What could/would/should central banks have done?

Maybe the policymakers should start admitting that interest rates are at best an inexact blunt instrument in setting monetary policy, especially when rate changes are applied reactively rather than proactively.
The definition of inflation is simple : rising prices. It's never been clear why raising interest rates, which in turn raises prices, should be considered as a weapon to STOP rising prices. The real culprit regarding inflation is excessive government spending. Caledonian Comment

This is the same debate they had in 1721, after the South Sea Bubble.

I fondly remember how Robert Walpole, who had been against the South Sea Company from the beginning, took charge after the crash and eventually sorted out the terrible financial mess.

Those were the days.

I've now computerised Walpole's sophisticated model of the economy, and I'm going to post it for free on the internet; so central bankers around the world can download it and sort out today's economic soup.

Surely it was the well-known global trade imbalances that both were, and remain, the foundations of the credit crunch?
Had not Asian countries bought so many US T-Bonds from US Banks, their vast credit expansion that Alan Greenspan called a "conundrum" would not have led to the irrational flattening of the yield curve that facilitated silly lending policies, and borrowing by weak creditors?
Whether or not you agree that the foundations were the trade surpluses, you might agree that the initial problem of excessive savings was obvious as long ago as 2005 and caused long-term Bond rates to fall. Those rates are not controlled by Central Banks. Nobody controls them directly. The worldwide balance of supply and demand for savings and loans determines them. Which then and now shows surpluses of savings over investment demand. As Bank balance sheets recover, those Bond rates are now falling back to reflect the continuing surplus of savings.
Re-balancing world trade flows to ensure those huge surpluses of savings are dispersed is the task of our international community rather than central banks. Those bankers are merely the crazy (and rich) people who exploit those imbalances.

All pales into insignificance when you consider how banks found a way to avoid the regulation that everyone knew they needed. They are by far the biggest and most powerful interest group in Britain.

We cannot rely solely on regulation to solve this crisis. Fundamental reforms are necessary need to be made without relying on regulation.

Such as we've seen, regulation can easily be co-opted or captured by those we are trying to regulate. We need to find a way to get banking and finance sector interests out of government and ensure financial institutions never become either too big to fail or so big that they improperly influence markets and government.

Central Banks should have ensured that money retained its price.

The price of money collapsed well over a decade ago and Central Banks just stood by and watched and made up fairy stories on how this was a good thing.

Basically rates should have been double what they were to stop the bubble in its tracks - they knew this and did nothing. Just like now they know rates should be in the region of 5 to 6 percent but they dare not put them up.

The purpose of a control mechanism (in this case, interest rates) is to control yet the banks failed to use the one that they had/have - this is gross mismanagement and total absolute incompetence.

With higher rates there should also have been a cap on loan to value and income to loan multiples - but these might have proved unnecessary if money had been correctly priced. Central Bankers (and that means you Mervyn King and the late Eddie George and the MPC as well as the Permanent Secretaries at the Treasury - Nick McPherson and his predecessor Gus O'Donnell) are directly responsible for the incompetent management of the economy and should be sacked - and the educational institutions and academic, so called, economists responsible fro the training at the faulty institutions which claimed to have educated these men should also be re-educated to do something social useful.

What is the point of a central banker when they fail to do even the most obvious and simplest of things? (Particularly when they were fully aware of the developing situation.)

Caledonain Comment suggests: "It's never been clear why raising interest rates, which in turn raises prices, should be considered as a weapon to STOP rising prices".
Here's one explanation:
Rising prices/inflation reflects increased borrowing - by government or others - that raises the supply of bank lending. Because faster growing bank lending = increased money supply (which money may grow faster than the supply of goods & services), that imbalance pushes prices upwards.

By raising interest rates, the propensity to borrow by businesses - the aggregate largest borrowers in the economy - is discouraged. That usually moderates borrowing and thus the rate of increase in the money supply and inflation. [It's worth noting that the UK was a net re-payer of government borrowing over the same period. Which is why Government debt is still only 57.5% of current GDP and much lower than the national debts ratios of the Euroland States, Japan and USA. A large part of recently acquired debts are invested in ownership of LLoyds Group, RBS and Northern Rock].

However, higher interest rates in a national economy can also attract greater inflows of money deposits that may have the effect of pushing up the exchange rate causing a drop in exports and a rise in imports. Those above par interest rates are probably the explanation for the apparent over-valuation of sterling from c 1996 to 2007, and the UK's persistent imbalance of trade over that period. You may recall that the UK was the largest recipient of inward FDI over that period too. So FDI probably also helped push up our exchange rate above a sustainable level.

What is needed is to get back to a sound economic structure as the foundation of the economy which secures the reatail banking system, the building societies, the insurance and pensions companies as was previously the case, so that bubbles can be allowed to burst without bringing catastophe.
The function of central banks is to maintain fiscal balance and currency stabilty within a sound framework. It is not act as gamekeepers to chase speculators like poachers through their thickets of self invented instruments. Speculators, including the modern breed of investment bankers or traders need to know that when their bubbles burst there will be no rescue,their fortunes and futures will vanish from the screens and they will be ruined.
There will be an impact on the wider economy but the effect will be no more than a blip. At present these bankers are bigger than the economies of which they are part and their trading exceeds the GDP of the whole world many times over. This all has to be detached from the real economy and be seen more as a part of the gaming industry.It is all socially useless as Lord Turner says, but it is economically toxic in it present form.
Central bankers do need to wake up to the fact that it is impossible to have persistent infation in the value of unimproved assets, whilst maintaining lower inflation elsewhere, without making the whole economic model unstable.

"they say real interest rates were actually fairly high in the UK, and that didn't stop soaring house prices."
---
House prices aren't governed by interest rates directly.

In general terms total value of house prices = total value of mortgages.

Back in the 70's for a mortgage it was 3 times the main wage-earners wage. With average house prices roughly 3.5 times national average wage.
They then changed it to 3 x main earners + 1 x spouses earnings.
Then 3.5 x main earners + 3.5 x spouses
Then it went from 60% LTV to 100%
Then it went to 3.5 main earners + 3.5 spouse + parents wages
Then self certification 3.5 x whatever you like. With the average house price 10 times national average wage.

At each stage the amount available for mortgages increased which ment house prices increased.

I could afford to buy my parents house when they moved there in the early 80's (£40,000 house at 10% interest rates) but I cant afford to buy a small flat today (£200,000 at 0.5% interest rates).

If you compare sterling against a basket of other major currencies, Brits have had their wages slashed by over 20% during the last 18 months. Most companies would be able to return to "growth" if their staff had a 20% pay cut enforced upon them.

You can thank Gordon and his banker pals for that. They bought inflation-proof assets by the cartload, then sent you the bill.

[Unsuitable/Broken URL removed by Moderator]

The intended Macro-prudential tool is the hard way of doing it.

Asset price bubbles could be general (can't think of an example), in which case action on interest rates is appropriate; or in specific assets where changing economy wide interest rates is a bit like killing mice in the house with a shotgun. The general damge to the rest of the economy may be greater than the bubble damge prevented.

But asset price bubbles depend upon people believing that the asset in question is good collateral at current prices. All the central bank (or FSA, or whatever regulator) has to do is inform the regulated finacial institutions that, given the departure of the asset price from historic relativities, it is now poorer quality collateral; and the regulator will so treat it in examining the adequacy of each bank's risk modelling. That will deflate the specific nascent bubble, if it is a bubble, without damage elsewhere.

Even central banks should look at doing it the easy way.

Without being too blunt all the economic models are rubbish.

They ignore debt.

All the Americans, Poms, Frenchies, Spanards and Aussie companies and banks are carrying a load of toxic debt. This has not been purchased by the various governments.

Plus all the citizens (consumers) have enough debt and are not borrowing. The spare pound dollar peso is being used to retire debt.

The green shoots of growth are government money. No consumers are borrowing any where.

regards

Ossab2, Perth, Australia

Two simple thoughts:
Firstly, it was the indivdual borrowing that caused the poblem, if this is limited to a fixed amount against taxed income then this will regulate the amount of individual borrowing. And encourage people to pay tax if they want to borrow.

Secondly, it is in the interest of all incumbant governments to have borrowing increase from its current level, as this produces an immediate boost to the economy. So governments wanting the econemy to improve over the next year or two (all of them) won't really go for anything that sounds like restricting lending.

Rather pessimistic I know, but the logic is there. Governments don't actually play for long term stability as that won't get them re-elected.

The pickle we are in is that there is too much individual debt and it needs reducing so that we don't get another financial collapse, but the only way for the econemy to pick up is for people to start spending, and they won't do that as they don't have money and need to borrow it. Down ward spiral. ;~}

Central Bankers would easily have realised that the UK housing market was in a bubble in 2006 if they lived the real world-Can anyone earning £20,ooo pa with no deposit afford to buy a house priced £180,000 ?

#6 -- Thanks for the GCSE economics lesson !
But I'm sorry, my point remains. Interest rates are at best a blunt weapon in controlling inflation, not least because in a global economy they sometimes have little or no effect. I can understand how rates can be raised in response to "internal" or "self-inflicted" price rises, caused by say large wage increases or excessive borrowing, but it seems pointless and unfair to raise rates in response to "external" causes, like oil prices going up as a result of greedy intenational speculation. Why should mortgage payments for Joe Public rise because of City spivs ? We need to devise a much more responsive, planned approach to monetary and fiscal policy, starting with cuts in public spending. Caledonian Comment

Lord Turner was being polite: there are far more emotive terms to describe the activities of the banking sector (very few of which would be allowed by the moderator of this blog!).

None of the political parties are prepared to accept just how angry people are about what has happened to them. To borrow a quote "Most companies would be able to return to "growth" if their staff had a 20% pay cut enforced upon them." and the demoralising effect of unemployment goes without saying.

We need a new economy and saving the banking industry (and the stock market for that matter!) in their current form is not the way to go about it. Share-holder value and Profit as the sole measure of a company's value and worth are crude and distorting: we must re-think this!

A lot of people believed for years that the housing market would collapse a good 20-30%. Well even now after the near destruction of our financial system, houses prices have only dropped approx 10% (I have excluded flats as they are a special case).
Unfortunately the days when you could buy a semi on 3 times average salary are long gone, its simple supply and demand ,people are leaving longer, the countries population is growing year on year and house building is not keeping pace.

I would estimate that at least 50% of the home owners have such a small mortgage that you could raise BOE interest rates by a factor of 20 and it would not give them sleepless nights. I would suggest the financial collapse had more to do with a realisation within the industry that no one understood the actual risk to their capital, the collapse of Lehman Brothers confirmed their empires were built of sand.

The regulators were at fault in not understanding the risks being taken and the obvious financial collapse that would occur when the confidence in these risky ventures disappeared. I still believe the only sensible solution is to split the retail from the merchant banking roles and only have taxpayer guarantee for the retail side, raising the capital ratio's could still be insufficient for the next crisis.

If all the management of the economy is vested in a small geeky committee fiddling with tenths of percent interest rates then the british economy is the puppet of events outside our control. There needs to be proper supervision of the economy through direct manipulation of credit, taxation, public expenditure and investment. The crisis has revealed the MPC to be utterly irrelevant.

Blimey. I said that a while ago on this site - either on Robert Peston's blog or this one. Basically that...

The problem I see is bankers lending at a vastly different rate than they are paying to savers, and at a vastly different rate to the base rate.

What that allows them to do is to pass the problem on to their customers. The customer ends up footing the bill by paying excessive differentials, although because each customer tends t be either a lender or a borrower to any given institution it is not obvious at an individual level that that is what's happening.

It is only by taking a step back and looking at the big picure that we see this. And add to that the double whammy of tax increases/spending cuts to fund the loans to the banks and... it sucks. The shareholders, who were the people who actually opted to take the risk for profit, should be the ones to suffer by dint of a protracted period of low share value/return.

So there seems to me to be a strong suspicion of cartel operation about this. You can see why a bank that had had a problem would operate at these lending differentials if they can get away with it (and as we have seen monetary policy currently does nothing to prevent it), but that will only help them if they have customers prepared to pay those rates and... they shouldn't have, because...

There are banks who have had no such problems who should be able to offer interest rate differentials largely as they were before the crash. But that is not happening. Why? The only possible answers I can see is that the less affected institutions are grabbing higher revenue simply because they can, or that there is collusion, cronyism.

The former seems unlikely since the unaffected banks would surely see that they would do better to grab customers from their stricken brethren by offering higher deposit rates or lower lending rates, so the fact that this is not happening looks very much like collusion is the only remaining possibility.

You heard it here first. Again :)

I have to agree with post 14, at the moment the UK is a twin track economy ,the private sector cutting costs and employees terms and conditions, the public sector spending money that does not exist. Although the debate on the banking sector is capturing the media's attention,the re balance of the public sector to a level which the country can actually afford will become the real story for 2010.

A very partial anaysis which revolves around the Bank's monetary responsiblility and asset bubbles. Stephanie, read the BoE Financial Stability Report of July 2006.In the Tripartite Committee, they were responsible for running up the red flag on systemic risks. They spotted the crucial ones, being exploding bank balance sheets, over-use of wholesale funding derived from the exploding use of complex and potentially illiquid structured credit instruments.Transmission dangers between Large Complex Financial Institutions. Its all there. They even anticipated that UK banks could lose their annual profits and have capital eroded on a market reversal.They judged this outcome however very unlikely. What was their recommendaton? Everyone was to re-model for system-wide risk........an inquiry should focus on this judgment and who did what next.

This is an example of taking a simple activity and attributing complex motives.
1. The bank directors did not understand that unsecured loans to unqualified buyers based on interest only with future bubble payments would lead to bank ownership of such loans; or
2. The bank directors understood that the unsecured loans would fail but that great profits could be had through process fees associated with such loans.

If #1, they should be fired and probably close the schools they attended.

If #2: a premeditated criminal activity that should be before the criminal courts.

Currently, they are receiving public funds and assisting in the development of new regulations......terrorist have done much less damage..as history has shown, collapse usually comes from the inside.

Stephanie,

Oh so house prices increasing by 200% over 10 years using money from the far east to stimulate credit was not an obvious "bubble".

Hmmm,, look back through the BoE accounts and you'll see the reliance on short term lending from whole sale lenders increasing year on year by the 100's of billions. Were these figures difficult to read ? Or perhaps the fact that parliament had devorced the control of bank lending from the BoE over the same period of time ? Or the fact that mortgages went from 75% to 125% of value ?

Hmm,, you say difficult to spot - maybe if it wasn't your job, otherwise you would have to be blind and totally brain dead from the neck up. Perhaps this explains where those who are "cared for in the community" work ?

Or perhaps it WAS actually spotted as pointed out by Robert Peston. Goldman Sachs pointed out there was a problem in 2005 to the Fed in USA and in fact had numerous meetings until 2007 to highlight the problem. But still good old UK went on it's merry way cutting the flesh from the bones of the public.

Now I hear they have done the same again.

Isn't it true to say that some, if not most, of the bank bail out and Quantative Easing money has gone into the stock market ? Nice fat financial transactions earning a nice fat commission for our friendly bankers eh ? After all, how do you spend 1 trillion pounds of tax payer money ? Certainly not on tax payers - I wonder how many of these well paid bankers actually pay any tax, I bet most are not even domiciled in this country.

Can someone please, please research where the Quantative Easing and bank bailout money has gone ? It isn't being lent back to the public. I would really like to know where my tax payer money has gone - as would the majority of tax payers. It's only a matter of a Trillion Pounds or so, small change to some but to me that IS a lot of money and far more important than an IMF report.

SLEIGHT OF HAND

"So, we now know more about when you can intervene to prevent future booms and busts, and how much to blame central bankers for the bust we've just had. But the answer to both is: not as much as you might like. And the how of preventing future crises is going to take a lot more work."

We have, across the Liberal-Democracies, a system defined by extreme deregulation (i.e. free-market anarchism/libertarianism) such that the only control left is that of control of money supply (Central Bank policy/base rates and 'printing').

So, when the inevitable bubbles and busts which this amonts to as aan economy (aka business cycle) gets out of hand, some people surreptitiously get 'researchers' to focus on how Central Banks or banks in general might hae tweaked it a bit.

The reality is that you are talking about fiddling with a tiny e.g. 1% of the system, which is still controllable, whilst most of what went wrong had nothing to do with the money supply (look at how little difference pumping billions into banks has made)...

It's the anarchism per se which is the problem. Just because some hostile groups made one Command Economy like that of the USSR (or the fledgling Old Labour system in post-war UK) unstable does not mean it can't be done (note sanctions against Zimbabwe, N Korea etc?). We have computers these days.

See PRC. The biggest Stalinist state in the world (4x that of the entire former USSR). Like the trivia we have to endure about which of the three liberal-democratic parties to choose from. This is also slieght of hand. Just look at how all politicians have major hissy-fits when the BNP is mentioned. That's because it highlights what they are all up to with their false choices for the public.

Casino Bankers decided as a POLICY to buy worthless bundles of US sub prime mortgages which their co-fantasists had rated Triple A.
Pray tell me how they are not culpable?

Had they retained the services of and listened to advice from those senior managers over the age of 50, people who understood Loan to Value, Ability to Repay and the effects of a Recession well maybe we could have avoided the crash.

Of course the speculators would have made a lot less in bonuses, hence the dismissal of the older guys and the Lemming like rush to disaster. Unfortunately, the system doesn't penalise the crazies, they stay rich and millions of ordinary people suffer.

Surely it cannot be beyond the wit of World Finance Ministers to prevent a repeat, or can it?

To be fair to the central bankers it was not their responsibility to call the top of the market. This is a political act which, in a democracy, remains with the executive. The person to call the top of the market in the UK is the Chancellor of the Exchequer who, at the time of the boom, was a certain Gordon Brown.

Only when he created tne Tripartite model in those heady days when things could only get better, he forgot to put himself in charge. Like every true-blue Blairite he created a miasma of competing entities all offering different analyses from which he could pick and choose his own perspective. What he forgot is that smokescreens are not enough: sometimes you actually have to make up your mind and decide something.

What we need to know is what case was presented to the Chancellor, by whom and when. There were enough people at the time reckoning we were in either a boom or a bubble but they never got a hearing because of the noise of the the thundering herd.

I think there is sufficient economics going around for us to understand the boom and the bust. What we seem to lack is the political will to do anything about it other than reinflate the bubble. The issue is more behavioural and cultural with a bit of psychology woven in.

It's very easy to spot a bubble. Asset prices climbing like crazy, people that have no business buying and selling the assets making a bundle, a belief that the party will never end etc.

What not so easy is to spot when it will burst and thus protect against it. The reason for this is that it usually depends on an event to predicate the crash and nobody can predict such an event.

18. At 1:16pm on 23 Sep 2009, chris911t wrote:
Blimey. I said that a while ago on this site - either on Robert Peston's blog or this one. Basically that...

The problem I see is bankers lending at a vastly different rate than they are paying to savers, and at a vastly different rate to the base rate.


----------------------------------------------------------------

Blimey, a fundamental lack of understanding of how a bank's financing works.

The money lent from the government is a very small percentage of the funding that a bank has.
The other funding is via secured lending, inter-bank markets, debentures, mezz debt, any number of sources, including shareholders.
Those funds are lent at a very much higher rate of interest than what the government lends at.

For example, if 20% of a bank's funding is from the BOE (with the rest raised elsewhere), then if the BOE drops its rates by 1% the saving to the bank overall is only 0.2%.
But now you expect them to drop their standard variable rate by the full 1%... does that makes sens to you (or to you Alistair Darling)?
Therefore if the BOE drops its rates and the retail abnk follows suit they'll be worse off by 0.8%

These are fictitious numbers and only used to illustrate a point.
All I'm saying is that the base rate is very, very different from the bank's cost of capital and comparing the base rate to the standard variable rate is a pure waste of time.

Steph, I think there is another aspect of what a central banker can do which the IMF paper does not address. This is to demand capital adequacy. If banks are not allowed to lend more than (say) ten times shareholder funds, it is difficult to see how an asset bubble could happen. The problems with Northern Rock would not have happened if their disastrous business model of borrow and lend had been subject to such a rule. Ditto B&B and A&L. Now here we are again with Lloyds securitising mortgages and we start the merry roundabout turning again. The FSA seems to have learned nothing. They should have been stopping this.

State intervention via fiscal, monetary or whatever policy cannot resolve crises.

It can merely transform and/or delay them.

For example, the end of the US dollar link to gold and the inflation of the 1970's merely transformed the crisis in profitability. The huge amounts of fictitious capital today (despite some loss of value) are a consequence. The transformation of some of this into another form of fictitious capital, i.e. government debt, doesn't resolve the problem.

The state has no solutions to prevent devaluation.

#14. CaledonianComment wrote:

"Interest rates are at best a blunt weapon in controlling inflation...Why should mortgage payments for Joe Public rise because of City spivs"

Because that was the weapon that the Central Bankers had - we left them with only that weapon and they had to use it - they failed and they should now all fall on their swords or be prepared for the very justified wrath of the people.

Mortgage holders were a significant part of the problem, and they had to, and still have to, suffer as house prices were, and are still, far too high for the average wage levels in the economy. The cretinous and craven lenders simply reacted to the market where they could get cheap under priced money so they bid up house prices. This would not have happened if rates had been properly kept higher. Nor would the exotic derivative products have been created. These mortgage 'backed' securities are still floating around and will continue to cause havoc in the financial sector for a couple of decades (my estimate based on historic parallels see below.)

I remind those with a historic bent that the US 1930's mortgage/property collapse took until 1951 to finally unwind and I see little prospect of this one being any quicker to resolve. This can all be fairly placed at the door of Mervyn King and Eddie George, the MPC and the Treasury and the city fawning craven politicians who believed what the 'experts' told them starting with John Major (who is a 'qulaified' banker, by the way) etc. etc.

The first thing to understand is that all modern managemers whether in government or the private sector, whether in banking or otherwise are cut from the same bolt of cloth, think the same way. Their philosophy comes from what I call the California school of life's values. Gimme the most profit in the least time no matter what the risk and do it or else you are fired and I'll get someone else who will. The only reason we have economies is greed, it is a necessary ingredient for the accumulation of wealth. Even squirrels hide acorns for future use. But there is smart greed and stupid greed. Smart greed recognizes that you get the highest profit by taking a long term view and making fundimentally sound choices not putting all your eggs in one basket either. Stupid greed takes one quick look and says there's the gold, go for it. When it turns out to have been an illusion, there is no wherewithall left to look anywhere else for more.

Since the great depression, this demand for the most, the fastest profit come hell or high water has been kept in check by regulators and others who were not from the MBA school of life but were trained elsewhere, such as in law school. When these people wanted to spend like there was no tomorrow on their do gooder plans to give the poor the rewards the rich already had, the MBAs said wait a minute, you will eat into our profits. The danger came because the two groups found a way to do both at the same time, give away the store to the poor and get rich quick on an inverted pyramid of bet upon bet that the scheme would work. And for a while it seemed to. And as is inevitable, as the inverted pyramid became top heavy enough, the entire ediface toppled over and no amount of money could put it back and restore its stability. Those who think it can are still kidding themselves. It will never recover to what it was.

What could central bankers have done to prevent all this from happening? Simple. Gotten out of the banking business and let the whole thing be run by bookkeepers and auditors. They may not know much about Collateralized Morgtage Obligations or Structured Notes and other Derivitaves but they know a pending potential loss due to irresponsibility when they see it. You don't hear the once pervasive phrase "due dilligence" used much anymore. So much for the slogans of self serving bankers. Now all they want to do is get their money and hide under a rock somewhere hoping they aren't discovered for the frauds that they are and shot.

When even Alan Greenspan says "there is something about markets I don't understand" it should give every manager, every one with an MBS reason to pause and think; Is what I have been taught and have become certain is true actually the truth and not merely a long repeated mantra and a mistake? Once the whole world believed the world was flat but that didn't make it any less round.

duvinrouge (#29) "State intervention via fiscal, monetary or whatever policy cannot resolve crises."

Why is Stalinist China doing so well (look up the constitution before you reply, and bear in mind why China distanced itself from the USSR in the 1950s). Then watch the first 8 minutes or so of the BBC drama 'The Last Days of Lehman Brothers'.....

Postscript (#32) Then examine your initial response to reading #32. Writ large, that's why we are in such a mess....

Does anyone really believe that fiddling around with interest rates is a sensible way of managing the economy? Recent experience has shown how feeble it is when you want to stimulate the ecomony, and when you want to control inflation it only works by encouraging an overvalued currency and crippling your manufacturing industry, There can't possibly be a more useless tool.

You get bubbles when there is too much saving going on. In places like China because of persistant trade imbalances, or here at home (and indeed in China) because of the ludicrous policy of relying on vast amounts of personal savings for pensions rather than a state pension paid for by current taxation. Some people save too much, others borrow too much - you can't have the latter without the former. Fix the trade imbalances and sort out a better means of providing pensions.

With regards to the housing market, the real problem is actually the planning regulations. If we relaxed those, so that planning was automatically granted for building *unless* the land has some particular ecological or amenity value, then prices would just reflect the cost of building rather than the maximum amount that can be extorted out of the buyer.

#32

Don't expect Chinese state intervention to rescue world capitalism.

No matter what the rate of exploitation extracted from the Chinese workers is, capital values still need to be devalued for a genuine rate of profit to be established.

duvinrouge (#35) Read what you wrote again. You wrote "State intervention via fiscal, monetary or whatever policy cannot resolve crises."

So long as you (and others) do not take responsibility for what you write and do, we have no hope. It's hopeless. This is my point.

Just to make it mor eobvious, why would a Stalinist state wish to rescue Liberal-Democratic capitalism? They may want to experiment with it and change it mind you. The USSR did this in the 1920s for a period (se the NEP). It was in the 1920s in fact.... before the crash! Tey also 'expelled' their chief anarchist - Leon Trotsky, a great hero of the original Neocons. Look up other anarchists - like the person who wrote 'Atlas Shrugged' - look up her real name.

I apologise for amking a point that I've made before. But, the very belief that the central banks can/could/should solve the problem is a big part of the problem. We should get away from the idea that finding finance in order to invest in paper or price inflation makes wealth. It doesn't, it's merely investing in a bubble. Those who (can) get out before the bubble collapses might make some money at the expense of others, but society as a whole loses.

I'd like us to go back to the Adam Smith school. Wealth is created by producing goods that society needs. The role of finance is to provide the tools and pay the people that produce until production becomes self-sustaining.

Thus, there's no long term profit for the UK in rising house prices. It would have been better to kill the process before it took off.

There's unlikely to be a long term profit from being a 'major financial centre'. Eventually, the countries using our financial services will develop their own. When that happens and we have no manufacturing industry, little agriculture, no raw materials, we'll be left with what?

...yawn...

more dullness:

a) Interest rates imposed by central banks and asset prices are unrelated
b) A quick razz through all the above just serves to remind me... people might be asking what/if/why/how should anything have been done NOW, but all that constitutes is a developing realisation that laissez faire free unregulated market/mayhem is a nonsense and what is needed is CONTROL.

Democracy is a farse because it does not elect the real leaders, as long as things aren't regulated. Yours and my money, our chances of earning, doing anything at all, with any technology, were and (unfortunately) still are in the hands of a small minority of bankers. The politicians need to put these suckers well and truly to bed, get things back under control, and give their democracy (or autocracy as the case may be) some real meaning...

At the present moment it is useless trying to allocate blame to central bankers. They are not the only culprits. The political, financial and business leaders all share part of the responsibility. So do the financial and business watch dogs. Finally, so do we - the general public who said "this can't last" but still carried on its debt laden way.

The real truth is that there are no answers. The 'great' economic models of Monetarism and Keynesianism won't work and there are no serious contenders in the wings. Socially there is no consensus as to how things should be resolved. Every option appears to be countered by an adverse response in an another area. Therefore, we have in effect no option other than to let this whole mess work itself out in some 'naturalistsic' way.

Now we can take some local actions. In the UK the latest flavour is to cut public spending. This may make us feel as though we are taking corrective action and therefore have some slight psychological benefit for some. However, it will merely take us back to a position we were in some time ago rather than moving us into an improved position. In global terms, our cost cutting will have no impact whatsoever!

So hold on, it's going to be bumpy. But you can be assured that nobody is in control!!!!!

No 18 "The shareholders, who were the people who actually opted to take the risk for profit, should be the ones to suffer by dint of a protracted period of low share value/return."

This is not how the free market economy works. Shareholders are supposed to take the *FULL* hit !! If the banks have more debts than they have assets, they they have to go into administration and if they cannot pay off their debts, then they become bankrupt. In the British non-free market economy, the government used to taxpayers' money to bailout the banks instead.

As had been said many, many times before many years ago, there should be a sharp separation between retail or High Street banking and merchant or casino banking. This way, if the risky bets fail, the casino banks can fail *WITHOUT* affecting the High Street banks !!

Two of the four High Street banks are not badly affected by the toxic assets. One of them was effectively bust if the toxic assets are taken into full account and the last one was pushed into that situation by "merging" with one of the most toxic of the banks/building societies !!

Addendum to 18 "There are banks who have had no such problems who should be able to offer interest rate differentials largely as they were before the crash. But that is not happening. Why? The only possible answers I can see is that the less affected institutions are grabbing higher revenue simply because they can, or that there is collusion, cronyism.

The former seems unlikely since the unaffected banks would surely see that they would do better to grab customers from their stricken brethren by offering higher deposit rates or lower lending rates, so the fact that this is not happening looks very much like collusion is the only remaining possibility."

Have you thought of the third and the real reason. The "unaffected" banks are also hit by the new demands for higher capitalisation and reserves because of the actions of the "naughty" banks. In order to comply, they have either to raise extra capital through new share issues and diluting the old shareholdings (i.e. punishing them for other peoples' sins) or make the profits in order to shore up their reserves.

If you need to blame someone, then blame this government for not controlling the "naughty" banks and building societies and then using taxpayers' money to bail them out of their naughtiness !!

DEAF AS A POST

ishkandar (#41) "If you need to blame someone, then blame this government for not controlling the "naughty" banks and building societies and then using taxpayers' money to bail them out of their naughtiness !!"

You do not appear to understand that the essence of Liberal-Democratic politics is not doing that whilst seeming to do something to the naive. Legislation is written and enacted to free the individual (and his/her 'business' aka milking of consumers) from government control, i.e from regulation. This is what the Cold War was about (statism vs free market libertarianism/Trotskyism), and it's what the 'Clash of Civilizations' or 'War on Terror' (statism) is still about.

No 24 "Surely it cannot be beyond the wit of World Finance Ministers to prevent a repeat, or can it?"

All this is not new !! In the early 1990s, many East Asian countries and their banks and companies borrowed heavily in the short term market to spend either on long term projects (e.g. construction or infrastructure projects) or gambling on the rising stock markets.

When their credit ran out, they went into a crunch of massive proportions. Thailand, Indonesia, the Philippines and South Korea had to go to the IMF to bail them out. Malaysia slammed a granite curtain on its currency which still exist to this day.

All their Central banks learnt that lesson well. They started by enforcing stringent regulations on their banks and private companies. They also squirreled away every bit of reserves they could lay their little mitts on. Comes the current crisis, they are far better placed to come out of it because they have the reserves to spend.

Singapore came out of recession first, followed shortly by Hong Kong. China, by spending some of its massive reserve came out next. It was months later before both France and Germany crept out of recession. Meanwhile, Britain, with all the blathering about green shoots, blah, blah, blah, are still mired in recession.

The lessons learnt by those Central Banks in the Far East were not learnt in the West probably because of arrogance and intransigence. *THEY* knew better than those silly chaps in the East !! Well, events have proved otherwise !!

Therefore, it is *NOT* that Central Banks cannot control such crises, it's a matter of having political and economic will to enforce such controls !!

Sorry about all the typos above. I was watching TV while typing and my touch-typing is definitely not up to scratch !! :-(

Real interest rates being 'comparatively high' surely depends on your definition of inflation and CPI does not include cost of housing, I believe.

Actually, interest rates have been lower in the naughties for Mr Bloggs and me than at any time in our adult lives. We did, once, when moving from one location to another say 'could we afford to eat if rates went up from 9% to say 12%?' The answer was yes but our mortgage rate actaully hit 13% for a time

Stephanie:
With your expertise will know, and have written frequently of the critical over-arching political and social context of economic policy.
Looked at within the narrow confines of whether or not to raise interest rates,certainly central bankers are not be blamed. Using the crude instrument of interest rates to choke off house price inflation damaging the 'real' economy has been the great British dilemma for decades.
Since when were these three 'warning signs' indicative of a (house price) crash? The standard test is the ratio of average earnings to average house prices. House prices have always had, to some extent a life of their own detached from the rest of the economy - and lets be clear it is the house price bubble which brought us to this mess - which is why the three warning signs didn't work. Is the central bankers' report clear enough in this separation? (Perhaps because it is a cooperative effort with countries not susceptible to house price mania).

To be fair, few saw a house price crash causing such devastation, (personally I was looking forward to it!) which was due to the 'dicing and splicing' of the vast sub-prime risk madness around the whole financial sector - as you often point out. The last crash in the late eighties was also associated by a recession but involved factors not prevalent this time e.g. general high inflation - thus it seemed likely we could avoid a recession this time.

Hence, the proposed "macro-prudential" policy tool of two sets of policy instruments to achieve two distinct goals, might have some merit - but would it work and is it really needed and would it address the deeper political and social issues beyond the scope of central bank concerns?

In the 1929 stock market crash there was massive borrowing on the back of a growing economy (to purchase stocks rather than houses) and institutional denial of reality -remember when the chairman of the Fed walked across Wall Street, literally with a suitcase of money to buy stocks in a futile effort to keep the bubble inflated. Jonathan Sachs was saying on 'Thought for the Day' that in the 1960's when he was studying economics, the greatest problem believed to be facing society was massive leisure time (a 20 hour week by now) due to increasing mechanisation. (I remember it well). We actually now work longer hours.

One reason is increased consumption (two cars instead of one), but the main reason is the financial tyranny of house price inflation needing, among other things both partners to work full time. I don't know about you, but I want to keep my nice car - but I could have done without the massive mortgage burden over the last 30 years. My wife and I, who are doing the same jobs as when we bought this house could never afford it now. And we might have to give it up - to downsize - in order to help our two daughters with their deposit!!

Shiller's analysis of bubble psychology - the stories we tell each other which act as reinforcement and give validity to a certain type of activity, e.g.`my house is my pension' as a way of explaining and justifying property investment, requires political courage which no government will dare to attempt.

There are means, such as a property tax which could be implemented now before the bubble starts to re-inflate, but do you think it will happen?

State intervention via fiscal and monetary policies merely transforms the expression of the crisis from the devaluation of commodities to the devaluation of money.

The state can delay and transform, but cannot resolve the crisis.

duvinrouge (#47) "The state can delay and transform, but cannot resolve the crisis."

Hidden clause = in free-market (anarchisic) liberal-democracies.

This is what makes so much of modrn political-economics such nonsence. Hidden/tacit clauses (ceteris paribus) are left out, rendering assertions such as yours, meaningless rhetoric.

No 45 "We did, once, when moving from one location to another say 'could we afford to eat if rates went up from 9% to say 12%?' The answer was yes but our mortgage rate actaully hit 13% for a time"

In the Swinging Seventies, when Ol' Bushy-brow Healey went cap-in-hand to the IMF to beg for £6 billion, the interest rate hit 15% !! And that was when top rate tax was 19s 6d in a £ (97.5%) and a 15% Income Investment Surcharge on top of that if the money came from interest or dividends, making it 112.5% in total !!

Just don't tell the G20 ? ? ?

Too late, Stephanie, to tell our own G20 numpties anything.

Up 'til now the blame has been "global" with the occasional singling out of US sub-primes.

Obviously, the first one is no longer believable and the second one is not politically acceptable, especially after the Lockerbie nudge-nudge wink-wink fiasco.

Nice to see, though, that we've found the new Bond-villan to put in the cross hairs:

"Mr Darling's idea is to also have a blacklist of countries that are regulatory havens where the rules and regulations companies have to follow are less onerous.

'People can set up in the Caribbean or South America, the regulators here can't get the sort of information they want and that sort of secrecy leads to instability,' he said."

When I read the first paragraph I thought he was about to hoist the white flag, offer unconditional surrender or blame it all on ten years of his predecessor.

When I read the second paragraph I had to pick myself up off the floor, in fits of laughter, at the thought of all those London bankers in their red braces flying off to Rio to set up shop.

I do hope Gordon can arrange a bilateral meeting with the Brazilian president to explain that the whole problem is HIS ! !

No 46 "The last crash in the late eighties was also associated by a recession but involved factors not prevalent this time e.g. general high inflation - thus it seemed likely we could avoid a recession this time."

Maybe, maybe not !! In the Eighties, China had just barely started on the road to "Socialism with a Chinese face". It couldn't even satisfy it's own internal demand for good, let alone for exports. Now, China is a major economic player and a medium to high tech manufacturer to the world. Since they export much of Britain's consumer imports, Britain has simply exported the inflation to China.

Increasing protectionism will be accompanied by a geometric increase in inflation and that's when the double whammy - inflation and the falling currency - will hit hardest !! It happened before and may happen again. 50 years ago, the £ was US$4 and what is it now - $1.50 of a greatly weakened US$ !!

Chuck in double digit inflation and the Ghost of (the Seventies) Stagflation Past will rise again !! "Beeewaaare, Ebenezer Scrooge !!"

"Jonathan Sachs was saying on 'Thought for the Day' that in the 1960's when he was studying economics, the greatest problem believed to be facing society was massive leisure time (a 20 hour week by now) due to increasing mechanisation. (I remember it well)."

Surely, that was a tongue-in-cheek statement !! I remember it well, too, having lived through it. We had plenty of leisure time, shivering in the darkness because there was no gas for heating and no electricity for the lights !! The country was in chaos due to the riots and wildcat strikes everywhere and offices were opened 3 days a week, hence the Three-Day Week (21 hour a week)!! It had nothing whatsoever with mechanisation !!

"but I could have done without the massive mortgage burden over the last 30 years."

My mortgage was for 70% of the property price and for 30 years but it was paid off in 20 !! As the saying goes - I's a free man !!

"Shiller's analysis of bubble psychology - the stories we tell each other which act as reinforcement and give validity to a certain type of activity, e.g.`my house is my pension' as a way of explaining and justifying property investment, requires political courage which no government will dare to attempt."

How does that square with the fact that all the *REAL* techies of the late 80s and early 90s warned that the tech companies were *NOT* worth what was demanded but the Dot.com bubble grew and, subsequently, burst anyway !! It is not the stories that we tell each other but the stories told by glib-tongued jumped-up salesmen to the greedy, credulous masses that keeps producing bubbles and/or Ponzi schemes !!

The property price bubble was warned of as far back as 2002 but did any of the masses take heed ?? Oh, NO !! Instead, they all dived in to "cash in on the hidden value" of their property and blew the lot on riotous living !! Now they (and we) are paying the price for that !!

"There are means, such as a property tax which could be implemented now before the bubble starts to re-inflate, but do you think it will happen?"

Implementing such taxes are the last resort of an incompetent government !! They could mandated that mortgages *CANNOT* exceed 3x one salary plus 1x the second and that would have killed off or, at the very worst, put serious dampers on the property price bubble. Instead Our (then) Glorious Chancellor rubbed his hands in glee at the amount of taxes he's raking in !! Now Our (current) Glorious Leader and (then) Glorious Chancellor is denying all responsibility for the bubble, blaming, instead, the American sub-prime mortgage fiasco for the crisis !!

Coulda ?? Shoulda ?? Woulda ?? Our Glorious Leader "Coulda" and "Shoulda" done the right thing years ago but "Woulda" he do it ?? Not on your Nelly so long as the taxes were pouring in !! So don't blame the BoE for the government's failure !!

I do think that this analysis of the crisis is very "City" friendly.
It was there far all to see, all the signs of a market out of control were there, house prices running wild, huge amounts of speculation on the energy markets with "cheap" money to fund it, especially the madness of smaller companies trying to take over larger ones, Porsche and Schaeffler in Germany as prime examples.

The regulators were looking the other way for too long, saying that doing little or nothing is right is questionable at the very least.
The simple fact of the matter is that several finance products are subject to either no regulation at all or at best very little is madness, these products have to stop these products being offered or remove the possibility to initiate such transactions.

Even the most ordinary of folk can see this coming, so people that spend their entire lives immersed in this world have a far greater responsibility to act not just pretend the events just happened over night and hold up their hands.

ishkandar (#49) "In the Swinging Seventies, when Ol' Bushy-brow Healey went cap-in-hand to the IMF to beg for £6 billion, the interest rate hit 15% !!"

And then in, the anarchistic/antichrist 80s, Keith Joseph and his Neocon friends had the gormless British Public buying shares in The Means of Production, Communication and Exchange etc which they already owned!! Just as they did the Russian in the 90s.

Capice?

#51 quite

It doesn't take much mental arithmetic to work out the lost revenue from stamp duty when the number of sales halved

Then of course there's the lost revenue from taxing the incomes of estate agents and mortgage brokers and 'bank profits' and VAT on sales of new washing machines or curtains or carpet or new bathrooms.

Vast amounts of government expenditure was dependent on an active housing market

And then of course there was the nonsense of the fees paid for each 'new mortgage' as two or three deals ended - this pretty much paid for the administration of outfits like Northern Rock etc and some profit beyond -
say 1 million mortgages a year @ 1000 per shot - there's a billion for you.

#48

The Chinese state being state capitalist can mobilise production without the direct constraint of the profit rate, I accept that, and agree it's an important point to get across.

But because China is part of the capitalist world it is dependent upon the world market.

If the rest of the world are not buying as much as they were it doesn't mean that the Chinese state can easily substitute domestic demand to take up the slack, no matter how totalitarian their power may seem.

A lower trade surplus means less fictitious capital (e.g. US Treasury bonds) can be bought by the Chinese and recycled through the credit system.

The capitalist crisis is a threat to the Chinese Communist party's dictatorship as well as an opportunity to extend their power.

These shifts in power relations increase the risk of war.

Don't people have very short memories? I see lots of people going on about the "last crash" being in the eighties, what about the dotcom bubble at the beginning of the decade, exactly the same signs of the markets completely loosing touch with reality, pricing companies that only had "ideas" and no real assets at 10-15 times that of real highly-successful manufacturers, phone companies etc etc.

This is the exact same, "hedge funds" selling ideas and nobody actually knowing what it was that they were trading.

This form of "virtual trading" has to be dampened right down. There may be cases when this mechanism can be used to everyone's benefit, but this form of selling has clearly gotten out of control and those making such deals have to be able to demonstrate the "real market value" of any share packages.

du vin rouge (#55) "The Chinese state being state capitalist can mobilise production without the direct constraint of the profit rate, I accept that, and agree it's an important point to get across."

An even more important point to get across is that the term 'state capitalist' was used by Trotskyites like Tony Cliff (look up his real name, and Ted Grant's whilst you are at it) in a pejorative sense to criticise Stalinism or, if you like, Old Labour. When the means of production, exchange and communication etc are owned by the people (state) it is not capitalism at all. Capitalism is when the means of production, etc are in private ownership. A 'capitalist' is just someone who earns their living not from their work/labour (from farm labourers to doctors/university professors), but out of capital - loans of money and 'earning' of interest etc.

What you have seen in Liberal-Democracies for decades is the erosion of the state, the welfare state. It is why Old Labour doesn't exist. New Labour is pretty much like the original Bolsheviks, i.e state busting anarchists. They serve the interests of capitalists. Can you see that now?

No 55 "If the rest of the world are not buying as much as they were it doesn't mean that the Chinese state can easily substitute domestic demand to take up the slack, no matter how totalitarian their power may seem."

Firstly, define who the "rest of the world" are that are not buying as much as they were !! Chinese trade with Latin America rose enormously in the last 5 years. So had their trade with Africa. Their trade with India and South East Asia doubled. And, with a population of 1.3 billion, if every citizen bought just 1 spoon, that will keep their spoon factories going for years !!

"These shifts in power relations increase the risk of war."

Only for imperialists/expansionists who insist on invading anyone who disagrees with them or send out carrier battlegroups to bully and/or intimidate smaller nations. Truly peaceful nations have no need for "projections of power" by sending out carrier battlegroups or siting missiles on foreign soil !!

When was the last time the Swiss did that ?? Even the Swiss Guards are a largely ceremonial troop "for the defence of the Pope and the Vatican" !!

No 57 "This form of "virtual trading" has to be dampened right down. There may be cases when this mechanism can be used to everyone's benefit, but this form of selling has clearly gotten out of control and those making such deals have to be able to demonstrate the "real market value" of any share packages."

There's no law against casinos and bookies just as there's no law against such "virtual trading" !! The problems arise when these "traders" are bailed out when they lose. When was the last time this government bailed out a casino or a bookie or members of Gamblers Anonymous ??

What is needed is a sharp division between proper retail or High Street banking and casino banking !!

BTW, how do you calculate the "real market value" of interest rate swaps or any insurance policy, for that matter ??

#57

This is why you are not a socialist/communist.

Lenin demonstrated an understanding of the nature of the state in "The State and Revolution".

A state is different to government.
The state essentially enforces economic classes with violence (or at least the threat of).
China has a class controlling capital (and so labour) because it is a one-party dictatorship.
The people do not control the means of production.
They are not allowed to want/do anything that goes against the party line.
The party knows what's best!

No matter how well intentioned the individual communists may be, they cannot give power to the people through the councils (soviets, or whatever they get called), because in a capitalist world, (free-market)capitalist forces, e.g. the CIA, will cause a counter-coup (I don't say counter-revolution), so the multi-nationals can sieze the means of production.

The question is if free-market capitalism were to collapse would we end up with a world communist party dictatorship or communism (i.e. people with the people not the party)?

So a crash is coming. So raise interest rates.

But that is what Japan did thus precipitating the 'Lost Decade' and Greenspin did to precipitate the sub prime crash.

So a crash is coming. So lower interest rates.

But that is to restore the hyperinflation in paper assets which low interest rates were driving in Japan before the crash of 1990 and were driving the absurd stock and house inflations here and in the US immediately before this crash. And putting US capital at a disadvantage wrt to China, India and Japamn... and the sub-prime poor who were getting something for nothing.



There is an endless literature in economics on how every conceivable monetary strategy and policy by the authoritiues can be circumvented if the private sector so wishes.


Credit squeezes are policy instruments as Germany discovered in the inter war period with the withdrawal of credit to her, and as the bin people of Leeds etc are discovering as credit crunch unemployment shifts returns from labour to capital.


Private ownership of finnace capital is the problem. Its elimination the solution.

The journey we must take is a simple one - from Hayek and Arrow-Hahn and neo classical economics back to Keynes (or discovering him) and then on to Marx.

A test for you to decide where you are on the journey. Does governement spending drive out private investment or does private demand creation via asset bubbles drive out government welfare spending?
The latter of course, via the piece of ideology that sees private affluence driven by asset inflation a good thing, and government creating resources for the many a bad thing.

and perhaps we should ask the Indian and Canadian central banks

duvinrouge (#60) "The party knows what's best!"

That's right. For 'The Party' think Civil Service. Every good govrenment should have one. Hence Mandarins. It needs to be staffed by good people too, usually recruited after passing exams. It needs to have an Honour Code too. We once had one. If you want to topple the state, fill it with incompetents, introduce a bonus culture, introduve Market-Testing etc

Sound familiar?

You need to grow up. Lenin and chms were sent into Russia to get it out of WWI. It wa Stalin who sorted it out by basically getting rid of the anarchists and establishing Old Labour principles along Webbian/Fabian lines.

You're clearly not reading what I am posting carefully enough, you just wnat to argue like so many others. Please don't cite any more of the infantile rubbish which the 'revolutionaries' produced, we see all that from the Conservatives, Lib-Dems and New Labour who have been ruining this country with such clap-trap on behalf of their backers for decades.

I've been trying to show you something worth following, but never mind.

Stephanie, you say "So, we now know more about when you can intervene to prevent future booms and busts"

That presupposes that those at the helm would actually recognise the warning signs. Our current Prime Minister once portrayed himself s the world expert on this topic. If he couldn't recognise a boom of this magnitude, with its counterpart bust just around the corner, it must throw into doubt anything Labour has to say on this topic.

Much of the economy has been built on a house of cards. It can last for a while, but we're in trouble if the wind starts to blow.

60. At 2:17pm on 24 Sep 2009, duvinrouge

It's refreshing to see someone correcting the mis-conceptions of Communism without it being me for once.

The problem Jaded Jean has is I don't think she fully understands what Socialism or Communism really are. The idea that there is a Trotskyite conspiracy which has lasted throughout the ages and has now adapted to Neo-conservatism in the US belongs in a Dan Brown novel.

The mis-conception and paranoia around the subject can clearly be seen in the US where they couldn't decide if Obama was a 'communist' or a 'Facist' for trying to bring in health reforms. What I think they were correct about is that the health reforms are another way of moving public sector taxes directly to the private sector (as our own NHS demonstrates with the procurement of contracts for repairs, new IT systems, drugs etc.)

The confusion is not co-incidental however, all democratic parties position themselves between left and right of the centre. The free market produces opportunities for nationalisation (like the banks collapsing) - but this is nothing to do with Socialism - as you rightly pointed out the Government pretending to represent the people takes control of the bank - not the people at all.

As the Government eventually sells this all back to the private sector at a cut down rate - the value within these industries are passed between Government and Private sector companies - each time extracting further value which require bigger and bigger support from the worker (either through taxation when it's nationalised - or through reduced pay in the private sector)

The debate between left and right goes on - but the conclusion we all want is the same - no state control. However what we're actually getting is a Government / Private sector partnership which is no better than the Communist party is in China, Vietnam or even 1900's USSR.

It's very hard to explain this as most people revert to the 'Stalin Gulags' defence which has nothing to do with Communism or Socialism but is in fact a plain and simple Dictatorship.

There's no law against casinos and bookies just as there's no law against such "virtual trading" !! The problems arise when these "traders" are bailed out when they lose. When was the last time this government bailed out a casino or a bookie or members of Gamblers Anonymous
**************** *********************
I disagree there, the option you suggest is "cutting one's nose off to spite one's face". This let them fall by the wayside attitude is what caused a most of the industrial base in the UK to die off, that and the crippling taxation.

The alternative is to set up effective regulation of finance products and markets so that this thing cannot happen in the future so that "saving the wreckless" is no longer necessary.

63. At 3:13pm on 24 Sep 2009, JadedJean wrote:

"You're clearly not reading what I am posting carefully enough, you just wnat to argue like so many others. "

At the risk of making you paranoid - don't you think it could be your un-sound facts and theories that makes so many others argue with you?

I do read your posts carefully and when I strip out all the nonsense your whole argument revolves around a Trotskyite conspiracy which has run from 1917 until today and moved from extreme left to extreme right.

Maybe you're getting confused with Trotsky's 'permanent revoution' and the need for international communism with the actions of the current regimes who seem to be cornering world power for themselves.

As duvinrouge pointed out - this is not power held by the people and therefore is nothing to do with Communism.

What you seem to be experiencing is your upbringing in the US which has led you expect a 'Red Conspiracy' of some description.

In order to defend you from that conspiracy you hand over all your civil rights and liberty to the Government who happily spend your tax money on waging wars.

#63 You communicate clearly what an abhorent regime Stalin represented.

64. At 3:21pm on 24 Sep 2009, DistantTraveller wrote:

"That presupposes that those at the helm would actually recognise the warning signs. Our current Prime Minister once portrayed himself s the world expert on this topic. If he couldn't recognise a boom of this magnitude, with its counterpart bust just around the corner, it must throw into doubt anything Labour has to say on this topic."


....yeah - but to be fair can you name any prime minister in history who has spotted it coming (and would we know if they did)?

#65 How right you are!

66. At 4:03pm on 24 Sep 2009, englandcomeon wrote:

"The alternative is to set up effective regulation of finance products and markets so that this thing cannot happen in the future so that "saving the wreckless" is no longer necessary."

...and how much do you think that would cost - and who pays for it?

You simply advance the bailout money to the everyday running of the regulator. The legal advice needed would be astronomical as the banks tried every trick in the book to subvert the regulation in order to get a march on it's competitors (it's called competition).

writingsonthewall (#65) The problem Jaded Jean has is I don't think she fully understands what Socialism or Communism really are. The idea that there is a Trotskyite conspiracy which has lasted throughout the ages and has now adapted to Neo-conservatism in the US belongs in a Dan Brown novel.

Thatcherism/Reaganism/Blairism/Bushism is Trotskyism. It is anti-statism. It is pro-free market anarchism. This is why Trotsky was expelled from the USSR and why the Bolsheviks were purged. They were like Militant Tendency. It led to WWII.....

#69 writingsonthewall

"....yeah - but to be fair can you name any prime minister in history who has spotted it coming (and would we know if they did)?"

I agree it is difficult to predict the future, but all too often the warning signs are ignored. It turns out that much of the economy relied imaginary money. It can all hold together for a while until someone notices there is something wrong, which triggers a run on the bank.

I'm not advocating going back the days of bartering goats and sheep, but 'money' needs to be based on something real.

The particular problem for Gordon Brown is the magnitude of the bubble which has now burst. The fact that he told us he had consigned the bad old days of 'boom and bust' to the wastepaper basket of history only serves to remind us he didn't know what he was talking about.

No 60 "The state essentially enforces economic classes with violence (or at least the threat of).
China has a class controlling capital (and so labour) because it is a one-party dictatorship.
The people do not control the means of production.
They are not allowed to want/do anything that goes against the party line.
The party knows what's best!"

WOW !! Where were you these last 50 years ?? You sound like you just stepped out of a 1950s stasis machine !! Perhaps you should read up more about China and capitalism today before you post more such '50s views.

No 62 "and perhaps we should ask the Indian and Canadian central banks"

The Indians say, "Me trade 'um buffalo pelts" and the Canadians say,"Sure, I'll give you 10 gallons of maple syrup for 'em !!" :-)

No 66 "The alternative is to set up effective regulation of finance products and markets so that this thing cannot happen in the future so that "saving the wreckless" is no longer necessary."

Sounds good but practically impossible. In the first case, derivatives and other financial products spring up faster than regulators can regulate. Shutting the barn door will not get the horse back into the barn.

Secondly, the regulators are usually the least knowledgeable people around vis-a-vis financial products. If they were any good, they'll be out creating more new financial products. Therefore, by the time the regulators can think up the regulations to apply to one set of derivatives, the derivative creators will be 2-3 generations down the line !!

The only other way is to issue a blanket ban on all derivatives. This will mean that farmers cannot sell their crops before they are harvested and go bust from a lack of funds. Airlines cannot hedge the future cost of their fuel and go bust with massive losses - see XL budget airline.

Therefore, it's all easier said than done !!

No 69 "....yeah - but to be fair can you name any prime minister in history who has spotted it coming (and would we know if they did)?"

To be even fairer, none of them made grandiose pronouncements that they have solved the problem(s) and that *THERE WILL BE NO MORE BOOMS OR BUSTS* !! Wasn't there a saying about short-barreled cannons and self-elevation ??

No 71 "You simply advance the bailout money to the everyday running of the regulator. The legal advice needed would be astronomical as the banks tried every trick in the book to subvert the regulation in order to get a march on it's competitors (it's called competition)."

Actually they don't even bother because the regulators are still running around in circles about three products back !! :-)

#73 DistantTraveller

Can you send me a link please to where Brown says he has consigned boom and bust to the waste paper basket of history? I probably missed it.

https://www.guardian.co.uk/politics/2008/sep/11/gordonbrown.economy

I do think that is a good thing that the man has been pushing anti-boom/bust pro-regulation, and in all probability it's one reason why he is in the position of PM putting ideas into practice. I would suspect that banging that drum for the last ten years has had little effect because of inertia, and it is only now in the light of the crisis that such rhetoric is starting to make sense. It would be a shame to shoot the messenger I think.

No 73 "It turns out that much of the economy relied imaginary money. It can all hold together for a while until someone notices there is something wrong, which triggers a run on the bank."

I think a certain Mr. Charles Ponzi might have something to say about that !! And a certain Mr. Phineas Taylor Barnum as well !! :-)

https://news.bbc.co.uk/1/hi/england/staffordshire/8272058.stm

Could this have been someone's pension fund that was forgotten ??

BTW, did Terry Herbert, the discoverer, use an Anglo-Saxon word when he made his discovery ?? Bet he did !! :-)

#79 FrankSz

"Can you send me a link please to where Brown says he has consigned boom and bust to the waste paper basket of history? I probably missed it."

Brown has repeated his message of 'no more boom or bust' many times. There are even some amusing clips on a well known video website - possibly not suitable for linking directly here, but no doubt you can find them!

#82

Well, sorry, the best I could find was:

"Mr Brown said: "I will not allow house prices to get out of control and put at risk the sustainability of the future." He said he was determined that the UK should not return to the "instability, speculation and negative equity" of the 1980s and 1990s."

and this analysis:

https://www.channel4.com/news/articles/politics/domestic_politics/factcheck+no+more+boom+and+bust/2564157


This repetitive mantra of ending boom/bust cycles sounds to me, as a non partisan, as exactly what is needed.

79 FrankSz

To help out the understanding may I add that Gordon Brown said when he was Chancellor of the Exchequer that the Labour government had `ended Tory boom and bust'. He never said he had ended all boom and bust. It is much the same as Mrs T when people say she said there was no such thing as society: one has to read the entire comment and understand the context.

The issue we have now is one of context. Gordon Brown was in charge of a Treasury team that failed to see the consequences of the banks creating even more money from out of even more debt. We can all conceptualise as to the economic criteria which was in play then and ask why nobody queried the apparent good times. Could the man have called the top of the market? Should he have called the top of the market? What would have happened if he had? Universal condemnation, more than likely! He was damned if he did and damned if he didn't. In my view this was just tough, politics is like that and so is life: he failed to make the call and thus destroyed any integrity that he retained.

Now he is running about like a good soldier trying to pull the international economy back together. Not a bad tactical choice under the circumstances but where does it leave the man on the dole? Unfortunately, still on the dole. In a democracy, this is where it is at.

Sorry but Henry Kissinger can give the man as many glass images as he likes but after wrecking the UK pensions industry, wrecking the UK manufacturing base, entering into a conspiracy of light regulation with the City which contributed to the biggest bust in eighty years, using regressive taxation strategies within the UK that left the poor paying higher rates of tax than the rich, one is left asking is there anything this guy actually understands?

In all this I see little of the Presbyterian principals that Brown says he inherited from his father. All I can see is the standard academic strategy in which all backsides are polished and pleased. It is the lack of basic practical economic knowledge which exercises me.

Or maybe it is actually the continuation of a neo-Trotskyite conspiracy that evolved following the suppression of the Kronstadt Soviet in 1921. Nice to see WOTW coming across JJ: an irreristable force meets and immoveable object!

https://news.bbc.co.uk/1/hi/business/8272858.stm

So, now comes the truth. They were bust and no amount of spin or jingoism will make that any different. They played with fire when they gambled with their depositors' money and now they are burnt. So who was supposed to regulate them and how ?? Still don't see anything about HSBC or Barclays going down the same road !!

and how much do you think that would cost - and who pays for it?
+++++++++++++++++++*********************

That I'm afraid has to be priced into a trading tax where any movement has a surcharge placed upon it, what you suggest is to allow all to carry on as before and bail out the money grabbing casino players.
How many more crashes of this magnitude can European governments (tax payers) pay for?
It can and will not carry on like that in the future, a small group of people (bankers) will, with any luck, not be holding a loaded gun at the heads of govt in future.

Gordon Brown's 'No return to boom and bust'

https://www.youtube.com/watch?v=FUY9ewD1Jls

stanilic (#84) "Or maybe it is actually the continuation of a neo-Trotskyite conspiracy"

There's nothing 'conspiratorial' about this. The original trouble-makers were sent into Russia to topple the Tsarist state. It didn't matter what they thought they were doing (they were very young), they just served a subversive purpose on behalf of Germany at the end of WWI. The same was done in the 60-00s because of the rise of statism/fear of the USSR (it's scientific successes).

It's always just a means to the same end - i.e. anti-statism/pro free-market. Surely you can see this? Politically, Trotskyites are just adolescent dreamers like cognitivists. They're all just muddle headed wreckers, i.e trouble-makers. Good for bankers and other predators though. ;-)

Stalin saw that, so did Hitler, and much of the rest of Europe.

The USA became a natural breeding ground for anarchism after the exodus from the Pale at the beginning of the C20th (thought it's not the first time, there's a long history). History is repeating itself. :-(

There's something odd about this anarchistic group's behaviour I fear: a higher prevalence of Axis II Cluster B PDs as a consequence of endogamy? NCAH (CYP21, C6p21) related - feminsised brains?

#81 ishkandar

LOL!

I bet China will be interested in this find...they'll do anything to dump a few more US dollar$

Some arithmetic that seems to have been forgotten...

We are told that we have so far, as a World, spent (invested???) 11 trillion dollars (as a down payment?) to prevent immediate collapse.

What really concerns me is the very much larger figure of perhaps 600 trillion of exotic derivative products built upon the non performing assets of the housing market and other markets. I find it hard to credit that we as a World could possibly consider that only 1.8 percent of these duff assets (synthetic financial 'products'[!!!]) need rescuing. My logic goes like this.

If only say 2 percent of something is rotten, then how come there is a problem? But we know there is a problem so there must really be far more than 2 percent of a problem. As I said, if 98 percent of the asset base is OK, what is the problem? So there must really be a far far larger percentage of the 'asset base' that is non performing (or toxic).

How much? I think it is a reasonable estimate for there to have been a problem (apart from the collapse of confidence) there must be 10 to 15 percent just on the basis of arithmetic for there to be a problem so that implies a further bail out requirement of between 15 and 30 trillion, globally. (Or in terms of UK GDP per Capita, assuming the present division of costs some 150,000 to 225,000 dollars per person. - the present figure is about 30,000 dollars per UK subject - incidentally about the UK's GDP per capita . To put it another way the bailouts will cost use five to seven and a half years of our total income!!!!)

There are problems with the data I have used - the 600 tn figure was the one widely bandied around earlier in the year/late last year - but my argument remains much the same even if the figure is out by 50 per cent.

Some bright spark said the problems are over and we have done enough - my suspicion is that that argument is not well founded, just from the imperatives of the arithmetic.

Now just one more point: About the equivalence of bail-outs no matter what mechanism is used to effect the bail out.

Let us face facts - state(taxpayer) funds are spent in all circumstances, be it printing money or 'investing' or the gross underpricing of financial assets (i.e insanely low interest rates) - all of these strategies have the same effect they transfer wealth from the poor old taxpayer to the bloated banker. (Sorry a bit pejorative - but I do get heartily fed up with bankers and regulators telling us that they know what they are doing whilst they need to continue to steal the wealth from the poor!)

There is no way to avoid the arithmetic consequences of the excess of the late two decades and the resulting burst bubble - we are well and truly b......d and it will take decades to 'recover' not a few months! I also believe that the pain of the reconstruction should fall most severely on those best able to pay! - but this is my moral and ethical choice.)

A STEP TOO FAR?

Terrorist threat to Sacha Baron Cohen over Brüno ridicule

https://entertainment.timesonline.co.uk/tol/arts_and_entertainment/film/article6729022.ece

#83 FrankSz

"This repetitive mantra of ending boom/bust cycles sounds to me, as a non partisan, as exactly what is needed"

Well, he did indeed say it many it many times! Unfortunately saying it and delivering it are two different things!

I see BankSlickerminustheR has given a useful link at #87

#84 stalinic

You write "when he was Chancellor of the Exchequer that the Labour government had 'ended Tory boom and bust'. He never said he had ended all boom and bust. "

No, this isn't how it happened! Brown did indeed say "no more boom and bust" - many times. Honest!!!! He only changed his story to 'no more Tory boom and bust' when he went, er, bust!

Check the video clip at #87

#88 JadedJean

You say "Good for bankers and other predators though. ;-)

Stalin saw that, so did Hitler, and much of the rest of Europe."

So, are you saying Hitler got it right?

On a previous blog from Stephanie (Gotcha) you gave two links to pages full of virulently anti Jewish statements. You also linked to another page regarding Black IQ.

There isn't really much point arguing with you; you only say anyone who disagrees with you doesn't understand.

But actually, your comments do seem to match a familiar pattern.

Just listened to Michael Heseltine on Newsnight tonight...
to paraphrase his comments..."the UK is deluded if it thinks it has a 'special relationship' with the US...the ONLY country it has a 'special relationship' with, is Israel".

correction to #94 Michael Heseltine made the comments on Question Time

"But even that isn't universally true - they say real interest rates were actually fairly high in the UK, and that didn't stop soaring house prices. There's little evidence that low policy rates actually drove the boom."

That's not strictly speaking true, now Steffers, especially on a global (US) scale.



The ultra loose fed funds rate targeted by Greenspan for far too long after the bursting of the DoCoMo bubble resulted in a huge expansion in the money supply which fed into the credit system.

This was because, as we now know, much of this credit creation was being financed in wholesale markets at the short end of the yield curve - the part most responsive to the fed funds target, only to be lent out for far longer durations - as US mortgages.

The transmission mechanism for keeping long end interest rates so low was the heavy purchase by China of longer dated maturity dollar assets, driven by their foreign reserve strategy.

Why did China have so much cash to fling at these assets? Well two reasons.

Firstly China pursued a somewhat mercantilist strategy to maximise its export growth share in manufactured goods. This resulted in a large current account surplus which had to be invested somewhere. However, we cannot exclusively blame the Chinese Government here. The Chinese people are notoriously frugal savers. This is a "sticky" mindset. You cannot change it overnight with a policy announcement. Real change would, and still does, need a generational shift in cultural attitudes towards consumption and debt, if that is even possible. If I had to choose a mindset to attach pejorative connotations to in blame for this imbalance, I'd choose American Greed over Chinese Thrift every day of the week.

Secondly, Greenspan's 3 year experiment in 1% interest rates, by virtue of the USA's position as ~35% of the world economy, hammered down policy rates across much of the industrialised world. This was what primarily drove the global money supply and commensurate credit expansion to such hugely inflated levels. Much of this liquidity ended up in Chinese hands, as a surplus nation, and was recycled back into the aforementioned long-dated US assets.

These two factors created a self-reinforcing feedback cycle. The liquidity created by the Fed created growth for Chinese exports which in turn raised the dollar holdings of China, furthger depressing long-term interest rates which perpetuated the credit expansion, which fed back into Chinese exports.... And so on.

So, next time you write off the link between low policy rates in the aftermath of DoCoMo/9.11 and the boom and bust which followed, try looking a little harder.

Thanks.

#96 MaverickGoose123,

An interesting analysis. However, you may have to re-analyse your perspective.

That your scenario holds true from a US perspective may be true. Therein lies the prolem. Somewhere, probably before 9.11, the World changed. What had previously held true that US actions set the pattern for the rest of the World actually became a myth. The over-riding strength of the US economy was the basis of that myth. Hence Greenspan's policy of 1% rates which appeared sustainable if you acceped "too big to fail" was in fact a lie. The US economy was already shot through by that time and it was trading upon past glories - biggest had turned out not to be best.

If you want an example of the same thing look at the British Empire of the 1920/30s. Geographically it still looked very impressive - militarilly and economically strong. That illusion was quickly shattered by 1939.

You also can't lay all of the blame on China. The Western economies did not go to China with one arm up their backs. Sure China took advantage of Western business seeking short-term advantages of low costs whilst destroying their long-term economic strength. But that was a reactive Chinese policy not a proactive one - nobody forced us to do it! So what were they supposed to do with all of the cash that flowed in?

So next time yo want to offer a US based view of low policy rates try looking a little wider and deeper.

No 86 "That I'm afraid has to be priced into a trading tax where any movement has a surcharge placed upon it, what you suggest is to allow all to carry on as before and bail out the money grabbing casino players."

On the contrary, what I suggest is *NOT* to bail out "the money grabbing casino players" !! They made their bets; they take the hits !!

"It can and will not carry on like that in the future, a small group of people (bankers) will, with any luck, not be holding a loaded gun at the heads of govt in future."

Absolutely true !! Neither HSBC nor Barclays held any loaded guns !! It was RBS, HBOS, Northern Sponge, oops sorry, I mean Northern Rock, etc that held the loaded gun and got bailed out !!

Some of their shareholders even had the temerity to ask for the *FULL* value of their shares pre-bust. Very much like a gambler asking the casino to give him back all his losses !!

If this situation is not to be repeated again and again, in the future, then the retail banking *MUST* be sharply separated from the casino banking !! And the gamblers *MUST* be allowed to fail, regardless of how big they are !!

America's bailout of AIG must have sent waves of shock and horror throughout Las Vegas !! They must be imagining hordes of gamblers asking for their losing bets back !!

nO 88 "The USA became a natural breeding ground for anarchism after the exodus from the Pale at the beginning of the C20th (thought it's not the first time, there's a long history). History is repeating itself."

One of my heroes, whose ancestor was a grower of winter wheat ("azimi"), emigrated from the Pale to America during that period. He grew up to get a PhD, made tons of money writing tons of books on scientific subjects and science fiction and died a highly respected man. He was in no wit, shape, form or manner, an anarchist !! In fact, if I remember rightly, he was very humanist. His name, if you haven't figured it out yet, is Isaac Azimov !!

Facts and more facts were very much a part of his life !! Platitudes and nonsense were what he despised !!

No 89 "I bet China will be interested in this find...they'll do anything to dump a few more US dollar$ "

Naaw !! They are doing a lot of digging of their own. However, a former Chancellor might want to flog this lot just as he did the last of our gold reserves !! :-)

That said, the Chinese would be willing to pay top $, or should that be top USD debts, for Burberry's and Aspinal's !! Unfortunately, the Sultan of Brunei already owns the Dorchester and Al Fayad already owns Harrods !! What else can we flog that's worth a bob or two zillion ?? :-)