Bankers and Governments or is it One or the Other?

It's stick together or perish, and certainly don't be the odd man out. As I warned earlier in the year, it's a team effort that got us here and it'll take a team effort to fix it. Mavericks may end up playing in their own league, alone.

That goes for governments too.

Perhaps a recap. or is it a re-capitalisation we need.

The only thing different between now and 1929 is that the bankers aren't leaping out the windows. They've decided to stick around and commit slightly slower suicide choking on their credit fear. Wake up. Governments are otherwise forced to 'take over the business' and you're all out on your butts.

Rec or Depr - ession stick together, governments must lead 22/03/2008 07:45:40

Unsettling events on the UK front at the moment with rumours flying everywhere. There are risks certainly, but there is no doubt a little of that 'I hope it doesn't happen to me" (so much that I'd rather believe that it's happening to someone else) syndrome going on globaly.

It's time to stay calm and stick together.

We've developed a global economy and of course now any problem is a global problem.

It's nothing unexpected. Obviously everyone has some bad numbers somewhere, but unless everyone gets together globally, there may be more losers than winners. As a 'noneconomist' I have absolutely no qualifications to make suggestions, but why should that stop me? I'm not the one with a collapsing bank/financial system. Everyone's actions right now will no doubt be very closely examined in the light of day. Best not try to be greedy. I'm not advocating socialism but a bit of social interest might help.

What Went Wrong?
What's changed? Some folks got to buy houses, and some acquired real estate portfolios and a lot of people made too much money out of it. Shouldn't people have houses? At least one, surely.

It's not like it was spent on bombs or something perishable, unless real estate has become perishable, and if it was then see 'managing consumption' below. It's the 21st century and I thought we aspired to live in democracies where an individual has a right to have a place they called home. Perhaps a new economic or banking instrument which guaranteed at least one chance to get a home. Treat the primary home differently and take some of the inflated costs out of acquiring a home. Perhaps altering tax treatment for speculators, so that for the long haul family home owner there is a chance to actually own one.

It's no wonder Prosper and the like are growing so fast. At least their terms are fixed at the beginning of the loan. The trend to variable rates has homogenised borrowings on real estate and has homeowners effectively paying speculators rates for the most basic of housing needs.

This current fad of interest rates up and interest rates down to curb spending isn't funny when it comes to mortgages. If interest rates are used as a blunt weapon that hits those who can least afford it most heavily and threatens family homes - it undermines society in so many ways. There is little to be gained with such actions. Next time you want to stimulate the economy you have to be even more lax with lending rules to get any effect. Those caught up in the last wave of rises are 'once bitten' and likely to have less borrowing ability next time around.

Using mortgage rates as a consumption club seems a little 'cave man' for me and it really isn't democratic. If you have paid your loan on time you can still be in trouble because the bank was foolish enough to lend money to someone who didn't. It should be their risk, not yours.
Variable rates will be a lot harder to sell next time. The level of interest rates fear which pervades society does not promote optimism and trust, nor does it lead to investment in either new businesses or housing.

In the absence of a financial instrument which differentiates between a home mortgage and a real estate investment mortgage, supported by equitable taxation, there is no order in the market.  If speculators can finance merely the portion of the real estate market up for sale at any time, and receive taxation incentives to play, there is no way to maintain orderly pricing. In a small market it is even easier.

What happens now depends purely on government policy. Some already have a housing crisis, so how does the government intend to stimulate further housing development with rates pushed up? More incentives to developer investors? This leaves a lot of voters paying high rates on overvalued properties and they didn't enjoy the benefits developers receive, yet they are only paying for their family home, an asset which can't be realised without selling and downgrading, moving to rental accommodation or a tent. Is this the job the governments are here to do? Governments lose power when citizens lose homes.

What Can Be Done?
Governments are already having to chip in citizen's money and should use the opportunity to negotiate the best result for those citizens. If they are to assume risk then they should demand a vote getting deal. Governments should buy out only homeowners sole residence mortgages which fit a rational lending and risk profile.

Rates could be fixed for homeowners and new home builders and variable for investors buying existing homes. Of course I doubt that'll be popular with landlords. Lending has to be restricted to a level where it can be serviced and repaid, if necessary by making the financial institutions carry more of the risk in a loan over a legislated threshold. The gains should be for the wise and brave.

This may be more palatable for governments and the majority of society. Would it free up capital for business investment? Homeowners would be able to build up savings and become investors again.

With the current veiw of the warming globe, consumption needs to be managed more than ever.

Managing Consumption
Perhaps a tax which varied depending on the class of item and when you most recently bought a class of item? Instead of the value added tax (VAT) why not get rid of it and introduce a warming added tax (WAT)?

This could allow first time buyers and conservative consumers to be rewarded for constraint and rampant wasters to be taxed to the eyeballs. A way to earn carbon credits, and be encouraged to buy cleaner technology. Profits made from investments in carbon reducing businesses could earn extra credits in WAT so that you could get a double windfall by being allowed to upgrade to that more efficient car, boat or jet without being taxed to the max because you upgraded last year. The WAT tax raised must be invested in green industry and we all benefit. Manipulating the WAT tax would regulate consumption and will influence demand for credit in areas which are counter productive, without penalising low consuming homeowners.

Developing Nations
Could a portion of each government's 'rampant consumer tax' , part of the WAT raised by taxing the most excessive consumers, be delivered to some sort of global development fund?

Get Together
Everything that happens on this planet has some effect on every one of us. The markets are global, the problems are global, perhaps a little coming together and a little good news is in order. The consequences of a loss of confidence will be rather severe and long term for some. Best try and pull something out of the hat before the commodities markets go flat too.

The numbers can be worked if there's a long term plan.

I believe that this may be a good time to get together and seize this hopefully unique moment in history. The governments and the banks can make Pheonix rise from the ashes before we all get burned (well, I'm cool of course). Are there any real leaders out there? What is Barrack Obama's view? Mr Brown? Mr Rudd? Angela Merkel?

Give us some confidence building and 21st century leadership and most of all, some hope.

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Dean: Pollies had a nice cuppa, talked a bit, but didn't leave with a plan - let's sleep on it. Failed. Go and stand in the corner.

Doom and gloom or opportunity? 18/03/2008 09:47:30

The US -  Looking at GDP growth, cost of living increases for average families, cargo container imports and trucking activity suggests the US is well into 'recession'. Bear Stearns isn't the end of the credit crunch and it's not just a credit crunch by any means. There are more bigger players to follow. The US may see a depression soon.

Australia is way down, artificially suspended by a few key stocks, otherwise it's really down around 50%. Oddly Sydney home prices just eclipsed New York.  There are a lot of Asians buying in at any price - a house up the street from my first Sydney home sold for $32m strong Aussie dollars the other day - are they seeking a safe haven for the times ahead?

The UK seems to be making a brave face of it but I don't see substance.

China is reeling under high energy and resource costs and it's markets are shrinking rapidly.

India is wobbling and will have a growing middle class to contend with. 

Commodities are on their way down except for energy at the moment.

Once commodities crash then energy will follow and the Middle East will be in trouble.

Currently any oil price can be justified - we know it's a classic market of virtually infinite demand and finite supply - but there are still an awful lot of very big speculators in there.

I suppose gold is always good... but for what?

Banks will face runs and governments may rescue a few and the smaller ones will be gobbled up, not because they aren't doing things better than the big banks but because they don't have the depositors and the ties with government.

Sound gloomy?  The advice I have is from someone who has been right about every glitch since 1986.

What can be done to stop it? Print money? Can one country ie. the US prevent it, or is it too late for them. I know Europe would like to rise to the fore but what do they have - high energy, resource and labour costs?

Of course the fundamentals are all still there. What has changed? Is it a manifestation of the battle between the haves and have nots?

Will global warming, high food prices and catastophic weather events also play a part?

Any ideas on how to prevent a disaster, or do you disagree?

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No-one disagreed. Alarm bell is already broken.

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Soros and market visibility - by the noneconomist 09/04/2008 07:40:11

George Soros has 'come out of retirement' albeit to launch his new book Credit Crisis 2008 and what it means. I haven't had time to read it yet so I'll go by his spoken words. Recent statements by Mr Soros on market transparency and market dynamics give food for thought. Perhaps if he could have given a little earlier warning of what was to come it may have been more helpful, but I knew what was coming at least a year ago, and I'm sure that I was not alone.

The difficulty in highly performance oriented jobs like trading is that the first guy to take his foot off the pedal, get's the axe. This doesn't really encourage the prudence that is required when trading as part of a system playing with funds exceeding the household wealth of the U.S. It encourages pushing as close to the edge as possible. Looking back, winners brag about how they got out at the top of the market and losers lament that they didn't hold just a little bit longer or go a bit shorter. The speed at which we can transact complicates the issue as traders demand millisecond timing on trades to catch the very last drop of profit out of their position.

George says that markets tend toward disorder rather than equilibrium. Traders work in the absence of perfect knowledge. Well that's fairly obvious, and if prices stayed the same for too long, traders would make neither trades nor money. The market demands movement. With the vast sums available using leveraged 'products' traders can move the market if it slows down too much, even without having a specific goal, just out of boredom and the desire to move to the new deal. The hedge funds did this with oil while the lenders freely handed out cash to real estate speculators.  Well not exactly cash…and this time many people bet the farm.

In times of little market movement everyone hangs on the next message coming out, hoping it will move the market enough for them to profit. A small announcement can have an irrational effect. A big announcement such as 'we are heading for recession' is probably a self fulfilling prophecy, even without the many irrational and uninformed investors clutching at some snippet of knowledge that might turn them into a winner. I just don't think we can sustain the big bang theory in the markets, in the real universe it takes an awful long time for the dust to settle and coalesce into something new.

I believe George has moved a few markets in his time. At present he is carefully trying to promote caution and co-operation, limiting the use of leverage in the markets and monitoring where it is. Put CDS etc being traded on an exchange or just listed as being in place, at least so that parties can determine the risk of their counterparty. He counsels balance in legislation but suggests that the market cannot be left to itself. We can see the results of leaving an unregulated market, circulating trillions of dollars in cyberspace, to itself.

No-one wanted to call a halt to the fantasy until it began spiraling out of control, it would have been a self fulfilled personal recession, and nobody truly knew the extent of it, although we all recognised the danger and the probable outcome. The one trillion dollar estimate seems too low to me but then I'm not an economist.

As we sit waiting for handouts knowing that at the end of the day the governments would have no choice but to bail us out and reinforce bad behaviour with reward - where to now? As I said in an earlier piece, it's time to stick together and all eyes are watching and the merest transgression may incur the wrath of the frustration that consumers and governments feel through the circumstances they didn't control. Consumers did borrow and spend, banks did carelessly lend and governments missed the ball, but someone else to blame is always a morale booster, don't let it be you. One thing that is as sure as night following day, there will be regulation to list these oddly structured debts and dubious instruments of risk because if they don't - they'll miss the ball again next time.

Now it all comes back to trust - who can you trust? It'll still be a while before we know the full effect, as George warned, we'll have to see what happens in the real economy, and the effect it has on the markets, but we already know don’t we?

The real economy is of course where the answer to our pain may be found. There's really no point in being immature and sitting around sulking, get out and do some deals. The world is still there and everyone still wants to go forward.  It might be wise to take a look at your corporate citizenship first and bring it out for a polish, because if you pick the right deals in these early days pre-recovery, it'll have a positive effect on your business way beyond the bottom line and you can't really get it wrong, if you get it - right?

People are more likely to trust the optimist and there's nothing wrong with some realism too, but we need a good news week or two, so get together and make some.

p.s. I mentioned up and comer Santander recently, they’re doing some deals. Could they be one to watch?

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Stand alone and fall. Hit each other while you're down and drag yourselves down?

The majority of you obviously didn't get it - right?

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Wasn't anybody listening? It appears that at least one or two were.

It's time for the rest of you to save your souls.

If five groups in the room don't trust each other, make them one group. In the old days they'd marry off sons and daughters, these days they'll be nationalising the banks and merging them.

Either get on with it or empty your desk on Monday before the angry mob get you.