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Back in the bad old days before investment banks were handing out massive bonuses to mainly undeserving dickheads who just happened to be lucky in that they were working for one of the banks that didn't go tits up and also that they managed to hold onto their jobs, way back then, the US set up a commission to investigate the financial crisis and its causes. There were six Democrats on this panel and four Republicans. A couple of years later and they have managed to produce not one, not two, but three reports. The Democrats have blamed Greenspan and deregulation. Three Republicans have issued a minority report saying that deregulation was not to blame. And one Republican has issued a minority minority report, effectively blaming Freddie Mac and Fannie Mae.
Whenever anyone anywhere demands "a public inquiry", I think that the performance of this commission should be thrown in their faces.
Notwithstanding the abysmal performance of the investigators, there was some useful documentation. I've just finished reading John Lanchester's Whoops, which is a bit of a Democratic Party-leaning interpretation of the causes of the disaster, and also a bit of a rose-tinted glasses look at the "good old days" of Glass-Steagall. Lanchester makes a few errors, I feel (and the proof-reading could have been a bit better as well!) not least his conclusion at the end that nothing has been learnt from the disaster. What he misses there, of course, is that he assumes that the disaster is over, that we are in the road to probably slow recovery. It's the Birks view that history will show that the disaster is still happening. In terms of alcoholism, recovery and change can only start when you hit rock-bottom. The UK "crisis" of 2008 hasn't been "solved" because it hasn't yet been suffered. Lanchester falls into the trap of thinking that petrol at 131p a litre, VAT at 20% and perhaps one less holiday a year is the sum of the deep deprivations the British public will have to undergo. But the final shifting of the borrowings of the past -- over to sovereign debt -- hasn't yet been played out.
But, back to the US Financial Crisis Commission. Two of the more interesting facts to come from this were
(a) Ben Bernanke revealed that 12 of the top 13 US financial institutions were in danger of running out of cash. This perhaps explains why so many politicians at the time said that it was a crisis of liquidity rather than a solvency crisis. The liquidity problem was so massive that it didn't even occur to the politicians (and not a few economists) that it didn't have to be an either/or problem; it could (and was) both. But politicians and bankers were in fire-fighting mode. The solvency problem could be put off for a couple of years (see Ireland, December 2010) whereas the liquidity problem had to be solved by Monday October 22nd (or whatever day that particular Monday was). The result of that was that everything was thrown at the liquidity problem with no heed for its solvency implications a couple of years or more down the line. "Something will turn up", they hoped.
Curiously, something has -- China. This is both good (it puts off the next crisis for a while) and bad (it doesn't get rid of the structural problem). Stephanie Flanders observed that the last country to undergo the loss of status as a world reserve currency was the UK, and, in a sense, we are still living with the painful consequences of the benefits reaped by the Victorians as Sterling was building up as a reserve currency.
But when Sterling lost its world status (a gradual process, but let's take 1945 as a convenient inflection point) there was another currency -- the dollar -- willing and ready to step in. China today is the US of 1945. It produces shedloads of stuff that other people want to buy (or, in 1945 in the case of the US, had to buy). The difference is that China is not willing for the yuan to become a global reserve currency -- possibly because its leaders have seen the long-term implications.
So, eventually the dollar has to cease being a global reserve currency (I'm discounting the possibility that the American consumer will suddenly realize that it can no longer carry on benefiting from Chinese purchases of US bonds without any quid pro quo) but there is nothing to step in to take its place. This is a quite distinct economic first, and is one of the explanations for many academic economists scratching their heads and saying "fucked if I know". My guess is that the answer is out there, but what that answer turns out to be will catch us all by surprise. A synthetic currency which the financial industry is not allowed to trade (cue zillions of complaints about "the need to hedge" etc from the lobbyists at the investment banks)? A "real" global currency that somehow copes with the paradox of different interest rates in different parts of the world? This is quant finance stuff. All that a mere mortal such as myself can say is that the current global financial system (one reserve currency in one country) is broken and a new global financial system will inevitably be invented, probably before I die, to replace it.
That won't make much difference to ordinary financial transactions -- that big change is going to come from mobile phones. Once again a new finance is creeping up on us, whereby airtime is becoming a virtual currency. Should the sellers of airtime be regulated as banks? I would say, yes. If you create something out of thin air (in this case, an airtime allowance, or an Amazon gift voucher allowance, or my iTunes account) then you are in effect printing money. If I give Apple a hundred quid for my iTunes account, which I can then use to trade for stuff other than iTunes, then Apple is printing money.
The mobile phone has long since ceased to be a mobile phone. Most such devices are probably used 95% of the time for some other purpose. Soon one of those major purposes will be as a mobile wallet. And that is going to be the biggest change to money for the person in the street.
The second interesting thing to come out of the Commission's documentation was confirmation that Goldman Sachs had pocketed $3.4bn from the bailout of AIG. You may remember that the US Treasury effectively used AIG as a conduit to stop the rest of the US banking system going broke. It was a crude mechanism and it had the interesting side-effect of bailing out quite a few European institutions as well. Effectively AIG had been in a situation where it could have offered its counterparties as little as 60 cents on the dollar for the money that it owed. But then the Treasury said that AIG was TBTF (too-big-to-fail). Since any company's only weapon in this "haricut negotiation" scenario is the nuclear option of "if you don't accept 60%, then we will go broke and you will get nothing", once the Treasury says "AIG will not be allowed to go broke", you lose all negotiating power.
Goldman Sachs duly got $3.14bn from AIG on its CDS contracts (this is on top of the $14bn liquidity bailout from the US Treasury) and it booked $2.9bn of that to its own account. If you account for 40% of that as money that it would not have made if the Treasury had not issued its guarantee, that means Goldman Sachs made just shy of $1.75bn from the US taxpayer at the stroke of a Tim Geithner statement. That's not far short of ten bucks from every adult in the USA. Nice work if you can get it.
Geithner's response today (along with Bernanke's testimony at the time) was that there literally was no choice. The fall of Lehman had shown that the banking system had become so intrinsically interlinked with everyday life that if AIG had not been shored up at any price then society would have broken down.
But who is to blame for this? In the UK I am no longer allowed to demand my wages in cash. That right has been legislated away. My wages HAVE to go into a bank (one within the UK clearing system), and there is nothing I can do about it. Cash is no longer king. It's all electronic. In Japan they have spotted that giving this much power to the banking system is a mistake, and as a result everyday life could (just) sidestep the banking system. But in the US and in the UK (and most of Europe) it can't.
Similarly, to make any large deals in cash is to light up a red flag. Your transaction is notified. HMRC start investigating you and the sources of this "undeclared" money. Government, by its very nature, likes to keep track of its people. Twas ever thus, right the way back to Ancient Greece and beyond. Be those communities small or large, be they democracies, autocracies, dictatorships, plurocracies, city-states or even small communal self-governing villages, whatever they were, the bosses liked to know what you were up to. There will always be someone, or some group, that wants society to work that way. So when the banks came along and said "look, all of this cash means you don't know what people are up to. Let us run the system of financial exchange and give us the legal right to force people to deal through us, and we'll tell you if any of them are up to anything dodgy". ("Dodgy" in banking terms is, of course, a very relative term. it doesn't, for example, include what the banks or their valued clients might be doing.) Is it any surprise that the more naive and free-market devotees said "yes"?
We are now living with the result of this. "Hard" currency (a misleading term, perhaps "anonymous" currency would be better) has been legislated away, but government didn't want the expense of administrating what replaced it(and, TBH, we wouldn't have been any better off in any sense if they had -- look at the Public Sector pension obligations that aren't even written to book, about £1.3 trillion? and imagine all of our bank deposits being treated in a similar way) so it has been handed over to banks, which thus become too-big-to-fail.
All of this is, in the long run, obviously unsustainable. But the two problems are (a) It isn't clear what will replace it, despite no shortage of naive and usually economically innumerate people out their who have their own version of the economist perpetual motion machine, and (b) in the long run, we are all dead. (IOTW, the long run is longer than you think).
_________
Whenever anyone anywhere demands "a public inquiry", I think that the performance of this commission should be thrown in their faces.
Notwithstanding the abysmal performance of the investigators, there was some useful documentation. I've just finished reading John Lanchester's Whoops, which is a bit of a Democratic Party-leaning interpretation of the causes of the disaster, and also a bit of a rose-tinted glasses look at the "good old days" of Glass-Steagall. Lanchester makes a few errors, I feel (and the proof-reading could have been a bit better as well!) not least his conclusion at the end that nothing has been learnt from the disaster. What he misses there, of course, is that he assumes that the disaster is over, that we are in the road to probably slow recovery. It's the Birks view that history will show that the disaster is still happening. In terms of alcoholism, recovery and change can only start when you hit rock-bottom. The UK "crisis" of 2008 hasn't been "solved" because it hasn't yet been suffered. Lanchester falls into the trap of thinking that petrol at 131p a litre, VAT at 20% and perhaps one less holiday a year is the sum of the deep deprivations the British public will have to undergo. But the final shifting of the borrowings of the past -- over to sovereign debt -- hasn't yet been played out.
But, back to the US Financial Crisis Commission. Two of the more interesting facts to come from this were
(a) Ben Bernanke revealed that 12 of the top 13 US financial institutions were in danger of running out of cash. This perhaps explains why so many politicians at the time said that it was a crisis of liquidity rather than a solvency crisis. The liquidity problem was so massive that it didn't even occur to the politicians (and not a few economists) that it didn't have to be an either/or problem; it could (and was) both. But politicians and bankers were in fire-fighting mode. The solvency problem could be put off for a couple of years (see Ireland, December 2010) whereas the liquidity problem had to be solved by Monday October 22nd (or whatever day that particular Monday was). The result of that was that everything was thrown at the liquidity problem with no heed for its solvency implications a couple of years or more down the line. "Something will turn up", they hoped.
Curiously, something has -- China. This is both good (it puts off the next crisis for a while) and bad (it doesn't get rid of the structural problem). Stephanie Flanders observed that the last country to undergo the loss of status as a world reserve currency was the UK, and, in a sense, we are still living with the painful consequences of the benefits reaped by the Victorians as Sterling was building up as a reserve currency.
But when Sterling lost its world status (a gradual process, but let's take 1945 as a convenient inflection point) there was another currency -- the dollar -- willing and ready to step in. China today is the US of 1945. It produces shedloads of stuff that other people want to buy (or, in 1945 in the case of the US, had to buy). The difference is that China is not willing for the yuan to become a global reserve currency -- possibly because its leaders have seen the long-term implications.
So, eventually the dollar has to cease being a global reserve currency (I'm discounting the possibility that the American consumer will suddenly realize that it can no longer carry on benefiting from Chinese purchases of US bonds without any quid pro quo) but there is nothing to step in to take its place. This is a quite distinct economic first, and is one of the explanations for many academic economists scratching their heads and saying "fucked if I know". My guess is that the answer is out there, but what that answer turns out to be will catch us all by surprise. A synthetic currency which the financial industry is not allowed to trade (cue zillions of complaints about "the need to hedge" etc from the lobbyists at the investment banks)? A "real" global currency that somehow copes with the paradox of different interest rates in different parts of the world? This is quant finance stuff. All that a mere mortal such as myself can say is that the current global financial system (one reserve currency in one country) is broken and a new global financial system will inevitably be invented, probably before I die, to replace it.
That won't make much difference to ordinary financial transactions -- that big change is going to come from mobile phones. Once again a new finance is creeping up on us, whereby airtime is becoming a virtual currency. Should the sellers of airtime be regulated as banks? I would say, yes. If you create something out of thin air (in this case, an airtime allowance, or an Amazon gift voucher allowance, or my iTunes account) then you are in effect printing money. If I give Apple a hundred quid for my iTunes account, which I can then use to trade for stuff other than iTunes, then Apple is printing money.
The mobile phone has long since ceased to be a mobile phone. Most such devices are probably used 95% of the time for some other purpose. Soon one of those major purposes will be as a mobile wallet. And that is going to be the biggest change to money for the person in the street.
The second interesting thing to come out of the Commission's documentation was confirmation that Goldman Sachs had pocketed $3.4bn from the bailout of AIG. You may remember that the US Treasury effectively used AIG as a conduit to stop the rest of the US banking system going broke. It was a crude mechanism and it had the interesting side-effect of bailing out quite a few European institutions as well. Effectively AIG had been in a situation where it could have offered its counterparties as little as 60 cents on the dollar for the money that it owed. But then the Treasury said that AIG was TBTF (too-big-to-fail). Since any company's only weapon in this "haricut negotiation" scenario is the nuclear option of "if you don't accept 60%, then we will go broke and you will get nothing", once the Treasury says "AIG will not be allowed to go broke", you lose all negotiating power.
Goldman Sachs duly got $3.14bn from AIG on its CDS contracts (this is on top of the $14bn liquidity bailout from the US Treasury) and it booked $2.9bn of that to its own account. If you account for 40% of that as money that it would not have made if the Treasury had not issued its guarantee, that means Goldman Sachs made just shy of $1.75bn from the US taxpayer at the stroke of a Tim Geithner statement. That's not far short of ten bucks from every adult in the USA. Nice work if you can get it.
Geithner's response today (along with Bernanke's testimony at the time) was that there literally was no choice. The fall of Lehman had shown that the banking system had become so intrinsically interlinked with everyday life that if AIG had not been shored up at any price then society would have broken down.
But who is to blame for this? In the UK I am no longer allowed to demand my wages in cash. That right has been legislated away. My wages HAVE to go into a bank (one within the UK clearing system), and there is nothing I can do about it. Cash is no longer king. It's all electronic. In Japan they have spotted that giving this much power to the banking system is a mistake, and as a result everyday life could (just) sidestep the banking system. But in the US and in the UK (and most of Europe) it can't.
Similarly, to make any large deals in cash is to light up a red flag. Your transaction is notified. HMRC start investigating you and the sources of this "undeclared" money. Government, by its very nature, likes to keep track of its people. Twas ever thus, right the way back to Ancient Greece and beyond. Be those communities small or large, be they democracies, autocracies, dictatorships, plurocracies, city-states or even small communal self-governing villages, whatever they were, the bosses liked to know what you were up to. There will always be someone, or some group, that wants society to work that way. So when the banks came along and said "look, all of this cash means you don't know what people are up to. Let us run the system of financial exchange and give us the legal right to force people to deal through us, and we'll tell you if any of them are up to anything dodgy". ("Dodgy" in banking terms is, of course, a very relative term. it doesn't, for example, include what the banks or their valued clients might be doing.) Is it any surprise that the more naive and free-market devotees said "yes"?
We are now living with the result of this. "Hard" currency (a misleading term, perhaps "anonymous" currency would be better) has been legislated away, but government didn't want the expense of administrating what replaced it(and, TBH, we wouldn't have been any better off in any sense if they had -- look at the Public Sector pension obligations that aren't even written to book, about £1.3 trillion? and imagine all of our bank deposits being treated in a similar way) so it has been handed over to banks, which thus become too-big-to-fail.
All of this is, in the long run, obviously unsustainable. But the two problems are (a) It isn't clear what will replace it, despite no shortage of naive and usually economically innumerate people out their who have their own version of the economist perpetual motion machine, and (b) in the long run, we are all dead. (IOTW, the long run is longer than you think).
_________
