So why can Bush implement measures that we were ridiculed for proposing them before it got any worse? When the left warned that the financial sectors’ ability to avoid taxation probably affects social cohesion more than a teenager spraying graffiti on your wall? Would we have been more credible if it had been the “too big to fail” City saying this rather than the social democratic left?

When both the European left & right talk about the “myth of free markets”, don’t we have a “progressive consensus”? Of course not, it’s easy for the right which holds power in most European countries to blame the markets now when they themselves didn’t do anything about it before. But let’s move beyond the “we told you so” and the “I believed this all along” and look how we can get out of this mess.

If taxpayer’s money is conributing to cover the highly increased risks the financial institutions has been making, isn’t it only fair that those financial institutions contribute more to insure citizens against the risks that they face?

You might argue that the problem’s gone global but the solution can only be national given how complex and different tax structures are in each country. So how about a transaction tax, like for example the Tobin Tax?

What’s the Tobin Tax? It taxes currency conversions in foreign exchange markets which reduces the incentives to speculate in the short term. How does this add up? Given the turnover in these markets is around $3.2tn, even if you went for a very cautious 0.05% tax, you would create a revenue of at least $400bn a year.

But won’t the financial sector complain about this new tax? Maybe, but are they complaining about the money the taxpayer is bailing them out with?

OK so now what do we do with that money? We could start by using it to help insure our residents from life risks. And then we could making the system more transparent.
Now that doesn’t sound too radical does it?

FWIW I think probably the best example is the panic of 1907 which ultimately resulted in the creation of the federal reserve and an interventionist monetary policy in 1913.

Whether there is enough political will and accountablility to strengthen the present global financial system, how best to do it and whether this is actually desirable is still contestable.

I tend to agree that the opaque links between the central banks and politicians exacerbate problems when things go wrong and that the pain spreads as a result. But I also think that this need not be so provided the central bankers get their houses in order.

So what the correct response (not the left or right response) should be is not to call for drastic shifts in fiscal policy which destabilise confidence further, but to tighten up the enforcement of regulation and shift the burden of tax onto the wealthy in as close to a neutral way as possible.

Spending cuts in this situation would be bad not because of the hardships and suffering that would be forced on the poorest (though those of us effected by cuts would obviously shout loudly), but because this would have a negative impact on the wider economy when stability is at a premium. Tax rises at this time would be worse because this would have the double impact of reducing any growth while reinflating the economy.

If all this sounds strikingly close to the new LibDem plans then I think they should be listened to on this subject.

I don’t think Luis is saying that no one saw this coming. Even the Economist has been warning about the complexity of the financial instruments and the risks of Greenspan’s interest rate policy for years. It is, nevertheless, a fair point to make that no one knows how far this thing is going to unwind because we have never experienced anything like it before.

What the hell, it probably doesn’t matter anyway, conspirators and incompetents most likely combined to magnify the effects of each other. The rest of us just have to adjust to the circumstances – such is progress!

I am no economist, but I do agree with Tony Curzon Price, if I have understood him correctly, that the ultimate outcome of any investment – including one by the state – ought to be that any upside should be there to be had. Anything less than that, it seems to me, is simply handing good money to folk that have already displayed their incompetence.

The Administrations’desire to keep this away from public scrutiny ought to set alarm bells ringing, I’d have thought….

The fact that the banks were making so much money on these assets should have clued them in to the fact that the assets were, in fact, not stable. I mean, I’m certainly not an expert on financial markets but I do have a memory. Every time I hear on the news about the next hot market, and people making money hand over fist on some asset or resource, it doesn’t take a genius to realize a crash is inevitable. When you look at a graph of the price and it’s skyrocketing upwards, it’s almost a foolproof indication that a crash will happen.

Presumably the objection to this would be that much of the City would up sticks and leave, thereby knocking a further hole in the economy. To which two answers are possible: a lot of it may well do so anyway if Salmond leads Scotland out of the UK so a little contingency planning would be sensible, and more generally the City represents too high a proportion of the economy (too many eggs in one basket).

I know, I know, I’ll have the Friends of David Ricardo hissing at my economic illiteracy. But I think Ricardo would have been the first to recognise that the products/services in which comparative advantage exists (or not) will change over time, and in any case there’s a hidden assumption that all financial services represent a single “product” which is at least arguable – why isn’t insurace a different product from retail banking, for example? The benefits of vertical integration are a contingent factor, not a theoretical derivative.

the banks took speculative trading positions (in opaque financial instruments) that went wrong (much like one might borrow money to buy a stock that you expect to rise)

banks having unwittingly built their balance sheets on assets that they thought were solid, but have turned out not to be

My understanding is that people had loans made to them with the house as collateral, these were sold on, sliced up into CDOs, guaranteed by ratings agencies, traded, hedged against, and put off balance-sheet in special purpose vehicles etc. etc. in a process that quickly became very “opaque.” Then big institutions leveraged themselves up to the nines (“borrowed money”, I believe is the conventional term) to jack up the profits they were making fro all these fancy new instruments. Which is fine, unless the housing markets go down and your magnified profits start turning into magnified losses.

So I don’t think there’s anything intrinsically wrong with “talk of parasitic financiers who produce nothing and indulge in nothing but speculation.” If these people were meant to be accurately pricing risk, they seem to have done a spectacularly bad job of it.

And I agree with commenters #1 and #2 that loads of people saw this coming. Some were dirty hippies, some were libertarian nut-jobs. If you’d given the issue some attention and didn’t think that Alan Greenspan was the single smartest man on the planet, the odds were you harboured some grave reservations about the financial system.

I do like the idea of “temporary government job creation, such as heavy investment in renewable energy and transport infrastructure (which will have the added bonus of cutting long run energy costs)”, though. I’ve been upset that the “Green New Deal” is getting less play than you’d hope.

As Bonddad put it today “In other words — everybody who should have seen this coming is now shocked we’re in this mess. The only people to get this right were the bloggers — or as NDD says, the “dirty hippies.” Now, these same people who have gotten nothing right over the last year are desperately seeking money to help stave off a disaster. These people have no credibility on this issue. None. Nada. Zip. Zero.”.

The mechanics are known and understood. Again the bloggers mentioned have explained it exhaustively but right now the main culprit to worry about are Credit Default Swaps (look ‘em up – there’s a good explanation on Moon of Alabama).

I guess I’m disappointed. It’s one thing to berate the Guardian for publishing articles that really don’t get to the heart of the problem, but then again your proposals are vague and conditional laden. The problem right now is that, whatever we might think of the responses happening across the pond in the US, our exposure to this crisis is far greater and we need better analysis than vague mumblings about perhaps finding out what went wrong. These analysies exist, but they aren’t happening in the UK, so the left here had better start getting an international focus if they want to respond cos the parochial stuff won’t cut it.

and if you think that brown and Darling are going to be of any use in getting us out of the mess they created, then I refer you to Bonddad’s comment above “These people have no credibility on this issue. None. Nada. Zip. Zero”

helen

You would then find a long list of critics of the ‘management’ of derivatives trading that would be hard to categorise as Trotskyites (George Soros, Warren Buffer – who labelled the more exotic derivtive products as ‘financial weapons of mass destruction’ – see http://news.bbc.co.uk/1/hi/business/2817995.stm – et al). You could have a look at Satyajit Das’s ‘Money, Guns and Traders’. The big lie is that nobody foresaw the crisis.

“… we ought to wake up to the reality that business greed is subverting the American way of life—and hurting the image of American capitalism and democracy—more effectively than the ploys of any foreign enemy.

When even Martha Stewart is ethically suspect and her company’s stock has plummeted—though not quite to the depths of Enron, Global Crossing, Tyco, Dynergy, Wal-Mart and Rite Aid—it is time to return to the wisdom of Franklin Delano Roosevelt, the Depression-era president who saved capitalism from itself.

Wealthy from birth, FDR had a healthy awareness of the tendency of the upper classes to destabilize society and even destroy themselves with their greed and hubris. Unlike Karl Marx, however, he believed the unraveling of capitalism was not inevitable if these excesses could somehow be corralled. Thus was born the idea of government regulation as the vital support structure for the powerful, fertile but unstable free market.

Unfortunately, greedy people and institutions don’t like being monitored, and they have the means to corrupt governments and skirt laws.

Since the so-called Reagan Revolution, powerful corporate interests have succeeded in profoundly damaging the foundation of a properly regulated economy.”
Robert Scheer, LA Times, June 2002
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U.S. gross domestic product (GDP) is about $15 trillion.
The GDP of all nations combined is approximately $50 trillion.
The total value of all the real estate in the world is estimated at $75 trillion and the Total value of all the world’s stocks and bonds is about $100 trillion.
The derivatives market is around $500 trillion (Marketwatch).