Perfect Storm
Where have the financial masters of the universe gone?
The exponents of laissez faire free market forces, the fast city banking slickers, the purveyors of credit debt, the self proclaimed experts and managers of economic prudence and the guardians of probity in the guise of the FSA and the Bank of England, The Fed, markets et. al; all dressed themselves in the emperors clothes of expertise. Unfortunately there has of late been a proven notable lack of skilled judgement of action and visions from these proponents of the operants of market forces and laissez faire economics.
The fearless think tank economist that continually called for ‘light’ regulation, relaxation (or none) and the departure of government interference, to free up the operation of the open market is now very quiet. None are rushing forward with their pet solutions of a market’s perfect self correcting conditions. And it is easy to see why. When it is clear that the market is not self correcting and is relying just now on the direct financial injection of public - government funds!
The lack of governmental oversight and control over the last 20 years in allowing the financial markets to control themselves has now resulted in the greatest challenge to the world financial system for 90 years. To use the euphemism that is currently in vogue “the credit crises” and all that it entails has shown that ultimately governments cannot allow the financial markets to run unfettered and they must now instigate greater control and oversight.
The credit crises gets worst (See Credit Crises Depression- 1.5.08) so apart from banks not lending to each other at a higher inter bank rate, not passing a interest rate cut down to borrowers, restricting the availability of credit to the housing sector and card users; there is a running uncertain about their own asset values in holding financial packages linked to mortgages which they are all busy in ‘exchanging for government backed bonds’ to help build up their resources and take measure to recoup their own self imposed losses. Some have even called for more share holder funding, with limited success.
The pain of the finance sectors is only being mitigated by governments. In the UK there has been the Northern Rock bale out, that was taken over by the government rather than let it, as a private organisation, collapse. There is the UK / USA mortgage asset transfers of risk from banks to the governments and now the two biggest USA lenders Freddie Mac and Fanny Mae gain the backing of the US treasury for the same reason; to prop up economy confidence. Although the credit crises apparently stemmed from the housing credit corruption, it has shown up an inherent weakness in the state of the world economy to the extent that a major depression is desperately being fought off by the governments now faced with the perfect storm of apposing forces. This problem is particularly serious in both the UK and the USA being the main exponent of lasisez fair economics, a difficulty that has not affected the European market to the same extent.
The dilemma now is that there is the retrenchment in credit provided to consumers to dispose of on assets and consumables. With this monetary restriction and lack of confidence in the banking structure, smart money has sort to seek a secure exploitable home and it has alighted on oil. This has led to speculative incursion and rapid increase in a whole range of commodities and energy to the tune of a 40% + rise in a matter of 12 months feeding through to consumer goods and driving up inflation. The usual tack by government would be to increase interests rates to curb demand and inflation but with a falling productive and consumer confidence, it needs to keep some element of economic growth in play so cannot simply jack up interest rates for fear of exacerbation a longer term recession.
Although the expansion of borrowed credit has helped fund the past twenty years of growth, the weakness particularly within the UK is that such growth has not been backed by increases real productive capacity and reserve wealth to cushion against a down turn. Individuals and the governments have become used to living on future earnings and do not save enough, dependent instead on cheap credit, imports and stable energy cost. All of which is a high risk exposure to uncontrollable events.
Naturally people find that such a sudden increase in their living cost not immediately coverable and cut back on any form of discretionary spending. This also impacts confidence for those that have disposable income to not spend resulting in an abrupt drop in general consumerism, falling retail sales and a spike in actual or pre-emptive unemployment. A ancillary effect then falls on governments PSBR, with falling income from tax streams and the inability to increase direct income taxes, is opposed at the same time as a need to raise money to funds it's spending program and meet the increasing social cost thrown on it by the (it hopes short) impending recession.
With the billions being pumped into the banking system within the UK, USA and to a much lesser extent Europe, to support ‘market’ confidence this proves the old adages that the government is the ‘lender of last resort’ and is ultimately at variance with the ideology of totally free market forces.
Governments have to become more interventionist in controlling all markets to the extent that where there is obvious over exuberance and impropriety taking place that has such a profound effect on the economic systems which undermines public confidence, not to mention the financial cost to the prime financier, the public, via taxation; they have to take immediate and forceful action.
How is the current situation going to pan out?
It is likely that the restricted credit market will not recover to its previous over generous level. With the generated increases forced onto the cost of food and fuel, inflation will rise. This will be pressed up by higher wage demands that will in turn call for higher interest rates. At the same time the value / strength of the pound and dollar will be under pressure as their weakness is exposed in the under ability to rebuild economic value. Lack of confidence will be evident, driving their currency value lower, this makes imports more expensive adding to inflation with little benefit gained from exportable goods value. Balance of trade payments will go negatively cavernous. To buy in capital investment both will have to keep the value of their currency higher against the need to both tackle inflation pressures and have lower interest rates to maintain some economic growth – a duplicitous situation.
There is no doubt that a recession will be imminent and long lasting, it will be a close run thing to avoid a depression, either way it will help stabilise cost as productive and market activity gets squeezed, demand falls off and some resemblance of order may be retained.
Pump priming the economy is against the dictates of laissez faire free market forces but the government are being called upon to do just that by underwriting bank debt, lending financial resources, stimulate the housing and building activities and against better judgement lower interest rates; all of which will have little effect and store up problems for the future.
Banks and finance houses have to lend funds to stay in business. If it is not their own funds that are used, it has to be via some other lender of resources, state, foreign sovereign or private and they will wish to gain a rate that betters than any stock market return so will require a higher interest rate that is imprudent for growth. It is only by pushing funds into the cash generating streams at an interest cost that they, the banks, generate a return on which allows them to be in business, so an un-virtuous circle is created. One problem as has been demonstrated, is that probity is not built in and greed eventually beaks through unless stringent controls are effected.
However apart from picking up the corrupted pieces, it is unlikely that any western government has the capacity or willingness to intercede in the way the financial market operates, as it is too wedded to the philosophy of markets knowing what is best and being self corrective. It is abundantly clear now that this is not the case. As an example of evaluating the pros and cons of different economic market ideologies, this current debacle is an object lesson in the frailty of scientific economics and it is not favouring the free market ideology. Markets by their very nature of their operation are rapacious and are designed to extort in a usury sense value for their own ends; in this they are both the manipulator and key controller divorced from and devoid of any long term planned strategic benefits to the culture they operate in.
For the moment it is hoped that corrective measures can be put in place to balance up the global markets, failure to do so will make the next BIG crises more than a manageable disaster.
For now, as usual it is the ordinary Messrs. Jack and Jill plc have to carry the can for the confidence tricks of banks and the USA/UK governments that have created this mess; they have in truth miss-managed their economies and its time to throw them out!
P808080808
© Renot 2008
The exponents of laissez faire free market forces, the fast city banking slickers, the purveyors of credit debt, the self proclaimed experts and managers of economic prudence and the guardians of probity in the guise of the FSA and the Bank of England, The Fed, markets et. al; all dressed themselves in the emperors clothes of expertise. Unfortunately there has of late been a proven notable lack of skilled judgement of action and visions from these proponents of the operants of market forces and laissez faire economics.
The fearless think tank economist that continually called for ‘light’ regulation, relaxation (or none) and the departure of government interference, to free up the operation of the open market is now very quiet. None are rushing forward with their pet solutions of a market’s perfect self correcting conditions. And it is easy to see why. When it is clear that the market is not self correcting and is relying just now on the direct financial injection of public - government funds!
The lack of governmental oversight and control over the last 20 years in allowing the financial markets to control themselves has now resulted in the greatest challenge to the world financial system for 90 years. To use the euphemism that is currently in vogue “the credit crises” and all that it entails has shown that ultimately governments cannot allow the financial markets to run unfettered and they must now instigate greater control and oversight.
The credit crises gets worst (See Credit Crises Depression- 1.5.08) so apart from banks not lending to each other at a higher inter bank rate, not passing a interest rate cut down to borrowers, restricting the availability of credit to the housing sector and card users; there is a running uncertain about their own asset values in holding financial packages linked to mortgages which they are all busy in ‘exchanging for government backed bonds’ to help build up their resources and take measure to recoup their own self imposed losses. Some have even called for more share holder funding, with limited success.
The pain of the finance sectors is only being mitigated by governments. In the UK there has been the Northern Rock bale out, that was taken over by the government rather than let it, as a private organisation, collapse. There is the UK / USA mortgage asset transfers of risk from banks to the governments and now the two biggest USA lenders Freddie Mac and Fanny Mae gain the backing of the US treasury for the same reason; to prop up economy confidence. Although the credit crises apparently stemmed from the housing credit corruption, it has shown up an inherent weakness in the state of the world economy to the extent that a major depression is desperately being fought off by the governments now faced with the perfect storm of apposing forces. This problem is particularly serious in both the UK and the USA being the main exponent of lasisez fair economics, a difficulty that has not affected the European market to the same extent.
The dilemma now is that there is the retrenchment in credit provided to consumers to dispose of on assets and consumables. With this monetary restriction and lack of confidence in the banking structure, smart money has sort to seek a secure exploitable home and it has alighted on oil. This has led to speculative incursion and rapid increase in a whole range of commodities and energy to the tune of a 40% + rise in a matter of 12 months feeding through to consumer goods and driving up inflation. The usual tack by government would be to increase interests rates to curb demand and inflation but with a falling productive and consumer confidence, it needs to keep some element of economic growth in play so cannot simply jack up interest rates for fear of exacerbation a longer term recession.
Although the expansion of borrowed credit has helped fund the past twenty years of growth, the weakness particularly within the UK is that such growth has not been backed by increases real productive capacity and reserve wealth to cushion against a down turn. Individuals and the governments have become used to living on future earnings and do not save enough, dependent instead on cheap credit, imports and stable energy cost. All of which is a high risk exposure to uncontrollable events.
Naturally people find that such a sudden increase in their living cost not immediately coverable and cut back on any form of discretionary spending. This also impacts confidence for those that have disposable income to not spend resulting in an abrupt drop in general consumerism, falling retail sales and a spike in actual or pre-emptive unemployment. A ancillary effect then falls on governments PSBR, with falling income from tax streams and the inability to increase direct income taxes, is opposed at the same time as a need to raise money to funds it's spending program and meet the increasing social cost thrown on it by the (it hopes short) impending recession.
With the billions being pumped into the banking system within the UK, USA and to a much lesser extent Europe, to support ‘market’ confidence this proves the old adages that the government is the ‘lender of last resort’ and is ultimately at variance with the ideology of totally free market forces.
Governments have to become more interventionist in controlling all markets to the extent that where there is obvious over exuberance and impropriety taking place that has such a profound effect on the economic systems which undermines public confidence, not to mention the financial cost to the prime financier, the public, via taxation; they have to take immediate and forceful action.
How is the current situation going to pan out?
It is likely that the restricted credit market will not recover to its previous over generous level. With the generated increases forced onto the cost of food and fuel, inflation will rise. This will be pressed up by higher wage demands that will in turn call for higher interest rates. At the same time the value / strength of the pound and dollar will be under pressure as their weakness is exposed in the under ability to rebuild economic value. Lack of confidence will be evident, driving their currency value lower, this makes imports more expensive adding to inflation with little benefit gained from exportable goods value. Balance of trade payments will go negatively cavernous. To buy in capital investment both will have to keep the value of their currency higher against the need to both tackle inflation pressures and have lower interest rates to maintain some economic growth – a duplicitous situation.
There is no doubt that a recession will be imminent and long lasting, it will be a close run thing to avoid a depression, either way it will help stabilise cost as productive and market activity gets squeezed, demand falls off and some resemblance of order may be retained.
Pump priming the economy is against the dictates of laissez faire free market forces but the government are being called upon to do just that by underwriting bank debt, lending financial resources, stimulate the housing and building activities and against better judgement lower interest rates; all of which will have little effect and store up problems for the future.
Banks and finance houses have to lend funds to stay in business. If it is not their own funds that are used, it has to be via some other lender of resources, state, foreign sovereign or private and they will wish to gain a rate that betters than any stock market return so will require a higher interest rate that is imprudent for growth. It is only by pushing funds into the cash generating streams at an interest cost that they, the banks, generate a return on which allows them to be in business, so an un-virtuous circle is created. One problem as has been demonstrated, is that probity is not built in and greed eventually beaks through unless stringent controls are effected.
However apart from picking up the corrupted pieces, it is unlikely that any western government has the capacity or willingness to intercede in the way the financial market operates, as it is too wedded to the philosophy of markets knowing what is best and being self corrective. It is abundantly clear now that this is not the case. As an example of evaluating the pros and cons of different economic market ideologies, this current debacle is an object lesson in the frailty of scientific economics and it is not favouring the free market ideology. Markets by their very nature of their operation are rapacious and are designed to extort in a usury sense value for their own ends; in this they are both the manipulator and key controller divorced from and devoid of any long term planned strategic benefits to the culture they operate in.
For the moment it is hoped that corrective measures can be put in place to balance up the global markets, failure to do so will make the next BIG crises more than a manageable disaster.
For now, as usual it is the ordinary Messrs. Jack and Jill plc have to carry the can for the confidence tricks of banks and the USA/UK governments that have created this mess; they have in truth miss-managed their economies and its time to throw them out!
P808080808
© Renot 2008
posted by Renot at 6:19 am
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