Making sense of it all - Finance, Politics and Greed

I've made it clear in past posts that the financial crash was something that many had foreseen and that I, personally, had planned my own affairs since roughly 2003 with the risk of such an event very much in mind. This was the thinking behind buying the farm in the Manawatu in 2004. Concentrate equity. Reduce exposure to debt. Get out of the residential property market. Have an asset that can produce as well as simply exist.....and so on.

The rationale, for me, was that Bush, through invading Iraq and running huge deficits, would almost inevitably lead us toward the same stag-flation of the early 70s caused by spending up huge on war and borrowing to fund it instead of raising taxes to pay for it. Then add on peak oil, climate change and other things that didn't exist then. Plus no sign that the US (or the world in general) was in any mind to actually, really change the negative, destructive behaviours that lead us all to this point.

I could see that ever-increasing debt simply wasn't sustainable. I had in mind that the tipping point for the housing market in NZ would be about 8%-9% for mortgage rates. I could see - from my vantage point within AT&T as an Asia Pacific Client Solution Manager - that the accelerating shift of manufacturing to China would in 4-5 years time (about now) lead to HUGE job losses in most of the OECD. I was handling the pre-sales projects for bids to build the networks to service and connect the planned factories / distribution centres and R&D sites for the companies now shedding jobs by the thousands. Millions of jobs were doomed anyway, I suspect. The crash just allows the process to happen sooner and faster.

But this week, The Economist puts forward another reason for the crash that ignores most of what I thought was important, relevant and obvious. Instead of monster US government fiscal deficits and the torching of billions in war, they blame "imbalances" in global trade for an Everest (or three) of free-floating cash looking for short term homes. They say the reason money was so cheap was that there was so much of it around from China and oil economies. I had thought very low interest rates in the wake of the Tech Crash in 2000 were intended to provide "stimulus" and prevent a recession. The same justification was used to go ahead with the Bush tax cuts in 2001, despite their original conception in 1999 as a means to return the surpluses to taxpayers (and don't worry about funding Social Security). But that's history and political context and The Economist appears to avoid these in its analyses.

In another article in the same issue, The Economist reflects the breach of trust resulting from the human and regulatory failings that contributed to the crash. In the end, they call for a

"system that supports economic growth through the best mix of state-imposed stability and private initiative."

It isn't clear what "the best mix" might be, though I'm sure it would be a close match with the interests of any person or company that cared to advance their own view.

The Economist also has a think about the future of "sovereign wealth". It's a erm used to describe the group of investment companies owned by cash rich governments (China and Qatar and Saudi Arabia and others) around the world. In some cases they have direct access to money approaching trillions of US dollars. They have taken a mighty pounding in the crash, having invested in some of the banks and businesses hardest hit.

There is a lot of food for thought there. One gets the sense that the writers still emotionall cling to the paradigm they know and have defended in the past, while a the same time seeing that the future cannot be as it was. Assumptions once taken for granted must be tested and reviewed and may even have to be changed. The tone is careful. The overall feeling is reluctance mixed with accepance of what has occured. But as to what to DO about it.....old ideas die hard indeed. Some regulation clearly needed, but not too much and no specifics anyway.

Overall, The Economist's explanations are technical and fail, in my view, to adequately recognise and take account of the policies - and politicians - that hugely contributed to the crash.

What seems clearer to me, trying to make sense of it all, is that - for now - the people making the decisons about what to do next and where to go next should be those directly accountable to the taxpayers who are - now - in many countries being essentially forced to cover all the risk, back the bad debts and pour money into the carcases of large that are now essentialy among the walking dead.

Nothing else seems to make any sense. The finance markets had the chance to show the world they could regulate themselves and the blew it spectacularly.

To allow the failed to simply pillage the world's Treasuries in order to make good their losses....and then expect to cary on as before makes nosense at all. It would amount to the biggest theft in history.

"We'll be good - honest! We really mean it THIS time!"

Pull the other one.