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  • Financial crisis open thread

    by Rumbold
    30th September, 2008 at 2:26 pm    

    Any ideas to solve the problems? Stop handing over taxpayers’ money to a bunch of thieves perhaps?

                  Post to

    Filed in: Economics

    43 Comments below   |  

    Reactions: Twitter, blogs

    1. Refresh — on 30th September, 2008 at 3:10 pm  

      I’ve long supported the notion of personal responsibility and with that in mind these bankers should have their personal assets frozen and we should regard them in the same light as your common or garden drug dealer, and Thatcher and Reagan as the drug barons with Professor Alan Walters their Consigliore. Remember their wonderful notion of ‘democratisation of credit’?

      These fat-cats should be forced to prove that their personal wealth has not been acquired from ‘illicit’ banking.

      In the same light, to show we mean what we say, we should extradite every billionaire that has flocked to London to the countries they have robbed - again freezing their assets including football clubs etc.

      Sounds harsh? Not in the least. It needs to be done to bring back morality and integrity to the notion of ‘a fair day’s work’. Its as fundamental as that.

    2. Sid — on 30th September, 2008 at 3:17 pm  

      Is there going to be a review by the Mergers and Monopolies Board following the creation of a number of super-banks thanks to the stronger ones swallowing up the ones that are about to keel? We need consolidated banks like we need a hole in the head.

    3. douglas clark — on 30th September, 2008 at 3:19 pm  

      Refresh is not being hard enough. We should take their passports away, we should place each and every one of them on a money abuse register and they should never be allowed near even a piggy bank again. Would it solve anything? Sadly, no. But it would give me a warm glow….

    4. Refresh — on 30th September, 2008 at 3:31 pm  

      Even incompetence is better than what these guys have done, they have been wilful. Their motto seems to have been milk it whilst you can.

    5. Hermes123 — on 30th September, 2008 at 4:04 pm  

      Every system has within it the seeds for its own destruction - and capitalism is no exception. That is a paraphrase of Karl Marx, who is probably smiling in his grave now! This could bring the western order of things to an end and there is a great cartoon in todays’s Private Eye, with Bin Laden saying ‘I think I should have been a merchant banker’.

    6. Jai — on 30th September, 2008 at 4:12 pm  

      Well, greater regulation is something that’s already been inevitably set in motion. But apparently what’s really required is a systemic change in the culture of the industry; that would be facilitated either by withholding any bail-out packages and letting matters continue to deteriorate (which will have even more disastrous effects for the western economy and global financial markets, especially if more banks collapse), or by implementing successful rescue measures and hoping that the culprits will have learned their lesson.

      FT’s website had a good article yesterday where a retired banker said that the biggest change he’d noticed during the past 20 years had been the personality types of new recruits to the industry, ie. there had been an influx of hyper-aggressive alpha-male types. His tongue-in-cheek suggestion was to “flush out the lot of them and start afresh”.

    7. justforfun — on 30th September, 2008 at 4:40 pm  

      $700 billion is all that is needed, it seems. Not much really.

      Hank Poulson I believe has $700m from his days at Goldman Sachs.

      So he has 1/1000th of the amount required. There must be another 999 Hank Poulsons out there. It should not be too hard to find them. And then there would be no need for the average American to fund this bail out. Nationalize Hank Poulson.

      No wonder Americans are angry - Its one thing to piss on someones back - but then to tell them its raining is really just taking the piss.


    8. Raul — on 30th September, 2008 at 4:44 pm  

      How many perspectives do you view this issue from? From the american perspective, global perspective, capitalism, free trade, globalization, hypocrisy, crony capitalism, leftist delight, alarming complicity of the media , the weakening of activism and US democracy.

      The bill is going to pass, the interest groups are too well entrenched and everyone in power is mixed up with these folks, the pig is going to have a superficial makeover and Congress will pass the bill.

      What’s a lacking is serious analysis of the issues at hand, what caused it, how do we deal with it, what can we do to prevent it happening again, what are the short-long-term consequences, what regulations are needed, but this has been the short thrift in favour of scare tactics and doomsday scenarious to scuttle debate and get things done under the threat of the gun. They do not want to have that discussion because this is about saving private interests and not the economy, the economy will get affected because of their recklessness and unfettered greed so far, not the absence or presence of a bailout. The bailout will just keep some fat cats floating during the crisis. If the situation is as dire as they make it out to be no one would be wasting time arguing about ceo compensation. This is as accurate a description of crony capitalism as you will find anywhere in the world. The first step to a credible bailout is to get rid of Paulson. He is damaged goods.

      Now bailout defenders are talking about common folks losing jobs as if they are bleeding hearts, apparently wall street wants the bailout so that ‘common folks’ don’t suffer. You would have to really dense to fall for that one. In the absence of any economic logic or even attempt to get to the bottom of this we have projection of those who seek accountability and a systematic way to do this as novices and those who call for an immediate bailout with no discussion by erecting a doomsday scenario in a non transparent way as the experts. That’s garbage economics and plain politics.

      The folks in wall street have not only been lecturing about free markets and why people must suffer short term and people do suffer so that companies can become more competitive and efficient in the global economy but also putting pressure on companies to lay off people and make more money. I have no beef with profit maximization, that’s capitalism and all that but its now Wall street’s turn to live up to these ideals and they must.

      If wall street now fancies socialism just because they can’t take the short term pain they have been advocating vigorously for others, then the changes must be more democratic and intensely debated because that is huge change in direction and a huge decision. That’s the burden of exception. There is no escape behind doomsday scenarios or ‘too big to fail’ - in which case the solution to the problem would be to cut the banks down to size but there has been no talk of that.

      There has been a glaring absence of informed economic discussion apart from blogs, well the public is reading up and wisening up thanks to access to a broader range of expert opinion beyond CNBC, NYT and their ilk and who have no conflict of interest and say it like it is. Once again in a global event the media is compromised in their complicity and superficiality

      From the US perspective this is an awful situation for voters because they will come face to face with their helplessness. The only thing that can stop it is a million person march or more in Washington and only because its election time, if elections were 2-4 years away this would gone though like butter.

      From the global perspective the silence of the usual busy bodies like the IMF and world bank is jarring to say the least given their hyper activism during the asian crisis and long winded lectures of free market where these principles were forced down many countries. Now the message from US is as long as its benefits US its good and so called principles are self-serving foreign policy tools, this destroys whatever little credibility they had in the economic realm. US duplicity and hypocrisy is now so endemic and self interest and arrogance so blatantly in your face that I don’t see how anything the US says can be take seriously. How much credibility will the bitter pill of free markets have in the next crisis that happen worldwide, or when more IT workers in US are laid off for off-shoring to India and other places. This changes everything.

    9. Katy Newton — on 30th September, 2008 at 4:50 pm  

      Now bailout defenders are talking about common folks losing jobs as if they are bleeding hearts, apparently wall street wants the bailout so that common folks don’t suffer. You would have to really dense to fall for that one.

      It’s not about bleeding hearts. Wall Street needs these people to be able to spend their money because ordinary people spending their money are the basis of every financial system. Therefore they need people to keep their jobs. The problem with a major financial crisis is that regardless of who was to blame for it in the first place, everyone suffers at every level once it’s happened. That’s why everyone needs some sort of bailout.

      I am not a big fan of government intervention and I personally think that steps should have been taken to make sure that this state of affairs was never reached, but now that it has been I can’t see any alternative to some sort of a bailout, unless everyone wants unemployment, recession, poverty, mass foreclosure etc etc etc.

      Interesting article on why the bailout currently proposed isn’t a particularly good idea here.

    10. BenSix — on 30th September, 2008 at 5:56 pm  

      $700 billion is all that is needed, it seems.

      In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

      “It’s not based on any particular data point,” a Treasury spokeswoman told Tuesday. “We just wanted to choose a really large number.”

    11. Raul — on 30th September, 2008 at 6:03 pm  

      @Katy - Capitalism can cause unemployment, recession, poverty and all these things as a matter of course. Does that mean we should dismantle capitalism? The upside is more efficiency. Similarly this crisis CAN cause all those things but the upside is reckless and inefficient players exit the system hence more efficiency. If you accept the system you have to play by the rules.

      Surely outsourcing cause job losses in US and affects the financial system though others gain, so do we ban outsourcing? I am sure those who are directly affected will make gladly make a case for it and subvert capitalism just like wall street is now but that doesn’t make it right hence the need for independent experts most of whom are strongly not in favour of this particular deal as opposed to a deal - a very important distinction that supporters of wall street gloss over - and Paulson to make himself scarce.

      This is the problem, people recognise the need to do something but it should be in in the interests of the economy and not some interested group who can subvert the system to their benefit like they have done to cause the crisis. They want this to be thorough, reviewed and debated and a solid plan put into action, not fall for scare tactics and rescue some banks and well connected folks from bankruptcy at tax payers expense under the guise of all round doom in the economy like Katy is suggesting. Merely saying it is not enough, make the connection and the case of the impact otherwise its just scare mongering.

      Understand the crisis -

      Paulson and crony capitalism -

      Scaremongering -

    12. Refresh — on 30th September, 2008 at 6:18 pm  


      Thanks for the link. Something very odd going on here, Paulsen and Bush want no oversight, no say in CEO compensation and both are scheduled to leave office very soon.

      And this ‘“We just wanted to choose a really large number.”

      All of this from an administration that has brought nothing but calamity, and wants to export ‘free market’ democracy to the world.

    13. Katy Newton — on 30th September, 2008 at 6:36 pm  

      Raul, please read what I said before you start saying “like what Katy is suggesting”. In case you didn’t notice, I linked to an article explaining why this bailout is not a good idea, and advocating exactly the sort of well-reasoned, properly argued plan (rather than a random cheque for $700bn) that you’ve referred to, yes?

      Also - I’m currently wrestling with this army of straw men that you’ve unleashed. I didn’t suggest dismantling capitalism or banning outsourcing. I don’t believe in nationalisation. I do believe in the government taking a part in trying to put forward a strategy to get America out of the huge smelly hole it appears to have dug itself, because unlike you I live in the real world, not textbook-land, and I know that generally speaking most people in the financial system have taken steps to insulate themselves personally against this sort of financial crisis, whereas most ordinary not-rich working people have not.

    14. Raul — on 30th September, 2008 at 6:59 pm  

      Katy - There is no strawman but one must resist the temptation to defend hypocrisy under the guise of pragmatism, in which case values become meaningless. However that’s my personal opinion of the textbook variety and is of no consequence.

      No one who believes in free markets can support this bailout without more debate, you are assuming there is big smelly hole but I would like to know more about it, is this a big smelly hole for the economy or just for the bankers, before taking a call and unfortunately this is the discussion that should be happening instead of scare mongering.

      What is disappointing is when people make the direct connection between the bailout and unemployment, recession and poverty without proving any arguments about why this should be so as if its inevitable, that’s just irresponsible.

      It is a possibility but by no means a certainty, similarly there could still be unemployment, poverty and definitely recession inspite of the bailout, or there is no bailout and these things happen anyway. So I do want more experts and economists to be involved in coming up with a plan beyond the wall street clique of Paulson and his flunkies.

    15. sonia — on 30th September, 2008 at 7:23 pm  

      Yes - first identify the problem. Different people will tell you that there are different ‘problems’. The problem really is much deeper than ‘whose money’ goes where rather it is the problem with the money system itself.

      The money and hence financial system is a) not understood for what it is really and b) this system is fundamentally unsustainable.

      why? because:

      the system is that money is created through interest-bearing debt. so there is always more debt than money in the system. so the ‘issue’ will never be resolved i.e. collectively, all debt will not be able to be paid off, unless you create money through other mechanisms e.g. spending it into existence and not through interest-bearing debt. what we do now is move a bit of debt here and there, from person to person, institution to institution.

      Now these are the issues that NO ONE talks about, economists in particular. Most people don’t understand and why should they.

      so focusing on the bailout is like “arguing” who is going to pay for the lock on the door after the horse has bolted, when your barn door is about to collapse. its a bit late for that, its a minor issue really, compared to the problem at hand

      if people are actually interested in money and how it is created, the myths around money, there is a very good presentation somewhere on the net. I do think this ‘credit crunch’ time is a good time to flag up the “system fundamental” problems.

    16. sonia — on 30th September, 2008 at 7:33 pm  

      “The problem with a major financial crisis is that regardless of who was to blame for it in the first place, everyone suffers at every level once it’s happened. That’s why everyone needs some sort of bailout.”

      that’s definitely true. now we’re in the system we’re in, everyone is impacted by it.

    17. MaidMarian — on 30th September, 2008 at 7:56 pm  

      Perhaps I can offer a slightly different view - one that does not seem to have been much of a feature in the coverage of this issue?

      I have heard all about rapacious banks and thieving bankers ad nauseum and I have similarly heard all about government’s regulatory failure. All good points that surely need to be weighed, I do not dispute that.

      But what about the public? Someone decided personally to take out a loan. Someone decided personally that mortgaging themself to the hilt and relying on the property market was a good idea. Someone voted for deregulation repeatedly. Someone decided to sell their houses at recklessly inflated prices.

      It is curious that whilst people are keen to pass the plame to banks and government few seem willing to look at themselves, their neighbours and their friends.

      Sonia (16) - Is ultimately spot on. It is not enough to bemoan bailing out bankers because the stark reality is that everyone suffers and in such a situation the poor tend to suffer most. Bailout is the least bad option, I am under no illusions.

      But I have rather tired of watching (for example the rather poor C4 programme ‘The Human Cost of The Credit Crunch’) people complaining as though somehow there were offered a cast iron guarantee that their property would rise in price exponentially in a way that would sustain large scale borrowing. These people are adults and they made adult decisions.

      I have been responsible, I would like to think. My wife and I have a mortgage at 3.25x income, no loan beyond a small overdraft, save a little every month and pay into a pension scheme. Despite this, we seem to be paying the price for more reckless individuals and families.

      Of course people are angry - what we are seeing is that banks have got themselves into a position where they have enjoyed private benefit whilst their risks have been socialised. When the risks reify the benefits of the past have not been due as a part of the deal.

      But however sugar-coated assertions are about only acting once massive recession kicks in those arguments are outweighed. To my mind, of course, government are more than entitled to be far more assertive in future.

      In finest Daily Mail - Something must be done!

    18. Raul — on 30th September, 2008 at 8:43 pm  

      Blaming loans takers partially is counterproductive, if a bank offers you a loan at 2% you are not going to say no, its not your job to evaluate your banks’s business plan or manage your bank’s risks, its your job to evaluate yours. At 2 percent you can pay back the loan, perhaps at 4% you couldn’t and won’t take the loan. So blaming the loan taker seems unfair. It was Alan Greenspan’s and the Feds idea to have low interest rates apart from political interference with FannieMae an Freddymac to extend loans to more people and surely these folks must be held accountable.

      The banks is managing its risk and hopes to make a profit, and till 6 months ago they were rewarding themselves handsomely. So the banks appear to be responsible fair and square for the mess along with their cronies in the system.

      The implications of this bailout are huge, for the US and globally. Globalization, capitalism, and free markets takes a hit even though its badly managed US systems that are responsible. All the issues like outsourcing, free markets and globalization along with protectionism in economies is going to be very difficult to argue against on principle if you make an exception without proper debate and a well laid out rationale for intervention and what it hopes to accomplish.

      Paulson’s current plan far from building this framework to justify the intervention only sinks US credibility further down the abyss for non transparent action and in your face cronyism. Paulson is singularly responsible for this mess and the outrageous terms of the bailout and should be let go and someone far more balanced and credible brought in.

      This is not about blaming banks and feeling happy. Its about evolving a robust framework and plan of action to manage the fallout, identify and address the problems and shortcomings, clean up the mess and prevent this type of thing from happening again. But the only thing that has been addressed in unfettered power for Paulson, 700 billion to buy junk paper, unclear exposure and benefits to tax payers and hope for the best. This doesn’t look like a serious response more like a bailout of friends. Please do read the 2nd link I posted in my earlier post about the Treasury departments’s secretive concall to reassure analysts and make a mockery about some of the agreed terms like releasing the money in tranches, and tell me you don’t think this is is a criminal enterprise and cronyism in action.

    19. Bert Rustle — on 30th September, 2008 at 9:09 pm  

      In my opinion, to solve the problem, one needs to address the causes of the problem. The following links are illuminating.

      Stan J Liebowitz professor of Economics in the Business School at the University of Texas at Dallas has addressed this topic. “The Real Scandal”

      “…the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults. … In the 1980s … activists [claimed] … that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation. … the Boston Fed [stated] “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” … Some of these “outdated” criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant’s ability to manage debt. …”

      An early paper of his on this topic is “Mortgage Discrimination in Boston: Where’s the Bias?”

      His latest paper is downloadable at “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown” “… Why did the mortgage market melt-down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be? It is the thesis of this paper that, in an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s. The decline in mortgage underwriting standards was universally praised as an ‘innovation’ in mortgage lending by regulators, academic specialists, GSEs, and housing activists. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The bubble increased the number of housing speculators with estimates indicating that one quarter of all home sales were speculative sales prior to the bubble bursting. The recent rise in foreclosures is not related to the subprime/prime distinction since both markets had similar size increases in foreclosures that occurred at exactly the same time. Instead, the adjustable-rate/fixed-rate distinction is the key to understanding the rise in foreclosures. This is consistent with speculators turning and running when housing prices stopped rising. It is not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown. …”

      The Boston Fed. Boston Fed - Equal Opportunity Lending manual can be found at

    20. sonia — on 30th September, 2008 at 9:14 pm  

      i think maid marian makes a good point in many ways. (though i see raul’s point of view as well) it makes me think of the way collectively people have just accepted (without asking or thinking too much) the ‘powers that be’ about money and the economy, and that someone somewhere knows what’s going on and can ‘fix it’. its this belief in authority and that authority is doing what it can and for our good and our interests. (and that most economists aren’t brainwashed fools) rubbish, a load of rubbish.

      this goes all the way back to Bretton woods.

      of course the reality is there is systemic failure, and within the system, individuals and institutions do what’s in their best interest/or what’s convenient at the time. fine, that’s understandable, but let’s actually acknowledge the scale of the problem, and the fact that the system is fucked, and that means all of us, are affected. which is why we need to all step back and think really hard about what is actually going on. together we are all embroiled in this.

      China will be bailing us all out, or not, as the case maybe. So it’s not really even taxpayers money, in the American case!

    21. sonia — on 30th September, 2008 at 9:21 pm  

      Spend money into existence through funding public infrastructure (dont bloody borrow it from some private who knows who and pay interest on the debt at extortionate rates) if you’re the government, bloody spend the money into existence. governments “borrowing” money from ‘private’ lenders - this is the really stupid thing.

    22. Katy Newton — on 30th September, 2008 at 10:04 pm  

      No one who believes in free markets can support this bailout without more debate


    23. Refresh — on 30th September, 2008 at 10:31 pm  

      A bit on ‘Democratisation of Credit’ - note the Goldman Sachs connection from a 2005 piece on credit Cards:

      And so I call Lord Griffiths of Fforestfach. He’s the vice chair-man of Goldman Sachs International, a former director of the Bank of England, and once the head of Margaret Thatcher’s Domestic Policy Unit. I’d been told that if anyone could answer that question, he could.

      I ask him if this whole mess can be traced back to one man. I expect him to say something like, “Oh no, it’s far more complicated than that. It is a gradual shift. Nobody is to blame.” But he doesn’t. Instead, he says, “I hate to say it, but I was one of the people who argued strongly in favour of it.”

      “When was this?” I ask.

      “December 1970,” he says. “At that time, the banks were a classic cartel, very much a middle-class preserve, and I believed that the democratisation of credit had to be a good thing. Everyone in principle should have access to credit.”

      So, in December 1970, he says, he wrote a paper for the Institute of Economic Affairs advocating a revolution in banking. The report - Competition In Banking - concluded: “The only way in which to make banking a competitive industry is to remove all obstacles to potential new entrants into the industry.” It was, by all accounts, a key factor in the subsequent deregulation of UK banking.

      It becomes obvious during my conversation with Lord Griffiths that he has come to believe that he inadvertently unleashed some kind of monster. He says he never could have predicted “the dynamism” with which the lenders would pursue his ideas. “The dynamism,” he says. “The innovation.” I’ve never heard these words uttered with such sadness. “I don’t think anyone would have foreseen how innovative and aggressive and competitive the financial services would become in their techniques,” he says. “The whole lot of them are to blame.” He pauses. “I’m not advocating a return to the status quo. But the pendulum has swung much too far.”

      Now Lord Griffiths has just published a new report - What Price Credit? - which has this somewhat apocalyptic conclusion: “The sheer scale of consumer debt [£1 trillion] has made millions of households extremely vulnerable to shocks to the economy … such as oil price rises, acts of terrorism and wars … Debt is a time-bomb for the 15 million people who struggle with repayments.”

      I tell Lord Griffiths about Richard Cullen’s suicide, and he sighs. “I had a friend,” he replies. “A clergyman. I met him for dinner one night. He was suffering from cancer. He broke down over dinner and confessed to me that he had 32 credit cards. He said he was using each card to pay off the charges on the others. He told me about the shame he felt. You could just sense the emotional pressure. I’m no doctor … ” Lord Griffiths pauses, then says, “He died soon afterwards.”

      Then he says that a friend of his recently compared the credit card industry to slavery - that the lenders are the new slave masters and the borrowers the slaves. I ask if he’s bombarded with credit card junk mail, and he says, “Oh yes - I probably get one every fortnight.”

      The whole article here….

      Who killed Richard Cullen?It began with a loan for £4,000 and finished with a £130,000 debt and a man ending his life in despair. His wife was barely aware of the calamity by credit card that had befallen them. How did it happen? Jon Ronson tracks down the bankers, the list-brokers, the lifestyle analysts who have made us the most credit-addicted country in the world

    24. Bert Rustle — on 1st October, 2008 at 8:19 am  

      Karl Denninger explains how the TARP bailout enables non-US banks to sell securities based on non-US mortgages to US banks which are then to be bailed out by the US taxpayer.

      Peter Brimelow has an article sub-titled “ Another Case Of Collusion? It’s Time To Take A Hard Look Washington As Well As Wall Street ” which has to telling quotes (and linked references)

      … I really did co-write the first one, for Forbes magazine on Jan. 4, 1993. [The Hidden Clue] The Federal Reserve Bank of Boston had just published a study purporting to prove definitively that mortgage lenders were discriminating against minorities, the hot cause of the day. [Mortgage lending in Boston: Interpreting HMDA data (Working Paper 92-7)]

      But when my brilliant co-author, Leslie Spencer, asked the Boston Fed’s research director, Alicia H. Munnell, what minority default rates were, she said proudly that census tract data showed that they were equal to whites. When Leslie pointed out that this actually proved there was no discrimination, because the lenders had somehow weeded out the credit risks down to the same acceptable level, Munnell was dumbfounded and had to concede (on tape) that she did not, in fact, have definitive proof of discrimination at all. …

      … Bottom line: LTCM seems to have been bailed out because it was well-connected. Its connections were significantly to Goldman Sachs, which in turn was extremely well-connected to federal government. Its former CEO, Robert Rubin, was Treasury Secretary at the time.

      By an amazing coincidence, another former Goldman CEO, Henry Paulson, is orchestrating the current bailout.

      Significantly, the books revealed that LTCM has made itself the “chosen instrument” of, for example, the Italian government in its efforts to groom the Italian bond market in order to join the Euro. LTCM repeatedly cornered the Italian bond market with the Italian government’s tacit connivance, even though this was devastating to Italian small investors.

      Dunbar wrote of LTCM that by the end of 1997: “Governments treated it as a valued partner, to be used whenever markets weren’t efficient enough to achieve macroeconomic goals.”[Inventing Money, P. 179]

      My questions: What governments? What goals? Are subprime mortgages just a later example?

      How long has this sort of collusion been going on?

      After the Panic of 1907, the U.S. Congress set up the Pujo Committee to investigate the so-called “money trust.”

      Of course, that resulted in the Federal Reserve, which arguably is now part of the problem.

    25. El Cid — on 1st October, 2008 at 9:19 am  

      The funny thing about this mess — the mother of all credit busts — is that it can be legitimately attacked from both left and right.

      Those on the left can point to the old Marxian critique about how profits are privatised in a capitalist system while losses are socialised. The man and woman on the street and the middle class professional bamboozled by a subject out of his or her comfort zone can rail against fat cat bankers bloated on ill-gotten gains and protected from their own incompetence.

      Those on the right meanwhile can rail against government interference in the market and argue in favour of letting it all go to pot, which would allow the free flow (eventually!) of capital to sort things out, no matter the damage caused in the interim. In the log run we would be better off and stronger. They can also point to the fact that credit extended by a quasi-state institutions to poor people so that they could live the American dream and buy their own homes lies at the heart of this crisis. After all, the Federal National Mortgage Association (or Fannie Mae) was created in 1938, a key pillar of Roosevelt’s New Deal policies.

      So if we can steer clear of the ill-informed knee-jerk partisanship for a moment, I would make the following observations.

      1) The US (and to a lesser extent the UK) have long been living beyond their means on a cocktail of easy credit and unrealistic expectations. An adjustment that would mean people saved more, spent less, and were less dependent on Asian credit was inevitable. The longer it took, the bigger that adjustment.

      2) This crisis was a failure of regulation. Why were banks allowed to borrow massively from other banks beyond their means (i.e. beyond what they already had on their balance sheets through cutsomer deposits).

      3) Why were banks allowed to originate debt just to sell on to other investors rather to take on to their own balance sheets, seemingly without limitation?

      4) Why were rating agencies given an effective monopoly over credit quality checks affecting trillions, disincentivising investors from doing their own due dilligence.

      5) Why is a study of the history of bubbles not compulsory for an industry which tends to be relatively youngish?

      6) Why are financial bonuses not tied to long-term performance?

      7) All these and several more questions will — hopefully — be addressed in time by the regulators and by the market itself (the stand-alone Wall Street investment bank model, after all, seems already to have been wiped out).

      At the same time, though, it is important to understand what is going on here. This is the banking system, the oil that feeds the engine.

      If we don’t fix it, it’s going to get a lot worse. This is no time for novices.

    26. shariq — on 1st October, 2008 at 9:56 am  

      Great comment El Cid. Do you mind if I publish it as a guest post later today?

    27. El Cid — on 1st October, 2008 at 10:29 am  

      Feel free Shariq. I’m flattered

    28. Jai — on 1st October, 2008 at 10:38 am  

      Agreed with Shariq — Excellent comment #25, El Cid. I’m glad your time in the Back Office at your local boiler room outfit in Romford has taught you something ;)

    29. Sid — on 1st October, 2008 at 11:15 am  

      Why is a study of the history of bubbles not compulsory for an industry which tends to be relatively youngish?

      They say that the frequency of these boom/bust cycles is 11 to 12 years. But the memory of industry only goes back 8 years.

    30. El Cid — on 1st October, 2008 at 11:37 am  

      Yes Jai, over a mug of tea and a Kit-Kat in the local kaff me and the lads dissect many a global problem
      It’s just common sense sometimes ennit?

    31. douglas clark — on 1st October, 2008 at 11:51 am  

      El Cid,

      Congrats on the uplift. It is entirely justified.

      However I’d have to ask you which of the options you posed: either,

      the Marxist critique, which oddly I’d subscribe to,


      the right wing critique which looks like a lot of squeeling upper class tits to me,

      you personally agree with.

      Just asking.

    32. MaidMarian — on 1st October, 2008 at 12:57 pm  

      Raul (18) – ‘if a bank offers you a loan at 2% you are not going to say no, its not your job to evaluate your banks’s business plan or manage your bank’s risks, its your job to evaluate yours’ Total cobblers.

      Sorry, but why are individuals not going to say no at 2%? How about this, ‘no – I do not want a loan, I want to live within my means.’ Easy enough I think. Interest rates can do up as well as down, people should know that. Individuals should understand terms of credit. Certainly they should make no assumptions about a permanent rise in property prices to underpin repayments as many seem to have done?

      Surely it is in the interests of a person to evaluate banks? My wife and I steered well clear of Northern Rock in 2005. Any bank that essentially lends £8 for every £1 it holds is playing with some serious gearing and we made an informed choice on that basis.

      You skate very close here to allowing any individual to abdicate responsibility. The sentence, ‘So blaming the loan taker seems unfair,’ is quite astonishing.

      Let me be clear, banks have much to answer for, but I do not feel that individuals should be allowed to abdicate responsibility and claim they are a ‘victim’ of the ‘credit crunch’ when they are the ones who made adult decisions to borrow to excess. I quite agree that there is, to say the least, a bad taste left in the mouth by the socialisation of risk against private benefit. But if it is my taxes that stand behind bad debt my wife and I are essentially paying for the bad decisions of individuals aren’t we? Sonia (20) puts it very well about this blithe acceptance. Many of us did not sign up to that acceptance and we are the ones who look like we will have to pay the price. I have no problem per se with a bailout. The social costs simply can not be ignored. What I have a bit problem with is the, ‘not me guv, I’m a victim of the credit crunch,’ mentality that seems to have taken hold.

    33. David — on 1st October, 2008 at 12:59 pm  

      Stop handing over taxpayers’ money to a bunch of thieves perhaps?

      Have you abandoned your anarcho-capitalist ideals? Or do you need a bailout from the PP piggy bank?

    34. sonia — on 1st October, 2008 at 1:42 pm  

      we should read bert rustle’s links
      at the end of the day the so-called economists and governments who listen to them have a lot to answer for - they are the ones who gave this shoddy system the legitimacy it has, and that’s why individuals thought ah these guys know what they’re talking about.

    35. sonia — on 1st October, 2008 at 1:44 pm  

      milton friedman
      blame him

    36. Refresh — on 1st October, 2008 at 1:55 pm  

      El Cid, you summarise it quite well. Its not that nothing should be done. Its

      1. What
      2. To whom
      3. for whose benefit

      that will define it as a left/right solution.

      I for one have been clear, my knee keeps jerking the same however much I read on the subject. The bail-out is already being viewed as the biggest heist in history. I think Michael Moore has something to say on the subject.

      So here is my position on the 3 W’s

      Put $700Bn into the economy (not the same as putting it into the banks) as targetted tax credits and create jobs so that people are enabled to continue to pay their mortgages. Consider this fulfilling another role, poverty reduction.

      Clawback the $300Bn+ tax breaks Bush handed out to the rich. And lets watch the fun when the rich turn on the super-rich.

      Lets look again at the bonus schemes and structures to identify complicity and profiteering and identify laws and regulations under which we can legitimately lynch these ‘loadsamoneys’. If the laws and regulations do not exist, lets put them in place and make them retroactive - and then lynch them.

      To avoid these high fliers from polluting other sectors of the economy, we need a blacklist so that they are never knowingly re-employed in any position of authority. This is the Executive ASBO, that should have been in place well before Blair started picking on hoodies.

      For whose benefit - the poor, the taxpayer, and the honest - and quite frankly Business.

      When we are done there, we should turn to the energy sector. One step at a time.

    37. Refresh — on 1st October, 2008 at 3:24 pm  


      Your position and mine are probably not dissimilar except you went for the higher risk of 3.25x earnings. I resolutely avoided that. I presume something persuaded you to take the higher risk.

      With the phenomenal level of advertising for credit cards, mortgages, driveaway-a-car-for-£99 deals that we have seen over the last decade we should not be surprised that people were persuaded.

      Add to that the younger generation who have seen nothing but credit cards and student loans have no other real experience of money. Lets not forget remortgaging became a way of life - made easier by one-click switching between providers offered by technology. I cannot blame these folk.

      Companies would not spend that much on advertising if didn’t work. It worked because all voices which spoke up about it were silenced. The government (from Thatcher to Blair) relied on the feel-good factor that came from the credit bank-rolled by rising equity - so it was not going to voice concerns.

      Voices of reason are/were so silenced that the quality press even ran regular columns and tables showing how to switch credit cards and mortgages for the best deal of the day. Surrounded by that level of propaganda, I think you are being a little too harsh with the public.

      Having said that, I have always resented the credit card, and resented debt. My excuse (or saving grace if you prefer) is that I am a little older and still remember Hire Purchase agreements and my father’s time honoured attitude to debt.

    38. MaidMarian — on 1st October, 2008 at 6:03 pm  

      Refresh (37) - I certainly take the point. Incidentally, I went for 3.25 only after a great deal of thought and playing with the numbers.

      Advertising, student debt and so on, yes. These are valid points, well made and taken. But is it harsh not to question why people run up debts that self-evidently are a risk too far? Let me be clear, the point in my original post was not to abdicate banks or regulators of responsibility. It was to point out that at some point, adults in severe debt made an adult decision to take on that debt.

      To my mind it is stretching a point to say that debt has somehow been rammed down the collective throat, but I suspect we are debating degrees here rather than the overall point.

      One solution perhaps springs to mind. Instead of having a property market that appreciates and hence is seen (wrongly, it would appear) as a ‘safe bet,’ we have a currency that appreciates. That way savings become more valuable, property prices go through relative falls, pensions become more attractive and higher interest rates are attractive. Equity in houses also becomes a bigger cushion.

      The dollar’s slide under George Bush (40% in 8 years I believe) will probably be a bigger long term legacy than Iraq from his time in office.

      Whether Sterling or the Euro are the better bet may be a question whos’e time will come again.

    39. Refresh — on 1st October, 2008 at 7:04 pm  

      ‘To my mind it is stretching a point to say that debt has somehow been rammed down the collective throat, but I suspect we are debating degrees here rather than the overall point.’

      Actually there was a lot of ramming going on. A good example are the chain stores. Often people making a purchase were being offered an immediate 10% discounts if they signed-up to their store card. And they would tell you that you can cancel it within 30 days but still get the discount. The finance companies will have factored in the number of people who will forget to cancel or foolishly hold on to it. Its a statistical business. They can afford the discounts because of the extortionate rates they charge.

      An experience I had only 3 months ago at a furniture store when ordering a kitchen (heavily discounted already), the sales guy was desperate to get me to take it on credit without needing to make a payment for 2 years, to the extent he was willing to give me further discounts. I declined. And he then explained that he would get a better commission if I took the agreement. The commission of course came from the finance company. So cash was not king. That I am afraid is the nature of the beast.

    40. douglas clark — on 1st October, 2008 at 7:16 pm  

      Refresh @ 39,

      Every time I go in to buy something from an electrical retailer, I get exactly the same sort of hard sell. There is a category of salesman who would lure you into indebtedness who is independent of sector. Banks are just as guilty. These are the modern, and legitimised, version of loan sharks….

    41. Refresh — on 1st October, 2008 at 8:24 pm  

      ‘These are the modern, and legitimised, version of loan sharks….’

      For over two millenia indebtness and usury was derided, and the last 25 years have shown us why.

      The ancients knew their stuff and brought in regulations to match.

    42. douglas clark — on 1st October, 2008 at 9:02 pm  



    43. Bert Rustle — on 2nd October, 2008 at 8:55 am  

      Aggregated George W Bush clips on promotion of minority home ownership in the USA. Ignoring the intermittent partisan titles in this link, it clearly demonstrates that George W Bush was as much on-board as the Democrats.

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