Politics
  Everything you want to know about the bank crisis  Iain Macwhirter
  Published 01 May 2008
    
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  As the financial crisis enters what the governor of the Bank of England has called a "new and dangerous phase" Iain Macwhirter has been looking at the big questions
     

    How bad is it?  
  This is the worst financial crisis in 60 years, and it has shaken the banking system to its foundations. Even the Chancellor, Alistair Darling, has compared the crisis to the Great Depression and he is not given to overstatement. Banks are in the business of lending money they don't have - it is called "fractional reserve banking". But every so often the banks succumb to irrational exuberance, lend too much and find their reserves have been eaten up too fast, forcing them out of business. This is what happened to Northern Rock, and is now happening to all the big banks. That is why they had to be rescued to the tune of £50bn last month by the Bank of England - ie, us. They will be back for more.
    Do the banks know what they are doing?  
  Well, they know now. During the house-price bubble, the banks were lending recklessly to people with no prospects. In the US it was called "sub-prime" lending, and amounted to organised fraud. Loans were knowingly given to "Ninjas" - people with "no income, no job or assets" - who could never hope to repay them. Britain too had sub-prime lending. At the peak of the boom UK banks offered "suicide loans" of up to 120 per cent of the value of the house with only self-certification of income. The mortgage holders were in negative equity as soon as they got the keys. These people are in real trouble as mortgage rates rise and house prices fall. Northern Rock lent out roughly 200,000 of these in the two years before it went bust and had to be nationalised. This makes the government the biggest holder of sub-prime mortgages in Britain.
    How could the banks be so stupid?  
  Partly this was down to the delusion that house prices could only ever go up. But the other reason was a practice called "securitisation". The banks packaged the dodgy loans into interest-bearing bonds and sold these to financial institutions across the world. This took the loans off the banks' balance sheets and allowed them to lend even more money they didn't have. The banks thought, wrongly, that they no longer bore the risk of default on these mortgages because they had been sold on to other people. This was a big mistake. The debts came winging back. Now the entire financial system is in cardiac arrest because banks no longer trust each other.
    Didn't the regulators see this coming?  
  Regulators such as the Financial Services Authority and the Bank of England were asleep at the wheel. The Treasury, Bank and FSA are run by relatively low-paid civil servants who are in awe of financiers and their lifestyles. They believed that the banks were run by masters of the universe who knew what they were doing, with their mathematical formulas and leveraged deals. In fact they were run by bonus-greedy wide boys, who gave no thought to the future and had no concept of social responsibility. The City bonus culture encourages short-termism and risk-taking. It was in these people's interest to pretend the credit boom could go on for ever, and that securitisation had taken the risk out of lending money. They thought they wouldn't be around to clear up the mess. In fact, even when the roof did fall in, those such as Adam Applegarth of Northern Rock still got their pay-offs and bonuses - in his case a "golden goodbye" of £750.000. Shareholders seem unwilling to curb the
 greed of the new generation of CEOs who run City firms. The regulators don't even try.
    Does this affect my savings?  
  The good news is that the banks want your money, so they are putting savings rates up. The bad news is that most of the banks are in effect insolvent and are posting epic losses on their irresponsible lending. Many are in danger of going out of business, but the Bank of England doesn't admit it for fear of causing panic. However, the collapse in the share prices of banks such as Royal Bank of Scotland and Halifax Bank of Scotland tells you all you need to know. The entire banking system of Britain is now on life support from the state and even the Bank of England's reserves are not unlimited. If your bank goes under, only the first £35,000 of your savings are secure under banking laws. The only bank that gives a 100 per cent guarantee of depositors funds is, paradoxically, Northern Rock, which is government-owned. Perhaps the government will nationalise more banks if they go bust. But maybe it won't be able to.
    Is anywhere safe?  
  At times like these investors reach for so-called "safe havens" - assets that tend to rise as the value of currencies falls and provide a hedge against inflation. Precious metals are the most obvious, which is why gold rose to more than $1,000 (£500) an ounce recently, though it has since fallen back. Oil has become a hedge, which is why its price keeps going higher. Many UK pension funds and investment houses are putting money in commodities such as wheat, rice and other foods in the belief that they can only go up and up. Most of us would think that profiting from starvation is morally reprehensible, but the market doesn't do morality. And be warned: commodity prices can go down as well as up. The safest haven is National Savings and Investments index-linked savings certificates, which everyone should hold.
    What else can individuals do?  
  There's really no way of heading off the debt nemesis. Britain is even more indebted than the US was at the height of the boom. Personal debt here has risen to £1.4trn, and house prices rose by even more absurd multiples than in the US. British property is overvalued by 30 per cent, according to the International Monetary Fund. This could mean another trillion wiped off the total value of British homes, now worth around £3trn. The only way people can protect themselves is to pay off all their debts, fast. People living in houses larger than they need should consider selling before prices fall. First-time buyers should not under any circumstances be encouraged into the market, even if they can find a mortgage. Avoid discretionary spending, such as those silly sandwiches we buy for lunch, because you will need the cash to pay for higher food prices. In most parts of the country it is a lot cheaper to rent. Joining a car club can save thousands.
    What is the government doing?  
  The government thought it could jump-start the mortgage market by giving a £50bn bung to the banks in an attempt to reignite the housing boom. It will regret it. It was irresponsible of the Bank of England to accept the banks' dodgy mortgage bonds in exchange for billions in cast-iron Treasury bonds because the banks know that their mortgage bonds are largely worthless, otherwise they would have offloaded them by now themselves. The banks will be back for more as they post more losses. The governor of the Bank of England has made a point of saying there will be no financial cap on the bonds-for-gilts swap.
    Why is the government bailing out the banks?  
  The default position in the Treasury is that house prices will always go up in the end. It hoped the banks would return to lending to first-time buyers, the housing market would revive and consumers would again be able to use their homes as cash machines. It is not going to happen. Abbey put its rates up even further on the very day the banks left No 10 with £50bn in their back pockets. The banks know that house prices will fall sharply over the next two years and are withdrawing from the home lending business.
    If we finance the banks, can't we tell them what to do?  
  Gordon Brown should be asking that question! The neoliberal thinking that has dominated the Treasury for the past two decades sees no role for state intervention - except to pay the banks when they get into trouble. It is socialism for the banks; capitalism for the rest of us. Moreover, there is a disturbing overlap between the higher levels of government and the big banks because of the privatisation of aspects of the state through mechanisms such as the PFI/PPP. It is no accident that when Tony Blair left office he walked into the Wall Street bank J P Morgan for a reported salary of £2m for a part-time job.
    What about the US Federal Reserve?  
  The Fed was captured by the banks a long time ago, which is why it has pursued reckless policies such as negative interest rates, which benefit Wall Street but not main street. The Federal Reserve became a cheerleader in the creation of the debt society and largely created the house-price bubble that has now burst with spectacular consequences. After the dotcom crash of 2000, the then Fed chairman, Alan Greenspan, held interest rates far too low for too long. The US, like Britain, became a nation of property speculators. Everyone thought that as long as house prices rose, Americans could keep spending, even as middle-class incomes stagnated in the 1990s. Now it has collapsed, Greenspan's successor, Ben Bernanke, has tried to save the banking system by inflating another bubble. But cutting interest rates has not worked. The cost of borrowing has actually increased.
    What does it mean for the global economy?  
  The global dimension is truly worrying. World trade is still fairly buoyant even as the credit crisis deepens, but no one expects this to last. China and India are still heavily dependent on American consumers buying their cheap TVs and toys. If they buy less, these economies will be put under severe strain. What is most worrying is the stability of the global market in financial deri vatives. The market in these exotic financial instruments is now worth some $500trn - nearly ten times the value of all the companies on the world's stock exchanges. The US investment guru Warren Buffett has called these derivatives "financial weapons of mass destruction".
    What is to be done?  
  The days of laissez-faire in international finance are over - or should be. The banks have admitted that they cannot be left to regulate themselves and have had to be bailed out by the state in one of the greatest financial rescues in history. The banks have been given free access to public funds in a way that the British manufacturing industry never enjoyed in the Seventies when the UK still made things. The credit crisis has destroyed the intellectual credibility of neoliberalism. This is a turning point in world affairs and in economic and political thinking. The free-market orthodoxies of the past 30 years have crashed and burned. However, change will not happen of its own accord. If the government had the will do to so, it could emulate the policies of President Franklin D Roosevelt in the 1930s and regulate the economy in the national interest. This will mean tackling social inequality, the bonus culture and the lack of accountability in financial services. Instead
 of just propping up bankrupt banks, the government should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets and refitting the western economies to combat climate change. It does not have to be like this. But without change, we will just go into another cycle of financial boom and bust. 
  Iain Macwhirter is an award-winning political columnist for the Herald 
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    30 comments from readers    
Jane Greene 
01 May 2008 at 11:11   
     I'm absolutely fed up with people talking an essentially strong economy down and am very surprised that the New Statesman is signing up to this Daily Mail agenda.
  
Carl Jones 
01 May 2008 at 13:00   
     Jane; its not a question of talking ourselves down, the fact is, the MSM has being lying for years about the economic costruct now unfolding. 
  
  Iain has covered some good points, but has also failed to tell the truth on others. The BofE/FAS were not asleep at the wheel. Greenspan knew exactly what he was doing with US interest rate policy and so did Bush with his tax cuts. 
  
  Mr Brummer (NS) wrote an article about 6 months ago and I told him then, that he should stop lying and tell the truth, that we are heading for the mother of all depressions and unlike Iain, I do believe the elite designed this mess....it will lead to wars, it will lead to food genocide. The real losers wil be Chna and India as we move into a period of very high inflation, maybe hyper-inflation which will see the US paper wealth held by China vanish. 
  
  The US will need another major war, so lookout for the construct which will bring this about...avoid going to Israel, would be a good start, as I believe this is a prime target.
  
johannine 
01 May 2008 at 15:26   
     so much negativity 
  at times like this the only thing to fear is fear itself 
  
  to survive this we need to be able to speak truth ,and yes much truth has been put forward in this article ,so i will try to put some of it down ,and let it be rebutted where i go wrong 
  
  fractional reserve is an old deception ,money has been created by lenders signing a promise to pay [repay] ;when we sign a mortgauge document for x ,the contract becomes a security ,that is onsold ,that gets ''repaid'' at maturity[20 or 30 years and x plus intrest gets repaid to the holder of the security [ie govt] 
  
  the ones who hold the securities have lost ,only part of the money they put up in good faith , safe as houses has proven house prices rise [double about every ten years [ok they have inflated beyond the old formula but essentially will hold a certain value [as well as return rent] so things arnt as dark as it seems for the cause 
  
  but there are other dangers , our money essentially has been created by an accounting trick [and for the proffit of privatised banks, owned by certain elites [who took over the banking system in 1930-s [when the worlds fed reserves had their last hickup, now the bankers took all our gold and silver [that according to most nations is the only legal tender] 
  
  the fed trick has removed the silver and gold from our currency [they cashed in the old currency which redeemed paper notes by promise to pay in silver coin[sterling sliver , you may have noted that our current coins are made from nickle [not silver] 
  
  anyway a lot more shenanigans have gone on , but essentially the banks [private owned banks , were able to create credit by simple book entry [via the old means of fractional reserve lending, knowing they didnt have to buy silver to make the coins and coins cost only a fraction of the worth of silver [but notes cost only pennies] 
  
  the thing is nicle now costs almost the weight they hold in nickle [and notes worth only a few cents are yet redeemable in nickle [and in some countries who hold copper coins they are actually worth more for the copper than their face value 
  
  thing is govt needs to get the control over the peoples fed reserve banks back ,thus trading mortgage securities for govt bonds securities is a good thing, [the banks need to come back to govt to redeem them] 
  its that or let the private bankers bankrupt us all completly 
  it is time that intrest went back to govt [not private bankers] [our income tax derives from when the bankers stole the fed reserves ,because govt had to lend its own currency from the foreign owned bankers we had to pay tax 
  
  anyway there is more to the solution [as well as the problem ,but when govt gets control of its own currency again we can be saved by the means of seignorage [printing the equivelent of the trillion dollar [pound note [or by minting a coin each to the bankers for one trillion [or whatever 
  
  anyway its a bit more complicated than that but essentially govt needs to take [buy back the bank so it can reissue real national currencies[so people can repay their debt [if you read between the lines , know ouir money has been made by lending [if we stop lending the money to repay loans dries up 
  
  [perhaps that is the bankers plan to get us all on credit cards [but some [like me ] dont qualify for a 'credit ' card [yet own my home free and clear] but could get a credit [sorry debit card ]by putting my mortgauge in the hands of the bankers [and that isnt going to happen] 
  
  a side note is that bankers seeking to forclose your home need the origonal contract [to pay ] [not a copy] but they dont have it anymore [they sold it as a security] ,so if our courts demand the origonal [not a copy] the bad banks get weeded out because they bundled your mortgauges, now hopefully held by govt.
  
gajahmerah 
01 May 2008 at 16:17   
     I think there's too little laissez-faire: because banks are so big and everybody's in bed with everybody else (figuratively speaking), then if one bank has a problem, the whole system can crash. Therefore banks should be smaller so that it doesn't really matter if some of them go out of business. We should have savings banks, speculation companies, brokers, etc. and not these huge financial conglomerates. 
  
  As for what to do: buy shares! Gold is just as random a currency as paper money. Salt and sea-shells used to be the currency in the stone age. Shares give you a part of 'real' economic activity. And since banks are depressing the stock market now, you can go shopping at a discount! 
  
  So don't be gloomy. Instead profit from the stupidity of the bankers. That's what a free market is all about.
  
robertsgt40 
01 May 2008 at 17:33   
     This is the financial rape of a nation. Here is the US the moneychangers have pulled the same exact scam. Does anyone really this this was not a well thought out plan to transfer wealth from the nation into the hands of a few greedy financiers? If you do, I have some deals for you. That debt was directly tranfered to the taxpayer. The guilty will walk....with their bonuses. Financial history repeats itself. Reap,sow,reap sow. It's just another harvest for the moneychangers of old.
  
rodmc 
01 May 2008 at 22:16   
     You have to be very careful when using the term sub-prime, while there are ninjas and people with horribly large mortgages this is as much a clever bit of spin as anything else. For the most part these sub-prime people were honest, had income and could pay their mortgage. However the later ended when the investors in those mortgage securities wanted a higher return and hiked up the rate of interest from the normal levels to in some cases around 8-12% - I saw one women in the US who had her rate go up for 4.5 to around 10. With no reason, she had by that stage not missed one single payment. This is at the same time as US rates are around 2%. This for the most part is greed, pure and simple. 
  
  The sub prime problem has been created specifically due to two conditions the banks willingness to lend to a group of people with slightly higher risk profiles, and their greed in hiking up the rates later (way beyond the actual real risk, or without basing it on the borrowers record). This has resulted in what would have been ok grade bonds (representing those mortgages) now being next to worthless. The result is the banks greed in both directions has resulted in them being left holding the baby. Where as if they lowered the rates on these loans the problems would not be so severe. 
  
  If a bank goes bust or requries bailing out then the executives should by law have to return their bonuses and face investigation for dereliction of duty. After all they are banks and not casinos or pyramid schemes :-) As it is we are rewarding them for failure.... 
  
  I say this not as a left but as a free market (now ish) person :)
  
writeon 
01 May 2008 at 22:19   
     But we don't have a 'free market', that is a large untruth, close to a myth, or at least primative, political dogma. We have a controlled market designed to benefit an elite disproportionally compared to the rest of us. 
  
  The British economy is anything but 'healthy'. It's sick to the core, unstable and heading for a fall. The last thirty years of Thatcherism have been a disaster, or a party on the deck of the Titanic, with the ruling elite putting the telescope to their drunken right eye and refusing to see the iceberg up ahead. Fundamentally Reaganism/Thatchrism was an attempt by the Right to party on for a few more decades and damn everyone else and the environment. Their economic policies have been a crime against humanity. 
  
  Personally I believe there is growing evidence that the Capitalist system is collapsing around our ears. We have wasted thirty priceless years on an economic illusion, unlimited growth in a finite world, instead of preparing for a sustainable future. Now the party is over and the chickens are coming home to roost, unfortunately for lots of people they are going to be vultures. 
  
  Instead of a desparate war of all against all for what's left of the planets resources, we should be going in the opposite direction. Military spending is just so wasteful and counter-productive, we should slash it to the bone and divert the resources towards three basic things; a crash programme to develope alternative energy sources, ramping-up basic food production, and eliminating world poverty. Cutting military spending by 90% would easily provide enough money to finance such a reasonable programme of global reform for a better future. 
  
  Morally we simply cannot continue to gorge ourselves on the world's limited resources and watch the poor die needlessly. If we recklessly follow our current path not only will millions face a terrible future of destruction, desease and starvation, but our 'civilization' won't really deserve to survive if we just let it happen without really lifting a finger. 
  
  The 'free market' is a dangerous illusion. For hundreds of millions of people it's really a 'death market' and the sooner we grab it by the scruff of the neck, shake it hard and take control of it the better off we'll all be. It's not as if we have a choice, not really. We have a stark choice. We can cooperate and share the world's resources fairly and rationally, or we can carry on down the path to disaster.
  
DBC Reed 
02 May 2008 at 00:24   
     Can't disagree with any of this.As McWhirter says banks control the issue of credit in this country and get paid interest for money they don't have.The sooner 
  interest rates become a tax-replacing source of state revenue the better ,via nationalising the lot: we're nearly there already. 
  It is always the interface between credit creation and the housing market that causes trouble.It would n't be difficult to stop cheap money pouring into property by a blocking-measure such as Land value Tax or the old Schedule A which until 1964 taxed the rental value of owner-occupied houses out of income.Would be easier and kinder to the banks, which seems to be the Guv's priority.But I'd nationalise the lot of them as they successively fall off their perches.Or not prolong the agony and get it over with quickly.
  
barney999 
02 May 2008 at 01:32   
     Why do people not realise that things aren't going really bad. Although they are. 
  
  Everything is going according to plan. 
  
  It just depends on where you are standing and looking at this situation. 
  
  What we are really seeing is a transfer of wealth, from those who can least afford it, to those who have gorged themselves to the point that they, like a junkie, just need more. It cannot be analysed in a rational manner. 
  
  So much for the people doing the gorging. How about the people pulling their strings and making them behave in this wholly irrational, and damaging, manner. 
  
  That's a whole different story and, at this time, it seems to be one which people, in their semmingly deliberate ignorance, do not care to hear.
  
barney999 
02 May 2008 at 01:49   
     Sorry, pressed the wrong button - continues below. 
  
  Our financial system is being deliberately taken down. The banking system is, already, in a state of insolvency. 
  
  Imagine our society, as it is structured at the present time, without a banking system. It ceases to exist, because it has become terribly, and wholly, dependant upon this system in order to function. 
  
  Is anyone seriously going to argue the case that this situation came about as the result of an accidental sequence of events? 
  
  We have been here before, I think. 
  
  This time it's just about to get a whole lot more worse. A hint. Watch the bond market 
  
  Depression 2. The mother of all depressions.
  
moutainhigh 
02 May 2008 at 09:30   
     Jane Greene’s comment about talking the economy down is doltish it denotes that “Words” are the power in this world. Wake up Jane the days of the Spin Doctors are dying, we live in the material world which all of us are about to find out. And it’s not about talking up or down anymore!
  
Jane Greene 
02 May 2008 at 09:44   
     If you think, moutainhigh, that words have no power then you are an unutterable fool.
  
Carl Jones 
02 May 2008 at 09:47   
     barney999, I have been laboring this point, but everyone seems to be walking around with squinting eyes. Any recognition that the elite are pulling a fast one, would destaballize their entire belief structure. 
  
  Readers and fellow commentators must shake off this idea that the political construct holds some sort of power, they simply don`t. 
  
  The Guardian ran a article which supposedly illustrated a funding/support connection between Lord Jacob Rothschild and US presidential candidate....this story is a dummy. Its designed to give interested members of the public, the idea that a seriously elite player (if not, the global top dog) can support a US presidential candidate and have them lose....another example would be the over the top support from the Kennedy`s for Obama....this was the establishment kiss of death. The elite wants you to believe they don`t have their first chioce in the Whitehouse. 
  
  Only two prominent people are pointing the finger of responsibility at Greenspan and Bush. Stiglitz and Soros...one has been reported in the MSM and the other has been ignored. As for the rest of the MSM reporting, is has been chasing events and only a couple, including this article, has got somewhere neer the truth. 
  
  The one thing everyone is failing to recognise, is that "globalisation" is the real reason why we are in such a mess. Of course, Greenspans sweetning the US economy for war with Iraq, is a factor. But if you like, you should imagin what the US economy would look like now, if $3+ trillion debt money (still to be paid back) hadn`t been injected into the US economy and the same can be said for the UK, but to a lesser extent. 
  
  In the UK, first time buyers couldn`t get on the property ladder....this was before the credit crunch. In the US, ridiculous mortgages were given to low earners who were very bad risks....no wonder, with the Fed. printing paper like it was going out of fashion. The elite knows we have nowhere to go...we are like abused childern...we don`t know any different. 
  
  There is another aspect which should be considered. When was the US presidential election last hampered by a similar economic prospect. Usually, the 12 months prior to the election is stable? 
  
  http://www.propagandamatrix.com/articles/may2008/010508Fake.... 
  
  Some NS writers have hinted about whats in the above link....maybe there won`t be a US election and this is the reason for the timing of the present economic construct....anything can happen, all options are on the table. LOL
  
moutainhigh 
02 May 2008 at 10:07   
     Jane you must be in the PR Industry. 
  What I am saying is the era of “Spinning” is over. 
  Now cheap money is on the wane the lies of the spin doctors will not stand up. 
  We as humanity have to start living like adults and not as children. 
  Mummy is not going to be dishing out the sweeties anymore you will have to eat bread and be satisfied. 
  Try eating words and you will starve!!
  
Extradry Martini 
02 May 2008 at 11:48   
     This article is riddled with factual errors, contradictions, hyperbole, biases and prejudice. The New Statesman should be ashamed of itself for printing it: I mean, why have someone writing an article on something so specialised when he clearly knows so little about the subject? 
  
  For example: 
  
  1. “But every so often the banks succumb to irrational exuberance, lend too much and find their reserves have been eaten up too fast, forcing them out of business. This is what happened to Northern Rock…” 
  
  No it wasn’t. (one might think that enough had been written about what happened to Northern Rock over the past months for the writer to find out, but erm…) 
  
  2. “The banks thought, wrongly, that they no longer bore the risk of default on these mortgages because they had been sold on to other people. This was a big mistake. The debts came winging back.” 
  
  Er, what? Debt which was sold on to other people did not “come winging back” to the banks. By selling the debt on to “other people”, “other people” took the risk (and rewards) of it. It is what “selling” means in investment. The writer appears to be confusing this with the assets in off-balance sheet vehicles, which the banks have had to prop up. But they always knew that they would have to do this if the debts went bad – they just didn’t think this was going to happen. 
  
  Amazingly, in this paragraph, titled “How could the banks be so stupid?” (in a piece called “Everything you want to know about the credit crisis”), the writer manages to miss - entirely - the central mistake being made by mortgage investors (!): They based their risk assessment on ratings by ratings agencies who had moved away from measuring creditworthiness to actuarial analysis, there was no longer anyone measuring creditworthiness which led to money being lent to people who were not credit-worthy. 
  
  3. “Regulators such as the Financial Services Authority and the Bank of England were asleep at the wheel.” 
  
  They were making the same mistakes that the banks (and everyone else) were making, yes. Does the writer think he could have done better? Can he point us to any article of his prior to last July in which he told us that they were making mistakes? 
  
  4. “The Treasury, Bank and FSA are run by relatively low-paid civil servants who are in awe of financiers and their lifestyles. They believed that the banks were run by masters of the universe who knew what they were doing, with their mathematical formulas and leveraged deals. In fact they were run by bonus-greedy wide boys, who gave no thought to the future and had no concept of social responsibility.” 
  
  I think this bit speaks for itself – childish and prejudiced rubbish. 
  
  5. “The City bonus culture encourages short-termism and risk-taking. It was in these people's interest to pretend the credit boom could go on for ever, and that securitisation had taken the risk out of lending money.” 
  
  If “these people” knew that these loans would go sour, they would have (still incentivised by bonuses) hedged their positions as the crisis began to unravel early last year. They had plenty of time to do so. The fact that almost none of them did and that banks lost so much money demonstrates that they were behaving out of stupidity, not out of venality. Still, no point letting the truth get in the way of what one wants to believe, eh? 
  
  6. “The bad news is that most of the banks are in effect insolvent” 
  
  Simply and verifiably incorrect. 
  
  7. “The banks know that their mortgage bonds are largely worthless, otherwise they would have offloaded them by now themselves” 
  
  What kind of logic is this? The statement starts with the assumption that the loans are worthless and therefore the banks want to sell them. Has the writer not considered that the banks might not want to sell all their loan assets (e.g. because they believe them to be worth more than the price in the currently risk-averse market)? 
  
  8. “The market in these exotic financial instruments is now worth some $500trn - nearly ten times the value of all the companies on the world's stock exchanges.” 
  
  Schoolboy error. When derivatives positions are closed out at banks, they are done so by writing a new contract (with the opposite characteristics of the original position), thus banks have huge amounts in nominal terms of derivatives contracts, but tiny risk in comparison. More than 95% of derivatives contracts are offset. Of the remainder, the risk is not of the whole nominal amount, but on the price change of the underlying instrument. On top of that, for every long position in a derivative, there is a short position. The writer is also incorrect to say that derivatives are “exotic”. The vast majority are very simple indeed. 
  
  9. “The banks have been given free access to public funds in a way that the British manufacturing industry never enjoyed in the Seventies when the UK still made things” 
  
  Nonsense. The government was subsidising industry at that time. That means they were actually giving money (rather than lending – big difference) to uncompetitive and badly run organizations. 
  
  The rest of the last paragraph is simply absurd, so I am going to leave it, aside from saying that it was the over-mobilisation of banking “assets to stimulate the productive economy” which got the banks into so much trouble in the first place.
  
Jane Greene 
02 May 2008 at 12:08   
     Well no wonder you despise words so much given the laboured way you use them. The point is not about spin doctors - and no their era isn't over - but rather about the effect ebbing confidence has on markets. An economy may be perfectly sound or reasonably sound but if no-one believes that to be the case then it will decline. So, yes, talking the economy down is hugely damaging. It won't help our overseas aid budgets or anything else if we plunge into recession! If you are trying to say people should spend what they have rather borrowing and betting on an uncertain future - then that's good sense. If the banks had followed this simple economic thought - lend to people who can pay back - they would not be struggling now. Nor would they have had to be bailed out by the taxpayer ending I hope for ever the lie that there is such a thing as a 'free market'.
  
antelope 
02 May 2008 at 12:16   
     I agree that things are very high risk at this point and that there's good reason to believe not only that a major crisis is imminent but that things will never be quite the same again. 
  But these aren't certain [assuming that the present banking crisis is temporary]. And I do get fed up with people taking every opportunity to claim what's happening as evidence for some conspiracy theory or other. 
  Whats happening may well be a crisis of the capitalst system. But I for one know of no other system that has led, or even offered the potetnial of leading us to, utopia. Crisis of capitalism it may be, but not as a consequence of madhat men in pistripes scheming to reduce the world to penury whilst they hide somewhere on yachts. 
  Whats happened is a consequence of over confidence in one particular dogma. Thats all. Reality is too complex for there to be one political philosophy to fit all. We need a combination of approaches, hence the need for welfare state and publicly funded services in free market economies for example. 
  What's happening isn't down to some wacky conspiracy, it's down to laxity of control, simplistic belief in dogma, well intentioned over optimism, naivety and a failure to follow a middle road. 
  The world is facing a number of major crises that all seem to be coming to a head at the same time. And thigs are presumably going to have to change very significantly to accommodate them. But please don't get sidetracked into looney conspiracy theories. Everything cycles...all we're seeing is the bottom of a cycle, unfortunately the bottom of several simultaneously! But there's grounds for optimism as well because change is always opportunity and I'm sure that a much better world will emerge from this in terms of greener technologies, stymied globalisation and a gentler and more universal way of life. The 20th century was an experiment..now we're going to have to step back, consolidate and put together a new approach, hopefully not one based on centralised dictat but one which derives from people, enabled by a more broadly wise government.
  
antelope 
02 May 2008 at 12:37   
     Woops, I forgot to mention greed in my little list of what 'it's down to'. The greed of bankers, business people, traders, investors..all these people are as guilty of promulgating this current crisis as anyone, governments included. And guess what, most of these people are mere members of the general public, like you and me. And I doubt that there are many people, even in this forum, who would pass up the chance of making two million quid in twelve months if offered the opportunity. 
  Perhaps it's not the ability to earn such money that's the problem but how we spend it, as individuals. I like to kid myself by thinking how altruistic I'd be if I was rich. And I may be more so than some. But I bet I'd also have a few big money trinkets to enjoy as well. And I'm sure we all would. So doesn't this point the finger at each of us as much as anyone? What a shame that it appears that we need strong government to 'guide' us in what we earn and how we spend it, through taxes and leislation, rather than being able to trust ourselves, the public, to do so well and wisely. It seems we need government to to manage and control our greed like an economic tool. It all goes haywire when we're given the opportunities but are left to our own devices. As we're seeing. I for one certainly wouldn't be so smug as to claim that things would be different if I'd been a big banker.
  
Carl Jones 
02 May 2008 at 12:41   
     "The 20th century was an experiment"....you are right on the button...two world wars contrived by the elite. Two elite constructs, the IMF and World Bank who spent the best part of 30 years screwing the developing world and a United Nations which can only be described as the largest house of corruption this side of Uranus. 
  
  People like Jane and Antelope are the sort that wander throught life leaving a trail of destruction and this is done largely through ignorance. 
  
  Antelope, could you expand on these "looney conspiracy theories?
  
antelope 
02 May 2008 at 13:17   
     Carl...The IMF and the World bank did, as far as I'm aware, indeed make many decisions and take a general approach that with the benefit of hindsight did at least as much harm as any doubtful good. But I was brought up in the developing world and I know that local corruption and incompetence was also to blame. The IMF and WB followed a given dogma and it was too precise. I know people who work for the WB and believe me, they're not bogeymen, they're highly educated in their field [agriculture for example] and mean well but have worked with an institutional approach that was inappropriate to cultures and societies that are way too diverse for a single approach to macr economics to be appropriate to all. And the World Bank funded projects, such as dams for example, before the process of proper environmental or social impact analysis became widely used. Like all big institutions, it was guity of lacking joined up thinking, and divisions worked without regard to the
 recommendations of each other. I don;t want to defend either organisation, and I dont know enough about either to be able to. But the idea that they were proactively working for the detriment of the developing world in some sort of conspiracy with the chairman of Lloyds bank is laughable. I might give more credence to the idea that the current communist Chinese government sees economic growth as a useful tool with which to finally overpower the west, although only a little credence as a hypothesis, I certainly wouldn't rant about it. 
  I'm glad you think that Hitler was in cahoots with Churchill...two political elites of the time....allows me to place you well. 
  Anyway, I've said my piece and am too busy to argue..take it or leave it.
  
Extradry Martini 
02 May 2008 at 13:29   
     I have to agree with Antelope. Time and again, government intervention in free markets has been a disaster. The point is that governments are made up of human being who make just the same of mistakes that other human beings make. The difference is, of course, that politicians and civil servants know about politics and delivering public services and know much less about the markets in which they intervene than those who use them. If you want any evidence just look at US support for bio-fuel. More than all the World's growth in corn production over the last few years has gone into biofuel with the result that parts of the world are being threatened with famine and biofuel releases just as much carbons as fossil fuel. 
  
  Governments are just terrible at intervening. Thank goodness Margaret Thatcher's government did away with those monstruous subsidised industries. The country would be in a sorry state right now if it hadn't. 
  
  The reason why the new deal worked and why governments should intervene to stop the financial system collapsing (not a bank bailout) is that what they are doing in both cases is ensuring the survival of the free market, which no longer functions because of irrational risk aversion (which follows irrational risk-ignoring) of those with the capital to make it function.
  
moutainhigh 
02 May 2008 at 13:40   
     Jane I do not depise words. 
  But the word I do like is “Truth” 
  Obviously a word beyond your conception. 
  Stay in dreamland spinning.... Deary 
  You will not be writing such silly comments in two years time. 
  Words will not help you then. 
  Sorry you hate money so much... you will need it then 
  when all the credit is gone.
  
Carl Jones 
02 May 2008 at 14:32   
     Anteolpe...I have also talked with ex World Bank employees and I will stick with my view. Hitler and Churchill are not the elite, just puppets. Not only were the British and Amerikan corporate elite funding the Germany war machine, but the Bush family continued to financially support Hitler until 1943, and against US law. You might want to google "Hitler was a British Agent. There is also an account where Churchill is in his bunker during the wee hours of the war, where he is heard to say "it seems that all of us war time leaders are puppets being guided by hidden hands", or words to that effect. You seem to be locked in a version of history which was wrtten by the winners and that is your chioce. 
  
  Extradry Martini. 
  
  There you go blathering about "free matkets".....I suppose the PPT`s (plunge protection team) activities are legal? Looks more like a case of elite insider dealing to me.lol 
  
  Every business in this country is SUBSIDISED by the government with family tax credit. Mr Ripoff employs workers who rely on the Family Tax Credit, this is just a different method of subsidy and the larger corporations rely on smaller service businesses and suppliers who alse survive by employing workers supported by Family Tax Credit. The only reason why you aren`t whining about it, is because it suits you and your like. 
  
  I dare you to support the removal of child benefit and family tax credit....I just dare you.lol Then we might actually see just how well employers perform in a genuinely competative wage market. failure by the so called free market would lead to a swift revolution.lol
  
Extradry Martini 
02 May 2008 at 15:09   
     What on earth has small scale tinkering with the taxation system got to do with anything?
  
Jane Greene 
02 May 2008 at 15:11   
     I don't hate money. You just can't eat it - unlike words which I fully expect you to be munching on in two years time. In the meantime just keep regurgitating the cliches you've already swallowed
  
moutainhigh 
02 May 2008 at 17:10   
     You do Hate Money! 
  
  I expect you owe lots of it. 
  
  That’s why you are giving this silly emotional response. 
  
  If you want to keep on believing the myth... that's your choice don’t expect the rest of us to agree with you!! 
  
  Value has to reside somewhere and it’s not the Fed’s printing press!! 
  
  Or the Money you have borrowed on your house! 
  
  The Games UP!! hahahahahahaha
  
writeon 
02 May 2008 at 21:04   
     I'm going to try to be very specific as I think I was being rather too general in the above. 
  
  The term 'credit crunch' is far to benign to describe the situation we are mired in. It should perhaps be called 'The Great Bank Bust' which is what it really is. 
  
  U.S. and British banks are insolvent, they are bust. What's happening now is damage limitation, trying to disguise the true nature and staggering enormity of the crisis we are seeing unfold. Northern Rock isn't an isolated case, rather it's the first case and not the last. 
  
  Clearly I'm sticking my neck out here, calling a spade a spade, but I believe we are witnessing the beginings of a financial and economic crisis that could prove worse than the Great Depression. 
  
  Take the world's, more or less, largest bank - Citibank in the United States - it's bust, the only thing keeping it afloat is massive injections of cash from the US government and enormous loans from the Chinese and the regimes in the Persian Gulf, notably Abu Dharbi. Abu Dharbi has pupped somewhere between 7 and 8 billion into US banks in recent months, and it still isn't enough, so the Americans are trying to negotiate even bigger loans in a desparate effort to keep their heads above water. It may not work and it may be too late, as the US economy becomes bogged down in deep, deep, recesion; which we may never really get out of, at least not in our lifetimes. 
  
  This sounds close to hysterically over-dramatic as we are used to prosperity and a lavish, almost wonderous lifestyle of plenty and excess in all areas, at least those of us lucky enough to live in the West. Unfortunately it's all coming to an end and it's unlikely to return. The Thatcher/Reagan model is as bust as the banks, and good ridance to it. The consumer orgie is over, now the time has come, alas, to pay the bill. 
  
  What we now require is an almost total reorganization of society from the top to the bottom. A redistribution of power and wealth on global and massive scale. A kind of Marshall Plan for the world. Unfortunately the ruling elite have no intention of giving up any of their power and wealth, on the contrary they intend to fight tooth and nail to maintain their position and damn the rest of us. The rich countries, lead by the United States is preparing to attack the rest of the world and grab what's left of our legacy of raw materials, using military might to delay the inevitable for a few more decades, but at a tremendous cost in blood and destruction. The irony is that using military force to maintain an unsustainable way of life is futile in the long run and will only lead to an even more violent fall and probably even quicker. It would be far more sensible to divert resources from the military towards building an alternative model of economic and social development.
 Unfortunately, the United States, the most powerful nation, the key nation, has a ruling elite that is also the most reactionary, greedy, stupid, short-sighted and violent, imaginable. They are going to destroy themselves and America and probably drag the rest of us down with them. 
  
  It's all rather sad as we could choose a different path, a better, more civilized path, a path we needn't be ashamed of, a non-criminal path, a sustainable path, a path of hope and change. Only I doubt very much we will make the effort to change course in time to divert disaster. The ruling elites answer to our myriad problems is brutally, stupidly, simplistic - war.
  
Carl Jones 
02 May 2008 at 22:52   
     writeon; that must be one of the best posts/comments you`ve ever made....even going back to the BBC Radio 4 Taday message boards, which are now totally censored. 
  
  I agree with what you say, and I have said it as well, but you have done it with so much emotion, and passion, that readers should take note.
  
moutainhigh 
03 May 2008 at 08:27   
     Writeon- that was brilliant! 
  
  Lets now "Make Hay while the Sun still shines" 
  
  Cause we are helpless to stop what's coming! 
  
  Brilliant Piece..............
  
johannine 
03 May 2008 at 09:28   
     It may have escaped peoples attentions so far but the insurance companies [and underwriters ] must be carrying a lot of burden to pay up [judging by the ammount of new life insurance adverts seeking death cover etc ,on tv ;clearly they are seeking a cash injection by getting new custom to pay of their underwritten dealings] 
  
  Thing is the principles who underwrite their dealings will have taken some big hits ,and be seeking to unload their own securities and stocks and shares , that is likely to be the second wave. 
  
  Many will be forced into putting their mansions and estates on the market ,so expect to see the uber real estate take a hit soon ,possably this would account as well for the fall of gold back from its 1000 us heights. 
  
  While the fall in us dollar has made the us stocks cheaper for foreigners to buy , the falling price of real estate [in an ever more impoverished nation [usa inc] is going to have some intresting side affects [what with failing infastructure and roads , the dollar will soon reach parity with the peso , heralding in the amero [trouble is will the amero be owned by the self same banking cartel that owns the privatised fed , 
  
  or will govt 's yet again be able to create [print] their own money ,not have to lend it from the bankers at intrest as they now do [that got us into this mess] due to govt inability to monitor the bankers books [noting the fed bank has never been audited] and likely never will.

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