The global financial crisis: a layman's view (geddit?)
You'll have to trust me here: I promise you I'm not being deliberately dim about the global financial meltdown, or whatever it's called this morning. I am simply not terribly good on the finer points of economics. I was never taught economics at school - which I really think is a failure of the education system as it was in the 70s and 80s - and although I understand what a mortgage is and what banks do, beyond the "high street", as it were, once we're out into the murky waters of international finance and the stock market and the City traders, I'm an idiot. I'm a sucker. Here are some things I do know: the banks seem to have been fucking about with our money, playing at the roulette wheels, making bad investments while the going was good - and it has been particularly good for the last ten years, during which "growth", that great god we are all supposed to worship, spiraled upwards. I know this is what banks do, and have done for hundreds of years - they "look after" our savings, and use it to buy other stuff or invest in other stuff, or lend it to other customers, or businesses.
Right, I'm up to speed. Now, somehow, and I know it's all down to deregulation of the money markets (I'm clever enough to know that free market capitalism is dependent on deregulation, and that during the 80s, conservative government policy was to sell off public assets, dismantle unprofitable nationalised industry and let the money markets run riot), it all seems to be unravelling. I still sort of don't quite understand how a bank can go bust, but I know it can, and that Northern Rock did, and that HBOS would've if Lloyds TSB didn't jump in and merge with it, after Gordon Brown lifted some competition regulation to wave it through (oops! another bit of regulation gone!) - however, what I do know is that a lot of people who work for banks are either very nervous or out of a job, due to Lehman Brothers, a US bank, going under this week. What I also know is that there seems to be little sympathy for people who work in banks losing their jobs. Ha ha! Some men in suits are carrying archive boxes out of a shiny building in the City - that must be a good thing, musn't it? Well, no, because surely not all people who have lost their jobs are red-braces-wearing Masters of the Universe? Aren't most of them just ordinary men and women who work in offices? I know plenty of people who work in offices. They do not deserve to be plunged into financial uncertainty.
I'm baffled by the reaction of the US government, which is seemingly bailing out private institutions and thus nationalising them, which is against the entire free-market Republican creed, which demands "small government" and no regulation. It seems that when capitalism fails, as it is doing on an almost daily basis, it is happy to be airlifted out of trouble by public money. Make your fucking minds up, free-marketeers! Do you want to be buccaneeers, playing the markets, spinning the wheel, or do you want Mummy and Daddy to come round and pick you up from the party when you find you have no money for a cab home?
I watched Question Time last night to try and get a handle on the crisis, and Ian Hislop was on barnstorming form, barracking Harriet Harman for her government's abject failure to regulate the City over the last ten years. They're all for "cleaning up the City" now, in Brown's words, but isn't it a bit too late for all that? Does it really take hundreds of thousands of job losses to wake this government up? I had never heard of "short-selling" until yesterday - the act of literally betting on share prices among traders, which I understand has been stopped. If this kind of malarkey has been ongoing while we laypeople have sleepwalked, with our money, into misery, then something has gone horribly wrong.
I've stopped buying expensive coffees from coffee shops. It's amazing how much money you save in just a couple of weeks. That's my practical response. That, and vowing to put down my Mitford Sisters books for a few days and finish The Shock Doctrine before it's too late*.
*Oh, I've just checked, and it is too late.
posted by Andrew Collins @ 8:45 AM
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26 Comments:
It's all a bit worrying really. You mention you weren't taught economics at school in the 70s and 80s. Well, I went to school in the 90s and 21st Century and studied maths at university. I've never been taught a single bit of economics in my life. Your article demonstrated you know more than I do. Perhaps this is a reason why we as a nation overspend in our everyday lives too?
If you want to get anywhere near understanding the financial system, can I recommend Doug Henwood's Wall St.? It's available for free download at http://www.leftbusinessobserver.com/WSDownload.html if you don't want to buy it (but do so anyway - Henwood is a top journalist and a good man). A quick spoiler: short-selling isn't anything like the worst of it.
I do respect Naomi Klein but TSD is a bit daft at times.
What I can't understand is why no regulation was put in place years ago to stop the whole situation - to stop the ridiculous lending and to regulate banks investments. And more than that, why is noone being held responsible? Why is down to the people?
We didn't get healthy cheques (I just wrote "checks", I'm all Americanised) from our banks when they had cash, nor did they consult us on investment, yet they expect us to take full responsibility for bailing them out. We've to spend less, we've to pay higher interest, we've had our cards and overdrafts reduced or cancelled.
If you want to know how money works and what banks do I strongly recommend you, watch this:
http://video.google.com/videoplay?docid=-9050474362583451279
This example shows the Federal Reserve, but the Bank of England was the basis for the Fed and works the same way.
Deregulation to a bank, is like no motorway speed limits to a boy racer. Good regulation is good for everyone, but big business argues that no regulation is better, they will regulate themselves.
Just to be safe, I took all the money out of my account (about 97 quid) and burned it, so that the bailiffs can't get their hands on it.
Can anyone lend me a quid?
Can I just cheekily copy and pasting the bit I posted on the last TW thread?:
I know this topic provides neither the time or the place (but if I acknowledge that maybe I’ll get away with it) but who was the regular who pilloried me on here a few months ago for describing those overpaid pillocks who ‘work’ on our stock exchange as “pissing around with our lives”? Own up cos I can’t find the thread. I was accused of having a Yuppies obsession or some such like; as if it all went away when Thatcher was kicked out.
After the news about short-selling today (how come it was allowed in the first fucking place?) I think I was going easy on them. And now 40,000 people might lose their jobs. Not directly because of those twats on the stock exchange but they were hardly helping were they?
Bastards.
andy - you're not alone.
i worked at LIFFE the financial derivatives exchange in te early 90s (albeit as a designer) -- it was all a mystery to me and I have A levels in maths and art!
i think the problem is we think it's all more complex than it actually is - which is why the barrow boys do well - they see it on face value.
this is what i understand.
Lehmans lend out dosh to companies (to build huge buildings, aeroplanes and spaceships or build a website like boo.com in the dotcom boom) and get the money back with interest when the company, product etc is successful. This isnt necessarily their money - its the money from a central pot or fund. A fund manager decides what to do with it and what to invest (and how risky). Pension companies would put their (our) money into the funds too. Anything you invest in is used like this - so a pension, an ISA, an endowment mortgage.
If you are a farmer and have 1000 tonnes of potatoes coming in the autumn and it's a bad year, then the price will go up due to the shortage - good for you but you might not have so many potatoes. If it's a good year then you have loads of potatoes but so does everyone else and the price drops. So you try to set a guaranteed forward price at the market. Traders at the market will put forward an offer price for a fee, and fix this as a 'futures' contract. These contracts - have a value in themselves and become tradeable in a secondary or 'derivatives' market. This can be the same for commodity futures such as oil, wheat, sugar, orange juice or pork bellies. (watch 'Trading Places' for a simplfied explanation).
There's a market for everything. The banks in the US have packaged up a whole bunch of mortgages and sold a stake in them on around the world (it's numbers on a screen not pictures of houses). In a rising market which we've had for 15 years the price of property has been relentlessly going up and up - and they've gotten complacent about the risk. And of course not many people have been defaulting. But in the US people have been losing their jobs, interest rates have gone up and down, and property has taken a tumble. They've been lending on 6x salary over here and been lending to people who aren't financially stable. Worse case scenario was they own the property. But now it's not worth anything. Multiply this up a few million times and you've got a serious problem...
Of course the banks now dont trust each other. If you want me to lend you some money to spend on a sure thing - i'd want to know what that sure thing was and get a cut. The banks aren't sure if it's a sure thing or another bunch of dodgy mortgages they are investing in. The money used to move around quite freely -and now they don't trust each other any more so the market seizes up...
I love it - the chickens are coming home to roost. But you can bet that someone somewhere is making a mint out of the situation. Probably George Soros.
I did an economics A level - for a term. My parents made me do it and being utterly hopeless at anything to do with maths, I couldn't hack it and swapped to History instead, which was much more up my street.
So my handle on the current situation is gleaned from BBC Breakfast and the newspapers, and the bulk of it is going right over my head.
All I know is I've got a mortgage with HBOS fixed at a low rate for five years, and a friend who works in banking at Canary Wharf told me that by then, this will all be sorted out by then so not to worry. Though she also tells me that her job is safe today, but who knows what will happen tomorrow.
Two questions for you then Andrew- 1] what will happen to the jobs of those poor people in the fancy coffee shops and 2] where will you put the money you save from not buying said fancy coffee...?
I know we Scots like to be snotty about our education system, but I was speaking to someone intelligent and apparently educated (in England) that had never been taught about evolution, and now I find out you don't learn about Economics either. I did both in some depth and I'm not aware of missing out great amounts of other subjects.
I'm not having a go here, I find this very strange and I'm curious to know what people learned in place of these things. We must have missed something you did.
Here's a primer on subprime with stickmen.
I reckon that the current batch of "money men" that are know watching the value of their investments crashing and losing their jobs and massive bonuses probably haven't been in their jobs long enough to have been around the last time something like this happened, and as such thought themselves invincible and weren't equipped to plan for such an event as "the value of something going down as well as up".
Eventually the financial markets will recover, and then another generation of whizz kids will come along with some new scheme for making buckets of money from other people's hard earned cash, think they're invincible because they've never known a down turn, and the whole cycle will start again.
I did A-Level economics in the early 90s and a year-and-a-half at University too. I gave up when I realised that not only did I not understand it, but I didn't care that I didn't understand it. Haven't got a clue what is going on with the world now, but it sounds quite bad.
My usual rule of thumb for working out how bad the news is depends on the lenght of time the story is given on the 10 o'clock news. For example the death of an ex-royal in a Parisian car accident takes over the whole of the news for weeks (or years if you are the Daily Express). This story gets 10 mins then makes way for the Lib-Dem party conference. So actually is not that important.
Peter Sausages.
This crisis really makes me sick. I don’t fully understand it but what I do understand is that the bankers are having their cake and eating it. When the times are good they take the profits and when it’s bad we have to bail them. The tax payers have to hand over the money to fix it and any part of the business that is still making money, just like the section in Northern Rock is kept privatised so that the money generated returns to the men at the top. If it’s a capitalist market shouldn’t they take the good with the bad it almost makes me want to side with Andrew and turn communist :)
err...aren't we all to blame here? Economics qualifications aside, if we weren't so bloody greedy taking out loans that we couldn't possibly pay back on property/credit that was (still is) ridiculously overpriced, thereby allowing the financial institutions to think that they had assets they never had that was then used to gamble, and lets not forget that is what all financial institutions do every single day of their lives (we just call it things like 'indexes' and 'stock markets' and 'futures' etc. but in essence it is just the same as taking a quick one out on the 4:15 at haydock but on a slightly bigger scale) then we shouldn't be at all surprised when the money they didn't actually have from debts that could never be paid from people (i.e us) who were prepared to pay for things that were overpriced to start with (or to make more moeny for themselves - 'buy to let' anyone?) is not available when it is needed.
I notice no one was screaming and jumping up and down when it was all going 'right' and your already overpriced semi that you couldn't really afford (but hey you would make 10% year on year wouldn't you so you could sell at a profit) wasn't now losing 40% of its real value.
I have no sympathy, this is an adjustment and I am sure in 10 years time we will forget all about it and simply start all over again.
Jones the Punter: I object on the basis of two things
1) I did complain/surmise/doom monger a LOT at the time.
2) I didn't take any of the overpriced loans or overspend or buy things I couldn't afford, thus I'm not screwed now.
Also, I don't think that individuals should have to be aware of the market, there are people who earn a LOT of money to do that on behalf of the public. Most people get a mortgage via some sort of broker, even if it just their bank's mortgage adviser and these people should not have been allowed to advise people to take a mortgage that they couldn't actually afford. Yes, people should have been less greedy and there's a painful lesson about avarice there, but idiots need a little guidance and they weren't given it by the people that exist purely to give it. That's wrong.
Also, part II. We, the public, did not ask the banks to sink their profits into the American market.
This made me go and watch Question Time on BBC Iplayer, I never thought that would happen.
I think the future Mrs Mingles, Naomi Klein, put it best when she said: it's just socialism for the rich.
When other companies fail, they're just victims of the free market. When large banks fail, they're bailed out by the government.
Beautiful and brainy. Does anyone know if she's still single? Now that's a fox Andrew.
PS: One of my closest friends is an economist/management consultant. They dont have a bloody clue either.
I work for HBOS, so in about three months time I’ll either work for Lloyds TSB or will be out of work.
My job means I get a large amount of exposure to the high-level stuff at the business, although I’m not in any position to influence any of it.
The reason the FSA or the Treasury, or for that matter HBOS, didn’t plan for the current downturn, is because they naively underestimated how long it would last for and on what scale.
In the late 90s, early 00s, to about late 2005, Tony Blair kept power, despite a number of massive blunders – not least the post-9/11 war on terror. Why? Because top-end working classes and middle-classes were so very comfortable. Banks like HBOS gave them mortgages, re-mortgages and loans. Banks like HBOS paid the government billions in tax and employed thousands. People were comfortable, so they voted Labour because they thought to themselves “We’re not doing too badly.” Meanwhile banks like HBOS where handing out bonuses to staff that were unprecedented.
The HBOS business model was basically designed for a buoyant housing marketing. Wholesale selling of stocks it’s called. Simple terms, HBOS parcelled up millions of £100k mortgages, which were worth £160k to HBOS and sold them for £140k to investors in the US. If you do this with, say 1m £100k mortgages that’s a quick £400m made. They did this consistently during the housing boom. Now there is no housing boom, so HBOS has no parcels to sell to investors, and the few they do have the investors don’t want.
The FSA has finally said it will ban short-selling, which some people claim brought HBOS down, but believe me – that isn’t true. Short-selling of shares – where you borrow shares of a shareholder for a fee, sell them, buy them back, give them back to the original owner and pocket the profit, happens and is wrong, but it can’t bring a business the size of HBOS to its knees.
I could have summed this up in one word; Greed.
I work for a firm of solicitors and our biggest client (and the client I work for) is AIG. Now that the Federal Bank (thanks to their $85 billion loan) own 80% of AIG, that makes me George Bush's bitch.
Deb Holt
I dislike the fact that a small number of people make obscene amounts of money out of doing something that a large proportion of the population could do equally well. That said, I find some of the response to all this a bit silly. All investments are a risk. "Investment" is a euphemism, isn't it? It's always gambling however it's dressed up. Banks have to tell us that they are safe, solid, sensible places to put your money because what else are they going to tell us? They're private businesses after your money. Do we really think these companies just magic up the interest they offer to get us to lend them our money (alongside the profits they make for themselves)?
If you do think it's magic then fair enough. If you buy into the marketing of the big banks - that they're these benign ancient organisations that are really just interested in people, and where the whole "making money grow" thing is just a sideline - then fair enough. Maybe you just put your money into the bank and assumed it was safe because they told you it was and because everyone else was doing it too. Fair enough. That's what people do. It's what markets do too. It's what banks do. As long as everyone else is lending money to people at the riskier end of the mortgage market then it must be safe to do so - after all, the other lenders are all doing all right, aren't they?
Don't get me wrong. I don't know how the markets work either (just in case you haven't noticed). It appears to be a giant trick, where everyone feels like they're getting better off but in reality no one is, apart from the people feeding the furnace. [It's a bit like the whole "progress" thing, isn't it?] I've a feeling there must be a better way. (And I bank with NatWest.) But if you're thinking these idiots should have known what was going to happen and should have done a bit more research before handing over your money just to feed they're own greed, well why did you give it to them in the first place? Because they told you you should?
Yes, it's sickening to see the state bailing out the banks. But the state has to intervene because it isn't in the interests of the state to have all our financial institutions come toppling down like a house of cards. And that toppling effect wouldn't simply be the result of those institutions making bad investments; it would be because of the actions of investors (i.e. us) panicking as we see one bank after another fail. For better or for worse, our economy relies upon a large number of us making long term investments. And that requires the sort of stability and confidence that the markets can't always offer.
Can we do without the markets? I don't know. I don't think anyone does. And I'm certain no politicians know, and no politician is going to suggest we try it. What would work better? Does this system really "work" at all, anyway? I don't know. The trouble is when someone comes along and says he does know, I've got no way of knowing if he's right. And surprisingly enough, all the rich and (therefore) powerful people seem to be absolutely certain that this system is the best. And they're the first people you'd go to if you wanted to know what's in the best interests of the majority, aren't they?
I have noticed a marked reduction in the amount of happy-go-lucky Beach Boys themed Halifax bank adverts in the last few days, along with a similar scarcity of you-need-us-'cos-you're-thick "for the journey" Lloyds bank adverts. Possibly the current situation is too preposterous for even the ad-men to spin. Or possibly, over the weekend the new Lloyds advert "HBOS with Lloyds for their their final journey" will air. Thank the lord for Natwest with their Fools and Horses sub prime comedy line. Tsk.
Anyway AC, if you want to have a look into the storm that may still break, check out the inter-bank insurance policy market. This is where whole banks bet on other WHOLE BANKS (not) going bust. It would be a domino effect. No wonder it's all being shored up quicker than Frog Island in a thunderstorm.
Peston off the BBC website is quite informative by the way. And this is your cut out n keep blameguide:
http://news.bbc.co.uk/1/hi/magazine/7625107.stm
Truly, the most illuminating and thought-provoking set of comments I've had.
None of it makes the situation any easier, but it's good to hear from people on the "inside".
I find I can't actually get worried on a daily basis. Beyond watching the pennies - and thus bringing Caffe Nero to its knees - there's little I can do. I worry about close friends and family whose jobs may have become less secure. Otherwise, it's all pretty abstract, as the world of international finance and banking always is.
And I genuinely don't understand why shares all went up yesterday, but I do wish the media hadn't labelled it "Freaky Friday". (Who decides these things?)
"I dislike the fact that a small number of people make obscene amounts of money out of doing something that a large proportion of the population could do equally well."
To be fair, I really do not remember the 1980s that well.
(Sorry, Mr Collins, but this comment section was desperately in need of some satire)
What is the ridiculous nonsense that those who work on the stock exchange suddenly became philanthropists once the 1980s were out? Some people watch too many of these nostalgia shows where everything is neatly packaged up into decades. The suits may change but greed did not start in 1980 and die out in 1990.
Talking of neatly packaged nostalgia shows (well I was) did anyone see the Mee-Box pilot on BBC3 a while back? It was refreshingly funny from start to finish without actually seemingly breaking any new ground. But it did a particularly brilliant pastiche on those ‘origins of punk’ pieces you sometimes get. Full of very funny but very accurate lazy clichés.
Don’t suppose you have any insider information on whether Mee-Box is going to get commissioned do you Andrew?
Odd to be discussing it here, but sadly, there is to be no series of MeeBox. This is not inside information, though - Adam revealed it on his excellent blog. The reasoning he gives is depressing indeed. It's hard to believe that BBC3 once commissioned something as grown-up as Grass. We wouldn't get it past them now.
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