Adrian Hamilton: There are better things to do than shaming these bankers
The challenge now is whether you act to tame the market or try to replace it
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Independent Minds
If the Treasury Select Committee wants to understand how an entire financial system was allowed to get out of control perhaps it ought to look at itself. That is not a criticism of the Committee's current show trial of the bankers. The public is desperate for blood. No politician is going to pass up an opportunity like that, especially a group of backbench MPs desperate for their five minutes of fame.
But if the object of this exercise in public flagellation is to find out just how the banks got us into this trouble and what we need to do stop it happening again, it has to be said that it is pretty much a sideshow. We know by now what went wrong (the explosion in derivatives and securitised instruments), why the banks threw themselves into the melee with such abandon (that was where the profits were and the banker's bonuses) and what went wrong with regulation (it suited everybody to let it flourish so long as it produced growth, jobs and the illusion of prosperity).
Mortgage-backed securities and exotic instruments didn't just come out of the blue, however. They came in answer to a globalisation of financial flows and a development of wholesale markets that seemed to be genuinely spreading risk and reducing the cost of finance.
The challenge now is whether you act to tame the market or try to replace it. For the unique, and frightening, aspect of this recession, compared to most of its predecessors, is that it is so global. You're not going to be able to restore growth without a functioning market for international financial flows. And you're certainly not going to be able to restart it with a mantra of banks returning to a deposit-loans base that politicians here keep chanting.
The quandary is particularly acute for Britain, since we have put so many eggs into the basket of London's rise as a capital of wholesale finance. It was financial services which provided most of the national growth and a high proportion of its tax base during the last decade. Easy enough to call bankers criminals now, but does the Government (and the Select Committee) want to preserve London's position and if so how?
Now no one realistically expects Commons committees to tackle difficult questions where there is no obvious right and wrong. The products of the parliamentary patronage system, they're just not built that way. But if the Treasury Committee is not going to get their teeth into the policy implications of the recession, the Commons certainly won't.
There the argument is still stuck in a simplistic reflation-versus-do nothing exchange of insults. The debate has moved on from there. What we should now be discussing is, given that we are now seeing limits of how much we can spend on reflation, what are the most effective measures to combat the downturn?
The Governor of the Bank of England, Mervyn King, merrily talks of reducing interest rates to zero and printing money ("quantitative easing") to fund the deficit. He may be right given the severity of the situation. But there are eminent economists who genuinely feel that not only will this inject inflation into the economy over the long term but that you could replace one bubble in housing with another bubble in bonds.
In the same way there are profound differences, as we are learning from Obama's experience in introducing his latest bank bailout this week, over whether it is best to set up a state bad bank to take the toxic debt off the balance sheet of the banks or to insure their bad loans against loss or to go the whole hog and simply nationalise the troubled banks.
Those urging direct measures to reflate the economy are divided between economists who favour tax cuts against those who favour direct state investment. And even then there is an argument between putting your money in slow-moving capital projects or into direct welfare projects.
These are not just arcane technical arguments. They matter because in the end it is our children who have to pay for mistakes and our expenditure at this point. Buy toxic debt at too high a price, pour money into the wrong projects, throw away sums on ineffective tax cuts, debase the coinage and it could take a generation or more to pay it off.
In the US they are debating these questions with real passion. Here we have hardly begun.
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in order to diminish the value of people's savings, and pensions
Those of us who have argued for a better regulated, fairer system of government and economics have been ridiculed and sneered at for a long time. It is now time for us to hit back. The present Establishment has been seen to be rotten to the core - all snouts in the same trough. Out of this we must make radical changes to our business and political environment. We must learn from the failures of the social democratic model that collapsed 30 years ago, and revive the best parts of it.
Those who thing athe next general election will solve anything are doomed to disappointment. Cameron and co, if elected, will not make significant changes. They are very much part of the problem. It will take time for politics to change, but change it must, and it will. People are angry and disillusioned by what has happened. This is no ordinary recession. Its effects will be felt for many years.
I suppose the "great and the good" will come up with a new, improved system that will work for a few years before once again we build up to a bubble and crash. That's just the way human nature is.
I really don't think we'll get anywhere if we take this as an explanation for our demise. Taking your three central features, derivatives, profits and illusion, what we need to be asking is:-
1. How much of the development of the derivative and securitisation market was genuinely wealth-creating in both design and effect? How much was generally constructive, and how much was no more than gaming the system to transfer wealth from one place to another?
2. For those who foresaw the calamitous result of what was happening, how possible was it for them to do anything to stop it? Would a neo-sceptic, whatever the strength of his intellect and experience, have been allowed anywhere near the reins of power? If the building-blocks of perceived success are created by robbing the future to inflate the present, how straightforward was it for any business or financial leader to operate in denial of this?
3. Kipling wrote "If you can dream, and not make dreams your master". How much has the modern world's propagation of unreality worked against this? How many people have not become "men" because they have failed to develop an alter ego to complement the dreamworld of their childhood? How possible is it for adult concepts to prevail in a democracy of children?
I thank you
Firozali A.Mulla
No. Youcan equally say it started during the Labour administration which had to go to the IMF. This led the Tories to try to avoid that failure and ignominy ever happening again. And doubtless a Labour voter could suggest it happened even earlier than Wilson's government.... It's a cycle. What's so particularly bad just now is that the whole world is badly affected and our self-aggrandising ex-Chancellor Gordon Brown didn't try to save money for the proverbial rainy day. He simply spent spent spent and boasted lies such as he had beaten boom and bust- or perhaps he even believed his own propaganda?
He didn't do his proper job at the Treasury which was to safeguard this country as best he could financially. So when a particularly vicious, world-wide bust turns up, this country is spectacularly ill-prepared. Gordon and Labour can't blame this on any previous administrations as Clarke left the Treasury in good condition. Blair is culpable in that he didn't know what his Chancellor was up to, or knew and didn't do anything to stop Gordon's criminal wasting of this country's financial assets. Blair could have and I think we all know now should have sacked Brown years ago, and then we might have been in a better situation now. I guess we can all see now that Gordon indeed has that personality problem some of his colleagues referred to and in a PM it's a serious flaw. He believes just too much in himself and can't see his flaws.
That same scientist , looking at the evidence, would also say that the audit profession has totally failed us all.
In Canada the leading banks, Bank of Montreal, Toronto Dominion, Scotia Bank, like Santander, wisely avoided these Wall street scams recognizing the reliance on property values in USA which have been falling for years. Our 'Masters' fell hook line and sinker for this junk like a wide eyed fools buying fake rolexes from a spiv. Except these fools were buying the fakes with our money. When we opened the box, no Rolex, not even an Omega, just a hissing viper.
The reasons why banks got involved in these products.
Yes it was profit (greed as it is the same thing) driven but also they were deemed (and still are) essential to the portfolio of products banks had to offer to the investment community. Invariably if you were unable to offer sophisticated products with complex payout profiles you missed out on the traditional vanilla business. that business like foreign exchange, equities or finance. Accordingly your market share would fall, your trading floor would be considered inadequate and sensible traders would be binned for those with PHD's and the ability to blind with science.
The investment community, denied yield through traditional products, sort to enhance returns through complexity - they went to banks that could offer the fatted cow and now we are all the worse for that. So why were returns so poor?
That lies firmly at the foot of Government policy. Refusal to supply the market with higher risk free rates and mandate a central banks with the wrong inflation target; create legislation that required the putchase of Govt debt over higher yielding assets - artificially driuve the yields ever lower to the benefit of the borrower and detriment of the saver. Governments created the playing field, the interferred in the market place and through manipulation have destroyed the value of the savings. Bankers are not innocents but they share the blame with Brown and his 197 budget,
Nor is this particularly a class matter. The so-called middle and upper classes - well educated in techniques of obfuscation, are more adept at it. While the great dysfunctional and marginalised white working class whose misfortunes are deeply lamented by the champions of equality and fair play, express it without much fear or favour, aided and abetted as they are by large sections of the mainstream media.
To grasp the extent of the malaises, one has only to read the various expressions of manufactured outrage at the ban imposed on the racist Dutch hate monger?s proposed visit to the UK (as a guest of UKIP no less), on the pathetically absurd pretext of defending his human rights and right to free speech! Yet those very philistine, historically illiterate, opportunistic hate monger defenders of free speech, are the first inline for pulling the plug on any and all human rights legislation, on the grounds of preserving freedom! Againt this backdrop, Harry is being refreshingly honest in expressing the worldview which informs and underpins those if his peers and society.
One can understand the pervasiveness of the malaises, given its deep roots in centuries of imperial conquest, domination and wholesale slavery and plunder. However, fundamental changes in geo-political and economic realities in the past half century, has all but swept away the material and instrumental underpinnings of the imperialist-supremacist world-view, leaving in its stead, a mass post-traumatic stress disorder, partially resolved through pseudo-imperialist fantasy, and naked verbal and physical aggression and violence - in the street, the terraces, schools and colleges, public and private sector. It is not merely the police which is institutionally racist, it is the rump of British society which is pathologically so. Unfortunate comments by royalty, aristocracy and celebrity merely provide a fleeting glimpse beyond the carefully erected PR edifice.
His appointment as adviser to Morgan Stanley was contiguous with Morgan Stanley stripping off the best part of Northern Rock's asset at a knockdown price.
With people like him involved, is it surprising that the public is paying out billions of pounds in blackmail to the banksters?
If we don't keep paying them, they will crash the world economy; if we keep paying them we will only have a continuing depression while the bonuses flow.
How did this come to be?
Alexander Hamilton had suggested that the new Republic's government should reimburse the securities it owed to those who fought in the Revolutionary War at their full price. When speculators heard of this, they bought the securities from the fighters in the Revolution at a fraction of their cost, hoping to make a good profit. There was much opposition to this, many in the newly established Congress wanting a fairer reimbursement for those who had actually done the fighting. But there was some wheeling and dealing carried out on this and other matters which were to have long term consequences for the new Republic. Two of the most important were to do with slave holding and the siting of the capital of the Republic in a swamp on the banks of the Potomac, rather than in Philadelphia. So the many people and their families who fought and died for the Revolution were short changed for the benefit of the rich few. There are many other examples prior to now. The most recent and egregious being the Savings and Loan of 1980s and the bailout of Long Term Capital Management in the 1990s and now of course the Wall Street Tsunami That is until the WST swept around the world. The receding of which will show more and more nasties left high, dry and stinking, such as the Madoff Affair.
S&L was then "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." The ultimate cost of the crisis is estimated to have totalled around US$150 billion, about $125 billion of which was directly subsidised by the U.S. government, ie the taxpayer, which contributed to the large budget deficits of the early 1990s. This debacle again hit the many but not the rich few, including Neil Bush.
LTCM in 1998 lost $4.6 billion in less than four months and became the most prominent example what over leveraging can do. The Federal Reserve Bank of New York organised a bail-out of $3.625 billion by the major creditors in order to avoid a wider collapse in the financial markets. In spite of this the fund folded in early 2000. Why did the Fed step in and organise the bail out of LTCM?
A quote from the report that Chairman Alan Greenspan gave to the Committee on Banking and Financial Services, U.S. House of Representatives.
"..Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own..."
This was Chairman speak for the fact that many very rich people (market participants) would lose their shirts as would some banking and finance institutions. Adding the threat to "the economies of many nations including our own" was there to reassure the House Committee that this was really the act of a patriot!.
In other words, this intervention would prevent the market from operating as it is supposed to according to all the gung ho free marketeers. To put it bluntly the Fed stepped in to stop the very rich from becoming very poor. The very rich can become even richer with no risk. For them there is no downside as they will be bailed out by Governments or through government intervention.
No need to address the WST and its effect on the real world
But what Alexander Hamilton said in in the 1790s is still very much in the mind of the people who really control the Republic. And you could say similar for those in the UK.