Global financial system implosion begins

[kyser_soze]

British Pound Panic Selling, Counting Down to Bankrupt Britain

Yeah, did you read his list of solutions? Tax cuts in the form of a tax credit payment (similar to Australia's $2k giveaway), cut public spending by cutting back state services, nationalise the whole banking system, with the state taking hold of all the toxic debt, then re-privatising the whole lot in a short timescale.

So basically he's a right winger who's repsonse to solve the crisis is mainly 'cut taxes and cut spending'. He's also one of the people who helped create this problem in the first place:

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates.

 

[Barking_Mad]

Yeah, did you read his list of solutions? Tax cuts in the form of a tax credit payment (similar to Australia's $2k giveaway), cut public spending by cutting back state services, nationalise the whole banking system, with the state taking hold of all the toxic debt, then re-privatising the whole lot in a short timescale.

So basically he's a right winger who's repsonse to solve the crisis is mainly 'cut taxes and cut spending'. He's also one of the people who helped create this problem in the first place:

The thing is that neither of the solutions proposed in the mainstream are viable in that they are both destined to fail in different ways. It doesn't mean that critiques of proposed solutions are wrong in themselves.

 

[Barking_Mad]

Daill Mail article. Not had chance to cross reference it elsewhere, but no reason to suppose it is not correct given the sourced quotes within it.

Day the banks were just three hours from collapse

Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.

The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.

Only frantic behind-the-scenes efforts averted financial meltdown.
If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalising the entire financial system and guaranteeing all deposits.

But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.

The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply.

The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.

Icelandic senior minister resigns as government becomes first global political casualty of the credit crunch

But shares continued to plummet, turning into a rout on the Friday when the FTSE crashed by ten per cent within minutes of opening.

Both Royal Bank of Scotland and HBOS were nearing complete collapse - but Lord Myners, who built up his fortune during a long career in the City, said the problems ran far wider.

'There were two or three hours when things felt very bad, nervous and fragile,' he said. 'Major depositors were trying to withdraw - and willing to pay penalties for early withdrawal - from a number of large banks.'

The threat to the system was so severe that the Bank of England was forced to contact RBS's creditors in New York and Tokyo to persuade them not to withdraw their funds, but it is not known which other banks faced a run on their reserves.

'We faced the very real problem of how banks could stop depositors from withdrawing their money,' a Treasury source said yesterday.

'The banks themselves were selling their shareholdings, accelerating the stock-market falls, and preparing to shut up shop. Mortgages would have been sold on and savers would have been spooked, to put it mildly. It would have been chaos.'

After a weekend of crisis talks, which concluded at dawn on the Monday, it was announced that Lloyds TSB was taking over HBOS, supported by £17billion of taxpayers' money, and RBS would receive an injection of £20billion - prompting the resignation of RBS's infamous chief executive, Sir Fred 'the shred' Goodwin. Share prices at last started a small rally.

Ruth Lea, economic adviser to the Arbuthnot Banking Group, said last night that it was 'highly irresponsible' for Lord Myners to reveal the scale of the problems because it could serve to further wreck already fragile levels of confidence.

'We are not out of the woods yet,' she said. 'I fear for Barclays, after the fall in its share price, and Lloyds has been damaged by the HBOS takeover.'
She added: 'If it was panning out in that way, then the Government would have had no choice but to step in and nationalise the entire financial system.'
Angela Knight, chief executive of the British Bankers Association, said: 'The issues related only to HBOS and RBS. To imply that all the banks would have gone under is wrong. It is complicated.'

Lord Myners also said that bank executives had been 'grossly over-rewarded' during the 'golden days' of big bonuses. 'They are people who have no sense of the broader society around them,' he said. 'There is quite a lot of annoyance and much of that is justified.'

 

[elbows]

Yeah i had read lots of stories in the rest of the press about Lord Myners comments. It doesnt surprise me at all, the original bailout was just to prevent immediate collapse.

Todays global gloom headline is about 67,000 job cuts worldwide being announced today

http://www.guardian.co.uk/business/2009/jan/26/job-losses-uk-europe-usa

 

[goebfwai]

The twin blasts of fiscal and monetary stimulus have been massive...Ben Bernanke, a Depression junkie, is proceeding with a messianic sense of certainty. The wash of money should ensure that the next 18 months will not mimic the cascade of disasters from late 1931 to early 1933

Ambrose Evans-Pritchard, 26 Jan 2009
Daily Telegraph
http://www.telegraph.co.uk/finance/...back-to-1931.-Good-news-its-not-1933-yet.html

 

[elbows]

Ambrose Evans-Pritchard, 26 Jan 2009
Daily Telegraph
http://www.telegraph.co.uk/finance/...back-to-1931.-Good-news-its-not-1933-yet.html

That was a pretty interesting article. Its good to compare things to the depression, in detail.

Still apart from the main gist of the story, there were some pretty sobering numbers in there:

The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10m Chinese have lost their jobs since the crunch began. Japan's exports fell 35pc last month, year-on-year.

 

[goebfwai]

Local Employment Trading Schemes/barter

Useful links to publicise during the recession in these cash strapped times...

http://www.letslinkuk.org

and an international barter association

http://www.irta.com

 

[Dr Jon]

I see that Cynicus has made some interesting observations:

...
In other words, the value of our labour that is being expropriated by the government and being gifted to the banks is largely being used to pay overseas depositors - the Asian countries, the oil states, not depositors within our own countries. Money is pouring out of the Western world. This is why, when so much money is being dropped into the banks it seems to disappear as fast as it is dropped in. When the banks are announcing losses, they are not actually 'losing' the money, they are transferring the money to a new place. That place is not within the Western world - or someone somewhere would be recovering from the crisis.

The problem is this. What we are actually witnessing is our own insolvency. We are having to service the debts that we owe to all of the creditor countries, and we just do not have the means to service these obligations. As fast as we are gifting the value of our labour to the banks, the banks are then using that gift to repay our external creditors, but it is just not enough. The government is having to expropriate ever greater value of our labour to keep the repayments going.

...

As I sit here writing this, I can not but help but wonder about whether any of those responsible for these ongoing bailouts have any idea whatsoever of what they are actually doing. They stride around bombastically proclaiming that they are 'saving us', saving the financial system, when the reality is that they are deluding themselves, and every single one of us.

It's the Russian Doll of debt.

 

[Barking_Mad]

I see that Cynicus has made some interesting observations:

It's the Russian Doll of debt.

The article is essential reading.

The stereotypical picture that we are offered to justify the protection of the banks is the picture of lines of people outside of the banks trying to gain access to their deposits. We can almost hear the cries of outrage at the idea of the 85 year old lady who loses her life savings in a banking collapse. This is supposed to be the financial system that we are protecting, helping to ensure that the little old lady does not lose her savings.

However, in order to protect that little old ladies' savings (or the deposits of companies or whatever variation of this theme), why has it been necessary for so much to be gifted to the banks? Surely, if there were a bank run, the value of the assets of the bank could have been sold, and the government could then have had the option of using its expropriation of the value of our labour to compensate those who lost deposits. It is here that we can see that something is very wrong in the picture. We know that many of the depositors must be from non-Western countries or the money pouring into the banks would appear somewhere in the Western banking system. They are not just protecting depositors in the country, but all overseas depositors too.

In other words, the value of our labour that is being expropriated by the government and being gifted to the banks is largely being used to pay overseas depositors - the Asian countries, the oil states, not depositors within our own countries. Money is pouring out of the Western world. This is why, when so much money is being dropped into the banks it seems to disappear as fast as it is dropped in. When the banks are announcing losses, they are not actually 'losing' the money, they are transferring the money to a new place. That place is not within the Western world - or someone somewhere would be recovering from the crisis.

The problem is this. What we are actually witnessing is our own insolvency. We are having to service the debts that we owe to all of the creditor countries, and we just do not have the means to service these obligations. As fast as we are gifting the value of our labour to the banks, the banks are then using that gift to repay our external creditors, but it is just not enough. The government is having to expropriate ever greater value of our labour to keep the repayments going.

 

[elbows]

Cynicus is very interesting, but there is something I deeply dislike about the picture he paints. There is a lot of truth in there, so its very useful, but it seems slightly off to me. I havent quite figured out what yet, so I will just start with a few complaints about his latest article:

Why does he make it sound so unfair that we are having to repay the countries that leant us money? We've known that much of the system has run on the basis of 'America spends, Asia lends' for a very long time now, it suited us in the good times, very unfair of us to try to have it both ways now the party is over.

He says all the money we are throwing at banks is going back to our foreign creditors. Not true. Some of it is staying here, and is simply replacing the foreign money that has now left. Thats similar to what he is saying, but not quite the same.

Thats not the only place the money is going to. Deleveraging means that some money is literally vanishing, and some of our bailout is going to replace that.

He seems to be totally ignoring the drop in the value of assets such as housing. If a house was valued at £500k and now its worth 400k, that 100k has gone, is hasnt been transferred to someone else.

But yes his description of what money really is, that we have been giving our past, present & future labour in exchange for easy money now, is true and disturbing. No point making out that its a mistake of the now though, we got ourselves into this over many decades and its a bit late moaning about it now that it doesnt suit us anymore.

We allowed ourselves to be robbed during the good times - eg the North Sea oil, the people of Britain got some benefit from it, but a lot of it was whisked away. Just a part of the trend to privatise the profits and socialise the losses. Well, the time to fight to keep hold of the profits has passed, if we wanted to do something about that injustice it needed to be in the 80's, too late to build a sovereign wealth fund out of it now.

 

[g force]

The Myners thing is interesting but not entirely true because the UK banks could just as easily pull their money out of overseas operations and investments. So while there's no doubt a systemic collapse was averted due to the intervention I don't believe we were "hours away" from closure.

Also seen some interesting stuff about why HSBC isn't in the shit compared trelating to how the bank is split and the way the HKMA (HK authority) has stricter controls over how/where HSBC transacts it's business and reports its risk/liabilities and maintains the balance sheet. That in itself is hugely damning of the FSA and it's "light touch" approach so aevoctaed by Brown, Blair and others.

Wondering how long before Obama announces the Super-regulator for Wall St? 6 months?

 

[elbows]

The Myners thing is interesting but not entirely true because the UK banks could just as easily pull their money out of overseas operations and investments. So while there's no doubt a systemic collapse was averted due to the intervention I don't believe we were "hours away" from closure.

Everyone undoing their positions and pulling their money out of everywhere extremely rapidly, might be what a systemic crash would look like?

I dont think the system can handle the unwinding of positions at such a pace, even if we technicaly have the foreign assets to make up for foreign debt.

Stephanie Flanders had an interesting blog post about why the UKs position is not quite as insolvent as it may seem:

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/01/is_britain_in_danger_of.html

 

[Fruitloop]

Hmm, I don't get the impression that Stephanie Flanders has understood the issues in the same depth as Cynicus.

RE: his position on the house prices: if I understand him correctly I reckon he would say that the £500k price of a house, part of which has been 'lost' was never representative of the value of the house, it was only representative of the price, in a market where there was rising demand, an oversupply of credit and no correlating increase in supply. That’s what I’d say anyway….

With respect to the position in the developing world, I think there is a lot of misrepresentation going on in the media in that they are suggesting that the ‘financial crisis’ is some endogenous problem of the world of finance that is affecting everyone equally, whereas in reality it is to do with an unsustainable economic relationship between the countries that are major producers, and the fact that western nations that have been consuming for a long time without producing stuff of corresponding value. So whilst the fact that we are pretty fucked has a bad effect on China etc in the short-term (because no-one wants to see their major customers go bust), they are still in a far better position in the long-term owing to the fact that they produce so much stuff that the rest of the world wants.

I think that Cynicus has said somewhere that overall the last ten years or so have been a good thing, in that the huge addition to the pool of labour has resulted in there being a lot more value out in the real economy, it’s just bad news for us that we can no longer enjoy a balance of production and consumption massively canted in our favour. I wouldn’t completely agree with that, but I reckon that since for the most part he is writing from a fairly capitalist perspective, as well as from the perspective of a concerned citizen of a western nation, from a left point of view you have to read him with that in mind.

 

[extra dry]

lots of if's and maybe's in that blog. I would expect to see the pound going down in the next weeks, and the banks running for cover with the government.

As for British exporters...can anyone give a list of the top five or ten products that the UK exports..how will there value increase when an importer country can get similar goods from china or other places at lower prices...I have not seen anything with 'Made in UK' stamped on it for a while now...

 

[elbows]

Yeah that makes sense. Balance of trade figures have shown how bad a spot we are in on that front, for many years now. It was quite an eyeopener for me that when historically we wanted China's tea, but we didnt have much they wanted, we got them addicted to opium.

And yes Im not looking to Stephanie for all the answers, or the big picture, but as part of a balanced diet her stuff was interesting.

 

[kyser_soze]

With all due respect e_d, you probably don't know any of the names of companies in China either, but that doesn't mean they don't exist.

Fucking hard to track down a 'Top 5' list across all categories tho!

 

[Fruitloop]

Yeah that makes sense. Balance of trade figures have shown how bad a spot we are in on that front, for many years now. It was quite an eyeopener for me that when historically we wanted China's tea, but we didnt have much they wanted, we got them addicted to opium.

And yes Im not looking to Stephanie for all the answers, or the big picture, but as part of a balanced diet her stuff was interesting.

Yeah I totally agree, it would be wrong to subsist entirely on a diet of doom-mongers, and I wouldn't want to discourage anyone from posting contrary stuff in the future.

In terms of her point about foreign-currency holding of UK banks, it would be interesting to see a breakdown of what they're actually held in, as that would be a lot more useful than the current total value in sterling.

 

[extra dry]

Just found this...

machine tools
industrial equipment
scientific equipment
shipbuilding
aircraft
motor vehicles and parts
electronic machinery
computers
processed metals
chemical products
coal mining
oil production
paper
food processing
textiles

Think that all these sectors are being hammered by the down turn at the moment on a global scale.

 

[kyser_soze]

FWIW those who are interested in UK exports:

From The CIA World Factbook

Exports:
$468.7 billion f.o.b. (2008 est.)

Exports - commodities:
manufactured goods, fuels, chemicals; food, beverages, tobacco

Exports - partners:
US 14.2%, Germany 11.1%, France 8.1%, Ireland 8%, Netherlands 6.8%, Belgium 5.3%, Spain 4.5%, Italy 4.1% (2007)

Imports:
$645.7 billion f.o.b. (2008 est.)

Imports - commodities:
manufactured goods, machinery, fuels; foodstuffs

Imports - partners:
Germany 14.2%, US 8.6%, China 7.3%, Netherlands 7.3%, France 6.9%, Belgium 4.7%, Norway 4.7%, Italy 4.2% (2007)

So there you go - we import about £200bn more than we export, and the US and EU are out biggest trading partners.

 

[extra dry]

China National Aero-Technology Import & Export Corporation or CATIC for short

Chang'an Automobile (Group)

China Minmetals Corporation
It is one of the largest metals and minerals trading companies in the world and the largest iron and steel trader in China. The company handles more than 12 million tons of steel products annually. It also trades iron, coke, coal, copper, zinc, and lead. In addition to the trade of metals, China Minmetals also trades in electrical products and operates subsidiaries that focus on real estate development, marine shipping, mining, and other investment activities.

 

[Talkie Toaster]

Phew, that Cynicus article is long but well worth a read, if somewhat sobering.

 

[extra dry]

sorry kyser, I don't want to get in a mud slinging match here.

Interesting thou, we (the uk) has 200bn more out goings than coming in, we trade with the countries who are going to get further Hammarskjolded by what is going on in the world....2009 is going to be a tough year all round.

 

[Crispy]

His 'funny idea of money' (or something like that) is the core idea. It's a simple one though, at heart - we've been borrowing against future growth for decades, and counting that borrowed money as new growth. The sums haven't added up for ages, and now the penny is dropping.

 

[elbows]

His 'funny idea of money' (or something like that) is the core idea. It's a simple one though, at heart - we've been borrowing against future growth for decades, and counting that borrowed money as new growth. The sums haven't added up for ages, and now the penny is dropping.

Yeah thats the one that I give most emphasis to - we borrowed against a future that will never exist. The penny dropping on that front is the same as the climate change and peak oil pennies dropping.

Also worth pointing out that UK balance of trade was propped up by North Sea oil exports, and now we are an importer.

And lets not forget one of the things we are good at exporting - weapons.

 

[g force]

Ah yes...weapons! God bless us....

Interesting thoughts from Hilton in tonight's ES about the potential future of banking - something that's been mentioned a lot in industry conferences. Trust is the key issue and many banks have to go "back to basics" in terms of deposits and lending, maybe mortgages and that's about it. That means a step change in how they do business.

But a certain supermarket bought out it's banking provider last year and has no legacy banking to worry about....say hello to Tesco Bank?

 

[kyser_soze]

I predict that one day the UK will be renamed 'Tesco', and later Tesco will merge with Google (the old 'USA'), Carrefour (France) and several other corporations who've grown larger than the countries they started in...

 

[Bernie Gunther]

Yeah thats the one that I give most emphasis to - we borrowed against a future that will never exist. The penny dropping on that front is the same as the climate change and peak oil pennies dropping.

Also worth pointing out that UK balance of trade was propped up by North Sea oil exports, and now we are an importer.

And lets not forget one of the things we are good at exporting - weapons.

Yeah well, if we want to decide this is 'odious debt' run up without our consent by irresponsible bankers (which mightn't be a totally bad idea) then we might be needing the weapons

 

[Mitre10]

It is indeed a sad day, it seems that Merill have had to cut their 2008 bonus payments from $15.9Bn to $15Bn.

I am saddened for the innocent victims here. Fewer spa trips, having to cancel the second Bentley, redecorating deferred on the French chateau. They are rightly upset about the bonus reduction and I hope the government does the right thing and gives them a lifestyle bailout.

Just because Merrill had six consecutive loss quarters and the entire financial house of cards fell down is no reason to penalize them. The little people can , of course, eat cake.

http://www.bloomberg.com/apps/news?pid=20601087&sid=acmnZa01tgN0&refer=home

 

[Talkie Toaster]

So if they're still paying big bonuses, doesn't that rather clash with the theory that all the bailout cash is headed overseas as per Cynicus?

Where the fuck is the money going? Bonuses, paying of creditors, somewhere else? All of the above?

 

[goebfwai]

Everyone undoing their positions and pulling their money out of everywhere extremely rapidly, might be what a systemic crash would look like?

I dont think the system can handle the unwinding of positions at such a pace, even if we technicaly have the foreign assets to make up for foreign debt.

Exactly. A lot of economic experts, commentators and journalists have cited the in depth knowledge of the Great Depression of some of the major players in government and the economy (e.g. Bernanke & Greenspan). They say that with that knowledge and expertise they can make decisions that don't repeat the failings of the past. But conditions are much different now, and that doesn't necessarily make a new great depression less likely it makes it more likely. In fact it could even be worse.

Time and technology has moved on. I don't think they give sufficient weighting to the effects of chaos theory and the speed of communication, commerce and funds transfer we have today in the global financial events. Things that happened over days, weeks, months & years in the thirties (face-to-face, by letter and over the phone), with email, mobiles, the internet, telephones, computer trading, internet banking and transfers, can now happen in nanoseconds, seconds and minutes, and lead to job losses and business collapses in weeks.

In times gone by when the bulk of capital transfer was physical, shocks to the system were much slower and took time to take root.

Now that deposits can be withdrawn electronically (and the banks needn't even be physically open when you do), it creates a situation where there can be massive capital flight in a very short space of time. It means shocks to the system (a highly networked, globalised and interconnected system - which are the most vulnerable) can happen incredibly quickly.

Previously I was supportive of the bank bail-outs but now I am not so sure. There should have been stringent conditions placed before they were bailed out. The banks should never have been allowed to call in business overdrafts and loans in the way that they have done. The deleveraging of British industry and retailing has dealt it a death blow.

It has quite simply been decimated. The whole thing has led to a near-terminal collapse in consumer confidence. A vicious spiral of job losses - which reduces income, confidence and causes more job losses - seems certain.