Tuesday, January 20, 2009

Get real, Gordon

So we the UK taxpayers are now providing an insurance policy for the banksters. Insurance usually covers events subsequent to the payment of the first premium, but this is different. We are going to be covering risks that were created long before we began to insure them.

Damned if we do and damned if we don't. Do nothing, and banks begin to crash, one after the other. People lose their savings, people lose confidence, good banks haemorrhage cash that is withdrawn to be stashed under the king size. Try to prevent this, and the taxpayers of the future are burdened with a huge National Debt.

Gordon stands firm, a seemingly unwobbly rock of determination in the middle of a roaring torrent of financial uncertainty.

The ultimate worry is that the UK could go bankrupt. He is trying to provide guarantees against a nightmare of debt. The debt arises from stupid bank lending on the housing bubble, a debt that has been multiplied many times over by the financial derivatives market. The total value of the derivatives market was estimated last year at $60 trillion, 13 times greater than the world's capital base, and 10 times greater than the world's GDP. Even Flash Gordon cannot hold that kind of pressure in check. It is now down to a mere $50 trillion and falling (though I read in the Guardian Special Report Friday 30 Jan that they are worth $290 trillion. 50 trillion, 290 trillion, what does it matter?)

Lehmans Brothers Holdings held up to $440 billion in credit default swaps (CDS) derivatives. "Up to", because nobody knows how to put a price on the damn things. The post mortem will not be complete for a couple of years, but so far the the damage has come to a puny $75 billion, because some of the rats jumped out of the sinking ship to infect the rest of the financial fleet, and because the positive and negative values "netted out" - canceled each other.

They are called Toxic Assets (a) because they are so huge, and (b) nobody knows exactly how huge they are. We have a financial system with a bloodstream thick with pustulant unknowns, some known unknowns and much more unknown unknowns, and maybe a few unknown unknown unknowns. I'm thinking of Bernie Madoff and his hedge fund Ponzi scheme here.

The worry is that Gordon and Alistair are setting their faces to weather the storm, guaranteeing that the good old British (or should that be Scottish) dependability will ensure that the banking system makes a good recovery in time.

The question is - is recovery possible?

Money is created through lending at interest. Money arises from debt. Money is a social construct based on confidence. If confidence leaves the system, money loses its value. On top of this basic fact, the derivatives have inflated the debt to the dizzying proportions that we now see.

The basic problem in Gordon's position is that he is compelled to pour yet more money into banking - an essentially unreal economy. He says that it is because if the banking system goes, the real economy goes - which is slightly, but not absolutely true. Gordon should remember the old adage, "Food will get you through times of no money better than money will get you through times of no food".

The Government's money is going to the banks with few conditions it seems. Short Selling has restarted, and we do not read of plans to regulate the financial system, not even the OTC derivatives. Labour is shy of nationalising the banks outright, although that is clearly the way things are going.

The real tragedy is that our money is going into a black hole, into a place where hard earned cash can disappear into the aether in a trice, on the back of negative market sentiment. I would rather see my money invested in a Right to Rent policy, whereby the nation takes over un-payable mortgages, leaving the family in situ, paying an affordable rent. Invested in house insulation, which means that money and carbon dioxide release is saved for as long as the houses stand. Invested in renewable energy technology. Invested in the community, and in recycling, and in the many other branches of the Green Economy. Invested in the real economy, Gordon. Capisc'?

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