Wonderland

Published by Tom

October 15, 2008

The last few weeks have been disorienting. I have been through recessions before and this feels only slightly different. Yet people really seem to believe – and to want to believe – it is the end of capitalism. To me there is only one difference to previous recessions; the level of debt (both public and private) with which it begins – at least in Britain.

The insane level of personal debt (and the loss of fear of debt) which has left Britain the most indebted of the G8 countries means that ours will be deeper and more miserable than others’. While the Toynbees of this world sneer at Americans, whose debts average about 140% of disposable income vs the already deplorable 105% before this debt binge began, they fail to mention that for the average Brit (not forgetting that many of us are solvent) it’s more than 170%. Until about 500 billion of excessive debt is paid down, British consumers are hors de combat economique. Yet still the Government talks as if, if it can only take enough from the prudent minority to get the banks up and running again, the insanity could resume.

That is the last thing that should happen. Where is the Thatcher figure to tell us that we can neither pay ourselves more than we earn, nor borrow more than we can repay?

Meanwhile, though the cause of the crisis is Carol Voorderman economics, the Left is blaming lack of regulation. Only people who have never worked with banks could delude themselves thus. The truth is they were highly regulated by the sort of second-raters who take public sector jobs. Increasing regulation will solve nothing, because regulators will always be outthought by highly incentivized, ambitious and intelligent people. Even now, some governments are lowering capital requirements for banks to allow them to lend more. How cretinous is that?

The problem is one of perverse incentives. Rather than being bailed out by the public purse, the shareholders who chose directors too stupid to understand the complex products developed by the young geniuses they employed should be taking the consequences. Depositors who trusted banks with more money than was covered by guarantee schemes should be losing that money so that future generations will learn greater prudence.

All they are learning now is not to worry about why an Internet bank offers implausibly higher interest because -if it all goes wrong – even if the obscure country where the bank is based had either not collected the Guarantee Fund contributions from the banks, or had spent them on other things, their government will steal the money from the wise to give it to the foolish.

What you reward, you get more of. The West is rewarding fecklessness and that is what it will get.

4 responses to “Wonderland”

JMB

October 15, 2008

because regulators will always be outthought by highly incentivized, ambitious and intelligent people.
Now ain’t that the truth. No matter what safeguards you put into place, there are always creative ways around them and the “clever people” are very quick to find them.
the shareholders who chose directors too stupid to understand the complex products developed by the young geniuses they employed should be taking the consequences
The majority of the shareholders of any company now seem to be big pension funds. Small investors even when they vote know they have absolutely no influence on who is chosen. One very large company here has been so mismanaged that one of the largest pension funds is taking it over and taking it private. Now is that a good thing? I wonder.
Depositors who trusted banks with more money than was covered by guarantee schemes should be losing that money
Easier said than done I’m afraid. It means one ends up with money in so many places it is hard to keep track of. Not only that, I am not even sure that all that money could be covered in the event of a great meltdown.
It’s a really, really bad situation and it means a lot of people should be pulling in their horns, all over the world. Will it happen? We’ll see. Or will the bandaid solutions keep everything limping along until the next crisis.

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Pogo

October 15, 2008

“Rather than being bailed out by the public purse, the shareholders who chose directors too stupid to understand the complex products developed by the young geniuses they employed should be taking the consequences.”
Problem is, as I’ve said on “Burningourmoney”
“Those private shareholders with less financial clout than Warren Buffet have absolutely no influence over the boards or AGM of any large public company. It resides withe the fund managers of the large pension funds and other financial institutions – who are all “members” of the mutual back-scratching club that is ‘The City’”.
OK… Maybe that’s a good enough reason for not being a small investor.
Re your comments about “regulation” – I see from the BBC website that the head of the FSA has “apologised”, would I be adjudged a hopeless optimist by expecting him to do the decent thing and resign (and have his pension reduced by the same amount as it looks like we’ll all see)?

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Rob

October 16, 2008

Don’t worry Pogo, I’m sure “lessons will be learned”.

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Kevyn Bodman

October 17, 2008

Whatever action governments had taken in response to this crisis there is going to be a lot of pain.
But by bailing-out the banks, i.e. saving people and instituions from the consequences of their irresponsible, imprudent and stupid actions governments have made it much more likely that this whole mess will be repeated.
The uncertainty is whether it’ll happen again in 15,20 or 25 years from now.
Governments should have done NOTHING.
Of course it would have been painful but it’s going to be painful anyway.
But had the governments done nothing the shake-out, and then the recovery, would have occurred more quickly.
And future behaviour would be modified because it would be understood that there really are risks and unpleasant consequences for the makers of poor business and economic decisions.And those consequences should be borne by those poor decision-makers, not by the taxpayer.

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