Niall Ferguson did not predict the financial crisis of 2009

I've been busy with Prof Niall Ferguson, the right-wing ideologue and current Reith lecturer. He tends to contradict himself - here is Matt Yglesias' collection of his contradictions - and the blog Though Cowards Flinch points out that he said in 2006 "I was sure that this financial crisis was going to happen" but that in 2005 he had said "Recessions are happening less often and when they do they are not too steep and not too protracted." This quote has disappeared from the Los Angeles Times, but it is still up here in the Telegraph.

And just in case it should accidentally disappear from the Telegraph too, I am going to copy and paste it here as well. Here goes:

We're turning Japanese - so Labour could have 30 more years in power

By Niall Ferguson

12:01AM BST 09 Oct 2005

A politician without office is like a snail without a shell. There is simply no way of disguising the inherent, slug-like vulnerability of being in opposition. Yet hope springs eternal, even for a naked snail. It is not only the British Conservatives who cling fondly to the illusion that if they can only find the right leader, they will return to power on a wave of rekindled public enthusiasm. This is also the collective fantasy of the Democratic Party in the United States.

Yet what went on in Blackpool last week strongly reminds me of the energies the Democrats expended in 2004 to find a candidate capable of beating George W Bush. Like the arcane rituals that ultimately brought forth John Kerry, the process of selecting a new Tory leader is not without its human interest. In each case, there is something of the beauty contest, but also something of the freak show.

And yet the ghastly possibility cannot quite be extinguished that it is all a complete and utter waste of time. Perhaps it simply doesn't matter who leads these parties. Perhaps they would be doomed to lose even if they could rejuvenate Margaret Thatcher or resurrect Franklin Roosevelt.

To this proposition, all politicians who inhabit the shadow world of opposition have a knee-jerk response. Sooner or later, they say, the public will tire of the party in power. Then, under the new, modernising, charismatic leadership of (fill in the desired name), we shall sweep back into office.

It can happen, of course. In Poland, the two centre-Right parties have just won decisively, ending four years of incompetent rule by former Communists. In Spain last year, the Social Democrats returned to power after eight years in opposition, ousting José María Aznar's People's Party. Yet democracy in both those countries is a relatively young phenomenon. In more mature democracies, I venture to suggest, there is a discernible tendency for incumbent parties to stay in power for longer.

We in the English-speaking world still tend to expect the major parties to take fairly regular turns at running the country. Power in Britain has changed hands seven times since the Second World War - in 1945, 1951, 1964, 1970, 1974, 1979 and 1997. In the United States during the same period the White House has been home to six Republicans and five Democrats. But consider the cases of Germany and Japan, where democracy has also been functioning smoothly since it was restored after the Second World War. The German Christian Democrats have lost power only twice since 1949 and are on the brink of regaining it as I write.

In Japan, voters swing even less. Last month Prime Minister Junichoro Koizumi's Liberal Democratic Party won a decisive election victory. This means that, apart from a brief ten-month interlude in 1993-94, the LDP has now been in power for more than half a century.

With its elaborate code of politeness and its intricate social hierarchies, Japan is the nearest thing to another planet you are ever likely to visit. Things work with an efficiency that irresistibly reminds the Western visitor of Star Trek's Mr Spock (a perfect example being the automated toilets that wash and dry your backside for you). Yet in some ways Japan is not Vulcan at all. It is simply the future of planet Earth. Ahead of the curve in so many ways, Japan may also be showing us where 21st century Western politics is heading: forward to the new one-party state.

The phrase "one-party state" is usually associated with undemocratic regimes. Fascists and Communists alike were always attracted to the forms of popular rule - speeches, rallies, campaigns and even votes - while dispensing with the essential ingredient of choice. Yet one-party states can also arise in free societies.

The Japanese case is, in fact, far from unique. The Social Democratic Party governed Sweden without interruption from 1932 until 1976. The Christian Democratic Party occupied a position of similar dominance in Italy from 1945 until 1980. The Labour Party ran Israel from independence until 1977.

It has happened in the English-speaking world too. Apart from Peel's government in the mid-1840s and a handful of short-lived minority ministries on either side of it, the Whigs were in office from 1830 until 1874. The Tories were in power (albeit sometimes in coalitions) from the First World War until the end of the Second, with only the briefest of Labour interludes in 1924 and 1931.

In the United States, the Democrats had a virtual stranglehold on Congress from the 1930s until the 1960s. My colleague at Stanford's Hoover Institution, Marty Anderson, points out that since 1968, the Republicans have been quietly building up a position in all the key institutions of US government that could prove equally enduring.

To be sure, in every case apart from Japan, all these near-monopolies on power have expired after around 40 years - slightly less than a generation. But if a week is a long time in politics, a generation is an eternity. Just ask any of today's Tory wannabes how they fancy shadowing their Labour counterparts for, say, another 32 years.

Is it conceivable that this is not the beginning of the end of Labour rule, but only the end of the beginning? Is Britain turning Japanese? I can think of four good reasons why it might be.

First, our old anxieties about the Left's reliability with regard to defence have ceased to matter since the end of the Cold War. Second, our increasingly "liberal" social behaviour (more children out of wedlock, less attendance at church) has eroded the credibility of conservatism as an ideology. Third, our transformation into one of the world's most urban societies has marginalised the Tory party's traditional rural base.

The fourth and most important point, however, is economic. Tory optimists have been telling themselves since 1997 that sooner or later Labour must blunder, just as the Tories did over the Exchange Rate Mechanism in 1992. They fondly remember how often economic crises have pulled the rug out from underneath Labour prime ministers. Yet they overlook three things. First, economic volatility has declined markedly since the 1970s. In all the G7 countries, annual growth rates vary much less than they used to. So do inflation rates. Recessions are happening less often and when they do they are not too steep and not too protracted.

Second, the huge increase in international capital flows mean that it is far easier than it used to be for advanced economies to finance both budget and current account deficits. This year the United Kingdom will run a current account deficit that 30 years ago would have sent the pound over a cliff, closely followed by the party in power. Today no one cares.

The third point is simply that we now have lower expectations of economic policy-makers than we did in the 1970s. If growth slows, we are more likely to blame Asian competition than Gordon Brown. If inflation or interest rates jump upwards, we throw our brickbats at Threadneedle Street, not Downing Street.

For all these reasons, I find the idea of another few decades of Labour rule distinctly more plausible than a Tory election victory under yet another brave new leader. Apart from anything else, Western societies are following Japan in getting steadily older. Already, close to one in six of us is 65 or older; 30 years from now it will be one in four. "Time for change" is a slogan that excites young people. It has less appeal to a senescent society.

So good luck to whichever snail finally wins the race for the Tory leadership. I only hope you are ready for a lifetime of slugging it out in opposition.

• Niall Ferguson is Professor of History at Harvard University and a Senior Research Fellow of Jesus College, Oxford www.niallferguson.org

© Niall Ferguson, 2005

What's wrong with the Greek economy?

What's wrong with the Greek economy?  "Creative" (=dishonest) accounting + Tax avoidance are discussed below, but there are other factors that may assist recovery.

This below is distilled from a report on Der Speigel here.
There is an update - "What to do about the Greek economy" - here.

Goldman Sachs helped Greece hide the huge hole in their financial trousers with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. They got so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date. It was a special kind of swap with fictional exchange rates.The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005. So we will get another day of reckoning in 2015-2020. Lovely. Will the sums get multiplied in the CDS machine?


Greece only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. Under Maastricht rules, the deficit has to be kept below 3%. In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

Not in the Der Speigel article are the reports that tax avoidance is a Greek national pastime. Over here, it is conservatives who hate tax and like to avoid it. I wonder if it is the same group over there. 


So Greek people and Greek Government are to blame for the fiasco. But like the banks, Greece is too big to fail. So the EU and IMF have bailed them out. Next problem - will the speculators bring the Euro down, or will the EU follow Stiglitz' advice and take the battle to the speculators? John Major lost us £19 billion trying to do that. It made him go to the lavvie when he lost.


But the EU is too big to fail. Isn't it?

[update 11th April]
The present litany of financial Greek woe, harvested from the Economist:
Greece is raising money by selling bonds, but at a very high 7% yield, that will cost the Greek Government. The cost of insuring Greek bonds is higher than Icelandic bonds - a sign that it is seen as more risky.

The IMF is ready with a $16 billion bailout.
The Greek Government has 13 billion Euros in cash that can take see it through this month.
It s going to need another 10-12 billion Euros to get through May, then another 25 billion Euros to see it through the rest of 2010.
In March, Greece did a bond sale, and only got   4/10ths of what it hoped for.
It is seeking $5-10 bn in the USA.
Greek public debt will be 150% of GDP (compare to Japan at 190%).

Not good. The speculators are circling like predators, looking for the weak specimens in the herd. One at a time, they can pick them off - Greece, Portugal, Spain. Note that all of these are countries recovering from dictatorship. One factor may be that Government (and therefore taxation) is held in low esteem after a dictatorship.

People worry that it will be the UK's turn to be roasted by the market sharks next.  However, our debts are lower and longer term than Greece.

The only thing to restrain the speculators is the thought that if the whole world economy collapses, there will be nothing for them to eat.

In all this hugely complex, mind-boggling system of smoke-and-mirrors economics, there is one simple thing to remember: Money is created by making loans at interest. That is why the global financial system is riddled with debt. Only 4 countries have no debt. And the debt is owned not to other countries, but to banks,

Remember that food will get you through times of no money better than money will get you through times of no food. In other words, real economics is based on ecology, making a sustainable living from the biosphere. We live in a system of false economics founded on money. Money is a useful tool, but not a reliable object of worship, especially when it is produced by making interest-bearing loans.

Now go to What to do about the Greek economy?
Also: Excellent in-depth analysis by a Greek 

Dubai Government seeks to avoid its responsibilities

Interesting passage in the Observer's piece on Dubai.

The Dubai government," it said, "is under no obligation to extend support to any government-related entity". In other words, these companies, led by the largest, Dubai World, which benefited from implicit government guarantees when they were raising huge amounts of debt from western banks, were already being cut adrift.

This is an common trick used by mega-capitalists. They seek to benefit from profits made by their subsidiaries, and cut themselves off from losses. They seek rights, but avoid responsibilities.

Multinational corporations use this mechanism as a stock in trade. Trafigura set up Compagnie Tommee to dispose of the toxic waste on the Probo Koala. The directors of Tommee are in jail, while Trafigura directives are free (although they did spend time in Cote d'Ivoire jails, where they were beaten up. They were released when Trafigura paid the government of cote d'Ivoire $198million for a clean up operation).

The law needs to be changed so that companies bear full responsibility for the operations of sub-contractors and subsidiaries.

Tobin Tax: Will Hutton backs it, idiots disagree

The sheer natural justice of the Tobin tax makes it a no-brainer to all except the greedy banksters who stand to lose an infinitesimal percentage.

Advantages:

1. All should pay tax including bankers.
2. Tax from the very richest should go to the very poorest. Anglo-capitalism is inherently divergent. This corrects the divergence.
3. Some of the tax can go to insure against the next Credit Crunch.
4. Will Hutton agrees so it must be right.
   

This was the tail end of a piece where I collected the arguments against Tobin, but it seems to have got lost somewhere in the ether...

The thoughts of Chairman Vince Cable

I went to Bristol today to listen to Vince Cable speaking at the end of Bristol University's excellent Festival of Ideas. He was OK; steady, efficient, clear, but non-ground-breaking imo.

My notes:

Two views: the economic crisis might be nearly over, or it might be just beginning. 4 elements to it:

1. Common or garden recession
2. Asset value collapse. Commercial property (to which pensions are tied, unfortunately) down 50%, private property down 20%. There is a definite 19-year cycle in property prices (so Brown was culpable in ignoring it - RL)
   
3. International dimension - nobody immune. Commodities are down.
4. Banking collapse: we were 24 hours from a meltdown in October, 5 out of 10 UK banks were at risk, 3 of the 5 biggest banks in the world are british, RBS is worth (?) twice as much as the UK economy.

UK and US economies will fall by 5% this year, not as much as in the Great Depression when they fell by 30% in a year. (because Govts did not pump money in then. Cameron has not learned this lesson, therefore he is to be feared - RL)

Govt borrowing is at 13% of GDP, highest ever in peacetime.

Banks are inherently unstable - they lend long and borrow short (and they create money out of nothing - RL)

Cleverness is no defence against being taken in by bubbles. Isaac Newton got burned in the South Sea Bubble. Lloyds got burned in Argentina. JS Mill gives an account of a credit crunch.

Derivatives forgot where their assets were. Our guarantee to banks are v much at risk.

Vince says nobody has any firm solutions. These are the problems to be tackled:

1. Are we deflating or inflating? Retail prices are falling, but consumer prices are rising. Government borrowing could crowd out private borrowing.
   
2. The Budget Deficit is normal for a recession, but HMG is borrowing from world markets and the markets could turn against Sterling. We need to borrow to keep people in work, but not borrow to avoid a run on Sterling.
   
3. When will the Banks recover? Soon? HMG, bankers and Tories expect early normality, and then sell the buggers off. On the other hand, the Scandinavian recovery took 10 years.
4. We need to separate out bad debts, clean up bonuses and tax avoidance, do major surgery on the banks, and
5. Look at the deeper issues. Greed. Keynes said capitalism is the worst system apart from all the others.

Reponding to questions, he said total economic collapse risks nationalist rusurgence and econmic nationalism (protectionism).

I wanted to ask about Ponzi-type derivatives, and how likely they were to implode, and why Govt had not tried to ringfence them in some way, but was in balcony to chairman's left and was missed.

The audience - packed, all ages, middle class-ish, applauded only once during the talk - when he mentioned that Trident was to expensive to keep.

Oil - Vince used to work in oil industry. Brazil has found huge deposits, as big as Saudi, but v expensive as it is in v. deep water. (he did not mention Peak Oil and was sotto voce about Climate change - RL)

Oh - and, like a lot of people, it seems he does not understand where money comes from. He thinks the stork brings it. Vince, the banks make it by making debt. That's why there is such a lot of debt about, me dear.

The financial crisis made clear to all (except bankers of course)

Hat tip to a Mr Lynn Jones, recently of General Motors, for this wonderfully lucid explanation of the financial crisis.

Seanie is the proprietor of a bar in Dublin .

In order to increase sales, he decides to allow his
loyal customers - most of whom are unemployed
alcoholics - to drink now but pay later. He keeps
track of the drinks consumed on a ledger (thereby
granting the customers loans).

Word gets around and as a result increasing numbers of
customers flood into Seanie’s bar. Taking advantage of
his customers’ freedom from immediate payment
constraints, Seanie increases his prices for wine and
beer, the most-consumed beverages. His sales volume
increases massively.

A young and dynamic customer service consultant at the
local bank (Angola Irish Bank) recognizes these
customer debts as valuable future assets and increases
Seanie’s borrowing limit. He sees no reason for undue
concern since he has the debts of the alcoholics as
collateral.

At the bank’s corporate headquarters, expert bankers
transform these customer assets into DRINKBONDS,
ALKBONDS and PUKEBONDS. These securities are then
traded on markets worldwide. No one really understands
what these abbreviations mean and how the securities
are guaranteed. Nevertheless, as their prices
continuously climb, the securities become top-selling
items.

One day, although the prices are still climbing, a
risk manager (subsequently of course fired due to his
negativity), of the bank decides that slowly the time
has come to demand payment of the debts incurred by
the drinkers at Seanie’s bar.

However they cannot pay back the debts. Seanie cannot
fulfill his loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 99 %. PUKEBOND
performs better, stabilizing in price after dropping
by 95 %.

The suppliers of Seanie’s bar, having granted him
generous payment due dates and having invested in the
securities are faced with a new situation. His wine
supplier claims bankruptcy, his beer supplier is taken
over by a competitor.

The bank is saved by the Government following dramatic
round-the-clock consultations by leaders from the
governing political parties. The funds required for
this purpose are obtained by a tax levied on the
non-drinkers.

RL:Brilliant. The nub (or one of the nubs) is here "Nevertheless, as their prices continuously climb, the securities become top-selling items."

The economist Hyman Minsky classified derivatives into hedge, futures and Ponzi. It is this Ponzi aspect that has created a "value" for these instruments which is an order of magnitude greater than the world's GDP. When they come home to roost, they will break the banks. Governments need to identify and neutralise these Ponzi derivatives, perhaps by making them the responsibility of the CEOs who negligently bought into them. This would be unfortunate for the CEOs because they would go bankrupt despite their bonuses and pensions, but hey, you cannot make an omelette without breaking eggs.

...And for those who remain confused despite this simplified explanation, here is a visual pictorialisation of the whole process of the bank rescue...

Stanford Fraud and Global financial strip-tease

"Sir" Allen Stanfraud's $8,000,000,000 scam may seem small beer compared to the Bernie Madoff's mighty $50 billion job, but it does deserve attention, as the second in what promises to be a long line of frauds as we watch the slow disrobing of the diseased global financial system.

Stanfraud sold CDs. No, not that kind, but Certificate of Deposit which were labeled as safe, easily-cashed high rate of return investments, whereas in fact he was putting them into unsafe property and private equity schemes. His clients were idiots, because the rule is, you get safe and low return, or risky and high return, you don't get safe and high return.

Experts had been suspicious of "Sir" Allen (knighted for acts of money distribution in the Caribbean, and I believe that the Irish term for louse is pronounced "Sir") for 15 years. Why did the suspicions not get turned into evidence? Because there is a basic premise that you do not question the man who has a lot of money. It goes back to the chimpanzee side of our nature - do not challenge the alpha male, unless you want to go about with bits of fur missing.

Derek Wall will be pleased to see that the Venezuelans who did not like Chavez put their money into Stanfraud's banks instead of local Venezuelan banks. There's karma.

Schadenfreud is frowned on, but it is not illegal.

Overall, though, there is an urgent need for Governments to put up a Security Wall, a ring-fence, between good money and bad money. Good money is what is used to oil the machinery of the real economy - provision of water, food, low carbon energy, housing and pollution control, fundamentally. Good money is what people earn by honest toil, from lifetime savings.

Bad money is money made by trading in money, or trading in guns and toxins, and scams and Ponzi schemes.

If Greens were in government, we would be working hard to design a way to allow the good money to survive, and for the bad money to collapse down and drown in the cesspit of its own corruption. To create a situation where the banksters, the spivs and wheeler-dealers personally accept responsibility for their decisions, so that as and when the whizzo Ponzi schemes they invested in collapse into nothingness, it is they personally who go bankrupt, and not the banks that people have put their savings into. Bankrupt, the business persons will have to live the experience suggested by Wanda, the keenest financial analyst of all.

Unfortunately, Gordon is living up to his reputation for dithering. He has put the question of bonuses out for review, instead of wading in there with a financial machete. The Tories are criticising, but would do the same.

We do not need a general election, with a political makeover that changes the wallpaper from pale pink to pale blue. We need a robust, root and branch overhaul of the entire political and economic system.

Iceland appoints new premier & Left-Greens may lead new government

Green Change : Iceland appoints new lesbian premier, Left-Greens lead new government: "Iceland’s new government named Johanna Sigurdardottir, a Social Democrat Cabinet minister and former airline hostess, as the island’s first female prime minister after the economic collapse toppled the previous administration.

Sigurdardottir, 66, will lead an interim government of the Social Democratic Alliance and the Left Green Movement until a snap election is held, President Olafur Ragnar Grimsson said in a televised speech today in Reykjavik. The date of the election will be decided later today."

Polls suggest that the LeftGreens may end up being the biggest party in the Athlingi (Parliament).
A couple of years ago we met up with the Nordic Greens in Tim Beaumont's (RIP) rooms at the House of Lords. The Green Left from iceland were there. Didn't think much of it at the time. Democratic electoral systems are a wonderful thing.

The First Past the Post system should be chucked into the dustbin of history, along with an unelected House of Lords, Brown Envelopes (Ban the Bung!), and unregulated financial markets, to name but a few. And we do not mean at some indefinite time in the future, we mean in real time.

Good luck to our green friends in Iceland!

ICELAND:People Stand Up, Government Falls

ICELAND: People Power Produces Unexpected Muscle

One of the stories that has not surfaced in UK media over the past few weeks is the long series of peaceful demonstrations outside the Icelandic Parliament.

What now? "Likely possibilities are either a national unity government or a government of the SDA and the Left-Greens, with support from the Progressive Party".

I guess the reason our media did not publicise these demonstrations is that to have done so might have compromised their impartiality.

Or it might give us ideas. Here in the UK, we do not of course have demonstrations like those hot-blooded Icelandic types. Our demonstrations do not go on all night, we stop at 5 o'clock and have a nice cup of tea and watch ourselves on telly.

But we might get a more democratic electoral system as a result of the recession.

The recession: is it Gordon's fault?

Well, is it? The Tories are pointing out that Gordon Brown was Chancellor when it was all brewing; but he stresses it is a global phenomenon.

What is the truth in this political ding-dong?

There are three factors; the business cycle, house prices, and the financial markets.

The capitalist economy has a natural rhythm of expansion and contraction. Gordon unwisely said he had "abolished boom and bust"; clearly he was wrong. Maybe he thought he had avoided the extremes of the business cycle, but that shows he was ignorant of what was really going on.

He could not have been unaware of the growth of house prices, but he did nothing about it, despite the clear recent example of the house price crash of the 1990s. He left it to the market. Had he intervened, by, say, taxing the increase in the house prices, and capping the amount of commission the estate agents were getting (clearly one of the drivers of house price inflation), or requiring the buyer to have a certain amount of deposit to put on a house, and regulating the ratio of income to mortgage loan, or had he used any other such device that are in use in other European countries, he could have avoided the house price boom. He did not, so he is culpable, but we can be sure and certain that his Tory critics would have screamed blue murder if he had intervened in the precious free market. We can also be sure that the Tories would have done exactly the same thing.

Now. The financial markets. The basic position is that new money is created almost exclusively by private corporations making loans at compound interest for private profit. This is not a promising start, since the money system is predicated on debt, which is a power relationship between lender and borrower. Having made some ill-considered loans to people who did not have a good chance of paying them back, money lenders must have had an ely that they were at risk. In response, they bundled the loans up into packages, and sold them on to hedge funds, as a kind of insurance against the risk of default. Ironically, in doing so, they increased the risk to the system many times over. The unregulated hedge funds re-packaged them up into yet more complex bundles, and at each stage, the debt was multiplied, until we reached the point that the "value" of these instruments ballooned to ten times as much as the GDP of the whole world.

This is an irrational situation, psychotic in the sense that it is detached from reality. It arose from treating money, which is a social construct as if it were a commodity. Ann Pettifor has explained this very clearly. The unreality of the financial markets is even expressed in the language that commentators use, when they talk about the "real economy" - real work done by real people - as opposed to the "financial markets" - activity carried out by people who do Something in the City.

So is Gordon to blame? Yes, he is, along with every other politician and commentator who accepted as gospel that the economy must grow infinitely, despite the fact that we live on a finite planet, who accepted that it is OK to make money by buying and selling money as if it were a commodity, and who accept that Free Market Fundamentalism is Absolute Truth.

The Tories are right to blame Gordon Brown; but they would have done exactly the same. In making political capital out of their criticism, they are increasing their opinion poll standing. But Dave Cameron has been captured by the anti-Keynesians in his party, and is therefore foolishly prepared to repeat the mistakes of the 1930s, by trying to balance the books in the course of a recession. If the Tories get in, their policies will make the recession many times worse. Brown is bumbling about, throwing good money after bad, trying to pour money into the black hole of debt that is the financial system, rather than concentrating on putting it into the real economy in a Green New Deal, but at least he understands that the Government has to invest in the economy. Dave Cameron does not understand this, and therefore he must be kept out of office at all costs.

As things stand, the Tories are heading for a victory in the next General Election. There is one change that could keep them out, or at least make sure that they do not have an outright majority. We need Proportional Representation. We must create an alliance with the LibDems, Labour democrats, all Labour MPs who have enough political intelligence to know on which side their bread is buttered, we need all democratic and environmental NGOs to short sharp campaign to get the Government to get a PR bill in place before the next election.

There is unprecedented enthusiasm for this on the Policy email discussion list of the Green Party (3 in favour, one doubtful).

So that's agreed then. Let's go; Here's the campaign chant:

What do we want?
Proportional Representation, preferably AMS, but anything is better than FPTP!
When do we want it?
Before the next General Election if time can be found on the Parliamentary timetable!

Monetary authorities fumble brewery test

The Guardian reports that Alistair Darling was given only 1 hour warning by the FSA before they lifted the ban on short selling last week that led to a 25% loss in the share price of Barclays Bank.
Although this shows a worrying lack of communication between the FSA and the Chancellor, (the FSA said it was an "oversight") Darling must have known that the FSA ban would expire on 16th January.

The words "piss up" and "brewery" come to mind.

Wunch of Bankers would short sell their Grandmothers

The ban on short selling in the City ended last week, and resulted in Barclay’s losing 25% of its share value.

How to do short selling (SS):

1 Borrow some shares.
2 Sell them
3 Wait, in the hope and expectation that they will fall in value
4 Buy them back cheaper than you sold them
5 Pocket the difference between the buy price and sell price
6 Give the shares back to the idiot who lent them to you in the first place
7 Go and have another well-earned line of coke

Short selling introduces instability in the system, which is why they banned it in October. Free marketeers say the value of short selling is that it reveals the true value of a company. If a company dies as a result of short selling, its demise has just been brought forward.

Well, maybe, or maybe not. Given that successful short selling depends on the shares falling in value, the SS pack is motivated to bring the company down, not just by selling the shares, but by being seen to be selling the shares. So they aim to bring about and amplify the fall in the share price of their target.

Then there is an ethical question. If I lend you my mole wrench (not that I would), I expect you to look after it, and make sure you return it. I do not expect you to sell the bloody thing while my back is turned.

The fact that the ban on SS was only temporary shows that Government, despite obediently shelling out untold squillions of taxpayers’ money to keep the banks alive, is still in awe of the erstwhile “Masters of the Universe”. Government is afraid to nationalise, afraid to ban the SS, afraid to apply the firm hand of regulation, afraid to offend the privateers of finance.

Let us take up the cry “They are not Masters of the Universe, they are just a Wunch of Bankers”

Toxic asset repository is the way to go

Treasury mulls bad bank for toxic debt - Telegraph: "The Treasury is understood to have asked the investment bank Credit Suisse to draw up a detailed plan for the logistics of creating a bad bank, in a bid to restore confidence in the sector and to kick-start lending to consumers and businesses.

A bad bank has been floated as a potential measure to help solve the financial crisis by analysts but it has risen up the political agenda in recent weeks as banks' balance sheets look increasingly dire."

I blogged obsessively in October on this sensible way of dealing with the toxic asset question, which are an explosive mixture of sub-prime mortgages which have been marinated in an opaque brew of derivative funds. The mortgages were bundled up into packages to be sold and re-sold as seemingly clever but ultimately stupid derivatives traded in an unregulated, anarchic derivatives market. We should buy them, but at knock down prices.

We have to draw the poison from the system if the banks are to get lending again.

It is a good idea to gather them together in one place, so that they can be studied. Many of them may prove to be illegal Ponzi schemes of the Bernie Madoff type.

Insofar as there are mortgage agreements in them which the homeowner cannot possibly pay off, the government should operate a Right to Rent policy, taking over the mortgage, but allowing the homeowner to stay on in the same house, paying an affordable rent. In this way, the state will once again have a stake in bricks and mortar, which is a good investment in the long run.

The Hedge Fund Implode-O-Meter - tracking the hedge fund implosion - leverage, speculation, SIVs, CDOs, arbitrage, interest rates, credit bubble

The Hedge Fund Implode-O-Meter - tracking the hedge fund implosion - leverage, speculation, SIVs, CDOs, arbitrage, interest rates, credit bubble

Useful link.

The New Year is the time when hedge funds present their accounts. Should be interesting.

Hedge fund Ponzi scheme uncovered to no surprise to readers of this blog.

New York (HedgeCo.Net) - Former chairman of the Nasdaq Stock Market Bernard Madoff was arrested yesterday and accused of orchestrating a ponzi scheme that bilked some $50 billion out of investors, authorities say.

The founder of Bernard L. Madoff Investment Securities allegedly has been running the scheme for years, using new money coming into the fund to pay returns to other investors, keeping up the façade of an admirable performance. In his alleged confession to the FBI, Madoff took the blame, saying he “paid investors with money that wasn’t there.”

According to the SEC complaint, Madoff informed two senior employees at his firm yesterday that he was “finished,” and that his business is “all just one big lie,” and “basically, a giant Ponzi scheme.” He also allegedly admitted that the firm was insolvent and had been for years.

Wahey, here we go. Regular readers (both of you) will recall that this blog was obsessing (use the labels below, Solutions to the financial crisis) over the economist Hyman Minsky who characterised derivatives into hedge funds, futures and Ponzi schemes. Now this one has come to light. $50 billion. 50,000,000,000! And they guy was well-respected. Now he faces a possible court room experience, followed (if found guilty) with 14 years in Gitmo - no sorry, that should be 14 hours community service, maybe. Awful. Terrible that this should happen to a rich person.

What is really terrible is that the whole world is still solemnly accepting the credit-based imaginary monetary system as the only possible reality, rather than looking at economics in the light of physical, biological and ecological realities, and reframing our monetary policies accordingly.

The question is, how many other derivative funds like this are there? By definition, any financial rewards system that depends for future growth to pay present investors is a Ponzi scheme. That means in fact that the entire world financial scheme is Ponzi, since we either have to have economic growth or economic recession - nothing in between. No concept of a steady state eoconmic system. Green Parties have been objecting to the unsustainable growth in throughput in the economy for 30 years, ignored or ridiculed by grey politicians. Maybe sometime soon economists will begin to realise that economics must be founded on sound ecology.

9 Postulates on Money

I'm off to Dorchester today to discuss the economy with the local Green Party. Here are my notes (in case I leave them behind by accident):

1. The amount of money in the world is increasing year on year. The growth in the global money supply has a doubling rate of 6-12 years.
It follows from this that:
(a) the system is unsustainable
( b) money is being created somewhere

2. Since the power of Government to create money is limited to coins and notes, about 3% of the total, it follows that private loan institutions (banks &c) put 97% of the new money into the system, creating the growth in the money supply.

3. They do this by making loans (creating debt) which must be paid back with interest, and using a fractional reserve system that allows them to lend to a multiple of the amount of capital that they actually hold.

4. Governments have granted lenders the ability to provide loans which are supported only by the confidence that
- not many of their borrowers will default at the same time
- not many of their creditors will want to withdraw their money at the same time

These are not safe assumptions, as the 2007-9 financial crisis caused by the “credit crunch” has demonstrated. The privatised, interest-bearing loan method of creating money leaves the economy open to periodic crashes, which cause poverty, inequity, social tension and carry with them the risk of war. At the same time, when the system is working, the lenders’ only constraint is their judgement as to the borrowers’ credibility. They have no thought as to the benefit or harm to society and environment that the loans to which the loans will be put.

5. The necessity of paying back loans and interest is one of the drivers of economic growth, since a business that has interest and loans to pay off must produce more goods than a business that has no such obligations.

6. Economic growth is destroying the ecosphere.

7. Since all money is issued as debt, bearing compound interest, it is no wonder that the world is drownig in debt, at every level, from personal to international.

8. The derivatives have inflated this debt by “leveraging” – borrowing to buy in the hope of future profits. Minsky describes some derivatives as Ponzi schemes – pyramid selling. The total value of derivatives market is about 10x the world’s GDP. This is one reason that banks do not trust each other, and so will not lend.

9. If the banks will not lend, there is not enough money in the economy, and we go into deflation. It is absurd for the Government to borrow money from the banking system it has just rescued at huge cost to the taxpayer. In this deflationary situation, it is open for the Government to issue new money for investment purposes, creating the needed money just as banks create it (as a multiple of its reserves). This can be issued to renewable energy projects as low interest loans, zero interest loans, or grants.

Hedge funds, Pyramid selling, court room apertures

The Editor
The Guardian

"Riots break out across Colombia after investment scam collapses" (p. 23, 14th November); "US hedge fund bosses threaten to move to Britain" (p32, ibid). The economist Hyman Minsky classified hedge funds that financed their operations out of future investments as "Ponzi" types, which is exactly what the Colombian pyramid scam was doing. The difference is of course that these hedge fund managers are too big to get through the doors of a court room.

The Economist defends the indefensible CDSs

The Economist article starts: "They are, says a former securities regulator, a “Ponzi scheme” that no self-respecting firm should touch. Eric Dinallo, the insurance superintendent of New York state, calls them a “catastrophic enabler” of the dark forces that have swept through financial markets.

Then it goes on to try to justify them.

My comment: The economist Hyman Minsky, who to his credit predicted all of this and was sidelined for his pains, classified derivatives into hedge funds, futures, and Ponzi.

Ponzi schemes are illegal confidence tricks in the real world. Why then are they not illegal confidence tricks in the banking world?

I rest my case.

Why won't the Banks cut interest rates?

Alistair Darling and Yvett Cooper are getting a bit cross with the banks, because the Bank of England (BoE) has cut interest rates to 3%, the lowest for 50 years, and they want the banks to reciprocate by cutting rates to business and mortgage borrowers. The banks show little sign of enthusiastic compliance, and Northern Rock, the bank that Darling bought part of only the other day, has joined several others by withdrawing tracker mortgages which are linked to the base rate - a deliberate act of disobedience.

The BoE rate is now a mere 3%, at its lowest for 54 years, but the rate that banks use to lend to each other, LIBOR, is still 4.98%, 60% higher.

Why the gap?

First, interest rates are how banks make their (and our) money, so lower interest rates mean less profit per pound lent out for the banks - at a time when they are desperate to fill their gasping empty coffers.

Second, they do not trust each other with their money, do not trust each other not to go bust owing them billions. Some interbank loans are overnight, to allow the banks to balance their books as they are required to do, and presumably they do not expect each other to not wake up in the morning, but other interbank loans go out for months.

So high LIBOR rates is banks' a way of saying, "We are not confident about the health of our colleagues/competitors in the financial system".

So why are they not happy? Part of the answer must lie in the derivatives, the enormous, unstable inverted pyramid of multiplied debt that hovers over the financial markets like an enormous alien mother ship casting a threatening shadow over the City. Never forget that some derivatives are nothing but a massive Ponzi scheme, a pyramid selling scam that works while the system is expanding, but implodes when the system reaches its limits.

The bankers and politicians are like soldiers in a WWI shell hole in which a grenade has just landed. They are frozen rigid with fear, waiting for it to go off. None of them has the guts to grab hold of it and chuck it away, by challenging the legality of Ponzi derivatives in the courts.

Bush's $2.7 trillion spending spree

Bush's legacy to Obama:
New Debt: $27,000,000,000,000 ($2.7 trillion USD)

TARP $700 billion
Bear Stearns $29 billion
Detroit Big Three $25 billion
AIG $123 billion
Fannie and Freddie $200 billion
Mortgage-backed secs. $144 billion
FHA Rescue bill $300 billion
JPM for Lehman $87 billion
Fed’s TAF program $200 billion
Commercial paper $50 billion
Fed currency swaps $740 billion
_____________________________________
Total: $2.7 trillion

Total US historic debt is $11.3 trillion.
World military spending is just short of $1 trillion every year.

Trillion is a seductive number. It trills off the lips. I am old enough to remember the day when a million seemed a big number.

Debt is essentially putting the future, and future generations in hock for what we cannot get it together to pay for today. The only thing that can put that financial debt in the shade is the incalculable ecological debt that our burning of fossil fuels is creating.

Ah well...