Wednesday, September 17, 2008

Guilt and the Apocalypse

So, to sum up, the banks have lost all the money they ever made - Nassim explains how - AIG has been nationalised prior, probably, to liquidation, Merrill Lynch and Lehman no longer exist and HBOS doesn't look too great. I find myself feeling nostalgic for the dim, distant days of Northern Rock, a memory of simpler, happier times when it was clear that only Gordon Brown's catastrophic chancellorship was to blame. But is there, in this context, such a thing as blame? There was, on Monday, an exchange on Newsnight between Jeremy Paxman and Diana Choyleva. She said the high liquidity, low interest rate policies of governments were to blame, the banks had, in effect, no choice but to take what we now know were insane risks. Paxman scoffed. But did she have a point? At the level of individual bankers, she did. They had to compete to survive. But, at the level of the banking system as a whole, Paxman was right to scoff. If banks were as smart as they claimed to be, they could have got together to assess and limit risk, but they didn't. Instead, they behaved like fools - except, of course, that they keep their bonuses. Choyleva, though she was defending the banks, could only do so by describing them as insensate beasts, reacting dumbly to their environment. They rise to partial consciousness only when demanding government intervention. Is this just the way of the human world or is it fixable, by, for example, as Nassim woud probably suggest, sacking all the statisticians?


  1. What people have forgotten, if they ever held it, is that the banks all of them including the central banks have one function, to make money. Using every means they have to do just that.
    And how can any blame them now, when the fiction of three or more days is acceptable. We really do know that Coin is not shipped and we sure as hell know that it is not moved by horse cart and sailing ship. Just because the banks got into a habit developed by the NM, does not mean that the situation should have continued. But continue it does, and will do so until more people have a grasp of basic maths.

  2. i read this in March:

    They predicted the collapse of the US economy by September and lo, here it is.

    i predict that by Christmas we'll all be living in caves eating bugs and fashioning clubs from human thigh bones.

  3. Everyone is trumpeting Galbraith but he was and is correct. You put enough traders competing against each other and a mad few are always going to take extreme risks to get ahead of the competition. Once a few are succeeding with these risks the whole market moves to stay competitive until it unravels as we see now. Further government regulation could prevent this but would restrict our economic growth during boom time as we wouldn't be able to compete with governments (such as the US) who will never regulate their markets as much.

    The problem with our current situation and with capitalism in general is that one mad individual or government will always push economic markets into more dangerous ground in search of profit. If everyone else ignores this the mad individual profits hugely increasing their ability to control the market; if they all pile in it then it collapses under its own weight.

    As Guido said a few days ago capitalism is a system of profit and loss. This is not a callous libertarian 'I've got mine' statement; it's economic reality. To avoid this boom and bust you'd need collective consensus across individuals; this would be unprecedented in human society. We can only console ourselves with the fact that the profits generally outweigh the losses over time.

  4. While we are all getting our retrospective crystal balls out, here is another guy who saw it comin,

    Yes its none other than Mr Appleyards favourite person George W. Bush himself.

    From the NYT Sept 11 2003.
    New Agency Proposed to Oversee Freddie Mac and Fannie Mae

    ''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

    Representative Melvin L. Watt, Democrat of North Carolina, agreed.

    I suppose we can say as American presidents have to share power, Dubya was over ruled?

  5. Chris Dillow in the Times today points out the problem of banking ownership allowing a divergence of interest between self seeking employees and their corporations. (Surely a similar divergence has long been found within state enterprises.)

    Beyond that ownership issue, not enough has been made of the appalling failure of credit rating agencies whose whole reason for being was to assess the risks held by banks. They were the crucial mechanism that failed.

  6. Would you cross the Atlantic in a jet if you were told that the jet had been built not by Boeing or Airbus but by Barratt Homes? And furthermore that the aviation authorities, now run by right-wing free-market fanatics and religious nutters, had no opinion on the matter?

    That's what happened with AIG, I think, a company that began by insuring fridges and shoes and ended up insuring billions in credit swap derivatives with no oversight from anyone.

    Oh well, much tighter regulation and fencing off of investment banking from "high street" banking and just about everything else perhaps. A recognition, anyway, that while we may need it, it is also a toxic substance that should be properly stored and maintained.

    Also, putting the screws to the accountants and redefining what their function is. Behind every scandal, from Maxwell to this, one of the big international firms of accountants has been taking the money and passing off total fiction as fact.

  7. Steve said... "one mad individual or government will always push economic markets into more dangerous ground in search of profit."

    And short term profit, Steve. Financial institutions have competed against one another in chase of short-term reward. They forgot risk. They invented ever more complicated instruments to hide risk and deliver reward. Risk has now bitten their collective arses.

    Do not be afraid; this is just the parasites of the banking industry dying. As long as governments protect depositors and let shareholders hang all will eventually be well.

    On that point, 232p for HBos looks a bit generous...