the US government is about financial reform.

22 MKII

Well its your patch but I can't say I have seen or heard anything yet that wasnt predictable. I have looked for a series of posts from 2008 I made predicting backlash due to loss of faith following false dawns but the archives are not easys to search, you have to plod thru them.

The politicans are sore because they were held to ransom and somehow they thought the banks would be controllable. The banks are not controllable by parley. They made tha same mistake here in the UK. That is th root of the whole problem, they let the banks off the leash, failed to regulate. In 2008 the politicans said to the electorate by their actions and words that they would bail the banks but it would 'work'. It was never going to.

You bring all future longterm debt to book overnight and you have widespread bankruptcy. You have no choice other than to bail. Then you have longterm debt force fitted into a short term timeframe so it is then near bankruptcy. It was always going to be near bankruptcy becasue there just is not the money to make it anything else. The only way to return to 'normal madness' is to reintroduce the same or near same level of fresh long term debt back into the system and that isnt going to happen. That was never really explained to the voters because they would baulk at the idea of pain but no gain. The mood was always going to sour. The voters would have said if I am going to see apin then so what let the banks have it as well.

Long term debt is pretty simple. You borrow long term because you have not got the money now, Borrowing from the future makes you poorer in the future, wealthier right now. Spend 'now' ill advisedly and you do not increase your wealth. You then get to the future and unless you borrow yet more again you are poorer. You still have the debt to pay. Forcing debt to be paid in an accelerated time frame makes you poorer again. Thats where we are and it was always going to be that way. When people have lost a lifetimes endeavour they are always going to get mad, even if they are the ones making the decisions and ignoring the facts.

The outcome has to be loss of trust in government and big business, and the recent European poll on it showed 70% of college educated now no
longer trust. That in itself will slow recovery. Basically governments and big business have shown their true colours and destroyed decades of illogical trust.

The situation is beyond Obama, you cannot unpick decades of collective effort in the wrong direction. In a recession penalty is arbitary and voters dont like reality they imagine meritocracy which does not exist. Obama had to offer change, he has acknowledged he was voted simply on that offer. But he cannot do it quick enough.

This is going to trough along until either the foreshortened debt is digested or the banks together with the consumer again engage in debt. Probably 5 to 8 years, maybe more.

So I have not looked at the idividual puppets but the show in the US looks familiar to me. A similar charade will play out here with the voters trying to duck cuts but they are inevitable. There is no gap to jump and anybody suggesting otherwise is asking for a big hit.

An extend period in this sort of consumer environment may well change consumer behaviour so it is debt adverse, with the economic consequences associated with that. That is my expectation, but you can never rely on the consumer to do something rational. There are however significant shifts in values about.

The banks need putting in a special bankers safari park. Boundaried but a predation environment. That also seems to be afoot. You cannot expect them to welcome it. It needs interntional cooperation to do it because they are multinationals.

#2. shireblogger wrote:

"Do we allow some financial risks to build up to fan growth or do we step hard on the brake with tight regulation and narrower banks/financial institutions and accept lower growth."?

My suspicion is that the answer lies in the consequences of the growth in financial risks resulting from the growth in lending (or what is essentially lending). When the growth in money is reflected directly in inflation then it is counter-productive and inherently damaging and leads to instability.

In the present case an excess money has led to asset price inflation - both leading up to the crash, and far more damagingly now since.

So my answer to your question is that as soon as there is any outbreak of inflation steps have to be taken to restrain the money supply, or in your terms growth in financial risks. This is I believe a well understood basic element of economic management and has been taught, for sound reasons, for hundreds of years.

The tragedy of the present economic difficulties is that the fools that are presently regulating the World's economies have forgotten the basics and believed their own rhetoric that they have done away with boom and bust.

The consequences of understanding/remembering this is that interest rates should have been far higher far earlier in the noughties, and even now, that house price inflation(asset inflation) is again predicted to reach double figures this year(2010) interest rates must be put up urgently - with all of the consequences for the wider economy.

Interest rates have to be used as there is no other way of bearing down on asset price inflation - pending new legislation which of course will not happen this side of an election - the consequences of this is that asset price inflation is a one-way-bet until after the election so the safest gamble is to invest short term in houses and disinvest just before the election - this will drive inflation higher still and make the bubble so much bigger. This is most probably no gamble at all as the apparent incompetence of the money supply regualtors knows no bounds - the worst thing of all is the idiots who are responsible know this themselves too - and are just going to sit on their hands letting it happen again - one wonders is they have they any integrity at all? Happy gambling everyone! Remember however asset prices can go down as well as up!!!!

What is to stop the banks from setting up another investment business and lending all our savings to that comapny from the retail banking one?

They can even do it at preferentioal rates, but then of course they are effectively lending to their speculative business at 0% as things stand.

Needs a lot more thought.

RE: 13 MarcusAureliusII
'And now the spector of incompetent bankers getting large bonuses at taxpayer expense while most people's personal finances are crumbling. Those bonuses on the pretext that if unpaid these bankers would quit and work elsewhere as though anyone would be stupid enough to hire them'.

You would think that last sentence was self -evident wouldn't you? Except these 'useless' bankers seem to have no trouble finding massively overpaid positions in other financial institutions. What matters is what and who they know. So for instance disgruntled staff in RBS or HBOS will be welcomed with open arms by HSBC and Barclays because of their inside information on the proprietary trading software and strategies used by their former employees. After all, the bonuses are only paid to those who hit or exceeded their performance targets so they must have been doing something right which makes them attractive employees for a different bank.

The further up the ranks you go its more about 'who' you know, therefore Andy Hornby and Fred Goodwin are not seen as damaged goods but as potential goldmines of contacts and influence in the upper eschelons of banking and, more importantly, government. Thus Hornby now runs Boots and Fred has a number of non-executive directorships thrown at him by various institutions.

Because the whole credit crunch fiasco was simply caused by banks acting like the worlds financial markets are one big casino the people who got it wrong aren't seen as incompetent by their peers..just unlucky. With that attitude we won't be far away from the next crisis either, but you can bet that the CEO's of any badly affected organisations won't suffer.

mc101;

"What matters is what and who they know. So for instance disgruntled staff in RBS or HBOS will be welcomed with open arms by HSBC and Barclays because of their inside information on the proprietary trading software and strategies used by their former employees."

HSBC's and Barclay's loss would be RBS's and HBO's gain. The key of course is to make those strategies illegal with severe penalties for violating the new laws and then dilligently enforcing the them. At that point the strategies become worthless especially when someone who doesn't believe them and is caught violating them and is made an example of by doing a lot of hard jail time for it.

Santayana said words to the effect that those who don't learn the lessons of history are condemned to repeat them. Learning a lesson doesn't mean merely memorizing facts but understanding the underlying principles that led to the tragedy and how to apply them effectively. This is the only way to prevent it from happening again, only the details being different the next time. The lessons of the great depression of the 1930s and the events that led up to it is what economists, bankers, and politicians of both political parties in the United States forgot or never knew. The similarity between then and now is so remarkably striking that even once it is understood there is reason to be concerned that in 80 years it will be forgotten again and the cycle will repeat itself. One lesson of history is that memories are short and that the hubris to think that the current case is somehow different from the past leads people to rationalize making those same mistakes over and over again.

The economists and bankers convinced the politicians that the regulatons put in place in the 1930s was straightjacketing them, preventing them from making the kinds of profits that were possible. And that is true, that was exactly what they were designed to do. Because as every investor should know, risk and reward go hand in hand. With the possibility of large returns goes the possibility of large losses. This is unacceptable to a reliable banking system that is insured by the government so that people will have complete faith in it. Such a segment of the investment sector is necessary because it is the underpinning of the rest of the economy, it simply can't be allowed to fail the way it did in the late 1920s and 1930s, the way it just did again. We also learned that when people get away with testing the laws to their limits, that when they aren't enforced, that when it is seen that there is enormous profit to be made in doing this, everyone else will rush in as well and a criminal culture will become the norm. "Everyone else is doing it, we have to also to compete with them." We also learn that turning a blind eye to problems only allows them to fester and become much worse, they rarely if ever solve themselves. Eternal dilligence and strict enforcement is the only way to prevent trouble by nipping it in the bud whenever it appears.

Somehow there is a culture that says that if someone robs a bank of $10,000 at gunpoint wearig a ski mask he should go to jail for a long time but if someone robs a bank of $10 billion dollars using a computer to twist the bank's rules and find loopholes to swindle it dressed in a business suit and tie he gets a reward. That these bankers are any different from common criminals is a notion we must quickly disabuse ourselves of. That may be harder in the UK were economic and social class still hold more sway than in the US. This of course is not entirely true in the US as wealthy criminals do get away lightly or scott free because of their wealth. Examples are Ted Kennedy and Martha Stewart both of whom should have served long jail sentences for their crimes under our laws.

Nothwithstanding that the following coments will be attacked as the ramblings of a rabid socialist, it appears to me that you are all describing elements of the same thing - the debilitating effects of the excesses of the present financial system.

In both the UK and the US, the general public are well aware that our present positions have been engineered by the finance industry and that they are more concerned with self-preservation than they are about aiding the recovery of the economies that they live in. This has been exacerbated by politicians (of all shades) who cannot see beyond the maintenance of the financial status quo.

Show me one leading politician who, 18 months to 2 years ago, stood tall and questioned the bank rescues. Even today, there is an unquestioned assumption that the banks had to be saved. We really need to ask ourselves WHY and WHAT would have been the conseuences of leaving them to their fate?

Having rescued the banks, politicians on both sides of the Atlantic then demonstrated their incompetence when it comes to management. If any of the rescued banks had saved a corporation in the same way they would have demanded that total control was passed to them. What did our politicians do? Well they chose not to perform their executive duties and have stood on the sidelines wringing their hands and complaining about "unacceptable bonuses". We deserve the politicans that we have (of all parties).

I have not researched what the US States have done with the stimulous funding that they have received. However, with a still growing unemployment rate, it would appear that they have probably used the majority of it to maintain their present services and fund their debts.

The UK government has not really engaged upon a stimulous package and have concentrated all of their attention/resources on QE. We still do not know the full QE story but it would appear that very liitle has escaped to stimulate the real economy but has helped the banks to shore-up their balance sheets. That is even more worrying when you consider the level of external lending engaged in by UK banks. On the other hand, the behaviour of US corporates appears to have come as a shock. Previously they have always put 'home' first.

Both of our economies have been built and sustained upon debt (leverage if you will). Those levels have been exacerbated by the actions of our political leaders. Yet we have not really seen any major effort to reduce either public or private debt levels (take Cameron's statement today as an example). I believe this is because they believe that they can't.

Over 18 months ago a number of people on this blog suggested that all debt should be 'forgiven'. They were rounded upon and derided at the time but I feel that their ideas should be revisited.

We are now 18mnths-2 years into this debacle. With our present policies it would appear that we have at least another 4-5 years before we can even return to a pre-crisis situation. So we are talking about a 6-7 year span. Now to my mind we are looking at a depression and not a recession. The two are not the same beasts and require totally different strategies to cope/overcome them. At present we appear to be working on fairly ineffectual recession focused startegies - they will not work.

Even if they do have some effect we really must question what we are supposed to be returning to. Do both the state or the individuals wish to continue carrying high levels of debt in economies that are more and more reliant upon imports for their very existance whilst even more activity are 'off-shored'?

So to round off. Summers can keep saying "don't rock the boat" but all you will achieve is reducing the amount of water you are taking in but it is still over the chart-table.

#30. foredeckdave wrote:

"Over 18 months ago a number of people on this blog suggested that all debt should be 'forgiven'. They were rounded upon and derided at the time but I feel that their ideas should be revisited."

revisiting... same response which broadly goes like this: If you forgive all debts - the assets that have been acquired with the debts will become the property of the borrowers absolutely without having to pay for them. This results in a huge transfer of wealth from billions of savers to millions of borrowers.

Further to return to a 'normal' situation these very savers will need to continue to save and have their saving aggregated (and multiplied by bankers!) and lent to the (imprudent) borrowers. I don't think these savers/investors will be too happy to do this having just had their savings transferred to borrowers who have not had to repay their borrowings.

Further more the prospect of being repaid is what is keeping many in not most banks and financial institution afloat. Remove this prospect and you ain't seen nothing yet in terms of an international financial crisis!

etc.

The banking system at the present time is rather like the cartoon character running off of a cliff - for as long as it (the banks) don't notice that there is nothing to support them they will not fall if you prevent them from ever receiving repayments of their 'high quality(!)' loans, as would be the case in debt forgiving, everything is lost- do what you propose and
..v
...v
...v
...v
(splat - I don't know how to write the sound of huge numbers of banks and financial institutions collapsing!)

FDD;

"In both the UK and the US, the general public are well aware that our present positions have been engineered by the finance industry and that they are more concerned with self-preservation than they are about aiding the recovery of the economies that they live in."

Actually that is not correct. The ONLY concern of private industry is profits. A company whether a small business like a corner store or a global conglomerate is in business for only one reason, to make money for its owners. It is not a charity, it is not interested in "the economy" or in "society." To the extent it pretends it is, that is merely for the sake of publicity and good will to enhance its own market position. The rest is bunk. And that is how it should be. Through government we define what they can do that is legal, what is illegal, and steer them to what we want them to do and not do by the way taxes and government expenses are structured. They do the rest themselves.

Plenty of people in America were very angry at the bank bailout two years ago. They were angry at the politicians and regulators who let it get to the point of a crisis without even being aware that it was coming let alone averting it or alerting the public. Allowing the collapse of Lehman Brothers was based on the "who gives a damn what happens to them" sentiment. It nearly froze the entire world's economy solid, an instant financial ice age. The prospect of many others especially AIG being in the same boat was the nightmare of the great depression all over again or even worse. We were told that the banks had to be bailed out or there would be another depression. The government's incompetence seemed even greater when the bailout plan was approved without careful scrutiny by Congress almost immediately exactly as the Treasury Department and the Federal Reserve said it had to be, the only plan that would work and as soon as they had the money in their hands, they reversed course, told America that plan wouldn't work after all, and that they had to impliment a different plan. And they did without the further approval of Congress.

As for forgiving debt, that in effect was exactly what government did, it loaned money to banks for free and then let them invest it in government secured instruments that paid them essentially for doing nothing. Why would they take that free money and risk it on loans to private industries instead? Meanwhile the government took some of those "toxic assets" off the bank's hands and exchanged them for US Treasury backed instruments effectively putting those toxic assets on the taxpayer's books instead. So whose loans were forgiven? The banks. And who forgave them? The US Taxpayer and his children, grandchildren, and great grandchildren as commited to by their elected representatives in Congress. That is why the US public is so angry. That and the promised recovery of the economy is not visible, at least not to the average American. Not yet anyway.

I'm not suggesting that the US government simply "forgive" loans. It can't do that directly. It cannot simply default on its own loans from China for example. I'm suggesting that it merely print lots of money and give it directly to American taxpayers. I'm also suggesting high protectionist tarrifs to bring manufacturing jobs back to the US and keep much of that new money inside the US. If the US economy which is 2/3 consumer driven doesn't recover, neither will anyone elses.

Every time someone talks about printing money and inflation, it conjures up images and talk of Weimar Germany and Zimbabwe. I'm not talking about 1 million percent inflation and devaluation day by day, just 300 to 400 percent in one single shot. And that is a very big difference. Once the shock is psychologically absorbed and it is clear it won't happen again, the markets will re-adjust to the new paradigm and business will start getting back to normal albeit with new winners and new losers. Among the losers will be those whose outstanding loans will be paid back in full with cheap new dollars. Among the winners will be Americans who will for the first time in a long time get out from under a huge and growing mountain of debt.

32. MarcusAureliusII wrote:

"the US public is so angry that and the promised recovery of the economy is not visible, at least not to the average American."

MAII you talk a lot of sense and you're right the average American Joe is angry with the Banks and to a lesser degree the Government. But imagine how cheesed off he would have been if the major Banks had been left to fail - economic armageddon, I believe! The Great Depression would have been a tea party in comparison as the amount of investments at risk were multiples of the world economy.

Bernanke was a scholar of the great Depression and, although mistakes have been made - Lehman Bros maybe - by and large this downturn has been less severe than it could have been. Even now there is subdued lending which indicates Banks are still distrusting the economic environment. Without supporting the Banks, we would all be in the soup kitchens.



By the way I am not a Banker!

marcus,

The Theory of the Firm states that firms exist to maximise their profits. Now we all know that statement is not true just as your statement is not true. I readilly conceeded that firms exist to make profit however they do so within both a leagal and moral framework. Now law and ethics are social constructs not commercial. Therefore it is not true to say that "the only concern of private idustry is profits".

As for debt forgiveness then I would not be suprised, if we stay for a long period, in this stage of the depression that the US and China will come to some accommodation regarding debt. Forgiveness by another name perhaps?

I do however share your opinion that, on both sides of the Atlantic, protectionist policies will eventually have to be implemented.

I read a lot about systems and regulation and theories about how these institutions behave, but am I the only one who wants to talk about what really underlies all this: People.
Banks are not computerised entities, they are collections of people, people who, in the case of the financial meltdown, were allowed to behave abominably for years, thriving on greed, with practically no connection between the enormity of their power and their responsibility for decisions. A banker says yes or no to a deal dependent on perceived risk and perceived yield, without reference to the real people that get affected in the real economy (as opposed to the synthetic economy of financial services, where mind-boggling concepts such as hedge funds, arbitrage and leveraged finance allow already very rich people to exponentially increase their income at no real risk (if they're clever)).
Any regulatory system brought in to control or limit the banks' activities has first to look at how it influences behaviours of individuals within those banks and the consequences of creating patterns of behaviour which are fundamentally dangerous and, basically, antisocial - which threaten social and political stability for nations.
Failure to do that, especially with inhumanly fast global electronic trading systems, will simply lead - once again - to the kind of catastrophic cascade that caused all this misery in the first place.
Economists, almost universally, failed to see this coming, because their systems are based upon people behaving logically within a market system which is wrongly assumed to function in a particular way. But people are not logical, and we are seemingly incapable of predicting the effects of large groups of them deciding to do a particular thing before it is too late.
Luckily, few resources seem to have been put beyond use - which should, in my view, be the real definition of 'losses' - in the last crisis, but there was plenty of misery in the 'real' economy, and very, very little for the people who actually caused all the trouble in the first place; in fact they were able to turn around and blame governments for not regulating them properly.
The general public is mystified and angrier than politicians and bankers seem to understand, and current proposals are not doing anything to quell our disquiet.
We will have another crisis if we fail to act now to curb and negate behaviours which put pure greed above institutional integrity and a respect for humane and decent social behaviour.

#31 JFH,

Having paid-off my mortgage and watched the value of my savings drop like a stone, I do not relish wholesale debt forgiveness. However, the level of national, corporate and idividual debt is so high that we are stopped from returning to anything like a norm.

I really don't kow how any useful 'forgiveness' scheme could work but I am prepared to re-look at any proposals that may be forwarded. After all, we did not think too long and hard about the bank bailouts - we merely accepted that any alternative would have been worth.

Couple of points to the ineteresting comments:

The reality for the vast majority of small firms (certainly in the UK and everywhere else I would argue) profit isn't the main goal but actually been able to draw a minimum living wage and cashflow (my apologies if by profit earlier comments menat wage).

The average I think you find for small businesses in this country the average wage is around £15,000 (very few pay dividends).

Any student of banking will know that retail/commercial banking (not the wholesale/investment type) is akin to a utility like electricity/gas etc.

Any catastrophic national failure catapults an economy back about 500 years (medieval bartering).

The banks were bailed out becasue of the economic consequences - problem being the banks knew (even if they didn't wish to actually end up there).

QE here is purely a government play to keep ineterst rates low (and therefore national borrowing low) and to ensure sale of gilts to finance growing NATIONAL debt).

However, as they say in economics there is never a free lunch - you pay for it somewhere.

QE is distorting markets which will (eventually when it is stopped) be corrected. The damage is in bubbles that have already started again in real estate and various other asset classes.

Inflation is normally not far behind. My comment earlier regarding the Glass-Steagall act still stands as avoiding future financial crisis along with good regulation that's been missing and avoiding mickey-mouse interventions like QE by central banks...................

#36

CORRECTION:

should have read "would have been worse"

#36 fdd
I really don't know how any useful 'forgiveness' scheme could work but I am prepared to re-look at any proposals that may be forwarded.

I'm no economist but I'm prone to sticking my beak in where it doesn't belong and sometimes a fresh look generates fresh ideas....or maybe just ones that have been touted before so forgive me if this has been looked at in the past.

My version of a scheme would focus on the housing market (as seems to be the focus of most things these days). It wouldn't scrap the debt, just adjust it. I'd start by plotting the graph versus inflation. Mortgages issued over the past say ten years would be adjusted downwards causing payments to drop and give people the cash they require day to day. I probably wouldn't include property investors in this as they have been complicit in the mess and if a few went bust it might force the prices down further which I'd welcome.

For this to work there might have to be some protection that the money isn't just extracted again if the prices in the area haven't dropped in they way they should have.

If I'm going to be taxed on this, I want it to be paying off my own debt! That QE money should have went in like that, not to fund their latest pet project and gold plate their toilets! I'd rather have the money in my own pocket so I can carry on my pet projects and generate some much needed real value.

31. John from Hendon:
..v
...v
...v
...v
(splat - I don't know how to write the sound of huge numbers of banks and financial institutions collapsing!)

Perhaps it sounds something like this?

Check there every Friday night to keep track of our booming recovery.

32. MAII
The ONLY concern of private industry is profits... The rest is bunk. And that is how it should be.

That is EXACTLY the attitude that got us into this mess:
- offshoring to destroy American jobs: boosts profits
- importing illegal aliens to work cheap with no benefits: boosts profits
- importing H1B visa holders to work cheap with no benefits: boosts profits
- leveraging the banking system to the hilt: boosts profits
- capturing the Legislative and Judicial branches of government for your own purposes: boosts profits
- dumbing down the educational system to raise a generation of mindless consumers: boosts profits

If individuals were allowed to have this moral code, we would all be out killing people and robbing banks b/c that would boost our personal profits. Fortunately, individuals are expected to act within the larger framework of what's best for the community. I don't see why businesses cannot be held to the same standard.

**
I'm not talking about 1 million percent inflation and devaluation day by day, just 300 to 400 percent in one single shot.
**
This would decimate savers, as overnight their total wealth would go down by a factor of 3 or 4. I'm not sure I like the idea of going to bed with $10K in the bank and waking up with $2500. But I guess that just makes me one of those "new losers" you were talking about. Silly me, for educating myself and working hard and saving my money. Can't have people like THAT in Amerika, now, can we?

I suppose a currency devaluation would make you a "new winner"?

If I remember it right from school there is an equation, that ties up profits, savings, investment. Money (in the banks) are (ideally invisible) agents of this equation, like gas (in a cylinder) , although they try to be a bit of Maxwell's demon (you know, the one who sorted out particles into two chambers). Maxwell's thermodynamical imbalance was a product of intelligent design, and so are surpluses and deficits of the global economy. When you try to propose some entropy lowering, be careful what you wish for. When you are not moderate in increasing it - take care! In the first case we go into "thermal death" state (these soup kitchens, or, more eloquently, subsistence economics). In the second case the demon might be hit by the swinging gate - the pressure in one of the chambers got to great and is far to close to vacuum in the other.
And to add to it all: 11-th commandment should say: Who doesn't want to pay taxes will buy gilts benevolently.

This is a mixed bag of thoughts but hopefully it contributes to "going forward".

1. By far and away the biggest assistant to halting the recession has been coordinated interest rate cuts arising from the first G20.

2. We should continue along the same lines with coordinated QE disposal. That is, the G20 central bankers meet, put their negative chips (QE) on the table and agree an equitable G20 QE reduction. Sovereign Debt is reduced across the G20/G200 giving assistance to Japan, Spain, Ireland, Greece, US and the UK.

3. Everyone wins and Mervin King comes home with the ability to issue further QE and fund this year's UK deficit. Greece and Japan get their AAA credit rating back.

4. There is no impact on trade, capital movements, global imbalances and FOREX.

5. The world accepts greater liquidity but this does not lead to inflation and even if it did it would be contained by its universiality.

6. The net result is a reduction across the world in Sovereign Debt and the elimination of the great dangers that it presents.

7. To date we have done nothing to solve the "credit problem". We have only shifted bank debt to Sovereign Debt and at the same time increased debt. I repeat, we have done nothing to solve the problem. we had a credit problem and now we have a bigger credit problem.

8. We had to do something different but we did more of the same as the Archbishop of Cantebury pointed out.

9. Credit is to bring foreward tomorrow's income and spend it today. It is bad news as pointed out by Mr. McCauber. When individuals do it it is they who have to pay for it out of future income. When the state does it it is jam (votes) today but it is future generations (not current voters) who have to pay.

10. I have been advocating this extension of "coordinated interest rate cuts" for many months. Do we have alternatives?

11. We have two alternatives. (Please remember that this is global and not just a UK problem.)

12. The first alternative is to live within our means which would result in 20% cuts in public spending and massive tax rises for middle income families. This is the route that we are taking but we are delaying it in the UK until after the election. The problem with this alternative is that we might end up with a Greek Tragedy (Greece, Japan, Ireland, Spain) and the next government comes sooner than expected in the form of IMF loan conditions.

13. The second alternative is to remember where the money has gone and take it back. We all know where the money has gone, but let me remind you. House price inflation. This has been a world-wide phenomenon brought about by low interest rates.

14. Ultra low interest rates are now fanning house price inflation again. We need to get savings equal to loans, no deposits no loans, to curtail house price inflation. This is how it worked in the past before banks invented magic money in the form of selling on mortgage loans in the form of mortgage collateralise bonds.

15. Wealth creation is the only way to pay for a welfare state and it comes from directing money to young men with ideas and, dare I say it, "investment bankers" who are the intermediaries in this process. Wealth creation does not come from bricks and mortar or holding gold or the legacy of dead artists who are dead and therefore guaranteed not to add to supply.

16. I have pointed out on many sites that Mervin King's "nice decade", now renamed "the stability decade", was only "the credit decade". £1.5t of personal debt in the UK cut ten ways and spread over 10 years reduces GDP over that period from plus 3% pa to minus 7% pa. It was neither nice nor stable but building misery for the future as Mr. McCauber stated. add in public debt at £850b, PFI at £216b, student loans and the £200b taken from future middle income pensions and real GDP is more like minus 20% over the New Labour period in office.

Please comment.

fdd;

"The Theory of the Firm states that firms exist to maximise their profits. Now we all know that statement is not true just as your statement is not true."

Perhaps I should have been more explicit. It is not the amount that businesses try to maximize, it is the yield as a percentage based on the size of the investment. It is the percentage return on that investment they try to maximize. If you don't believe it, I suggest you buy a share of stock and go to an annual shareholders meeting where the CEO and the Board of Directors have to explain to the owners, the shareholders how their perfromance in this regard compares with previous years, with competitors in their industry, in their sector, and the economy as a whole. They also have to lay out their plan to improve their profit performance and answer questions about why they didn't do better. Banks and other large investment organizations look for periodic "guidance" from the CEO's to get an indication of what the next quarter's P&L statement will look like and then actual performace is compared to it. This comparison will determine their future credibility with the market. And when the market doesn't like what it hears, it dumps them like hot potatoes no matter how much money they've donated to charity or how much social good they've done for society. It ALWAYS boils down to numbers.

I had a chance to watch this from the inside at one of America's largest corporations AT&T. When Worldcom was perpetrating its massive fraud on the market claiming fictitious performance, the CEO of AT&T C. Michael Armstrong would send the entire corporation e-mails and hold periodic corporate wide meetings stressing that the investment institutions kept telling him that AT&T;s GS&A was too high at 29% and that it had to get it down to where its competitor Worldcom was at 25%. The interest AT&T had to pay to borrow money from lenders depended on this fact. The corporation turned itself inside out trying to compete with Worldcom's myth. Private businesses including large corporations live and die on these numbers and expectations of where they will go based on the business strategies management proposes and the board of directors authorizes. This is what private business ownership is all about whether the owner knows it or not.

The reason the value of your house dropped is that there are too many houses and not enough money among people who want to buy them to have an opportunity to pay you what was once the market price. This is the law of supply and demand in action. There is a supply glut and not enough money available to generate demand. This came about because those people who built houses were convinced that they could make the most return on investment by continuing to build and sell more of them when money was still readily available. The good news at least in the US and I think in the UK possibly to a lesser degree is that unlike the devalued assets of shares of stock in the great depression, these real assets will continue to exist even if the current owners go bankrupt and much of them will likely one day be bought and used even if it means for a while at reduced prices. This is because our populations will continue to grow and people will have to live somewhere.

FK;

"- offshoring to destroy American jobs: boosts profits"

Destroying American jobs was not its purpose but boosting profits was its net effect. So long as sufficient jobs remained available in the US, it gave American consumers their biggest bang for the buck in terms of buying power.

"- importing illegal aliens to work cheap with no benefits: boosts profits"

Absolutely correct. Just compare the cost of food in the US to practically any other country and you will see what a huge benefit it has been to American consumers. The "remittances" that is the money sent back to foreign countries to the families of illegals in the US is very important to their economies and keeping their sociopolitical pots from boiling over. Mexico makes more money from these remittances than it does from producing oil. It's cheaper and better than having to deal with a large number of Latin American revolutions and the problems that would bring including many more fleeing refugees. Many unemployed Americans simply will not take the jobs these people do for us at any price.

- importing H1B visa holders to work cheap with no benefits: boosts profits"

Yes it does boost profits to the detriment of American workers who can't compete with those wages. That is not supposed to be allowed unless the companies that hire them can demonstrate that they cannot obtain the same skills at US market rates without importing people. How about demanding that Congress enforce the laws we already have?

"- leveraging the banking system to the hilt: boosts profits"

That was the fatal mistake, the lesson of history that was forgotten. The boosting of profits was short term and unsustainable. The long term consequences were the disaster we are now in.

"- capturing the Legislative and Judicial branches of government for your own purposes: boosts profits"

Vote the bums out. Run for office yourself. In the US it's hard to avoid becoming politically involved. Very different from many foreign countries I think. President Obama is not beholden to large corporations. He got much of his money from individual donations of the poor and middle class and from labor unions. Where's he been? Why isn't he protecting American jobs?

"- dumbing down the educational system to raise a generation of mindless consumers: boosts profits"

Actually it costs money to American corporations in the long run and they know it. The lack of adequately educated and trained workers in the US will hurt American business. When the economy does recover whenever that is, the number of qualified applicants for jobs demanding advanced technical skills will be inadequate and in many cases these skills cannot be satidfactorily imported nor the jobs exported. I'd bet the US spends more on education per student than any other country. In fact private industry knows the benefits it derives from supporting colleges and universities and America's educational system at that level is unparalleled anywhere in the world.

"If individuals were allowed to have this moral code, we would all be out killing people and robbing banks b/c that would boost our personal profits."

In the sense of the business world (not physically of course) that is what businesses do, that is what they are expected to do, that is how capitalism works. You may not like it but no other system has been found that can generate wealth even remotely as successfully. This is what competition is all about. The only restraint we put on it is to regulate the emergence of monopolies when some companies become too successful and wipe their competitors out.

"I'm not talking about 1 million percent inflation and devaluation day by day, just 300 to 400 percent in one single shot.
**
This would decimate savers, as overnight their total wealth would go down by a factor of 3 or 4."

That part of their wealth that's in cash or cash equivalents such as bonds would. A scheme would have to be put in place to consider and mitigate the impact this would have on Americans on fixed incomes based on that kind of investment. The devaluatoin of cash is the whole idea. It is to devalue the debt the infusion of cash would cause making it possible to pay it off at 20 to 25 cents on the dollar rather than let it all go into default at zero cents on the dollar as it is headed for now.

"I suppose a currency devaluation would make you a "new winner"?"

I have arranged my personal finances so that I will be. That is what I expect to happen whether it is the result of careful planning or is simply the inevitable consequence of the haphazard continuation of what has been happening all along. So I say Mr. President, Secretary Geitner, plan this out carefully, secretly and completely, think very big, think in terms of a one shot kill, take careful aim, and then pull the trigger firing the fatal bullet that will kill off past American debt.

#44 MarcusAureliusII,

Come on! You are moving the ground again. ROCE and ROI are surely measures of profitability but they are not the only indicators of a firms long term wellbeing. As a counter to your AT&T story I would ask you to look more closely at your major car manufacturing companies.

Both here and there the majority of businesses can be identified as SMEs. The ground rules and financial climate for these organisations is totally different from that of the large, super and multinational organisations.

"- importing illegal aliens to work cheap with no benefits: boosts profits"

"Absolutely correct. Just compare the cost of food in the US to practically any other country and you will see what a huge benefit it has been to American consumers."

Cheap food is no benefit if you have less dollars to buy it as you are out of work. And, as a side issue, cheap food is not a benefit to society at all when you have levels of obeisity prevelent in the US.

Surely one of the key items in Obama's plan is to correct the leverage requirements on banks proprietry trading?
The current situation (in which banks can do this on favourable terms, using the central banks as insurance) must end. If it walks like a hedge fund and quacks like a hedge fund, it should be treated like one.

fdd;

The goal of business whether large or small, international or local, legal or illegal is to make a the most profit possible for investors. One thing I noticed when I moved to the West Coast and lived there for five years around 30 years ago was the difference in culture between long term greed on the east coast and short term greed on the west coast. East coasters were in business for the long haul, they would settle for lower profits over a more extended period of time, the west coasters wanted it all and they wanted it now. In fact they wanted it so badly that they had it spent even before they got it. The next quarter's bottom line was the most important thing to them, the consequences for next year or five years down the road were left to take care of themselves. This may have been because people moved around constantly on the West coast. Perhaps frequent minor earthquakes had something to do with the psychology of it. Go back to a company you'd worked in and left two years earlier and you might not see even one familiar face the turnover was so high. When I joined a spinoff of the Bell System that was starting up in New Jersey just after the divestiture of AT&T I didn't even get new employee orientation for two years after my hire on date. On the east coast it was not unusual for employees to retire with thirty years or more of service. On the west coast, it was rare to find companies that had even been in business 30 years. Sadly the west coast view of life may have taken over the rest of the country. Well at least one innovative thing California gave us in America was right turn on a red traffic light after stopping (except in New York City where it is still illegal.)

NLV;

I'm not surprised at your jealousy over America's low food prices, and low taxes which leaves many Americans with lots of disposable income for discretionary expenditures. That and IMO personal computers is why America is so fat. We spend too much time sitting in our cars, offices, in front of our TV sets, personal computers, at airport lounges, on planes. Much to stressful and sedentary a life to burn up all those calories from carbs and fats. That's why diet and exercise are multibillion dollar industries here.

I still follow my unofficial imported cheese index as an indicator of European competitiveness on the American market. This is where I compare two sources of high quality protien, one domestic the other foreign. The price of imported cheese has risen to an average of 15 to 17 dollars a pound with premium blue veined cheeses like Society Roquefort at around 21 to 23 dollars. A beautifully trimmed domestic Angus porterhouse steak will still sell on sale for around 6 dollars a pound, non Angus as low as 4 dollars. Babyback pork ribs in 3 rack cryopacks are down to 3 dollars a pound in warehouse stores. Those price must seem incredible to Europeans. I've got two large freezers filled with them and rib roasts in my basement. Not one wedge of imported cheese though. Haven't bought any in years. Not worth it.