11 October 2008

Panic On The Streets Of London

Of course, I didn't quite foresee a...
complete global banking collapse with whole European countries going bankrupt, but back in 2001, I did realise that house price rises of £200 a day could not continue forever. I kept predicting a recession every year since then and was wrong every year to the point where even I was beginning to wonder where it would all end. Common sense told me that the longer we went on loaning tens of thousands to people on the dole and others with little earnings, the bigger the crash - the bigger the recession that was to come - but it didn't seem as if things were following that script until...bang, crash, wallop, suddenly the global money men who rule our pseudo democracies start to panic.

The whole world changes and £500 billion is quickly borrowed to prop up bankers while cutbacks and tax rises are on the agenda for the rest of us. AsPolly points out even a supposed centre-left government cannot persuade people that £3bn a year to eradicate child poverty is a good value, and yet this bankers largesse is found without even guarantees that executives won't continue to pay themselves millions. Indeed, these very people have the cheek to say there will be a brain drain without these massive bonuses. Considering the mess we are in, why we would want them to stay at all is never answered.

The good news is that most people can see that right-wing ideology is behind 'regulation light' banking, no matter how much Tories now pretend to want to curtail City bonuses. This is a massive opportunity for the Left, if only Labour can position themselves on the left.

Considering the 1987 crash took 3 years to hit the real economy and was only half the scale of the current crash (so far), I predict we are in for some massive unemployment and inflation in the years to come. I never understood why the massive balance of payments deficit we were running ( a clear indicator of living beyond our means) could now be ignored when in the past it was so critical. It seems that the five years plus under a Tory government from 2010 that we face could make the Eighties Thatcher hell look like nothing. If you have heard enough of this depressing rant, PZT looks on the bright side of it all.


  1. The reason why the proverbial has taken so long to hit the fan is because the banks were able to keep the merry-go-round turning against a background of cheap credit – but only by repackaging the debt and selling it on so that it could be used as the basis for further lending, and only by incrementally lowering the eligibility criteria to bring even the lowest paid into the housing market – as with any Ponzi scheme, the game can only continue as long as more suckers sign up. When you run out of those, the whole operation collapses – triggering all those Credit Default alarm bells and shredding capital balances. We are only at the beginning of this process.

    One of the big myths of the current crisis is that it appeared out of a clear blue sky: writing in 1990 amid the Savings and Loan scandals, Robert Sherrill warned of “a return to the reckless and lawless 1920s and early 1930s” if the proposals to deregulate the banking sector went ahead. In 1997, Brooksley Born, then head of the Commodity Futures Trading Commission, warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it" and was ostracised for her pains. The Savings and Loans debacle (which is estimated to have cost US taxpayers at least $500bn), like the derivative-induced collapse of Long Term Capital Management and the fall of Enron were just warm-ups for the main event. Adam Hamilton was aghast at the derivatives position of JP Morgan as long ago as 2001; Warren Buffet warned of ‘financial weapons of mass destruction’ in 2002 – when Robert Scheer was arguing that: “we ought to wake up to the reality that business greed is subverting the American way of life—and hurting the image of American capitalism and democracy—more effectively than the ploys of any foreign enemy … it is time to return to the wisdom of Franklin Delano Roosevelt, the Depression-era president who saved capitalism from itself.”

    The same currents flowed across the Atlantic. However, it’s not possible to pin the blame on the Tories - New Labour enthusiastically adopted the mantra of deregulation, with Peter Mandelson declaring that, along with being ‘relaxed’ about people getting ‘filthy rich’, he saw his job at the DTI as "increasing capital market liberalisation", in order to provide "the most business friendly environment in the world" (1998). Just as in the US the Democrats have been heavily implicated in the process of deregulation (under Carter and Clinton), so New Labour – with its erstwhile leader now on the board at JP Morgan, have been marching to the same tune.

    This is a major reason why solving the crisis is going to be tough – everyone involved in the rescue operation (with Mandelson back at the forefront) is implicated in the collapse; the talking heads we see telling us where we went wrong and how we’re going to repair the damage are the same ones who were telling us how dynamic our City masters were, earning every penny of their bonuses; the journalists now trying to explain how they’d seen it coming were the City’s biggest cheerleaders. None of them really believe in the state – except as a conduit for taxpayers’ money into the trough of the financiers (via consultancy fees, PFIs and a myriad of cosy contracts with the public sector). The truth is, capitalism has always been bailed out by the state – and without state regulation it would implode. Regulation is essential to the operation of processes that depend on trust and confidence; take away regulation and those elements evaporate.

  2. Neil, true to form you say that this is a failure of 'free market capitalism' or such like. But this whole property price bubble/credit bubble was not a symptom free markets, very much the reverse.

    1. What kick-started the credit bubble was the People's Republic of China pegging their currency to a depreciating one - the US dollar, churning out TV sets etc at far less than true cost, and then instead of using the profits to improve the welfare of its own people, investing that money (about ten per cent of US government and corporate debt is held by the PRC) in subsidising imports from ... er ... the PRC.

    2. As any fule kno, land is in fixed supply. A reduction in interest rates might increase the quantity of TV sets, cars, holidays consumed but does not materially alter their price (super-profits would get competed away). So all the artificially low interest rates did was push up house/land prices.

    3. Then the bubble became self-sustaining. The Nulab government knew that rising property values create an illusion of wealth (and this is not a political point - the Tories would have been no better, and George W and whoever is in charge in Spain, Ireland, Australia, NZ etc) so saw no reason to dampen this off with liberalising planning laws or introducing Land Value Tax (the closest thing there is to a free market tax).

    4. People who were lucky enough to own property before the bubble really kicked off in 2000 thought this was great. So they had every reason to be NIMBYs - i.e. they knew that restricting supply would push up values even further. Land ownership in the UK is far from a free market - it is a series of local monopolies.

    5. And yes of course, where there is apparently effortless money to be made, people will dive in and exploit those opportunities - whether as a mortgage-equity withdrawer, as a buy-to-let landlord or as a City banker. These people did not create the situation - they merely exploited the fact that The Government rigged the rules (perhaps partly because most MPs own two homes and so have a vested interest in ever rising property prices) and made the most of it (as did I, as it happens, and I am not apologising for one single penny that I made).

    6. So yes, in that sense I agree that this was The Age Of Irresponsibility - but The Goblin King and Tiny Blur were in charge for eleven years - this happened on their watch, it has nothing to do with the Tories (I admitted above that they would have been just as bad under The Tories, but that does not exonerate Nulab in the slightest)

    7. Finally, yes the Tories are said to be in favour of deregulation (I doubt whether they are - this is just the usual "Indian Bicycle marketing"). I am a small government free market liberal and I am totally in favour of 'deregulation' but by the same token I am in favour of 'sensible supervision' in which respect those retirement homes for Nulab luvvies - the BoR, FSA, Treasury - failed miserably. Mortgages of 6 times income and 25% of property values? F***ing hell, did that not ring alarm bells?

    Here endeth.

  3. In point 7, for "BoR" read "BoE", obviously.

  4. For fuck's sake Neil, get your head out of the sand. Enough of your smug 'I'm left wing and even when we're in power, it's the tories fault.' No one's buying it.

    The tories and labour are puppets of the people who created this situation and are now going to pose as the saviours - the international banking cartel.

    The answer is to take away their monopoly on making money out of thin air - let the government print the money, massively increase the fractional reserve ratio and resurrect national barriers in defence against the globalist agenda.

  5. TT: My point is that this Labour government has not got into trouble for being too left wing has it?

    It is where it has continued Tory policies on 'light touch regulation', PFI etc where it has had its biggest headaches.

  6. Neil:

    It is possible that PFI could be sensible but not when it is used simply as a way to cook the books.

    Regulations on the financial markets were followed. The regulations in place were the cause of the various bundling packages that were so complicated that no one could see what was going on. Light touch it was not, bloody stupid, certainly. The regulation needed should be principle based, (ie. honesty and clarity paramount rather than box ticking), but there is little chance of that comming to the fore.

    Perhaps we might of stumbled on something we can agree on; corpratism is a very bad thing. However I doubt you would agree that it is simply socialism for large business'.