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Who do we blame for the financial crisis sweeping the globe? Bankers and regulators should certainly shoulder a lot of the blame: bankers for taking on too many risky and dodgy deals, and regulators for taking their collective eye off the ball and allowing this all to happen. But individuals should also take some of the blame.

Over consumption (or some would say greed) is the crunch issue, and people's willingness to borrow money to fund their consumption. Put another way people either wanted to or were persuaded to buy more and more things, such as new houses, cars, holidays, electrical goods (and the associated consumption of energy and resources this brings). So at the root of this crisis, it is the lifestyle most of us lead, as consumers, that has fuelled the financial meltdown and is now hurting us and the planet. Aside from all the adjustments that will be need to be made in the markets, changing our lifestyles will be the harder and more urgent task.

the talk at the moment is not about finding bargains but survival. So at this point the blame game becomes irrelevant. A topic for another day. Today we all have to pull on the oars together. The hangings can happen when we reach land?

So we have seen competition law ignored. Normal takeover reporting rules ignored [e.g the bbc guy who was in on the takeover who was fed info by....]. No way was HBOS going under before a Labour party conference?

If insurances firms go then we may need to see laws requiring insurance ignored which is the story behind AIG. If that went then everything they insure from planes, to trains, to buildings, to cars, to hospitals etc becomes invalid. Which makes it 'illegal' to use them.

One chartist goes back to the 1730's to 1790's [which ties in with the French revolution] to make a correlation with today. Then the Bank of England stopped a run on the Bank by only paying out in coppers [big heavy coins then] and then later Wellington designed central London like a Napoleonic Fort.

So this is big history.

However there is a end. As the bad credit gets flushed out the market [like a case of the kebab revenge] what you will be left with are the strong survivors. It won't be the same economy. Our lives will be much different. Expectations will have to drop. No more property booms, consumer booms perhaps for a generation. Shows like Location location location will soon seem as crass as 1980's power jackets.

So when its over we are not going back to what one might now start to call the post 1945 economic model. We are going forward into a new world. Into the unknown. It might be better. Especially if it kick starts a two way grid as the uk searches for new industries to replace the lost financials.

Blame? We should not be interested in blame right now. What we need is somebody sorting out the mess.

Imagine getting to the supermarket check out and being told your credit card is no longer being accepted because the insitution has just had a bear market raid.

Doing nothing is not an option. And we will remain in trouble until our Govt becomes proactive.

great. we're all doomed. i'm going to close my savings account and buy gold bars that i can stash under my mattress.

Very interesting, very interesting in deed.

There seems to have been an almost uneasy silence about the effect of oil prices on the quickening demise of the western banking system, am I right to be worried?

I'm in no way knowledgable on how the larger global economy works (and the intricacies therein) but I am aware that the availability of cheap crude-oil has been the thing that has made cheap 'credit' available and allowed our economies to grow (too large perhaps?).

My question to you Paul, or anyone who would be so kind as to point me in the right direction, is has this entire 'credit crunch' been caused by bad financial practise/deregulation or has our reliance on cheap, easily-available oil started to turn on us and we are now seeing a tightening of the reigns? If the latter, I would be seriously concerned that it's very much a case of shutting the barn door after the horse has bolted.

I'm self employed and have a chunky tax bill to pay in January. The money to pay it is sitting in a bank account and I was thinking it's safe under the Govt. backed insurance scheme. I'm not so sure after reading Paul's comments. It seems incredible that I'm actually pondering moving it into National Savings and wondering whether if the Govt. defaults, I can set off the money it owes me against my tax bill from HMRC. We are living in weird and frightening times!

#2 I agree that Channel 4 need to start a new show to replace Location, Location, Location. What about "Midnight Flits - Leave your property (and mortgage) without a trace)"!

AIG declares a trillion dollars of assets, based on what? Assets values today are entirely what a buyer is prepared to pay and not a cent more.

Assets also include money owed and in thiese days who can guarantee who is going to pay.

Leveraging went into overdrive and when the largest buyer turns a seller the basis changes in minutes.

Big business will always want to kill off any competition but there is now a massive distrust of big. Unfortunatley Socialists can't see that and assume its the next best thing to government control.

We cant reinvent the wheel but we can ensure politicians elevated to positions of importance stop thinking of feathering their nests when out of office and operate in the national interets.

Regulators must have experience to anticipate markets as againmst always seeking to close the gate after the horse has bolted.

Will this happen? Of course not because there is a trough of self perpetuating trough feeders who only taken on like minded people. How many people in the UK Treasury saw the last '91 crash? Is there any wonder we are now up the creek.

We need to let the market do its own thing and find its own level. We have too much regulation but all in the wrong areas and too little where it is needed.

It takes a spratt to catch a mackeral and teh more professionally experienced market operators take on p[ositions in eth Treasury and in the UK the FSA the better we will all be down the line.

As things stand right now all these recent actions and pasteing over cracks not repairing a defunct model.

Free market capitalism where shareholders demand bigger profits year-on-year; which means companies try and make consumers buy more and more; consumers need credit to buy products; financial instituions are only too happy to lend because this means (in the short term) bigger profits for their shareholders.....

But lets not forget simple greed, speculators after the get rich quick solution, becuase we live in a world where it is unacceptable to wait for anything....

Lets hope we learn, I fear we won't...

Where's the economic theory to explain all this?

Any takers?

#5 You read: The Party's Over: Oil, War and the Fate of Industrial Societies by Richard Heinberg.

My recollection of the basic theory behind it (and it is a few years since I read it) is that the Western banking system is based on economic growth and cannot cope with a shrinking economy. Economic growth requires a cheap energy source - oil. The high oil prices which come along with "Peak oil" will mean the end of economic growth. Our financial systems cannot cope with this will collapse.

I'm no economist (you can probably tell!) but it seems to me that this is pretty close to where we are. High commodity prices restrict economic growth, the value of assets (e.g houses) decline and, well, we know the rest....

Milton Friedman and the Chicago School proved wrong in the harshest of manners.

I'm almost glad but for the hardships millions of low and middle income families will have to contend with because of their folly.

It's more to do with the bad financial practise/deregulation than the cost of oil, although the increased price of oil is adding to the inflationary pressure we are also feeling, as it is increasing the price of transporting food and other goods, which is, in turn, increasing the price of the food and goods.

Deregulation meant that banks were more easily able to provide credit to people who really shouldn't have been offered mortgages etc, and "bad practice" took advantage of this new ability and offered credit to all and sundry.

The people who were considered as the most risky were offered what is known as a sub prime mortgage, which was based on a few factors - i.e. bad credit status of the borrower, income and job history, income to mortgage payment ratio etc - and then that mortgage was bundled up in to more and more complicated financial instruments and sold on to other banking institutions.

These bundles of debt have now become so complicated and interweaved that none of the banks really know how much trouble they're in until the proverbial hits the fan..... which is what is happening at the moment.

In the US, the people with sub prime loans have started to default on their mortgages, which means that their houses are being reposesed and sold cheaply, which is making the housing market drop like a stone. This means that more people get into negative equity (they owe more on their house than it's worth) and then when they get into financial difficulty and default, the bank can't sell the house to cover the mortgage so makes a loss.

Multiply this over the entire banking sector - because everyone now owns a little slice of the defaulted mortgage due to the "clever" bundling - and everyone is in trouble.

One of the causes of the present run on every financial institution in the World is that almost nobody trusts the accounts, in particular the balance sheets.

This problem has to be put at the door of the accounting profession.

The accountants need to step froward now with detained rule changes so that people and institution regain confidence in banks (and other businesses) accounts.

...Where's the economic theory to explain all this?...

its called the chicago school of economists who have been dominant in presenting financial oligarchy as public democracy.

they are merlins.

#12 Is it not the increase in energy and other commodity prices what has helped push everything over the edge? The banks make risky loans, the borrower can meet the repayment obligations when the economy is doing fine but if the economy slows when oil prices increase then..........

Is This-- Just A Phase????
Hold on this has happened before.
Back In 1990,and after 9/11...
As Jim Rohn Would say
"This is just a Cold winter in the Markets.
Wait for the Spring"!!!!!!

THE EMPEROR'S NEW THEORY (#9)

To look for a way out through economic theory, is like calling in Lynne Truss to correct the syntax of the little boy who said: "The Emperor's not got no clothes on!"

Two points:

1. The Financial Services Act 1986 repealed certain parts of the 18th century gaming acts making contracts for differences enforceable. Are we surprised if London has become a casino.

2. Regulators. It is not just a case of whether regulation is good or bad but whether regulators are corrupt or not. Read the Parliamentary Ombudsman's report on Equitable Life and in particular the Chronology as to whether the reinsurance treaty was fraudulent but promoted, designed and connived at by the Treasury/FSA/GAD. You might like to ask the then Chancellor how an insolvent company was allowed to go on trading.

Correct me if i'm wrong but from reading the blog it would seem to me that in this current climate the £32,000/$100,000 per account deposit guarantee is a total red herring?

As if the position arose where the guarentee needed to be called in, it would mean your retail bank was bankrupt with other financial institutions and the government having failed to save it.

Presumably if the government had not been in a position to save a retail bank surely that means that the government would be all out of cash and any hopes of the banking deposit insurance covering the bill would have long since gone too.

This makes me think that placing your savings with the same institution that provides your mortgage is the best way of minimising your loses.

Does anyone agree?

Is now the time to pile your savings into Northern Rock as they are a nationalised concern?

How have we got here? Well, the markets evolved according to economic pressures. No. 8 asks why we go for short term profit, it's because the long term ones are more open to taxes - look at pensions and savings.

As for a depression, best hope not - most nations infrastructures are reliant on other nations and have little in the way of backups. A depression in the current times could collapse some socities, including the UK.

As for the attack on shorting, Paul could you point to a company they were wrong about? HBOS was nothing to do with shorting - 5.5% of it's shares were 'borrowed' when it tumbled vs 3.5% at it's height - and everything to do with not having the cash to support a raft of maturing debts.

robert peston's blog seems to have stopped taking new comments (no disrespect intended paul).

i want to say a few words of sanity on short-selling, as there seems to be a lot of misplaced self-righteousness about it.

the key thing to remember about short sellers is that the speculators have borrowed the shares they are selling. this means that they MUST eventually buy them back at the market price, and MUST return the shares to the stock lender on the date specified in the stock loan, in return for which the short-seller receives back a fixed cash amount they he had paid to the stock lender on the date he first borrowed the shares. this means that if the shares' price rises during the period the short-seller borrowed them, the short seller makes a loss as he has to pay more to buy the shares back in the market than he gets from the stock lender on returning the shares he borrowed.

i don't think blaming "hedge funds" or conspiracies by banks for short-selling makes sense. the fact is that every trader, especially in this environment, is under enormous pressure to make money for whatever financial institution he or she happens to work for in whatever way he or she can. if people think share prices are falling, they will make money by shorting shares, and they will focus on stocks that look weakest.

in normal circumstances this is perfectly okay behaviour. if the short-seller is correct that an individual stock is overvalued, then the price will fall and stay down even when he goes to buy the shares back in the market (thereby creating new demand for the shares that will push the price back up). it is very normal for a stock that has been shorted to actually enjoy a rally in price when the speculators go to buy back the shares because of the buying pressure this "short covering" creates. however, if the short seller is wrong about the stock being overvalued, and the price rises when he buys it back, he could lose a lot of money. in fact, sometimes if the stock that is being shorted is illiquid (i.e. not readily available on the market) he can get "squeezed" - i.e. other traders that know the short-sellers need to buy the stock back will buy up the stock and temporarily push the price up. so short selling is not something that is done lightly.

however, in the current circumstances, short selling is very problematic for two reasons. firstly, when all shares are falling it creates herd mentality. if you are a trader and you know the market is panicked, that share prices are falling and everyone else is shorting bank stocks, you would be crazy not to do the same thing yourself. if you buy stocks you lose money. if you invest in cash you underperform. so you short stocks.

secondly, the speculators believe they are making a "one-way bet" akin to george soros speculating that sterling will be thrown out of the erm in 1992. basically, traders believe that the pressure they create by their own activity will actually weaken the fundamental value of the stock they are targeting, making their bet a self-fulfilling prophesy. in this case, this is done by crushing the value of lehman or hbos stock to such an extent that they cause a panic among creditors / depositors and therefore a liquidity crisis for the target bank that then causes the target to become insolvent and its shares worthless.

again, do not be fooled into thinking that some evil financiers thought up this dastardly scheme. instead, many individual traders perceive the "mood" of the market to be disastrous, foresee where this is likely to lead for certain individual bank stocks, and herd behaviour takes over from there.

it is for these two reasons that it is very sensible (and somewhat belated) for the regulators to suspend short selling temporarily.

finally, why do financial institutions lend shares to short sellers, especially if they think this is contributing to the current financial crisis. well the answer is NOT because they earn interest (as one poster on robert's blog suggested). quite the opposite. a "stock loan" is just the mirror image of a collateralised cash loan - the stock lender receives a short-term cash loan from the short-seller that is collateralised by the shares he is lending to the short-seller. it is therefore the stock lender that actually pays interest to the short-seller on the cash loan he receives, not the other way round. why do this in the current crisis? because banks and other financial institutions are suffering a liquidity crisis (remember that the interbank lending market has completely evaporated) and are desperate to source short term cash from wherever they can find it.

so in my opinion it is fine for the regulators to suspend short-selling temporarily, provided that this is combined with additional liquidity (short term loans) from the central banks to substitute for the reduced ability of financial institutions to lend stock. as is indeed the case.

i would add one more general comment: finance is not simple. it is easily misunderstood by the public, and therefore easily condemned when things go wrong. nobody predicted this crisis, including any of the "i told you so"s on this or robert peston's blog. that is the simple truth.

OTHER PEOPLE'S MONEY

benagyerek (#22) Just how often are brokers 'lending' shares to short-sellers (and charging a fee for doing so) when in fact the shares they're lending are really those of their clients who entrust them to brokers in nominee accounts because they have to these days?

...nobody predicted this crisis....

quite a few did. Its been known for a while this is the greatest financial crisis in western civilisation. For some its just too big an idea to see it. Even some who did see it didn't want to believe it.

this is nothing if the insurance firms folded. Then nothing would be insured. It would close everything down because they could not operate uninsured. The ³ÉÈË¿ìÊÖ and NN would close if they were left uninsured. AIG raised the spectre of that.


finance has blindingly simple rules. Trying to get around them to try to make super profits is complex. Like the saying goes in 'high' [complex] finance if you don't know who the mug is in the room then its you. :)

The chart guys like Tony Cherniawski on yorba tv predicted this crash a while back [we all fell off our chairs so to speak at his analysis- there is a video archive] and they also have videos of what they think will happen next. So there are people ahead of the curve. And the curve does turn up in the end.

Big piece on short selling and general financial situation on Newsnight tonight. Paul Mason gave nice review but uncharacteristically Jeremy gave easy time to David Rule of the International Securities Lending Association ... who obviously was in favour of short selling ... said traders can't work without it eg to hedge options. Here is nice article supporting shorting from his organisations site. [Unsuitable/Broken URL removed by Moderator] My problem is that whatever the market advantages, naked short selling is morally wrong. You simply cannot sell something that you neither own nor have even borrowed.

Now I want to vomit ... all these politicians jumping on the short selling bandwagon ... suddenly saying it's wrong when the've known about it for ever.

... I'm so sickened I'm going to change sides.

The graphs show that HBOS interest was high in June and July (8-10%)but dropped dramatically end August until now (about 3%)... So it's not quite clear how these "evil" people have managed to bring the price down this month?

FORM OF WORDS

To my ear, there is a new kid on the block.
'THE FINANCIAL SYSTEM'.
In the last day or so, I have heard pleading that it must be protected, trip from the lips of both J Gordon Brown and Alistair Darling.
I fell to wondering what is encoded in this innocent phrase? What is now in danger, that was so safe before, that it need never be mentioned? What is now, for the first time, under threat so dire, that we dare not speak its name - using a euphemism? Could it be BRITAIN'S SOLVENCY?

Someone asked earlier, where is the theory in all this? In many ways the free market, neo-liberal, laissez faire doctrines could easily be blamed for the current crisis.

However the problem with this is that those doctrines are based on a true system of free markets with minimum state intervention. It relies on a model of the perfectly informed, self interested man being able to act perfectly logically in every transaction he ever makes. Of course this is not the case and is as ludicrous an idea as that of a centrally planned socialist system.

Unfortunately this doctrine has been hugely influential (a large part of that because it held the blinding trump card of having 'defeated' socialism and was therefore the only method of social organisation left known to man - thanks Fukuyama!)So we have neo-liberally informed policy makers (as a default setting having in general been educated in elitist western systems) making everyone believe that spending as much as possible is a virtue as this will keep the economy going (and trickle down theory of course meaning those sweatshop workers will one day be better off). This behaviour ends people (not to mention the environment, flora and fauna) up in huge amounts of debt that the banks are happy to finance due to the immense amount of profit there is possible to make...then suddenly, oh dear, we've all incurred a load of bad debt, this wasn't supposed to happen!....er, Big Brother Nation, any chance you could help us out!? And of course the nation has to capitulate because otherwise the system (the basis of its authority) would disintegrate.

This dirty mixture of the idea of freedom (American imperialism anyone?) mixed with a deceptively intrusive and regulatory state has got us into this mess in the first place. If markets were a lot less de-regulated much of these problems would be allievated, and states could became much more pro-active in providing equal starting chances to all (education, social security, basic healthcare) At the moment the EU trading blocks, CAP, TRIPPS, TRIMMS, tarriffs and all the other rediculous trade infringements are root causes of the problems we see at the moment. If markets were truly freed up we would see many more independent financial institutions being developed that could give consumers a choice (as in whether they want their money to be gambled for a chance of income or whether they just want a safe place to deposit money - the original idea of a bank!) That way if greedy investors want to earn millions of pounds, they would have to do it with people who have agreed to it, and not force debts onto inniocent tax payers!

#12

I think that the US housing bubble started to burst back in 2005, then carried on through 2006 and culminated with large surge of foreclosures in 2007, which then started off the world-wide credit-crunch we are still battling through.

Whereas the large increases in energy (breaking $100 for a barrel of oil for example) only really started within the last 6 months or so.

The increase in the price of energy and food is certainly not helping matters at the moment, but I don't think it is a cause - nor really a direct effect - of the origins of the credit crisis.

I will happily be corrected though if anyone thinks I've misread the situation!

I know this is a really ignorant question but I'm going to ask it anyway. If the sub-prime mortgage crisis is at the root of all of this , and the consequence of it all means global economic collapse, then shouldn't there be a "bailout" for the mortgage holders not the lenders (or the institutions that now own the debts)? I mean isn't it in everyone's interest to help the people who bought the houses with loans they cannot repay, to meet their repayments? Wouldn't the crisis disappear then? If the US government bought all those houses, rented them back at an affordable amount (or refinanced the mortgage at a sane rate or something), and then regulated to prevent another sub prime crisis; wouldn't that solve the crisis? Wouldn't all these bad debts be paid off, or become good debts?

I think that the UK and US governments have acted quickly and correctly in relation to short selling.
However, what I think that they should have done is to have given the financial community 48 hours notice of this, along with notice of an indefinite moratorium on trading of finance sector shares. In this way, the brokers could have quickly used the short selling to stabilise companies at their true value and then, been forced to invest long in them.
This would have brought back the stability to the markets and, encouraged institutions to trust each other again. thus leading to a reduction in inter-bank lending rates and, a consequent increase in liquidity, without requiring the central banks to pump in billions to prop up the sector.

FSA announcement news item on protected stocks on Yahoo.


Excerpts:

UK regulators on Friday revealed a list of 29 financial companies it was seeking to protect from short selling as part of the latest efforts by the authorities to combat the global financial crisis.

The rules also ban futures and options trading in the financial stocks and require the disclosure, from Tuesday, of existing net short positions of more than 0.25 per cent of a company. There is an EXCEPTION for market markers. (my caps)

Criminal activity may be behind financial crisis


Excerpts:

Even the Chairman of the SEC, as detailed later in this article, attributes the demise of Bearn Stearns to rumors, and not a lack of capital.

What is concerning authorities is that huge short-sell orders relating to particular stocks have been placed at the same time as, or ahead of, the emergence of rumors concerning those stocks.

According to one vague tale, initially picked up at Lehman Brothers, a group of hedge-fund managers actually celebrated Bear’s collapse at a breakfast that following Sunday morning and planned a similar assault on Lehman the next week.

Attorney General Andrew Cuomo ... said short-selling itself is legal but what is illegal is if you are spreading false information, rumors, and you join a conspiracy to purposely drive down the price of a stock, and you are profiting from the decline,' he said in an interview.

The SEC has already sent subpoenas to more than fifty hedge funds, and is preparing to issue many more, in relation to conspiracy and market manipulation concerns.