Saturday, September 27, 2008

A Bailout Reader and a Few Thoughts

As I posted the other day, I don't understand banking, money and credit. All that seems self-evident to me is that you can't, in the long term, run an economy on ever-increasing levels of personal and corporate debt, while the nation imports more than it exports and the government spends more than it takes in. It has to stop somewhere - and it seems a chunk of it - mortgage debt packaged into corporate debt, packaged into bonds/securities/financial instruments which no-one fancies putting a value on any more - has done just that.

That's one chunk. There are others. How long can we continue importing much and exporting little ? The difference, as I understand it, is made up by foreigners buying government and other bonds - sterling and the dollar being seen as 'safe' currencies.

But for how long will this last ? Sterling and the dollar rose to greatness on the back of their countries' industrial greatness (and IMHO a key component of that was cultural greatness). When that's gone, why hold dollars ? And when the foreign money goes, our economy stands in all its skeletal nakedness - compared with the well-covered economies of the BRICs (I don't mean that there isn't - or won't be - an economy. There's an economy, and people working hard, in Peru - or Burma).

There's a comment by dearieme on my Westinghouse post :

My wife made a new friend this year, the wife of a Visiting Scholar at Cambridge, a Chinese. After a few weeks here she had a good question. "I don't understand how this country is so rich", said she, "where are all your factories?"
Admittedly Cambridge is the service sector capital of the UK.

And the culture ... I worked alongside some young guys from Bangalore last year. They couldn't believe the behaviour they saw in the streets of an evening - and this is Wiltshire they're talking about - not exactly Moss Side. The were afraid of - and tried hard to avoid - some of the gangs of young people walking around - especially the drunk ones.

"Why don't people stop it ?"

"Has it always been like this ?"
What happens if and when the countries of the Middle and Far East decide that they no longer wish to use their massive surpluses to fund the massive deficits of the West ?

Another chunk is accounting practice. Lehman Bros apparently made a profit of $800m in 2007, and a record $4bn in 2006. How come, if it was bust in 2008 ? How were their assets priced ? What was the Head of Risk Management doing ? I must say while I'd fancy his bank balance, I'm not sure I'd fancy his next job interview.

"Now tell us a little about your career, Mr O'Meara. What was your previous position ?"

"Global head of risk management for Lehman Brothers, sir"

"I see. That will be all. Next please !"

The Mises Institute, an organisation devoted to the Austrian School of economic thought, has a handy Bailout Reader, with links to the various issues surrounding the economic unpleasantnesses we seem to be vicariously experiencing at present. The real experiencing will doubtless arrive soon enough.

Here's a link to the first of a series of videos on our banking system ('fractional reserve banking') and how it works.

All of the above are from people who presumably have a view on the way things ought to be arranged. While you've got to be aware of that, no matter, if one can learn.

And more links from Ross at Unenlightened Commentary, including the story of how a combination of "community activism" and well-meant Democratic legislation encouraged lending which looks pretty irresponsible to me.

Looking into the future gives further cause for concern: "The bulk of these loans," notes a Federal Reserve economist, "have been made during a period in which we have not experienced an economic downturn." The Neighborhood Assistance Corporation of America's own success stories make you wonder how much CRA-related carnage will result when the economy cools. The group likes to promote, for instance, the story of Renea Swain-Price, grateful for NACA's negotiating on her behalf with Fleet Bank to prevent foreclosure when she fell behind on a $1,400 monthly mortgage payment on her three-family house in Dorchester. Yet NACA had no qualms about arranging the $137,500 mortgage in the first place, notwithstanding the fact that Swain-Price's husband was in prison, that she'd had previous credit problems, and that the monthly mortgage payment constituted more than half her monthly salary. The fact that NACA has arranged an agreement to forestall foreclosure does not inspire confidence that she will have the resources required to maintain her aging frame house: her new monthly payment, in recognition of previously missed payments, is $1,879.
That piece was dated 2000. Can't say no warning was given.


Martin said...


"What happens if and when the countries of the Middle and Far East decide that they no longer wish to use their massive surpluses to fund the massive deficits of the West?" -

The new Dark Ages will happen; and all the tattooed sluts, male and female, educated and uneducated, will be unable to handle the psychological shock of not getting what they want, where they want, how they want it; and will reveal themselves to be the barbarians that they are, or that they have been made.

All those economists and journalists who said that sovereign wealth funds buying our industries, and foreign governments subsidising our deficits, are going to get a rude awakening should such investors decide to take profits, sell their dollar holdings and tank the American and British economies. They may learn that the foreigners' decisions to fund our spending were made not because they bought into the same globalist mantras as we did, but as cold acts of policy to be withdrawn from as and when it suits them.

The Western world is soon going to get the mother of all lessons in realist power politics. The ersatz 'bailout', which is in turn nothing but the purest expression of fascistic state capitalism, is going to do nothing to stop it. Crime will increase and liberties will be curtailed to a degree which will make those restrictions which have occurred over the past 11 years look frivolous. Working hours will increase further and severe wage controls will come into effect as the government, of whichever hue, seeks to recover.

Tim Worstall said...

"The difference, as I understand it, is made up by foreigners buying government and other bonds"

Not quite. By buying up assets. Of which bonds are of course one. But so are shares, so is land, buildings, companies and so on.

The balance of trade must indeed balance. So if we're importing more than we export then we have a trade deficit. That is, a deficit on the current account. To balance that we must have a surplus on hte capital account.

Which, of course, we do.

The trade deficit is around £40 to £50 billion a year I think. The capital surplus most therefore be the same.

We sell the family silver in order to finance current consumption.

Given that total household wealth is around £3 trillion we can do this for quite a long time.

Further, if we create new wealth faster than we're spending it (ie, if we can increase wealth by 2% a year) then we can carry on doing it forever.

Anonymous said...

Your strapline, Laban, is the quote from Yeats - about the centre not holding.

The Bangalorese might ask "How can this happen". We all know the palpable sense of fear that descends on every town and large village on a Friday or Saturday evening, as the scent of anarchy fills the air.

A society has to prioritise. A society with a massive public debt, a groaning welfare state, has to make some hard choices.

And this, perhaps is where the falcon leaves the gyre and heads off to who knows where.

The police are now so overstretched, and illegal immigration is so high, that when the police pick up an illegal immigrant, they no longer arrest and detain him. They just give him a piece of paper and tell him to report himself to an immigration centre.

This is anarchy. This is a society no longer in control of itself. All over Europe, it's the same story.

Mark Steyn suggests that the reason that France did not join the War on Terror is because it would have rendered France ungovernable.

Charles Candless said...

Just reading Mark Steyn's America Alone. Yes it's a polemic, yes it's looking a bit dated (America is as screwed as we are), yes it's flip in places but it's extremely worrying.
Also just bought Inspector Gadget's book which is next on my reading list after (I think) you tipped it Laban. Hoping he will have some answers law and order wise!

Revolution Harry said...

Laban, this is worth a read.

Anonymous said...

Wouldnt be surprised if O'Meara had no problem getting another job. Past performance, losing bi££ion$, thats for the little people. He's the sort of much needed talent that any corporation would pay over the odds for.

Hugh Oxford - its not anarchy. Its what the late Sam Francis termed anarcho-tyranny.

Obvious social disorder and decay are untouched but the state can reach out when it suits. Wrong rubbish in your bin, eating an apple while driving. Making unflattering remarks about certain groups when making a speech at an agricultural show. Suggesting - correctly - that Islamic suicide bombers might come from the ranks of the UK born. Not paying your TV license. Then the state is right there knocking on your door.

Tim Worstall, while often making good points,is unfortunately a cheerleader for the globalising nation destroying processes which cause such havoc. He is alright jack of course, rootless, with no loyalty to nothing but his bank balance.

Anonymous said...


Apologies to Tim Worstall, was mixing you up with blogger Tim Newman:

You wait all day for a Tim, then two turn up at once.

Anonymous said...

Steve Sailer has more than one post suggesting that it was laws in the US forcing American banks to lend to 'minorities', to counter 'racism', who subsequently defaulted on these loans at higher than average rate, that triggered the 'sub-prime loans' crises that in turn lead to the current 'global financial crises'.

Anonymous said...

Full video can be seen here.

Brought to you by the kind of people who took 1984 not as a warning but a manual.

Particularly liked the line slipped in at 31:31: "...and the population just replaces itself." Yeah, I remember a couple of attempts at that one.