Monday, 29 September 2008

Godzilla and Beaker investigate the credit crunch*

There are two ways to look at the current meltdown in global markets.  Both are very tempting, and both contain a kernel of truth.    

Way one is the great temptation to dance through the smoking ruins of Wall Street rather like Godzilla or the monster from Cloverfield.  With great glee stamp flat the massed hoards of overpaid, emotionally absent, ideologically perverted, morally bereft scum!  People who have flown the entire economy into the mountain through their naked, obscene greed and then come winging to the government to help them out.  STOMP!  Didn't show any solidarity with the miners, when their industry was broken, did you, you fucks? SPLAT! How did you expect it to go on and on and on and on?  Don't you realise that this is made up magic beans money?  It stopped being a useful way for actually useful to manage risk about thirty years ago.  CRUSH!  And then look back at the twisted metal and laugh.  Bwahahahahaha!  No one gives a fuck about your Brietling now, fuckwit.  

Way number two is to transform, magically, horribly, from Godzilla into Beaker  from the Muppets, and run around because we're all doomed. 

All of which is an attempt to say there are two questions here.  One are we doomed?  And two, do we / Bankers / the Government / purveyors of magic beans deserve it if we are?

First up, in the long term, we are all doomed.  I don't mean in an every-man-must-die way here either, but in a very specific Peak Oil way.  Whether we hit the peak this year, next year or in five years is almost immaterial because its coming and likely to be soon - too soon for us to invent the first ever energy technology with no downsides to save us.  But this is a tale for another day.  The question, is the Credit Crunch (aka Cletus' revenge) going to break the economies of the west like a dry twig and leave us queuing for soup and using our iPhones to plug that gap between the cardboard walls of our hovel that the wind whistles through so cruelly?  Well, as I see it, mibbees.

The problem is that every vaguely sophisticated economy since the dawn of time needs some kind of a banking function to oil the wheels.  Banks are a super cool way of making sure that money flows around and gets to those that need it to make more while making sure that the owners of the original sum make a big fat rake too.  It allows people to borrow money and invest in stuff, houses for example, which makes them feel like they are active members of the society.  It means that business with short term cash problems don't go bust.  In other words, banks at their best, take money that would otherwise be sitting as gold bars under the ground, and make it work for all of our benefit. Some benefit more than others, but no one said life was fair.

If this basic function goes away, even for a few weeks, we are hosed and no mistake. The danger is the credit crunch might make it do just that.  Banks at he moment are so short of liquid cash (not other assets, like mortgages or gold or paintings of the Queen) to use to slosh around that they won't even lend to each other.  This is really AWOOGA AWOOGA AWOOGA dive dive schnell achtung Englander! bad.  To put that in context, by AAADDSAE bad I mean otherwise healthy businesses going bust because of cash flow problems.  I mean people, lots of people, losing their savings.  I mean no credit to buy anything for an extended period, which means nothing gets bought, so more business go down.  All of which equals Jarrow marches, more Steinbeck novels and a really bad time for everybody.  And that's before we get to the political consequences.  

This basic banking function actually going away though is by no means certain, Paulson plan or no Paulson plan.  There are solid banks out there and the Government ain't done yet.  Central banks are working like crazy to un-gum the wheels and get this money sloshing around productively again.  They might do it.  

So, in short, as we stand here is a real possibility of catastrophe - the strongest in my time of Paying Attention - but it is by no means assured.  I'm not a betting man, so no odds folks.

Whatever happens though, we are in All Sots Of Trouble right now.  Who's fault is it?  There are number of candidates; we-the-punters, Wall Street, maths PhDs who should go and work in physics, greedy bottom feeding lowlifes at all turns, the Chinese.  So, laydeez and gentlemen, this is our cast of vile miscreants.  This is an adult show, so I would advise pregnant ladies or people with heart trouble to read no further.

Perp one: you and me, gentle reader.

The average wallet or purse in the UK has eight credit cards in it.  Lots of them are maxed.  We have borrowed and borrowed and now we are fuckoed.  House borrowing, car borrowing, borrowing at 35% APR to go on fucking holiday to Ibiza for two weeks and shag a telesales worker from Minehead.  We were insane in the membrane.  This great orgy of borrowing has two horrible consequences.  Well three if you count the STDs from Minehead and all the orgies.  They are: 1, now we have to pay it back, we're all skint, lots of us are going to default and then we'll never borrow again and he money is gone all gone, do you hear me, and 2, once we ran up the debt it went of to Wall Street and the City to be made into magic bean CDO money. Which brings us to perp two...

The Global Finance System, aka watch and learn Beelzebub.

I'd like to say that once upon the time merchant banks weren't full of absolute cunts who were motivated only by greed and intent on making a huge pile of loot for themselves, and the rest of the world could fall into Satan's fiery maw as far as they could care, but this would be a lie.  Finance has never been the natural home of philosopher kings.  It is instead the home of the rapacious vultures, dead eyed killers and Brooks Bros clad Nazgul - financiers, neither living nor dead.  Two things have happened recently which have made the whole things worse.  One, the old rather pissed boys who wore pinstripes and did business over five hour lunches with old, equally pissed, chums from Eton or Yale have slowly left.  These guys were no good (see The Great Depression for example) but they were pissed which meant they weren't that quick.  Now they have been replaced with guys who are sober (at least during the day - at night they like to take coke and abuse strippers or the homeless), sharp as blades and twice as morality free.  The second bad thing is that we have given them really powerful computers and bunch of maths PHDs who should be doing physics to run them.  

This has lead to an explosion in financial instruments (translation: nearly but not quite scams).  Because everyone who invented, bought and sold these things was trying to scam everyone else involved, it sort of worked and huge, huge piles of loot were made for the Nazgul, the maths PHDs and the pissed old boys who still held stock.  Some of this cash even made it to coke dealers and strippers, but not, alas, the homeless. This is called trickle down economics, incidentally.  

A lot of the financial instruments were made by getting a bank's PhD to make a magic cauldron on his computer and put in a bit of debt that they might get back, some of the credit card debt that that introduced you to the telesales rep from Minehead, mortgages debt from Alabama etc and so forth, mix it into a shiny new thing called a CDO and flog it to the bank down the road, who put it in their magic cauldron and so we go again.

I could weep.

So now the magic beans have turned back into just-beans, all this has fallen down in a heap and we're all up shit creek.  So, are bankers to blame?  Yes.  But its not just them.  For example, why were able to borrow all this money?  I mean, we - the public - clearly can't be trusted.  Someone must stop us borrowing money we can't afford to pay back.  Why didn't that work?  Two reasons - one bankers leant it to us because they either actually thought they'd get it back (ha!) or more likely, they could flog the debt for magic beans and get it off their balance sheets.  Reason two is that the people who control interest rates - and remember the higher the rate the less borrowing happens - fucked up.  Their names are the Federal Reserve and Bank of England.

Fed and Threadneedle.

In fairness to these two august institutions, it wasn't all their fault that they fucked up.  Their job, under the current economic model, is to control inflation.  (The current economic model is Milton Friedman' s fault, btw). And inflation was low and stayed low.  This is the fault of the Chinese (and I for one hail our new masters, the Chinese) because they made loads of crap we wanted to buy and made it really cheap.  Made it so cheap in fact that even as we bought more and more, which you'd expect to drive up the price, the price stayed low low low.  So did interest rates.  So we borrowed, companies borrowed, private equity borrowed, Cletus the slack jawed yokel borrowed.  Banks than made all this debt into magic CDOs and sold them to one another and all went round and round until you, me, Cletus and private equity started to default, he music stopped and we stand here, two minutes to midnight.  

Lordy, Lordy, Lordy.

More tomorrow if I can be arsed and lights haven't gone out.  Tomorrow's installment to include: why did we all default?  And why can't I spell or punctuate? 

* I came up with this title last, which is  shame because it would have made a better blog all round.  Sigh.


Anonymous said...

This is great stuff -- blog on, blog on!

insanity said...

I'm in agreement! This was a very succinct and useful summary of the situation. I look forward to reading more :)

Richard said...

The Danish Peyps here. Looks good so far, look forward to the next installment!

Richard said...

That's wondrous a little a whacking on my mind's eye. Thanks very much m'dear.

Unknown said...

This post + coffee was a wonderful break from coding, keep 'em coming.

Oh, and consider yourself plugged.

Richard said...

This reveals the most terrifying thing about the whole internet- when Langridge tells people to do something- THEY ACTUALLY DO IT.

Anonymous said...

I still haven't written Smurgle yet (although I suppose I still vaguely aim to. Damn.)

Unknown said...

Thank you. This is a very informative post. A lot of things are clearer now...