Friday, 5 August 2011

Pass the parcel

You know when pictures like this one start getting used things aren't going terribly well. This time round its a bit of a biggie I reckon and all because of a game of pass the parcel.

Ireland provides a nice example of what this entailed:

The Irish banks did loads of mental lending; when confidence in the financial system evaporated in 2007-08 all the big institutional investors stopped lending to them. Before they ran out of money, the Irish government stepped in and guarantied all Irish bank deposits to stop absolutely everyone taking their money out of them. There was also some support from the European Central Bank.

However, shit done got fucked up already. So because the Irish banks had stopped throwing money at residential and commercial property bubbles, both collapsed. Allova sudden Irish banks were about to lose more money on their mental lending than they could ever afford, so again the government stepped in nationalising here, capital injecting there and buying whole debt portfolios off them to draw a line under the potential bank losses (and give them some cash in the process).

Oopsy, cos all this help fucked Ireland’s economy because after paying out all that cash and taking on the banking system’s problems, allova sudden it wasn’t the banks that were fucked (well they still are), rather the government was suddenly up shit creek without a bail out because it had taken on more than it could manage and now no-one trusted it either (and presumably did some sums looking at total national tax revenues vs. debt repayment costs over a given period of time).

To varying degrees similar processes were repeated across the world. The thing is though all of this was dead easy. Well it wasn‘t, but it is compared to the current situation. When the banks were bailed out, and the debt parcel effectively passed from the private to the public sector, national governments stepped in to bail out their own banks i.e. they looked after their own and did so without needing to secure the agreement of dozens of other nation states. When there was the need for multinational agreement i.e. Barclays and Lehman Brothers or Fortis bank, things either didn’t work out or work very well.

Now though its different and potentially worse for all sorts of reasons including:

For a start, in the past a government stepping in to bail out, shore up, re-capitalise a bank etc., was a soothing, calming, lovely thing, a bit like putting financial market sentiment in a bath with smelly candles. Now? it’s a fucking terrifying prospect, to a large extent because governments don’t have the cash to help out any longer.

That shit with the debt ceiling was a clear sign of Americans being fucking mental. Viewed from over here, the Tea Party lot were previously an uneasy joke. The notion that those vicious, self-destructive, mega rich serving morons are able to influence and disrupt stuff is a very bad thing; there is no cavalry on the horizon

Its far more abstract and clashes with national sentiment; the Greek bailout involved Germany and France ultimately helping out their own banks (which would otherwise have lost squillions due to their exposure to Greece) and meant their companies could still export to Greece. But, that’s abstract and prone to getting lost in nationalistic and political rhetoric - Germany directly bailing out a German bank is easier to understand and gain support for than German taxes being spent filling the whole created by another country’s wasteful ways etc.,

The logistics are a nightmare; its the EU fer crhissakes, all those countries having to get together to review proposals, debate them and then vote is a cat herding process that takes aaaaaaaaaaaages whereas market sentiment and confidence operates in nano-seconds. And anyway any aid figure agreed today will be far too low tomorrow (as the Bank of England special liquidity arrangements made perfectly clear). Plus, if Barrosso’s letter proved anything its that there’s some utter morons involved who, I’m guessing, are more than happy to put their vanity ahead of the global economy so they can get on the telly, however destructive the consequences.

The sheer size of the problem; the credit crunch originated in one part of the US mortgage market whereas Italy and Spain are amongst the largest economies in the entire fricking world.

Anyhoo, the really scary bit comes when everyone stops lending to each other again and even more bits start toppling over. And getting party political for a mo, to my mind it highlights how successful Alastair Darling was as chancellor when he did his drive by negotiations and drew a line under the British crisis, at least for a while. For me the lesson from that experience about what’s needed now is a clear, quick and effective decision making capability, a clear, multi-faceted, all bases covered plan and more financial support available than could ever possibly be used (with plenty of rules to avoid or at least limit the moral hazard). From a British perspective though I reckon we’re potentially fucked if it really starts hitting here; the Tories were dithering fools thru-out their time in opposition during the credit crunch while the LibDems were and remain completely out their league, whatever Vince Cable might say.

Anyhoo, mebbe bond holders will finally get the real humping this time round that they deserve or mebbe we'll see the Euro zone collapse and a run into protectionism. Who knows. On a different note I reckon if the ConDems had really wanted to stick it up Gordon Brown they should have put forward Darling as a candidate for running the IMF, cos he da man.

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