World Development Movement plans to control food price gambling`

WDM have a petition to the European Commission for you to sign.


This is a scaled down version of their petition. I have edited it for brevity and clarity:

I am deeply concerned about the impact of food speculation on consumers in the developing world and in the EU. Speculation by financial actors in commodity derivative markets is causing excessive volatility and inflating prices for physical commodities such as food. These markets exist for price discovery and risk management in the physical market however they are being distorted by speculators seeking to profit from rising prices, which increases volatility.

This has a devastating effect in global food markets as was seen in the 2007-08 food crisis when a further 115 million people went hungry. Food prices reached a record high in December 2010 and I am concerned that without effective regulation to improve transparency and reduce speculation in commodity derivative markets we risk another food crisis on the same scale.

I support the strong proposals in the review of MiFID which would go a long way to ensuring these markets work effectively for producers and consumers and to reducing the negative impacts of speculation.

In relation to the questions in the consultation:

8. and 12.
I strongly support the introduction of a requirement that all commodity derivatives should be traded on an exchange (or equally regulated facility). All commodity derivatives should be eligible and would be sufficiently liquid due to the relatively limited complexity and high volumes involved. Many complex derivatives could be broken down into component parts and then each of these components traded through exchanges. Ensuring all commodity derivatives are traded on exchanges will improve transparency promoting price discovery, prevent dealers profiting from information asymmetry in OTC deals and ensure that OTC trading does not distort the prices of exchange traded derivatives.

It is vital that regulation reflects the difference between derivatives of financial and commodity assets, and the risk of distorting the underlying market. Food is not a financial asset like any other and regulation must reflect the potential for devastating impacts on people’s lives through speculation on commodity derivative markets. Commodity, and in particular food, derivatives should be more effectively regulated to reflect this risk to vulnerable poor consumers around the world.

60.
All commodity derivative trading venues should make position limit information available to regulators and the public as proposed in the consultation document for the purposes of market transparency. I am concerned that financial speculation is severely distorting these markets; however analysts can only identify these effects if market transparency allows regulators and the public access to information about market participants’ positions. In order to ensure effective transparency this information needs to be published regularly and in sufficient detail to allow detailed analysis of the impact of different categories of traders (see below).

61.
Traders should be categorised in multiple ways to accurately reflect their role in the market. This categorisation should reflect whether they are commercial or non-commercial participants (i.e. whether or not the hedging relates to their trade in an underlying asset as part of their commercial activities), the investment vehicle (for example commodity index funds) as well as the type of regulated entity.

62.
As I have stated above I strongly believe that all food commodity derivatives should be moved off OTC due to the risk of distortion to underlying food markets. However should a small number of commodity derivatives remain OTC the harmonised position information should also be published to ensure market transparency and to prevent OTC trading distorting activity in public markets.

145.
Regulators should be given the power to adopt hard position limits for all types of derivative contracts, whether they are traded on exchange or OTC, and especially for food commodity derivatives. Regulators must have the power to prevent speculation affecting the underlying physical market and position limits are the most effective tool to ensure the effective functioning of these markets. In addition these limits can be set to allow sufficient liquidity to allow commercial hedging while minimising the negative impacts of excessive speculation.

146.
Position limits absolutely must be used to prevent market manipulation in both derivative markets and manipulation of the underlying asset. Preventing this kind of market abuse must be seen as good practice for the effective functioning of all markets but takes on an added significance for commodity derivative markets, especially for food. In addition, position limits must be used to prevent disorderly markets; including preventing markets becoming divorced from the fundamentals and instead reflecting wider market forces such as trends in currency or equity markets. Through using position limits to reduce excessive speculation regulators can ensure that derivative markets reflect the underlying asset, ensuring lower and more stable physical market prices, and allow commercial participants to better manage risk and plan commercial activities. The directive should introduce position limits on a permanent basis to ensure effective functioning of these markets, not just introducing the power for regulators to introduce them an emergency measure or under certain market conditions.

148.
Position limits should be applied to individual firms to prevent market abuse; to specific investment vehicles (such as ‘long only’ index funds); to investment firms such as hedge funds that rely on algorithmic or technical analysis (momentum traders) and overall to commercial and non-commercial participants in a market. Operators of investment vehicles such as commodity index funds should be required to disclose their positions on a frequent basis to the relevant regulator, momentum traders could be defined according to the definition of automated trading in the consultation document, and commercial and non-commercial by the definitions established in the Commission’s proposals on OTC derivatives, central counterparties and trade repositories. These three categories reflect the different ways in which derivative markets can be distorted; long-only index funds causing excessive price inflation, momentum traders increasing volatility and an overwhelming presence of non-commercial participants distorting prices away from the fundamentals.

I also urge you to consider the impact of this regulation on the people of the EU and the developing world in analysing responses to this proposal, not just its impact on the financial services industry. Many financial institutions make significant profits at the expense of affordable food here and around the world, due to our current under-regulated markets. I am aware that these institutions will be lobbying hard in their own interest to water down these regulations, however loosening these regulations will only serve to boost profits for a handful of firms while damaging markets, failing to reduce market risk and damaging the lives of people around the world.

Yours sincerely,

Open letter to an MP on the Toxic Asset question

No apologies for continuing to bang on about the derivatives market, because it is a disease at the heart of the financial system. If the toxins cannot be withdrawn from the financial system, they threaten to bring down the banks, which will turn a 2 year recession into a 10 year depression. War might figure among the many adverse results of that. So here is a letter containing a way forward on the toxic assets problem. If you broadly agree with it, please copy, amend (some parts are specific to my situation), and send it to our own MP or representative.


... MP
House of Commons
London SW1A OAA




Many thanks for your letter of 09 October, and for your succinct resume of the position with the financial crisis.

However, you did not address the question in my letter, which is how we might draw the “toxic assets” out of the financial system. I am concerned that Government should use the breathing space that its bailout has obtained to take action to contain and if possible deflate the bubble of toxic assets created in the derivatives market.

In my previous letter I mentioned a figure of $1.14 quadrillion as the total “value” of the derivatives market, but on further research was unable to trace the source of this figure. However the Bank for International Settlements gives a figure of $596 trillion in December 1997*, which is about ten times the amount of foreign debt owed by every country in the world. The derivatives market may well have doubled in the ten subsequent months. This is an absurd amount, psychotic in the sense that it is a notion completely divorced from economic reality.

It is unconscionable that the “products” of a tiny handful of financial gamblers and gamesters should endanger the livelihood of everyone in the world. It is therefor an urgent necessary to examine these products in detail in order to verify that they are in fact based on valid and legal trading principles. One general point is that the people who created these instruments have been behaving as companies, but have been operating outside of company law. In particular, they must be examined to find out whether at least some of them amount to Ponzi schemes, which are illegal. If they are found to be illegal, the debts that they represent can be repudiated by the banks, which might help to stabilise the financial system and save billions of pounds of taxpayers’ money.

Mr Paulson is quoted as saying that he wanted to "kill the bad hedge funds and heavily regulate the rest." However, it is noticable that the “cash for trash” component of his TARP seems to have slid down the agenda, presumably because he recognises that the sheer magnitude of the TA problem would overwhelm the resources of the US Government.

Willem Buiter, inter alia, has suggested that a Toxic Asset Dump, TAD, should be set up, to act as a receiving and clearing house for institutions who have doubts about whether they still wish to hold them on their books. In this institution the value – or otherwise – of the “assets” can be analysed, and their legality – or otherwise – can be assessed. From what we learn in the TAD, ways and means can be devised to subject toxic derivatives to a controlled deflation.

The details of the exact scope and powers of this institution can be finalised by the statesmen and their financial regulators, but the central principle is to bring the derivatives market to account. Some banks, unsure of the validity of their derivatives holdings, might be grateful for the opportunity to subject their holdings to an objective audit, especially if they thought that there was a chance that the debt implicit in them might be cancelled if they were to be found to be illegal. At a second level of regulation, banks should be required to file the details of their holdings in specified derivatives, particularly the CDS. Confidentiality might be offered if there was a perception that knowledge of their holdings might endanger their standing in the markets. At a third level of regulation, all derivative holdings might be required to be registered with the TAD.

Given the globalised nature of the financial markets, it would seem best to set the TAD up at World Bank or IMF level, but the UK could forge ahead with a pilot scheme in order to speed up the process.

I would be very grateful if you would transmit this letter to the Treasury for an answer, or preferably ask a question about the Government’s plans to contain the derivatives market in the House.

Please also raise the question in Conservative Party circles, and especially to find the opinion of specialists in Company Law about the Ponzi aspect of some of these trades.

I hope that you will not mind that I send this as an open letter. This is not from any motive of political competition, but because these matters are so serious that any measures that will increase the chance of this proposal to be taken up must be used.


With many thanks

Yours sincerely

Hernando de Soto is the Man for sorting the economic mess

Wahey! Page 3 of Observer Business and media has a piece on Hernando de Soto, (Hernando de Soto Polar, to give him his full moniker, so as not to confuse him with the Spanish Conquistador, nor with the Austrian school economist Jesús Huerta de Soto). Our Hernando is a highly regarded 67 year old Peruvian economist who speaks up for the poor and the informal economy.

He believes Gordon Brown's low interest rates and quantitative easing will fail unless he also tames the derivatives.

First, his numbers:
$13 trillion in notes and coins in the world
$170 trillion of credit in bonds and equity
$600-1000 trillion in derivatives (this aligns with the unsubstantiated figure of 1.4 quadrillion which was floating about last year).

13, 170, 1000. Derivatives out-scale physical money by up to two orders of magnitude.

The Observer report continues "What dramatically undermined capitalism since about 2000 was the growth of unregistered assets - derivatives. Now that those have turned toxic, as the loans attached to them have been defaulted on or have come to be regarded as worthless or significantly devalued, we do not even know how big the problem is. We do not know where it is either - mainly because the banks have been reluctant to reveal the truth. Many of the derivatives that have caused the crisis are bearer bonds, and there is no worldwide register of them...

De Soto is used to living in a country which is about 60 per cent a hidden - or shadow - economy; the black market accounts for most trade and most people have no title to their home. His work is about empowering people by recording their entitlement to certain assets (most obviously their homes), thereby, enabling them to borrow, trade, receive letters and conduct other basic commercial transactions through those assets.
The UK and the US have become shadow economies ... through the toxic asset crisis. Both have now started detoxification programmes, but in a rather wobbly fashion. ... It is only when all banks with significant problems sign up, make honest declarations and the toxic assets are taken off the books that they will start lending normally to each other and businesses once more, says de Soto.
"You will end up there," he says. "But it's very frustrating to see this from the outside. The whole source of the debacle is the US and the UK. And it is tough to watch you not getting to the centre of the issue. There is an intellectual lag. But this is a problem that can't be dealt with in terms of traditional monetary policy.
Detoxification is a process we have more experience of than we realise. When East and West Germany reunited in 1990, the East German currency had to be detoxified and de Soto believes that the work of the 300 or so experts involved in that programme would provide useful insights now.
But once detoxification happens, results could be seen quickly: "This [detoxification process] is something that could be done in two or three months. It will be a painful exercise but, once you have found a way to take the detoxification out of the system, you are going to be able to free up credit." [emphases added]
So in a nutshell, Brown has first to register the derivatives, and then to neutralise them, otherwise all the taxpyers' money, and new money that he has thrown at the problem will be wasted.

Regular readers of this blog will be relieved, as indeed am I, that all the obsessing about derivatives that has been going on here since last October has been valid. I am not an economist, thank god, but I have picked up on Willem Buiter, who has been saying the same thing, and wrote to the Treasury on October 13th 2008, urging action on the Toxic Assets (complete ignoral). You do not have to be clever or even smart, you just have to look at the figures for the volume of the derivatives relative to the real economy.

The Green Party, indeed, all sentient beings capable of written communication, should be calling on Alistair Darling to listen to de Soto and Buiter, and demand that the banks register their toxic assets. This is in fact on Darling's agenda. He is proceeding along the time honoured lines: "When all else fails, RTFN"*

Trouble is, people are rabbitised by the headlights of the credit crunch, believing it to be beyond ordinary mortals to understand. It is not.

Why has Darling not done this already? The answer must be that he is still in awe of the banksters, because they have been pushing Governments around for more than 100 years. Wake up Alistair! Banksters are no longer the Masters of the Universe, they are just a lot of Very Naughty Boys.

*read the fine manual.

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'?

Derivatives Detox

Letter to Guardian

Your leader, (Bonfire of the certainties Oct 14th) is dazzlingly clear and accurate in its diagnosis and prescriptions. You are right to say that new financial products must be approved by the regulators, in the same way as new pharmaceutical products must be approved. To take the analogy a step further, if the health service becomes aware that a new drug has toxic side effects, it is taken off the market. Derivatives, particularly Credit Default Swaps, have toxic side effects to the financial blood stream, not least in destroying trust. And they are infectious. If a corporation succumbs, out of its corpse crawls a Hydra of claims against the gamblers who made the wrong call on that corporation’s health. Ironically, given that some claim to act as insurance policies, they have the property of multiplying debt and magnifying risk. The magnification is so big that the total “value” of the derivatives sector is more than $596 trillion, which is about ten times the amount of foreign debt owed by every country in the world. This is an absurd amount, psychotic in the sense that it is a notion completely divorced from reality. It is unconscionable that the “products” of a tiny handful of financial gamblers and gamesters should endanger the livelihood of everyone in the world. The financial instruments that they have produced and profited from now threaten the financial system with a tsunami of odious debt. They must therefore be withdrawn from the financial market if that market is to survive. This is not going to be quite so easy as taking a drug off the market, but it can be done.

First, their legality should be carefully reviewed, both in general and also in particular instances. In general, the people creating these instruments have been behaving as companies, but have been operating outside of company law. Second, an institution, (Willem Buiter suggested it should be called a Toxic Asset Dump, TAD), should be set up, to act as a receiving and clearing house for institutions who have doubts about whether they still wish to hold them on their books. In this institution the value – or otherwise – of the “assets” can be analysed, and their legality – or otherwise – can be assessed. From what we learn in the TAD, ways and means can be devised to subject toxic derivatives to a controlled deflation.

Brown and Darling deserve credit in that their actions have stabilised the banks for a time. They must now use this time to take action to defuse the derivatives time bomb.

Toxic Assets: Neutralising the Poison

I have today sent the letter pasted below to the Chancellor.

Please feel free to copy, amend (if wished) and post it to him also, and to spread it among your friends' lists. Only if they get multiple mailings will it penetrate through the rings of defence to reach the Chancellor himself. A copy to your MP will help.

There is something we can do about this crisis. We are not just passive spectators. The economics community is paralysed, and solutions are hard to find.

Right to Rent and Green New Deal are further measures we can press on the Treasury as the recession deepens.




-------------------------------------------------------------------

Rt. Hon Alistair Darling MP

Chancellor of the Exchequer

Correspondence & Enquiry Unit

2/W1 HM Treasury

1 Horse Guards Road

London SW1A 2HQ







Dear Mr Darling

We congratulate you on the adoption of the UK approach to the financial crisis by the G7 and IMF. We welcome the Treasury’s support for banks with £50 billion of part-nationalisation, which gains for the State a much needed influence on the banking sector. We support further bank partial nationalisation, but find it regrettable that the shares purchased were non-voting. We welcome the decision to regulate CEO bonuses, and point to the opportunity to reform and regulate many other dysfunctional banking practices at this time. We welcome the further £200 billion of short term investment to try to ensure liquidity, noting that it may bring in an income from interest.

In purchasing shares in banks, HMG is gaining influence. We would advise that as part of that in influence that the Government would reserve the right to levy a small charge on current accounts. This may prove to be a useful instrument in case it is needed to increase the velocity of circulation of money in the coming months or years.

On the other hand, we are opposed to any attempt directly to buy the “toxic assets” that are poisoning the banking system, as in the Paulson plan. This is a high-risk strategy that will probably result in a futile waste of taxpayers’ money.

We oppose purchase of Toxic Assets for the following reasons:

1. It is opposed to natural justice, in that money is flowing from the taxpayer to may for the mistakes of the rich elite.

2. It carries a moral hazard in that in insulates financiers from accepting responsibility for, and learning from their mistakes

3. There are opportunity costs, in that money would better be spent in the real economy, applying a Right to Rent policy for homeowners who cannot afford their mortgages, and the Green New Deal, which is needed to address the triple threats of recession, peak oil and climate change.

4. There is a probability of corrupt and/or sophisticated diversion of the monies away from their original purpose. We learn that the agents who will administer Paulson’s bailout stand to gain $7 billion for their work.

5. There is no certainty of the efficacy of trying to purchase the toxins out of the system. There is no sign yet of the Paulson Bailout having stabilised Wall St, and though it may work through, our judgment is that it will postpone, not prevent, the full collapse of the stock markets.

6. The magnitude of these toxic assets is beyond the capacity of any agency, even the World Bank , to buy off. We see from the BIS that the total value of OTC derivatives outstanding derivatives reached $596 trillion in December 2007, and I sprobably greater now. The derivatives market has created a debt greater than the total foreign debt owed by all nations. Clearly it is impossible for any government or even the World Bank to purchase these derivatives out of the banking system. Yet if they remain in the system, they will continue to poison confidence between banks.

This is an extraordinary threat caused by an extraordinary problem, and it therefore requires extraordinary remedies.

Point 5 of the G7 plan is to “Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary”.

In order to achieve this aim, the World Bank (or other appropriate international body) should authorise the creation of a repository for these toxic “assets”, which Prof. Willem Buiter has suggested should be termed a Toxic Asset Dump (TAD). Buiter suggests purchase of these “assets”, but we consider that viewed as a whole, they have no real value, and indeed have a negative value in their effect on confidence in the system.

Any bank holding such assets will be permitted, encouraged and in some cases required, to file them with the TAD repository, paying only an administration fee.

The concept is to have an amnesty for these assets. They will be sidelined, taken out of circulation. Once thus stabilised, they can be studied by accountants and academic economists. If it emerges that there is real value in some of them, the banks that handed them in may receive some repayment, though some will be go back to the taxpayer in payment for the expense that they have borne as a result of the errors and misjudgments of the banking system.

Initially, the concept is a free, voluntary submission of unwanted TAs held by banks. It may be that a more complex system will be evolved, depending on the rating of each asset. Clearly there is an enormous amount of detail to be added to this concept before it can be rolled out, but we hope that the concept itself will be adopted by the British Government.

The principle underlying this plan is the doctrine of Odious Debt. It can also be justified in the Abrahamic religions in terms of Jubilee.

We believe that this concept offers a way to draw the toxic assets out of the financial system.

We hope that the minds of your advisers will be open to build on this concept.

Yours sincerely

Toxic Assets: Buy? Bah!

So the markets are crashing.

Maybe tomorrow they will bounce back, the intravenous infusion of taxpayers money (or should that be smelling salts?) will revive market sentiment and action at global level by the G7 will do the business. The markets will revive and we will get away with a couple of years recession, and then – back to BUA (business as usual), with banksters and politicians building nuclear power stations, burning oil, blathering about doing something about global warming sometime fairly soon in the not too distant future, and fighting illegal wars.

Or not. As the case may be.

If the markets are to be saved from galloping en masse, grunting and snorting, over the cliff, something will have to happen about the Toxic Assets (TA) problem.

I spent a couple of hours today checking out the source of the $1.14 quadrillion figure for the TAs that I gave in the blog below. It was quoted as from the Bank of International Settlements. I went there and found December 2007: $57 trillion, and May 24 2008: $596 trillion, but no quadrillions of any kind.

Maybe $1.14 quadrillion is a bit of internet bla-bla, and the TAs are only $596 trillion. Though they could easily have doubled since May. Anyway, half a quadrillion is still a lot of money in USD. Though not as much as it once was.

Paulson is actually trying to BUY some of these things. Does he reckon he can spend a quadrillion? That is a thousand times the amount he has spent so far.

The fact that we are bandying these numbers around is a symptom of notional hyperinflation. Real hyperinflation cannot be far behind.

All this weirdness is the result of inside out, back to front thinking that lies at the heart of the debt-money system. “Toxic Asset” is an oxymoron. How can an asset be toxic? Surely if it is toxic, it is a liability, not an asset?

Not in DebtMoneyLand language. If you take a loan from the banking system, your debt is entered twice, once as an asset, and once as a liability. Your debt is an asset to the bank because you pay interest on it, which is how they make money. Only if you stop paying, the asset account turns into a debt. This is the risk the bank lender makes.

Managerialists (new word, meaning someone who has had his or her brain stuffed with MBA information to the exclusion of all else) hate risk, but love risk management. The clever instruments offered by the derivatives seemed to be a sophisticated way of managing risk. Managerialists bought into them. But in order to function, the derivatives multiplied the amount of debt, and it now stands at this very large figure of between half and one quadrillion.

In the words of my old surgical registrar, these derivatives are a heap of dingoes’ kidneys. They are not assets, they are a fantasy number: they are like free market equivalent of the square root of minus one. They should not have come into existence, and only did happen because the financial regulators had their brains on standby mode.

We do not mind the market in derivatives hoovering itself up into nothingness; we do not feel sorry for the marketeers and banksters as they watch their graphs going southwards; but we do care about the pension funds, and the effects of recession on real people.

So we should make a special Toxic Asset Dump (TAD). I am pleased to find that Willem Buiter, a respected professor of economics at the LSE
is of the same opinion. The difference is that he thinks we should BUY the damn things. This is repugnant. The people are doing the banking system enough of a favour by providing a service where the poison can be taken out of the banking system, so that the banks, sadder and wiser, can get back to their core business of acting as intermediaries for the real ecological economy that is going to need all the financial help it can get over the next few years.

Still, he is the professor, so I will look out for the case for purchase to me made. So far, he has a problem in finding out what the market value of the "assets" might be. To my simple thinking, if they are toxic, they have a negative value, so the banksters should be grateful that we do not ask them to pay us for taking them off their hands.

Buy? Bah!

Ed Balls says crisis is the worst for 100 years

Ed "Private Frazer" Balls says the economic crisis is the worst for 100 years: "Children's and Schools Secretary Ed Balls has warned that the current economic downturn will be worse than the Great Depression, reports said.

Balls, a close ally of Prime Minister Gordon Brown, told a conference at the weekend that the crisis was the most serious global recession for 'over 100 years,' according to the Yorkshire Post .

At the gathering in Yorkshire, he also raised fears of a resurgence in far-right groups as there was during the Great Depression."

This deliberate statement, as part of a speech, confirms Gordon brown's Freudian slip last week, and indicates that the Government is aware of the true extent to which the banking system is...I am searching for a non-sexual expression here...ruined by the Ponzi credit derivatives.

It looks as if the banks have gone the way of the Norwegian Blue To clear up any doubt, the banking system has shuffled off its mortal coil and joined the choir invisible. Its metabolic processes are history. It is demised. The banks' account sheets make Mr Micawber look like Croesus. They are Black Hole Singularity. They are tohu-bohu, without form and void.

To summarise: the financial system is built on debt. Banks create money for lenders out of nothing, restrained only by a multiple of the capital that they actually hold, a typical ratio being 65:1, meaning that they were lending out £65million for every million that they held. The derivatives bubble has inflated this debt bubble until the derivatives market is "valued" at ten times the world's GDP. Part, if not all, of the derivatives market is a Ponzi scheme, a pyramid selling scam which is dependent on infinite growth to sustain itself. In shor the banksters have been taken for a ride with all our money. When Ponzi schemes break, there is no compensation for the marks; they lose all, and are lucky if they get the satisfaction of seeing the scammer locked up.

If this analysis is correct, we are in the coming months going to witness the evaporation of our money into cyberspace. I believe this is why Ed Balls, consciously, and Gordon, subconsciously, are letting us know that a Depression of ten or more years looms.

If our money does go up in a great financial bush fire, we are going to need a plan to rectify the situation. This is where James Robertson's G20 Campaign offers a new beginning.

The other aspect of the problem is that Ed Balls was warning of a right wing backlash, as in the 1930s. This is a real threat, and he did well to warn of it.

Right wing politics is a hot air balloon, with two burners: unemployment and housing scarcity. As long as there are white people with no jobs and no homes, the BNP can point to immigrants in jobs and homes and make them scapegoats for the people's anger. The classic response of the Left, to march and counter-march against them, is a hopeless tactic, creating a game of cowboys and indians, or worse, Israelis and Palestinians. The real political solution to the rise of the far right is for Government to make sure that there are sufficient houses and jobs in Britain for all. The Green Party's Right to Rent policy is a start for housing; and the Green New Deal is the tool for creating good work and energy security. The GND+ is an even better tool, that creates even more jobs, but the Handbrake Tendency has seen to it that we cannot vote on that for another 18 months (sigh).

What is the Green Party's policy on the financial crisis? Well, we will be able to vote on a few measures, including a short stab at Monetary Reform, at our conference in Blackpool Winter Gardens, 20th-23rd March. Until then, we have no policy.

This, to my mind, is absurd. Our Manifesto for a Sustainable Society is a great democratic venture in political policy, but it is not holy Writ, and it does not cover political developments that happen after policy is decided at Conference. Clearly, we need a day to day ability to respond to the rapidly changing political circumstances. We do have a Political Committee appointed by GPEX and accountable to them, but its processes and decisions are opaque.
We need to formalise this process, giving Political Committee power to make decisions that go beyond what is written in the MfSS, and report back to Conference. However, it will take two years to get this through, if ever...

So there we have it. We just need Monetary Reform, Right to Rent, GND+, and a Green Party leadership that is empowered to think on its political feet. La lutte continua.

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.

Huffington Post on leverage

Huffington Post, Mort Zuckerman: "Much of this debt takes the form of securities and derivatives that remain on their balance sheets. In fact, another systemic risk and one that cannot be measured is based on the opacity and complexity of these exotic securities, mainly credit default swaps and derivatives that remain mainly on unknown financial balance sheets in amounts that exceed $50 trillion. The financial risk and exposure to loss is misunderstood and underestimated even by the credit agencies so the ensuing financial damage could be of a magnitude that could threaten the financial system.

AIG is a classic example of the inability to estimate the exposure. Management first estimated they would need $40 billion to get past their financial crisis; the government increased this to $85 billion; and within thirty days the cost had soared to $121 billion. Lehman is another example. When it went bankrupt, they had to unwind the credit insurance on Lehman, at a cost that has just been revealed to exceed $360 billion, an amount unrecognized by the Treasury when Lehman went under. These kinds of staggering losses could be multiplied many times over by defaults in cascading derivatives."

Leverage, it's called.

What's wrong with the Irish economy?

A lot.  I have condensed this from Robert Peston's piece here.

Let us start with an adaptation of an old rhyme:


Small fleas have bigger fleas 
Upon their backs to bite 'em,
And bigger fleas have bigger fleas
And so ad infinitum.

In Ireland's case, the small fleas are the mortgages on the new properties that Ireland built in the Celtic Tiger years. Rising house prices were a Ponzi scheme, sustained by its own expansion, which duly collapsed when the expansion stopped. The biggest fleas are the derivatives.

The collapse of the property markets has left Ireland with a lot of debt.
Its total debt - banks + public + private - amounts to 700% of Ireland's GDP.

Politicians like Osborne are fond of (falsely) comparing the budget of countries with the budget of households. When a household has debts 7x greater than net income, the householder is inclined to look at what is involved in declaring bankruptcy. And so it is with Ireland.

So what happens if, say, the two weakest Irish banks should be declared bankrupt?

They are the Anglo Irish Bank and the Allied Irish Banks. 

First, this would annihilate the monies that the good-hearted taxpayers of Ireland put into those banks to shore them up. I gather that 23.8 bn Euros have been put into Anglo Irish, and about 7bn Euros into Allied Irish. Say 30,000,000,000 Euros in all. Gone. Poof! Annihilated. Finito! Kaput! Tax payers money. The same taxpayers that have been screwed by the savage Irish cutbacks.

But wait! Banks are insured! They have Credit Default Swaps which are derivatives that bet on banks not going bust. If they go bust, Ireland can claim on the CDS's can they not?

Well, apparently not. CDS's are not like your average insurance where you have an insurance company that actually pays out when your house collapses. No. Instead, the risk has been bundled up and resold (at a profit) then rebundled and resold (at a profit again) innumerable times. There is a multiplier effect each time it is sold. The total effect of this multiplier is such that the value of the total derivatives market before the Credit Crisis in 2008 was 10 times the global GDP. 10x. 1000%.

So if the Irish banks go bust, it is going to create lucrative job-creation schemes for bean-counters world wide as they try to work out who owes whom what. Many of these CDS's will be held by pension funds and high street banks (except cool banks like Co-op and Triodos), so it is not just the hedge fund managers who have to sell their Ferraris, but old Mrs Groggins who will have to keep warm by burning the furniture.

And not just that.

There are direct creditors of Irish banks at risk for $170 billion.

• $46 bn in Germany
• $41 bn in UK
• $25 bn in USA
• $21 bn in France

Individual banks are at risk:

• Danske bank has 92% of its net assets in Irish loans
• RBS has 90%
• Lloyd's 60%
• Barclays 16%

So if the Irish banks go pop, it is not just a little local difficulty for the Irish. Finance, like ecology, is a system of mutually interdependent parts. There are other strings of interconnectedness which have not been mentioned here. 

The conclusion is that Irish banks cannot be allowed to go bust.

Therefore a bailout is indicated, which will come from the EU and/or Eurozone, and or the IMF.

Ireland is delaying this bailout, because it does not want to be the first to go whimpering to the Big Boys. It would rather that Portugal, Spain or Greece should be first.

But a bailout there will be, for sure. And then another one for Portugal Spain and Greece.

All of which calls into question the nature of money.  And the best thing you can do to get your head around that little conundrum is to watch the Money as Debt videos here.

A last word. I am not an economist, just a jobbing GP and green party blogger. What gets up my nose, apart from the arrogance of "The Markets" who have buggered the economic system, and have the insufferable audacity not just to not be grateful for the bailouts, but to require that the people should be punished for the crimes of the market, is that professional economists (a) did not spot this coming, and (b) are not reporting clearly on what is happening - apart from a few like Robert Peston and (c) have not created a computer model that can describe and predict macroeconomic developments, as the climate scientists have done.

I am going to stop now, because this is a very long blog post, and you must be getting tired. Before I go, a very mild summing up of my feelings about the banking system.

Crap.

Update: further helpful suggestion here.
Update: Guardian letter from Greg Quiery adds corruption, tax evasion by the super rich, whistle-blowers ignored, offshore investigations abandoned,  and other all-too-familiar failings.

EU begins to tame the derivatives

The Guardian reports on the EU plan to bring the derivatives under regulation Charlie McCreevy, the EU Commissioner for the internal market, is setting up a clearing house - or rather, is asking the banksters if they would very much mind if they would consider doing so.

It is incredible that politicians are still bowing and scraping to the marketeers, after they have cost us so deep in the purse.

I have sent Mr McCreevy the proposal that the legality of Minsky's 3rd rank derivatives should be tested.

Hedge funds in the psychiatrist's chair

The behaviour of the financial markets is interesting to me as a psychiatrist.
The obvious analogy is to manic depressive illness, now called bipolar. The overactivity and sense of wealth in bull markets is obviously paralleled with the manic phase of the bipolar cycle, as is its detachment from ecological reality. This is followed inevitably with the depressive part of the cycle, when everything changes to the opposite extreme and activity slows down. The bipolar individual has the same relation to monetary wealth: irrespective of the realities of their bank balance, in the manic phase the individual spends money freely, and in depression, the individual believes that they are bankrupt.

So far, so obvious. But there is another more subtle analogy to be drawn between the financial market, indeed, commercial life generally, and psychopathology of obsessive compulsive disorder (OCD).

The obsessive seeks to control and eliminate risk. Since this is impossible in the wide diversity of life, the mind provides a single proxy of risk control which the subject focuses on. It may be bacterial infection, so that the sufferer spends hours every day in ritual hand-washing, or it may be burglary, so that the patient goes back repeatedly to check that the door is locked. In every case, the desire for perfect control leads to irrational behaviour, which the patient knows is irrational, but is powerless to stop.

The control motif is found in managerializationism. Managers in any organisation seek to control the system below them. To do this, they set targets and protocols for their offices to follow. In doing so, they tend to annoy their workers, who find their work routines in a state of continual change, which results in less, not more efficiency. It is the product of the manager to change the system. If they did not change the way things are done, what would they be for?

In the financial system, the control motif is more overt. Banks want to manage risk. Any loan is risky: the debtor might default. In an attempt to manage risk, fund managers have gone to the hedge funds to “insure” themselves against risk. In an attempt to insure their own products against risk, the hedge fund managers have sought to insure their funds with an ever expanding range of derivatives, financial instruments where risky loans are parceled up and sold on.

“Big fleas have smaller fleas
upon their backs to bite ‘em,
and smaller fleas have smaller fleas,
and so ad infinitum”.

One property of some hedge funds is that they are only profitable and secure if the market continues to grow. The economist Hyman Minsky correctly described these types of funds as “Ponzi” – a form of pyramid selling scam. The mangerializationists have been taken for a ride by elaborate scams. The correct response for governments should be to take them to court.

Mangerialisationists, lacking anything real to do (apart from finding out if their office is happy and functioning well, and if their subordinates have any suggestions that would make their work more efficient), find themselves attracted to words. They use obscure words to make their subordinates feel ignorant, so that they do what they are told. Faced with someone selling them a financial instrument with interesting names and unintelligible mechanics, the managers cannot help themselves. To say that they do not understand what is on offer is out of the question. They buy in.

In each stage of this “risk management”, the fund manager who buys the risk also adds his price for taking the risk, so that the liability becomes magnified. This is why the “value” of the derivatives has reached a size somewhere in the region of ten times the Gross Domestic Product of the whole world. The GDP of the world includes some pretty meaningless items such as Russell Brand and Jonathan Ross, but it also includes the cost of providing such life sustaining realities as water, food, housing, energy and waste disposal, not to mention manufacturing and distribution. So these derivatives have grown many times greater than the real necessities of life for all humans on the planet. And they exist because of a mistaken attempt to control risk.

The right way for a bank to control risk is to make sure that their lenders have a reasonable chance of meeting their payments (something that they failed to do) and to lay capital aside in good times to cover their risks in the inevitable downturn (which ther also did not do). Having failed to do the right thing in the real world, they attempted to buy certainty by buying into hedge funds and dodgy derivative schemes, which has made matters worse, just as a person with OCD tries to eliminate risk by unrealistic and endless hand washing or checking, and wastes a large part of his life in doing so.

Davos 2009: Gordon Brown calls for global co-operation to beat economic slump - Telegraph

Davos 2009: Gordon Brown calls for global co-operation to beat economic slump : "This is the first financial crisis of the global age. And there is no clear map that has been set out from past experience to deal with it."

What does he mean? We have had recessions before, recessions which have been international in scope. Globalisation means that this recession is more global than in history, but is this all he means, or is Gordon betraying an unspoken worry that the present disease in the global banking system that goes further than this? A disease that has never been seen before?

If so, he is talking about the derivatives which have multiplied the amount of debt in the financial system by orders of magnitude. Nobody, not even George Soros, understands the damn things, because they are absurd, and it is impossible to determine a value for them. They are a huge known unknown infesting the accounts of any banks that have dabbled in investment banking. The derivatives market, or at least part of it, is a huge Ponzi scheme, which flourished when the market was growing, and now the market is collapsing, they are collapsing in on it, like a jerry-built house filled with rotting flesh collapsing in an earth tremor onto the owner and his family. Our political and economic masters who sang the praises of Globalization (US sp.) have ended up waltzing the world economy into the biggest confidence trick in history.

Maybe the financial system will recover in due course. Or maybe the derivatives will get into the financial bloodstream and cause financial septicaemia. Gangrene may set in. Amputations may result.

Maybe we will have to radically redesign the financial system from scratch.

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.

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 Crushing Potential of Financial Derivatives

The Market Oracle Has a clear piece on the Crushing Potential of Financial Derivatives.

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.

Fred Goodwin should accept responsibility for his decisions

Clearly, "Sir" Fred Goodwin should be parted from his £650,000 pension, because he was personally responsible for the foolish acquisitions policy of RBS while he was CEO.

However, Government should go much further. The overriding aim of policy should be to build a fence between good and bad money. Good money is the real deposits made by savers into banks for safekeeping, and bad money is the manic, irrational, notional, speculative, casino type "financial instruments", the CDOs, CDSs, and Minsky's Ponzi-type derivatives. Bad money is what Warren Buffet termed "financial instruments of mass destruction", whose total "value" is counted at 10 times the GDP of the whole world economy. They are hovering on the financial horizon, and the banksters are unable to put a market value on them. Someday, these malign financial birds of prey will come home to roost, wrecking the institutions that own them, turning the recession into a 10 year global depression.

These derivatives must be neutralised.

Minsky characterised them as Ponzi schemes, schemes that make money while the system is growing, but which become valueless when growth in the financial markets grinds to a halt. Like now.

When Ponzi schemes collapse, the suckers who bought into them lose everything, except what they can scrape back from the estate of the scheme originator, if they are lucky enough to catch him.

Now. Bonuses are paid to top bankers for their performance. They exist to motivate, and to reward success. They are sacraments of the holy ritual of wealth creation. They symbolise the cult of the individual.

So. Just as the bankers were paid handsome bonuses in recognition of their personal entrepreneurial skills and brilliant financial judgment, now that their plans have gone tits up, they should accept the converse, accept the consequences of their personal misjudgments.

What I am proposing is that the responsibility for the fancy instruments that they bough into should come back to the individuals. Anyone who put his (or her, in the case of Nicola Horlick) signature on the purchase agreement of a toxic asset should now accept personal responsibility for that asset. They should own it.

The great likelihood is that they will go bankrupt. This is tough on them, but capitalism is tough, as the Tories never tired of telling the unemployed back in the dark days of Thatcherism. They will go bankrupt, along with the 30,000 or so ordinary people who go bankrupt every year. They will of course qualify for SS benefits, along the lines sketched out by Wanda.

Naturally, there will be a court battle. The banksters will claim that they signed on behalf of their institution, and that the negative values of the toxic assets should therefore go back to the banks, and thence to the taxpayer. Lawyers acting on behalf of us, the people, will argue that their bonuses show that they were acting on their own behalf. The judges will have to decide, and it will to all the way to the very highest courts. We may win, we may lose. We must try, because if/when these toxic assets come home to the banks, it is going to bankrupt the world economy, and that will certainly end in global tears.

It is therefore right that the few ubermensch, the ruthless free market fundamentalists like Fred "The shred" Goodwin, who referred to some of his acquisitions as "mercy killings" should bear their fate philosophically.

I will ask m'learned friend what he thinks.

Meanwhile, here is an alternative, slightly less radical, approach to this problem.

Let banks fail, says Nobel economist Joseph Stiglitz

Let banks fail, says Nobel economist Joseph Stiglitz - Telegraph: "Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks."

Hmmm. Food for thought here.

According to the Telegraph, Stiglitz said "the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure...City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said".

The challenging aim of this exercise is to separate "good" money - the bank savings of families, public services and pension funds - from the "bad money" - notional figures that have been thrown recklessly into the casino economy, the global derivatives market. Stiglitz is saying that the UK Governments present position, of offering to insure the banks against bad debt, is hopeless, given the black hole of debt that the banksters have created in the Ponzi style derivatives.

He says let them go hang. This is what happens when a Ponzi scheme collapses - the scammees come out of it with nothing but a learning experience.

So - GB insurance scheme no good.

What about the Bad Bank, or Toxic Asset Dump, advocated months ago by Prof Wilem Buiter, and still under consideration by Darling where the so called "assets" created in the casino economy can be corralled up? Stiglitz calls it "cash for trash", and George Soros (same link) doubts it would work.

It depends how much cash you give for the trash. Given that nobody knows how to put a price on the Toxic Assets, "not a lot", would be my answer. The Bad Bank should be modeled on the amnesty model, where people can hand in knives and guns to their local police station, no questions asked, but certainly no money paid out. In the Bad Bank, the "assets" can at least be studied. Some may prove to have some positive value, which might pay for the administration costs at least, or even provide a windfall for the public purse. Some will prove to be pure Ponzi scams, and the originators could be taken to court, and repay their debt to society by doing 20 years' community service in the Bad Bank itself. Wearing orange jump-suits and tied to the desk in case they try to jump out of the window.

So the Bad Bank might still be the way to go, if the price is right. Chances are that if they go down this route, Alistair ad Gordon will pay out too much cash for the trash.

If not the Bad Bank, then we have the Stiglitz plan - pull out the people's money, and let the banking system collapse under the weight of its own internal contradictions (as the Marxists should say, but don't, because, amazingly, they do not support Monetary Reform, preferring to leave the creation of money in the hands of the private corporations).

The devil is in the detail. We need to pull good money out of the building before it falls. Savings, and loans to ecologically useful concerns that have a reasonable chance of being paid back.

The rest of the financial "services "can go hang. This will include many mega-capitalist Transnational Corporations, who are heavily exposed to toxic assets. Arms companies will be threatened, so politicians will have to be screened off from their desperate lobbying for World War III as a way of stimulating demand for their goods.

But what about the pension funds? Most of these are up to their necks in the swirling cauldron of decaying putridity that constitutes the stock market. Is there some way of rescuing them? I have no idea. Suggestions welcome.

Having drawn a line between good money and hopeless trash, we nationalise at least some banks, and use them to fulfil the old core banking services, and furnish the system with new, clean money issued by Government on behalf of the people.

What will this new money be based on?
Gold is a bit retro.
Greed has been shown to be not a good backer of global finance.
Gaia is the ultimate guarantor of our human life, so the money should be based on some valuation of the aggregate ecological capital in any region.
What income does the nation have from the sun - direct, in insolation (jargon for sunshine, not a typo for insulation), and indirect solar income - wind, wave tide, hydro?
What potential is there for agriculture, if water resources are properly spread around?
What human capital - knowledge, skills - is there in the nation?
This is the natural capital of a nation, and the challenge for economists is how to create an internationally accepted currency unit that reflects Gaian values. Richard Douthwaite has made an outline with his Energy Based Currency Unit - the ebcu.

To design a new currency that reflects ecological reality is not an easy task, but it is a necessary task if the banks fail, whether the failure be due to the failure of world leaders' attempts to save the banks, or whether we accept Joseph Stiglitz advice, and leave the global bankers to experience the consequences of their global folly.