A bigger bomb. a longer fuse

"So basically they are making the bomb bigger but have succeeded in lengthening the fuse."

One last point – a general one but an important one. Whoever buys the risk from the banks, no matter what claims are made for how separate they are from the banks and how much this removes the risk from the banks, ask yourself where these other people got the money to buy the risk from? The fact is 98% of all the money in the world is credit backed bank created money. No one is insuring bank risk or buying risky assets with sovereign backed money. They are buying it with credit backed money – credit that at some point was created by and loaned from a bank. Somewhere back along the chain a bank counts that loan as an asset and has a risk attached to it. That one simple fact means that it doesn’t really matter who ‘buys’ a bank’s risk. Ultimately it is still tied to a bank and the banking system. The risk never ever goes away until the loan it is part of is paid down. The risk from the bad loans that are still crippling our banking and financial system have not been removed or dealt with in any way other than to move them from the regulatory spot light to a darker corner where they can fester un-noticed. They will not be dealt with until the loans are paid down or written off. The losses must be cleared from the system and will be – by bankruptcy or bail outs. In the mean time all this insurance is, at best, moving the mines around the mine field.

For the full article see here.

Where next for the banking 'crisis'?

China's shadow banking sector has become a potential source of systemic financial risk over the next few years. Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.

Moreover, many WMPs are not even linked to any specific asset, rather, just to a pool of assets, whose cash inflows may often not match the timing of scheduled WMP repayments.

China's shadow banking is contributing to a growing liquidity risk in the financial markets. Most WMPs carry tenures of less than a year, with many being as short as weeks or even days. Thus in some cases short-term financing has been invested in long-term projects, and in such situations there is a possibility of a liquidity crisis being triggered if the markets were to be abruptly squeezed.

In fact, when faced with a liquidity problem, a simple way to avoid the problem could be through using new issuance of WMPs to repay maturing products. To some extent, this is fundamentally a Ponzi scheme. Under certain conditions, the music may stop when investors lose confidence and reduce their buying or withdraw from WMPs. The rollover of a large share of WMPs could weigh heavily on formal banks' reputations, because many investors firmly believe that banks won't close down and they can always get their money back.

The article quoted is written by Mr Gang and appeared in China Daily, a state controlled publication and the country's largest English language paper. The financial activity that concern Mr Gang would of course show up in the statistics as part of China's current economic growth.

I am indebted to Golem XIV for this reference and more comment on the article and the situation in China can be found on his blog.

Never-never, or Never, never, never

Never Never Land or the Never-Never is said to have originated in the Australian Outback, unspecific parts of which were so named because they were a place which, depending on your outlook, you would never want to go to, or never want to leave. Apparently the phrase is still in such use in parts of Queensland and the Northern Territory.

It was J M Barrie who introduced the phrase into popular English usage. In Peter Pan Never Land was where the babies went who fell out their prams and were not rescued, and where they joined the lost boys (presumably little girls did not fall out of their prams in Edwardian times). So it was a place to which 'normal' people could never go, and from which it's inhabitants could normally never escape, and where they could never progress through mortality like the rest of us. (The Edwardian fear of mortality and its varying expression in the grandiloquent and the fey is a theme for other reflections.)

Yet 'never never' gained its strongest and most characteristic place in the popular English imagination when 'the never never' became the common term for hire-purchase, an early form of credit that enabled one to acquire goods and pay for them in regular stages. Of course it was not 'never' that one actually finished paying for them, but, so strong was then the residual popular sense that actually enjoying or using something before one had paid for it was the road to ruin, that it acquired a strongly morally disapproving overtone.

How far have we travelled from there, and to what place has it brought us, when credit is now so universal and interwoven into all our economies, personal, national and international? The acerbic commentator might say that even the prudent amongst us usually have little idea of exactly when the funds for their purchases actually leave their possession, and the feckless neither know nor care whether they ever were or ever will be in it - but in that they have been shown, quite literally, to be no different from those who have charge of our largest and most venerable banks, whose pretence to the ownership of funds is so large and so false that no-one dare challenge it.

'Never, never, never!' was the famously obdurate declaration of Ian Paisley senior that Ulster would never accept the Republic of Ireland's having a role in the constitutional affairs of Northern Ireland, something that was shortly to come about and which many would have regarded as historically inevitable. Indeed, so historically inevitable was it that the lion and the lamb were shortly to lie down together when he and Sinn Féin's Martin McGuinness were elected First Minister and deputy First Minister respectively to the Northern Irish Assembly, created by the Belfast Agreement, on 8 May 2007. They apparently got on so well that they became known as 'the chuckle brothers'. Of course Sinn Féin and Martin McGuinness did not actually represent the interests of the Irish Republic, but in earlier days Paisley would not have made such nice distinctions.

I do not wish to suggest Paisley has been without his merits and abilities or that he did not mellow with age; he was created a life peer in Gordon Brown's dissolution honours list in June 2010 (someone else whom we may expect to mellow with age, unlike Tony Blair - 'age shall not weary him'); in February this year Paisley was admitted to hospital with a serious heart condition from which he was later reported to be recovering.

Paisley no doubt intended a bastardised echo of Winston Churchill's celebrated 'We shall never surrender.' How masterly, or how natural, is Churchill's falling cadence with the word 'never', making it not something to be asserted but quietly acknowledged; how contrasting with Paisley's stridency; and how wide a gulf does it reveal between the culture of Churchill and that of Paisley. 

So for us now, in our present polical-economic woes, is it never-never land, or never, never, never? Perhaps both.

We are indeed in never-never land in every sense. Our debts can never be repaid. Our economy is in a state of perpetual immaturity. Our past elysium, that brief post world-war-two interlude when there seemed to be a miraculous combination of steady material improvement and a recognition by those in power that there was a debt to be repaid to the ordinary citizens of the nation who had saved Europe from catastrophe, is well and truly lost.

There is no way forward except through reform, not the kind of 'reform' that Tony Blair and David Cameron like to talk about - masking their partisan political preferences in the language of historical inevitability and public benefaction in a false echo of the great Victorian Reform Acts - but something in the full, literal meaning of the word.

Yet for those who effectively control political, economic and financial power it is 'We say never, never, never!' and they say it with less grace, if less street-volume, than Ian Paisley. Never is there to be the necessary rebalancing of the financial obligations in the economy; never are financial pretences to be acknowledged; and never is the tide of the increasing accummulation of wealth amongst an extremely small minority of the population to be reversed or even halted. Yet theirs is the 'never' of Paisley as they increasingly lay waste the economy on which they depend both for the aquisition of their wealth and for some form in which it can be expressed and have value. And ours is the 'never' of J M Barrie, a land of the lost.

'Nothing shall come of Nothing. Think again.'

Invasion of the Body Snatchers

Never allow comments

Sub prime

http://www.golemxiv.co.uk/2011/11/buckle-up-credit-crunch-2/?utm_source=rss&utm_medium=rss&utm_campaign=buckle-up-credit-crunch-2

The blue pill

Charles Wheeler October 4, 2011 at 4:36 pm

The blue pill’s been pretty effective for 30 years because debt has papered over the deep fissures caused by the startling polarization of wealth and economic power – most starkly in the US (http://goo.gl/SY5ZY) and UK. It’s enabled a majority to cling on in the housing market, finance tuition fees and hospital and school building programmes and retain the remnants of a safety net for those mired at the bottom.

But the arithmetic is changing. Pretty soon most young people will find themselves shut out of the housing market and denied social housing – doomed to serve up an increasing share of income to the rentier class; many more will find the prospect of student debts of £50k too much of a disincentive (particularly those who’ve already drawn the short straw of substandard ‘sink-school’ education and low expectations – leaving the field open to their less able but wealthier peers, exacerbating the divide between the Herberts and the Henrys). The elderly are already finding that the crippling costs of ageing are being transferred to the individual and the family. Disability benefits are effectively being abolished even for most of the most severely disabled, again pushing the financial, physical and psychological burden onto those least able to bear it.

As a result, confidence in the future is plummeting and the next generation are growing up with the realisation that they will be expected to worker harder and longer for less than their parents.

And this is before the effect of the cuts has fed through.

In the nineteenth century, as the ‘residuum’ grew liberals like Charles Booth set out to prove that the scale of the problems of the underclass had been exaggerated by socialists – only to find it was much worse than imagined. He then sought to scapegoat the casual labourer as the cause of society’s ills in much the same way that today’s economic liberals pin the blame on those at the bottom of the pile (the poorest of the 50% that share just 5% of the nation’s wealth). But it wasn’t just the poor that suffered insecurity, the drop for even the relatively comfortably off had become so precipitous that only a tiny proportion were unaffected by the psychological effect of the gravitational pull of poverty.

For the post-war generation life without a welfare state is just a distant memory. It’s a while since the majority have had to live with the concern that a chronic illness might bankrupt us; that a disability would leave us totally dependent on family, charity or face life in an institution; that any kind of incapacity in old age would wipe out our life savings in a few months (so much for the incentive to save!); that being born into poverty wouldn’t be an insurmountable obstacle to advancement or bar to opportunity. But, with the collapse of social care, the time-limiting of disability benefits and the slow death of the NHS, and the ‘marketisation’ of higher education, all those fears that plagued our Victorian forebears are coming back to haunt us.

In a sense, social democracy was a victim of its own success – the fact that most of us grew up expecting to be educated, receive healthcare and some help should we suffer a disability or live long enough to need some assistance in old age, as a right has led us to take these benefits for granted, or even to assume such guarantees are no longer necessary. But Polanyi’s announcement of the death of laissez-faire has proved premature. Beveridge’s ‘Giant Evils’ of squalor, ignorance, want, idleness and disease are being uncaged.

As more and more income has been taken by the top 10%, the tax burden on top earners fallen, and ‘trickle down’ morphed into ‘hose up’, only rising levels of debt have kept the boats afloat. Where, in 1980 a manual worker could finance a mortgage, run a car, take a holiday and see his children through university on a single wage – it now takes a couple working full-time to keep up with the rent and the car loan (see: http://goo.gl/xAO0 on decline of the middle income worker in the US). This is the root cause of the financial crisis, as ever more exotic financial instruments have been created to mask the growth of inequality. Instead of taking a share of growth in higher wages as happened in the immediate post-war period, this has been substituted with rising debt + compound interest (and even now the orthodox continue to chant the mantra from page 1 of the neoliberal playbook: wages are too high at £6 an hour!) – an ultimately unsustainable combination in a slow-growth economy. As a result even those back-stops we may have thought inviolable are being removed: universal healthcare, decent education, adequate pensions, the right to a life of more than mere subsistence for disabled people, the attenuation of child poverty.

Perhaps, under this assault, the effect of that blue pill is going to start to wear off.

See post and other comments at http://www.golemxiv.co.uk/2011/10/china-10-7-trillion-yuan-of-debt-going-bad/

I read the news today

http://www.golemxiv.co.uk/2011/09/the-monstrous-fact-from-bail-outs-to-debt-peonage/?utm_source=rss&utm_medium=rss&utm_campaign=the-monstrous-fact-from-bail-outs-to-debt-peonage

Breakfast reading

http://www.golemxiv.co.uk/2011/09/europe-bank-debt-in-lurid-detail/

Which hole did we leave the money in?

Knighted for services to digging

‘Sir’ Martin Sorrell, CEO of WPP, the world’s largest advertising/publicity/media conglomerate, which he is perpetually promising to return to a UK tax base (returning the compliment of his knighthood), but not just yet (like the uncle who rewraps your Christmas present each year), has announced yet another bumper set of financial results. He points out that western corporations are sitting on several trillion dollars worth of ‘largely unleveraged’ assets, and that, by way of quaint illustration, Apple recently boasted greater assets than the US Treasury. Rather than invest in productive capacity (guess why), according to Sir Martin, those corporations are reinforcing their brands, thus accounting for WPP’s current success.

So western business have no faith that economies are set to grow but are spending to try to hijack business from their competitors and ensure that their brands are the last to drop off the public’s shrinking shopping list.

Sir Martin, however, still backs the UK government’s economic policy of cutting the deficit ahead of all else. It’s just as you do with any company, he explained, you get the balance sheet right first… Some may find it depressing that not only so many businessmen but also so many politicians profess to believe that the principles for running a national economy are indistinguishable from those for running a private company, or even a household budget.

Meanwhile banks, despite their plunging share values (and who holds bank shares apart from other banks and financial/ investment corporations?) have some largish amounts of money too (albeit not large enough). ‘The US banks are not lending but not because they don't have the money. The Big US banks have $1.7 trillion on overnight deposit in the NY FED. Most of that is QE money. It is doing nothing for anyone except the banks. US tax payers 'gave' it to them and the banks are now being paid interest on it ... by the tax payer.’



The only show, or hole, in town

‘Hopes that the Bank of England could unleash a new round of quantitative easing to rescue the ailing economy were boosted on Thursday when a member of its monetary policy committee said there was "undoubtedly scope" to restart the recession-busting policy if necessary.’ The member in question is said not yet to think it is necessary but today in the US and elsewhere all eyes are turned to Jackson Hole, former beaver trapping location, in the hope that Bernanke, chairman of the Federal Reserve, is about to announce the third round of US quantitative easing. Opinion is by no means unanimous that QE3 is either desirable or possible but ‘David Blanchflower, economics professor at Dartmouth College in New Hampshire and a former member of the Bank of England's monetary policy committee, believes that QE3 is the "only show in town" for the Fed.’

It has been pointed out that, with the fantastic concentration not only of wealth but of influence and financial decision-making in a very few hands, western economies are becoming effectively not ‘free-market’ but planned and directed economies, essentially similar in structure to the Soviet economy before the collapse of communism.

Lookout

I hope people anxious to understand what is going on day by day in the economy and the 'markets' and how to interpret their newspaper headlines (UK "bank shares rally", "US stocks soare,") are following golem XIV thoughts, the insider's outsider.

Greek percentages - or beware of Germans bearing loans

... or of the IMF, or the ECB, or the EU.

The Greek economy shrank over the past twelve months by 5.5%.

Among 15 to 24-year-old Greeks the unemployment rate is 42%.

If the Greek government were to seek to borrow on the international markets now they would expect to pay 25.08% interest for two-year funds.

The German government, whose commercial banks are highly exposed to Greek debt (perhaps even ‘existentially’ exposed, as we seem to use the adjective now), but much of whose electorate is intensely hostile to any further loans to the Greeks, has proposed a ‘restructuring’ of Greek debt whereby some losses would be imposed on bond holders – votes at present being a little more valued than banks.

The European Central Bank, which, as I understand it, now holds much recycled debt from Greece and other ‘peripheral’ EU countries. Has warned that compulsory restructuring is ‘unacceptable’ (interesting how some people’s or organisations’ ‘acceptance’ becomes essential whilst others’ becomes eminently ignorable). The ECB has also signalled its intention to raise European interest rates again in the near future.

Other European countries, and the US, are said to worry that any compulsory Greek debt restructuring could ‘alarm’ markets and place other, not quite so peripheral countries in jeopardy, such as Spain – whose economy is too large to be ‘bailed out’.

Is there any realistic prospect of a ‘safe landing’?

I should perhaps apologise to my German readers (who, Mr Google informs me, are surprisingly predominant in a small field - whereas, sadly, I appear to have none in Greece). I truly don't think the German people are any more short-sighted or selfish than the rest of us: we all get confused sometimes and anxious to protect our own interests, so far as we can apprehend them in a complex political and economic situation.

Face value

Quotations courtesy of Golem XIV Thoughts:

Mervyn King: 'When you look at Britain's banks you can't help but see they are insolvent.

Mr Skidelsky horrified both Hutton and Cable by saying he felt the entire Globalization and Free Market agenda had to be reconsidered. And that 'protectionism' to protect jobs and wages was necessary.

Will Hutton said, growth - permanent economic growth was inevitable and he was not worried about growth nor sustainability and neither should we be, because - and I kid you not - "we will solve our problems by getting resources from other planets, having huge spaceships for people and economic growth."

Trafalgar Square?

http://golemxiv-credo.blogspot.com/2011/05/esta-mierda-no-es-democracia.html#comments

Always worth reading.

A hard rain's a-gonna fall

http://golemxiv-credo.blogspot.com/2011/05/are-german-banks-in-worse-shape-than.html#comments

Correction

Perhaps, as a correction to my immediately previous post, I should cite this (‘Reprofiling’), and, for good measure refer my reader to this (‘The New Normal’), which, all combined, poses the question whether corrupt privilege is so entrenched in our system that it can never be reclaimed for the public good, or whether the financial system is so inescapably compromised and crippled with its distortions that its collapse may be only a matter of (not very much) time.