Re: Financial crisis
- From: Alan Fitch <apfitch@xxxxxxxxxxxxxxx>
- Date: Fri, 19 Sep 2008 23:55:37 +0100
Stephen wrote:
On Fri, 19 Sep 2008 18:43:02 +0100, "Siderius Nuncius"<snippety-snip>
<matron.nuncius@xxxxxxxxx> wrote:
I really don't understand this. My dad was a right-wing economist, very
much of the "How many economists does it take to change a lightbulb?",
"None - the market will take care of it" school. (We didn't exactly see
eye-to-eye on these matters.) Sadly, he's no longer in a position to
explain and I wondered whether anyone here can.
The second change in capital is the extent to which it has become a
confidence trick. Doom mongers were forecasting this ever since
national currencies moved off the Gold Standard, but as long as people
generally trusted governments and were successfully dissuaded from
asking difficult questions then all was well. Banks make imaginary
money by lending out more than they have, safe in the knowledge that
what they lend will be deposited with them again, so that it can be
lent out to somebody else. As long as they have 10% of their loans in
the vaults they can get by. Of course if the debts go bad, they
suddenly have a problem. In the 1980s most European banks were in as
much trouble as the weakest ones are now. The Midland and Lloyds were
both hollowed out be the Latin American debt crisis. The Midland was
a complete basket case, but it was in nobody's interest to make this
fact public, and in due course HSBC stepped in quietly to bail it out.
Lloyds kept their heads down and eventually pulled through, not least
because inflation tended to erode debt away.
Following the 1980s deregulation the financial markets became global
and more entrepreneurial and it was recognised that there were ways of
making imaginary money out of imaginary money as well as real money.
Because regulation was looser, and different regulators looked at
different things it was hard to see the true picture. And for a while
it worked, and shareholders did well, so traders were rewarded, and so
they became more reckless, and the whole thing became a bubble. And
the internet meant that knowledge moved faster. And then the EU
decided that instead of old fashioned paternalistic regulation, the
answer was transparency, which meant that if you went looking, it
became easier to see that the bubble was a bubble. And eventually the
greed got to great, and too many people saw the bubble for what it
was, and because of the internet nobody could keep it all quiet like
in the past, and the bubble burst.
I have also wondered about this. I think there are many things to ponder.
Firstly, there seems to be an idea that banks are in some sense "solid".
However it seems to me that banking has consisted of a series of crises,
at least one per decade - property in the seventies, third world debt in
the eighties, dot com boom late nineties, now "sub-prime mortgages".
My theory is that there is some kind of wave behaviour, similar to waves
of innovation in technology. Except this is a wave of forgetfulness and
greed - after a few years "people" forget the last time they got burnt,
pile money into the next big thing, it all goes wrong, 2 years later
they've forgotten again etc... Remember that until recently banks and
investors were generally making amazing amounts of money.
Secondly, markets are traditionally said to be a "good thing" if
everyone has perfect information about the state of the market. But
technology in the form of electronic trading systems has given people
with fast enough algorithms the ability to trade much faster than human
beings, which makes the market inherently less stable (in my opinion -
remember only the facts have been changed...). Also advances in
technology and speed of trading have made it possible to make money by
betting on futures, rate-of-change of share prices, rate-of-rate-of
change of share prices etc. The linking of electronic trading systems
around the world has also enabled the flow of phenomenal amounts of
money across borders in a way that it is simply beyond governments to
control. And the ability to transmit information extremely fast has led
to a greater influence from "confidence" and "belief". Now everyone
believes we're in trouble - so we are...
Thirdly this has all happened before. Many times. Did you hear the
series on Radio 4 about boom and bust?
regards
Alan
P.S. Regarding large salaries. Remember, if you are poor, you must not
be paid more or you will price yourself out of a job - your job will go
abroad where labour is cheaper. If you are rich, you must be paid more
so you do not go and work abroad, where pay is higher. Got it?
--
Alan Fitch
apfitch at ieee
dot org
.
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