Financial system in meltdown


8:17 am - September 15th 2008

by Sunny Hundal    


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Lehman Brothers is no more. Merrill Lynch has been bought out and AIG is looking for $40billion just to stay afloat. Alan Greenspan, of the Federal Reserve, is calling it a ‘once-in-a-century‘ financial crisis. I expect the FTSE 100 will dive as soon as it opens today.

“This is an earth-shattering event, this is like a tectonic plate shifting event,” said Thomas Priore, chief executive of Institutional Credit Partners, a hedge fund active in credit markets. “This is welcome back to Black Monday.”

Feel free to use this thread to post new information, cry about your falling stocks or call for a new socialist world order. Either way, we’re in deep trouble.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


Alan Greenspan – the man who inlfated the bubble which is now bursting.

A new socialist world order? Now that would be deep trouble!

I’ve long predicted a financial meltdown. The level of borrowing was never sustainable.

However, it’s looking more devastating than even I expected. Scary Mary.

I’m left with two different emotions. On one hand I feel really good because a bunch of self-centred, arrogant fools are being thoroughly smashed up by their own stupidity and, on the other hand, I feel worried because we will end up paying for their irresponsibility.

It’s unfortunate that we need them but hopefully they’ll be kept on a tighter leash from now on.

It’s unfortunate that we need them but hopefully they’ll be kept on a tighter leash from now on.

Indeed, much of the crisis is to do with significant deregulation in the US and UK banking sectors.

Expect to see the Democratic congress roll back the GOP Newt-era deregulation. I wonder if Brown will dare upset the City and push for greater controls?

I don’t usually advocate regulation. But banking ethics and shareholder demands don’t mix terribly well. Also, as “Soon” points out, it’s the people who end up footing the bill.

Awesome post on your blog Aaron, I guess times like this make you feel smug and depressed at the same time? 😉

6. Theodor Marco

One of many more collapses to come. The important thing is that our government doesn’t bail out any more financial institutions. They may just as well throw our money into a black pit, like say towards a pointless war instead. Er…

Somehow, this was predictable. Indeed, the level of borrowing was never sustainable, and this is clearly seen (and felt) in these moments. I just hope that you are much too pesimist, and I hope we are not “in deep trouble”. 🙁

>”The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.”

How dare the US government interfere in the workings of the free market!

;-))

Wonder how the TaxPayersAlliance would spin this one?

Fannie and Freddie were “government sponsored enterprises” dating from the era of the new deal.
It was the implicit govt guarantee on their debt securities which led to their grotesque overexpansion in the first place.

Does anyone see the strange correlation to how the scale of borrowing is in direct proportion to the weekly wages of footballers in the premiership. Now look at the sponsors of football clubs. Football is the circus of our day.

Andy Gilmour – “How dare the US government interfere in the workings of the free market!

;-))

Wonder how the TaxPayersAlliance would spin this one?”

Uhh… by opposing it? Libertarians/small “c” conservatives don’t have a corresponding reflexive “pro-Americanism” to mirror the left anti-Americanism. We can afford to take each policy as it comes. Libertarians are fully aware that socialism operates at the heart of America’s financial system to the disadvantage of the poor and the advantage of the politically connected: http://www.cato-at-liberty.org/2008/09/08/not-a-market-failure/

Nick – “Libertarians are fully aware that socialism operates at the heart of America’s financial system to the disadvantage of the poor and the advantage of the politically connected.”

Until they run out of money themselves, at which point they run over to the bad big government for financial help.

Adam Applegarth anyone? As loud a libertarian as you get, spent years telling us how governments should become smaller and how various government safety nets should be removed then ran cap in hand to the same government once he was neck-deep in crap.

Libertarians = Hypocrites.

It was the implicit govt guarantee on their debt securities which led to their grotesque overexpansion in the first place.

But they were still answerable to shareholders.

This sleight of hand in blaming ‘socialists’ is all very amusing, and predictable, but how are you guys going to blame socialists for the failure at Lehman, AIG, Merrill Lynch, Northern Rock and more?

The problem isn’t givt backing, it is their bad risk assessment and taking on bad debt. It shows actually that these people are crap when unregulated.

And if the Feds hadn’t stopped in to rescue Fannie Mae and Freddie Mac, then the financial system would have fully collapsed.

Of course the TPA would oppose it. But then who said they lived in the real world? 😉

cjcjc

Actually they were semi-privatised – to get the borrowings off the government’s books. Mixing public and private enterprise always messes things up – see New Labour.

Even now – following the bail-out – both still trade on the stock exchange (having lost 80% of their market cap).

This sleight of hand in blaming ’socialists’ is all very amusing, and predictable, but how are you guys going to blame socialists for the failure at Lehman, AIG, Merrill Lynch, Northern Rock and more?

The problem isn’t givt backing, it is their bad risk assessment and taking on bad debt. It shows actually that these people are crap when unregulated. ~ Sunny

Agreed.

Awesome post on your blog Aaron, I guess times like this make you feel smug and depressed at the same time? 😉 ~ LeeG

Indeed, but I’m also someone who sees opportunity in such desperate times. The knack is judging the bottom – and then buying everything you can!

Oh and thanks. :o)

“Adam Applegarth anyone? As loud a libertarian as you get, spent years telling us how governments should become smaller and how various government safety nets should be removed then ran cap in hand to the same government once he was neck-deep in crap.”

Soon, nowhere (apart from on this blog last year – http://www.liberalconspiracy.org/2007/11/20/what-about-northern-rocks-boss/ ) can I see anyone claim that Adam Applegarth is a libertarian and I think you will find that neither the TPA, the LPUK, the LA, or Samizdata or any other popular libertarian opinion source are suggesting that banks be bailed out by the government. The LPUK blog goes rather further, proposing, in principle, an end to Government-backed currency altogether. You are very mistaken to associate these bailouts with a libertarian economic position.

The knack is judging the bottom – and then buying everything you can!

Yes – though please let me know!!

“The problem isn’t givt backing, it is their bad risk assessment and taking on bad debt.”

You don’t see a likely connection between these two things? If you were told not to worry too much about your savings because if you lost them, they would be paid back, do you not imagine that might influence your spending/investment decisions?

If you were told not to worry too much about your savings because if you lost them, they would be paid back, do you not imagine that might influence your spending/investment decisions?

You could apply that to FM and FM, possibly. But you’d need to show some evidence for that, rather than just rhetoric.

How would you then explain the collapse of capitalist titans such as Lehman Brothers or Merrill Lynch? That’s who I was talking about.

Nick – “Soon, nowhere (apart from on this blog last year – http://www.liberalconspiracy.org/2007/11/20/what-about-northern-rocks-boss/ ) can I see anyone claim that Adam Applegarth is a libertarian and I think you will find that neither the TPA, the LPUK, the LA, or Samizdata or any other popular libertarian opinion source are suggesting that banks be bailed out by the government.”

My mistake, not Applegraph but Matt Ridley, Northern Rock’s chairman. He spent the 1990s writing in the Telegraph against all government interventions in economic matters which fairly qualifies him as a Libertarian. Amazing that the organization he was previously in charge of had to be bailed out by the detested government at the behest of the man himself and to a whooping £50bn.

Well if Matt Ridley personally called for a bail-out then, yes, he is a fair-weather libertarian and a hypocrite. If not, then he is just a poor businessman. Businesses should be permitted to fail. Otherwise, it is not a free market.

23. John Meredith

And yet, despite all this talk of catastrophe, the fall on the US Stock exchange was less that 2.5 percent, something that happens every year. It seems that the system is robust enough to withsatnd even these seismic shocks. It will need to be reformed, of course, but I don’t see the case is made for more regulation.

Well NR and the other independent banks are very different propositions to Freddie and Fannie.

And yet, despite all this talk of catastrophe, the fall on the US Stock exchange was less that 2.5 percent, something that happens every year. It seems that the system is robust enough to withsatnd even these seismic shocks. It will need to be reformed, of course, but I don’t see the case is made for more regulation. ~ John Meredith

So the stock exchange took the news well. It was probably tempered by the fall in the price of oil – offsetting some of the impact. Also, I’m not sure how the stock exchange is to do with whether we do or don’t need more robust banking regs (or what you mean by reform if it isn’t more regulation – even slightly more). Surely the fact that several *massive* lenders have collapsed due to irresponsible lending is enough, no?

26. John Meredith

“Surely the fact that several *massive* lenders have collapsed due to irresponsible lending is enough, no?”

No, or. at least, not necessarily. The idea that these institutions are not regulated or only lightly regulated is wrong. There is a mas of regulation, it just wasn’t any use. The financial sector with the least regulation, hedge funds, seem to be doing OK (and remember when everyone predicted disater from that quarter?). That is what I mean for the case not being made. There is definitely something wrong with the way the big investment banks are (were) structured but I syuspect that they will sort it out now that they have had their backsides kicked.

Sunny,

Neither “socialists” nor “capitalists” were to blame for the FMFM mess.

The criticism of FMFM is that it represented the worst of both socialism and capitalism; managers used the freedom from risk afforded by an implicit government backing to behave like capitalists with an unfair advantage and that, thus protected, they didn’t make a brilliant job of managing their risks.

The accusations leveled at them is not only that they put the state on the hook for their poor judgement but also that they failed to make mortgages in America any cheaper than in Europe where, despite our greater acceptance of the state, we do not have comparable institutions.

And it gets still worse because, even if FMFM had made mortgages cheaper, they still wouldn’t have helped out the American homeowner because, when mortgages get cheaper, house prices rise to compensate. So your outgoings end up the same.

It should therefore be obvious that these institutions made no sense from either a left or a right perspective – they were simply bad organisations.

As the economist will tell you

http://www.economist.com/opinion/displaystory.cfm?story_id=12009702

The financial sector with the least regulation, hedge funds, seem to be doing OK (and remember when everyone predicted disater from that quarter?).

Was LTCM not disastrous enough?

Your point about having the wrong kind of regulation rather than too little is a fair one though. The regulators had the power to stop the current situation but either didn’t see what was happening or didn’t understand or just didn’t bother to act. I work in banking and the FSA is certainly keen to dictate small details about how we do things on a daily basis but couldn’t prevent the Northern Rock and Equitable Life fiascos.
It’s like they force you to get your car MOT’d and serviced, ensure your tax is up to date, are properly insured and know the highway code inside out then stand by and watch as you drive the wrong way down the M1.

I’d say this whole debacle is less an issue of regulation than of transparency.

ps – Looks like AIG is next in the bag.

thus protected, they didn’t make a brilliant job of managing their risks.

Hi George, I’m not denying they were ‘bad’ organisations, and your assessment isn’t wrong either.

But that bad assessment of risk happened not only at FM FM but also at other investment banks that weren’t protected by the same guarantees. I’m saying the problem is not enough regulation itself, in this case.


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