Wednesday, February 06, 2008
Meanwhile back with the Rocky banks..
A timely reminder that there is no such thing as THE Free Market untrammelled by ‘government’. All markets exist in some form of framework, if only to give us confidence to deal with strangers.
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
….. the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
The bigger point still, however, concerns macro-prudential regulation. As William White of the Bank for International Settlement has noted, banks almost always get
into trouble together. The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example…….In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.
Labels: banks, crash, credit, economics, Financial markets, globalisation, government, taxpayers
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Wednesday, January 30, 2008
A dozen banks collapse, depositors wiped out
Story in Wall Street Journal. Fortunatly this collapse is in 'Second Life' not on Wall Street proper or our own shores - though the make-believe financial institutions were taking in actual real world money from eager depositors.
Though as this Metafilter report (30 Jan 2008) makes clear things are really fairly hairy in the so-called real world.
Wonder if this secrecy is reassuring...
Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits.
Though as this Metafilter report (30 Jan 2008) makes clear things are really fairly hairy in the so-called real world.
According to the latest biweekly numbers released last Thursday by the Federal Reserve, for the two weeks that ended January 16th American banks had negative $1.3 billion in non-borrowed reserves. This is, historically, extremely unusual; just two months ago they had $30 billion (positive, of course) in non-borrowed reserves. The only reason some banks haven't been shut due to insufficient -- negative! -- reserve requirements is that the Federal Reserve is currently loaning them enough money through the brand new TAF (Term Auction Facility) program (also running in Canada and Europe) to make up their shortfalls. Today's TAF press release says that 52 American banks or institutions are currently receiving loans totaling ~$40
billion -- but the Fed refuses to name who they are.
Wonder if this secrecy is reassuring...
Labels: banks, credit, Financial markets
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Wednesday, January 23, 2008
Ex post facto -its economic deja vu again.
One way of spotting pseudo-economics flannel in these uproarious days is to watch for Bloomberg-TV style ‘market’ announcements. Bloomberg (and other Market Report TV services) have cross-screen banner reports of this kind:
“Megacorps down 3 following oil price jitters. BigBang soars by 6 after boardroom revamp”
In other words commentators claim to know exactly why thousands of shares have moved or stuck over a short timescale. The possibility that it may all be noise or random dances or due to sheer cussedness just isn’t acceptable. So ex post facto reasons have solemnly to be attached to price reports.
If the commentators really were able to give such precise analysis at such short notice they wouldn’t be out on TV or on the financial pages or even on the blogs. They would be in some back room making money. Except that in the backrooms the old story of economic pride blinding sane judgements hits us once again. So being out of sight is no guarantee of economic sanity either. Déjà vu anyone?
There are serious analysts out there but they tend to look at more fundamental things. The Bloombergistas are no more knowlegable that political ‘reporters’ who hyperventilate on opinion polls and bar-room gossip.
Only (begin to) trust analysts who admit that we are today like a ship in a huge storm, that nobody can micro-predict where wind and currents are pushing us, and that there are no easy solutions like interest rate cuts to bring us to port or even calmer waters. We have years of greed and stupidity (including uncritical market-worship) to undo and the reason it is happening now is that we reached a point of instability.
What we need is economic seamanship, and for me that includes scepticism of knee-jerk ‘market analysts’.
“Megacorps down 3 following oil price jitters. BigBang soars by 6 after boardroom revamp”
In other words commentators claim to know exactly why thousands of shares have moved or stuck over a short timescale. The possibility that it may all be noise or random dances or due to sheer cussedness just isn’t acceptable. So ex post facto reasons have solemnly to be attached to price reports.
If the commentators really were able to give such precise analysis at such short notice they wouldn’t be out on TV or on the financial pages or even on the blogs. They would be in some back room making money. Except that in the backrooms the old story of economic pride blinding sane judgements hits us once again. So being out of sight is no guarantee of economic sanity either. Déjà vu anyone?
There are serious analysts out there but they tend to look at more fundamental things. The Bloombergistas are no more knowlegable that political ‘reporters’ who hyperventilate on opinion polls and bar-room gossip.
Only (begin to) trust analysts who admit that we are today like a ship in a huge storm, that nobody can micro-predict where wind and currents are pushing us, and that there are no easy solutions like interest rate cuts to bring us to port or even calmer waters. We have years of greed and stupidity (including uncritical market-worship) to undo and the reason it is happening now is that we reached a point of instability.
What we need is economic seamanship, and for me that includes scepticism of knee-jerk ‘market analysts’.
Labels: crackpots, credit, Markets
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Thursday, December 13, 2007
The credit crunch - private parasitism on the public purse?
The idea of nationalising Northern Rock gets a cool comment in an article by Ann Pettifor (Globalisation: Sleepwalking to Disaster) posted in ‘Open Democracy’.
Pettifor calls attention to the analysis by the International Swaps and Derivatives Association that in the second half of 2007 the value of Credit Default Swaps (really a form of insurance) was $43.5 trillion - that is about £21,000,000,000,000 sterling give or take a few tens of millions between friends. Which is twice the value of the US Stock market and three times the GDP of the USA.
On Northern Rock she says:
The debate on all this will be quite heated I think.
Pettifor calls attention to the analysis by the International Swaps and Derivatives Association that in the second half of 2007 the value of Credit Default Swaps (really a form of insurance) was $43.5 trillion - that is about £21,000,000,000,000 sterling give or take a few tens of millions between friends. Which is twice the value of the US Stock market and three times the GDP of the USA.
On Northern Rock she says:
Private gains and public losses
The tide of “easy money” daily drains away from the stricken mortgage-lender Northern Rock and other financial institutions. This bank was chaired until recently by Matt Ridley, a rightwing libertarian who once wrote that "governments do not run countries, they parasitise them”……
The management and shareholders of Northern Rock have built up £40 billion ($80 billion) in
liabilities, mainly to British taxpayers. Alongside the apparent bids for the company - from Virgin and the private-equity firm Olivant among others - the option of the Bank of England to "nationalise" it, and therefore "socialise" its liabilities - is being actively promoted. In that case, the burden of its rescue would fall on British taxpayers. That has not stopped investors entering the fray and blackmailing both the government and the Bank of England for more money.
The crisis of Northern Rock has exposed many persistent delusions about capitalism, among them one recycled in openDemocracy by Roger Scruton: it is one of capitalism's strengths "that, when investors make mistakes, they pay for them" (see the tenth comment here).
Not so. While gains by banks and corporations are inevitably privatised, their losses are often nationalised (read socialised). The true parasites reside in the private sector.
The debate on all this will be quite heated I think.
Labels: credit, economics, globalisation, taxpayers
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