Bear goes on rampage in fairy-land
"You’re making it all sound far more simple than it actually is.” That’s what someone, who works in a bank, told me at a party, late on Friday evening, following some thoughts I had on the $ 700 billion bail-out. She was a legal advisor to this big bank, you see, and I thought, “Now hold on a moment, here’s a lady who might actually know what is going on out there in finance land.” I’ve asked loads of people who work in banks, or the financial sector, or who seem to be cleverer than me when it comes to the money markets, to try and tell me what has caused this problem. I always get a different answer.
Its something to do with buying debt. (People actually buy debt?). Or its something to do with toxic assets (People invest in assets that include the word toxic?). Or its something to do with a bank that used to be a building society that goes by the name of, check this out, Fanny and Freddie (Incredible but true). Or its something to do with buying too many derivatives. (What are they again?). I am, as you understand, still mightily confused about what all the fuss is about. I thought it had something simple to do with reckless bank managers, under pressure from the top, lending too much money to those who would never be able to pay it back.
As far as I can tell there is some sinister phantom force out there referred to as “the markets” that seem to be sending the shivers down the spine of every global banker from New York to Tokyo from Beijing to Frankfurt. At the time of the last great recession Franklin Roosevelt said so famously, “We have nothing to fear but fear itself” – but then you have George W. Bush II, looking into the camera like a frightened rabbit and you wonder what lessons have been learned.
“Well, we’re not overly worried,” G. quipped in “we owe the bank “loadsa” money and have no savings what to speak of so if the banks go belly-up does that mean we can keep our monthly payments?” Its no wonder the lady-banker thought we were simple idiots but there was a sense of schadenfreude in seeing a banker squirm.
Yeah, OK, I know I’m just a simple dumb blond who can’t get her pretty little head around all these important issues but I can’t help thinking that if the banks had behaved a bit more like dumb blonds and kept their affairs simple then none of this would have happened in the first place. No one, as far as I can gather, is able to get to the bottom of this, because the whole financial sector has been given free reign to create a vast set of rules, counter-rules, over-riding-rules, and new rules that are about as impossible to unravel as the Gordian knot. Derivates, short-term selling, bonds, futures, credit bonuses, share options, going public etc. It’s the beauty of the “free market” apparently. Markets, The Economist and some extreme Republicans would have us believe, are pure as the driven snow. I can't help wondering though whether bankers and markets wouldn't be getting their knickers in a twist if they hadn't got their Derivatives into such a twist.
In fact I even took time out last week to read The Economist because I thought now here is a weekly rag that will undoubtedly inform me about what is going on. The Economist said: “There is no faulting Europeans for consistency when it comes to distrusting financiers, liking businesses that make things you can touch and looking to regulators to keep markets in good moral order.”
There you have it. “Europeans” are simple. Just like me. A dumb blond who likes “to touch” something to believe it. Not like the clever guys in The Economist who can understand nebulous, abstract markets that one can “sense” rather than “touch”.
There you have it. “Europeans” are simple. Just like me. A dumb blond who likes “to touch” something to believe it. Not like the clever guys in The Economist who can understand nebulous, abstract markets that one can “sense” rather than “touch”.
Have any of you played Pokémon cards with an eight, nine or ten year old boy? Well let me tell you I have and I can’t get to the bottom of that either. The rules of the game are about as absurd and unfathomable as the financial market. They keep changing depending on the intuition of the ten year old kid.
There can, therefore, be but one conclusion: only ten year old boys are truly capable of understanding the rules of Pokémon and only the select few who work in finance are truly capable of understanding the little “risk” games that they have been allowed to dream up over the past ten years. If you happen not to be a part of the financial cabal then you are just too dumb to understand.
One thing I am sure of though is that were I in a position to decide on this $ 700 billion bail-out I too would say an emphatic. “NO”. I mean really. The United States’ Treasury Secretary getting down on one knee to literally beg for a blank check makes me thing that this is more theatrical farce than serious money matters. Were my kids to do that to me I would smell a rat. The way I, dumb blond, see it is: a whole loada money is going to be given back to the very people who lost the whole loada money in the first place. Would you give money back to them? Are they, err, reliable?
If G. and I don’t meet our monthly payments, regardless of whether our bank topples over the abyss or not, someone, somewhere will come and collect the money. No bail out for us home-owners. Only financial ruin. Complete and utter.
“Didn’t you get given some shares in the Halifax some years ago Dad when they went public,” I asked him last week when Lehman Brothers crumbled under the weight of its absurd “risk” taking.
“Oh yes,” he replied. “I got given some shares. It was worth around £ 1000 at some point. I gather its only worth around £ 200 at the moment.”
“Aww shucks that sucks.” I replied.
“Not really,” he answered “Its all fairy money anyway.”
posted by Kathleen at 1:51 AM
5 Comments:
Yes, but, having said “no” to the rescue plan banks will continue to mistrust each other and clutch their money very tightly. If the banks don’t lend to each other they won’t be lending to businesses either and if businesses can’t raise capital they won’t be able to invest in their future and in some cases pay their work force. Customers will cling onto their money and not spend and businesses will go bust. Result: economic melt down not only in the financial sector but in the backwaters of America and Europe too i.e. foreclosure on farms and homes, massive unemployment and increased poverty.
Joe Blogs may feel that bankers have received their just deserts but by backing a “no” vote they are effectively cutting off their nose to spite their face.
Hi Bea
The prospect of a recession is indeed a sobering thought. As a "gut" instinct though I can't help feeling that agreeing to some $ 700 billion "bail-out" is not the way in which to inspire greater market confidence.
Surely there must be some other more carefully crafted plan whereby the US government, temporaily until "market" confidence resumes, opens up its own line of credit - rather than giving money back to the same banks that made the huge losses in the first place.
I come back to my point about what Roosevelt said "we have nothing to fear but fear itself".
Not all are loosers in the current crises - some big banks and the faceless faces behind "the market" will be profiteering.
However, I do grant you that I am totally and utterly ignorant of all matters financial so I am perhaps seeing things too much in "black and white".
Sadly recession is no longer just a prospect but a reality. In Europe most countries are now in recession or close to it. Although your "gut" instinct says that a $700bn "bail-out" is not the way in which to inspire greater market confidence in fact the reverse is true as seen in today’s massive drop in share price and seriously destabilised markets. The “bail-out” was not cash-in-hand as you suggest but in fact a US government sponsored credit line. By issuing more government bonds (to be paid back by the banks eventually) the government was hoping to raise more money. Although not sure who would initially be buying those bonds?! The US electorate? Chinese Wealth Funds?
Sure “fear” is an important factor and by increasing access to money the markets were hoping some of their fear would be alleviated. Of course, changes will need to be made to help banks understand where on their books their debt lies and how much it is but right now the problem is access to money.
Of course some will be profiting from the current turmoil but sadly not enough and the problems in the financial sector need to be addressed fairly rapidly (not just gloated over). It took the USA three years to address the problems of the Great Depression in the 1920s. They did this by introducing a successful financial rescue plan – surely it is best to have learnt from this and introduce one right now rather than wait for recession to take a tighter grip?
Anyway, I think the US government is looking to introduce shortly (next week?) a revised rescue plan which I hope will get passed and bring some stability.
I think this quote sums up my feelings:
EU TRADE COMMISSIONER PETER MANDELSON
I feel they've taken leave of their senses and I hope that in Europe we will not see politicians and parliamentarians replicating the sort of irresponsibility and political partisanship that we have seen in Washington.
The American banking system is going to have to reinvent itself... It's going to be consolidated, it's going to operate in a different way, it's going to have to operate with more responsibility, less risk.
Hi Bea
For an ordinary person like me a "bank" is an institution that looks after my monthly payments, offers me a savings account with an interest rate and lends me money so that I can buy a house. I understand the rules of the game perfectly well. If I fail to pay my mortgage I land in the proverbial "sh*t". For most people like me figures that stretch beyond the six are incomprehensible. Huge figures regarding assets; liquid assets; toxic assets; trading; selling and lending are bandied about – yet for most of us these figures are unreal - like “fairy” money.
We live and work in a "micro" financial climate characterised by tight budgets and tough decisions about what to prioritise in terms of spending. If our mortgages aren't paid then banks are swift to foreclose.
In a way, the fact that they have repossessed so many homes in America - rather than offering temporary solutions to homeowners in difficulty - is what has created this crises in the first place. They have landed themselves with a whole load of worthless properties that no one knows what to do with.
We are told by "business" editors and "financial" editors and "economic" editors that a lack of capital within the banks is causing Wall Street to crash and banks to fold. Yesterday the BBC said that banks "lending" credit to each other "oils" the economy.
To a lay person like me that makes no sense. Why do banks, who should have huge capital from all our savings and monthly earnings and pensions, lend to each other? Why? To speculate. To take a risk? To make huge “fairy” profits? It all sounds a bit too incestuous, entangled and sticky to make sense of.
My own view is that a $ 700 billion "bail-out" package is a knee-jerk reaction, from a frightened President who appears out of his depth, an over-excitable Treasury Secretary and a Republican candidate who wants to looks as though he is in control - rather than a rational, sensible package offering a long term solution to get the economy out of recession.
I would admire the President and Treasury Secretary more if they were to take a calmer stance trying to reassure bankers, savers and traders that they will guarantee savings – but not give huge monies to banks so that they can start “lending” to each other again.
In any case, in spite of Congress' rejection of (what it now being called the "rescue-plan") Wall Street was still standing and trading continued in London. Failure to adopt the rescue plan will not mean the end of all global economic activity.
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