“George Parr, thank you very much.”

Robert Peston is concerned [Should I buy or sell? – Ed] about “a new and worrying phase” of
the credit crunch. Meanwhile, if you don’t understand what all the fuss is about, let the two Johns, Bird and Fortune, explain.. The Guardian helpfully adds the transcript.

, , , , , ,

  • Robert Peston is concerned [Should I buy or sell? – Ed] …

    You should really get that dual-identity thing looked into, Pete. It’s really reaching worrying proportions.

    Maybe Iris’s shrink could help you once he’s fixed all the raving queers?

  • Dave

    If you noticed Gordon Brown finally using the R word (after the Governor of the Bank of England ‘outted’ the economy as being in recession the day before), he was very careful to list a number of countries in recession and to follow his long list with ‘and finally, because no country is immune to the effects of global recession, the UK’ [not an exact quote]. The trick in this is to absolve national government of responsibility for events that they had sovereignty over by transferring the blame for their own autonomous actions onto the mythical self-governing Atlantis of ‘Globalisation.’ Yet all government remains local, despite the levels of interconnectivity that Peter Preston refers to. This started with local government (America) keeping interest rates too low for too long in order to promote consumer spending and thereby artificially stimulate the economy. In addition, the banks were coerced and cajoled by government (the Democrats in Congress) and by the Federal Reserve into lending vast sums of money to people who were on low incomes and poor credit risks, thereby creating the subprime lending market. Likewise, the EU via its ECB followed the policy of the US Federal Reserve in order for the economy of the grow-growing EU region to keep pace with the expansionist monetary policies of the US Federal Reserve. The Bank of England did the same thing – it too kept interest rates too low for too long. It looks like ‘globalisation’ but it is all local. All of those entities had autonomy. For course, for the dumb smucks who ‘pooled’ their sovereignty, well they are victims of the bad policies of others. Yet they too had the autonomy to relinquish their sovereignty, so even if they are not accountable for the actions of the third parties to whom they transferred the applicable sovereignty, they are still accountable for the (foolish) decision to do so. Other forms of globalisation, where money is extremely mobile, are again the results of local policies that allow such mobility. The fact that folks ‘pool’ these policies either formally or informally does not create in itself the said mythical Atlantis. Fools need to reclaim their sovereignty, not persist with this ‘globalisation’ madness where they all follow each other and like lemmings – and where half the lemmings are suicidal, panicked and mad.

  • joeCanuck

    I really enjoyed that skit. I’m surprised the pair of them didn’t start giggling themselves. Both quite brilliant at that sort of thing.

  • Dave

    Err, Robert Peston, not Peter Preston.

  • Harry Flashman

    OK this is where Harry finally shows his complete and utter ignorance of global economics; if you read Peston’s blog you see that some quite substantial economies are going down the toilet and no doubt most of the rest will be following soon, in other words the entire world is going into a big slump.

    So we’re all going to be substantially poorer than we were last year but if it really is global will it make any discernible difference?

    If you’re not selling your house and you can afford the mortgage repayments do you care if the value has declined? Unless anyone is seriously suggesting that the people of Iceland are going to be homeless and starving next year because of all that money they owe to silly British investors I am beginning to come around to the conclusion that for 95% of us it won’t make that great deal of a difference other than a weekend in Dubai will be out of the question for the next decade or so.

    When Argentina and Indonesia and Russia defaulted on their loans a lot of very rich people and banks got their fingers burned but for the vast majority of the population life continued as normal.

    I’m not complacent, my pension pot has taken a 20% tanking this year and I’m really pissed off but it had shown growth of 60% in the previous three years so I’ll have to take my oil, I won’t be thinking of buying a new car for four or five years, holidays will be spent within three hours driving time and I’m seriously considering taking a decent offer on my house and moving to a smaller place because I could do with the cash but starvation is not staring me and my family in the face and unless I am a complete idiot I can’t see how it will come to pass, I’ve had a bloody good ten years but now I’ll just have to take it easy for a few years and keep an eye on spending.

    Are we losing the run of ourselves just a little bit these days or am I a hopelessly naive fool who can’t see the tsunami coming my way?

  • percy

    aye joeCanuck they’re dead-pan experts.

  • If only the Bankers were 100th as good at their job as these two are at theirs.

    Just an observation and maybe its just myself but politicians are getting away with a lot these days in comparison to the “good old days”when they were savaged and ridiculed(and it did not do them any harm).
    We could really do with some one on a flagship channel giving politicians(all of them)a good going over.
    It would actually be good for them.

  • Dam you Pete, I was going to run that tomorrow;) great stuff.

  • George

    Harry,

    If you’re not selling your house and you can afford the mortgage repayments do you care if the value has declined?

    You do if you paid 100k more for your house than your next door neighbour merely because you bought it 12 months earlier. That means your mortgage repayments of over 1,000 a month going on for a decade longer than him next door. That’s a whole 10 years of extra pain.

    For 95% of us it won’t make that great deal of a difference other than a weekend in Dubai will be out of the question for the next decade or so.

    For 95% of a specific generation it might not, but it will affect people looking for jobs in the next 10 or retiring in the next five. It will also affect those who lose their jobs.

    When Argentina and Indonesia and Russia defaulted on their loans a lot of very rich people and banks got their fingers burned but for the vast majority of the population life continued as normal.

    Doubling your national debt in three months had its effects you know. I think if you ever talked about that time to an Argentine you’ll find that the majority of the population got their fingers burned. Farmers were hammered, there were mass protests from workers who didn’t get paid, half the population ended up living in poverty.

    I’m not complacent, my pension pot has taken a 20% tanking this year and I’m really pissed off but it had shown growth of 60% in the previous three years

    What if your pension takes another 20% tanking with another 20% coming off because of currency devaluation, followed by stagnation while we have rampant inflation? Throw in losing your job, high interest rates and higher taxes and even you might feel squeezed.

    I a hopelessly naive fool who can’t see the tsunami coming my way?

    One of the most dangerous things about a tsunami is that you can’t see it coming your way. Who knows you could be on the right side of the island.

  • Dave

    Well, Harry, it’s all local, so you need to look at your local dynamics to answer that question.

    At the moment, US investors are in shock about how badly they were misled and misgoverned by the powers-that-be and they’re distrustful now about the quality of information that is proffered by other governmental agencies, both US and international, so that uncertainty has had a seriously destabilising effect on financial markets – hence all the hysteria. Those investors know what caused the problems: expansionist monetary policies that used insanely low interest rates to stimulate credit-fuelled consumer spending in the economy. Governments use the tool of interest rates to control economic activity (low rates = more activity, and vice versa). They held interest rates too low for too long and the inevitable result was that people borrowed too much money for too long a period – without earning the wealth to repay the increasing debt. Now that expansionist monetary policies have caused consumers to borrow money (as they are designed to do), the governments haven’t created the wealth in the economy with those policies that they were designed to create, so folks are left with the debts but not with the means to repay it. You asked does this matter, well it matters to most people because these debts don’t simply vanish.

    Looking at the local example of Ireland, you will see that a huge part of its economy was sustained by these expansionist monetary policies that were proffered by the ECB (and copied from the US Federal Reserve in order for the EU’s slow-growth economy to keep pace with the US economy), so, naturally, once this credit supply dries up (when markets catch on that the monetary policy is simply creating debt rather than wealth), a huge part of the economy ceases to operate. As that happens, house price inflation caused by the ECB’s monetary policy of low interest rates becomes deflation, and so the banks see the value of their assets fall, thereby exposing them to the risk of insolvency and further destabilising the markets. Folks employed in the construction industry lose their jobs, and folks employed in businesses dependent on that sector likewise. Unemployment increases, so government spending increases as tax revenues fall dramatically. It roles on from there to all the debts piled up on credit cards and all the high street businesses sustained by that (no dried up) supply of cheap credit. No one spends money, so businesses fail and banks are then exposed to defaults on commercial loans in addition to exposure to credit cards and mortgages. As the recession arrives (following the boom-and-bust ECB monetary policy), house prices fall further and the assets of the bank decline further placing more pressure on their chaotic balance sheet ratios.

    That’s the local interconnectivity. The international interconnectivity means that widespread recession will lead to a fall in exports (assuming those exports are to declining markets and that replacement markets are not found), so that will hit the government’s balance sheet. Other aspects of it were already seen when the international lenders refused to lend money to the Irish banks due to their concerns about their exposure to property-related debt. In Ireland’s case, we are now in a bad way because we do not have control over the use of a vital tool that we urgently require to regulate our economy: interest rates. The reason we do not have this control is because we transferred sovereignty over Irish monetary policy from the Irish Central Bank to the European Central Bank. That is what got us into this mess in the first place. Davy (a division of the Bank of Ireland) warned years ago that the ECB was setting interest rates a full 4 percentage points lower than the underlining dynamics of the Irish economy required. It warned what the effects of this would be (without predicting the collapse of the banking industry, however). They were correct. The Taylor Rule would have determined that the Irish Central Bank should set interest rates at 6% in Ireland – not at 2% as they were set by the EU. This policy of the EU’s ECB for promoting credit-fuelled consumer spending in the economy has landed us in this mess. The extra problem for Ireland is now that we actually need to set interest rates at a low rate in order to protect our economy we are unable to do so because the fuckwits who created the mess now have sovereignty over our monetary policy. So the Irish are basically fucked – they just don’t know it yet.

    On the other hand, those of us in our early 40s who did well out of the property boom but divested ahead of the bust will take a modest hit on other things but they recession and even the depression will pass us by. Unfortuantely, that isn’t going to be the case for this younger generation. We’ve left them with all the debts – courtesy of a state guarantee for our losses that it will take them decades to repay.

  • Greenflag

    Dave ;

    ‘This started with local government (America) keeping interest rates too low for too long in order to promote consumer spending and thereby artificially stimulate the economy.’

    That’s just one side of the coin . The other is that as public , corporate and personal debt began to rocket upwards after Reaganomics (voodoo economics as per Bush Sr) lower interest rates were necessary for the USA ‘local government’ to be able to afford to pay the interest on national debt without raising taxes . The Savings & Loan debacle also added to the problem and the cost of bailing that problem off drove the USA into a mini recession which cost the Republicans the presidency .

    Here’s a suggestion for you to think about . Instead of blaming governments for lack of ‘sovereignty’ or ‘globalisation’ why not instead examine how the pursuit of red claw Milton Friedman neo conservative economics of the Reagan /Bush Sr /BushJr /Cheney brand has been behind not just the present financial crisis but the entire destabilisation of the countries of South America since the 1970’s , and the Middle East today.

    Have a read of Naomi Klein’s ‘Shock Doctrine ‘ -the rise of disaster capitalism – and learn all about how Uncle Milt Friedman managed to destroy most of South America with his hare brained fundamentalist free market policies in the 70.s and 80’s and which would have had the same results in Europe if we in this part of the world did not have a strong democratic tradition.

    The pensioners in Dublin the other day told Junior Minister Moloney to shut his mouth when he tried to persuade them that cutting their medical cards was necessary . They stormed the stage and grabbed the microphone from his hands . They would probably have lynched him if somebody had brought a rope .

    If that can happen over medical cards in Ireland what sort of political unrest would trying to ‘privatise ‘ health care unleash in the UK unleash . I suspect the French would roll out the guillotine and I don’t want to think what the Germans or Italians would go for .

    The USA under the neo conservatives has made enemies of virtually the entire South American continent bar the ultra right wing Colombians .

    America is tilting left . Messrs Friedman’s disciples are in disarray all over the world .

  • Comrade Stalin

    If you’re not selling your house and you can afford the mortgage repayments do you care if the value has declined?

    Harry,

    It’s that “if you can afford the mortgage repayments” thing that’s the problem. My mortgage payments are just over one third of my net income, which isn’t too bad. I can take a hit if interest rates rise suddenly.

    Where it gets scary is people reining in their expenditure, either because their bank won’t give them the credit to buy stuff, or because they’re less inclined to spend if they feel there will be pressure on their budget over the next few years. Private sector businesses ultimately depend to a great extent on consumer spending somewhere along the line. Retail shops and banking are in the front line here, but industry, haulage/transportation and construction are close behind. Note how the major car makers have been cutting production this week.

    An overall slowdown in economic activity means that there will be less units of labour required throughout the economy to meet the requirements of that activity. That translates into overtime cuts and job losses.

    So, if your point is “why do we give a damn about the banks?” I agree. But while the sky is not going to fall in and the world is not going to stop spinning, unfortunately the failings of the banks, and of our debt-driven fiscal and economic policies in general, are going to hurt people to an extent that is not yet clear.

  • Greenflag

    harry flashman,

    ‘Are we losing the run of ourselves just a little bit these days or am I a hopelessly naive fool who can’t see the tsunami coming my way? ‘

    Don’t worry HF the worst is yet to come . We’ll have to await the new world economic order post the USA election to see confidence restored .

    As for now – for those who are over borrowed – or who have placed too much trust in the financial services sector it’ll be a lesson in economic fundamentals . But we’ll get through it – chastened and hopefully the better for it 😉

    The politics in the UK will be however interesting as the UK slides into recession . Will the electorate trust the Tories not to slash social welfare in the middle of a recession ?

    They have a track record in that kind of thing .

    The eminence grise in Downing St may be in his element in the upcoming days and months ahead.

  • The real awakening from the present financial crisis is the general populace being made aware that neither the bankers or the politicians have any idea about what they are doing.
    The financial and political emperors are seen as the naked imposters that they are.
    It is unfortunate for us that we are the ones who will suffer the freeze.

  • who’s on first?

    Do they get funny at any stage?

  • Dave

    Greenflag, while socialists are proclaiming the death of capitalism, et al, you should keep in mind that were banks to adopt sensible lending practices such as lending no more than 3 times annual income and no more than 60% of the value of a property to ordinary people that lefties would be the first to cry about being deprived of the ‘right to home ownership by the capitalist classes’ and would be the first to lean on their members of parliament to persuade the banks to revert to irresponsible lending practices. Indeed, this is why the US Democrats passed legislation requiring that the banks increase subprime lending to low income groups. It is also why the British government is now calling on the UK banks to lend more money to small businesses on terms that are more favourable to them at the same time as the Regulator is calling on the UK banks to increase their capital to lending ratio by reducing lending. The Regulator wants the banks to act sensibly while the government interferes (again) with a political agenda calling on banks to do the opposite in response to campaigning by the small business federations. That’s having your cake and eating it. Socialists, clientist hacks as ever, will be the first to call on the banks to lend more money to poor people once the recession bites. Schmuck. 😉

  • runciter

    were banks to adopt sensible lending practices […] lefties would be the first to cry about being deprived of the ‘right to home ownership by the capitalist classes’

    Of course. Because high levels of personal debt and private property ownership are core values of the ‘left’.

    On planet Dave.

  • Harry Flashman

    I think I put perhaps to much emphasis on my personal situation in order to illustrate the greater question. What I am asking is how do we all see Iceland in the next three to five years?

    If as is being predicted this really is the collapse of capitalism and the road to penury for all who trusted in too much credit then surely Iceland will prove to be the perfect laboratory experiment. This small country massively over-indulged in the credit boom and now they’re bust so if anywhere is going to be the bellwether for what’s coming around the corner it will be Iceland.

    So do we predict that the population of Iceland will be facing a future of extremely reduced circumstances where the population will no longer enjoy the fantastic boom that they experienced and who will have to make do with whatever luxuries they bought and live well within their means for the next decade? Several of the more foolish Icelanders will be bankrupted and there will probably be a lot of unfinished developments and closed up businesses but on the whole the population of Iceland will still be alive and going about their affairs, poorer but wiser in the years to come.

    Or will the scenario be as painted by many, of starving Icelanders roaming the frozen tundra, expelled from their homes by vengeful creditors, viciously fighting their neighbour for the few resources that they can’t find for themselves or which can’t be obtained for barter due to the utter worthlessness of the Icelandic Kronor?

    I happen to feel Iceland will see the first scenario, as will the rest of the planet, as will I, but many here and in the media seem to believe it will be scenario B.

    Again I just think we’re letting our feverish imaginations run away with ourselves, it ain’t time to sell everything and buy Krugerrands and Kalashnikovs and head for the hills, you’re just going to end up looking a wee bit silly trying to buy a bag of frozen peas in Asda next year.

  • Dave

    “Of course. Because high levels of personal debt and private property ownership are core values of the ‘left’.

    On planet Dave.” – runciter

    Whereas on Planet Runciter, the 5 trillion dollars worth of subprime loans via the government-sponsored entities, Fannie May and Freddie Mac, weren’t proffered to the poor to buy houses, they were somehow diverted to the rich to buy mansions, isn’t that right?

    No, kid, those toxic loans (now transferred to the US national debt) were proffered to low income groups for the exact purpose of “private property ownership” via the US Democrats in Congress – and as our friend Greenflag will inform you, they’re socialists. Those GSEs were established for the specific purpose of enabling home ownership among low income groups. The Democrats consistently opposed all regulation aimed at reforming the GSEs, claiming that such would reduce financing for low income housing (thereby reducing the electoral for Democrats support among the working classes).
    Likewise, I think you’ll find that the British government (socialist) is also quite keen to promote “private property ownership.” 😉

    Harry, I don’t see Iceland as a good model for that purpose. They’re over dependent on financial services and don’t have any other methods of generating wealth – at least not wealth that will repay debts that are an astonishing 6 times their GDP. I think the per capita figure is around 168,000 in US dollars. In simple terms, it’s just a matter of trying to staying open for business as you earn the wealth that is required to repay the wealth you have borrow. They’ll stay open for business, but damned if they’ll every earn that wealth (or even a quarter of it is that is then final figure) as their mains model of wealth creation (offering high interest rates to foreign depositors to attract foreign capital) is gone and it isn’t coming back. In Ireland, we can earn the wealth to repay our debts but how long that will take is unknown because the extent of the debts is unknown. I know of one property developer who owes one bank [I won’t name it or him] over 730 million, and all of it is unsecured. That’s the way the commercial property loan market is configured, alas, and other loans that are secured are usually secured on the acquired asset alone – assets that are worthless in the current market. These guys are going to fall like flies around a freezer in the not too distant future – and then the fun starts, as that state guarantee becomes non-academic. It would certainly help if Ireland had sovereignty over its monetary policy as interest rates could be set as low as 1% or zero for a year or two. That would give the stunned markets room to breathe, think, and find a way out at the very least. As that won’t happen, it’s a case of dropped flies that fall with the loudest of bangs.

  • runciter

    No, kid, those toxic loans (now transferred to the US national debt) were proffered to low income groups for the exact purpose of “private property ownership” via the US Democrats in Congress – and as our friend Greenflag will inform you, they’re socialists.
    […]
    Likewise, I think you’ll find that the British government (socialist) is also quite keen to promote “private property ownership.” 😉

    Those parties are not socialist.

    The promotion of private property ownership is the antithesis of socialism.

    http://www.merriam-webster.com/dictionary/socialism

  • Comrade Stalin

    Dave,

    It remains the case that the idea that more people should have access to the property ownership thing came from Thatcher and those who thought like her. The socialists were the ones behind public rented housing. The left opposed the sell-off of public housing stock, and right now they still do.

    I don’t know what the point is in wittering on about the Democrats and Fannie Mae/Freddie Mac. A house price bubble occurred in the UK. There was no legislation to create it, and there was no FM/FM to push it along. It happened because the banks relaxed their lending policies based on grossly inflated property values. You can certainly make a case about interest rates and the policies that kept them low, but at the end of the day, the banks were not forced by the government to lend. Look at the Northern Rock for example, 125% loans. Where was the legislation that made them do that ?

    I actually think that we are very likely to see legislation that requires the banks to apply stricter criteria concerning loan to value ratioes and income multiplers, etc. And no, the left will not be complaining. The left will be asking for more government intervention to improve the standard and quantity of social housing.

    So, the fact that a serious financial meltdown occurred in the UK *without* the legislation you refer to and *without* a direct equivalent to FM/FM, I think that casts significant doubt over the implication of your anti-left narrative which is that this bust would not have happened without those things being in place.

    Runciter points out a very stark fact; the idea of people paying debt to the gold-chain wearing capitalists running the banks is an antethesis to socialism . The left in the UK saw Thatcher’s efforts at increasing private property ownership as an attack on their powerbase. It’s quite easy to see why. Are you as likely to go on strike or to question your employer if you have a mortgage to pay rather than paying to a public sector housing body with a statutory duty to ensure that you are housed ? The shift to property ownership in the UK was accompanied by a shift away from the left. That’s a gross simplification of political change in the UK, but it can’t be ignored as one of the reasons.

  • kensei

    Harry

    Iceland could ultimately default or inflate its way out of its problems. Are people likely to be roaming the streets? No. Would you fancy living there right now? Hell, no.

    There was a real risk of actual systemic collapse, which is why you saw such panic over the last two weeks. It looks like that risk has been mitigated, though it’s probably not completely gone. The key thing here isn’t the stock markets, it’s the credit markets, which have shown signs of easing up in response to the various bailout packages.

    But I think you’re diminishing the real pain people are going to face. Both my parents run the risk of losing their jobs. They won’t lose their house, they won’t starve but that scenario would cause a hell of a lot more pain than simply cutting the range of their holidays. If we’ve avoided end of the world systemic collapse, that is due in no small part to the state stepping in to deal with market failure. That is contra to the ideology of the last two decades, and requires some level of rethink.

    And finally, to repeat for the slow – Fannie and Freddie did not cause the crisis: http://economistsview.typepad.com/economistsview/2008/09/once-again-it-w.html

  • Greenflag

    Dave ,

    ‘while socialists are proclaiming the death of capitalism,’

    I’m not but then I’m not a socialist . What we will see the death of is the ‘free market chaos which has led to this present world wide failure of confidence in the market.

    Mr Greenspan ‘spilt ‘ the beans yesterday when he said that he had ‘erred’ in his belief that the banks and financial services sector would ‘regulate ‘ themselves in their own self interest and would not bring the roof down on themselves .

    He chose to forget/ignore that investment banks , hedge funds and the whole host of securitised ‘asset’ pedlars operated in the universe of me first ‘greed’ and damn the consequences . The CEO’s at the top of the Wall St Ponzi Schemes knew what was coming but as long as they were coining it they kept quiet . They could afford to do so as Treasury Secretary Paulson was a ‘Republican ‘ appointee and could be relied upon to cheer on the ‘market ‘ from his perch atop the growing debt mountain.

  • Greenflag

    Harry Flashman ,

    ‘Again I just think we’re letting our feverish imaginations run away with ourselves, it ain’t time to sell everything and buy Krugerrands and Kalashnikovs ‘

    Well it’s way too late to buy Krugerrands 😉 The Kalshnikov however could be useful . You can use it to NOT have to pay for a bag of frozen peas at Asda next year 😉

  • Greenflag

    Dave ,

    ‘It would certainly help if Ireland had sovereignty over its monetary policy as interest rates could be set as low as 1% or zero for a year or two. That would give the stunned markets room to breathe, think, and find a way out at the very least. As that won’t happen,’

    Funny you should that as that appears to be Federal Reserve Chairman Bernanke’s favoured policy for helping the USA get through this mess .

    No doubt the ‘world ‘ will follow suit as if they did’nt the capital flow out of the US would destroy whatever’s left of American capital markets .

    Once Iceland has been ‘rescued ‘ by the IMF and no doubt by others it will join the EU and along with Ireland and other countries return to a less socially destructive form of ‘capitalism ‘.

    As for being reliant on ‘financial services ‘ for wealth creation – the UK is in an even worse State . With it’s manufacturing base emisserated , engineering skils long outsourced and empire long gone the UK may have to tax Queenie or confiscate her ‘palaces’ to help keep the property owning Tory voting British newly upgraded ex tenant working classes in their overpriced homes .

    As Maggies not dead yet she can’t spin in her grave . But if anybody around Flood St, Chelsea catches a glimpse of an 80 year whirling dervish type figure spinning in circles along the street no need to worry . Call it Maggies last dance and lave the oul wan to her memories of Falkland glories and an ex financial services utopian UK .

  • Harry Flashman

    @kensei

    “But I think you’re diminishing the real pain people are going to face. Both my parents run the risk of losing their jobs. They won’t lose their house, they won’t starve but that scenario would cause a hell of a lot more pain than simply cutting the range of their holidays.”

    I’m sorry to hear about your parents and I wish them all the best at this difficult time, I am sorry if you thought I was being flippant and dismissing this issue as one of not being able to afford holidays, trust me I wasn’t. I am self employed and whilst I haven’t shut up shop just yet realistically I’m prepared for the worst and as a father of two young children with one on the way I think you can accept that holidays aren’t my biggest concern right now.

    I had a great ten years and I did well, in hindsight I can see that I was benefiting from a somewhat irrational bubble and I’ll have to adjust to the new reality. Thankfully my best year was 2007 and I used that money to pay off all debts and mortgages and having no personal debt I was able to top up my savings.

    I’d love to say this was due to my incredible intelligence and foresight in seeing what was coming but in fact it was precisely the opposite, I was either too unimaginative or just plain stupid to invest my money in those high falutin’ financial instruments that everyone else seemed to be getting into and I honestly couldn’t see how buying a block of apartments in Bulgaria was going to make me rich so I stuck it all in my pension and on deposit, well the pension fund has taken a right kicking and it appears they’re going to be reducing interest rates so it’ll be a lean couple of years ahead but I think I can get through it.

    And that’s my point I suppose, I’m not rich anymore, neither are a lot of my friends but then we weren’t rich ten years ago either and we survived. We will get through this, it’s not the end of world civilisation as we know it and ten years from now we’ll be tut-tutting at all the young hotshots flinging their money around and they’ll be telling us to lighten up and how it’s different this time.

    @Greenflag

    I notice you only paid attention to one side of Greenspan’s “mea culpa”; the one that suited your point of view but ignored the rather larger issue of the cheap money that he flooded into the system throughout the ’90s with the full approval and encouragement of President Bill Clinton (and Gordon Brown in the UK).

    My point is that surely it is now time to end the petty point scoring and face up to the fact that there’s plenty of blame to go around for everyone. It’s not simply a story of the greedy banks and nor is it all due to the political interference in the free market by liberal left governments, fundamentally almost all of us are to blame unless we can put our hands on our hearts and say we never took advantage of ludicrously cheap credit over the past decade and we can prove that we spent the 1990’s demanding higher interest rates and a cut back in home loans and cheap credit for the masses, none of us did, so it’s a bit churlish to now say that only one side in this mess is to blame.

    Like appeasement of Hitler in the 1930’s it is very easy to pretend in hindsight how opposed to it every one was despite the fact that it was wildly popular with the electorate and fairly well supported by all major political traditions at the time.

  • Greenflag

    Harry Flashman –

    I’m on the record several times as stating that under Clinton the US Government turned a ‘blind eye’ to the developing ‘chaos ‘ on Wall St . As for Greenspan’s flooding the market with cheap credit in the 90’s there were ‘sound’ economic and political reasons why this policy was pursued .

    The ‘debt build up’ began in the early 1980’s under Reagan as a consequence of his ‘voodoo economics ‘ which even Bush Sr at the time denigrated as being irresponsible . By the time the 1992 election came around ‘cheap credit ‘ was promoted as a way of saving Bush Sr’s electoral skin . You may /may not recall a certain Mr Perot gathering up 17% of the vote and pointing out America’s rapidly climbing ‘debt mountain ‘ on TV .

    There’s nothing inherently wrong with ‘cheap credit ‘ if it is seen to help many more people afford to buy a home, rather than have to rent one from the State or a private landlord . What was wrong was the failure of governments to understand that the CEO’s of the financial services would abuse the non regulation of the shadow banking system for personal financial gain and that down the line their minions would fleece the skin off the back of the poor and undereducated through granting 110% mortgages to people who they knew would not be able to maintain the payments .

    Hitler’s greed could never have been appeased .The ‘greed ‘ of Wall St is legendary . Anyone who reads up on the history of finacial scandals on Wall St going back to the Great Depression and earlier into the last decades of the 19th century would not doubt it .

    But that was always a given i.e the greed of Wall St . What changed was that the attitude of successive American governments to the ‘shadow banking ‘ system . These governments both Republican and Democrat but predominantly Republican since 1980 took the unregulated shadow banking system at it’s word .

    They should not be surprised although many are feigning shock and horror . It’s an example of how far American politics has veered to the right these past almost 30 years and has catered to the financial interests of ‘financial corporate America ‘ at the expense of the wider American society’s interest .

    Nov 4th will be ‘payback ‘ time. But it will take more than a Democratic victory to sort out this mess . It will take a new world ‘financial ‘ order with countries other than the USA having a greater say than ever before in drawing up checks and balances on the merchants of greed and profit who fleeced their way to personal fortunes regardless of the effect on their societies .

  • Greenflag

    Comrade Stalin ,

    Excellent post previous page No 21 .

    ‘The shift to property ownership in the UK was accompanied by a shift away from the left.’

    The shift away from the ‘left’ in the UK when Thatcher took over in 1979 was partly due to the shift in the voting pattern of the ex tenants now property owners section of society . But it was also due to a wider perception in Britain at the time that the ‘looney ‘ left had gone too far down the socialist road . In similar vein the USA today is experiencing the same phenomenon except in this case it’s the ‘looney ‘ right who are seen to have killed the goose that stopped laying eggs 😉

    Britain 1950 to 1979 was a country in ‘political turmoil’ as the country swung dramatically from left to right and back again as each ideology failed to grasp the nettle of Britain’s much reduced imperial and financial role in the world .

    From McMillan’s ‘you’ve never had it so good’ to the ‘winter of discontent ‘ to the ‘routing of striking miners and Fleet Street printers ‘ by the Thatcher Government is a classic case of ‘politics ‘ trying to find effective solutions to a country in relative decline .

    As America’s role in the world declines – they simply cannot afford to keep throwing hundreds of billions into the Iraqi hole among others it will be interesting to see how the new Democratic administration copes with the present turmoil .

  • Harry Flashman

    “You may /may not recall a certain Mr Perot gathering up 17% of the vote and pointing out America’s rapidly climbing ‘debt mountain ‘ on TV”

    Yes and Perot cost Bush the re-election because it was the conservative Republicans who wanted to rein in government expenditure the massive increase in debt and who were outraged by Bush Snr’s back tracking on “read my lips no new taxes” promise who voted for Perot thus allowing Slick Willy to win the election.

    Thus Clinton got in and the era of cheap credit for the masses under Alan Greenspan was initiated which you either support or you don’t support and frankly it’s never clear from your posts what exactly is your position on massive amounts of cheap credit for people who previously would never have been able to get it.

    Anyway you seem to wish to continue down the line of asserting that it is all absolutely and entirely one side’s fault and everyone you like was absolutely blameless in the matter and that other lot are all to blame (curiously despite your assertion that Reagan and Thatcher are the ultimate villains you’ve never been able to show how a Carter second term or a Michael Foot government would have improved the world’s fortunes) which to me is a decidedly childish attitude and against which it is rather pointless debating.

  • Kensei

    Harry

    And that’s my point I suppose, I’m not rich anymore, neither are a lot of my friends but then we weren’t rich ten years ago either and we survived. We will get through this, it’s not the end of world civilisation as we know it and ten years from now we’ll be tut-tutting at all the young hotshots flinging their money around and they’ll be telling us to lighten up and how it’s different this time.

    The point is that we did seem to come perilously close to some unknown kind of nasty; the underlying data was somewhat scary and the way in which normally staid commentators and policy makers were ina state of total panic should attest.

    Paul Mason’s (Newsnight economics editor) blog has also been quite good on this, here he compares the crisis to the eruption of Krakatoa http://www.bbc.co.uk/blogs/newsnight/paulmason/2008/10/this_is_an_economic_krakatoa.html.

    It’s good to have some perspective on the crisis. But policy makers need not be lulled into a false sense of security because we’ve replaced meltdown with recession.

  • Dave

    “Those parties are not socialist.

    The promotion of private property ownership is the antithesis of socialism.” – runciter

    You are confusing socialism with Marxism. The abolition of ownership of private property is a communist doctrine. Socialists are more concerned about means of production and fairer distribution of wealth. The claim was not that the policies of the Democrats to promote home ownership among low income groups were Marxist; it was that those policies are socialist.

    Alan Greenspan, then chairman of the federal Reserve, under pressure from the Democrats, actively encouraged this subprime lending to high risk, low income social groups by keeping interest low and by promoting dodgy credit-scoring models to the banks that would allow them to lend to these groups with some supporting rationale. Note his proffering of “subprime loans and niche credit programs for immigrants” and his affected socialist concern for the plight of “working-class people” and his charming sensitivity to the lobbying of “consumer advocates” who “contend that the lack of flexibility in the models” has shockingly resulted in “those with little or no credit history” being denied credit?

    [i]“From colonial times through the early twentieth century, most people had quite limited access to credit, and even when credit was available, it was quite expensive. Only the affluent, such as prominent merchants or landowners, were able to obtain personal loans from commercial banks. Working-class people purchased goods with cash or through barter, since banks did not make consumer loans to the general public.

    Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country.

    With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.”

    For some consumers, however, this reliance on technology has been disconcerting. Credit-scoring models are complex algorithms designed to predict risk. Consumer advocates have raised concerns about the transparency and completeness of the information fit to the algorithm, as well as the rigidity of the types of data used to render credit decisions. Consumer advocates contend that the lack of flexibility in the models can result in the exclusion of some consumers, such as those with little or no credit history, or misrepresentation of the risk that they pose.

    To address these concerns, some firms have worked to customize credit-scoring systems to include new data and to revalue the weight of the variables employed. Also, new organizations have emerged, developing new systems for collecting alternative data, such as rent payments and other recurring payments that will enable creditors to evaluate creditworthiness of consumers who lack experience with credit.

    Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits.”[/i]

    Is Greenspan a socialist? No. So why is he quacking like a socialist duck? Because is a man who knows how to please his current political masters and to keep his job (for a record 8 years) by so doing.

  • Dave

    “It remains the case that the idea that more people should have access to the property ownership thing came from Thatcher and those who thought like her. The socialists were the ones behind public rented housing. The left opposed the sell-off of public housing stock, and right now they still do.” – Comrade Stalin

    Is the left in the UK opposed to the ownership of private property? It is not. Why are you even trying to create the bogus impression that this is the case?

    “I don’t know what the point is in wittering on about the Democrats and Fannie Mae/Freddie Mac. A house price bubble occurred in the UK. There was no legislation to create it, and there was no FM/FM to push it along. It happened because the banks relaxed their lending policies based on grossly inflated property values. You can certainly make a case about interest rates and the policies that kept them low, but at the end of the day, the banks were not forced by the government to lend. Look at the Northern Rock for example, 125% loans. Where was the legislation that made them do that ?” – Comrade Stalin

    The problem that the Democrats created was lending money to those who were not creditworthy and who would not have received loans were GSEs not provided for the specific purpose of transferring the risk that was associated it with them from the private sector to the taxpayer. Those GSEs carried with them an implicit state guarantee that the markets forced the government to make explicit. In effect, it gave the lenders a risk-free model of acquiring wealth. That is what Greenspan was getting at when he said that the system failed: self-interest, which ensures that lenders do not take reckless risks, was undermined by the state intervening in that system to absorb the risks, i.e. the lenders could not by definition act recklessly because there was no risk to them in the transaction. That is why the system failed. It is also why the state is not left with responsibility for 5 trillion dollars worth of toxic loans via the GSEs, Fannie May and Freddie Mac, which is the root cause of the current finacial crisis.

    If the UK did what the Democrats did and passed legislation that forced the lenders to lend vast sums of money to poor credit risks, then it too would have a mountain of toxic debt. They didn’t, so their only folly in this is encouraging the Bank of England (despite its nominal independence, it is obliged to follow the economic policy of the government) to keep its interest rates set on a par with the interest rates of the EU so that there would be parity of economic activity between them. The policy of the EU’s ECB was copied from the US Federal Reserve, and the desire of the EU that its slow-growing economy should keep pace with the faster growing economy of the US (an economy that was artificially stimulated by the monetary policy of keeping interest rates low). As the US Federal Reserve kept interest rates too low for too long, the ECB and the Bank of England followed suit, all trusting in the bad policy of the other and all spreading the inevitable outcome of bad policies by doing so.

    The tragedy of this form of socialism as proffered by the Democrats principally through Barney Frank is that it had the opposite effect of the intended outcome (unless forcing the collapse of the banking system was the ulterior aim): instead of making housing affordable among the poor, it led to rapid house price inflation making housing unaffordable to the poor – in addition to exposing millions of low income Americans to the risk of foreclosure, negative equity, and others without a home unable to get a loan for one. This is why socialism never works. Folks used these cheap credit mortgages to inflate the price of housing, seeking a quick profit for themselves. The poor basically fucked each other over, as the principle of self-interest dictated they would.

  • Dave

    [b]Continued[/b]

    “I actually think that we are very likely to see legislation that requires the banks to apply stricter criteria concerning loan to value ratioes and income multiplers, etc. And no, the left will not be complaining. The left will be asking for more government intervention to improve the standard and quantity of social housing.” – Comrade Stalin

    I think that is true: the left will use this as an excuse to proffer a social housing agenda wherein the property is state owned. However, they will have it both ways and also demand that private and public sector continue to develop privately owned so-called “affordable housing” schemes in addition to demanding that the banks not restrict lending to low income groups. After all, socialists, being grubby clientist hacks, will realise that many low income groups actually aspire to own their own homes and that these pool of voters should also be served. AS these are currently the largest group, then the self-serving squeals of socialists will be that the banks should continue to act irresponsibly and lend use high multipliers and 100% mortgages. No politician (even those on the right) is going to demand that the banks adopt sensible lending practices in the housing market and spell this out as meaning a maximum of 2.5 times annual earnings; a minimum of 7 years continuous employment, and a minimum of 40% cash deposit on a house.

    “So, the fact that a serious financial meltdown occurred in the UK *without* the legislation you refer to and *without* a direct equivalent to FM/FM, I think that casts significant doubt over the implication of your anti-left narrative which is that this bust would not have happened without those things being in place.”

    And as I have explained to you: you are in an unflinching state of grievous dogmatic error.

  • Dave

    Typo: “Is Greenspan a socialist? No. So why is he quacking like a socialist duck? Because is a man who knows how to please his current political masters and to keep his job (for a record [b]18[/b] years) by so doing.”

  • Kensei

    Pay attention Dave. Repeat after me: Fannie and Freddie did not cause the crisis:

    http://sluggerotoole.com/index.php?URL=http://economistsview.typepad.com/economistsview/2008/09/once-again-it-w.html

  • Dave

    Well done, Kensei. Now be a good boy and toodle off to Google and find another link that informs that a statement isn’t true just because you read it on a Blog somewhere.

    And besides, the Law of Credibility in Blogland is that no post is true unless it has at least 30 links in it, thereby establishing the irrefutable authority of the author.

  • Dave

    I know… it’s all a Republican plot to blame the problems on the innocent Democrats, isn’t it? Heaven forbid anyone should observe that the people who now want to lead America out of the crisis created with misguided socialist dogma are the same people who led America into the crisis with misguided socialist dogma. To do this, they must rewrite recent history so that the financial crisis didn’t originate with defaults on subprime mortgages and that subprime mortgages didn’t increase ten-fold in 9 years under Democratic policy, legislation and oversight.

    See, the problem you have with your impudent attitude (“Here’s my link. Read it. It’s the law. End of debate, now and for all time – or just until after the election.”) is that we all post links to support our arguments.

    For example, here’s a link called How the Democrats Created the Financial. What’s the betting that author is a Republican voter? He could be spinning and he could be calling it exactly as he sees it, couldn’t he? I suppose he should cite a Nobel Prize winner too, eh? There are lots of them about and they’ll all give you their interpretation for what it’s worth. You’ll even find Nobel Prize winners who aren’t spinning for Democrats, unlike Krugman.

    However, for the best – by far – explanation of how the GSEs precipitated the financial crisis, you could do no better than to educate your ill-informed self by reading good old, plain English Wikipedia.

  • runciter

    You are confusing socialism with Marxism.

    Read the link, Dave.

    http://www.merriam-webster.com/dictionary/socialism

  • Dave

    Well okay then…

    *clicks*

    Oh!

    That’s me told, innit?

    Shame that there isn’t a socialist government in the West who doesn’t support the ownership of private property, innit? Keeping it local, do you think someone ought to tell Gerry “Holiday Home” Adams and Mark Durkan that neither party could possibly be socialist because both support private property ownership? It’ll come as one hell of a shock to all those folks in European countries who have been voting for socialist parties who aren’t actually socialist parties after all, won’t it?

    Democrats don’t like to use the S-word, so they figure they can introduce socialist policies by calling the (red) rose by another name. They managed that fraud very well in proffering affordable housing schemes to the masses. Of course, now that that socialist policy went tits up and almost brought the financial system down with it, they’re trying to undermine the free market system even more by rebranding said ‘affordable housing’ schemes and the massive subprime debts they created as examples of ‘predatory lending’ by the banks and at the same time exonerating said socialist dogma and interventionism that created the crisis. Brazen spin, but sadly folks are stupid enough to fall for it.

    Here’s a link for you.

    Now, from the ridiculous to the whatever…

    “Where was the legislation that made them do that ?” – Comrade Stalin

    In addition to my previous reply, I’ll just touch back on this with a bit more clarity.

    The difference between legislation and policy is that with the former, the government compels you to act in a specified way, and with the latter, it encourages you to act in a specified way. In the former, there is a direct link between cause and effect (you did X because they restricted your options to X). In the latter, the link between cause and effect is more casual. It is true that you had the autonomy to not do X, but the government still has responsibility for encouraging that action.

    So, as in the example of the Democrats, if a government authority passes legislation that requires the GSEs to assume higher risk mortgages (an extra one trillion dollars worth), then the government directly causes the high risk lending practices by this action. On the policy front, if a government authority lowers interest rates, then it does so promote credit-fuelled lending in the economy. The policy is intended to make lending cheaper so that folks borrow more, and spend more. Simple economics, and simple cause and effect. The longer you keep rates low, the longer the period of borrowing, and the greater the debt pile.

    The problem with the Democrats is that they had a political agenda to promote cheap credit, not an economic one. Political agendas are very dangerous dynamics in monetary policies. In order for the policy of low interest rates to be successful, the government must have an economic motive and it must have information to the effect that the policy will lead to wealth creation in the economy, thereby allowing the borrowers to earn the wealth that they require to repay the borrowed wealth that they haven’t earned. Well, sadly for the Democrats, flipping houses doesn’t create wealth (whatever about ‘manufacturing’ new houses), it merely soaks up equity that could be put to more productive use elsewhere in the economy. So the policy of keeping interest rates low and making money available for subprime lending (trillions of dollars of equity) simply created debt instead of wealth. In this regard, Greenspan is responsible for not putting his job at risk by warning what would happen as a result of this abuse of monetary policy by the Democrats.

    So that’s why you don’t need to see legislation to see an effect: a policy will have the same outcome.

    The reason you don’t see a mountain of toxic subprime debt in the UK is because the UK didn’t introduce legislation that compelled the banks to lend trillions to high risk, low income groups in order to promote home ownership among the working classes. Sensibly, it left political agendas out of monetary policies. The reason you do see high levels of debt in the UK is simply because that government also made the mistake of keeping interest rates too low for too long with the specific purpose of promoting credit-fuelled consumer spending. So that’s how legislation and policy influence case and effect and how both can have similar outcomes causing folks to confuse the two.

  • Harry Flashman

    Now that we appear to be entering a recession it seems to be that we are wondering whether it will be like the early ’90s recession (a bit of a tough year but nothing that couldn’t be handled) or the ’30s (a dreadful decade which almost led to the eclipse of western civilisation).

    Me I figure it’ll be a mid ’70s type of thing; severe, societally altering, trouble on the streets, real hardship, discontent, industrial anarchy and strange goings on in high places as certain people wonder whether it’s time to depose the Labour government.

    For me one of the few benefits of that period was the excellent comedy it produced and I think this clip, one of my favourites sums up how a lot of us are feeling right now.

    Forces of Anarchy

    Mostly I’m a Reggie Perrin type, occasionally I find myself sympathising with Jimmy depending how much I’ve been drinking.

  • runciter

    Democrats don’t like to use the S-word, so they figure they can introduce socialist policies by calling the (red) rose by another name.

    They weren’t socialist policies according to the dictionary definition.

    If you want to re-define the language you should make that clear up front.

  • Comrade Stalin

    Dave, there is a huge world of difference between calling yourself left wing or being a socialist, and actually being socialist. I don’t regard Labour as being significantly left wing at all at the moment. That’s part of Thatcher’s legacy; she moved everything to the right, including the left themselves. And no, Gerry Adams is not a socialist.

    This crazy logic looks even sillier in reverse. Like I said, “proffering affordable housing to the masses” is pure, unadulterated Thatcherism. If it’s socialism, that means that Thatcher was a socialist. Am I misrepresenting your point of view ?

    I agree with you when you say that low interest rates provided the credit which fuelled the boom of the past ten years. But the suggestion that the government should have intervened to use monetary policy to put the brakes on things has problems of it’s own.

  • Harry Flashman

    The entire thesis of “socialism” has gone out the window in favour of power grabbing by people who regarded themselves as not being part of the ‘establishment’ but who sought power for themselves and their friends.

    Labour simply abandoned economic socialism figuring if they could get into power on the back of the free market and introduce the necessary changes to society while they were there that could ensure they and their ilk would retain in control then so be it; thus the last few remaining pillars of an ancient conservative society were kicked away. The destruction of such vital elements of a free society were a worthwhile price to keep the Left happy and Labour in power.

    Thatcher famously won the economic argument but was utterly defeated in the social argument, an argument that frankly she probably only had a very vague understanding of anyway.

    So now the Tories wishing to get into power happily abandon their social conservatism so that they and their friends, so long excluded from office, can once again get their time in charge.

    Political principles have ceased to have any meaning in the repulsive race for office by pygmies who know nothing other than how to wheedle and manipulate an ignorant electorate.

    Thus we have the most appalling mixture of the worst of both worlds; an amoral free for all where there is no moral right or wrong in either economics or society, just as long as the twits who currently have the ear of the nabobs in the “meeja” can get their sweaty hands on us, our families, our lives and our livelihoods.