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Crisis? What Crisis?

...on serious topics that don't fit anywhere else at present.
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Alan H
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Crisis? What Crisis?

#1 Postby Alan H » October 6th, 2008, 10:11 am

Markets are tumbling. Banks are going bust. All-time lows with more bailouts than during the Gloucester floods.

But, what does it all mean to us? What will the effects be on wages? Mortgages? The cost of food? Savings?

I for one, have little idea what it all means. But, I'd like to know several things:

Who caused this 'crunch' and why?
Are the media exaggerating it all and simply causing more panic?
When a company's share price falls, who's buying the shares that are being sold?
Why should we care if a bank or two go bust?
Are the 'fat cats' and the share dealing gamblers losing anything, or do they always gain?
Is it you and I who always end up paying?
What does it all mean?
Alan Henness

There are three fundamental questions for anyone advocating Brexit:

1. What, precisely, are the significant and tangible benefits of leaving the EU?
2. What damage to the UK and its citizens is an acceptable price to pay for those benefits?
3. Which ruling of the ECJ is most persuasive of the need to leave its jurisdiction?

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Nick
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Joined: July 4th, 2007, 10:10 am

Re: Crisis? What Crisis?

#2 Postby Nick » October 6th, 2008, 1:42 pm

Hi Alan! Since you are kind enough to explain the scientific questions, let me have a stab at answering these economic ones.

But, what does it all mean to us? What will the effects be on wages?


Unless a solution is found (which I think it will be, eventually) for many, many people it will have no effect on their wages. Either they are in the public sector, or they won't have any wages to worry about. It will have a downward pressure in wages, so inflation will be squeezed out of the system. I am more concerned about disinflation (as experienced in Japan in the 1990's)

Mortgages?
The rate of interest will fall. I expect .25% cut on Thursday, (and maybe a 30% chance of a .5% cut), followed by successive cuts in interest, certainly down to 4%, probably down to 3.5%, and maybe even as low as 3%. This is more likely now that problems have arisen in Euroland, as the Euro is likely to follow the interest cutting exercise. Your mortgage (if you have one) will follow, but maybe more slowly, as lenders try to restore their reserves. The supply of new mortgages has shrunk dramatically and the terms become much tougher, which will bring further downward pressure on house prices, as people find it impossible to move, thus effectively removing themselves from the market.

The cost of food?
The cost of food is largely the function of supply. Although there is an increase in demand, from increases in population and rising incomes in China and elsewhere, the sudden increase in food prices has come from poor harvests, particularly in Australia, and the inelasticity of demand and supply. A recession would lead to a fall in expensive foods, but maybe an increase in the price of more basic foods.

Savings?
Virtually all cash savings will be 100% protected, but equity holdings will be bouncing about for a while yet. Several high profile investment gurus have called this the bottom of the market downturn, including Warren Buffett, the world's richest man. The stock-market hates uncertainty, even more than bad news. If the uncertainty can be addressed we will all be much better off. Pensions, of course, have been decimated. I am livid with Gordon Brown :angry: (no change there then), not because he has caused the problems, (which are not his fault alone,) not because he has dithered in the last year (though he's got more serious recently), not because he should have repaired the roof while the sun was shining, but for repeating, ad nauseam, "no more boom and bust". We've had a boom in property prices and a bust in pensions, simultaneously and now the financial markets are bust too, leading to an economically disastrous disinflation in property prices. He promised what he couldn't deliver, and won't apologise for it.

Who caused this 'crunch' and why?

Official encouragement in the US to lend to those who could not afford it. Ninja mortgages- no income, no job or assets. As interest rates have risen since the economy has recovered from the dot.com bubble, the housing market in the US has collapsed by over 30%, so that huge losses have been incurred by US banks. This has been made worse by world-wide securitisation of the debts, thus spreading the risks worldwide. The opacity of the dealings, the willingness of banks to lend and the banking authorities blindness to the increase in risk has made matters worse. A bout of moderate inflation to reduce the fall in property prices has some merit, though concurrent losers and risks.

Ultimately, is it is the evaporation of confidence which is at the root of the problem.

Talk of "greed" is a complete waste of time, and in terms of psychology, completely wrong.

Are the media exaggerating it all and simply causing more panic?

No, not really. Rumour doesn't need the media, and the dangers are as big as the media are saying. What is very true is that banking relies on , and has always relied on, confidence in the institutions themselves. The history of banking and successive banking crises in the 18th and 19th centuries are manifestations of that.

When a company's share price falls, who's buying the shares that are being sold?

Put simply, those who think that the shares have fallen far enough that they are worth buying. In a period like this, when there are few people about willing to buy, the shares fall very sharply. Normally there is no general consensus about individual shares.

Why should we care if a bank or two go bust?

For the individual bank, not a jot. For its shareholders, not much, for its employees, somewhat, for confidence, a lot. Collapsing banks tend to put pressure on other banks, thus spreading the contagion. The banks which have collapsed have done so because of lack of confidence and matters beyond their capacity to solve. This is totally different to the collapse of BCCI a few years back which was the result of vast fraud.

Image that you are a business with a large overdraft, but growing and making decent profits. Imagine further that the bank suddenly withdraw the overdraft. Collapse of company, but was it fundamentally unsound? No. This is what happened to some of the banks, eg HBOS.

Are the 'fat cats' and the share dealing gamblers losing anything, or do they always gain?
They (or their shareholders) do lose on occasion. Just look at Barings. To talk of 'fat cats' may make you feel better, but it doesn't help anyone. Not withstanding our present difficulties, the world as a whole would be poorer without them.

Is it you and I who always end up paying?
It depends. You may have benefited over the past few years from rising property prices, and your job (and hence your income) may not be possible without the advanced sophistication of modern finance. It may also be that by bailing out the banks it means that you will lose less, or even gain. This is especially true if there is some sort of partial nationalisation of banks in the UK.

What does it all mean?
Any clearer?

:)

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Beki
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Re: Crisis? What Crisis?

#3 Postby Beki » October 6th, 2008, 3:06 pm

Nick touched on it, but one of the things that I was quite amazed about was the extent of this "world-wide securitisation of debt" and how much this tool for 'apparently' reducing risk allowed banks to leverage debt.

What this means is that the £1 that a depositer invested with a bank is lent out many many more times. The banks pay an insurance premium on this debt to reduce the risk and this is one reason for the nationalisation of AIG (the massive insurance company). Apparently if AIG had been allowed to go to the wall it would have taken most of the banks with it as they are all 'into' the insurance company for all this leveraged debt.

The Investment Bank model where the bank doesn't even get the £1 to lend (it has to borrow it) has pretty much collapsed as no-one will lend. Lehman Brothers and Bear Stern were Investment Banks.

Part of the problem has also also been the rating agencies not understanding the financial instruments that they were supposed to be rating and so the real risk was never worked in to the pricing properly.

I also don't think that the US attitude to financial regulation helps. With increasing global convergence of financial regulations, my institute (Institute of Chartered Accountants of Scotland) has been lobbying hard for a 'Principles versus Rules' approach to regulation. From the little that I have seen of US accounting regulations I must say that I agree with them. The US tends to have micro-legislation which is very detailed and very complex and because it is 'rules' based then people make a lot of money out of finding ways round the rules.

The Enron case was a pretty good example of this with our differing approaches to consolidating the results of group companies. Enron were able to exclude a lot of offshore companies by setting them up in particular ways and avoiding the 'rules'. Here in the UK, the approach is more about 'principle' - i.e. if you have a "significant influence" in any way then you have to include the company in your group accounts. I think it is a better way to go, but then I would because I consider myself a principled and professional person. It might not work if no-one else is!
Live as if you were to die tomorrow. Learn as if you were to live forever. - M Ghandi

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Nick
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Re: Crisis? What Crisis?

#4 Postby Nick » October 6th, 2008, 4:18 pm

I quite agree Beki. All those who are now complaining about lack of regulation in the US.... are they the same people who have been complaining for years about the the over-regulation of Sarbanes-Oxley, which arose from the Enron scandal, which has so hobbled New York, and so enhanced London, as a financial centre?

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jaywhat
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Re: Crisis? What Crisis?

#5 Postby jaywhat » October 6th, 2008, 4:34 pm

If you guys understand so much I am so relieved that everyone on TH will be OK. Thanks

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Beki
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Re: Crisis? What Crisis?

#6 Postby Beki » October 6th, 2008, 5:31 pm

Hi Nick / Alan / Jaywhat! :wave:

I never really got into the nuts and bolts of Sarbanes-Oxley because it came in after I was leaving the big-five audit firm that I used to work for. I am sure that had I stayed I would be much better aquainted with it. I take it that it follows the normal US approach of having a massive big rule-book to follow?

The latest contact I had with our US cousins was when the US Department of Education wanted an audit report on the Federal Loans that they give to US students. Fair enough, but they actually wanted all the UK Universities to completely restate their accounts under US accounting rules. Needless to say that didn't happen (me being an expert on US accounting standards - not!)

Apart from that, the 'tick-box' mentality of the correspondence was just awful. Everything had to be done to the letter and if you didn't have things JUST SO then it was returned. Bureaucracy gone mad and just made everything far more complicated than it needed to be. I prefer the approach of the first audit partner I worked for:

"If it looks like an elephant and it smells like an elephant then lets call it an elephant". Dear old Crawford, he really was one for the most relevant aphorisms.......
Live as if you were to die tomorrow. Learn as if you were to live forever. - M Ghandi

Ted Harvey
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Re: Crisis? What Crisis?

#7 Postby Ted Harvey » October 6th, 2008, 8:55 pm

My apologies to those who may find this lengthy track too political (and too lengthy!), but the truth is that the whole so-called 'crisis' affair is as much political as financial.

The context of the present changes in the national and international financial systems is about great, historical developments whereby, I suspect, China will take another giant stride towards superstate status by rescuing the USA (and Europe) with increasing provision of long-term capital inflows to their stricken economies.

For me, the troubling likelyhood is that significant but largely subtle changes to the way the USA and our UK economies and societies operate will be result from all this… but most people will be quite unaware as to how these changes came about… or even what the changes are. I think that one can conclude a lot from the ‘daily tabloid’ level of debate about the current global money market transformation.

For example, long-term consumerism and depoliticalisation of USA society, and latterly UK society, means that there are actually far fewer people than before who are politically aware or who truly understand much about society. Indeed a great triumph of the political right in the USA has been to convert a huge proportion of the blue-collar voters to vote directly against their own economic interests. This is achieved by getting them to go in for so-called 'values-based' voting - which is in fact just about bigoted and fundamentalist religion of the born-again evangelist sort.

Meantime, the UK and USA political classes and have lost much of their popular mandate and legitimacy because of growing apathy and atrophy (direct consequences of the depoliticisation, and neutering of democratic political institutions). This meant that the politicians were unable (unwilling?) to stand and uphold robust regulation and good governance against big business and powerful money interests.

In the present so-called ‘crisis’, the ordinary person on ‘Main Street’, may well suspect that something is unfair and wrong but they have no idea what, and no idea of what to do about it. Hence we delude ourselves that punishing some 'bad' greedy bonus fat cats or bankers will achieve anything.

Rampant consumerism and the demise of local politics have supplanted what would have previously been a healthy interest in our communities and civic life. The old community institutions with their inter-generation reserves of wisdom and experience have long-gone. Our media has come down to the level of so-called 'reality programmes' that are nothing more than unreal, degrading, materialistic and de-humanising consumer products. Hence the general populace are more and more ignorant on what matters.

Consumer capitalism is an amoral, utterly pragmatic and opportunistic entity that not only benefits from change and instability – it actually thrives on it. Therefore it sadherents will at times seek to foment such change or instability. These bouts of instability are often preceded by a period of so-called boom and much triumphalist hubris (i.e. dotcom bubble and now the housing finance sector).

And in case anyone thinks this is something of a Marxist tract, I have no sympathy for that line of thought – revolutionary class politics just substitutes vast numbers of lost lives for lost vast fortunes. Out of the present change and upheaval there will be some transient opportunities for progressive politics and thinking; these few opportunities should be grasped whilst available (and there will be ample opportunities for those of the financial investing type!).

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Beki
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Re: Crisis? What Crisis?

#8 Postby Beki » October 7th, 2008, 10:42 am

Time to insert my favourite cartoon again.....

Astute political commentary from my favourite six year old (and Bill Watterson of course)

Image
Live as if you were to die tomorrow. Learn as if you were to live forever. - M Ghandi

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coledavis
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Re: Crisis? What Crisis?

#9 Postby coledavis » October 11th, 2008, 10:19 pm

Your wages may be ok; if you've still got a job...
http://www.coledavis.org - insight analyst, specialist in the interpretation of surveys for charities and education

http://www.careersteer.org - careers quiz helping people to choose their career direction

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jaywhat
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Re: Crisis? What Crisis?

#10 Postby jaywhat » October 12th, 2008, 6:40 am

If the only way to sort this mess out is to have global agreement on global banking regulation, would this just possibly be an end to conflict and war?
I mean, would you go to war (get the money for planes and missiles and tanks and arms and pay the troops etc) if your money was all mixed up with your potential enemy's?
Could the crunch actually be good news?

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Nick
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Re: Crisis? What Crisis?

#11 Postby Nick » October 12th, 2008, 12:13 pm

Sadly not and for several reasons. First of all there has always been interdependence at different levels. Before the First World War, many monarchies in Europe were closely related by family and that didn't stop it. The Windsors were actually Saxe-Coburg-Gotha, and Kaiser Bill was a cousin. Secondly,there was also connections through international finance- the Rothschilds, for example- which were essential to the process of government as well as trade and that wasn't sufficient either.

Also, I think the nature of conflict and war has changed. We are increasingly unlikely to see old fashioned wars between 2 countries, but this has been replaced by skirmishes (like the recent conflict in Georgia) and insurgencies and civil wars which are raging in the Middle East. We no longer feel we can solve such problems by wiping out the enemy indiscriminately as was done in the past.

Having said all that, international trade and free trade does help to bind the world together, but the credit crunch will act against this by encouraging protectionism and inhibiting trade, so,on balance, I think we'd be better off without it.

Ted Harvey
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Re: Crisis? What Crisis?

#12 Postby Ted Harvey » October 12th, 2008, 9:55 pm

I don't think that there can be much doubt that the 'credit crisis' is generating new and significant dangers in the international order. One reason is that, as I asserted in my earlier posting, the crisis has shown up the paucity and debasement of our politicians and our political institutions in the UK, USA, and probably elsewhere. If we go much further down the road of popular disdain and loss of confidence in politics, coupled with financial panic among the middle and super-affluent classes we are on a danger-laden road akin to the Weimar Republic.

The second reason is that there is a great swirl and uncertainty over the likely transfer of powers in the international order. I have just read a heavyweight review by the St Louis Bank in the USA that argues persuasively that the USA is indeed 'broke'. Their argument is that only huge long-term inflows of capital from China (and maybe even more from the Gulf Oil States will ensure that the USA can prevail in this crisis. Meantime, of course the USA dependency on imported fossil energy and other supplies continues to grow.

In theory, international trade should sort that all out. But the USA's track record on dishonesty about its capitalism, xenophobia and 'USA first' offers little hope that it will countenance being 'in hock' to the Chinese and increasingly so to the Arabs. (The crass, Russia-baiting blundering of Bush that set off the Georgia crisis is an oil-related example). China, and Russia in the wings, will grow increasingly assertive (aggressive?) in their newly more powerful role relative the USA.

In the jargon of the trade we have moved into a new paradigm, meaning that for an indeterminate time we do not know the new dispositions an flow of economic and political power, nor what are the appropriate tools to manage the new situation.

But I’m sure it will all work out in the end :retreat: .

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Nick
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Re: Crisis? What Crisis?

#13 Postby Nick » October 13th, 2008, 10:16 am

"The darkest hour is just before dawn" (Mamas and the Papas).

Let's hope so, eh?

Ted Harvey
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Re: Crisis? What Crisis?

#14 Postby Ted Harvey » October 13th, 2008, 11:05 am

Well I’m intrigued by what’s going on in the columns of the so-called financial journalists just now in the business sections of the UK papers (you know, the ones that virtually without exception failed to advise their readers of the impending crisis).

Some say it’s a bear market and you should keep running for cover because there more losses to come. Some say it’s a bull market and you should run back into stocks and shares as fast as you can because shares are temporarily very cheap. It’s all summed up in the Saturday Telegraph where they had deliberately laid out contrasting articles by a bear and a bull side by side.

Financial experts? Capitalists? They ‘couldae run a menage’ as my granny frae Greenfield used to say :laughter: .

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Oxfordrocks
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Re: Crisis? What Crisis?

#15 Postby Oxfordrocks » October 13th, 2008, 8:46 pm

Image
There are three fundamental questions for anyone advocating staying in EU.

1. What, precisely, are the significant and tangible benefits of staying in the EU?
2. What damage to the UK and its citizens will be caused by leaving EU?
3. Should the supreme court ruling on British subjects be based in UK?

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Alan H
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Re: Crisis? What Crisis?

#16 Postby Alan H » January 14th, 2009, 11:23 pm

Just found this explanation for the current financial situation:
********************************************************************************
Answer to a Question « One Hundred Pounds
http://skinto.wordpress.com/2008/12/19/ ... -question/
~~~~~~~~~~~~~~~~~~~

Group of people A (the people that lend to banks) lent money to group of people B (banks) to foolishly invest.

Group B squander group A’s money by lending it to group C (people with stupid ideas for spending money). Instead of letting group A take responsibility for the foolish use of their money, a lot of noise is made about the terrible consequences if group B go bankrupt. (The terrible consequences being that group A wouldn’t get their money back). So you make a lot of noise about how the only way to save the economy is for the government (group D) to borrow money from international bond investors (group E) which will be paid back by taxpayers (group F). They then give this money to group B, who in turn give it back to group A (not before paying their own salaries and bonuses of course).

So at the end of the day, group A get every penny they were owed by group B (with interest of course) from group F. They make as much money as they would have done if their money had been wisely invested in enterprises that led to a new golden age for humanity, instead of the shitstorm we’re facing. As you can imagine, it doesn’t exactly incentivise them to wisely invest in future, does it?

[Retrieved: Wed Jan 14 2009 23:19:41 GMT+0000 (GMT Standard Time)]

###################
Alan Henness

There are three fundamental questions for anyone advocating Brexit:

1. What, precisely, are the significant and tangible benefits of leaving the EU?
2. What damage to the UK and its citizens is an acceptable price to pay for those benefits?
3. Which ruling of the ECJ is most persuasive of the need to leave its jurisdiction?

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Nick
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Re: Crisis? What Crisis?

#17 Postby Nick » January 15th, 2009, 7:48 pm

Don't believe everything you find on the internet.... [-X

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Alan C.
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Re: Crisis? What Crisis?

#18 Postby Alan C. » January 15th, 2009, 9:36 pm

An analogy of short selling. (I can't credit it, cos I don't know where it originated)

Once upon a time a man told a small village, “I will buy monkeys for $10 each.”

Since there were many monkeys in the forest, the villagers caught them and sold them to the man.

As the supply of monkeys diminished, the villagers’ efforts slowed, so the man offered them $20 each.

They renewed their efforts but the supply of monkeys diminished further, so he increased his price to $25.

Soon no one could even find a monkey in the forest.

The man increased his price to $50, but announced, “Since I must go to the city on business, I authorize my assistant to buy monkeys on my behalf.”

As soon as his boss was gone, the assistant told the villagers, “My boss has collected lots of monkeys. I’ll sell them to you for $35 and then, when he returns, you can sell them to him for $50.”

The villagers rounded up all the money they could and bought as many monkeys as possible. Then they had monkeys everywhere…

… but they never saw the man or his assistant again.

And now you understand the workings of the stock market!
Abstinence Makes the Church Grow Fondlers.

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Alan H
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Re: Crisis? What Crisis?

#19 Postby Alan H » January 15th, 2009, 10:08 pm

:laughter:

I'm sure I've seen that recently.
Alan Henness

There are three fundamental questions for anyone advocating Brexit:

1. What, precisely, are the significant and tangible benefits of leaving the EU?
2. What damage to the UK and its citizens is an acceptable price to pay for those benefits?
3. Which ruling of the ECJ is most persuasive of the need to leave its jurisdiction?


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