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Looming Financial Crisis?

  
  

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Fist Fun
15:41 / 02.06.08
Are inequality and poverty necessarily related?

What are you thinking about when you talk about poverty in the UK?

I see a country with a welfare state, free schooling and health and social housing for those that need it. The kind of minimum basic standards that I hope everyone in the world will eventually have access to as standards of living rise globally.
 
 
ONLY NICE THINGS
15:58 / 02.06.08
Didn't we have a lengthy thread where it was totally not demonstrated that free markets and globalisation were the cure for poverty? This before we even get onto the idea that everyone in the UK is well off. Both of which are, however, offtopic!

Back in the world, G Kennedy Thompson has been forced to step down from Wachovia. Eight US airlines are in administration, and IATA has knocked $6.8 billion off its expected forecast for 2008 in the last three months. US manufacturing has experienced its fourth consecutive quarter of contraction. In the UK, where everyone is well off, mortgage approvals are down over £2 billion on the six-month average, and inflation plus static manufacturing growth means that cost is increasing although demand is reducing.
 
 
Fist Fun
16:08 / 02.06.08
I don't think those examples are necessarily bad though.

UK mortgage approvals are down 2 billion but this is after more than a decade of massive rises in house prices meaning that many people are priced out of the market. As fewer and fewer people can afford to buy mortgage approvals come down... then at some point when housing is affordable they will go back up.

I don't think it is some terrible apocalypse it is just the way markets work. Cheaper housing could be a good thing for a lot of people.

If there isn't demand for air travel because the rise in oil prices makes it too expensive then those businesses should go out of business. If there is enough demand then they will stay in business. Cheap air travel isn't a fundamental human right and less of it will be good for the environment.
 
 
ONLY NICE THINGS
16:25 / 02.06.08
But without air travel it is harder to globalise, surely, and without globalisation there is poverty, and if there is poverty then there is, surely, a looming financial crisis?

Personally, I'm not heartbroken about the adjustment to house prices, but then I did not state earlier that the problem with regulation was:

So less incentive to build houses, renovate houses, provide rental property for those moving areas, less incentive to buy or sell so it becomes harder to buy or sell property when someone wants to move house or a property becomes vacant. So the housing market would be poorer for everyone.

This is exactly what is happening now. I also did not say:


in the example of the housing market, it all works very well the way it is now.

Mind you, I also did not draw a distinction between bailing out a bank (bad) and reassuring everyone with money in a bank that they, alone of investors, would be guaranteed to get all their savings back in order to encourage them to keep their money in a bank that would otherwise have failed (good). Basically, I have no idea what you're arguing here - except, broadly, that the current situation is fine, the government has applied exactly the right amount of control over business, but more free trade would be good, because it always is, but notwithstanding that everyone is and will continue to be fine and the last thing that anyone should do is try to anticipate or ameliorate whatever happens next. And that anything that appears to suggest that everything is not fine just doesn't exist.

Which is fine, as far as it goes, but I'm not sure where it goes.
 
 
Fist Fun
16:35 / 02.06.08
Well I am confused then.

Cos you pointed to the fall in the number of mortgage approvals as a bad thing and presumably a symptom of a inherently flawed economic system.

Now you are saying that you are personally not heartbroken with that. As I would assume are a lot of people... so how come that is bad?

For me the housing market is working exactly as you would expect. It goes up, it goes down. If we were to regulate that (again I am confused are you for housing market regulation or against? you never seem to commit) then you would most likely lose all the stuff I talked about earlier.
 
 
ONLY NICE THINGS
16:41 / 02.06.08
"Regulate all badness"

"Apocalypse"

"Inherently flawed economic system" - dude, where are you getting these things from?
 
 
Fist Fun
16:47 / 02.06.08
So what do you believe about the market, regulation and the 'looming financial crisis'?
 
 
ONLY NICE THINGS
08:33 / 03.06.08
I asked a question, Buk. Where are you getting those phrases from? I find them quite interesting.

Meanwhile, back in the world, B&B declare a really quite extraordinary rewriting of their rights issue under pressure from the underwriters to reflect the plummeting value of a piece of Bradford & Bingley. The resulting uncertainty knocked £2.77 billion of the value of the high street lenders at close of trading yesterday.
 
 
Fist Fun
09:20 / 03.06.08
I just made those phrases up out of my head because we are discussing a 'looming financial crisis'. Sorry if that was a bit OTT but I don't think it is that important.

So B&B shares have fallen. What does this mean for us?
 
 
ONLY NICE THINGS
09:46 / 03.06.08
You're wrong on whether or not it's important, I'd say, but that's about your approach to the discussion rather than the economy itself, so we can come back to it.

Most obviously, it means for Citi and UBS that the value at which they had underwritten the share offering meant that they were going to take a substantial loss on the new shares issued, assuming that shareholders did not take up the shares, which it might be safe to assume that they would not if they could get shares more cheaply on the open market. That's issue the first. Issue the second is that B&B then had to decide either to accept the underwriters' demands, and raise less capital from the rights issue, or reject it. They would also have to sell that decision to shareholders.

More generally, it highlights the risk that another way for banks to raise capital may be shut off - if underwriting rights issues is unprofitable, it won't be done. Banks are not lending to each other, so the most available source of funds becomes government, which creates upward inflationary pressure.
 
 
Fist Fun
09:03 / 04.06.08
I think for B&B their business model, weighted towards buy to let mortgages, has come unstuck because the buy to let mortgage thing is falling over.

So they had a poor business model so they fail and the shareholders who invested in that model and risked their dough in expectation of reward take the hit.

I don't think it really says much more than that.

Banks are still doing rights issues. RBS are in the process of a 12 billion one which completely dwarfs this so I don't think rights issues are going to become a thing of the past.

So the companies with poor business models are weeded out and the ones with good ones take the hit and survive. Which is good.
 
 
ONLY NICE THINGS
09:48 / 04.06.08
This is the RBS that is also being investigated for anticompetitive practices and collusion by the OFT, yes? This is the example of a good business model?

As you say, the RBS rights issue is already in process, so it's hardly a good basis on which to say that rights issues will still go on. Especially since the RBS shares, which were originally offered at a 46% discount, were approaching 200p, the heavily discounted price, which would have resulted in the shares being left with the underwriters? And the underwriters have had to buy shares heavily to push the price up to a point where they might not get stuck with all of them? This is great stuff, but it's not really proving your point. Is there another high-street bank rights issue you could point to?
 
 
The Idol Rich
10:23 / 04.06.08
Sorry to drop out there, I was enjoying that debate but my password temporarily stopped working – oh well, back now it seems.

I read that article now and yeah not much meat.
The gist is that there is a powerful elite of banker types who run the economy enrcihing themselves at the expense of the world taking as proof the current financial uncertainty.
They seem to say that because some people are vastly richer than others that this is necessarily a bad thing.

One thing he does mention that is worth discussing is the powers that the IMF and World Bank etc have. I think it’s fairly arcane and opaque as to how people are appointed to these bodies (doesn’t the US traditionally nominate a candidate for one and Europe a candidate for the other?) and yet they have huge power to apply economic sanctions to countries which they deem to have not met their criteria. Who are these people and do they really work for all our best interests? Is there not something strange about the way they compel nations to follow their ideology for markets with fewer and fewer regulations?

UK mortgage approvals are down 2 billion but this is after more than a decade of massive rises in house prices meaning that many people are priced out of the market. As fewer and fewer people can afford to buy mortgage approvals come down... then at some point when housing is affordable they will go back up.

But at the moment there is a kind of counter effect in that even though prices are falling, banks are less willing to lend, so it’s not getting any easier for people to purchase houses.

I think for B&B their business model, weighted towards buy to let mortgages, has come unstuck because the buy to let mortgage thing is falling over.
So they had a poor business model so they fail and the shareholders who invested in that model and risked their dough in expectation of reward take the hit.
I don't think it really says much more than that.

My guess is that this doesn’t represent the end for rights issues at the moment but the thing that is interesting about this to me is the way that B&B have re-priced the issue – allegedly at the underwriting banks’ request. What does it mean insure something if you can renegotiate the terms when it looks as though you might actually have to pay out? That in itself seems like a potential problem with the fundamental system of how rights issues work – probably more of a problem for it than the fact that B&B happened to release a profits warning right in the middle of their specific issue.
 
 
Fist Fun
12:24 / 04.06.08
Well I believe HBOS has one coming up.

I believe rights issues and banks will be around for a long time to come.
 
 
Fist Fun
08:58 / 08.06.08
One thing he does mention that is worth discussing is the powers that the IMF and World Bank etc have. I think it’s fairly arcane and opaque as to how people are appointed to these bodies (doesn’t the US traditionally nominate a candidate for one and Europe a candidate for the other?) and yet they have huge power to apply economic sanctions to countries which they deem to have not met their criteria. Who are these people and do they really work for all our best interests? Is there not something strange about the way they compel nations to follow their ideology for markets with fewer and fewer regulations?

I think the idea is that as countries free up their markets and remove barriers to trade their productivity increases and they become richer and more developed. As the standard of living increases the problems associated with poverty diminish.

So if you believe that free markets do increase wealth then it makes sense that there are institutions to promote this.

We could equally question charities who distribute funds. How are they appointed? Who decides where the funds go?
 
 
The Idol Rich
17:59 / 08.06.08
I think the idea is that as countries free up their markets and remove barriers to trade their productivity increases and they become richer and more developed. As the standard of living increases the problems associated with poverty diminish.

Well, that's the idea sure enough but is that the reality? The western (and other) powers who control the World Bank were happy to get nice and rich using subsidies, trade-barriers and the like as their industries were growing - can you really blame "less-developed" countries for wanting to take the same route to success? Will it really be the poor countries and their citizens that profit or the western companies that are desperate to deal with them?
Until that is definitively answered is it really right that the Bank can make loans conditional on implementing its demands? It may be that it is forcing countries almost at the point of a gun to take steps that aren't in their best interest.
The Bank has representatives from Britain, presumably appointed by our democratically appointed leaders, so indirectly they ought in some sense to be representing me (and you too if you're British) right? But there is never any discussion of this in the run up to a general election, it seems that it is taken as a given that the Bank continues in what it does utterly unfettered or unconcerned by any opinions or wishes of any of the populace of the countries it supposedly represents.

"So if you believe that free markets do increase wealth then it makes sense that there are institutions to promote this."

But just suppose that you don't believe that free markets do automatically increase wealth? Or just that even if they do they cannot be created by forcing them at unnatural speed on to an economy? Where is the organisation that spreads the alternative viewpoint?

We could equally question charities who distribute funds. How are they appointed? Who decides where the funds go?

Well obviously we should question that very closely too - although as no charity I'm aware of has anything like the sway of the world bank or controls an equivalent amount of money, at present I'm more concerned about the Bank.
 
 
diz
14:45 / 09.06.08
Well, that's the idea sure enough but is that the reality?

More or less.

Until that is definitively answered is it really right that the Bank can make loans conditional on implementing its demands?

Not that I don't have issues with the World Bank or the way it operates, but yes, of course it is. It's a lender. It has every right to attach conditions to the loans it makes.

Whether the World Bank sets appropriate conditions, whether it makes good decisions, or whether it is administrated in the way it should be are all good questions worth discussing, but when they're handing out their money, it's only reasonable to expect that they would have the right to hand it out in the manner they see fit.

To flip it on its head, where exactly would borrowers get the right to demand the World Bank's money without conditions?
 
 
The Idol Rich
16:21 / 09.06.08
More or less.

Well it’s debatable, to say the least, as to how effective the World Bank has been at raising countries out of poverty but let’s leave that aside for the moment.

Not that I don't have issues with the World Bank or the way it operates, but yes, of course it is. It's a lender. It has every right to attach conditions to the loans it makes.

Apologies if I wasn't clear but I didn’t mean to ask whether the Bank should attach conditions to its loans but whether those conditions should be the implementation of (perhaps I should have said “policy”) demands. Obviously a lender does have the right to attach conditions to loans it makes but I (for one) am not happy with the ideology that lies behind the conditions that the Bank chooses to attach. What I’m getting at really is, is it right that the Bank actively promotes an ideology which a lot of people from the countries which have representation on that bank find a total anathema? Isn’t there a huge disconnect somewhere in the diplomatic process between the citizen of a country and what the World Bank does? I guess that’s roughly what Larry Elliot was getting at.

To flip it on its head, where exactly would borrowers get the right to demand the World Bank's money without conditions?

I didn’t mean that people should be able to borrow without conditions, I’m just not comfortable with conditions that involve the implementation of controversial and long lasting (if not irreversible) policies. It’s obviously perfectly reasonable to make a loan to demand repayment at such and such a rate but is it reasonable to demand that a country allows more powerful western companies to compete in its industries? Even if the native companies are going to lose out and the people of the country are likely to lose out?
 
 
diz
17:29 / 09.06.08
Apologies if I wasn't clear but I didn’t mean to ask whether the Bank should attach conditions to its loans but whether those conditions should be the implementation of (perhaps I should have said “policy”) demands. Obviously a lender does have the right to attach conditions to loans it makes but I (for one) am not happy with the ideology that lies behind the conditions that the Bank chooses to attach.

OK, then you, as Prime Minister of Developing Country X, can find some other way to get funded.
 
 
My Mom Thinks I'm Cool
18:04 / 09.06.08
I believe zhe is saying that, as a citizen of the country from whence the bank comes, the bank's procedures should be a bit less mysterious and a bit more subject to the wishes of the people.

not necessarily the people of the borrowing countries so much as the people of the developed countries.

I don't think it's unreasonable that the bank lend with conditions. I'd just prefer those conditions to be better human rights records, or something.
 
 
diz
19:01 / 09.06.08
I believe zhe is saying that, as a citizen of the country from whence the bank comes, the bank's procedures should be a bit less mysterious and a bit more subject to the wishes of the people.

I'm all for greater transparency, that's fine, but necessary economic decisions aren't necessarily popular. In general, voters have a strong tendency to screw up the cost/benefit of short-term sacrifices and long-term gain. That's why you generally want to keep major financial institutions like central banks politically independent. Raising interest rates, for example, is seldom popular but sometimes necessary.

I don't think it's unreasonable that the bank lend with conditions. I'd just prefer those conditions to be better human rights records, or something.

Human rights are such a fraught political subject that economic assistance that's conditional upon human rights will never arrive. The three main obstacles anything conditional upon human rights runs into are the hypocrisy argument, the cultural relativism argument, and the national sovereignty argument, all of which basically boil down to "Who are you to tell other countries how to conduct their affairs?" Look at China's policy re: Sudan and Burma. Various countries will block anything conditional upon human rights concerns, regardless of what's attached.

Given that reality, do we really want economic development to wait until we reach global consensus on human rights (in other words, until Hell freezes over)? Would we rather people be oppressed and poor or just oppressed? Things that come with development, like sanitation and vaccination and health care and so on and so forth have value whether or not you live in a dictatorship.

You could also point out that economic development can often drive political liberalization. I won't go so far as to say that it always drives it, or that it is in fact the only thing that can drive it, but others would, and not without some justification.

Mind you, I am not saying that the World Bank or the IMF are not flawed, I'm just saying that your criticisms and proposed remedies are worse than the current problems.
 
 
My Mom Thinks I'm Cool
19:20 / 09.06.08
voters have a strong tendency to screw up the cost/benefit of short-term sacrifices and long-term gain.

dang those voters! voting for what they want, instead of what rich people want.

Human rights are such a fraught political subject that economic assistance that's conditional upon human rights will never arrive.

you have an amazing ability to predict the future of this hypothetical experiment.

Who are you to tell other countries how to conduct their affairs?

...isn't that kind of (exactly) what the world bank/imf actually do...? only instead of telling them to conduct their affairs in a way that fosters democracy, it's telling them to conduct their affairs in a way that fosters capitalism?

aren't you, in this one sentence, making exactly the argument we were making in the first place against the IMF/WB?

"who are you"? the people with the money, obviously. or, as you put it yourself, if you don't like it, OK, then you, as Prime Minister of Developing Country X, can find some other way to get funded.
 
 
The Idol Rich
07:09 / 10.06.08
OK, then you, as Prime Minister of Developing Country X, can find some other way to get funded.

Well, that's an accurate description of how it is, we're all agreed on that. My point is, I'm not happy with that and I guess that Larry Elliot's point is that even if every citizen of the powers that are represented on the World Bank isn't happy with that there is nothing that they can do about it.
 
 
The Idol Rich
07:25 / 10.06.08
I'm all for greater transparency, that's fine, but necessary economic decisions aren't necessarily popular. In general, voters have a strong tendency to screw up the cost/benefit of short-term sacrifices and long-term gain.

But does the World Bank have a better record?

That's why you generally want to keep major financial institutions like central banks politically independent. Raising interest rates, for example, is seldom popular but sometimes necessary.

That’s an interesting one – in the UK as you know the government handed over control of interest rates to the central bank, but why stop there? Tax rises are seldom popular but necessary, should the control of taxes be removed from the government’s power as well? Democracy is a strange system where there is obviously a worrying temptation towards populism but presumably if you are going to have that system at all then you need to have some belief that democratically elected politicians can be capable of making unpopular or long-term decisions. I don’t really see why economics should be a special case.

Human rights are such a fraught political subject that economic assistance that's conditional upon human rights will never arrive. The three main obstacles anything conditional upon human rights runs into are the hypocrisy argument, the cultural relativism argument, and the national sovereignty argument, all of which basically boil down to "Who are you to tell other countries how to conduct their affairs?"

Except their financial affairs obviously. Personally I would be much happier if the World Bank made a loan to a country conditional on, say, having a transparent democratic election rather than allowing Shell to buy their oil refineries but it’s not an either or is it? Why does the World Bank have to have an agenda to push at all?

Mind you, I am not saying that the World Bank or the IMF are not flawed, I'm just saying that your criticisms and proposed remedies are worse than the current problems.

Which proposed remedies are those?
I don't really understand what it means for the criticisms to be worse than the current problems - surely a criticism is just pointing out the problem?
 
 
Fist Fun
07:57 / 10.06.08
Well no country is obliged to take money from the World Bank so they could decide democratically not to do that.

I think the idea is that the money spent should be in ways which the World Bank believes will improve the economy of that country.
 
 
The Idol Rich
09:35 / 10.06.08
Well no country is obliged to take money from the World Bank so they could decide democratically not to do that.

Yes, they could decide not to borrow democratically but there is no democratic input that I'm aware of into the decision as to whether to lend.
Also, they're not legally obliged to take money from the World Bank but they may need money and that may be the only available source, in which case, in effect, they are obliged.
In the individual case no-one is obliged to borrow at punitive interest rates that they won't be able to pay back so I guess there is no problem with loan sharks right?

I think the idea is that the money spent should be in ways which the World Bank believes will improve the economy of that country.

The economy of the country or the economy of the world? Like I said anyway, there is a massive digression that it would be possible to get involved in here about how effective the World Bank has been in achieving either of these aims but I think that the main important thing to ask is whether there ought to be an unaccountable organisation, even an ostensibly benevolent one, that purports to know what is best for each country and that will seek to influence countries down the route that it considers best?
 
 
Fist Fun
11:01 / 10.06.08
In the individual case no-one is obliged to borrow at punitive interest rates that they won't be able to pay back so I guess there is no problem with loan sharks right?

Yeah fair point.

I suppose it is better to have it than not. Can't see any way that you could have the people of the countries recieving the loans deciding on the terms and conditions of the loans though.

I think you can overcomplicate these things. These kind of international bodies loan money with conditions that have the aim of improving the economies of these countries which is ultimately good for everyone.

That will probably do a lot more to improve human rights than pretty much anything else.
 
 
The Idol Rich
11:08 / 10.06.08
Can't see any way that you could have the people of the countries recieving the loans deciding on the terms and conditions of the loans though.

That's not what I'm getting at at all. I want there to be accountability for the World Bank - not so much to the countries it finances but to the people from the countries that finance it.
 
 
My Mom Thinks I'm Cool
13:53 / 10.06.08
Can't see any way that you could have the people of the countries recieving the loans deciding on the terms and conditions of the loans though.

you and diz have both mentioned this more than once. I don't know where it's coming from. has anyone in this thread said we'd be better off if developing countries could demand loans on their own terms? is there a reason you keep making this assumption?
 
 
Fist Fun
14:56 / 10.06.08
Just saying. Fair enough if you agree.
 
 
ONLY NICE THINGS
07:25 / 11.06.08
Dude asked you as question, Buk. Where has anyone said that the people of the countries receiving the loans [should be] deciding on the terms and conditions of the loans. Back it up, or this is just random straw man thrashing.

Meanwhile, in the world, Stephen Green, Chairman of HSBC, believes the current system of banking needs to be dialed back, and the Institute for Fiscal Studies reports a rise in non-existent child poverty in the UK.
 
 
The Idol Rich
08:18 / 11.06.08
I don’t think that we’re ever going to agree on the the World Bank but, just to clarify my position, what I’m not happy with is that there is an opaque and unelected body (benign or otherwise) that is able to influence the policies of various poorer countries. I’m not necessarily saying that I want it to make loans conditional on human rights increases or the like (although personally I would prefer that to guidelines regarding economic policy – in fairness I’m sure that some conditions are indeed of this nature anyway), what I have a problem with is at a higher level than that - simply with the fact that something that really does seem to be a grouping from an unnacountable global elite has such power.

Meanwhile, in the world, Stephen Green, Chairman of HSBC, believes the current system of banking needs to be dialed back, and the Institute for Fiscal Studies reports a rise in non-existent child poverty in the UK.

I wonder if there really will be a major change in banking or will it just bounce back as soon as the good times start rolling again (if they do)? My guess is that the subprime credit bundle security is dead but banks will always want to find new ways to make money and so as soon as they feel that they are stable they will look for new exotic methods and where they are now seeing risk they will see opportunity. Just as it should be I guess Buk will say.

The thing that is concerning me at the moment is the oil price. I know I’ve banged on about it before but it really does affect everything. The Guardian today has “experts” predicting it can go to $250 on its front page – not long ago people were laughing at that kind of prediction – or at least it was seen as radical. What would that mean on a day to day basis for everyone? Presumably the first effects will be in petrol and energy prices - if the price of oil doubles (again) how much will these two things rise? How many people can afford for them to rise that much?
The big question to me is, could OPEC raise production if they wanted to?
 
 
Regrettable Juvenilia
14:07 / 11.06.08
The thing that really galls about the World Bank, as Naomi Klein and others have eloquently (and with thorough referencing) pointed out is the disparity between its original aims and the present reality. The World Bank was originally intended* to reduce and prevent poverty through post-conflict reconstruction and development programs. Now, in practice, it exploits conflicts and disasters to push forward an extremist economic ideology (free market fundamentalism) that in practice makes the rich richer, the poor poorer and the middle class smaller. It says, as diz so accurately and honestly put it, "if you don't fall into line with our economic ideology you can fuck off", secure in the belief that it is the only game in town.

*Indeed this is still the stated intent to anyone who doesn't bother paying attention (even to the extent of reading the business press, which is where people like Klein get all their info - there are few secrets there because the target audience is largely sympathetic).
 
 
Regrettable Juvenilia
14:21 / 11.06.08
You could also point out that economic development can often drive political liberalization. I won't go so far as to say that it always drives it, or that it is in fact the only thing that can drive it, but others would, and not without some justification.

I would be interested to know how "economic development" is being defined here. Surely you can't mean unfettered free market Friedmanism, since it the history of the last 40 years shows that that cannot go hand in hand with political freedom or genuine democracy: it needs either totalitarianism or for elected politicians to pursue policies directly counter to their election promises (and then usually to crack down on the inevitable dissent).

In fact you've said as much already, diz, and I think you're better off sticking to your more honest and accurate assessment of the "problem": the populus has an inconvenient habit of voting against economic "reforms" that would cause higher unemployment, higher prices for basic goods, and less job security (and in most cases, against a diminished public sector, although get the media on your side about "strong public sector = communism" and that one can sometimes be dodged). So it's good (for investors, etc) to do what the National Party did in South Africa during the economic negotiations that ran parallel to the political ones during the last days of apartheid: insist that the country's bank becomes an unaccountable entity, so that it's unaffected by political "problems" such as majority rule.
 
 
diz
23:53 / 13.06.08
Yeah, those last 40 years were terrible. It was much better when more people were poor and thus more authentic. Why does India need a middle-class anyway?
 
  

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