The credit crunch, banking crisis, thread

Well, yes. It's a bit silly to lend money to people when there's no realistic expectation of them ever paying it back. What do they teach them in those business schools?

The most galling thing is that it was so effing obvious. It's been frustrating to watch this huge credit bubble build over the last few years and realising that no-one was going to see sense and deflate it. It’s all down to wilful, short-sighted greed by the banks and the fact that governments can’t resist basking in the feel-good factor. Okay, you could argue that individuals are responsible for borrowing too much based on too little, but the financial sector should’ve known better. And the knock-on effect of *their* stupidity is going to affect everybody. A sixth-former could’ve understood the lunacy of the sub-prime market if it was scribbled on the back of an envelope by... another sixth-former. The banks must have known. Bastards. p.s. My father-in-law has always argued for the nationalisation of banks. I think he may have had a point. p.p.s. I'm going for a lie down now... I can feel an attack of the vapours coming on. ~ www.fabulousmother.co.uk

"The most galling thing is that it was so effing obvious. It's been frustrating to watch this huge credit bubble build over the last few years and realising that no-one was going to see sense and deflate it." Well, the problem is that deflating the bubble didn't make sense to anyone who was in a position to make a decision to do so. From the bankers point of view, they were making lots of money, from the government's point of view (in the case of the US and the UK) they were sustaining strong economies despite the fact that they no longer actually made anything real. While there's a sort of buccaneering charm to some forms of professional gambling, it was pretty stupid to end up in a position where professional gamblers in sharp suits were the major 'producers' in our economy. But the Thatcher governments actively chose to us in that situation. The UK economy is horrifically dependent on financial services - as a result of conscious political choice - and that made it seriously risky to regulate The City properly, even when it was actually in the interests of The City (never mind the rest of the population) to do so.

Quite right, it only made sense to burst the bubble if you looked at the long-term and felt a responsibility towards it, which they didn’t. I’m not a City-basher particularly. The City, historically, has brought real money into the country simply by dint of it being an international financial centre. (Not at all sure how it works, but I’m guessing commissions/fees of some description for handling foreign trades… or having foreign banks operate here… you know, being the croupier rather than the punter.) Anyhow, we’ve certainly always relied on the City for a large slice of this countries wealth. But… and it’s a big but, as you say, we now rely on it way too much and, as you say, it’s mostly just gambling, especially after de-regulation. So when it goes tits up… What’s left after the City? We have no manufacturing left to speak of and I read somewhere recently that a staggering 80% of jobs in the UK are now in the service sector. Brilliant, that’s the first sector to fall on its arse in a recession. As someone said about here or the States, we’re simply selling hamburgers to each other… we don’t actually produce anything. p.s... now I’m depressed and I’m going to slope off and open a bottle of cheap wine... and vow not to watch Despatches about the scary stuff they’ve been adding to the bottles. p.p.s. don't get me started on Thatcher's passion for de-regulation... Mad Cow Disease was a direct result... there's a link there somewhere... ~ www.fabulousmother.co.uk

"But… and it’s a big but, as you say, we now rely on it way too much and, as you say, it’s mostly just gambling, especially after de-regulation. So when it goes tits up…" Yes. Not that gambling, within reason, is a bad thing in a market system. People make loans or invest money on the basis of risks and returns. If that didn't happen at all that nothing would ever get made and the Western world wouldn't be the relatively comfortable place that it is for most people. The problem is when people are taking financial gambles so reckless - and so far divorced from the real businesses or properties that they're supposedly tied to - that they can only be sustained for as long as everyone is able to suspend disbelief. "What’s left after the City? We have no manufacturing left to speak of and I read somewhere recently that a staggering 80% of jobs in the UK are now in the service sector." We're good at arms and drugs which, as I've probably waffled on about here before, are industries bankrolled by the state. Optimistically I'd suggest that The City isn't completely screwed.

Too many men in pink shirts moving around too much pretend money. Though the collapse of the easy credit/housing bubble was easy to foresee the knock on effect was not. Bankers are not complete morons, they were aware they were dealing in risk and covered themselves and limited their exposure. The problem was that when it started to collapse some of the products they'd been trading were so fiendishly complex that they couldn't work out how much they were in for (though not complete morons, neither were they as smart as they thought they were) - and with that uncertainty the market for lending to each other dried up. It's that lack of liquidity what felled Northern Rock, and together with aggressive short selling is felling the others. The fun bit at the moment is that it's the really aggressive wankers who are going out of business and the nicer people (BofA is apparently a very nice place to work) are hoovering up their assets. They've banned the selling of shorts now, so maybe it will calm down. Shame, I really wanted Goldman Sucks to go under.

"The fun bit at the moment is that it's the really aggressive wankers who are going out of business and the nicer people (BofA is apparently a very nice place to work) are hoovering up their assets." It certainly is amusing that Lloyds TSB, who not long ago were being merciless mocked for their fusty belief in lending against deposits are now running a megabank. Maybe not amusing in a good way.

I gather the only reason Lloyds were a wiser head is that they nearly went under due to foolishness a few years ago (but isn't that how everyone gets wise). Schadenfreude is nice, but we should think of the knock on effect. All those cocaine dealers and lap dancers who will now be feeling the pinch.

And there is absolutely no reason why there shouldn't be a nationalised bank. When banks deal with customers these days they just try and sell product - there's none of the 'protective' bank manager thing left. And that's very dangerous. It's indicative of the way in which they operate overall. Nationalise banks, energy companies and railways. It'd be a good start. Cor, I think I'm back in the 80s. See - we were right all along.

"Nationalise banks, energy companies and railways. It'd be a good start." Well, it would be good have a mutual/not-for-profit company operating in the energy sector. We have a nationalised bank already.

Yes, it was obvious... "Though the collapse of the easy credit/housing bubble was easy to foresee." And thus many people did what I did, sold their property and now look forward to buying a much nicer one when properties drop by an average of 30% which is the minimal nominal price drop I think we'll see. If it was so easy to forsee why did so many of my friends buy property in the last 5 years and are now going to lose their shirts? **** knows but yet again I have zero sympathy. Nationalisation? Well America by bailing out Fannie Mae and Elmer Fudd have effectively turned half of the States into a giant council estate. I am sure they'll be able to inject damp into the walls in time for Christmas. jude "Cacoethes scribendi" http://www.judesworld.net

As Maddan rightly said "The problem was that when it started to collapse some of the products they'd been trading were so fiendishly complex that they couldn't work out how much they were in for..." The reason for this is another example of the appliance of science (econophysics) http://www.ge.infm.it/~ecph/index.php resulting in highly complex calculations for derivatives. http://en.wikipedia.org/wiki/Derivative_%28finance%29 These scientists have attempted to reduce the operation of the stock market to a complex model of risk management... the result is financial rocket science where the market is propelled upward but no-one can be certain how much fuel is left and when it runs out the market plummets back to earth. The Financial guru Warren Buffet has been warning long and loud that derivatives are weapons of mass financial destruction - but greed makes people deaf!

One piece of good news (see my previous 'science as career thread' and 'David King' thread)... a journalist commented that the City will survive but it will be changed forever and as a result may not be the most attractive destination for the brightest graduates. Our best scientists may stay in science as a result of what is happening in the city. jude "Cacoethes scribendi" http://www.judesworld.net

What's 'short selling'? As I said to a friend back in the 70s 'capitalism will eat itself.' It's unsustainable. As an environmental scientist predicted, by the year 2100 80% of the world's population will be gone, due to natural disasters. The article was in The Guardian and if one should want to find it I'm sure rooting around on their site will give it up.

So far as I understand it Styx - In a way Short Selling demonstrates the complexity of the moden market. The short seller borrows shares to sell in the belief that their value will fall and he will be able to buy them back a little later and return them to the lender (with the lending fee) and make a profit. For the lender it might at first seem to be a no lose situation but if a lot of shares are sold short then investors can start panic selling causing the stock to plummet... in which case the lending fee charged by the lender will be dwarfed in comparison to the loss he has due to the reduced value of his shares.

Oh, I seeee. So it’s nothing to do with boxers then. Thought it was a sign of traders getting carried away. Look at mine, see, D&G… polka dots… no skids… what will you give me? No, go on, don’t be an idiot, what will you give me? (that last bit was ‘aggressive’ short selling). ~ www.fabulousmother.co.uk

I hate passing comment on things outside my field of expertise (and that is pretty much everything except invertebrate zoology, bioethics and medical law!) but from the numerous economic commentaries I have been reading closely I understand that there are three prongs to the problem. 1. You begin with a lie, for example as David points out the lie that this person who has a very limited income can afford their staggeringly huge mortgage repayments. 2. The lie is packaged up, and as Dan points out, is made insanely complex and then sliced and sold on so everyone has a piece of the rotten lie but has no idea how rotten it really is. 3. Fiat money! To quote L Rockwell, "The word fiat means: out of nothing. Money out of nothing is money that is eventually worth nothing. The possibility of precisely that happening emerged on August 15, 1971. Since Nixon severed the last tie of the dollar to gold, the world's monetary system has not been restrained by anything physical. We've depended on the discretion of central bankers. We can't trust that, and this crisis shows precisely why. The first problem helped stoke the housing bubble, the second problem has accelerated the inevitable housing crash (and will contribute to the overshoot on the return to trend). In the UK our economy is too reliant on the financial sector and flogging houses to one another, both of which are fake wealth and pretend money, so we are in a pile of poo. I don't think we are going to see queues of folk outside the soup kitchens but we are in for a painful correction and those who predict a bounceback commencing in 2010 are being overly optimistic. Other economic downturns/ housing crashes last 2-3 years on the way down followed by 4 years flat. Why should this time be any different? In fact, if anything, all the evidence points to it being worse. The housing bubble was bigger, households are more indebted, and the labour government has simply manipulated statistics to make it look as though unemployment is low. jude "Cacoethes scribendi" http://www.judesworld.net

"The housing bubble was bigger, households are more indebted, and the labour government has simply manipulated statistics to make it look as though unemployment is low." Well, that's true but (to an extent) all governments do that and the Tories scam for shifting millions of miners and industrial workers on to incapacity benefit is one of the costliest examples of it. What Labour has also done is vastly increased the number of people employed in the public sector. Off the top of my head, I think there's been something like 1.5 million new public sector job created since 1997, including a net increase of over 800,000. There's clearly room for debate over whether this level of spending on public sector staff is a good use of cash but, aside from the question of the actual delivery of services, the employment involved helps (has helped) to drive the economy. "In the UK our economy is too reliant on the financial sector and flogging houses to one another, both of which are fake wealth and pretend money, so we are in a pile of poo." Well, there's nothing wrong with property and financial services have their part to play, the problem is when they're the only thing driving the economy. As I've mentioned before, though, this was a political choice. Right-wing politicians are generally not very keen on any industry that employs large numbers of skilled blue collar workers because they join trade unions and demand to paid lots of money. So Thatcher/Major/Blair either actively crushed industries that involved skilled blue collar workers or just let them wither. The result is that we don't make real things that we can sell to people.

"What Labour has also done is vastly increased the number of people employed in the public sector. Off the top of my head, I think there's been something like 1.5 million new public sector job created since 1997, including a net increase of over 800,000." Absolutely... most of the new jobs created in the last 10 years are in either the public sector or construction industry. You're right, financial and property has a part to play but as you point out, unfortunately there's nothing much else (except guns and drugs of course). "There's clearly room for debate over whether this level of spending on public sector staff is a good use of cash but, aside from the question of the actual delivery of services, the employment involved helps (has helped) to drive the economy." When I see some of the jobsworths in the public sector (and I have done contract work for the deputy prime minister's office, the treasury solicitor and the old DoE and seen it first hand) I am reminded of Russia in the nineties. Our school always had a 6th form trip to Russia before the end of communism there. Russia claimed full employment but you'd see people sitting in these little booths at the bottom of escalators paid to watch over the escalator!! We have pen-pushing equivalents of escalator watchers in the thousands. Having so many non-productive positions is has the same net effect fiscally (though not socially) as paying out £30K pa unemployment benefits. I agree with your point about successive governments crushing industry in recent history and I don't think there are any easy answers. jude "Cacoethes scribendi" http://www.judesworld.net

Apparently by 2005, public sector employment had risen by 940,000 under New Labour: http://www.moneyweek.com/news-and-charts/economics/gordon-browns-great-j... I personally think this a good thing but it's not something the government have been particularly open about when trumpeted 'record levels of employment' in the economy. As you suggest, it doesn't necessarily have any significant connection to staffing levels for front line services. For example, employing four people to ask the community what it thinks doesn't do much to solve the problem of the local hospital being four nurses short.

This is worth a watch if you missed it on Monday night. It's a 30 min program. http://www.itv.com/CatchUp/Video/default.html?ViewType=5&Filter=27194 For me, the most worrying thing is that I still find Michael Portillo vaguely attractive. jude "Cacoethes scribendi" http://www.judesworld.net

"what might replace 'capitalism as we know it'.., 'capitalism as we don't know it'?" I think we're moving from a system where governments ignore the financial services industry at the request of bankers to a system where governments actively prop up the financial services industry at the request of bankers. There is an element of consistency.

Americans are going to have to stop equating market regulation with socialism.

Hell guys, loosen up! It's a great buying opportunity!

Don't need to.

No neither do I... and there are plenty of mortgages available for those with good credit history, a sizeable deposit and who want to borrow 3 x their salary. Lending to anyone else is partly what caused this in the first place. As Michael Portillo pointed out in 'Tonight' programme (posted link above) those who are resourceful will be able to adapt, find other employment if they lose their jobs etc. In the recession of the early nineties my father lost his job as a corporate tax specialist and took a mundane job number crunching and we just about survived. The coming downturn (http://www.telegraph.co.uk/finance/comment/edmundconway/3090601/Financia...) which may or may not be this apocalyptic will I think be a good thing in many ways. The brightest minds in economics have failed to ascertain why we have boom and bust cycles or how we can avert them. But what many fail to realise is that recessions are not only an inevitable part of capitalism but a necessary part. Inefficient companies go bust and those that survive become streamlined and more efficient. Roll on the bad times says I! jude "Cacoethes scribendi" http://www.judesworld.net

The Icelandic government has taken control of the country's third largest bank, Glitnir, after it faced short-term funding problems. etc etc etc.

The French government nationalised the UK's nuclear industry last week. Although I don't think that was to do with banks.

Congress was getting deluged with phone-calls from angry voters. Good day for vultures.

It failed (partly) because we are so close to the US elections and all the politicians are fighting for their seats. Many probably feared a voter backlash if they voted to pass the bill. I don't think the financial apocalypse will come but if it does and we are reduced to a bartering system, does anyone want to swap the PS2 game tie in of the kids' film "Happy Feet" cos P's nephew has completed it after just one weekend? jude "Cacoethes scribendi" http://www.judesworld.net

"i'd hazard a guess that they felt it was too socialist - and that doesn't go down too well to american ears - " Not exactly. It was voted down from both sides. The Republican right did indeed think it was socialist (a quite bizarre position for a bill explicitly formulated to preserve the existing capitalist order as great an extent as is possible). But they were obviously correct to say it was massive government intervention in the economy and they tend to use 'socialist' as a shorthand for any government intervention in the economy other than military spending, irrespective of the actual likely results. On the opposite side liberal Democrats (which is the nearest thing there is to a left in American politics), voted against because they didn't want their poorer and relatively left-leaning electorates to see them 'bailing out Wall Street'. As Jude says, there is an election in a few weeks. All House seats are up for grabs.

It seems the American voter doesn't see the connection between risk to financial markets and risk to their own livelihood. Who knows, they might be right.

"very strange vote, haven't they heard of government whips? democrats voting with republicans both for and against" It's a very different system in America. Representatives careers depend to a much greater extent than here on voters' views of them rather than their party. And, possibly more importantly, because the executive and the legislature are separate, there's no payroll vote. Tony Blair would've lost loads of votes, even with his landslide majorities, if he hadn't had over 100 MPs at all times who had some kind of government role.

How bad could it really get if nothing is done? According to William Buiter : 1. The US stock market tanks. Bank shares collapse, as do the valuations of all highly leveraged financial institutions. Weaker versions of this occur in Europe, in Japan and in the emerging markets. 2. CDS spreads for banks explode, as will those of all highly leveraged financial institutions. Credits spreads generally take on loan-shark proportions, even for reputable borrowers. Again the rest of the world will experience a slightly milder version of this. 3. No US bank will lend to any other US bank or any other highly leveraged institution. The same will happen elsewhere. Remaining sources of external finance for banks, other than the facilities created by the central banks and the Treasuries, will dry up. 4. Banks and other highly leveraged institutions will try to unload assets at fire-sale prices in illiquid markets. Even assets not viewed as toxic before will become unsaleable at any price. The interaction of a growing lack of funding liquidity and increasing market illiquidity will destroy the banks’ business models. 5. Banks will stop providing credit to households and to non-financial enterprises. Banks will collapse, both through balance sheet insolvency and through liquidity insolvency. No bank will be safe, not even the household names for whom the crisis has thus far brought more opportunities than disasters. 6. Other highly leveraged financial institutions collapse on a large scale. 7. Households and non-financial businesses revert to financial autarky, among wide-spread defaults and insolvencies. 8. Consumer demand and investment demand collapse. Unemployment shoots up. 9. The government suspends all trading in financial stocks until further notice. 10. The government nationalises all US banks and other highly leveraged financial institutions. The shareholders get nothing up front and have to wait for an eventual re-privatisation or liquididation to find out whether they are left with anything at all. 11. Holders of bank debt get a sizeable haircut ‘up front’ on the face value of the debt and have part of the remainder converted into equity that shares the fate of the old equity. 12. We have the Great Depression of the 2010s. jude

So senators vote later today and the soon-to-be-up-for-re-election Congressmen tomorrow... fingers crossed... dance marathon, anyone? ~ www.fabulousmother.co.uk

I can't see public support growing much just by the treasury upping the amount of savers deposits they guarantee. Despite the seriousness of the consequences of the bail-out failing, the only way I see it being supported strongly by the public is if government do the unthinkable and not only curb executive pay but start seizing their assets. No matter how revolted we are at the likes of Adam '125% mortgage' Applegarth sitting in his mansion and spending his days on the golf course, this is morally and legally hazardous and practically impossible to do. An employee can never be fiscally held to account for a bankrupt company no matter how much they contributed to the mess. Nonetheless, I think the congress will pass the bill tomorrow despite the risk of voter backlash.

Yes Congress has been getting a lot of angry emails but the majority of people are still apathetic or confused. They watch their 401k plans dwindling and they just want it to stop. The bill will pass in some form or other. But will it be more than a bandaid?

Most commentators see it as a six month stopgap. The underlying problems will need to be dealt with by the next president. They will need to deal with problems from the bottom up. Currently trying to firefight from the top down through necessity. jude "Cacoethes scribendi" http://www.judesworld.net

"This would start a consumer boom, people would pay off their toxic loans - everyone's a winner." I agree that a general tax rebate would be a better use of that money but specific interventions to pay off loans/ stop people being repossessed not only rewards those who have been reckless but prevents them from learning a painful lesson. I graduated in 1997 so have only every worked in the boom times. I have noticed that my generation's brains are so far removed from financial reality that their wallets and lifestyles need a dose of corporal punishment to sort them out. It hurts a lot in the short term but builds character! jude "Cacoethes scribendi" http://www.judesworld.net