I can hear the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008. “You know, they’re schemers. Schemers trying to control their worlds. I’m not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … was nothing personal, you know that I’m telling the truth. It’s the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…” collateralized debt obligations.

When I think of a small group of bureaucratic finance nerds in Basel thinking themselves capable of exorcizing risks out of banking, for ever, by cooking up a formula of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly by empowering the credit rating agencies, which was all doomed, sooner or later, to guide the world over a precipice of systemic risks, like what happened with the lousily awarded mortgages to the subprime sector, I cannot but feel deep concern when I hear about giving even more powers to the schemers.

In a word, us.

Who is going to win from this crisis ?

Them and us and Labour by the looks of it.

No, your not alone. “Price conditioning” is a tactic normally used by timeshare, double glazing and kitchen salesmen. The first figures they mention, or quote you, are well in excess of what they want to charge you. Makes the price seem lower. It’s haggling basically, in a lot of parts of the world it’s the usual way people buy and sell things, but it scares the hell out of Western consumers.

We’ve been sucessfully ‘price conditioned’ if you ask me. They started off talking about a few billion here in writedowns, and a few billion there.

We’re now so used to these mind boggling figures being banded about that no-one bats an eyelid at a £500 billion ‘bailout’, ‘investment’ or bet as I would suggest it would be more accurately defined as.

It’s the same with the severity angle. Hardly anyone noticed the first bite of the credit crunch last August, most people shrugged it off in fact. Now the talks all about meltdown and depression everyone is scared enough to go for it.

It might work, maybe it is a good idea, who knows, but you’re right to say it has all the classic hallmarks of an elaborate scam.

In other words, printing money causes inflation. Now that the banks have stopped the easy credit binge and are more intent on saving their money, what do they politicians do?

Pander to the homeowners and risk £billions trying to make them print more money.

House prices, our currency and commodities prices are falling to more sensible levels. Yes, it’s going to hurt, but just printing more money will only change things if the entire Western world prints enough (and the politics allow) a hyperinflationary price/wage spiral.

In my mind it’s one or the other, debt deflation and a time of unemployment and hardship or inflation and uncertain consequences that could get completely out of control.

There’s no easy way out of this, the fundamentals all point in the direction of the ‘good’ times being over. It still surprises me the amount of people who think that ‘things will get back to normal soon’. When you question them on what ‘normal’ is, it turns out they believe house prices rising at 20% per annum is ‘normal’ in their minds.

p.s. If Cameron had been honest about the economic/tax position even 12 months ago instead of playing a political game he wouldn’t be looking (weak -ed) and Brown wouldn’t have his event.

That wealth consists of the houses themselves, the mortgages secured on them, the mortgage backed securities created on the back of the mortgages and all the various other derivatives created out of them.

It also includes all the property developers who were building flats that nobody actually wants to live in, but were sold to investors, and all the supporting industries around them.

None of this “wealth” actually was worth anything. All that happened is that people have now realised it isn’t worth anything, and they aren’t prepared to pay anything for it.

As for what the government is doing at the moment, I can’t think of any other policies that would work better, but I don’t think what they are doing this weekend will solve the problem and enable us to continue as if nothing had happened. It looks like this is just the beginning of the crisis.

Reply: No I am not saying the authorities want this crash – they did want to cut the rate of private sector lending/indebtedness. NO it’s not all caused by Central banks, but it was easy money central banking which allowed the bankers to behave as they did in the good days, and it is tight money central banking which started the unwinding.

One is the unexploded bomb of bad debt. It will explode at some stage; maybe in a series of small pops, maybe as a single huge bang. If the former it is manageable, if the latter it could bring down a bank. Because no one knows when or how the explosion(s) will occur it is hardly surprising that lending to banks has frozen. The guarantees offered by the government seem a sensible way to ameliorate this problem, particularly because all the bad mortgage loans can only suffer a partial loss – many will be repaid anyway and those that default still have a house or flat as security which will give a substantial return of capital.

The other problem is the credit bubble of unsecured lending, including such things as car loans, borrowing on credit cards and unsecured overdrafts. Although the individual transactions are smaller than mortgage loans there are vast numbers of them, many in amounts too small for it to be economic for the banks to sue. Even a short and shallow recession can give rise to very substantial losses.

Restoring lines of credit for sound borrowers will not make the bad debts go away although it can produce new profits to cushion the blow. I doubt that any steps taken by government can do more than help to re-start modest levels of lending. If the main players in the business are not prepared to wait for bad debts to work their way through the system there is nothing government can do to change that.

There undoubtedly will, but a lot of the ‘wealth’ was based on ‘mark to market’ valuations of houses that had been hyped up by speculation, the media-fuelled national obession with the housing market and the hocus-pocus of the securitisation and swaps markets.

A lot of the banks so called ‘wealth’ was (and to some extent still is) based on the expectation that consumers will be able to afford to pay back the £1trillion plus personal debts they have accumilated.

Once house prices move so far away from earnings that a couple on average incomes cannot afford to buy even a one-bedroomed flat without going ’sub-prime’ then of course the whole thing will collapse.

Personally I think that the state mortgaging the next generations income in an attempt to prop up the value of this generations own dodgy ‘investments’ is highly immoral.

Just what is the legacy the current generations have handed down to the next?

They removed academic selection and made it harder for teacher to discipline children. Now left-wing backbenchers even want to make it illegal for parents to discipline their own offspring!

They encouraged massive immigration into the poorest areas of the nation, telling us it was good for the economy, and branding as racist any opinions to the contrary.

They have mismanaged their own pensions, and intend the next generation to pick up the tab whilst they plan their own cushy retirements overseas.

They have presided over an unsustainable credit boom whilst pretending the riches were the spoils of sound economic management. Now the fallout begins they want to fight against the market, passing the risk of the multi-billion pound bet they are making onto people that haven’t even left school and have no democratic say in the matter.

One day this generations healthcare and pension provision will depend on the generosity of those who are not yet old enough to vote. We should remember that, because when they learn about how we all squandered their inheritence trying to bail out collapsing governments and finance houses they might just decide to change the rules of the game.

Tory business chief backs Brown bail-out plan

Those are not words I would normally expect to write, but Simon Wolfson (chief executive of Next) did just that on the Andrew Marr prog today.

Sitting alongside the wonderfully dour Jon Moulton on the Marr sofa, I fully expected retail whizzkid Wolfson to stick the boot into the Government for its handling of the economy.

Why? Well, for one thing he co-chaired (with John Redwood) the Conservatives’ Economic Competitiveness policy group last year. The report won lavish praise from George Osborne for its insight and tax-cutting zeal (though the leadership stopped short of endorsing all of its proposals).

For another, Wolfson donated £10,000 of his own readies to Dave Cameron’s leadership campaign and has remained close to the Tory leader ever since.

But instead of going on the offensive, Wolfson proceeded to defend the Government’s £500 billion bail-out plan.

“What we have to recognise and what’s really important is that the money that is going into the banking system from the Government isn’t money that is being spent. It’s money that is being invested. There’s a lot of nonsense being talked about it and my biggest concern is that actually we worry everyone to death and we worry the market to death.

“And actually when you look at what the Government’s been doing, it’s the quickest plan put together by any government across the world. We’ve had Opposition and Government working together. We’ve had the FSA, the Bank of England and the Treasury all working together to deliver what is in fact a very good plan – and will probably make money for taxpayers.”

Now I know Wolfson is a smart guy who is probably more interested in shoring up consumer confidence to protect his own retail business than praising G Brown and A Darling. But still, they were words that may well come to be quoted by Labour.

You are talking about deflation. Not being an economist, I do not understand the term. Perhaps you could give some more basic explanation to economic ignoramuses like me. Is deflation not the opposite of inflation? It does not feel like my money is buying me more. Also, this is called a credit crisis, but is it not actually a debt crisis? Too many people and businesses in too high a debt?
Surely, the Government cannot argue that they have nothing to do with this? They should ultimately be in control of the money supply, and if banks are lending too much without it being underwritten by
actual funds they should have put a stop to this? Or is this done in such a way that it does not appear on the books? In that case I would call it fraud. It seems to me more likely that it was a deliberate policy. Surely, having an independent currency means that this is essentially not caused by external circumstances. But in that case the opposition should come down on them much harder.

In any case, thanks for maintaining this interesting blogsite.

T. Dorlas

Replky: Yes, deflation is the opposite of inflation. Excess credit led to soaring house, , property, commodity and other prices. Now today deflation, a shortage of credit, is leading to collapsing house, car, property, oil and ghrain prices.

In this respect the society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy. In other word we must now, more than ever, strive to find functional progressiveness in our tax systems.

I invite you to look at one proposal http://perkurowski.blogspot.com/2007/05/human-heritage-intellectual-property.html

This would boost share prices by making trading in them beneficial from a tax point of view while lower employment costs would help stem the dole queues by making it cheaper to employ people . The savings ratio would rise as the tax system would make it pay to put cash into bank accounts and by freezing taxes on transportation government would do its bit to make sure that consumers gained from lower oil & food prices thus helping household budgets . A big income tax refund would help the high street by giving many people more money to spend and assist people with servicing their debts . By removing stamp duty as a factor in house sales you would at least avoid depressing them still further .

To give a direct boost to struggling homeowners why not allow them a £30 a month income tax rebate ? That would get cash to people who are really hurting with big mortgage bills & negative equity . The aim must be to keep people from losing their homes and giving them extra help on top of the big tax rebate and other changes is surely common sense ?

As deflation threatens to cause another Great Depression this PSBR swelling demand boosting tax cut plan will help parts of the economy most at risk from this disaster while benefiting people who are suffering the most . Poorer people tend to spend cash from tax cuts thus helping hard pressed retailers .

Tax cuts funded by a bigger PSBR will I think tackle many of the problems that you blogs on this economic mayhem have mentioned .

In three years time public spending needs to be slashed so it hardly grows at all until the PSBR is wiped out – once the economic upswing is underway smaller government & lower public borrowing can help the process . All the areas of waste that John Redwood & others have alluded to can only be cut once the deflation has passed and the economy is recovering .

I know that interest rates and financial regulation is important but a nice big targeted tax cut plan might help the situation as well .

Instead we have Darling and Brown ‘announcing’ zillion pound nationalisations by decree. Have we learned nothing from FDR’s new-deal failures? Government intervention will make things worse for longer (look at the now almost expunged from history USA 1937 recession if you doubt this). If banks are fundamentally unsound they should go bust and other banks can pick up their assets from the receiver. Depositors are protected, shareholders have to take their chance as always. This can be painful, but it is the nature of capitalism and what makes it such a success. With the current nonsensical bailout plans EVERYONE is on the hook for however much Alistair Darling can be talked into promising by failed bankers! This is not responsible government, nor is it responsible opposition to meekly go along with this. I had hoped Mr Cameron was secretly Mrs Thatcher, simply unwilling to reveal his true colours for electoral purposes. In another echo of the 1970’s he is now obviously Mr Heath instead. Oh dear….

Higher taxes will cut into the productive part of the economy meaning a vicious circle therefore government should do most or all of the “sharing in the fruits” of recession.

I would also suggest that letting the £ fall would reinvigorate the manufacturing sector. The thing I am worried about is that we will see protectionism rising, as happened in the 1930s, which would have a seriously destructive influence on the real world economy. The thing to remember is that, so far, this is merely a crisis of the money system. Panic can & probably is now, turning it into an assault on material productivity.

Those toxic loans were then bundled up (“securitised”) and traded all over the world and resulted in the banks’ mutual lack of trust and confidence since nobody really knew the worth of the bundles.

Is anyone asking for the repeal of the CRA and, if not, will this whole sorry mess happen again?