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Markets in free-fall… banks being nationalised here there and everywhere. Interesting times. September 29, 2008

Posted by WorldbyStorm in Uncategorized.
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Hmmm… this evening was almost a reprise, albeit an expanded one of last night. Watching George Osborne talking about the ‘cupboard being bare’ this evening, got to say, I’m not convinced. His ‘solutions’ seemed anodyne, penny-pinching and completely out of whack with the times. They must be cursing the timing of this Conference in this week and this month. A two year freeze in council taxes just seems… well, nothing much really in the face of five – count ‘em – five bank nationalisations in Europe today. Like, this is big stuff, and they’re posturing at the sides.

In a way the votes in Washington are of a different order. There it seems to me that above and beyond the visceral fear evident amongst Republicans facing re-election (and note that Democrats seemed more sanguine about their chances as evinced by the voting pattern) and having to explain intervention using tax payers money are simply unable to understand what is happening here and are still buoyed up by rhetoric about the efficacy of the free-markets, or even worse the macho bluster about how the bad should go to the wall. Even more interesting is the cant about it being Wall Street, not Main Street, that is hurting. Well, yes, but even a limited appraisal of the situation demonstrates that the links in the chain between Wall Street and Main Street are rather shorter than might be imagined.

And that is as true this side of the Atlantic as the other.

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1. harpymarx - September 29, 2008

Well, George Osborne was blaming Gordon Brown on C4… So why didn’t Osborne et al “shout it from the rooftops” (as Jon Snow asked)? They went with this deregulating banking system as well that meant lots of debt being issued. And of course… Bradford and Bingley was part of the niche market in “buy to let” and self-certificated loans (“liar loans”)…. The housing boom is bust and the chickens are coming home to roost!

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2. garibaldy - September 29, 2008
3. WorldbyStorm - September 29, 2008

That’s a better post than mine garibaldy… :)

In a way do you think that links back into the sometime rhetorical approach to markets i.e. monopolies etc which can be pretty strong?

harpymarx, that was great on C4. Will Hutton was almost apoplectic at Labour’s inability to actually do anything with this.

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4. Garibaldy - September 29, 2008

Clearly there is a rhetorical element to all the discussion of markets, and the power of the market. But it does seem that bigger sections of the Republican Party than I would have thought actually believe this. Which says something about how badly the war in Iraq has gone that the leadership has had to abandon this type of rhetoric. I think the anti-trust legislation will be waved in the rush to create massive new banks.

Agree with you that Osbourne was rubbish, as the Tories are being generally. But unfortunately Labour may seem more rubbish. Was going to post on Cameron on NI politics, but ended up not being bothered.

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5. Wall Street in free fall: chickens coming out to roost « Harpymarx - September 29, 2008

[...] Street in free fall: chickens coming out to roost Bradford and Bingley has been nationalised and news has just been announced that US Congress has voted down the $700bn to bail out the [...]

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6. Eagle - September 29, 2008

That the banks created this mess is true, but there never was a government-free market, particularly in banking. Banking is controlled by the state more than most industries. I mean, the government controls the key ingredient – MONEY – and licenses banks.

Also, the government failed in its duty to oversee the virtual state entities of Fanny Mae & Freddie Mac. At the root of this problem is too many loans made to people who should never have received these loans. The banks made those loans, initially, under pressure from the government and then later they went for them with gusto as house prices soared – well above inflation – and they abandoned all sanity/caution/intelligence. The bad loans were repackaged as good and sold as high earning investments. Too many banks lost sight of the fact that at the root they were buying a lot of risky loans backed only by the houses they were intended to buy.

The banks’ shareholders are paying a big price right now. Sure some former employees got very rich, but so what? That’s not a big issue (any more than it is when I see a failed sportsman drawing a $10m salary).

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7. Eagle - September 29, 2008

I can understand how the Republicans voted today, but it will be a serious vote loser and soon.

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8. crocodile - September 29, 2008

Will Hutton is an interesting character. Not exactly a raving leftie, he has been warning for years about the perils of unregulated markets and the obsession with shareholder value as the measure of a business’s worth. And he’s being doing it, by and large, as a New Labour insider/advisor.

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9. garibaldy - September 29, 2008

Unfortunately Crocodile nobody has been listening to him. All these lessons about regulating banks were supposed to have been learnt in 1929.

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10. WorldbyStorm - September 29, 2008

Cameron and NI politics… interesting.

Eagle, that’s a very stark analysis (which is a compliment). I hadn’t quite thought of it in such a way. You see this as bad for the Republicans? How so? I mean I agree, but I’m curious as to your thoughts on it.

crocodile, I agree, I sort of like Hutton, he’s more leftwing than the British Labour Party, which okay, doesn’t exactly make him a raving revolutionary, but he’s one of those few leftists who seem to intuitively understand commercial activity. I think he was closer to the LP before they took power. Certainly they havent been listening to him.

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11. ejh - September 29, 2008

Sure some former employees got very rich, but so what?

Because the incentive of getting very rich very fast may well have played a role in inducing people to undertake the sort of behaviour that caused the crash. And because the feeling of untouchability, of being masters of the universe, that these salaries gave them, may also have contributed to the feeling that nothing cold go wrong with their schemes.

<i<I mean, the government controls the key ingredient – MONEY

Well, there are number of good reasons for that, not least of which is that the markets are unlikely to believe for long in a currency that’s not underwritten by a government.

(By the way, there is a lunatic Hayek pamphlet I once looked at which recommnded the issue of as many currencies as could be issued by anyboy who wished to issue them, with the market to sort out which of them they believed in and which they didn’t.

It’s a fair bet that Hayek never had to operate a cash register.)

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12. crocodile - September 29, 2008

Yes, ejh, and the culture of banks was to maximise profits in the short term to bump up shareholder value and increase the value of stock options. Because career life expectancy of a ceo in one of the big merchant banks is only about three years, you’d be well out of it with a big pay off whether your deals turned out to be successes or failures in the medium term. Indeed, there’s a case for saying that the guys in charge now desrve scorn and punishment less than the ones who let things go out of control years ago, but have long since cashed in their chips and retired.

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13. CL - September 29, 2008

Peace! Land! Bread!

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14. Eagle - September 29, 2008

ejh

My point was that banks don’t operate in anything like the laissez faire situation that we’ve been told over and over again. They always operate in a regulated environment.

Because the incentive of getting very rich very fast may well have played a role in inducing people to undertake the sort of behaviour that caused the crash. And because the feeling of untouchability, of being masters of the universe, that these salaries gave them, may also have contributed to the feeling that nothing cold go wrong with their schemes.

I’m sure it did. And those who paid those salaries feel like suckers today because their investments are in the toilet.

Look, you want to argue that the regulations should be changed to ensure a greater caution in bank practices? I buy that. But talking about the pay packets is a distraction. I’m in favor of putting limits on pay for those whose banks are about to be ‘rescued’, but otherwise I don’t think the government has a role there.

You don’t think Bill Gates and/or Bono has that “master of the universe” mentality? It’s a common fault with those who have made a ton of money. There’s way too much focus on the salaries and golden parachutes. Those were not paid for by the state and the state won’t be paying them.

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15. CL - September 29, 2008

“We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system.” Roubini, and this before the $700 billion bailout bill failed.

http://www.rgemonitor.com/blog/roubini

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16. Eagle - September 29, 2008

I hadn’t quite thought of it in such a way. You see this as bad for the Republicans? How so? I mean I agree, but I’m curious as to your thoughts on it.

I don’t know what they were thinking. I can only assume that a big percentage of those who voted no did so because (a) they thought it would help them get reelected and (b) they and their staffs are out of their depth trying to understand this.

If no ‘bailout’ is passed and Congress breaks up, then the markets will really tumble. Credit will be completely non-existent and right away there’ll be layoffs across the country. This could all unfold in a matter of two weeks. That will change the mood on election day and those who didn’t want to ‘bailout Wall Street’ will then – finally – see how it connects to them and their constitutents.

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17. Eagle - September 29, 2008

CL,

Buy gold

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18. Eagle - September 29, 2008

I think the anti-trust legislation will be waved in the rush to create massive new banks.

We’ll see. America has a lot more regional, state and local banks than those big names that you’re seeing on the news. Some of those are in trouble, but many are not. I’m not sure anti-trust legislation will really be a factor here.

If anything America has too many banks and too much banking.

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19. Eagle - September 29, 2008

I want to add that I thought the bill was terrible and on one level I’m glad it went down. However, I think something must be done and I doubt any new bill that comes along will contain the changes I’d like to see (like Fannie & Freddie being wound up and the government money being a loan rather than money to buy these securities).

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20. PamDirac - September 30, 2008

From a purely political standpoint, I think the GOP shot themselves in the foot by not helping to pass this package. Most probably Republicans will see another one even less to their liking, either from the current Congress or from President Obama. Failure to get this one through means that economic issues will likely continue to be front and center until November, barring some unforeseen event. And that’s very bad news for the McCain/Palin ticket, whereas if the package had gone through things might have calmed down a bit, at least enough to get people talking about something else.

In addition, you have House Republicans saying publicly that they had to vote against the package because Nancy was just so mean. These guys may have just elected Barack Obama with a nice Democratic majority, and they don’t even seem to know it, or care. I’d be enjoying the spectacle, if I didn’t fear what the next few weeks will hold for the economy.

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21. CL - September 30, 2008

For the govt. to buy the so-called ‘toxic assets’ is not a good idea: these are fictitious capital and have no value and therefore no price. The law of value cannot be repealed. (not while we have a capitalist system)
Sensible economists are coming to a consensus that the best, and probably the only, way to deal with the insolvency of financial institutions, is to inject capital directly-and this involves the public taking an equity stake. Call it socialization.
Banks, and all financial institutions, should be treated as public utilities. This sticks in the craw of the ideological free marketeers. The next few days should be interesting. Will the Republican right wing for the sake of ideological purity contribute to pulling the house down? Should be fun to watch.

Pam D. is right. McCain foolishly claimed credit for the bailout bill before it failed. Obama stayed cool and on the sidelines.

This is surely the finest mess that right wing ideology has gotten the world into in a very long time. The Reaganite and Thatcherite reaction is over. But the Republican crack-up is a clear and present danger until sanity and rationality return to the political economy.

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22. ejh - September 30, 2008

But talking about the pay packets is a distraction. I’m in favor of putting limits on pay for those whose banks are about to be ‘rescued’, but otherwise I don’t think the government has a role there.

But it’s not necesarily about what the government should do. The question is, whether offering these stratospheric bonuses is actualy a good thing, and the argument is that it is not.

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23. skidmarx - September 30, 2008

“But talking about the pay packets is a distraction”
If you think that capitalism can be de-fanged of its worst aspects. I saw in the FT recently that there is a feeling in the banking industry that those responsible for unusual financial instruments are the guilty ones who should be punished. I think it may be Andrew Hilton who pointed out on the World Sevice the other day that the growth in derivatives can be explained as a reasonable attempt to maintain profit growth after the Savings & Loan crisis of the eighties reduced the scope in the real economy.
“sanity and rationality return to the political economy.”
That’ll be when a revolution replaces the current irrational system.

I still haven’t seen any explanation as to why so many Democrats voted against the bailout.

“Buy gold” I hitched a lift with a Nazi once, who advised me to buy seeds and buy gold. I realised he probably wasn’t a member of any master race when he said that although there were people trying to kill him, he knew he could trust me. I see there’s no new vote tomorrow as the ZOG takes time off for a Jewish holiday.(kidding)

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24. WorldbyStorm - September 30, 2008

Problem is, and in a way Eagle you touch on this, that it is impossible in contemporary societies to see any way that governments can’t be involved in financial markets to a greater or lesser extent (and I’d consider that a good thing).

This Nazi, not the sharpest was he skidmarx?

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