The Blind Leading The Blind and the Domino Effect
The US, UK, European and Swiss Central Banks issued $280,000,000,000 into the banking sector, by issuing government bonds, with the security being “damaged assets, as in mortgage backed securities” in an unprecedented, concerted attempt to shore up the global financial system. This sort of debt swap has never been done before. In my layman’s eyes it would appear that they are effectively saying to the banks we will take all the hits, you have a Northern Rock style guarantee that we will support you. Talk about moral hazard!
We are living through a financial crisis unprecedented in it’s scale and scope, and the fear is that it is going to get a lot worse. There is real panic in the air. The mistakes of the past have been repeated. The 1929 crash was amplified by highly leveraged investments going bad, we are now going to see many hedge funds, private equity firms and banks fail as their highly leveraged bets go wrong. I prefer the term bet to investment, it is more honest.
You can see why governments are so obsessed with economic growth, as this allows the financial system to function. When growth disappears, the money system starts to implode. Failure begets failure, what we in the insolvency profession know as the domino effect – a large failure like Rover will cause multiple failures in its wake, and so on, the domino effect ripples on for years.
So who will be the casualties, who will be the largest institution allowed to fail? Anyone for Bear Sterns or Citigroup?
In the meantime, the badger has his first budget later today, and I can’t help thinking what an irrelevance he is. He is totally at the mercy of the machine, he had no choice to nationalise Northern Rock, and he must go along with whatever Mervyn King demands.
Figures from the council of mortgage lenders showed that 50,300 mortgages were taken out in January 2008, 34 percent lower than last year. Then the Department of Communities and Local Government (DCLC – who comes up with these stupid department names, they are a nightmare to remember) announces that house prices are up 8% from last February!
Mr King wants a period of austerity, he wants a house price re-adjustment, so do people without a house, and the house builders are bracing themselves for a big downturn. That downturn is now. Hang on to your hats, the housing sector has been driving the UK economy for 13 years, and all the easy credit and household debt has been accumulated on the back of the feel good factor as house prices tripled. The only question is how far, how fast the fall will be, soft landing or slump? The badger would do well to have a few fiscal rabbits up his sleeve to stimulate the housing sector – if only he read my blog? If only anyone would? Hey, if you don’t write it, it’s certain no-one will.
In the meantime, the speculators have moved on from shorting sub-prime securities to of all things oil, wheat and other commodities, now seen as safe havens. Texan crude hit $110 a barrel another record high. The MD of Greggs is kicking off in the press about the price of wheat, blaming this on speculators, not poor harvests, increased demand or biofuels. Wheat hit a record $13.495 a bushel recently. And it’s being driven by financiers making bets to try and recover their losses to the sub-prime meltdown – my head hurts just thinking about it. Why can’t they just bet on the horses like everybody else? Of course event hat is not certain, given todays cancellation at Cheltenham due to the high winds.
Severe storms from the North Atlantic late in winter/early spring again, more evidence of Climate Change, but that discussion is for another day, although I do like the link. Started a new book “The Carbon Wars” by Jeremy Leggett about the history of Climate Change politics, should be good. Still working my way through “The Shock Doctrine” by Naomi Wolf, one of the most enlightening and truly depressing books I have had the privilege to read.