Why didn’t we see the credit crunch coming?
Posted on March 19, 2008 by Richard Beddard
Filed Under Editor's choice, Markets |
Yesterday John Humphreys spent a day in the City of London (BBC audio) trying to get a fix on the credit crunch for the Today Programme. One of the City types he quizzed was Jon Moulton. He asked the financier, who wrote and presented this brilliant documentary, why he didn’t see the crunch coming. Mr Moulton replied:
Well I did but nobody was listening. I don’t recollect getting half hour slots on your programme.
Unless his documentary was a big lie, he patently did see the looming crunch. He’s outraged that the Bank of England, The Financial Services Authority, senior bankers and, apparently, the media ignored him.
Mr Moulton wasn’t alone. Warren Buffett, the most influential investor on the planet piggybacked on the most newsworthy story of 2002 to declare that derivatives like subprime debt instruments were financial weapons of mass destruction. Here’s an excerpt from his company, Berkshire Hathaway’s, annual report for that year (pdf):
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear…
Charlie [Buffett's partner] and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
It seems we ignored his warnings too.
The investment bankers creating and trading toxic debt cannot claim they didn’t see the crunch coming. Chuck Prince, then chief executive of Citigroup, was off in his timing when he told the FT last summer that sub-prime defaults were not sufficient to disrupt credit markets, but he seemed to understand the risks:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
…
The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be.
At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don’t think we’re at that point.
Mr Prince ignored his own warning!
He resigned in November after the company wrote off large parts of its subprime portfolio.
I get the impression, Alan Greenspan, formerly chairman of the Federal Reserve, might forgive Mr Prince his irrational exuberance. He explained in the FT earlier this week that risk management models are ill-equipped to cope with the real world:
…these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling – the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved.
In other words, bankers were blinded by greed. It’s human nature.
Martin Wolf writing today, is less charitable, suggesting that bankers understood that by creating and trading mortgage backed securities while house prices were rising they’d get rich on fees. When house prices fell and their securities were worthless, someone else would pay:
It is in the interests of insiders to game the system by exploiting the returns from higher probability events. This means that businesses will suddenly blow up when the low probability disaster occurs, as happened spectacularly at Northern Rock and Bear Stearns.
Moreover, if these unfavourable events – stock market crashes, mortgage failures, liquidity freezes – come in stampeding herds (because so many managers copy one another), they will say: “Nobody could have expected this, but, now that it has happened to all of us the government must come to the rescue.”
The more one believes this is how an unregulated financial system operates, the more worried one has to become.
I imagine investment bankers were both overexcited and cynical, but Sir Howard Davies, speaking on the BBC (audio) yesterday is in no doubt where all that dancing leaves us. The former chairman of the Financial Services Authority, director at the London School of Economics and a non-executive director at Morgan Stanley said:
I think any financial institution in these circumstances is bound to want to hoard cash. Bear Stearns saw their liquidity vanish in the space of a couple of weeks. Indeed in the space of two or three days really at the end and so every institution is trying to ensure its balance sheet remains as liquid as possible. In other words it has enough cash to meet all its plausible commitments. And the problem here is that what is individually rational behaviour may turn out to be collectively rather dangerous behaviour because if we all seek to hoard cash we’re all in trouble.
I’m sure Mr Buffett and Mr Moulton didn’t precisely foresee the crisis described by Mr Wolf and Mr Davies, they just recognised that the meltdown most people saw as a distant possibility was actually probable, in the longer-term.
It’s not necessary to possess their intellect to come to a similar conclusion. I believe one as mundane as my own might do. All it takes is recognition of the fact that the one thing the future is unlikely to be, is the same as the present. So many people, be they investment bankers or investors, seem to work on the opposite presumption.
Bearing that in mind here’s are a couple of things to think about:
- If you have a variable rate mortgage, or a short-term fixed rate mortgage, have you considered the probability that at some point in the next 25 years interest rates will be much higher than they are today, and possibly beyond your means?
- Have you considered the probability that it’s likely we’ll suffer a recession within the next ten years, and that the debt that is currently financing your investments might one day bankrupt them?
I asked myself questions like these in 2001, when I capped my mortgage at 6.25% for 25 years and adopted a habit of only buying shares in relatively unindebted companies. At times, when everyone was dancing and I turned away from cheaper short-term mortgage deals and interesting, but highly geared companies, I felt a pang of regret. But not now, when things are looking bleaker*1.
You might well ask, why didn’t I write about this before? I did. But I don’t think anyone was listening 
Footnotes:
- That’s not to say things are bleak, just that if they are, I think I’ve saved myself some anguish.
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39 Responses to “Why didn’t we see the credit crunch coming?”
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I certainly can’t say I saw this thing playing out the way it has been playing out, but I did see serious problems, which you may recall that I posted in a comment back in the fall.
I have been out of the market since the fall and plan to stay out for about a year. I personally don’t think we will see a bottom to this mess for about a year. There are simply way too many skeletons in the closet.
The level of debt is ultimately the source of the serious problems that made me decide it was time to preserve capital and put things into government guaranteed deposits and government savings bonds.
Hi Deborah, great to hear from you again. I remember - here’s your comment.
I’m still ‘dancing’, as I said I would, even if things get worse because (a) I don’t think I can time markets and (b) I feel reasonably secure - partly because I can answer the questions above.
I saw this coming 6 years ago. My eyes were opened when my son then became 18 and the bank gave him a credit card with £1000 credit despite him having no income. It took him less than 4 days to spend it and he’s been in debt ever since. This exemplifies, on different scales and multiplied millions of times, the result of greedy banks being able to behave in what many believe are unethical ways. I have no sympathy for them but I feel sorry for people (like me!)that have lost funds as a consequence.
All bubbles have to burst, this is a basic law of economics. Unfortunately 99.9% of people in the financial businesses don’t like to admit it. They are all driven by the herd instinct based on short term profit. If you want a long term IFA contrarian see http://www.contraryview.co.uk .
Good feature, well researched. My own feeling during most of 07 was that things were overheating - the sub-prime issue acted as the release valve, with property and stock markets both being highly visible indicators. I felt then and do now that the place to be is cash [or near cash] and manoeverable - and I concur give it 12 months to ride out - but I watch for very selective short-term opps in the meantime. My own guess is residental property down 20%, and FTSE stable once it can settle sub 5k… - it’s a much needed correction.
Hi Richard
By the way, I replied to a previous blog and I am still getting emails about other replies, how do I turn this off.
But what I really wanted to comment on is what was happening in the USA around 2006/7.
This may shock a few people.
There are a couple of very good friends, one of whom is a financial advisor. She was going to all these seminars and one she went to was run by this guy who recommended to house owners in California, to mortgage their house to 100% and more. Take the money and invest it elsewhere. He had done the sums and because of mortgage relief in the US tax system, it was a profitable avenue. He apparently went on to say that in California law, if things got tough out there, all they had to do was walk away from their house and have no legal comeback, apart from a lousy credit rating (which in CA, you can always rescue after a certain period)
This couple did just that. They got a 125% mortgage. They are now seriously underwater. If it wasn’t for their young son and their business, they would have walked away months ago.
Talk about promoting ‘moral hazard’.
At the time, I was pretty shocked by what this guy was saying. Coming from a very thrifty family, I deeply felt the immorality of it all.
But then I was in California….duh!!
Marcus Wolf hit the nail on the head when he said that if there is no penalty for risk-taking behaviour, then of course it will get out of hand. Chuck Prince is laughing all the way to the Bahamian sandbanks, as are the board members of Northern Rock, while investors like Tim Congdon and Joe Lewis seem to think they too should be compensated ! The answer would seem to be regulation, but the problem is it’s now a global issue and the institutions are not in place to control it. Even if they were, the apparatchiks who become regulators have no comprehension of what they are dealing with even if they had the power or the stomach to act. So it’s back to boom, bust and caveat emptor methinks.
That would be Martin Wolf of course - getting my FT, FSA and Stasi mixed up
Is it possible that the financial market has got too ‘clever for its own good?’.
If I cam to a bank and said I was selling mortgages …on houses that didn’t go up in value, and to people whose chances of increasing their income was minimal…what do you think their reply would be?
Because this was rapped up in ‘derivatives’ and sold by other financial institutions it seems that they were Ok?
Secondly, didn’t anyone ask why American banks were selling these ‘brilliant’ products outside of America? If they were so good, surely they would have been snapped up by local investors?
Thirdly, why does the Bank of England have to bail these banks out? If they make incorrect decisions, that force them to liquidate… then sobeit. A few major players disappearing will act as a surefire warning to others, both now and in the future, to be a little bit more careful where they put their depositors money.
As a bare minimum, those that have been bailed out should now be forced NOT to pay any commissions/bonusses to their employees until it is paid back, with interest. If they continue as they do now, then the impression will be that if you do wel… great… if you don’t then don’t worry, as the BofE will bail you out anyway… and I’m told we need money for schools, and hospitals… £11bn buys an awful lot of those.
Hi Rob, very good to hear from you.
I’m not sure… but the number of comments usually falls to zero after a week or so - and you’ll only get notified about that particular post, not every new post on the blog! I’m desperately trying to meet some deadlines before I go off for a couple of weeks, but if it’s still a problem in early April when I return drop me an email at richard.beddard [at] iii.co.uk and I’ll look into it. In fact I will anyway in case anybody else asks.
Regarding your friends, the Californian couple, this reminds me of one of the main points I was trying to make. Individuals who don’t think about the long term repercussions of their borrowing or investing are really behaving just like the investment bankers.
I’m thinking of people changing credit cards every six months or mortgages ever two years. It’s all very well while the low interest options are available, but to assume they’ll always be available is foolhardy.
Hi Douglas - thanks for the compliment. And good luck looking for opportunities. Perversely, it’s a good time for value oriented investors - or its getting that way
Just what do people mean when they say they saw it coming? Just what exactly is “it”?
I ask this because to some extent I think I saw something coming, but it wasn’t specifically grit in the gears of the banking system; a confidence problem that brings the market to its knees. It’s only now that I’ve learnt a bit about how the credit systems work - or not, as the case may be.
However, many people see something coming. When I sold my home, when I bought gold, I bought it because I sensed that “events would conspire” to push up inflation, bring down the housing market and push up gold. This was in 2004.
Often, particularly when comparing charts and fundamentals, you consider when to buy or sell. You like the fundamentals and feel that it’s right and that the chart tells you something - and (whether you bought or sold or not) something happens - events conspire that you had no specific details of; an oil find, a news release, a buyout or some precipitous change in market sentiment. It’s timing I suppose, but its fascinating how it works. I must admit that my timing is always perfect when I didn’t act. Why didn’t I sell? I knew that would happen a week ago! Why didn’t I buy? I said to the missus that that was going to happen?
Of course, I didn’t know in such a sense that I am super smart. I was just influenced by what I read (and none of these people wrote specifically about what was going to go wrong and when), but I felt that something was going to give and that it was going to be related to BRIC-growth led inflation driving interest rates from their years in single digits.
This hasn’t fully played-out (and it won’t if hanky-panky Ben Bernanke gets his way) but I did not envisage what is happening right now in all its US-style shock and awe splendour.
It seems that it didn’t take much of a rate rise to expose the bad lending. But is this even what caused it? Interest-rates I mean. I can trace it back to early 07 when HSBC fired its head of mortgage lending over a $10.7bn loss. It’s certainly my theory (but then it agrees most fittingly with my prediction and makes me feel clever).
I’d like to see: The anatomy of the crunch. From the early contributory factors to minute-by-minute on the FI trade-floor in August as the spreads widened and lending volumes virtually stopped.
Luke
P.S. No mention that its 5 years since we went to war, and the end of the dot-com bear/bull market began.
Like Alan Farthing my wife and I saw the problems some years ago ie the banks giving mortgages to people who could not pay it back without a struggle,credit cards issued to virtually anybody who wanted them, without a financial check being employed.It was obvious that interest rates would not stay as low as they were (remember 1981?} But overall the main cause is GREED!
Hi Luke, I’ve just put a link in the “What I’m reading” sidebar on the right to a review in the economist on “the first big book on the credit crunch.” It’s a very favourable review and it says the author “saw the crunch coming” three years ago.
The book is “The Trillion Dollar Meltdown”, and the review is here
It all started with liberalism in the sixties (didn’t everything! Including me :-))
You mention that every financial institution is trying to ensure its balance sheet ‘remains as liquid as possible.’ I understand however that most of the SIVs deals that are at the heart of this problem were ‘off balance sheet.’ If this had not been allowed by the regulators and the same rules applied to them as every other business, then we wouldn’t have a situation like we do today where nobody knows who is in deep trouble and who is not. Better still the people who were in a position to call time would themselves have known what was going on in the banks they were supposed to be running.
One question the “Today” package nuzzled but backed away from was the role of the rating agencies-especially S&P and Moody.
Both were rating Bears when it ran into the buffers ditto Northern Crock
Chocolate teapot anyone???????????????
Like most of your bloggers, we think we are the wise ones and saw it coming. In UK the problem is mainly sub prime credit from store and credit cards and personal loans handed out to almost anyone who asked. I hope the correction will be short and sharp and not prolonged by showers of liquidity to the banks and ever lower interest rates.
For those now out of the market and “real” inflation at least 5%, where do we go?
Malcolm Fraser, a previous Australian Prime Minister once stated that, “Every pie has to be paid for”. Simple but credible. In 1972 I noticed home owners across the Kingdom stored milk bottles on the window ledges, they did not have a fridge! 35 years later these same people have goods far in excess of thier needs and some -supported by credit (facilitated by commission only sales people)and subsequent long term family debt. “Oh! daddy, I feel that my self esteem would be much improved by a breast augmentation and I can have it on 0% finance. Yes I know I am at univerdity and have no money but everyone is doing it and I feel left out. It is only £4,300 and it will make me feel much better”. Daddy has three other children and is in debt but supports his daughter’s decision. A short time ago there was no fridge! As Malcolm Fraser said…… Reality has arrived and Greed is running down the lane to find a secure place until another day.
Chuck Prince the ex chief of Citigroup is right when he says that “when the music is playing they have to keep dancing” because their jobs depend upon it. They just hope that when the music stops they are not left holding the parcel of debt, which is why it was cut up and sold on to disguise the problem! Banks are the worst offenders when it comes to greedy growth.
I saw something coming. I knew at least five years ago that lending levels - mortgages and loans/credit cards - were starting to get out of hand.
It’s all caused by the instant gratification that just about everyone suffers from. Younger people are worse because they see their friends getting flash cars & big houses and they want it. They go to the bank for a 100K mortgage and the bank is offering them 150K. Back in 1991 we went for a 52K mortgage & the bank said we could have 79K. I knew for a fact that we couldn’t afford it. We would have went hungry. We didn’t take it & it could be argued that it was a mistake because our income levels rose sharply but I have been taught from an early age about the value of money and decided it would have been too much debt.
I can’t understand people (like Shelter) saying that the Government has to do something otherwise people will lose their houses. If they can’t pay their mortgage then they should lose their house !! I don’t think that’s being harsh. People need to accept responsibility for their own decisions. Also this nonsense that’s started whereby a company buys your house & rents it back because you can’t actually afford it has to be fully exposed. I believe the banks are behind this in an effort to mask the problem & avert the inevitable crash !!
I just wonder how much of the UK’s credit card debt is ACTUAL debt? That Martin Lewis has practically convinced the nation to ’stooze.’ If the majority of stoozers are disciplined enough, the money will be paid back and not spent. For me, I can’t help but think that government figures on national debt might just be a bit skewed to say the least. If my suspicions are right, the country might not be in quite as much debt as we think we are and homeowners may well be much more able to ride out this crunch.
A sad situation indeed. You’d kind’a think that ownership of the problem lay with those who benefitted from events that brought it about. Those who set the objectives that motivated dealers and imaginative bankers towards their big bonuses should surely be “accountable”.
It’s hard for me to understand why insider trading is criminal, while developing a market based on giving credibility to high risk debt is not.
But the parcel is already being passed. Watch as the bankers sue the credit rating agencies (largely funded by the banks anyway) and wait for the credit rating agencies to respond by saying that the banks mislead them first.
The lawyers won’t lose anyway.
My sons girlfriend Age 20 bought a flat 6 months ago for 95K with 100% mortgage and other loans added by the builder. She supposedly had independant financial advice by someone reccomended by the builder, the result she bought the flat. It was obvious to anyone with half a brain that on a salary of apprrox 18K plus extra for shift allowance she could not realistically afford that flat, she has other debts,Car on HP etc. I have no doubt that it is not going to be long before she will no longer be able to afford that flat, she will not be able to sell, and if she does it will be at a loss, so reposession would seem most likely. What baffles me is why these people that offload these properties to young vulnerable people ofering them a high multiple mortgage and money to cover deposits etc are not brought to task for gross incompetance, they may well have ruined a young girls life before she even starts.
Forcing mortgage payers who are in arrears out of their homes will only exacerbate the crisis, by forcing house prices down even further, it also guarantees that the lender will lose more money.
In the 89 house price slump, one particular mortgage company (name now forgotten) I visited was in meltdown over its bad debts. However they looked after their customers, and the MD told me they only had 100 homes they had to reclaim, all the other loans came good eventually
Hi Richard, nice piece. Was John Humphreys interest genuine or was he just after the story?
The answer to your question is complicated:
*The signal was given in March 2006
*Anyone (like me) who followed it by retreating to Govt. bonds looked a fool for 20 months.
*Since Nov 2007 my aggressive portfolio (no commodities or gold) has risen 9% and I now don’t feel quite so foolish.
(Old e-mail address suspended while I complete the book)
My stockbroker, Colin Smart (now retired), prophesied in 1982 that one day deflation would be upon us. This seemed a ridiculous notion at the time with inflation running away rampantly, but Colin maintained that it would come and it would be brought about by excessive levels of debt. Now some 25 years later his prophesy comes to pass. The world moves in cycles and we investors are flotsom on the tide.
Credit is a fundamental basis to capitalism. That money has time value. One can spend money now or suspend consumption and receive a credit for doing so. For the efficient flow of capital from those with excess to those without credit is required. How many people can afford a property without a mortgage? People work to pay the mortgage. They are exchanging the future value of their labour for the present value of the mortgage.
That said the US laws on mortgages are rather curious. It seems one can hand in the keys to the property and walk away from the obligation. I dont believe that this is the case in the UK. You can and likely will still be pursued for any difference between the property value and outstanding mortgage. This likely means that one is more incentivised to work through a negative equity situation.
I totally agree with Robert. Still, foreclosures are just another way of keeping the money moving.
Hello Richard,
Good article.
Just thought I’d add to the mix that the current sub prime crisis was apparently predicted 10 years ago by Christopher Wood, managing director and chief strategist of broking firm CLSA in an article that appeared in the Telegraph on line in September of last year.
Personally, I’m not surprised we’ve reached this point because anyone who has had to research the housing market will know that it has always been easy for some people to make lots of money whilst the majority pick up the pieces.
All these complicated instruments that were bought and sold seemed to me to be like literally buying expensively wrapped, empty boxes!
Combine that with human emotions of greed and arrogance and there you have it!
The housing market has been shown up for what it really is - a very large, glorified betting shop and the ultimate losers will be us.
Regards
Sharon
[...] Of course, its not comprehensive and we know the story well, but, all I’m saying is, as the Bank wants to help the public and financial firms prepare and manage for financial crises, it could speak with a clearer voice. Then perhaps it would be more difficult for bankers and borrowers to say, “We didn’t see it coming.” [...]
Some good answers here to a question I posed - http://pleasewalkonthegrass.blogspot.com/2008/10/you-never-know-i-studied-economics-once.html -
Derivative financial instruments are essentially ways of getting wafer thin margins from large sums of money circulating around the system. The problem is that if you get the calculations more wrong than right (over all such instruments ie the whole marketplace) then it ads up to a lot of projected growth/income missed.
Not only that, but if your reaction is to try and cover that ‘loss’ with other similar instruments, you’re really stuffed.
Some people see it coming and some don’t
James Robinson wonder in the Media page of the Observer 12.10.2008 (p 11) ‘Why didn’t the City journalists see the financial crisis coming?’; except a lone voice of Gilian Tett of the FT. One would expect that papers like FT, who has the resources, envy of many others, would have someone who is not involved in the day to day manufacturing of the NEWS, but who sits back and just takes long term view of the markets and the system as a whole, where it is coming from and where it is heading to?
I wonder why none of the journalists working for papers like FT, even the other broadsheet papers, couldn’t stand back and see the bigger picture; the media needs to think its role again.
I was an occasional writer for a small publication AN (Artists’ Newsletter) in 1980s and 90s, as an artist, I could see such a need to cast an overview of the humanity as a artist and creative person. I quote from one of the pieces I wrote in 1980s,
‘If we imagine, the whole of the humanity is a large caravan travelling with time. In this caravan most people are busy pushing pulling, carrying their possessions, sweating in a race of material achievements.
It is the Artist, who disengages him/herself from this entourage; frees from this rat-race, runs ahead of the caravan, finds a vantage point to grasp/intuit an overview, where the caravan is coming from and where it is heading to? Then the Artist expresses this vision by singing a song, playing a piece of music, writing a poem, making a painting or a sculpture to share it with the world.’
I commented again in 1989, when Francis Fukuyama, made his big declaration of ‘End of History’, it was published in The Guardian Nov. 14, 1989,
“In the cycle of history, every system grows and vanishes. Russia and its allies tried to hold on to the wheel of time, hoping they might stop it. That was a mistake they are paying for. Capitalism is not absolute system. Its only advantage is that with liberal mix, it leaves a lot of breathing points, so the system survives longer.”
Now what we see now these breathing points what liberal Capitalism has grown so big that it exhausted all the energy, leaving a skeleton that came down like a carcass of a dead cow.
Its not only the meltdown of the core (Wall Street) of the Western financial system, but it is exhaustion of an idea/system that West wanted to project as an example of the monetary system for the rest of the world to follow.
As an outsider I could see it coming in 1995, when I wrote a proposal for a World Symposium to imagine a future in the 21st century.
The second major event since the 2nd world war has been the disintegration of the Soviet Union, which has its global implications. This one event did make you feel, as if you wake up one morning and hear the news that the Earth has lost its South Pole and was left with only one ‘the North’. Imagine how much chaos it would create; the planet may lose its orientation and its annual cycle. Today, as a result of this one event in history, it is not only that any alternative view of the world have died a death, but we are left with a ‘one party/one opinion’ world.
(This was the opening para in a paper I presented in a seminar, ‘Shaping Histories - Imagining Futures’ At UNESCO Conference on Culture & Development, March 31, 1998, Stockholm.) (Clink on this link to read the full paper)
Now the real concern of George Bush, Gordon Brown other Western leaders, in not that few Banks have collapsed or they had to put trillions of dollars of public money to shore the system; the very idea/horse that they were riding to demolish all other kinds of ideas/systems in the world that very horse has collapsed. As a result they also lost the moral whip they used to most of the world.
Now watch it the day, the OPEC countries switch over from Dollar as trading currency to Euro, the Dollar will be worth very little may bring another major crisis in the US economy, no one has imagined. There are already countries Venezuela and Iran tried to put the currency change issue on the table in the last OPEC meeting early this year; Saudi Arabia, who has invested most of its reserve in the US, and strong supporter of the US, brushed aside the idea of currency change. But this postponement would not go on for ever.
Dollar, that was the choice currency at one time in the tourist trade in India, now the tour guides prefer to be paid in Indian Rupees that in Dollars. That is how the world values this currency now.
Can you imagine the scenario if only one country, say Saudi Arabia, who has invested over $750 Billion in the US economy, decides to switch its reserve to Euro-zone, America would not have resources to pay in any precious metal or the other currencies? Saudis certainly threatened to so when families of US victims of 9/11 tried to sue for damages personally 4 members of the Saudi Royal family in 2002.
This is the result of very arrogance of the US governments over decades since the 2nd World War, more so since the fall of the Soviet Union, it has become a bully/policeman of the world in a, what I called above the One Polar, world.
World, including me, is curiously waiting to see where it stands, when the planet seems to have lost it’s the only pole it was left with when Soviet power disintegrated in 1989. I am an incurable optimist, still believes that world will be more balanced without one dominating pole it was left with. Francis Fukuyama swallowed back its claim ‘End of History’; I believe this beginning very very interesting history is in the making in the 21st century.
Avtarjeet Dhanjal
http://www.haraf.com
Marriner S. Eccles, was the Chairman of the Federal Reserve from 1934 1948
In his 1951 memoir Beckoning Frontiers, Eccles detailed what he believed caused the Great Depression.
Our current situation is eerily similar.
Eccles wrote:
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nations economic machinery.
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
Fascinating quote John, thanks for sharing it.
The difference between Eccle’s commentary on the Depression of the 1920s and today is that in recent years it was a majority of the people who were suckered into an illusion of wealth by the easy availability of easy and cheap credit and a misguided view that both the cost of that money would remain low, while the rise in the value of houses would continue without interruption. Indeed in the UK this was positively encouraged by the government, (’an end to boom and bust’ and so on) so that constantly expanding consumption by the many could fund increases in the budgets for the public sector; a millstone which continues to hang unabated round all of our necks by the way. That this disaster has begun to unravel by way of a credit crunch is because the banks thought they had more money than they knew what to do with; hence the rise of trades in SIVs. Sadly it has turned out that they too were as misguided as most of our house buyers.
I don’t think anyone believed that the major banks could be so stupid as to buy all that worthless ‘paper’ without thoroughly examining what they were buying. When you look at what happened with the sub-prime market, it’s not hard to see that mortgages were mis-sold. Mortgages were given to folks who were bound to default and foreclosing in a depressed market was not going to get that money back - simple as… Why did the big banks buy the paper?? crass over-confidence and a belief that they were financially immortal is my guess - let them pay for their own mistakes.
Well I have been hit by the credit crunch having been laid off twice in 6 weeks, yes twice!
So having watched Sky News for the past x months and seeing all these businesses struggle and go into administration I have decided to start my own website. The site will hopefully help the consumer by saving them a few pounds, help the business by driving customers towards them, and I will earn a few pounds for my troubles - so everyone is happy I guess!
The Fresh Card is a discount card operating in Shropshire where the customer gets discounts at selected businesses, from restaurants to shops, pubs to clubs and wedding videography to wedding dress makers!
Well, I guess I am doing my bit!
Good luck to everyone during these testing times!
Interesting read all the comments.
Seems after the credit crunch more and more people are now choosing to start a business on the internet. I sincerely hope that this vast economic machine turns around.