My aim in this blog has largely been to give my best and most rational perspective on the reality of the economic situation. I have tried (and I hope) mostly succeeded in avoiding emotive and partisan viewpoints, and have tried as far as possible to see the actions of politicians as misguided. Of late, that perspective has been slipping, for the UK, the US and also for Europe.
I think that the key turning point was the Darling budget, in which the forecasts were so optimistic as to be beyond any rational belief. The budget was built upon these forecasts, and I simply do not believe that either Darling or Brown might even begin to believe such willful nonsense. Under such circumstances, it looks very much like Brown and Darling are willing to risk severe damage to the UK economy in order to prop up their electoral chances.
There are even more worrying signs, and these are more of a broad concern which extends beyond the UK into the whole Western world. Regular readers will know that I do not buy the conspiracy theorists, or that there is a nascent New World Order. I am far more inclined to the view that incompetence and idiocy are greater drivers of events than hyper-intelligent Mr. Evils plotting world domination. Furthermore, many of the conspiracy theories are nothing more than anti-
Semitic nonsense, and if you are regular reader you will have seen many examples where I have highlighted such nonsense.
As for the idea that the evil bankers might have engineered this mess as a route to world domination, it is simply a laughable and implausible joke. As the major banks teeter on the brink of insolvency, with only government between them and oblivion, any notion that this might be a conspiracy for world domination looks positively delusional.
Having said all of this, it is not to say that there is nothing wrong at all. There are some very worrying aspects to this financial crisis, and that includes the role of both the financial institutions and the governments of the Western world. I am still not clear, even at this stage, whether the actions of governments are a combination of misguided thinking and power corruption, or just plain power corruption. What I am ever more certain of is that there is an unholy alliance between the financial institutions, central banks and government. To call such an alliance a cabal, or other such names, would be to dignify a rag-tag of self-interest and '
clubbiness'. However, that economic policy has ceased to serve the electorate, and is increasingly serving the large financial institutions is increasingly clear.
I do accept that the initial bailouts of the financial system might have been a panicked reaction to an emerging crisis, in which the politicians might have groped for any solution to try to stave off disaster. In order to do so, they inevitably turned to the heads of the central banks for advice and guidance, and may not have realised that the central banks were far too cosy with the institutions which they were supposed to 'supervise'. As such, we can safely put the initial reactions to the economic crisis down to a misguided and panicked reaction, though this can not be certain.
A good perspective on the relationship between banks, government and central banks has been provided by a commentator. The former Chief Economist of the IMF, Simon Johnson, has written an excellent article entitled '
The Quiet Coup', and he also includes how academic economists have been seduced into the orbit of influence of the major financial institutions. He paints a picture of the to and fro between government and the banks, from academia to the banks. For example, he has this to say of the close world of banking and politics:
One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.
My intention is not to rework an article that expresses very well and very clearly the
clubbiness of this world. I would suggest that you read the
original article, which is long, but worth the read. Instead, what I would like to do is put this in some kind of context, to explain how the unholy alliance between the politicians, academia, the central banks and the financial giants is leading the West down a road to destruction.
In my last post on the state of the US economy I discussed the fact that there was something very, very wrong with the bailouts in principle. From the very first bailout, I have consistently opposed the actions. In particular, I pointed out in my earliest posts on the subject, that the first bailouts would be followed by further bailouts as the economy spiralled downwards. It was very clear from day one of the bailouts that the banks were in worse shape than anyone was admitting. At that early stage, I just thought that the politicians were misguided, that the central banks were misguided. It may indeed be true that this was the case, but I am not sure that we will know for certain. Perhaps they always knew that the situation was only going to get worse - much, much worse?
So what is the fundamental problem with the bailouts? Quite simply, as I pointed out in the early posts, the bailouts will, one way or another, be paid for by other businesses and ordinary tax payers. We were told, from those early days, that the financial system must be saved, or see the economy collapse. This is the justification for this unprecedented and gargantuan attempt to support these insolvent financial institutions.
Back in the early days, there was sufficient confusion and shock for this point of view to gain traction, and to allow for the bailouts to progress forwards. However, the scale and scope of the bailouts has continually been obscured, and what has never been widely apparent is just how much of the total economy is now directed towards saving these insolvent financial institutions. Quite simply, the entire Western economic system now appears to be pointed towards rescuing these insolvent institutions. It is, to say the least, the most shocking economic madness.
Another article, from the same magazine as the Simon Johnson article, details the astronomical figures for interventions by the Federal Reserve. A summary of these, as well as the bailouts from the government, can be found
here. It is worth a long look. The author of the article has this to say:
Through a dozen programs introduced since the crisis began, the Fed will be on the hook for trillions of dollars in loans, bailouts, and asset purchases. The government expects to be repaid for most of these commitments, of course, with interest. But that’s the tricky part. Largely unencumbered by congressional meddling, the Fed has in most cases refused to reveal the beneficiaries of its largesse—or what assets they’ve used as collateral—lest panicky investors and depositors lose faith. As a result, outside the walls of the Eccles Building, almost no one knows how sound those loans really are.
In one very effective
interactive graphic, the scale of the overall combined US government and Federal Reserve assistance becomes apparent. Again, spend some time on the chart. It is quite simply astounding.
If we then look at the UK, we see a similar pattern, but I have yet to see a source that pulls all of the costs together so neatly. From the Guardian, we have a
graphic which shows the direct bailouts as £25 billion Northern Rock, £42 billion Bradford and
Bingley, £37 billion
HBOS/
RBS/
Lloyds, £22.5
billion more for
RBS, and up to £10 billion for
Lloyds. On top of this is the
Credit Guarantee Scheme which is to:
make available new capital to UK banks and building societies to strengthen their resources, permitting them to restructure their finances, while maintaining their support for the real economy; and ensure that the banking system has the funds necessary to maintain lending in the medium term.
The scheme provides up to
£250 billion worth of guarantees (the page linked to says 'at least £200 billion), and the users of the scheme are
dominated by the 'usual suspects' such as
RBS, but also includes
Tesco Finance. We then have the Asset protection scheme, at £525 billion, with (you guessed it)
RBS already having
£325 billion insured under a scheme to
insure risky assets, described by Vince Cable as:
“fraud at the taxpayer’s expense” and that it was weighted heavily in favour of the banks, who were being invited to dump their worst assets on the Treasury.
To these bailouts we need to add the
Special Liquidity Scheme, 'to allow banks to swap temporarily their high quality mortgage-backed and other securities for UK Treasury Bills', which adds up to another £185 billion lent by
February of this year (the Bank of England
claims that there is no risk in the scheme - but why was it then necessary?). Finally there is the
Asset Purchase Facility (£50 billion at the outset), which has subsequently morphed into the
£150 billion quantitative easing scheme.
All told, these facilities add up to a massive government/central bank response to the insolvent UK banks, with many of the facilities creating massive potential liabilities. We are looking at a total that amounts to around £1 trillion of support for the banking system.
In both the US and the UK, the scale of this activity has seen a massive growth in the balance sheets of central banks, and a huge increase in their potential liabilities, as well as huge expansions in government debt.
It is at this point that we need to pause, take a long breath, and actually consider what it is that the banking system is for. In the many bailouts and rescues, we simply hear that the financial system must be saved, but do not hear what it is supposed to actually do. The standard line being trotted out is that the banks must be saved to get credit moving again. The question here is why it is that the limited numbers of banks that have received most of the various support measures are so important, and that is the question of what financial services are actually there for.
It is when we ask this simple question, this blindingly obvious question, that we can see the level of the fraud that is being done to the taxpayers and the damage to the wider economy. The financial system is indeed important in the provision of credit, in particular it is important in the provision of mortgages, investment in business and so forth. The core function, the real function of financial institutions, is to take the savings from person A, and make the money available to person B, or company C. As part of that process, the expectation is that the bank will lend the money with a level of care which is appropriate to the level of risk expected by the saver.
Here we have the problem. That is it. That is the only function of a bank/banking system in a healthy and well balanced economy.
As long as there are banks able to undertake this role, then the banking system is operating. In no way is any individual bank necessary for the underlying function of the financial system. Banks are intermediaries which should be there for the investment of savings, and provided that banks are able to function in this way, then the system is operating.
I am sure that this point of view will inspire objections (I look forward to the comments), such as the idea that the failure of the 'too big to fail' banks would have seen major bank runs, and a period of financial chaos. I do not, and have not, disputed this. The inevitable result of the failure of, for example
RBS, would have been lines of people at every major financial institution, and a systemic failure. There would also have been social disorder and a period of great stress. However, the pain would have been short and sharp, and far less costly to the wider economy. It would have cost, but the bill would have been so much less than that which is now accumulating.
But here is the problem. We are now in a situation where our economic future is now being poured into the bottomless pits of financial institutions that are still insolvent, and which are going to need ever more support on an ongoing basis. The insolvent banks are quite literally eating up our present and future wealth, and threatening the very integrity of the Western economic structure. It is turning an economic crisis that turned into a financial crisis, and now risks turning these crises into a economic crisis of a magnitude that will threaten everything that the Western world has represented.
These are strong and dramatic assertions. However, as I have watched this crisis unfold, I have at various stages seen opportunities to turn the situation around. At every point in the crisis I have seen ever deeper digging of the hole in which we find ourselves. I now think that we are reaching the stage where the nature of the bailouts, the nature of the eventual cost to the economy, are so great that the very faith in systems that have supported Western democracy might be undermined.
In particular, the amount of support for the banking system is a ticking time bomb, and a time bomb because, quite simply, those that are governing us are lying about the costs to ordinary people - the cost for their support, and the denial of the risks that they incur with each round of bailouts.
I have come to this conclusion over several months. I have watched as insolvent banks are allowed to declare profits when they are insolvent through
accounting tricks - supported by governments and central banks. All we have to do is see the massive support that has been poured into the banking system to see that any notion of profits must be a lie, but governments, central banks, the media, and even academics are all supporting this lie.
More recently, we have seen the so called bank stress tests in the United States. As one analyst identified (sorry, I can not find the link), even under optimistic projections, there is a massive amount of losses coming the way of the banks. Apparently they only need $75 billion of new capital, even though this is nowhere near enough to cover such losses. As the analyst pointed out, for the stress tests to be set at the right level, this would mean that the banks are currently massively over-capitalised - a complete absurdity. A brief review of the news stories (e.g.
here) showed that the banks were negotiating on the levels of capital that were required of them. How can this be justified?
Quite simply, we are being lied to in a systemic way. The banking system is still insolvent, and ever more support will be needed to hide this reality. This is support at a cost that is creating ever greater strains on the rest of the economy - and which will eventually sink the rest of the economy to a low that we can not imagine.
All built upon lies, lies, lies.
As if this were not all bad enough, we have what has become a subject of great interest to this blog - the weasel worded quantitative easing, or printing of money by central banks. As I have pointed out endlessly, this is one of the most outrageous policies that is being undertaken by the central banks, and can only end in ruin for the economic well being of the countries undertaking it. The explanations for the policy all follow a line that says that it is to ease credit in the marketplace, but the problem is that - once started - it seems to rapidly move into the purchase of government debt. Whilst there are technical explanations trotted out for this, it seems more than coincidence that the central banks undertaking this are those who are issuing huge mountains of government debt.
If you doubt this, take a look at the
debate for the European Central Bank's move to the policy, and you will find that it is the southern countries of Europe and Ireland, countries in economic
freefall, true bubble economies, that have pushed through the policy against opposition by Germany. Whilst government debt is not on the list for purchase yet, viewing the countries that pushed the policy it can only be a matter of time.
As if this is not bad enough, that central banks are indirectly monetising government debt, there are rumours that governments are now buying their own debt. This is still unsubstantiated, but this from
Ambrose Evans-Pritchard:
Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.
Quite frankly, I suspect that the rumours are true. When discussing
QE, this was one of the themes, or scenarios, that I considered. If true, at some point the truth will eventually emerge, and the consequences can only be dire.
Once again, we have lies, lies, lies.
And then there are the economic forecasts. We have the infamous Darling budget,
a work of fiction, a new
sunny forecast from the Bank of England (but nevertheless a suggestion of continuing extension of quantitative easing??),
Bernanke and his optimism for recovery in
consumer spending and the housing market and for the
banking system. I hope that I showed in my recent
review of the US economy that, quite simply, there is no prospect for any imminent recovery - at best a brief uptick or an inflationary 'recovery'.
Lies, lies, lies.
Above all else, we can see the lies working their way through the stockmarkets. If ever there were a suckers rally this is it. From one blogger, we have lists of 'insiders' buying and selling, with insiders selling hard (see
here,
here and
here). Quite simply, this rally is built on
lies, as no recovery is in sight. No doubt, those that will be hurt in the rally will be the outsiders, or
ordinary people.
And the truth? In the UK, there are bloggers like myself, and a small number of commentators who question what is going on. For example, there is Fraser Nelson at the Spectator who, whilst a partisan commentator, is highlighting the '
fishiness' of quantitative easing. There is
Liam Halligan at the Telegraph, who highlights in his most recent article that the end of QE will create a problem of how to sell bonds into a saturated market. There are more, but overall there are far too few commentators who are confronting what is going on, and questioning the underlying lies.
In the US, the situation is slightly better. Although there are legitimate critiques of Austrian economics, at least they are highlighting the nature of the lies. The
Mises institute is pouring forth a steady stream of articles highlighting the madness of what is going on, with Ron Paul pulling that critique into practical political action (such as his
campaign for an audit of the Federal Reserve). On top of this, there are the maverick bloggers, and the influence of people like
Peter Schiff.
Most alarming of all, the greatest and most listened to cynicism is coming out of China - who see the QE policies of Western governments for what they are -
harbingers of inflation. How desparate is it when it takes a totalitarian state to ram the truth home?
This is why I am writing an unusually angry post. I am sick of the lies that issuing forth, and I am sick and tired of the way in which the insiders appear to win, regardless of the cost to the rest of the economy. I have watched in horror as these bailouts have chewed up the wealth of the Western economies, both present and future wealth. I have watched in horror as governments have issued ever more debt to support their profligacy and support insolvent banks. I have watched in horror as central banks have commenced monetising government debts, and likely engineering inflationary defaults whilst risking eventual hyper-inflation.
Above all, it really does appear that governments and central banks are willing to sacrifice ever greater swathes of the economy to rescue incompetent and insolvent financial institutions. The only explanation that fits the facts is the grubby clubbiness of the system. It is not the great New World Order conspiracy, but rather the conjunction of interests between well placed individuals. Each, in their own way, moving forwards for their own personal gain. It is not the activity of great conspirators, but rather the collective movement of little men, of people who can think only of their personal gains. Money, vanity, power.
And the cost....
.....for there surely will be a cost.
That the economy will be left in tatters, I have no doubt.
That will mean unemployment, insolvency and hardship for many. But the cost will go much deeper than this. When the situation resolves to its eventual conclusion, and the real hardship starts, then the questions will start. The first and largest question to be asked will be to determine where our wealth went. Where did all of our wealth go?
At that point, as the lies are shown for what they are, there is the risk of the greatest cost of all. The risk is that people will start to question the legitimacy even of our form of government. The risk is that democracy is now in the firing line.
In the UK, a scandal is unfolding, a petty and mean scandal over how MPs have cheated their expense system. The status of politicians is at an all time low. If we look to the US on the other hand, the situation looks more benign. Obama is receiving widespread approval from those that he leads. In the case of Obama, I can see only the motive of personal vanity - that he believes his own mythology of being a saviour. However, in painting himself as a saviour, he risks the anger of dissillusionment when disaster comes in place of salvation. That is a dangerous thing.
When people are angry, when they feel disillusioned, and when they feel cheated - as they surely have been - that is when the crazies gain traction. The promises of brave new worlds, of new beginnings, the pied piper tune of 'if you just follow me...' This is the risk. I have alluded to this risk in a few early posts, and it has been part of my drive in writing this blog. I think we are now close to a point where such a risk is becoming real.
The extent of the manipulation, the cheating, the lies is now extending beyond what might be accepted. I think that people will become very, very angry.
An unhappy post.....
Note 1: I hope that this post does not offend regular readers. I have paused on hitting the publish button on this occasion. However, I think that this is worth saying. I believe that now might be the time for anger, as a way of possibly forestalling a greater anger later. As I wrote this post, I kept in mind that one of the commentators on the blog, Steve Tierney, is a politician. I think that even those that disagree with Steve would accept that he is a sincere and decent person. As such, I have some optimism - that perhaps there is an opportunity for a more decent and honest politics. My underlying worry is that perhaps there are too few of such people.
Note 2: A big thanks for the links against my last post, which led me to some articles that helped me pull this post together. As ever, very good comments, and my apologies for my lack of replies (as this post took a while to put together).
Cynicus Economicus,
"regarding the origin of money, I do not believe this is an issue."
You vastly underestimate the importance of this issue. Money can only originate in the processes of the market. In other words, the best money is chosen by the market. Moneys that don't originate on the market are not good moneys. So the system you're advocating would entail bad money because it cannot originate in the processes of the market.
"Electronic money is the obvious answer, not paper money"
Electronic money cannot originate in the processes of the market. The money commodity must have prior barter value before it can originate on the market. Electronic money doesn't have prior barter value. Furthermore, electronic money does not possess an important characteristic of good money: scarcity.
To be blunt, the system you suggest has no promise.