Archive for September, 2008

Bringing the open source model to data

The battleground today is for users’ data. Google uses this to great effect and has now made a grab for users’ browsing data with Google Chrome.

The various rumours about social networking sites sharing data have proved unfounded. The data is core to their business model and not for sharing!

How about a product that is open source and captures  data on the community for the community. A product that is entirely open and transparent about what data is captured and how it is used? What if this product allowed users to determine how they shared their data? What if this product charged commercial vendors for use of this data with the money going back to the community? Watch this space!

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Debt, commodity price increases and house price falls will drive down consumer spending

Over a decade since debt and property prices reached historically high levels they have been driven even higher by a financial system that just doesn’t want a recession. This has been a debt-fuelled delay to an inevitable recession. Just take a look at the savings ratio. Read the rest of this entry »

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Stop telling me the credit crunch is to blame

Criminal behaviour of the banking sector and the negligence of the Government and regulators is to blame. Together their behaviour fuelled a massive property price increase over a decade. Now that they have gorged themselves, the economy suffers and so does the man on the street.

Let the banks go down, prepare to nationalise the banking industry if the system fails, support those in financial difficulties and investigate the criminal behaviour and negligence at all levels.

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David Smith of The Times – There was a boom but not in consumer spending!

This week I have had quite enough of apologists for the financial community and feel obliged to respond in the few articles on this blog. This article is about David Smith’s piece in The Sunday Times – http://www.economicsuk.com/blog/000770.html that also appears on his blog.

As an aside, David allows debate on his forum – why not comments on his articles – see my blog article regarding old world journalists – https://jameslove.wordpress.com/wp-admin/post.php?action=edit&post=16.

He develops mentions three themes that characterise peoples concerns in his article:

  1. People do not want to bail-out the bankers
  2. People want something to be done such that we avoid this in the future
  3. The theme that is the basis of this article, people are also to blame for wanting to borrow

Let’s have a look at what David says about these themes.

On the first theme, David says that there is a difference between bailing out bankers and preserving the banking system. He goes on to say that “If the banking system goes, everything else does too” – now this is just scaremongering. A Government would of course step in to ensure a basic natioansed banking system before we lose the whole thing. David has obviously been duped by George Bush’s retoric in support of the $700bn bail-out. It is not the only way to do it. Precisely because there must be a difference between a bail -out of the bankers and a bail-out of the system a solution must be found that gives NO potential for profit to any bankers from any Government action. The only way to achieve this is to let the banks that are under capitalised go down and if it takes the system down then Nationalise the banks.

The second theme David suggests is like bolting the door after the horse has bolted. No David, this is not what we are saying. Learning from the crisis is about understanding it then regulating to close the loop-holds that allowed the creation of this house of cards. David goes on to say that he doesn’t see how a banks board could be expected to know the state of each traders book – this is truly pathetic. Of course no one expects a Board member to have an interest in this level of detail. In fact such detail is completely useless. The important thing to understand is the strategy of the bank – how come we are making so much profit? Have we correctly valued the risk? How much do we depend upon the short-term money markets? How sensitive is our balance sheet to shocks? These are all questions that Board members and the CEO should be asking. Why didn’t they? Well, everyone was making money and none of them had the courage to ask those simple questions. How disgraceful but of course human nature.

The thrid theme is the main theme of the article. Consumers are to blame for wanting to borrow. Now this is extraordinary! I think that there are ample reasons to suggest that this is the last place to put the blame. Relatively ill-educated masses being told by Governments, regulators, financiers and journalists that “boom and bust” is finished, that house prices won’t drop but just plateau out (David was one of these) and that inflation is dead and then being sold debt like no tomorrow. In extreme cases the financial system invented amusing names for the type of punter who took out loans – Ninjas – no income, no job. Why was this done and why was it encouraged – everyone was making money.

David makes a final point suggesting that because we did not have a consumer spending boom that it is a financial recession not an economic one. He finally makes the point that the financial system will be more difficult to fix if the economy is weaker. There are two key points here:

  1. The last decade of consumer spending growth has been consistent but muted. Debt has increased to crazy levels both at a household level and a Government level. At the start of the decade it was already at historic highs. It is a major surprise that consumer spending grew at all. It did so for two reasons, people feeling wealthy due to house price increase and criminal behaviour perpetrated by the financial leaders, Government and regulators.
  2. The economy drives wealth overall, the financial market is a tool that oils the wheels of growth. In the last few decades the financial system has been a driver of wealth for the few whilst the masses now feel poorer than they have in at least a decade.

It is time for journalists to take stock and question more. I wonder who pays their bills though!

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How fear and greed are driving the US bail-out

$700bn is not enough to avoid a recession, just prolong the slide. It does of course have the effect of saving the bacon, temporarily in my view for the Republicans and those who perpetuated the criminal acts of forcing credit down the throats of the unsuspecting masses. Read the rest of this entry »

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The Credit Crunch – Why banks should be left to go down

Let’s call it the “credit crunch” – this will scare them. They won’t know that they are not impacted just that they have to trust us to fix it.

The root cause of the problem that we are in today is over lending to house buyers that fuelled an extraordinary rise in the value of property. Interest rates were low, no deposits were required, a borrower’s earnings were not even checked and mortgage loans being handed out to an ever more believing crowd so that…well, this is the question. Why were mortgage companies doing this?

A mortgage company has $1in capital provided by its shareholders and let’s assume no depositors. It then borrows $19 from the money markets. Money markets are where banks and such like are able to borrow short-term. The mortgage company lends $20 to borrowers to buy property. These loans are secured on the property. They are then packaged up into a $30 bond instrument by investment banks who take a fee for packaging them up and for then selling them. These packages may also come with insurance for the bond buyers provided by the likes of AIG. The packages are worth $30 because the interest rate paid by the borrowers is higher than the prevailing bond yield so bond holders, keen to place their money at higher interest rates pay more for the package than the original cost of $20. The mortgage company receives $25 and books a nice $5 profit. The other $5 has been paid in fees to investment banks, lawyers and other intermediaries.

Now, take this model and let’s look at the sums involved. The US mortgage market is around $12  trillion, just short of the US GDP at $13 trillion. Let’s assume that house prices fall 30%. The bondholders of the mortgage backed securities lose 30% on their bonds, at least! When your capital represents 5% to 10% of your liabilities then this means meltdown.

So, we know that everyone was making lots of money and times were good. We also know that the whole banking world is under threat. Has anyone clearly explained what will happen if mulitple banks fail?

Let’s assume that all banks fail immediately! In this instance the Government would need to create a nationalised banking sector that would focus on protecting deposits, ensuring cash is available and that credit and debit cards fucntion. It would also provide basic lending facilities. This is an extension of what happend with Northern Rock.

This situation is an easy one to deal with. How about if banks fail one by one over an extended period? Governments in my view should let these banks fail and certainly not help them into some merger like the Lloyds/HBOS merger. Private shareholders and banking executives MUST NOT be assisted and allowed to profit from Government support. The only reason they are is that the politicans and bankers have thrived in a mutually beneficial relationship since lending first became widespread.

Let the banks fail, state clearly that deposits will be protected up to the limit of £35,000, Speed up the time for such deposits to be repaid (currently 6 months) and put in place a plan to nationalis the banking sector if it can’t rescue itself.

Why should Warren Buffett be able to ride the US Government’s support for the markets and make a huge profit? He shouldn’t.

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A look at Goldman Sachs’ balance sheet

Nice Website. I went straight to the information for their creditors – given the “Credit Crunch” as the media are calling it this seemed the first place that I should focus. Easy, shareholders equity is $45.2bn. OK so now let’s look at the other side of their balance sheet. Oh, first problem, the creditor information seems to provide only information required by regulations – not exactly creditor friendly. Let’s explore the rest of the website and see if we can find out what the structure of their balance sheet is like. Read the rest of this entry »

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