Money, Money, Money.

So what happens next in the world of corrupted finance?

What damage is to come in the suddenly created world of highly corrupted finance that is afflicting the western world economy? Everyone thinks they know what the problem was, is, what steps to take to resolve it and yet have no idea where it will lead.

The problem was initially with the credit crises, culminating in high LIBOR interbank rate, lack of interbank lending, lack of confidence in bank asset values, huge losses in the assumed value of financial assets, forced takeovers to “secure” confidence in some investment houses, mortgages defaults, reducing house values, a threatening inflation rise, and the roller coaster ride of share values. All were symptoms of the ‘credit crises’ and sub prime defaults that are being well rehearsed in a variety of media. Some focus is being placed on low interest rates that fed exploitation feeding a house and real estates property boom but a sudden rise in interest rates exposed some American mortgage payers to an inability to repay loans, default occurred that unwrapped the value legitimacy of financial instrument sold to internal and foreign ‘asset’ holders as ‘triple A’ bonds when in actual fact they were very suspect.

The trouble seem clear yet one immense effect is to under play the mention of the billions being pumped into the financial markets by governments to try and install some confidence into market systems that have for years decried state regulation and fought off any form of oversight supervision or intervention in ‘market’ activities. The defence against supervision has been vociferously using the self evident and widely held belief of the ingrained argument, that the financial systems and market forces are self regulating. A belief that even after the past months activities is still being audaciously espoused by some that can only be taken as a rearguard defence of the indefensible or portraying an exuberant of self deception.

It is abundantly clear that although the markets may be self regulating in structures that are isolate into discrete commercial and productive activities or are functioning in ‘normal’ unstrained operating times and faithfully reliant on the operant of the markets to be commercially rational, properly reputable and with people acting in good faith; intervention is not generally required. But the complexity of financial structures, the compound nature of asset negotiations and the huge importance that the financial system has on influences within the local and global economy, not to mention the risk to the individual personal finances of the population, has all become too inter-reliant to believe that complete self regulation can ever be allowed to work again.

The colossal effect of the current financial crises is of such a nature that strong regulation and supervision is now essential. The idea that governments like the UK and US, adherents to the philosophy of free market forces, and lasisez fair economics, could have ever been put in a position, with others, to take the current interventionist action, was preposterous. Unless states intervene with public funding, injecting into ‘markets’ to stop a systemic breakdown of the western world economy was thought classical economically derisive, that such action would be unnecessary, was unthinkable. The unthinkable has happened and at a mammoth cost.


We are now at the cross road of re-writing the text books on liberal economics. The massive unprecedented peacetime direct intervention of government action into market manipulation may, in the long run, have unintended consequences. The hoped for effect is that some stability will be forced into the market conditions. Governments are forced into taking up virtually all of the so called ‘toxic debts’ from banks and some finance institutions to ring fence those debts that are all assumed to be associated with the housing sub prime critic crises. A difficulty with this presumption is that no one really knows how much the actual ‘sub prime’ debt is worth but the chances are that the whole of the sub prime mortgages within the USA and UK do not of them selves constitute the value of the billions now being pumped into the financial sectors. Although the collapse of the sub prime market is still being used as the initial focus of the current financial crises and held responsible for the extended economic difficulties, this is not the whole story. Any cursory look at the assumed number of possible homes that might be subject to a mortgage default does not equate to the 1,000+ billion of monetary resources being used to stabilise the markets.

One can legitimately assume that a large over injection of money into the markets has something more to do with not just the housing credit crises but to cover up the over exuberance and corruption of markets in developing hyped financial instrument that have no intrinsic asset value attached to them at all. The whole financial market has become detached from the reality of what makes and supports the real value of monetary, commodity, assets markets.
In one sense it is no wonder that markets devoid of asset links have imploded, such markets are not rational, they are not moral, there is no self regulating systems that can kick in to warn of self defeating practices and who’s existence is technically intangible. Individuals operating within the market, driven to achieve financial returns in the mode of the highest profit for the lowest commitment, inevitable leads to unjustified short term rewards that promote unquestioned individual and corporate greed which in turn reinforced the market conditions to become uncontrollably expansive. Market operation became so complicated that very few people had the expertise to realise what was going on, that it was erroneous and due to the lack of regulatory oversight by government that played a part in standing back from the boom to feed the illusion of growth, has resulted in this panic now being fought off.

What happens next will be interesting. If the toxic debt can be isolated by having the USA an UK government hold and ring fence those debts into isolated holding bonds, or essential acting as guarantors, this will take the uncertainty of the unknown debt that a holder like banks have, away. This will allow a breathing space to have them reassess their own financial positions in relation to each other and time to revalue the potential defaults of sub prime mortgages. This may then ease the interbank lending rate and start a cautionary movement in cross bank trading. The eventual relaxation of credit restraint should shortly allow general lending to take place and restart a very limited housing market trade. There will continue to be a degree of uncertainty in trading until the toxic debt has been isolated. An effect of this uncertainty will be that the smart city money with again seek a home for fast investment returns and this will lead to fluctuations in basic stocks linked to food, oil, water, gas, electric and gold; with rapid rise and falls in the stock market shares. Such shares linked to stocks can be at least valued to the essential assets and output performance of supply and demand with them being associated to listed companies and commodities.


The unprecedented action by governments to stabilise the financial market will no doubt help banks to retrench and rebuild their finances but it will take time. It took Lloyds TSB 7 years to recover from the near fatal losses it was hit with in the SA defaults. It now has the strength, with a government nod, to now take over the HBOS in a forced unnecessary merger as a result of short selling. The subsequent moves by government to stop funds being involved in short selling, (temporarily banned In the UK / US) will help inject some control but it does leave future traders, hedge funds and the derivatives markets to continue largely unchecked other than with an extensive lack of cheap liquidity. Now that credit will be no longer cheap or multiple manipulated, it is likely that there will be no major take overs or private equity raids for many years. Realism of secured loans matched with close asset values will be the order adopted by all providers of funds.

Market operators will in time no doubt press for a relaxation of any “temporary” constraints once the toxic debt is firmly and realistically collateralised and allowed to work its way out of markets and balance sheets. For the moment market traders will reluctantly have to accept closer supervision but they will still hold to the belief in the now defunct absolute freedom of the markets and that any applied constraint will limit competitiveness on a world playing field.

At a past meeting of G7 finance ministers, worried about growing financial turbulence, they endorsed the approach to regulation presented to them in a report from an eminent expert group including the chairman of Britain's Financial Services Authority, the president of the Federal Reserve Bank of New York, and the chairman of the US Securities and Exchange Commission. The report began with recognition of past failure: "A striking aspect of the turmoil has been the extent of risk management weaknesses and failings at regulated and sophisticated firms." Its recommendations amounted to 3 proposals: greater transparency, greater disclosure, and stricter risk management by firms. Unfortunately the committee was restating what was essentially the practice of financial regulation for the past thirty years wrapped in the idealism of a practiced ‘light regulatory’ ideology. So, even then the problem was recognised but without a new much firmer approach the regulators will fail again.

Although there is clarion cries for more regulation and supervision of banks and financial instruments. The chances are that much verbosity will take place but the markets will use the international nature of finance movements to stem any great controls. However some control can be put in play. It is unacceptable that banks that operate in what is clearly now a much protected environment with the taxpayers / state being the “lender of last resort” and ultimate holder of all risk, therefore traders should not be allowed to continue unrestrained for the foreseeable future. The people that operate in markets, in countries that can demonstrate legitimate control, should be made clear to them that they must operate within defined limits of laid down propriety and culpability, so much so that any action by them that evokes careless risks should be made “ultra vires” and be personally held responsible giving rise to a ‘surcharged’ placed against them. This is a process that is just like that which can be laid against local authority officers and elected members in the UK who undertake actions that are financially onerous without due regard to probity or standing orders.
The international nature of financial markets means that unless a global consensus is achieved on how to limit the corrupt exuberance of market activity and rapacious trading, controls are not going to be effect on a local national level. Governments can though be much more diligent in observing what market are doing to create destabilise scenarios and curtail it immediately.
The alternative is to make closed short selling and off balance sheet trading illegal. Banks could also be made to hold much more cash and governments to be much faster in closing the market down, which is what Russia did for two days to gain corrective time.

For the time being no one is being legally charge for any form of corrupt action but it is most certain that there are some individuals who should be held to account, whether chasing them or handing out stiff penalties of one form or another will send a sobering message to the market, will help curb future maladministration, is debatable. What is certain is that bailing the markets out without culpability being laid certainly will.

So the good times will roll again. Wrong!

This initial resultant fall in current credit activity will promote a long recession with a very close skirt with depression. What is being overlooked is that this retrenchment into seeking proper valued investment, will take place in diminishing market of opportunities with a higher rise of consumable cost due to increase scarcity value. Inflation will be a growing imported problem. Exportable productivity particularly by the UK to offset the ‘balance of payments’ is not strong, with its 20% GDP manufacturing base it is in a very vulnerable position and will be forced to increase its borrowing requirements. Import cost will rise and inflation will be to the fore again at a time when people’s individual financial position will be under pressure as well. People will simple not spend, they will try to do, if they can, what banks will do; rebuild resources. The value of the pound will get battered.

There are imperceptible indicators that show the current crises will be surmounted in the short term 3-5 years but its long term effect is going to be pernicious. The termoil has seriously indicated that there is a systemic weakness in the way governments can manage their economies. There is increasingly a lack of resources that allows them to be independent of world affects and they do not have the financial generating resources to buy their way out of the impending trouble. The US is unusually attempting to be the broker of deals to help banks in the US and around the world over their liquidity gap by providing a facility to pull down term loans. Although it has huge resources to do so, it will also suffer from a recession and a terrifying PSBR deficit created to bale out its financial institutions and the sub prime debts. Through the result of this credit crunch, it has unwittingly done something that attacks the fundamental bases of financial systems and that is, that it has broken trust in the value of financial instruments. This will lead to another element of the ongoing saga which will shortly play out. It will be a fight for the dollars supremacy. Make no mistake, this credit crises and the exposure that has opened up for the dollar will eventually see an escape to other currencies.

Despite all this presumptive bad news, there are things that can be done, one of them is to realise that it’s not a rich mans world.



© Renot 2008
2509081353

Russia's Rushing Revolution

Let’s hear it for Russia.

Russia as it is known now, or in days gone by as the USSR, has had a history that is remarkable and as complex by any competitive modern standard as any throughout Europe or the Americas. As a country of diverse indigenous populations melded together under a soviet or federation mantel, it possessed in its early form sufficient power and strength to rival any states of the modern era and it might be suggested that had it not lost its way with the Crimean war and the 1917 uprising, it could have been of pre-eminence influence throughout the European continent. It played a pivotal role during the 2nd WW from which developed the subsequent cold war machination. It has since suffered for it.
Although it had been named as one of the 20th century supper powers; just as other holders of the title, it is a title that is over stretched if one examines the integrated depth of its economic social infrastructure. This defect applies to every proposed ostentatious super power. See Superpower 4.7.08.

Russia (federation) is a huge country with population demographics and geography that is scarcely matched by any other country. Russia now is a country of 142 million people, of 17m sq miles, at half the population and 6 times as large as its nearest challenger the USA. It is much larger that any single European country and has the world’s largest untapped natural reserves. China and India head the population numbers list but have never demonstrated any practical influence over European affairs apart from their productive capacity and have not laboured under the modern mantle of a superpower, unlike the USSR/Russia.

For the past few weeks there has transpired a great deal of fuss being kicked up by ‘the west’ over the offensive military action by Georgia and the reaction by Russia over disputed Georgian territory. This is risible if one considers how it came about. What on earth was Georgia’s president Sakashvili thinking in starting a military action on its own disputed soil against its own disputed people that happen to hold and prefer Russia authority to Georgia? The lunacy of Georgia must only be seen in the light of a strategic gamble by Georgia that due to its encouragement by the USA to vie for a joining positioning in NATO, it felt encouraged to force some action. This action, it might have presumed, would have given it immediate support by the existing NATO countries. Perhaps even to compelling NATO countries into joining in a conflict against the reaction of Russia. Such rogue madness of political mendacity should be seen for what it was, as a provocative gamble by an unpopular president in a country that is hardly democratic, ruled by a bunch of corrupt criminally connected opportunist. Anyone could have expressed the view that Russia would not allow such destructive action to succeed particular from a country that was until 1990s a satellite of the USSR and had tolerated a running dispute over split bordering regions.

The attempt by the us to move Georgia to become a member of NATO, primarily for its own reasons to extend its influence as far as possible into the ex soviet countries; was fortunately by Germany and France stymied. However its possibility did give Georgia the idea of pressing its claim over the disputed areas, albeit that they are recognised by the west as Georgian ‘territories’. This denial of easing Georgia into NATO was after the us blocked any move by other members of NATO to consider Russia as a NATO member and was taken as a callous rejection by Russia considering Russians acquiescence and help on a number of topical issues like Afghanistan and the ‘war on terror’.
Never the less it should be a lesson to Europe and the us that such disputed areas are better being actively managed to a concessionary point than allowing them to be used as geopolitical pawns onto a NATO platform and realise that the idea of having another rogue state like Georgia using a NATO card could possible ferment an actual war with Russia.

Much of the current disharmony within Europe over what to do about the success of Russia moving swiftly to trounce Georgian military stems from two reasons.
A) Russia was beginning to be seen as a country that was being more politically responsible, reasonably businesslike and open and on a better communication level with the western interest. Things were moving quietly to a level of political understanding.
B) It came as a surprise and shock at how fast Russia would and could react once its core interest were threatened. This more than anything else frighten the European interest for they realised that their own internal machinery e.g. NATO could not match the fast decision process capable of meeting a future threat if ever it was required.
C) And of course the investment risk and availability of the oil and gas that some countries of Europe are beginning to heavily rely on.

The tragedy over the issue of Georgia has been to some extent a situation of the west own making. Europe has been too busy extending EU membership as part of the great project like extending EU membership to Estonia, Latvia, Lithuania, Romania, Bulgaria, and playing warm up with Croatia, Turkey, Macedonia and maybe later the western Balkans without putting structure in place that form the hard framework of self reliance. It has allowed the us to dictate too much direction within the NATO framework, upon which it is totally reliant and ignored the practicalities of extending the EU project without reframing the NATO commitment within the context of the European continent. The us is busy in cosseting the Ukraine and Belarus for an extraneous strategic reason much to the annoyance of Russia with little input by the EU. These two countries, geographical, should be of more relevance to the EU than Georgia.

Some of the political short-sightedness is as a result of the rapidly changing structure of Russia. For a number of reasons the imploding of communism that had battled against the west idealism of freedom and democracy should have been the beginning of a renaissance for Russia and the EU. Unfortunately as the west was locked into the struggle with the cold war along side the us, it paid little attention the after effect of the turmoil that afflicted Russia after 1991 driven by B Yeltsin (and the denoted collapse of communism, all of which was fermented much earlier by M Gorbachov) and neglected to participate in any form of reconstruction but rather fostered dubious unworkable economic advice. This practical neglect of Russian difficulties, some would say that with the promotion of the ideology of free market forces onto the early leadership of the struggling Russia; was destructive and that external ‘advice’ helped ferment the theft of state assets to oligarchs that bought or stole at little cost or public resistance, the very foundations of its productive infrastructure and by doings so destroying it ability to operate constructive development control. This in a county that has still yet to get to grips with developing robust transparent legal structures.
The west should have seen the danger of undermining Russia but the cold war poisoned the west view of Russia, savouring the ‘victory’ of overcoming communism that blinded it to the subsequent unfolding corruption. Russia’s failure to wholeheartedly move democracy and the sensitivity Russia felt over its near failed state status was an expected outcome, this situation was taken up by Putin to re centralise authoritive control.

With newly exploitable resources being extracted with western technical and financial input, Russia is re-establishing itself by reclaiming centralised authority under loosely democratic principles. Under Putin it started to understand that it could not afford a westernised form of economics without the social and administrative infrastructure that have taken decades for the west to establish. For Russia to survive it had to take consensual dictatorial administrative power to channel and control its exploitable resources. It is these resources that the EU desperately needs and will form the basis of wealth generation for Russia which to allow it to play a big part in the affairs of Europe. Unfortunately the west is still hung up with suspicion and fear of having a large ‘totalitarian’ county on the edge of modern Europe and it does not know how to deal with it or on what long term basis a mutual relationship should be formed, other than becoming quiescently dependent on Russian energy production.

Now after the Georgian incident such dependency is considered risky or potential unreliable. The only response that the EU can muster is to put in place puny sanctions.
The idea of instigating any sanction against Russia, as has been mooted for its excursion into a offensive action, is brainless, as is the idea that had Russia not intervened swiftly that any country of the EU, UN or NATO would have interceded much earlier to stop Georgiana military from killing its (own ?) people on it own disputed soil. Yugoslavia, Srebrenica, or Rwanda should have put an end to that wistful idea that any of those organisation can response fast, if at all. The EU is not concerted enough yet to form a working forceful response on anything.

That Russia and its ex satellite state do create a problem for the EU and NATO seems clear and a resolution is required. Part of the solution is to have the EU do what it has so far failed to do and that is being independently forceful. It needs to stop relying on NATO (America) and develop forces under its own control and use. For this it has to have a sovereign status that can bypass the individual political lethargic process and pool a greater element of its military capacity. EU countries like Germany have to take up the problem of its constitution that forbids any of its forces being used outside NATO in combative fields, a problem seen in Afghanistan. It has to consolidate its position and not expand with increases into unstable territories but in preference it has to move to start considering Russia as an in integral part of the developing European continent; it is the potential heart of Eurasia and the EU should move to develop co operative partnership without the lean of the us.

Given the fact that Russia is on the brink of redeveloping its strategic strength, then it would be as well for Western Europe to finds ways of discussing an initial assimilation partnership with Russia. Unlike the established EU, Russia has many inter faction and post satellite countries that can suffer from calls for demographic / racial independence, creating difficulties for Russia itself and an apparent homogenous stable EU or new territorial state with ethnic differences. Such difference of demographics within satellite countries have to be resolved first and will not be done effectively if the west keeps Russia at arms length or attempts to ‘cheery pick off’ ex soviet states for the sake of the project and energy exploitation.

Russia is in the process of re stabling itself on a world stage. Within a decade Russia it is likely that Russia will be more important to Europe than either China or the us and it is therefore more important to consider its future development and attitude. This is not to say that the Russians federation is completely compatible with the ideals of the EU as it stands just now nor is it likely to be in the short term but ignoring its aspiration and the power that its new found wealth will bring, is not a progressive option. Many of the fears that the west has, stem from uncertainty of direction and its lack of cohesive strength. The question is whether Russia will use its new financial resources to rebuild it’s dilapidate military machinery in response to hyped threats or concentrate on its social democratic structures with the help of the EU.

After some 90 years of political turmoil and social instability with little consolidated infrastructure that benefits the whole of the Russian people and territory, Russia is now rushing to catch up with the rapid expansion of wealth and status that china has achieved. Such growth that china has done, has been without the benefit of oil or gas reserves but achieved on the basis of solid administrative structures and being the projected work shop of the consuming western world. Russia has the opportunity of doing much better. Its energy exploitation to Europe is bringing it substantial ‘sovereign’ wealth, this with it being much closer to the consumer market, offers great opportunities for growth that neither the EU nor it can achieve on their own. It will also give something more precious, not available by force, peace, (full) cooperation to face the dangers an angry Gaia.


© Renot 2008
809081450