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
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
posted by Renot at 5:56 am
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