Thursday, 25 September 2008

An Economic Sticking Plaster

"I remember a banker once trying to explain to me how the mortgage of, say, an unemployed single parent in St Louis could be morphed into a triple-A rated financial investment in London, New York or Paris. Magically, impoverishment became a "special investment vehicle". Try as hard as the banker did to get me to comprehend the beautiful simplicities of the whole process, I remained baffled. It was, I suppose, some sort of relief later on to discover that it was not me who was stupid." - Chris Patten

I too am taken aback. Actually, 'taken aback' is an understatement. It would be more accurate to say that I (like thousands of others) have been taken in.

I took it as read that the investment banks - those seemingly invincible titans that until last week dominated the City and Wall Street - knew what they were doing with all those exotic financial instruments, rather than simply gambling wildly while riding the economic boom.

I did occasionally think "what the fuck?", such as when I read that the value of derivatives on the market has increased by $400 trillion in 5 years, including $43 trillion worth of credit default derivatives. But I put those twinges of doubt to the back of my mind. I was wrong to do so.

"The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear...In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
- Warren Buffett* (2002)
"Nobody seems to recognize what a disaster of a system they’ve created. It’s a demented system. In engineering, people have a big margin of safety. But in the financial world, people don’t give a damn about safety. They let it balloon and balloon and balloon. It’s aided by false accounting. I’m more pessimistic about this than Warren...To say accounting for derivatives in America is a sewer is an insult to sewage" - Charlie Munger (2002)
"What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." - William H Gross(2008)

...And yet, despite these warnings, no-one with any power to do anything about it seems to have anticipated the events of the past two weeks, until Lehman Brothers failed and the dominoes began to fall, bringing about the situation we currently find ourselves in. - hence the clearly hastily drawn up bailout plan. It's not as though it's a complete surprise. It isn't as though the term 'credit crunch' was coined in the past fortnight - default levels began to rise markedly in the US over two years ago.

As long as the potential for short-term gain was there, though, and the personal costs of even the worst failure are low - Lehman CEO Dick Fuld, for instance, remains a multi-millionaire despite overseeing the collapse of his bank - the chance of enough of the people involved putting the brakes on the bets on bets on bets on debts unlikely to ever be repaid to prevent this meltdown were slim indeed.

As you may surmise, the $700 billion bailout that is currently being debated in the US Congress is nothing more than a sticking plaster (and one which some have suggested may have some very nasty side effects).

It will do nothing to move us closer to a solution to the problem that got us into this mess in the first place - the greed and unenlightened self-interest of those responsible. Even though they have fucked it up - their gambling with billions that they didn't have and were never going to get has come home to roost - those responsible are not going to give up the hundreds of thousands of dollars they have 'earned' over the years of the bubble, now the meltdown is here. Bailout, or no bailout.

* PDF

5 comments:

richard allan said...

(and one which some have suggested may have some very nasty side effects).

link broken ;)

And call me callous, but I don't care much about the meltdown either way. If you know what's coming, then you can profit from it.

Macx Stirner said...

Blogged here. The post is too long to summarise, really, so I'll stick with spamming you!

QT said...

@richard: Thanks. I've fixed the broken link.

Letters From A Tory said...

Not only does the bailout have nasty side effects, it has nasty motivations as well which I blogged about today.

Kevin Boatang said...

This bailout is not the ideal, but it is the course of action that has been decided and therefore must be followed through.

You cannot punish the people at the top, the rules were there (or not) and they played to those rules. Yes is was reckless, yes it was stupid and es they have lost their jobs. That's all you can do.

Moral punishment is not the way forward.

SImp,e fact of the matter is that if Bush and Clinton hadn't decided to remove teacher from the classroom, none of this would have happened. All that matters now is avoiding a drawn out depression.

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