Who's To Blame For The Current Economic Turmoil - It's NOT The Bankers
$700 billion. I haven't laughed so much since Gordon Brown proclaimed an end to boom and bust.
Firstly, surely a Chancellor of The Exchequer should know that capitalism is defined by boom and bust. It's impossible to have one without the other. The economic climate of 500 years from now will be defined by boom and bust, just as it was 500 years ago. As I've said countless times, the world and especially economic conditions, are ruled by cycles.
Secondly, anyone who believes the Wall Street bailout will cost $700billion should be committed. Who can possibly know the eventual cost but if I were taking bets I'd give you short odds of anything less than $4 trillion.
We're dealing with politicians and government money lest we forget. Politicians generally lie (or else they haven't got a clue what they're talking about) and government monetary forecasts are normally nothing but massaged sound bites.
Want a good example of this? Look no further than the London Olympics -
- The initial budget, the one which they 'sold' the nation on was £2.35billion
- Now it's around £9billion
- But you wouldn't bet against it heading to £12billion would you?
So Who's To Blame For The Mess
Well, I don't think for one minute it's the bankers and 'traders'. I say 'traders' because it's more proof, if any was needed, that most in the financial markets are nothing more than bull market heroes.
A monkey would have made just as much money as the average trader in these debt derivatives by throwing darts at an enlarged Bloomberg screen. I don't know if the monkey would now be broke but the traders are.
The bankers might have caused the problems but they weren't to blame because collectively they're probably the greediest people on the planet. Give them an inch and they'll take 10 miles.
Create a lax economic climate, characterised by low interest rates and easy debt acceptance and anyone who thinks the investment bankers aren't going to abuse the system is amazingly naive. It does not take a winner of the Nobel Memorial Prize in Economic Sciences to come to this conclusion - or to predict it.
Blaming the investment bankers for the mess is similar to asking a load of unsupervised drunks to look after a warehouse full of Johnnie Walker scotch. Then complaining because they've drunk it dry.
The Politicians Are To Blame
The real blame in my mind lies squarely with the US politicians and Alan Greenspan - long term readers will know I've been warning about him for some years now. Politicians, like many with power, tend to look after themselves first and others second.
I strongly believe the first goal of a politician is to get re-elected, preferably in power. One thing that seriously hurts a re-election campaign is a recession because they'll be blamed. So after September 11th 2001, with the US financially reeling, the politicians and Alan Greenspan slashed rates to stimulate growth which itself wasn't the problem.
The problem occurred when rates were kept too low, Wall Street got even more aggressive and as the money and profits grew nobody seemed to think that trouble was brewing. Flowing profits and money are a great pacifier aren't they? Keep the big money rolling in today at all costs (in fact, try to better yesterday's figures) and worry about the consequences tomorrow.
Anyone remember for example President Bush saying, just after the 9/11 attacks, the 'American people deserve a higher stockmarket'. I've never figured why they did nevertheless this is the thinking of those that are to blame for the problems.
Don't Worry - The Politicians Are Coming To The Rescue
You have to admit that right now the Politicians are doing a good job of diverting the blame from themselves. They've managed to skilfully put it all on the bankers and the evil short sellers. And as usual the majority believe what they're told.
The papers for example are full of letters from Mr Angry of Surbiton taking a swipe at the financial spivs and charlatans. This I find strange as I never saw letters appearing from these people in the years 2001/07. Why didn't they write in then thanking the same spivs for the house price appreciation which was a direct result of their actions?
Nevertheless, it's the politicians who are in charge now. The same group that caused the problem in the first place by failing to clamp down on the world's largest and generally unregulated Casinos. And with them in charge, and their associated short term knee jerk policies, it would take a brave man to bet the worse is over.
So What To Do Now
Firstly, I would suggest that nobody listens to any of the soothing messages coming from the Politicians or those working in the financial markets. Treasury Secretary Paulson and Fed head Bernanke have been telling us for about 9 months now (they stopped around 1 month ago) there are no real problems, the US banking system is in good health.
But then just this last week they tell us that unless something is done, and done quickly, the whole western financial system is in danger of collapsing. Again, I cannot understand why anyone listens to these people any more.
I feel slightly sorry incidentally for Paulson. You don't get to be the head of Goldman Sachs without being brilliant so it's sad to see his reputation being trashed.
Instead of listening to those in power or in the financial markets listening to common sense and rationality is a far better course of action. And right now common sense suggests that not only are we already in recession (regardless of what many of the out of touch economists suggest) but things are not going to get any better.
No Credit = More Major Problems
What I think might happen is not good news.
The banks are now so shot, so scared about the future that they're going to start hoarding their money and refuse to lend to just about everyone apart from their best and richest clients (corporate and personal).
Since Fed head Paul Volker broke the back of inflation in the early 1980s one can easily make the argument the whole world boomed on an orgy of lending. At first the lending was sound, but as the decades progressed the lending got out of control with funny stories about how cats and dogs started to get credit card applications in the post. Remember for example back in the 1980s just how hard it was for the average person to get a credit card?
The pendulum is now starting to swing sharply the other way. Until the beginning of this year you just had to be barely living to get credit (corporate and personal). But now the credit spigots are likely to be welded shut.
This must be a massive warning to anyone that holds stock in highly leveraged companies. If I'm right, then the market will soon start to attack these stocks with a vengeance as they're going to be starved of capital.
Debt Itself Is Not The Problem
It's not debt that's the problem, rather how freely it is distributed and to whom. In fact, debt, granted properly is a major driver, if not the main driver of economic expansion and prosperity. So with a lack of credit being granted it's hard to see the economy getting any better and the stockmarket rising.
In fact, I would suggest that within the next year the lack of credit is going to be the next major problem and lead to yet more stockmarket pain.
A Bold Prediction - Stocks To Fall Another 30%
From how I view both the current mess and the current state of the western economies I see little if anything that can stop prices re-visiting the 2003 lows basis any of the main UK stockmarket indexes (FTSE 100, FTSE 250, FTSE All Share).
