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Looming Financial Crisis?

  
  

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enrieb
23:20 / 20.05.08
Sorry if I misinterpreted the point, I have very limited grammar skills and struggle to make my point in a written form. I hope not to drag this thread off topic but the issue of oil price speculation is as much of a red herring as when the oil price hit $100 a barrel and the bbc claimed it was because some trader wanting to go down in history for buying oil at $100 a barrel.

Unfortunately I honestly don't have the grammatic ability to argue the case here for what I believe is about unfold in the US and UK over the next decade, I would like to, and I will attempt to explain but I am not sure I have the ability to express in words what I personally believe to be the case based on my understanding of international monetary flows of cheap credit.

I hope this short video will help shed light some of the current financial circumstances, caused by the global monetary credit expansion that will have to be paid for by global inflation of the money supply and subsequent increase in the cost of all commodities.


how the banks bet your money(well the money you owe the Chinese)

This lecture on the business cycles helps explain the credit expansion or business cycle and boom/bust from the Austrian point of view.

The Austrian Bust 4/4
 
 
diz
13:59 / 21.05.08
The point of the futures market is to create long term stable prices for the commodities market. The oil market just as any other commodities market is prone to many supply and demand fluctuations, should an oil pipeline be blown up in Nigeria or a hurricane strike a major oil field then the companies/investors that have purchased oil futures at the current market price will have made a profit, the companies/investors that did not invest in the futures market and expected the oil price to go lower would have made a loss. However should no disruption to the oil supply have taken place and an over supply of oil entered the market then the investors/companies who purchased oil futures at the higher price would have lost money and those who had not purchased oil futures would have profited.

If the futures market were not in existence then the market price for oil or any other commodity would fluctuate to extreme price levels on a daily basis making medium to long term business planning based on the oil price a financial minefield.

Exactly.

You seem to have a lot of faith in bankers being very sensible, rational, long-term, best-interests kinds of people, which I think is quite surprising, in the circumstances.

The system doesn't depend on people being sensible. It works, long-term, even when people are stupid and greedy. That's the point.
 
 
Regrettable Juvenilia
20:19 / 21.05.08
Indeed!

Your love has raised me from the dead, diz.

Raised me from the fucking grave with a considerable erection.
 
 
The Idol Rich
12:03 / 22.05.08
The system doesn't depend on people being sensible. It works, long-term, even when people are stupid and greedy. That's the point.

I think that's debatable - it certainly can go very wrong short term. One thing that (I think) is not mentioned in the excellent description of futures above is that (effectively) no money changes hands at the time the future is traded so, relative to share trading, people can trade much bigger size and take far larger risks with the same amount of money. A failure to understand this kind of leverage has knocked over a number of companies and caused shocks to the system although have obviously not destroyed it yet.
 
 
_pin
15:40 / 23.05.08
Isn't it going wrong, right now, because of the short-term gains to be made from things like sub-prime mortgages?

It works long-term because of regulatory systems. Personal greed is not a valid or useful form of regulation.
 
 
Fist Fun
14:18 / 24.05.08
I don't think it is going wrong any more than can be expected from time to time. It is just that right now people took risks in expectation of reward and the risk didn't pay off.

These things go up and down.

You could regulate away speculation and accompanying risk but I imagine everyone would be poorer for it.

The role of regulation should be to keep risks reasonable and to make sure the people who suffer when things go tits up are the people who have taken the risks in expectation of reward.

Regarding sub-prime mortgages how would you have regulated that?
 
 
Tsuga
18:11 / 24.05.08
It works long-term because of regulatory systems. Personal greed is not a valid or useful form of regulation.

No, but personal greed is the engine that drives the market. In this country, regulations, such as they are, are usually reactive and stopgap, being limited in scope due to powerful lobbyists (working on behalf of personal greed) weakening legislation, as well as because of multinational corporations and investors working within multiple independent jurisdictions of regulation. Which may be what diz was getting at earlier. The existing regulations are like puny chain on Hulk chest. I saw a quote from Warren Buffett (in an article today where he says he thinks the US recession will be worse than most people expect), he's speaking about derivatives trading specifically, though I think it's not limited to that:

"It's not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health."

Buffett complained about the lack of effective controls.

"That's the problem," he said. "You can't steer it, you can't regulate it anymore. You can't get the genie back in the bottle."
 
 
The Idol Rich
11:26 / 26.05.08
The role of regulation should be to keep risks reasonable and to make sure the people who suffer when things go tits up are the people who have taken the risks in expectation of reward.

That last bit is pretty important I think. The recent situation we have though is where financial institutions have fiercely resisted any attempt to limit what they can do and have then taken huge risks which threaten the mortgages or pensions or jobs of thousands of people who certainly didn't intend to take any risks. Then the banks go to the central bank cap in hand and say "we can't be allowed to fail, it would be disastrous for the economy" and they're probably right. Privatising gains and sharing losses is a fairly accurate description and it's no wonder that people are annoyed.
 
 
ONLY NICE THINGS
11:41 / 26.05.08
You could regulate away speculation and accompanying risk but I imagine everyone would be poorer for it.

I'm interested by the foundations of that imagining. How, in this case, do you define "everyone", and how do you define poorer? In a sense, people who are, for example, being foreclosed on are losing an asset which they obtained primarily with monies they did not own, so barring the evictions and the homelessness they aren't badly out of pocket, but nonetheless.
 
 
Fist Fun
12:17 / 27.05.08
I think if you regulated the housing market so that nobody could invest in the hope of gain you'd lose a lot of the cool things that happen when there is money to be made and that would have to be replaced by some regulatory service which wouldn't, I imagine, be as motivated as private individuals or companies making bank.

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.
 
 
ONLY NICE THINGS
13:01 / 27.05.08
OK, let's focus on the housing market. I think I misunderstood what you meant by "poorer" in the first statement - you started by saying that everyone would be poorer for regulation (which I took to mean that everyone would be worse off), but then said that the housing market would be poorer (that is, would contain less money) for everyone if regulated. Of course, the housing market is regulated, most crudely by interest rates, which means we also have to add the proviso that the regulation would have to be such that it prevented property from every increasing in or losing value.

So, what we're saying here is that in an economic setup organised around maximising profit on investments, putting regulations in place that would make it impossible to make a profit by investing in property would reduce the amount of investment in property? I think that's certainly true, but it is so far from the current situation or any proposed response to it that I'm not sure how far it gets us in terms of looking at the actual situation.

So, going back to people who took out sub-prime mortgages which were then foreclosed - what kind of impact would different forms of regulation have had on them? How would the property market have become poorer for them? I'm not sure, but I suspect they would simply have been unable to get mortgages, or possibly would not have wanted them because the expectation of owning an asset that would appreciate faster than their debt increased would not have been there...
 
 
Fist Fun
19:55 / 27.05.08
Well how would someone have regulated against the sub-prime mortgage crisis? I suppose you could regulate to ensure banks do not sell loans to people at risk of defaulting and regulate the way they are then sold on wrapped up with other loans.

But that is all with 20-20 hindsight. But nobody would know which risk was going to blow up. How would you move quickly to effectively regulate complex financial transactions across international borders? How would you target the regulation so it solves more problems than it causes?

I don't think it could do any of that due to the cumbersome nature of it. Whereas if you just give people the freedom to do what they want then it works out. It goes up and down and generally works well.

If someone wants to sell a loan and someone wants to buy it then they should be allowed to and they should accept the risk in that. I imagine that regulation would harm as many people who are quite able to repay a loan as protect (from themselves) those that are at risk of not being able to repay.
 
 
ONLY NICE THINGS
21:50 / 27.05.08
Well. one problem with the happy scene of honest brokers of debt that you are depicting is that it was not the case - that the complexity of debt bundling into CDOs was being used to conceal the level of risk, and thus to make one's debt look more enticing and safer and thus to stimulate trade - which is of course a transcendent good by which the means are therefore justified. One wraps bad debts in a good debt wrapper in order to make them appear safer - in effect to avoid letting a tedious thing like reality get in the way of the enjoyment of the idealised free market where everything you buy is going to make you richer. Back in the day, one used to call this a pig in a poke, but there's probably an economics word for it.

Also, of course, you just get the dead hand of state intervention a bit further down the road when the banks are ailed out by government - a de facto regulation and rather a betrayal of free market principles.

As a result of which, the credit market has caught a bit of a cold and companies are having there credit ratings looked at a bit more carefully. It won't last, though, and no doubt soon another exciting way to monetise poor people will be discovered which will be absolutely foolproof.
 
 
Fist Fun
22:51 / 27.05.08
The wrapping up bad debt thing is indeed very bad. Without hindsight though I can't see anyone being able to effectively regulate that so I believe it is better to let people and companies make their own decision about risk and reward. If fraud occurs then that should be punished by law.

I think bailing out banks is a bad idea and prevents those who seek to profit from risk taking the hit when it all goes wrong.

So if we are going to regulate away all badness what are our plans then? How can we regulate to prevent the next inevitable crisis?
 
 
ONLY NICE THINGS
07:49 / 28.05.08
The thing that confuses me about the argument you keep advancing, Buk - that free trade of everything is ace and the best treatment for any problems in the financial system is more free trade - is that the law _is_ regulation. Fraud law is a restraint on people doing what they feel is necessary to keep trade moving by getting their products sold. This is precisely what CDOs were designed to circumvent, and did so very well.
 
 
Fist Fun
08:21 / 28.05.08
I've got no problem with regulation to prevent fraud. I don't think completely unregulated free trade is a good idea but I do think it, in the example of the housing market, it all works very well the way it is now.

But to go back to the question. What alternatives have we got planned here? The implication is that the current crisis could easily be regulated away with no adverse consequences.

There will be future problems in the housing market over the next 5,10,20,50,100 years. What will they be and how will your regulate to prevent them?

If we are going to regulate away all badness what are our plans then? How can we regulate to prevent the next crisis?
 
 
ONLY NICE THINGS
16:38 / 28.05.08
The implication is that the current crisis could easily be regulated away with no adverse consequences.

Where is that implication? I certainly implied no such thing. Your _inference_ may be that etc, but that's a different matter. Again, you always do this, Buk. Argue that free trade is the best possible solution and then, if the basis for this assertion is questioned, a) restate it, with a proviso any specific objection ("x is a bad thing. More free trade would resolve it, by making everyone better off") and b) require the person questioning the virtues of free trade as a cure-all to provide a complete argument for a position that they are not advancing to start with, usually "how would a centrally-planned economy have made this better" - phrased in this case with the dismissive "regulate away all badness". However, free trade is not subjected to the same requirements - in the face of a credit crunch, the fall of the US residential market and a wave of foreclosures, you are still saying, unevidenced:

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

This whole procedure just feels a bit unrewarding over time, you know?
 
 
Fist Fun
09:13 / 29.05.08
You will probably groan here but I do want to have a worthwhile discussion about this without getting in to the whole internet argument point scoring thing. I'm not claiming any authority on this, just saying what I currently think, and I am genuinely open minded if the way I see things turns out to be wrong.

so...how else would things be organised? That is a fair question. Work with me here.

What will the next crisis be and how should the housing market be changed to prevent it?

Obviously nobody knows what that crisis will be, although it will certainly come. It might come through something that seems inconsequential or something that we all think we could predict. It might come out of nowhere.

But if you give people the freedom to take risks themselves, and literally put their money where their mouth is, then the people closest to the decision, with presumably the most knowledge and most to lose or gain make the decisions. That is how it works at the moment.
 
 
The Idol Rich
09:31 / 29.05.08
Obviously nobody knows what that crisis will be, although it will certainly come. It might come through something that seems inconsequential or something that we all think we could predict. It might come out of nowhere.

True. On the other hand plenty of people had been predicting a burst of the credit bubble for the last few years so this particular crisis (if that’s what is) is hardly unforeseen. I feel that we are talking about (at least) two, at first glance, unrelated things here with the credit crunch and the oil price rise – bad news that they are happening at the same time of course….for the economy at least, maybe not so bad for the environment.

But if you give people the freedom to take risks themselves, and literally put their money where their mouth is, then the people closest to the decision, with presumably the most knowledge and most to lose or gain make the decisions. That is how it works at the moment.

It’s how it’s supposed to work at the moment but the people queueing up outside Northern Rock weren’t the people closest to the decision. The people making the decision in that instance were indeed putting money where their mouth was but the problem was that it wasn’t their money.
A lot has been said about how the new environment will change the way banks operate but it may also usher in new regulations, I understand that it is often a financial crisis that precipitates regulations especially if the main people calling for a lack of regulation are perceived as being part of the cause of that crisis as their credibility suddenly looks rather suspect.
 
 
Fist Fun
10:25 / 29.05.08
It’s how it’s supposed to work at the moment but the people queueing up outside Northern Rock weren’t the people closest to the decision. The people making the decision in that instance were indeed putting money where their mouth was but the problem was that it wasn’t their money.

Again that was unfortunate but it was just market correcting and a risk blowing up. I don't think any customer lost money. The only people to lose were the shareholders (who were investing on a risk/reward basis) and the employees.

The Northern rock business model was based on higher risk mortgages which were deemed to be at greater risk of default. When this became public depositors rushed to withdraw their money.

But it was still the company and share holders that decided to go with that business model and decided the risk was worth the potential reward. In the end it didn't work out and the risk well and truly blew up... but that is all part of risk and reward. It sucks but it isn't a problem to be cured.

If you don't accept the risk you don't get the rewards.

I'm sure there will be more regulation because of Northern Rock. Which is fair enough in some cases but I just don't believe that regulation works because you pretty much only do it retrospectively. How do we regulate for the next unknown crisis?

I take the point that people did see the credit crunch coming... but if you pick a newspaper there is always a warning of some crisis or another coming. Some of which are real, some just don't happen. Sometimes a crisis comes that nobody expects.

If you try and regulate away risk then it probably won't work because the future is so unknown and you'll probably uselessy prevent a lot of things happening which people would have been happy to accept the risk/reward ratio and would have worked out fine anyway.
 
 
ONLY NICE THINGS
10:55 / 29.05.08
I don't think any customer lost money.

As a direct consequence of the government intervening, an intervention of a kind which you already said above you did not agree with:

I think bailing out banks is a bad idea and prevents those who seek to profit from risk taking the hit when it all goes wrong.

If the government had not intervened and the bank had collapsed, customers would indeed have lost money, as UKGov does not guarantee to repay all lost savings.

So, that's problem one. Problem two is that your last statements assume that no problem in the financial markets ever recurs, and that no regulation designed to address one of these non-recurrent issues ever has any impact on any other financial issue. Therefore there is no point trying to prevent a problem from occurring again, because it never will. This is not the case. Also that no prediction can ever be made about anything, and that if you just (guess what) operate a free market regulated only at the point where you think it is appropriate to regulate it (nebulous, but roughly along the borderline of criminal law) everything will turn out fine, for whatever value of fine.
 
 
The Idol Rich
11:10 / 29.05.08
Again that was unfortunate but it was just market correcting and a risk blowing up. I don't think any customer lost money. The only people to lose were the shareholders (who were investing on a risk/reward basis) and the employees.

Well, perhaps you could say that I picked a bad example as ultimately the customers didn’t lose out but I think it still serves because they could well have done – basically I’m just drawing attention to the fact that they didn’t know that their money was being risked, far less did they agree to that.

I'm sure there will be more regulation because of Northern Rock. Which is fair enough in some cases but I just don't believe that regulation works because you pretty much only do it retrospectively. How do we regulate for the next unknown crisis?

Obviously a very difficult question but does that mean that one should just give up?

I take the point that people did see the credit crunch coming... but if you pick a newspaper there is always a warning of some crisis or another coming. Some of which are real, some just don't happen. Sometimes a crisis comes that nobody expects.

Well yes but that’s not a reason to ignore the crises that people do expect.

If you try and regulate away risk then it probably won't work because the future is so unknown and you'll probably uselessly prevent a lot of things happening which people would have been happy to accept the risk/reward ratio and would have worked out fine anyway.

I’m not saying that I totally disagree with you and I accept that without risk there won’t be reward but I think that there has to be a balance. Surely you are not advocating a complete removal of all regulations so I assume that we probably differ mainly in a matter of degree….?
 
 
ONLY NICE THINGS
11:30 / 29.05.08
So, with that in mind, how about we look at one very specific area of the current financial situation. A number of American mortgage lenders sought to monetize the poor by offering high-rate mortgages to people with very limited incomes and no deposits. This has turned out not to be a very good idea in many cases, as the people offered these loans have proved unable to make their payments, but problems with the housing market have also made it difficult for the mortgage lenders to make money on the foreclosed properties. This high-risk debt, which is turning into simple bad debt, has been spread out through the financial markets in CDOs, which have made it harder to gauge debt accurately, and thus to make accurate risk/return assessments.

So, you've got a few points of pain clearly apparent there. One is the provision of mortgage debt to people who represent a significant risk of default. One is the way that risk is then sold on in a fashion which makes it harder to be certain of the risk actually being incurred. What are the others? Is there any chance that these problems might ever recur in a comparable form in future? What, if anything, does one do, if one is happy with the basic structure, to address them?
 
 
The Idol Rich
11:43 / 29.05.08
is the way that risk is then sold on in a fashion which makes it harder to be certain of the risk actually being incurred.

Think that you and I spoke briefly before about credit agencies which are obviously related to this part of the process. As far as I know there is still nothing to stop them grossly and systematically overvaluing a security type and passing this advice on to companies who are likely to take that advice.
 
 
The Idol Rich
11:49 / 29.05.08
One is the provision of mortgage debt to people who represent a significant risk of default

This is difficult to think about isn't it? Do we want to say that such people should not be able to obtain mortgages? I guess that, regardless of what we want, that will be the upshot in the near future as lenders overcorrect in terms of to whom they are prepared to lend. I guess in Buk's terms the risk/reward pay-off in lending to people your competitors won't touch has proven insufficiently high and whatever the next crisis is it probably won't arise that way.
 
 
The Idol Rich
11:51 / 29.05.08
Buk - regarding unknown future crises, have you read that Black Swan book? I haven't yet but I went to see the author (Nassim Taleb) speak at the Oxford Literary Festival a few weeks ago and he was very interesting on that subject.
 
 
Fist Fun
05:23 / 31.05.08
If the government had not intervened and the bank had collapsed, customers would indeed have lost money, as UKGov does not guarantee to repay all lost savings.

When I think about it I think it was handled pretty well actually. Shareholders lost all their cash. The existing government guarantee of 30k was highlighted as well as, I think, a commitment to pretty much protect everyone. Which, in the worst case scenariom would have been a fair way to spend public money just as you would help people if an earthquake struck.

What government shouldn't do is step in to prop up a business which isn't profitable in the market. Here I think a difficult situation was handled well.

Problem two is that your last statements assume that no problem in the financial markets ever recurs, and that no regulation designed to address one of these non-recurrent issues ever has any impact on any other financial issue.

Well maybe you could share some examples of the regulation you would like to see introduced after the recent big fuck off problems.

I have no idea what problems there will be in the future. The same situation may occur in the future but they may well work out absolutely fine. You have as much chance as hampering something which would have been fine as preventing a problem.

Rather than relying on regulation which by its very nature will be slow to create, slow to modify, far removed from its application I'd prefer to just let people to be free to decide themselves.

The Northern Rock problem wasn't inevitable although clearly there was a risk. Rather than regulating away risk, perhaps by banning the business practices of Northern Rock, I'm happy to let people and businesses take risk in anticipation of reward.

If someone wants to sell something and someone wants to buy it is in both their interests to get a good deal... so let them get on with it.

Where regulation does come in is when private companies or individuals engage in deals in their own best interests but which are harmful for society as whole.

The difficulty is deciding what is a private matter of risk and reward and what is of more interest to everyone.

For the sub-prime mortgages thing. If someone is willing to sell a mortgage and someone willing to buy I can't see how introducing regulation to prevent that is in any way in the interests of the buyer or the seller.

The buyers and sellers of that are more motivated than anyone in making it a success so why should someone else come along and tell them that they aren't allowed to do that.

...but perhaps we saw a sort of decoupling of risk and reward from the banks because of the ability to easily sell on bad debt. But again if someone is willing to buy a bundle of debts with some bad ones in there then why should we stop them? The buyer is very motivated to get value because it is their money. Who is the better judge? The people who are directly winning or losing from a sale or some distant regulatory body.
 
 
Fist Fun
05:23 / 31.05.08
Black Swan book?

Not read it but aware of the rough theme. Sounds interesting!
 
 
The Idol Rich
09:21 / 02.06.08
There is an interesting looking article on this subject in the G2 section of the Guardian today. "In the first of three extracts from their new book, Larry Elliott and Dan Atkinson explain how the reckless speculation of a super-rich elite has left us all the poorer".
 
 
The Idol Rich
12:57 / 02.06.08
OK, I've read that article now and there isn't too much meat in there. Larry Elliot is obviously in favour of more regulation but sadly in the article this is only mentioned in the vaguest terms and buried under a lot of hyperbole and some metaphors that are stretched almost to breaking point. I guess to get the interesting stuff I will need to buy the book.
 
 
Fist Fun
13:54 / 02.06.08
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.
 
 
ONLY NICE THINGS
14:04 / 02.06.08
Communists, eh? What are you going to do?

Meanwhile, it's been a bad day for Bradford and Bingley, and a good day for Steven Crawshaw, who now gets to spend more time with his money.
 
 
Regrettable Juvenilia
14:44 / 02.06.08
They seem to say that because some people are vastly richer than others that this is necessarily a bad thing.

It's a bad thing if the inequality is such that a vast chunk of the human population doesn't have access to things that one considers basics (enough food to be nourished, clean water, shelter, and so on). Surely even you can agree on that without fear of DISTORTING the MARKET, Buk.
 
 
Fist Fun
15:00 / 02.06.08
Yeah I definitely agree that is a bad thing but that isn't a problem of inequality it is a problem of extreme poverty.

If you have a situation where basically everybody is well off but some people are vastly richer than others then I am cool with that. Like in the UK for example.

I think globalisation, free markets and competition can play a big part in eradicating extreme poverty. Which is really important.
 
 
Regrettable Juvenilia
15:19 / 02.06.08
Yeah I definitely agree that is a bad thing but that isn't a problem of inequality it is a problem of extreme poverty.

Riiiiight... except that there is also extreme global inequality. Like everyone else opposed to the redistribution of wealth, you're presumably going to try to find some convoluted get-out clause that presents ending extreme inequality as anything other than the morally necessary and most expedient method of ending extreme poverty, right? Maybe quote my current namesake about "doing good with other people's money"?

If you have a situation where basically everybody is well off but some people are vastly richer than others then I am cool with that. Like in the UK for example.

Whilst obviously those in the worst kind of poverty in the UK are both fewer in numbers and in a less absolute state of desperation than many other places in the world, to complacently state that you are "cool with" the levels of poverty and inequality in the UK is absolutely shocking in its callousness. You are either hopelessly ill-informed or entirely inhuman.
 
  

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