The shock treatment applied to the world’s economies was no more than a fiscal version of “Pin the tail on the Donkey”. It is a failed experiment and politicians are now doing the only thing that they really understand. They are having a meeting.
The heads of the world’s 20 most prosperous (!) economies are meeting in the USA this weekend for what is probably the first of many such meetings, the ultimate purpose of which is unclear – both to us and to the politicians.
Meanwhile, about 6500 Hedge Funds are about to collapse worldwide – billions of shares that are about to be dumped. That will no doubt put the world’s stock-markets exactly where they really belong – on the floor.
They will all flat-line. Only then will we see the promised recovery.
The facts that are being fed to a curious public have all been through government sanitising machines before they are thrown to the media who then give us their version of the ”facts”. Unfortunately the truth is never absolute because the financial institutions (who, in many cases are still looking for cover) cannot afford to face the truth. They have spent far too long creating increasingly complex and incomprehensible financial instruments which not-only confused investors but ultimately confused them.
The epicentre of the global financial crisis remains in the USA and having learned that the very public approach to bank collapses was counter-productive, deals are now being done behind closed doors. American Express, for instance, has very recently become a bank holding-company. Why? Because they have to secure their place at the financial trough because they need a bailout of about $3.5 billion.
In the States GM is blaming a downturn in the automobile market for its sudden change in fortunes. The fact is that their financial division, GMAC which used to provide auto finance took an ill-advised journey into the sub-prime mortgage market. GM now needs a $25 billion bailout.
In the USA, Treasury Secretary Paulson worked very hard to arrive at a sum of $700 billion -remember the trials and tribulations and the voting?. That was not an arbitary figure but it was the amount required to purchase bad debts from US financial institutions.
Paulson has now changed his mind and has announced that the cash will be better spent in buying company shares rather than buying-up bad assets. There has been barely a whisper after that bombshell.
The phrase “negative equity” is very popular at the moment. It simply means that there are millions of individuals who owe tens of thousands more on their mortgages than their houses are worth. That means that ultimately, many will simply abandon their houses and move-on to rent. Makes sense.
Unfortunately, many of these mortgages have been repackaged and sold-on. They have been bought by banks, hedge funds and other institutional investors.
The original lenders are devising schemes that either allow mortgagors (borrowers) to have payment holidays or reduced payments. They want to keep people in their houses -primarily as a result of political pressure.
Those sorts of moves may appease the politicians but will not be popular with the institutions who have bought the mortgages. That could mean litigation. Imagine yourself investing in something and then being told that the terms were about to change. What would you do? You would sue.
The entire banking industry has painted itself into a very dark corner and if they were frank, they would concede that there is no way out.
Therefore when they have money thrown at them by frightened governments, you cannot blame them for not wishing to spend that money. They will squirrel it away and resist all moves designed to make them spend it.
Bankers know that their jobs are on the line, the economy is in recession so consequently whatever they decide to do has an unacceptable amount of risk attached to it. Not spending the money is the logical (and correct) option.
Bankers (in spite of what they claim) are not really entrepreneurial so they will not take undue risks. The correct thing to do is is to rebuild their capital bases and tidy-up their balance sheets. When those two initiatives have been stabilised, only then they may think about lending.
What banks and fund managers have been guilty of over the last ten years is asset inflation but those inflated assets have now deflated at the speed of a machine-gunned balloon. So the answer to ” What should we do now?” can be approached in one of two ways:
The first is the (already attempted) blunt politician’s instrument of throwing money at the banks and fiddling with taxation and other “gifts” in a bid to stimulate spending. Bush even tried sending people money. Half spent it and the other half saved it . Net effect? Zero.
The other method is to reflate those assets.
It can be done by way of an economic and monetary “con trick”.
The first stage will be to simultaneously DEVALUE ALL of the world’s currencies while at the same time suspending all GOLD trading.
The official gold price should then be raised enough to offset all global debts and thus reflate the value of all those toxic assets.
Finally, there is little sense in allowing speculators to fiddle with the value of the various world currencies.
The most logical step is to create a world currency.
There have been previous financial crises. This one will need revolutionary thinking.
Instead of thinking “out of the box”, most politicians – notably our own Prime Minister – are merely standing on it.