The Fragility of Hope

Once again I'm surprised at the surprise expressed, as if the recent events have fallen from a clear blue sky.

As I've said before, there can be no green shoots without stable roots and the roots are still unhealthy.

Can anyone seriously expect Gordon Brown and Barack Obama to come up with a global rescue plan? The best that they can hope is some sort of mutual affirmation, but remember that they are "mere" politicians, reliant on the abilities of others to work out the fine detail of any co-ordinated recovery plan.

Strip aside the hype and it's all looking rather bare.

Here's Niall Ferguson's predictions for 2009.

https://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=198

Sounds like we really are in Private Frazer mode doesn't it!

This is where the gradient steepens as the financial crisis joins in with the 'real economy' crisis. We can only look forward to continuing gloom for at least the next 6 months (and beyond I expect).

Glad I'm off to the sun for a few months - might as well sit in the sun and watch it all collapse!

Nobody knows (not even the banks!) how deep the rabbit-hole goes.

Just how many more bailouts and "stimuli" will have to happen before the mainstream economists and politicians realise that it just won't work.

Printing more money tickets is not the answer to capital decumulation.

"The global economic dominoes are starting to fall"

Starting ? The dominos have been falling since the middle of 2007, it's just that, to many people's surprise, they fall rather slowly.

The good thing about this is that if you understand what's going on, you have a bit of time to do something about it. Don't fall for the "no-one could see it coming" line.

The bad news is that most people take the slow-falling phenomenon as some kind of indication that things aren't so bad after all.

No. 5. cityNickDrew
"The bad news is that most people take the slow-falling phenomenon as some kind of indication that things aren't so bad after all."

We British like to moan, especially when things are going well.

When things are going badly, our "we can take it" character means we are often over-optimistic.

All in all, looking back through British history, we seem to survive.....somehow.

The beginning of the end of capitalism?

To even come close to providing a credible guess we need a credible model of how the capitalist system works.

The fact that most economists didn't predict the recession casts doubts upon their models.
They have lost credibility, so any other predictions, e.g. growth returning in 2010, are suspect.

Where is the model that adequately explains the capitalist economy?

The old Keynesian IS-LM or AS-AD type models are static equilibrium, so anything causing disequilibrium is external to the model.

The endogenous growth models do not take account of the rate of profit - the whole reason why capitalism bothers to prduce anything.

Where's the model that shows how capital circulates in the economy and how it reproduces itself?
Indeed, how it repoduces itself in an expansive way and a declining way (recession)?

How many mainstream economists are familiar with Marx's reproduction schemas?
Why does he have two departments: one producing means of production and the other producing consumer goods?

What are the difficulties of realising expanding reproduction?

Why did Rosa Luxemburg insist that capitalism needs non-capitalist modes of production to grow and that by growing and destroying them seals its own fate?

Might Rosa have been right?

You just summed it all up so beautifully.

Too late for those who don't want to hear bad news. There's no escaping it.

Someone please tell GB to keep his mouth shut from now on.

Hearing him speak total rubbish depresses me far more than facing up to reality.

MrTweedy wrote:

Here's Niall Ferguson's predictions for 2009.

https://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=198

Unfortunately, Mr Ferguson's retrospective completely underestimates the severity of the crisis we face.

This is not a Great Repression, but the Greatest Depression mankind will ever see.

If you want a more realistic -- and not the deliberately played-down synopsis we get exposed to on the corporate media -- then you need to follow Gerald Celente's trendcasting.

Everything else is just wishful thinking.

The amount of energy coming out of the sun cannot be changed easily.

The numbers on a balance sheet can be changed with a bit of ink remover.

If this financial crisis leads to worse hospitals, poorer schools, and poorer nutrition, it is because you are the biggest fools imaginable.

#2 MrTweedy

Interesting to read Niall Ferguson's thoughts on what might happen in 2009.

I would agree with a lot of his predictions. However, his assumption that the rest of the world will continue to buy US bonds with the same appitite may prove to be a little over-optimistic.

Yes we all knew there was more bad news in the pipeline , and there will be more to come......and yet......and yet .....with people not spending ,not buying , not moving....there will be an eventual increase in pent up demand.
I can see it where I live already.....plumbers and joiners are busy, it is hard to find a Corgi registered gasfitter, concert halls are packed and a heck of a lot of houses have been sold locally in the past 2 months.
Lots of people are paying off their mortgages, paying off their credit cards, but they are also planning holidays, weddings, helping grown up children getting established in their new homes.
This week will see another interest rate cut and for me that means the pressure is easing, the light is dawning, it has been hellish but hope is springing a wee bit if not eternal.
In the middle of all of this decline there are a few tiny little signs of cheer and I really do think maybe we are going to turn the corner soon .....
we have to so we will!

Those who entertained no such hopes suffered no surprise or disappointment. Hope does not fix things either.

#5 cityNickDrew:

You are quite right - it is all unfolding dreadfully slowly and has much further to go.

When this all started, I decided I wouldn't go back to the stock market until it was below 3,600. Almost there, but now I'm not so sure I want to go in.

As someone who likes to see things settled, I find the slowness infuriating and worrying. If this was a novel, I'd have read the last few pages by now!

"So you thought HSBC was one bank to have come out of the past year pretty well? Turns out that profits are down 62% down and they need to raise £12.5bn."

So, a 6 billion pound profit (ceteris paribus) isn't doing 'pretty well' Stephanie? What do they need to raise cash for? A Rights Issue might help them buy bottom of the market assets might it not? Or do you know something that the HSBC CEO doesn't? If so, do tell, or do you just do speculation?

When are you going to start listening to people other than those who have been and keep getting it all wrong?

"The global economic dominoes are starting to fall, even as individual governments still fumble for a solution to the first, financial sector phase of the crunch."

Indeed. For several months now my main concern is that the financial crisis is but a trigger for a much more dangerous economic crisis, where in essence we all cut back and cut back on non-essential spending, and then realise that non-essential goods and services are actually what most people produce for a living. As a result the potential bottom of this recession/depression is mind-bogglingly low.

We need to start thinking again from scratch here. The fact that it only takes say 40% of the population working full time to make all the goods and services we actually need must be changed from a problem into an advantage.

How can you do that? It has to be a matter of redistributing wealth and income through the tax system; of changing the tax and benefit structures to encourage part-time working; and of fully costing the environmental impact of energy consumption and polution such that we make local, human intensive production more economically viable.

THE HARRY POTTER GENERATION

MrTweedy (#2) "Here's Niall Ferguson's predictions for 2009"

He's another deluded soothsayer who doesn't appear to know (or is it care about) the difference between an intensional counterfactual conditional and a data driven hypothesis. The media is now full of these entertaining people. It's a sign of our brain-feminised times and a sad consequence of the fact that we now send half the cohort into Higher Education, i.e. 50% of the population instead of the 5-10% in the 60s/70s. That 5-10% used to comprise those at least 1 (and orginally 2) SD above the mean who could discriminate fact from fantasy. Now they're largely certificated in telling fairy stories because like other sub-prime markets, that's good for publishers', property developers', banks' and other service providers' pockets. Good for the fairy tale bubble economy.

Who will save us from the predators who feed off this Harry Potter generation?

"We haven't even saved the banks"

I want to examine this statement as I think it needs examination.

The word 'saved' is the key. What do we mean by saved? I guess that in common usage 'saved' means that business as usual can/has resumed.

But I wonder how different bankruptcy would be to the present situation. If the Banks had been declared bankrupt (which they are) the assets and liabilities would be sold off for what the receiver could get.

The problem is that there is no market for the assets and liabilities of all of the banks as the only market is the banks themselves. This is exactly the same problem we have today - and we have no made the banks bankrupt!

The downside (or upside!) of bankruptcy would be that the shareholders' investments would be worthless. We have avoided this - but is this a good thing? It is certainly artificial and causing huge problems in both the market and politics. The state would have to pay out for most of the depositors - however it is also certain that it could not do so and anyway through what banking mechanism would it actually pay?

On balance, even though the banks are indeed bankrupt the bankruptcy laws are inappropriate. I do however think that trading in all ban shares should be suspended until such time as the assets and liabilities of the system are more firmly valuable. It may even be appropriate that a Northern Rock type valuation should be done on all bank stocks - that is that they are worthless. The share prices are being manipulated to second guess and gamble on the price of the rights issues and this is hardly helpful for re-establishing stability.

If all banks should be compelled to issue a company valuation based on mark-to-market values - which as there is no market - would be zero at best, or massively negative.

I cannot see how maintaining the fiction of the banks being valuable is helpful to the process of saving the financial system - for that is what we are talking about. For so long as we try to refuse to accept that logic of the situation I do not see that recovery is possible.

My recipe is real money again (real positive interest rates at reasonable levels). Continue pumping money into Nationalised banks with the objective of valuing their liabilities as quickly as possible. For only after valuation can we start to recover. This will not be quick - a decade I guess may suffice to identify performing from non performing loans with any clarity. (But note the problem of valuation! - and without real positive interest rates valuation is impossible!)

The World's financial system has crashed - pretending this has not happened is a recipe for continuing the downturn. Accept it, re-establish real money again, protect all depositors - if necessary by converting their deposits to long dated gilts and enforce all loans.

Then we can get onto the 'real' problem of the 'greatest depression ever' - that is demand!

How do you confuse an economist?

Ask him/her what the difference is between money and interest rates.

Anyone willing to give it a go?

"We haven't even saved the banks."

Then LTCM blew up in the late nineties, the Fed, if I recall correctly, quietly told the banks to sit around a table to 'sort it out'.

This time I hear no such talk. Is it unrealistic to ask the banks to sit together with their top thinkers and suggest something rather than wait for the Fed to make make a move?

As a suggestion, the banks could at least cooperate and try to 'value' these pieces of poo. Just some 'standardised' model that captures the pricing and key risks. There may be distant hopes of secondary trading.

What about unwinding any toxic poos that are 'synthetic'? I understand that not all CDOs wrap up real mortgages, but some were created synthetically (via CDSs) to supply the appetite for zealous investors. These could be netted off and closed?

I am not certain of any of this - but I don't understand why the banks haven't sat around a table to discuss this.

I'm not sure what half the people commenting on this article are smoking. No wonder stock-markets are in a panic. People are losing their grip on reality. It is understandable to a certain extent, due to some rapid changes, but seriously, come on.
What we need is as follows; Firstly, strong leadership - with decisive, insightful action. (That doesn't mean radical socialism or its opposite capitalist counterpart.)
Secondly, we need to address the wider economic issues to take the pressure off the sharp end. I.e. Unemployment, inflation, improved economic infrastructure. You won't cure a cold by addressing symptoms, but it's damn well helpful. Thirdly, Britain, quite frankly, needs a more diverse economy. Are we going to get these 3 things. Probably not. So we will continue to fumble and stumble along. In the long run naturally, a satifactory state will emerge. How quickly depends on how quickly we reliase solutions can found and how quickly we implement them.

today (Really Black Monday) may be seen as the day it really started to unravel, when a company can make £6 billion (yes billion) profit and lose 19% of its share value, when a company can lose $60 billion (yes billion) in three months and survive to be "rescued" for the third time, it really is the madhouse....
When are the politicians going to realise that you dont get out of debt by borrowing more, (as any banker would tell you if you went for a loan to pay off debts!).....and when are the journalists stop swallowing this rubbish spouted at every interview and start holding these politicians to account....

this is perhaps off topic but my curiosity has got the better of me.......why on a BBC blog does the pound sterling sign £ not resolve
whilst the $ sign works perfectly?

'cause the Beeb use a cheapo standard US package and won't spend the money Anglicising it!!!!!!!!!!!!!!!

Morning Stephanie,
well I read your blog and you make some very pertinent observations.
Our Dear Leader has attended the EU get together and failed to get any agreement on protectionism.
He's gone to USA to show how important he is to President Obama (I hope he is shown the door with a hearty handshake).
Someone above described today as "Black Monday" well not quite, just the usual correction after the short rally (caused by shorters closing positions).
By my count this is rally number five, so, if history is to be repeated we have one more to go before the stock market system can rebuild on a firmer foundation.
As an aside in the real world, I've had two bills for next financial year, Council Tax only up by 4.95 per cent, water rates only up by 6.9 percent. These are the real issues that will break most budgets. Local Government and utilities companies still haven't got the message....people are being thrown out of jobs (including my son), inflation is reported to be less than 3 per cent and falling, so why are these increases so high?
I maintain my stance that Quangos do not produce anything useful, they should all be disbanded and we the taxpayers will have an extra 64Billion GBP (per year) to put into failing banks.
The decision on Thursday(5/3) to begin printing huge quantities of "money" will be the final nail in the coffin for this country, the pound will go through the floor and we will all be up to our neck in alligators (when the original objective was to drain the swamp).
I really do despair with the youth of today making very poorly thought out decisions and then claiming that the consequences could not have been forseen (cf the Treasury Model to value Lloyds toxic bank assets).

#25 splendidhashbrowns

It is becoming more and more clear that we are now in a Depression. The old relationships between indicators will begin to be less reliable than they normally appear. Therefore I would not put too much reliance upon stock market movements as an indicator of firmer foundations.

Fragility of hope? I would prefer "Blindness to reality"

When the world still refuses to accept that the majority of the banks are bankruptwith liabilities way beyond what the governments can afford to bail out, then how can we get to a lasting solution. Each "little" bail out is a sticking plaster on the gaping wounds in the banking system, and surprise surprise, it isn't enough.

Let the banks which were stupid enough to get themselves into this mess fail. let the healthy banks (Barclays & HSBC in the UK) pick up any bits worth saving or roll them up into a new high street bank.

All this messing about is prolonging the agony and in the ned we will end up in a far worse mess. That the economists don't see this is surely a simple reflection as to how poorly their models compare to common sense when things get away from the norm?

foredeckdave # 26

Well, it looks as though we are headed that way now, especially given governments' strenuous efforts to prevent the bust phase of the business cycle from unfolding.

It has been almost 80 years since Ludwig von Mises – who wrote many essays and papers on the business cycle between 1912 and 1946 - warned against the stock market crash, which ushered in The Great Depression: It seems we still have difficulty learning.

Well we can look on the immense bright side.

UK immigration/population growth is set to slow as the economic attraction of emigrating to the UK is finally outweighed by the miserable weather and the desperation of revised New labour immigration policies in an effort to cling onto power.

UK/world population growth is a much bigger medium and long term problem/threat to the world than the credit crisis, as underlying these economic problem is a question of finite resources and their allocation between rich and impoverished nations.

G Brown and other 'globalised chumpions' like him have put a millstone around the neck of the UK economy in the form of a couple of trillion in debt (Yes - you can let the banker's bet your house that the real debt position will be worse than what we are being told when a lot of the 'borrowings' are based on 'over printed' money and unstable currencies).

However, this should push us (the UK/world) into a new period of inflection and slower growth which should encourage all things green and sustainable. The greed effect will generally be more difficult to achieve.

We should really be thanking Gordon Brown and his party for putting the brakes on GDP and rampant population growth - although, not intentional, the UK economy (and global) is correcting itself and there is the intriguing notion that a global market will show distress and try and correct itself just like the world's atmosphere and eco-systems.

Thank's Gordon for being the main UK Chumpion of a FAILED massive expansion in global economic growth and finance - you've forced a green agenda on us that not even the Green Party could ever dream about!

The present economic situation UK and globally is the new economic world - the world has changed!

Even better - A good time to dig up the lawn and grow some carrots?

No. 11. foredeckdave wrote:
"However, Niall Ferguson's assumption that the rest of the world will continue to buy US bonds with the same appitite may prove to be a little over-optimistic."

I admire those commentators who attempt to forecast ahead. They are putting their heads above the parapet; so I respect their courage.

I guess Prof Ferguson is thinking that the opposite of what should happen is actually what does happen. Therefore, the US possessing a very weak economy should mean the dollar falls and investors shun US government debt. However, the dollar being the world's reserve currency means investors will probably still bet on the USA when every other country in the world is in a complete mess. That said, I agree with you, in that I doubt China will want to lend its cash to the USA, given that China will be spending it at home instead.

It will be interesting to see which forecasters come the closest.

No. 9. scotbot

Thanks for steering me towards Gerald Celente. I wasn't aware of his forecasts.

There will be 3 main players - EU, Sino-America, Russia.

The UK will be wondering whether to align itself with EU or Sino-America, and the asians will be wondering if to align themselves with China or not.

These 3 main groups will be involved in setting up new global regulations and institutions.

The future is rather interesting.

YOU KNOW WHAT THOUGHT DID..?

There you go Stephanie, they have updated their Feb 2007 video. Time to go and interview (as a Newsnight update on your last piece where you only interviewed Lysenkoists Flynn and Mackintosh oddly) the people who were saying this well before ETS (i.e. Richard Lynn, and Charles Murray, and maybe Phil Rushton too?). Sadly, Herrnstein, who laid much of this out after Cattell, died in 1994).

They do know what they're talking about, as it's data driven. At present, economists/reporters appear to be only following the muck-cart if you know what I mean.

".....There will be 3 main players - EU, Sino-America, Russia...."

i doubt EU will become a main player, it will fall apart well before that...the countries in the EU are incapable of divesting themselves of self interest....... there will be two world powers China and America, which one will the UK choose? probably it will make the wrong choice and go for America..... the 19th century belonged to Britain and its empire, the 20th century belonged to America and the 21st century belongs to China...

No. 32. FrankSz

Glanafon once pointed out that Britain benefits from its geographical location.
Therefore, Britain will still try to be allied with the USA and with the EU, both at the same time. A foot on either shore.

If China tries to create an internal market, given its export markets are drying up, then the close link between China doing the saving and the USA doing the spending could be broken - China would uncouple itself from the USA.

A bit gloomy there Stephanie. I think there isn't a cat in hells chance of concrete proposals coming out of any of these meetings etc. There'll be the usual abstractions thrown out for the media. You hint at it but don't state it: we really are in a depression. By that I mean an increasingly global economic contraction. Unfortunately the current generation of European politicians are tied to the old ways of thinking, so we can expect little from them. We are seeing poorly qualified politicians floundering around for certainties. There aren't any. We are in a state of economic crisis management at the moment (some might say 'disaster management'). This is going to be a decade long nightmare.

It does beg the question Steph, what will be 'final capitulation' this time round. Money is pouring into bonds; a bubble is forming, when it bursts the bond equity yield gap will snap and equities will sell off to the bottom. Thus a generation of conceit (anyone with more than £50,000 will be in the stock market) will end with mad dash for the exit just when you finally need to stay put.

I thought the other day that equities looked cheap., They are now five per cent cheaper still. And they will get yet more cheap. But I sense that we are now on the final countdown to capitulation. Hang on to your helmet...and (what's left) of your stocks!

Any hope of recovery may well have been regulated out of the equation where we are concerned by big brother Europe, who will make sure that any lifelines of recovery are tied firmly around the FRanco /German waist. The British government will happily roll over and let it happen with a joyous cry of "globalisation, no protectionism ". Until Britain takes centre stage in this government's priorities, there will be no recovery. The European interest rate drop, will mean the idealess Mervyn King will follow suit and even more investment will leave British institutions for the higher interest rates in Europe.

Its pretty obvious that in the UK you have more and more people doing less and less. More and more people pushing imaginary products and pieces of paper around and around in circles and calling it work. When plain facts dont fit create instruments and play them. Gives job growth.

More and more money here going on to products and projects with no real need. The whole thing is dysfunctional. A big growth area is building fancy footbridges where there have never been footbridges. Doesnt that tell you something. Doesnt it make you think that the footbridge would have been built before now if it was really needed. Footbridges are not high tech, or dont have to be. If you are making them high tech it is to make them more expensive. Doesnt that say something. Why build more footbridges when people are refusing to walk anywhere.

Meanwhile on the other side of the planet, China, they are doing more and more but mainly trying to sell it to the people doing less and less. And there are people surprised this doesnt work well.

So we had the industrial revolution here. It was a passing phase. Its worked its way out here. So lets ship it to China and transport them to the 19th century and the industrial revolution because it is to our short term benefit. What a surprise they are seeing some of the problems - including the pollution that we had here in the industrial revolution. But never mind. Complain about all sorts of things, human rights, pollution etc etc, but still keep buying come what may. Never say I won't buy until standards improve. Never slow up.

The government extolls spending, ie inevitably importing, as the solution. What sort of madness is this. It is like a spiv selling financial policies endlessly to get the commission. But that couldnt happen could it.

Lets hope they fast forward in China, after all we still have not cleaned up some of the badly polluted industrial revolution sites here, phosphorous from match making for example. We are good at procrastination on pollution. That is why the EU had to repeatedly threaten prosceution for pumping raw sewage into the coastal waters in the 80s. Primary 'treatment', as defended by Thatcher, being pumping only believe it or not.

And they people who are imagining they are steering things are surprised that very short term measures are proving useless because their last grand plan has not worked. What a surprise.

If the only way forward is more of this nonsense it is better that we stay in the so called trough until a better solution is found. Going around the loop again will only cause worse problems.

And what is usually needed when grand plans have failed is a new leadership with different proposals not the incumbents who got you into the fix. In Europe I dont see much change in that area. Goodness we even have people saying we do not want change now it might cause instability! What exactly do they think we have now. Talk about being trapped in your own derrangement.

FrankSz (#32) "There will be 3 main players - EU, Sino-America, Russia."

It's all getting a bit 1984ish if not Angletonian isn't it, except a) Orwell/Blair was a Trot and b) Stalinist China today heads the SCO, Russia is a member and Iran's an observer nation eager to join. I do hope Golitsynwas just providing disinformation. Allegedly, Angleton was never persuaded he was, and US intelligence has of course got a lot wrong since. Who knows? (I most certainly don't).

Dear Stephanie Flanders,

Please explain to me in a Blog entry (or ask Rob Peston or Nick Robinson to do it) how this works:

1. Billions upon billions is "lost" by various banks, brokers & insurance organisations
2. This implies that the money did, at one time, exist
3. Where is it now?

Possible answers:
(a) Changed into anti-matter during Large Hadron Collider experiment
(b) Siphoned off to pay for G. W. Bush's lawyers, in preparation for Guantanemo Bay investigations
(c) Siphoned off as bribes to keep "Cabinet Minutes" about Iraq away from public scrutiny
(d) Harriet Harman claimed it as expenses for her second home
(e) Used to help pay for Fred Goodwin's pension pot

... or do you have a less frivolous answer to a genuine question?

Thanks.

No. 41. expatinnetherlands

The commercial banks use the "money-multiplier" to lend the money they receive from deposits and loans exponentially. In other words, a bank can lend the same money many many times over all, at the same time. Essentially, they lend to a business who pays its suppliers and employees, both of whom then deposit money with the banks, who then lend it to another business, and this then repeats many many times. In addition to this, the banks also receive monthly loan and interest repayments from their debtors but only pay interest annually to their creditors. All of these factors serve to expand the supply od credit exponentially.

This means that if a bank repeatedly lends money to people/ businesses that can't pay it back, the bad debts can amount to astronomical sums of money. The losses are multiplied exponentially.

Also, when they were making profits during the boom of 2001 to 2007, the commercial banks paid out too much as dividends to shareholders and also bonuses to high level staff. The profits were inflated because the banks hadn't kept back large enough bad debt provisions in their balance sheets. Hence, the bonuses and dividends paid were too high. Now the bad debts are blowing up, the banks don't have enough cash reserves to cover the losses, and now have huge holes in their balance sheets.

As a general rule of thumb, Southampton University Business School estimates that a loss of GBP1 causes a bank to cut back on lending by GBP10.

A propos #41

AIG is an insurance company that, inter alia, insures banks against bad debts....AIG lost $60 billion in 3 months, presumably paying out on policies, so the banks that have lost money have been reimbursed, so why are we bailing them out, or are they being "paid" twice for the same loss? Or am i missing something?

#41

That's easy:
a) You buy a million dollars worth of CDO
b) Everyone finds out CDO is backed by bad mortgages
c) You try sell the CDO - no one wants to buy, you lost a million dollars.

What about the million dollars spent in a)? That went into the CDO buying the bad debt. That bad debt was sold by banks, which used the money as capital to issue more bad debt.

So the bad debt is defaulted and the money is gone.

In any case, money comes from banks that issue loans. All money is someone else's loan.

#41 expatinthenetherlands

The simple answer is that the money did not exist, it was merely an illusion created by a combination of mark to market accounting, over-infated assets and diminishing reserve levels.

The mark to market part meant that as stocks, shares, commodities all went up in price the accountants could cash in the profit without waiting for having to sell. Therefore as prices rose to fantasy valuation levels, so did "profits". Thold adage about you haven't won or lost till you sell no longer applied.

Over-inflated assets meant that the bank could loan you 500,000 for a terraced in Islington based upon the market value at that time. It didn't account for the fact that the market was artificially inflated and that, in the worst case of a collapse then everyone would ewant to sell their house at the same time and the price would plummet.

The leverage meant that the banks could loan more and more without actually holding more cash`in reserve. These loans (secured against over-priced assets) going bad means that the banks are now in a situation where they can loose far more than the bank is actually worth, especially as the banks own assets (e.g. shares or property) are also falling in value.

The interesting thing is the WHY of the cdo - it existed for the same reason as Freddie Mac and Fannie Mae: to keep the great cycle of Chinese and Saudi dollars flowing through the country.

re: .42 (MrTweedy)

Thanks for a truly informative posting, written in a way that even I can understand!

...and thanks to Stephanie for accepting my original (and not quite on topic!) question.

ps.1. Is MrTweedy a "nomdeplume" for Ms. Flanders?
ps.2. Are you a "Chicken Run" fan? (Mr.Tweedy was one of the stars in that wonderful animation)

MrTweedy # 42

You've just made the case for a gold standard and 100% reserve banking.

#43 jolo13 I think that 99% of the AIG loss is a write-down of its books; so they haven't actually paid any real money over to anybody else

it's a bit like the Persimmon housebuilder loss of nearly a billion announced today: that is mainly a write-down of the value of its land bank

PLCs and their accountants (unless they are crooks) are obliged to be transparent in making write-downs of the estimated value of 'assets'

and as many others have said to #41, the money that has disappeared was only ever notional; now it has evaporated; but we had been borrowing and buying stuff in the belief that it existed and now that we know it doesn't, we've stopped; a total mullering follows, as Peston would say

economics is largely existentialism

this is my memory of how it works based on my taking Economics 101 a long time ago, so a proper economist could no doubt explain it all better, if we could find a proper economist that is

#23 jolo13

I went into this with other posters on probably Robert Peston's blog. I was told: in Internet Explorer, select the Page menu, then Encoding, then Western European (Windows) and lo and behold the little boxes are replaced by pound signs £.

Unfortunately, whenever you enter the blog, IE gets set to Unicode (UTF-8) for some reason, so you are back to little boxes again.

As to the $ working, that is probably more to do with which characters are in each character set and the $ is more widely used.

somali_pirate_SP500



"economics is largely existentialism". I wish I had added DISCUSS and set that as an undergrad question at exam time!

#48

Actually I think there is a very strong case for a gold (or something effectively gold) standard and something approaching 100% reserves.

In fact I see something close to that being a natural/logic evolution of the current situation.

#48

And by the way, I think the realistic and better option is more popular involvement in the state, not less involvement by the state.

If the government was effectively a company where everyone was a shareholder, and some with a larger stake (eg: scientific bodies), would that be an equally satisfying solution?

No. 47. expatinnetherlands

I'm glad to be of service.
I am just a "normal" person who has an interest in finance, economics and history (all history is basically economics). Politics is subservient to economics - if you don't generate the wealth in the first place, you can't distribute it.
I haven't seen Chicken Run, although I know it's a well loved British institution.

It's worth adding that the money-multiplier got badly out of control this time around because commercial banks were allowed to borrow on the wholesale money markets for the first time in 2001. This meant the sums of money involved were in the trillions. The banks borrowed from Japan, China and oil rich nations, whose consumers tended to save rather than spend. Before this "deregulation", commercial banks could only lend from the money deposited with them by businesses and individuals. The cheap money from abroad pushed up asset prices, but the banks secured their lending risk against the asset values. When the asset bubble burst, it caused the perfect feedback loop....
In the Autumn of 2007, Japan, China, etc wanted their money back, but the borrowers to whom the banks had lent the money couldn't repay the loans, which meant the banks struggled to pay the money back. The whole thing was thrown into reverse. Northen Rock was the first to fall at the end of 2007. Lehman Bros then sent the whole situation into crisis when it was left to fall in September 2008.

This economic crisis will be written about for many years to come (perhaps for many hundreds of years - like the South Sea Bubble or Tulip mania). If the postings on these blogs are kept, they will provide historians with a rich mine of information about the views of the average person as these monumental events unravelled on a daily basis.

#19

Money is the means by which we put a value to goods and services.

Intrest Rates are the means by which we put a value to money.

Quantative Easing is the means by which we destroy the value of money.

#51 foredeckdave

yes, I quite like it myself

the whole situation is getting stranger and stranger - the meeting of Gordy and Obama in Washington today might look a bit like 'Waiting for Godot'

some very radical measures may be needed, but they would require international co-operation and co-ordination, which seems sadly lacking

can't see the G20 meeting producing anything much at all, except lots more communiques promising action

good stuff as usual steff, and fellow bloggers. with a couple of obvious exceptions the banter on here seems not to attract the kind of loon element peston gets. long may it continue.

21. i for one have been smoking it since about 9 this morning. ahhhhh.

#56 somali_pirate_SP500

It's sad to say it but I hold out little hope for the Obama/Brown meeting or the G20 - apart from a lot of words about an international response.

In the Autumn I held faint hopes that Europe would 'step up to the plate' for once. Within the boundaries of the EU there is the capacity and diversity for an effective protectionist policy. However, national interests have ensured that this will not come about. I now believe that, as this depression plays itself out, the stress between states may prove too strong for the EU itself. In the shorter term, the way that the ECB tries to keep its flock together will be interesting to see.

I just want to say -


Libertarianizationalism

and

Fractionalizationalized Reservisimal Lending

and

Quantitativeisimalizational Easibility of the money supply.


New words for old rope.....

#56

If I remember correctly, Godot never arrived.

If Godot is a pseudonym for "the global financial solution" it does not sound very promising.

As I lay in my bed last night pondering things, young Stephanie (if I may call you Stephanie), it occurred to me that what we're seeing now is a titantic battle between governments and the market.
It's a financial Stalingrad.
The question is: which party is Chuikov's 62nd Army? Is it the governments? Or is it the market? At Stalingrad, Chuikov's 62nd Army held on desperately to the final Soviet foothold in the city as Paulus' Sixth Army laid seige. But after Operation Uranus, it became part of the encirclement of the Sixth Army.
I've a feeling it's the market.
The market is powerful and governments do not have a great history when they set themselves against it.
The Major government coughed over circa $10 billion (although I gather when the dust settled the loss was much less) in a vain attempt to defeat the market in the ERM crisis. But the market won and won easily.
Now governments around the world are chucking unimaginable sums of money in attempts to defeat the markets. But the market appears to be winning. The market decided that certain financial institutions were finished and no matter what governments do the news gets worse.
How much money has been thrown at AIG? And the situation gets no better, only worse for that giant. It's the same with RBS, Lloyds and the American banks.
I think it's time for a different approach. Let the banks fail, protect the deposits by flogging them off to the strong banks.

Personally, I think the crisis was caused by:

Too much Premium Position Captivity

Not enough Strategic Diffusion Conglomeration

Too many Talent Bench Shortfalls

Premature Core Abandonment


With businesses not paying enough attention to these four basic principles, it's no wonder the economy's in a mess.

What ever happened to bankers' rectitude?

No. 61. subedeithemomgol

Unfortunately, the governments are trying to solve the crisis by spending more of the money they don't have.

They try to restore confidence in burst bubbles by cupping air in their hands (their hands are empty).........

#62 MrTweedy


Now that brought a smile to my face :)


However, as you read academic papers, especially those in HBR you should ALWAYS keep chanting this mantra:

"This may not be the truth"

The problem is that unless you have a German sounding name (apart from say Michael Porter or Malcolm McDonald) you cannot be taken seriously as a strategist!!

#63 MrTweedy

continuing your restoring confidence method by governments, please add in

'...and they (the governments) are working at an exchange rate of
10 words = $1 '

The word exchange mechanism can be further subdivided into
1 Merkel = 10 Browns
1 Obama = 49 Sarkosys (for now)
1 Balls (Ed) NeoEndogenous = devalued currency, no longer being traded
1 Merv = only to be speculated in by those wishing a permanent negative interest return

MrTweedy (#63) Like the drunk looking for his/her keys under the lamp-post.

The alternative is just too hard/taxing and the posts too hard to fill (see next blog entry).

#49

so the AIG "loss" is not a loss, a write down is quite capable of being a write up say next year.........as my dad used to say you dont lose a penny when your shares go down, you only lose when you sell them!

No. 64 foredeckdave and No. 65 strategycall

I like your humour and satire; it's good stuff.

fingerbob69 # 55

Money has only one economic function: to serve as a medium of exchange. More money does not mean more wealth. Wealth, on the other hand, is what we produce; from capital goods through to consumer goods.

The interest rate is a price just like all other prices. It is determined by time preference; that is to say that as humans, we all like to consume now rather than later, or that we much prefer to have present goods as opposed to future goods.

QE is as you say; money destruction.

I was just out for a drink with some guy who was over from Rand, he's working on some Israel project. He was a bit drunk but he told me that they lost a lot of work after Bush went and things are looking uncertain even for their top strategists. He said the best thing Obama has got going for him now is that all the traditional big players don't know what to do or where to go so they don't know if Obama is even a friend or an enemy. He said even their top scientists are kind of depressed because nothing is working according to models, or even if they are, they can't predict anything.

Funny thing is this Iran stuff. He said he can't believe people are still talking about it. He said that was supposed to have finished about 3 years ago, because nothing happened there. He said Iran has just got a big domestic energy probelm and that's all there is to it.

Anyway, the main takeaway I got from the whole conversation was that nobody knows what's happenign with the dollar. It's all really unstable and depends largely on the political winds in the mid.east.

Kurt

"Money has only one economic function: to serve as a medium of exchange."

Hey Man, for once we agree!!!!!!!!!!

What to make of all that? The two most vociferous groups of comment come from:

1. the Dad's Army platoon, torn between "doomed doomed!" and "don't panic! don't panic!";

and 2. the economists, still fabricating the obscure and highly variable causal sequences that got us in to this mess;

Since I don't fit into either group, I'm looking for some common ground among the rest. This seems to lie in the idea, implicit in the discussion around the G20 summit, that the need for international institutional reform is urgent. There's a lot if disagreement about what that should consist of. I'd focus on the IMF, World Bank and WTO. Amalgamate them, rebuild them from scratch, give them real resources and make them genuinely open and democratic. The argument against them has always been how unbalanced they are and how unwilling states are to cede sovereignty. The sovereignty argument is lost long ago, so it should be a matter of formalising what already happens. Making international economic organisations responsive to real economic concerns is the issue.

This comment was removed because the moderators found it broke the house rules. Explain.

Re: last bunch - good info and good banter.

So if I understand all this "money" stuff correctly, it DID exist, it WAS used/spent by real people in the form of loans etc., but large numbers of these parties apparently defaulted on the agreements and never paid the money leant to them back. Am I right so far?

If that's the case, then "we" actually all spent the money, and are now living through some form of divine punishment for not paying it back on time?
But we DID have it.
So we are all to blame.

Wierd.

No. 72. verymuchso

I agree the stable needs mucking out.

However, seeing as the horse has already fled, we now find ourselves in the situation of having no money to buy another horse.
We can't even borrow the money, as our credit rating is not very good.

No. 74. expatinnetherlands

We have spent our past earnings.
Also, by borrowing, we have spent tomorrow's earnings as well.

Now we have no money to spend, as today's earnings are being used to repay our debts.

To fill this gap in our spending, the government is attempting to borrow huge sums of money (from future tax receipts) and then spend it today.

The trouble is, if the government spends the money on building a road to nowhere, the spending won't help the private sector generate bigger profits, and the government's future tax receipts will be too low to pay back all its borrowing. (Low private sector profits = low tax receipts).

Unfortunately, it's all a bit of a pickle.
It will take 10 years or more for the economy to recover.

No. 74. expatinnetherlands

I forgot to mention that the money was spent on developing "over-capacity". What this means is the money was spent on cruises, the profits of which were then used to build more and bigger cruise liners. Money was spent on flying abroad, the profits of which were used to build more and bigger aircraft. The money was spent on cars, the profits of which were spent on developing new and faster cars. And so on, across a broad range of goods and services throughout the economy.

Unfortunately, no-one wants to buy cars, cruise holidays, or air travel at the moment; because we're spending our earnings on paying back our borrowing. This leaves producers with over-capacity. The producers cut back on their costs by making staff redundant, which then drives down demand for goods and services even more, and causes more bad debts as the redundant can't repay their borrowing.

expatinthenetherlands and MrTweedy:

The IMF reports that the crunch has cost the global economy $30 trillion in wealth. It's gone, never to be recovered. I don't accept that I or any group I belong to had the money and spent it. I live within my means, but I feel the effects of an international financial system over which I have no control and from which I don't benefit. I have savings, but they are reducing in value through no fault of mine.

If I feel the effects, others who haven't got a good job and a secure income (for which I work) must be feeling much worse. Why should we pay for the profligacy of others? We need practical solutions to this, and they have to be global.

No. 78. verymuchso

Unfortunately, over-borrowing did occur during the boom years. The resulting problems can only be paid for from the earnings and profits of viable individuals and businesses.

Too much money was borrowed, for a variety of different reasons, to buy a variety of different assets (not just houses).

The only practical solution is for households, businesses and governments to pay off their debts. Once the debts are paid down to a comfortable level, households and businesses will feel ready to begin spending again.

Like you, not everyone did borrow.
However, seeing as you appear to be "viable", you will end up footing the bill one way or the other, whether you like it or not. This is clearly wrong, but it is the reality of the situation we face.

Sorry to lower the tone for a moment.

We learn that the Nordic Tiger economies are struggling, the Celtic Tiger economy is critically endangered, joining the original Tiger economies of the ASEAN region.

Should we calling for the WWF alongside the IMF?

Shoot that Tiger....

What do you mean "they're endangered"?
Sorry, I didn't think before pulling the trigger.....

Re: Last few (especially MrTweedy)

In the words of Marvin, the paranoid android, "Ï'm so depressed".

Anyone got any Kleenex?

No. 82. expatinnetherlands
No. 78. verymuchso


The article below is worth reading. The author is James Quinn, in America. He is talking about exactly the issues we were debating above.

https://www.marketoracle.co.uk/Article9219.html

Mr. Tweedy, there's a bridge that goes to a place called Brooklyn I'd like to interest you in. I think it is an investment that suits you to a tee. Others have tried but failed to buy it before but there is a special opportunity now. It's a potential gold mine. Just put up a toll booth and see how much money you will make from it. There must be at least 1000000000 cars going over it every day.

No. 84. MarcusAureliusII

That bridge idea looks interesting....

Todays' market bounce has prevented the Dow from falling the 300 points you forecasted for this morning.

However, as I'm sure you know, after 1929 the Dow took 2 years to lose 90% of its value; and the Nikkei has fallen from 39,000 in 1989 to 7,000 today.

Plenty of time yet for more market adjustments.

"The global economic dominoes are starting to fall, even as individual governments still fumble for a solution to the first, financial sector phase of the crunch."

So now we are in a depression in all but name. Why bother with QE? Isn't this just more of the same "Blindness to Reality" as #27 so aptly puts it?

As #79 Mr Tweedy says, all of us viable people are going to have to foot the bill, sinners or not, so why not start now, rather than later?
Why continue to recreate the same problem and call it a solution?

Re: 41.

Apologies to Harriet Harman for incorrectly using her in my "joke" about claiming expenses for her various residences... I did of course mean Jacqui Smith.

Mind you, as politicians go, they are both contributing to the NuLab disaster that is befalling the UK.