September 15, 2008

What goes up…

Filed under: Politics/News — Tags: , , , , — 4fooey @ 8:30 pm

Today may become a significant day, an especially black Monday to trump all previous ‘black days’. As yet no-one knows whether today is the end of the troubles or at least the beginning of the end, or whether the financial turmoil unfolding in the past few days and weeks is just the start of our troubles.

In the past few months, financial companies and banks in the US have been announcing bigger and bigger losses or write-downs, and now several are going out of business or are being bailed out. I wouldn’t claim to know what some of these companies actually did, what they dealt in, how it’s all gone wrong and quite what the solution is. It does seem that things are very bad and that no-one really knows if the situation has hit the bottom or whether or not things are going to get a lot worse.

What I do know is that only 2 years ago companies like Lehmans, Bear Stearns, Merrill, Goldman Sachs, and the like were making humongous profits, tens of billions in profits and the employees of these companies were being rewarded with huge bonuses in the tens of millions. Meanwhile consumers were borrowing more and more, spending it on consumer goods that they really didn’t need (China said thanks very much and is now on the way to being the biggest economy), while the value of people’s homes was soaring ahead, and they borrowed more on the value of their over-inflated houses — everyone felt so good and everyone spoke about continual and continuous growth. The whole thing was unsustainble, and it wouldn’t and couldn’t last. Now the bubble has well and truly burst and the system has faltered — now everyone is going to feel the pain (except for most of the executives who will walk away with millions).

Amongst all this turmoil it was good to see the interview of Stephen Green, Chairman of HSBC, by Robert Peston on the BBC: see it here. In it, Green points out where the mistakes were made and how we should fix them. Like many other financiers and commentators he is suggesting more transparency — no-one knows how bad it is at the moment, so the solution is not entirely clear. He wants to see banking have a firmer capital or asset base, i.e. based on real stuff of real value. Somehow, confidence needs to be restored and money needs to become more liquid, needs to flow more readily. Many commentators are saying confidence will only return with more regulation, tighter controls, and a more stable system.

I find it hard to see how we have got into this mess. Many people have been predicting doom and gloom for several years. In the UK Geoff Randall and Vince Cable have said for many years the system was unsustainable, warning of meltdown. Many clever people must have seen this coming. Stephen Green seems a very sensible, right thinking man — he described how the world needs the financial and banking system, it is essential, and here to stay warts and all, but did concede that changes need to be made. Given that this is true, it seems that we do need a more sustainable model, one that works for the longer term, one that works for all of us (fair and equitable), and one that will deliver a sustainable future.

It’s slightly portentous that a pawnbrokers shop opened in our high street today — hopefully not too many of us will be needing their services.

As a footnote, this article was publised in the NY Times today: On Wall St. as on Main St., a Problem of Denial (subscription may be necessary). Basically people had deluded themselves into thinking the value of their houses (and businesses) would continue to grow, while borrowing money they could not afford to pay back.


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