Why do our politicians continue to mislead us about the recession?


9:19 pm - February 19th 2009

by Aaron Murin-Heath    


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I stopped and blinked when I saw this headline on The Guardian’s site:

Bank bail-out ‘could send national debt soaring by £1.5 trillion’ (link)

Okay, upon reading the article it’s clear that the “soaring” has much to do with the ONS (the Office for National Statistics) reclassifying banks, that have been “recapitalised” with public funds, as public institutions (i.e. taking on the bank’s liabilities*). Therefore, we learn, that debt may exceed 150% of national income.

This is frightening.

What bothers me though, is that people – politicians and the media mainly – view this recession as something that needs treating. When in fact, rather than being the disease, the financial crisis is the cure.

The recession is a market correction of a hugely over-inflated housing market (it will correct, and home values will/may return to a more realistic level of appreciation). The recession is a reaction to borrowing on a massive and wholly unsustainable scale. The recession is the global economy snapping back, as rampant growth surpassed the finite resources we have available.

We should stop thinking of the recession as something we can spend our way out of, and just swallow our medicine. Governments, rather than trying to perpetuate a bankrupt economic status quo (see the reduction in V.A.T.), should be using funds to provide basic safety nets for those who fall through the cracks.

We should stop lying to ourselves. We need to be honest. We can’t afford to continue spending money we don’t have. Continuous growth is an illusion. Markets will fluctuate. That’s the way it is.

We spent more than we had. We borrowed beyond our means. And now we have to suck it up.
deface wordpress
Sorry. But we need to grow up. And our politicians need to stop bullshitting, and tell us what we don’t want to hear.

The recession is the cure. Now let’s stop making matters worse, and deal with it.

*Assets, other than short-term bonds and cash-at-hand, are not included. This will give an inaccurate interpretation of the *real* balance sheet. In fairness, it’s hard to calculate assets when the value of property, and the ability of lenders to service borrowing, are so uncertain. Accountants should always side with caution – indeed, specific rules state as much.
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About the author
Aaron Murin-Heath is an occasional contributor. He is a writer based in Newark-on-Trent and Tallinn, Estonia. He is both socially and economically liberal. Aaron blogs at tygerland.net.
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Reader comments


Spot on.

2. Charles Wheeler

Unfortunately, the cure will kill us if we take too much of it in one go. An imploding economy is not a pretty sight – even if some see it as a come-uppance! Without drastic intervention the 1930s (only corrected with mobilisation and the massive spending of central government with the advent of wartime central planning) will look like a beanfeast. So save your moral outrage – it’s not a few ‘falling through the cracks’ we’ll have to worry about, but millions more unemployed – including complacent bloggers.

It’s an argument worth having that recapitalising banks may be a better way of lubricating the economy than safety nets (if banks do indeed return to borrowing), but I’m more concerned about the tone of political twitterings.

Politicians pretend we’ve done nothing wrong, and that they’ve done nothing wrong. When in fact we need to learn, and we need to hold back.

And sorry, but we’re being daft if we take too much from the 1930s. Things are entirely different.

…including complacent bloggers.

Complacent?

That rather prickles considering I have been warning of this recession since 2005.

I think you’ll find others have been more “complacent” than I.

The problem is that if the government had said to the banks “tough”, they would have foreclosed on loans across the country, businesses would have gone bust in their thousands and everyone would have had an easy scapegoat. No democratic government is ever going to “do nothing” in a situation like the one we are facing – no matter whether it’s the economically correct thing to do or not – because political factors will not let them.

Now as to the VAT cut and the none-sense about trying getting banks facing massive loses due to risky loans to erm make more risky loans, I agree it’s absurd. The only arguments I have heard in favour are similar to those of Charles – we can’t do nothing, and that isn’t an argument unless you can prove the measures work. So far as I can see the intent of the current measures are the equivalent of filling up the gas tank of an overheating engine. A more rational economic response in my view would have been to invest massively in infrastructure to try and ensure a comparative advantage over competitors.

Risky loans are not the issue. Day-to-day borrowing, on which businesses survive, needs to continue. This is where the banks come in.

Everyday, by mid-morning, businesses have to arrange short-term borrowing to satisfy their daily outgoings. This is a daily fact of modern business. If banks hold back funds, businesses will go bust (not because of recklessness, but because of a collapse of confidence between banks who cannot be sure of each other’s exposure to new risks, which has led to banks hesitating and not providing credit. i.e. meaning a change in circumstances for businesses).

It’s not about action per se, but tone – and how we move forward. I repeat: Why do our politicians continue to mislead us about the recession?

The recapitalisation of banks solution doesn’t work anymore. For a start, no one still knows the extent or reapitalisation required. Secondly, even if you lend them hundreds of billions, there’s still a risk they won’t start lending and so the economy remains in doldrums.

Lastly, and more importantly though, by re-capitalising the banks you’re failing to take your own advice. If you want everyone to suck it up, surely the banks should be the last to be bailed out since they’re the ones who screwed up big time.

If one really wanted to be radical and punish the people wh made the mistakes, then the govt woud create new, mutualised banks, which guaranteed deposits in other banks, but other than that let them go bust. Goodbye Lloyds!!

The problem of course is that it would take half the insurance markets, and hence the world markets with them.

On the other hand, sitting around doing nothing will def mean you get drawn into a vicious cycle of falling employment => falling employment => more defaults => more bad loans => more bank liabilities => less bank lending => more bankruptcies => falling employment.

The Japanese and chinese economy this week announced unprecedented dive in exports and rising unemployments. Guys, its easy to say lets ride it out but this is not even rock bottom yet. If it spirals out of control we could 4-5 million unemployed. That might even bankrupt us if welfare payments get too high.

I’m not advocating propping up a bad economy – the only thing any stimulus package will do it lessen the hurt from the fall. It might stop us from spiralling out of control.

a few typos above but i’m working off a crappy laptop somewhere and I’m tired 🙁

“No democratic government is ever going to “do nothing” in a situation like the one we are facing – no matter whether it’s the economically correct thing to do or not – because political factors will not let them.”

In a nutshell, we’re shafted.

Interesting to see a poster on a leftist site advocating the same remedy as the hardcore freemarket Austrian School (who saw this crisis coming unlike their “cousins” in the Chicago School).

10. Luis Enrique

Aaron, you really need to read “The return of depression economics” by Paul Krugman.

Agree with Luis. Krugman really is murdering everyone else on the economy over in the US. It’s a shame we don’t have a similar calibre of economist here (at least in the media eye) who is making a similar case.

Luis,

I think you’re confusing action with political tone, as I explained in my comments.

I’m an accountant, not an economist.

Agree with Luis. Krugman really is murdering everyone else on the economy over in the US. It’s a shame we don’t have a similar calibre of economist here (at least in the media eye) who is making a similar case.

Maybe… but it’s theory, not practice. He’s projecting. Economics is not a science. Because there is no test.

Krugman is wrong, pure and simple. Economies do not run on consumer demand, they run on saving and investment. Krugman’s “solutions” might result in a short term recovery but such a recovery would be just another artificial boom culminating in a bust. In any event, what happens when we run out of money to spend? Then what?

Keynesianism failed in the West in the 1970s and failed in Japan in the 1990s. It even failed in America in the 1930s (the relatively poor performance of Roosevelt’s New Deal is accepted by Keynesian economists (as opposed to historians) although they argue that it failed because Roosevelt wasn’t sufficiently Keynesian).

Methinks another look at another nobel prize winner for his work on business cycles, Fredrich Hayek, would be more rewarding. Even if one doesn’t agree with his free-market libertarianism, current events appear to vindicate his business cycle theories.

Savings – in the US and UK anyway – have to rise from the near zero they have been in recent years.

Aaron is spot on in that sense.

The issue is whether governments (1) can meaningfully mitigate the speed of the resulting contraction in demand – ie not cause savings to rise even faster in anticipation of tax rises to come and (2) whether govt grabbing a greater share of GDP will or will not hamper either the medium term recovery or longer term potential growth.

Economists are divided.
Those who are *prejudiced* in favour of big government will laud Krugman as “murdering erveyone” on the issue.
Those who are prejudiced against will laud his opponents.

Fact is nobody – including them – has any idea.

What we *do* know is that here in the UK Brown doesn’t give a f*ck how the economy or the public finances look in 5 or 10 years time. He is only interested in the now.
That is not a healthy starting point.

And yes #9 it was the Mises Institute and their ilk who were railing against the credit boom for several years. I have no idea what Krugman was saying after the internet bubble burst – was he encouraging the Fed to turn on the taps – which got us where we are now?

This is their short take on the current situation, taking account of Keynes too.

http://mises.org/story/3348

Keynesian economics didn’t fail Japan in the 90s, the Japanese govt failed the people by not dealing with the bad loans quickly enough and then slowly pumping lots of money over a long period of time… when in fact it needed a huge injection early to ensure it didn’t spiral into a massive recession (as it did).

If savings and investment alone save economies then Japan shoudnt have had any problems right?? So that theory goes out of the window.

And I laugh at the person saying we should use monetary policy at a time when interest rates are essentially zero and the economy still is in the doldrums and falling further.

A short term recovery is needed, as I said above, to ensure we don’t enter a vicious cycle. After that, that I agree we need an economy based on savings and investment not a consumer boom. Or a housing boom, really.

Sunny has a point.

Chicago-school solutions – in the short-term – are irrelevant when interest rate adjustments have no effect.

Not sure we need a savings-based economy. Let’s reduce debt and save a bit, but people’s jobs are dependent on money circulating around the economy. You might argue that big savers, such as Germany and Japan, are well-set, but we might also argue that there is little governments can do if people sit on their money.

It might be worthwhile to look at high-earner taxation, and look at redistributing, as that would help ensure a greater level of the money supply is fluid. Not that I would necessarily support it.

Aaron,

Bravo for writing this piece.

What Sunny says about it getting a lot worse and this bankrupting the country if welfare payments get too high is also true though.

The question is are you willing to see other public services reduced and cut so that we can afford to continue basic subsistence welfare payments no matter how bad it gets – literally a basic safety net and nothing more, or do you want to gamble and take on a huge ton of extra borrowing in order to try ‘stimulating’ your way out of the recession so that you can continue to provide luxury public services?

Cos, if the ‘stimulating’ doesn’t work the pressure on the public finances and the health of these precious public services looks even shakier.

21. Green Socialist
22. Luis Enrique

Well, I can only repeat my recommendation. I think you’d get a lot out of it. Lots of people being needlessly thrown out of work isn’t a cure for anything – reducing the severity of the recession would not be “making matters worse”. The right tone is not “take your medicine”. I don’t even know what “continuous growth is an illusion” means – look at a graph of median real income since 1700 – which bit of that is illusory? Where do you think growth comes from? You may be an accountant, but perhaps you would benefit from reading one or two good economists. I think your post reveals quite a few misunderstandings about what caused the recession, what can be done about it, and how economies work in general. The recession was not caused by “spending money we don’t have” – unless perhaps you are talking about capital flows from China and elsewhere, in which case that’s part of the answer, but it has nothing to do “unsustainable borrowing” by firms or consumers – the US govt is having no problem selling its bonds, what’s unsustainable there? Something along the lines of excessive leverage and misjudged risk within the financial system is closer to the truth. And it has nothing to do with growth outstripping finite resources. I could try to explain these assertions, but as I say, a better economist than me has written a book about it. Here’s an older, shorter piece of his on this theme:

http://www.pkarchive.org/cranks/hangover.html

(NB, Krugman isn’t right about everything, and he is probably over estimating the efficacy of stimulus spending.) and please don’t give me this “economics isn’t a science, and what economists say is only true “in theory”, so I can ignore economists and gain a better understanding of how the economy works just off the top of my head. One of the thing that has depressed me most about all this, is the prevalence of this grotesquely ignorant attitude in respectable circles. Economics might not be a science – we cannot run experiments where we take 1000 identical economies and do whatever to them, so we will never have the sort of knowledge about economics that would give us – but that doesn’t mean there’s nothing to be learned about economics, and that learning does not require getting to grips with theory and data – show me somebody complaining about economics only being true “in theory”, and I will show you somebody who knows bugger all about economic data in comparison with your average economist. The profession contains some pure theorists, as does, say, physics, but economics is obsessed with data, and of course rightly so.

(who saw this crisis coming unlike their “cousins” in the Chicago School)

Chicago-school solutions – in the short-term – are irrelevant when interest rate adjustments have no effect.

Chicago-school (or Friedmanite) economics is about keeping money supply growth steady. As such, it was obvious for a while that the money supply was growing much faster than GDP.

Monetarism didn’t fail: inflation-targeting using interest rates failed (an excellent article on this appeared in the Spectator a while ago). Greenspan made the fundamental error of abandoning monetarist discipline in favour of frantic rate-slashing and the Bank, under Brown’s auspices, made the error of targeting CPI rather than holistic money supply including asset prices.

Yes, rate-slashing has failed but that doesn’t mean monetarism (as a theory) is wrong. We need a conversation around how best to control money supply when China is flooding the market with cheap debt.

Friedman always said that tight control of the money supply was necessary to avoid catastrophic boom-bust cycles such as this. He is being vindicated.

Luis, check out the 20/20 post I linked to above (#4). I understand exactly about capital flows. And I’m not dismissing Krugman – who I’ve read for many years.

I think you’re making judgements about what I don’t say – when in fact, in the main, I’m writing about political tone.

I don’t even know what “continuous growth is an illusion” means – look at a graph of median real income since 1700

I’m sorry Luis if you think I’m a hopeless moron, but if I insert to word “uninterrupted”, would that tempt you out of Pedant’s Corner? Again, I’m talking about tone – specifically that of Gordon Brown several years ago.

I do think we have to suck it up. People are losing their jobs right now – they’re having to deal with it. We should do what we can. But if in the process people continue to increase their personal indebtedness, then we’d be making matters worse. I’m not against Keynesian solutions at all. I’m not against anything that might mitigate suffering.

Basically, I believe (and I’m sorry, but I’m perfectly entitled to my opinions) that after this correction, we should not pretend that things were fine and dandy before. We need growth – just not growth on steroids.

cicero,

I didn’t write that monetarism has “failed”.

I wrote ::

Chicago-school solutions – in the short-term – are irrelevant when interest rate adjustments have no effect.

People seem to be drawing odd conclusions of what I’ve written in this thread.

26. Luis Enrique

Aaron,

my bad – I misunderstood what you meant by continuous.

I still think you’re wrong to characterize the recession as cold turkey after a period of debt abuse, and hence I think you’re wrong about tone – politicians are not wrong to talk of the recession as if it is a bad thing we can hope to mitigate. Nobody thinks things were fine and dandy before – clearly there was a housing bubble and banks had started doing bad things. That particular book by Krugman addresses the error in the line: “We can’t afford to continue spending money we don’t have” – unless I am misunderstanding you again there: who is the “we” you mean? “We” the global economy can’t spend money we don’t have (unless we borrow from aliens), “we” the UK can borrow from overseas, but is that what you mean … we need to reduce govt overseas borrowing? “We” meaning firms, aren’t borrowing – look at the data on Chris Dillow’s latest post – corporate sector has been in surplus since 2003. “we” households, are not really the problem – who’s suggesting that the way out of the recession is for private households to “continue to increase their personal indebtedness”? Nobody I know of. If by “we” you mean the government/taxpayer then “spending money we don’t have” – i.e. borrowing – is precisely what we must be doing now – because everybody else is hoarding cash.

You may (as I do) disagree with the stimulus packages, but there is no doubt that Obama is far better at “transparency” – though the clever site that has been set up doesn’t have much detail yet.

http://blogs.news.sky.com/boultonandco/Post:353e0b48-79cc-439b-b729-3e77982c64c4

28. Luis Enrique

N.B. Aaron, I did look at your 20/20 post, and see your longstanding concerns about govt and household debt levels, and I am not saying these things played no role in the creation of the current problems. I am saying that everybody trying to reduce their borrowings – because we need to “suck it up” and get debt back to “sustainable levels” is precisely the wrong response to the problem and hence the corresponding tone would be wrong too.

“What bothers me though, is that people – politicians and the media mainly – view this recession as something that needs treating. When in fact, rather than being the disease, the financial crisis is the cure.”

Well said – never did understand what was wrong with “boom and bust”. They are like night and day, you can’t have one without the other.

If one really wanted to be radical and punish the people wh made the mistakes, then the govt woud create new, mutualised banks, which guaranteed deposits in other banks, but other than that let them go bust. Goodbye Lloyds!!
The problem of course is that it would take half the insurance markets, and hence the world markets with them.

Sunny why do you think the end of Lloyds Bank would take half the insurance markets and then what you vaguely refer to as “World markets ” out ? You have utterly lost me there .

Is there anyone who knows what Sunny is talking about ?

When you get into high finance the divsion between banking and insurance is almost non-existent so I think he means that the insurance companies are heavily exposed to the banks dodgy assets, and would become major unpaid creditors if a bank went under, taking everyones pensions with them. Personally I’m not sure about that, insurance funds tend to rely most heavily on gilts to meet long terms liabilities like pensions and life assurance.

On the other hand, sitting around doing nothing will def mean you get drawn into a vicious cycle of falling employment => falling employment => more defaults => more bad loans => more bank liabilities => less bank lending => more bankruptcies => falling employment.

Why not

falling employment => lower wages => more employment

or

=> more defaults => less bad loans =>
(Surely far more likely )

more bank liabilities => less bank lending => more bankruptcies => confidence that the remaining companies have real value=> more loans => recovery

Honestly you people make me laugh .Yesterday it was going to be a boom forever and today we are all going to hell because house prices are what was called stratospherically high a year ago . Sunny seems to me to latch words together for their sound , I still have no idea what his Lloyds Bank/ World Insurance connection is does anyone have any clues at all?

Aaron by the way I forgot to say this was an excellent post with which I agree .

Oh Christ I have just realised. Hundal the genius thinks Lloyds TSB is the same thing as Lloyds of London . Yes thats right Sunny it’s the same thing just like all people called Lloyd are the same thing Clive Lloyd , David Lloyd . Same person

When you get into high finance the divsion between banking and insurance is almost non-existent so I think he means that the insurance companies are heavily exposed to the banks dodgy assets,

See above believe the mystery is solved Only AIG were thusly exposed no-one else is ( Although there are rumours about Quinn Direct)Insurance Companies are sort of not allowed to live on debt it would be kinda illegal for obvious reasons .Nope I think Sunny thinks all things called Lloyds are the same thing.
Either we see a pretty fancy explanation pretty quick or I nominate Mr. Sunny Hundal for most stupid remark of the decade .

Only AIG were thusly exposed no-one else is ( Although there are rumours about Quinn Direct)Insurance Companies are sort of not allowed to live on debt

I’ll be sure to let my acquaintances in the reinsurance industry know this. They may have thought that they were doing clever things that entirely blurred the boundary between insurance and i-banking, and they may currently be rather concerned about what’s going on, but luckily Newmania has spoken and they’re all fine.

Luis, excellent stuff. I’m sure if you fancy doing another ‘economy’ post for LC Sunny would be delighted to put it up…

36. the a&e charge nurse

The internet confirms how readily ideas can be ruled by the power of suggestion.

Companies collapse because ‘markets’ are susceptible to exactly the same kind of contagion and hysteria.

If enough people say it will be so (and act accordingly) then it will be so.
This is why house prices went through the roof in the first place – who knows what the real value of property is other than the aggregation of x% of collective anxiety ?

I’ll be sure to let my acquaintances in the reinsurance industry know this. They may have thought that they were doing clever things that entirely blurred the boundary between insurance and i-banking,

John you do know that Reinsurance is when you insure a direct insurer and if you know this , how do you imagine a reinsurer, can make such a decision ? Can I take it that your knowledge of this is actually of the sort that can be written on a Jew`s foreskin and you just thought “Reinsurance” sounded impressive .( don`t forget your coat ….)

Take a look at the share prices.
The banks – as we know – have tanked.
The reinsurers, eg Munich Re, have fallen far far less than the overall market.

As indeed has Buffett’s company – Berkshire Hathaway – whose major holding is General Re.

John you do know that Reinsurance is when you insure a direct insurer

Yes. Well, actually a lot of the volume on Lloyds is reinsurers insuring other reinsurers, but that’s not the point

and if you know this , how do you imagine a reinsurer, can make such a decision ?

A reinsurer definitionally has a lot of capital, and is under various regulatory requirements as to what they can do with it. They don’t like the latter, as it restricts potential returns on their capital. Therefore, they do Clever Things to get round the restriction. Join the dots.

The reinsurers, eg Munich Re, have fallen far far less than the overall market.

…and when the dust settles, we’ll see whether that was the right call.

Meanwhile, BH is atypical precisely because of Buffet’s long-term stance against doing investment-bankery-jiggerypokery to push up returns.

Well written and well argued. Relative to recent growth trajectory *every* economy is going to suffer as a result of the crisis. How economies emerge (in terms of their fiscal position) depends on the political leadership/maturity of those countries. I am not optimistic about the UK case.

Join the dots eh…. LMX is dead actually , so wrong there , if you are looking for the nefarious Bank -like activities of Insureres have a look into Quinn Direct .

Even if there is nothing one can do to stop, prevent, slowdown or ameliorate the current recession, now is precisely the time we need to be looking at what happened and trying to figure out if there’s anything we can do to avoid a similar fate in the future.

So we need to look again at monetarism and debate whether, for example, states are the best vehicle to be managing the “money supply” or whether, as Hayek suggested “last time”, this function needs to be privatized and commercialised.

Allied to this, whatever we conclude about who should manage the money supply, we need to understand the privilege bankers have accumulated by the state’s guarantee, implied or, as now, realized in many cases and debate whether the regulation, as a barrier to entry and true competition, is actually worse than the problems it is supposed to cure.

We need to look at the nature of asset price bubbles and its relationship to money supply and have the debate again about land taxes preventing the sinking of “surplus” money into property prices.

None of these are going to have any impact on the current situation, but if we have not settled some of these issues and be ready to implement them when the system is finally ready for its reboot the opportunity may be lost for another cycle.

Oh – and most of all of course, we’ve got to learn that governments created this, by trying to manipulate, or at least influence, their economies for political ends. And all that implies for whether governments/states can help fix this or are inherently part of the problem and if so, what we should do about preventing it having this destructive influence in future.

This article is completely right. The market will correct itself, for it is in its own interest to recover, regardless of government aid or intervention. Part of the problem began one or two years ago, when governments worldwide (starting in the U.S.) began “saving” banks which were in danger of crashing. Had they been left to their own devices, the “recovery” would begin sooner.

I cannot agree with so much “do nothing”. Something does need to be done as I said, not to get us out of this but to try to tailor the system such that similar problems do not recur. Monetary and land reform are tw key ones.

I agree with you, Jock: Some things can/should be done to prevent some of the causes that contributed to the current crisis, but I really think that pouring loads of public money on the economy will not fix it. This is mere propaganda from governments which fail to act on real problems like, as you say, land reform (very needed here in Spain, for instance). Of course the necessary reforms are the hard ones to address, and the risky ones for politicians in power.

Aaron

Your plea to politicans to “stop bullshitting, and tell us what we don’t want to hear” ignores unpleasant realities about our political system:

1 If politicans told us the truth about our economic system the political system which is intrinsically linked to our economic system would collapse.

2 Modern society and our power structures are based on many myths. Conventional wisdom about the economic system is just one of them. Established politicans have nothing to gain from telling the truth. Their power flows from bambozzling us. That’s why they never own up. There are no votes in it. It’s like the proverbial turkeys voting for Chrstmas.

If we wish to recover from the mess we are descending into then both our political and economic systems must be replaced.

Here is what really bothers me.

It has long been true that stock markets are a good indicator of future economic outlook. They go up and down in response to the announcements of policy by politicians and central bankers.

But “derivatives” are a more recent phenomenon, and if we read them like we read stock markets, the signs all point to catastrophe. Derivatives started out as insurance policies on investments. They have turned into a form of gambling on markets.

The Wall Street Journal’s Judy Shelton recently commented:
“…..The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) — over 12 times the world’s nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts……”

What is the point of that amount of derivatives having been bought and sold, other than that massive gambles are being made on the worsening of the economic situation? The fees that will have been earned by the sellers of these derivatives, will be of a significant size even relative to the normal profits of financial institutions. Is this how some of those institutions have earned such sizable profits in recent years, only to fail catastrophically once they began to be required to pay out on those derivatives?

Worse, how much taxpayer “bailout” money and government guarantees are being staked against the “derivative” liability black hole?

Left wing politicians are in the ascendancy at the moment. These people combine economic ignorance and conceit; they are “rescuing us from the consequences of the failure of capitalism”. Their central bankers are no better. Central bankers are not bankers at all, they are “planners” in the worst sense of the word.

George Soros has become famous for being able to outwit the central bankers of even the world’s fourth largest economy, to enrich himself colossally at the ultimate expense of the hapless people of the United Kingdom. I think Soros has merely stepped up a notch, and probably many, many other clever uber-investors.

The politicians and the central bankers believe they are in the process of turning the world’s economy around with their “bailouts” and guarantees and stimulus packages. $684 trillion of derivatives contracts says that there are a lot of very very wealthy speculators (the fees they have paid out to buy these derivatives is substantial and has inflated the profitability of the financial sector) who are gambling on the exact opposite happening. My guess is that they are right and the politicians and central bankers are wrong.

If the politicians and central bankers can even see the brinkmanship they are engaging in, their conceits will never allow them to “fold”. They think they can hold the tide back, and we, like King Canute’s people, are stupid enough to trust them. We have become so used to huge, comforting nanny state hovering above us, that we are blissfully unaware even that the size of the mortgage market is several times as big as our govermments are, let alone the size of the bets that these speculators are placing on the inability of those politicians to turn the mortgage markets, and other markets, around.

Of course the politicians believe that by doing what they are doing, they will turn the markets around and the derivatives liabilities will not eventuate. So, too, do most of the executives of the financial institutions that have been taking these derivative bets; otherwise they would not have taken them.

This is a story begging to be investigated. As governments pour taxpayers money into financial institutions, and borrow and print more and more money for that purpose, how much of it is flowing straight out again into the pockets of George Soros and other successful derivatives speculators? Is that the purpose of politicians mortgaging the futures of their citizens and their citizens descendants of the next few generations?

And who is in the know whether this is what is happening, and why are they not speaking out? The temptation must of course be strong, if you are clever enought to understand what is going on, to participate in the derivatives gamble and enrich yourself. Of course, some people are speaking out and are being politely ignored; like Peter Schiff, Nouriel Roubini, Steven G. Horwitz, Karl Denninger, Bruce Bartlett, George Reisman, Paul Kasriel, David Kenner, Bill Bonner, Harvey Golub, Roger W. Garrison, Steve Eisman,
Ivy Zelman, Meredith Whitney, Robert Blumen, Thorsten Polleit, Hans F. Sennholz, Joseph Salerno, Bill Fleckenstein, Ambrose Evans-Pritchard, Ron Paul, Dean Baker, Frank Shostak, Christopher Mayer, Kurt Richelbacher, Mark Thornton, Antony Mueller, and Stefan Karlsson, to name but a few. Many of these people are followers of the Ludwig Von Mises school of economic theory. I suspect that George Soros and other successful “market breakers” have also absorbed the principles of economic theory that are the achilles heel of our current crop of central bankers, and are using their knowledge and genius to outwit them.

This also raises suspicions whether politicians, central bankers, and executives of financial institutions are complicit. George Soros practically owns the main Left wing politicians of the major countries, from President Obama down.

If you thought that this part of the world was exempt from this kind of risk, think again. Here is Adele Ferguson, in “The Australian” in February 2008:

“…..Australian banks have a big exposure to derivative markets. Their total shareholder value of $110 billion is dwarfed by the size of the banks’ collective exposure to derivative markets of $12.9 trillion.
Put simply, the total derivative positions of the banks are 117 times as big as the banks’ shareholder value. If even 1 per cent of these derivatives contracts default because third parties at the other end get into trouble, the whole shareholder wealth would be wiped out and our banks could be broke.
Given total bank assets are $2.1 trillion, it begs the question why Australia’s banks have exposure to $12.9 trillion of derivatives positions. All banks hedge to reduce risk, but this is a big amount of hedging…..”

Adele Ferguson fails to identify that this is not hedging, this is gambling. She also falls into the classic error that I have expounded on above, when she goes on:

“….Banks worldwide are in a favoured position. While most are listed entities, they can always count on the shareholders being underwritten by the taxpayer in a crunch. The most recent examples of this were Northern Bank in Britain, which reportedly had about €25 billion ($54 billion) pumped in by the Bank of England, and Societie General attracted immediate support from the French Government. In the US, the Federal Reserve has been helping out its commercial and investment banks…..”

This confidence is completely and utterly false. The amount of the liabilities taxpayers are exposed to are astronomically bigger than anything they can cope with. This false confidence that politicians are engendering in us, whereby we all line up happily to give our life’s savings into the care of our “safe and secure” banks, is merely setting us up to provide an increased haul for the biggest fleecing in investment market history; and more than that: the biggest POSSIBLE fleecing: almost all mom-and-pop and elderly folk savings and investments, and the future earnings of several generations of taxpayers.

It just remains to be seen what the recipients of all this wealth choose to do with it. We will all be at their mercy.

Can someone please explain to me where I am completely wrong? I simply cannot understand why this situation is not patently obvious to at least a few people who have it in their power to alert us.

50. Luis Enrique

Why not just destroy all derivatives ?


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