Wednesday, September 17, 2008

That Crisis Of Capitalism

Me no understand, doctor.

Alright. So the credit crunch was caused by people being a bit too clever, and not asking 'what if' ? But the reason governments are stepping in all over the place is because of the size of the exposures. If Northern Rock had been the Puddletown and Kingsbere, a small building society who foolishly demutualised then ran out of credit, they'd either have gone bust or another bank would have picked them up.

This applies in spades to Freddie, Fannie, Merril Lynch, AIG and now HBOS. They were so big, with so much business out there, that going bosoms up would threaten the survival of other major institutions.

"You owe the bank £50,000 and can't pay. You're in trouble"

"You owe the bank £5 billion and can't pay. The bank's in trouble"

So what's the solution of the great and the good ? In the case of Fannie, Freddie and AIG, hand over pots of taxpayer cash. In the case of Merrill and HBoS, merge them (with BoA and Lloyds respectively) to form even bigger financial entities.

Is it just me ? You've got something so big that its collapse threatens the system - and the solution is to make it bigger ?

I suppose if you want the Lloyds deal to go ahead it's probably not a good idea to start muttering about breaking it up, but surely post-kerfuffle any institution big enough - Fannie, Freddy, BoA, AIG, Lloyds/HBoS (I'm presuming NR wouldn't have been rescued without all those retail customers) - to cause major structural damage in the event of its death - surely anything that size needs to be split up - by legislative fiat if necessary - until the biggest companies are of a size where they can't take the whole economy down with them if they go.

It's not as if the Yanks lack practice at busting companies up. They just (I think) haven't done it for a while - not since Ma Bell. I'm not sure if antitrust law would cover such cases - so here's an opportunity for some legislation. OK, you lose some economy of scale and add some small amounts onto transaction costs, but think of all the taxpayer dosh you'll save.

Commenters are welcome to tell me

a) if this is nonsense - and if it is,
b) why


Anonymous said...

Fannie May and Freddie Mac were government backed companies anyway, half-nationalised, as it were. The government was always going to get involved.

I don't know the reason why AIG was helped. Lehman Brothers was allowed to go to the wall, rightly. Northern Rock was nationalised for labour political gain (or rather, to avoid political loss).

Anonymous said...

Break them up later, I think.

Anonymous said...

Agree with both earlier comments. Jeff Randall nails it in the Telegraph

Anonymous said...

Fannie May and Freddie Mac failed because of bad loans. Bad loans were made because people who were deemed high risk were still given that loan. Part of the reason for that was because of pressure from politicians and the media angry that poor people were unable to obtain credit from commercial banks.

It will be interesting to store the newspaper headlines about greedy bankers forcing loans down people's throats because in twenty years the pendulum will have swung back again and the greedy banks will be being criticised for refusing to extend loans to the poor once again.

The reality is that no politician will deliberately end a boom even if they foresee an inevitable crash. This is true even if the boom is driven by artificially easy credit.

Anonymous said...

Assuming of course that our real government at the European Commission allow such a merger

Harry J said...

Laban, can I suggest you watch either of the two following videos. The first is fairly long at 47 minutes and gives a basic outline of the banking scam. The second goes into more detail in particular about America's struggle to avoid the clutches of the, private, European banking cartels. It's much longer at over 3 hours but worth the effort. Once you've watched either, or both, then ask yourself the same questions again. The third link is to a UK website dealing with some of the questions raised in the videos. It seems they have regular meetings in Bromsgrove which if I remember correctly you have a connection to of sorts.

A few quotes:

“Whosoever controls the volume of money in any country is absolute master of all industry and commerce… And when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”

American president James Garfield. Unfortunately, within a few weeks of making this statement on July 2nd of 1881, he was assassinated.”

"The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole...Their secret is that they have annexed from governments, monarchies, and republics the power to create the world's money..."

Prof. Carroll Quigley, renowned, late Georgetown macro-historian (mentioned by former President Clinton in his first nomination acceptance speech), author of Tragedy & Hope: A History of the World in Our Time.

“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Sir Josiah Stamp - Director of the Bank of England (appointed 1928) Reputed to be the 2nd wealthiest man in England at that time.