How Our Money Vanished 20


I have just finished reading an absolutely brilliant exposition of the banking crisis by John Lanchester in the London Review of Books (hat-tip George Monbiot).

Lanchester’s explanation of how the disaster happened is clear and brilliant, though it need concentration and a nice cup of tea. These are his conclusions, with which I generally agree:

It’s for this reason that the thing the governments least want to do ?” take over the banks ?” is something that needs to happen, not just for economic reasons, but for ethical ones too. There needs to be a general acceptance that the current model has failed. The brakes-off, deregulate or die, privatise or stagnate, lunch is for wimps, greed is good, what’s good for the financial sector is good for the economy model; the sack the bottom 10 per cent, bonus-driven, if you can’t measure it, it isn’t real model; the model that spread from the City to government and from there through the whole culture, in which the idea of value has gradually faded to be replaced by the idea of price. Thatcher began, and Labour continued, the switch towards an economy which was reliant on financial services at the expense of other areas of society. What was equally damaging for Britain was the hegemony of economic, or quasi-economic, thinking. The economic metaphor came to be applied to every aspect of modern life, especially the areas where it simply didn’t belong. In fields such as education, equality of opportunity, health, employees’ rights, the social contract and culture, the first conversation to happen should be about values; then you have the conversation about costs. In Britain in the last 20 to 30 years that has all been the wrong way round. There was a reverse takeover, in which City values came to dominate the whole of British life.

It’s becoming traditional at this point to argue that perhaps the financial crisis will be good for us, because it will cause people to rediscover other sources of value. I suspect this is wishful thinking, or thinking about something which is quite a long way away, because it doesn’t consider just how angry people are going to get when they realise the extent of the costs we are going to carry for the next few decades. I think we will end up nationalising at least some of our big banks because the electorate will be too angry to do anything that looks in the smallest degree like letting them get away with it. Banks can’t change their behaviour, so we have to do it for them, and the only way to do it is to take them over. We can’t afford any more TBTF.

I get the strong impression, talking to people, that the penny hasn’t fully dropped. As the ultra-bleak condition of our finances becomes more and more apparent people are going to ask increasingly angry questions about how we got into this predicament. The drop in sterling, for instance, means that prices for all sorts of goods will go up just as oil and gas prices have spiked downwards. Combined with job losses ?” a million people are forecast to lose their jobs this year, taking unemployment back to Thatcherite levels ?” and tax rises, and inflation, and the increasing realisation that the cost of the financial crisis is going to be paid not over a few years but over a generation, we have a perfect formula for a deep and growing anger. Expectations have risen a lot, over the last three decades; that’s going to have a big impact on how furious people feel about the hard years ahead. The level of future public spending cuts implied in Darling’s recent budget ?” which included the laughably optimistic idea that the economy will grow by 1.25 per cent next year ?” is greater than the level of cuts implemented by Thatcher. Remember, that’s the optimistic version. If we’re lucky, it won’t be any worse than Thatcherism.

But it is the forensic examination of RBS before this which is most enlightening. I understood most of the principles, but to have the detail set out so clearly is very useful.

http://www.lrb.co.uk/v31/n10/lanc01_.html


20 thoughts on “How Our Money Vanished

  • anticant

    I don’t believe that the cost of all this profligate borrowing is ever going to be paid off. At some point it will simply be written off as bad debt, just as German reparations were after the 1914-18 War.

    It is not just the banks and the Treasury which have got us into this mess. It is the practice of ‘creative accountancy’ shamelessly employed at least since ENRON onwards. My father and grandfather were both Chartered Accountants in the days when accountancy was a respected profession and honest company directors paid due regard to the advice of their auditors. Nowadays, auditors are toothless beasts because the big accountancy firms pick up far more fat fees from ‘consultancy’ work than from keeping their clients’ balance sheets on the straight and narrow.

  • Craig

    Anticant

    I agree 100%. I caused outrage once on an accountancy blog “the Sharpener”, when I said I didn’t accept someone was not a crook just because they had audited accounts. I pointed out that Polly Peck, BCCI and Enron all had accounts audited by blue chips accointants. It was all lies.

    Doubtless Alan Stanford did too and that US Ponzi scheme fellow.

  • Phil

    Have a listen to Michael Sandel’s 2009 Reith Lectures – the one on Radio 4 this morning was very much to the point.

  • Scott

    Glad Lanchester is getting more attention — forget Robert Peston, he’s the best financial journalist in the country. And he can write!

  • John D. Monkey

    Craig

    Just shows that you should never allow economists or accountants to run anything – the old saw about them knowing the cost of everything and the value of nothing is true.

    I hope you listened to Michael Sandel’s first Reith Lecture today – very relevant to this. You can get it on the i-player if you missed it.

    One of the points he makes is that if you put a monetary value on everything, people’s behaviour changes – eg if you “fine” people for being late to pick up their kids from school, they will happily pay this as it gives them some cheap child care!

    Agree 100% with Anticant re. the big accountancy firms and consultancy work – auditing seems to be almost a loss-leader to them now. They are also on a huge gravy train of work from Government departments and quangos, exploting the obsession with headcount reduction. Ministers and senior civil servants seem happy to pay 5x the cost of employing a staff member to a consultant, as it come under a different heading and allows them to say they’ve cut staffing costs.

    Ditto the big IT firms, they are making a fortune designing systems that don’t work and specifying solutions to problems that don’t exist. One former employer paid tens of thousands for a system to do a job that could have been done on a programmme that came as part of MS Office.

  • anon

    Gordon Brown represents in one man the totality of the problem and yet like a blow-up plastic duck ring in the swimming pool he constantly springs back to the surface. When you try and repair the puncture in the plastic you will never succeed. At some stage the fun is going to stop for both Tory and New Labour, who embraced this poisonous, Thatcherist ethic.

    Congratulations to you, Craig, for positioning yourself as a candidate for election, for the time when that puncture finally comes.

    For me, the dream was a lie from election night winter 1978. We are 30 years down the line and most of the population has still got its fingers firmly stuck in their ears like excited kids at the pool. Thatcherism is dead at last. Praise be to God. I pray to Him as well that I will also live to see the video of Blair dropping through the floor like Saddam Hussain for his colonial crimes in Iraq and Afghanistan.

  • Jon

    @anon – Blair is a war criminal, agreed. But we don’t have to stoop to his level, regardless of the capital punishment served on Saddam Hussein. A fair trial at the Hague is all I ask – life imprisonment would be the maximum sentence that can be passed if he is found guilty.

  • MJ

    “The level of future public spending cuts…”

    If I were a senior grandee of the Labour Party I’d probably welome a Tory victory at the next election. Let them make all the unpopular cuts in all the wrong places then bounce back as saviours after a term as Opposition.

  • anon

    Jon

    I’ve just read Craig’s comments policy and I await deletion for my earlier comments. I am studying refrigeration at the moment. You move heat from place to place by generating heat in the refrigerant under compression or expansion. It seems to me that the economy is the same. The people who control the money can force the price not just of commodities but the assets of nations, up or down at will.

    The cyclical nature of the economy is just like a gambler cashing in their chips. Brown knows that the bankers will probably heat up the economy again soon. Did you notice that he was overcast with gloom six months before the recession started? He plays with the big boys, so he probably knows what’s going on.

    Colonising oil countries by taking innocent hostages and forcing compliance to our demands is routine stuff for these guys. Boom and bust manipulation is just part of their boring office treadmill, like your or my filing a tax return.

    What I find odious about Blair is that I was slightly taken in by the false sincerity of his presentation. As you say his worst punishment would probably to have to carry on believing in himself even into his near dotage, like Mrs T.

  • tony_opmoc

    Lanchester’s essay has some extremely good points and is written in a way that is relatively easy for a layman to understand. Some of his conclusions are very valid – but he is looking at the Western World’s economy in the same way as if he was looking at a small company.

    First of all I put my hand up and raise the question.

    To who do we all owe this massive amount of money to?

    Lanchester says – we will be repaying this enormous debt for generations, whilst pensions are trashed, public services are cut and unemployment rises dramatically – effectively impoverishing us all.

    Who are we paying the money to?

    Virtually every country in the World has Massive debt.

    Virtually the entire World is in the same boat as us.

    So Who or What is this Entity that the entire World is becoming an impoverished slave to?

    And when he/she/it is paid back this enormous sum – what is he/she/it going to do with it?

    Once you start asking questions like this, then you realise that Lanchester hasn’t even thought about the World financial system as a whole.

    The World is not like a small company. We do not have to impoverish ourselves.

    What we need to do, is to start doing some useful work. We have largely stopped doing that because of the total failure of Thatcher/Reagan/Friedman economics. This has not only impoverished ourselves – but also turned much of the Third World into factory slaves and their Countries into polluted cesspits.

    We do need a kind of new economic system, such that we are encourgaed to build things to last – rather than build things to fail (to be thrown away and be replaced with other disposable junk – to maintain corporate profit.)

    We need to end enviromental destruction by having sensible polices with regards to resource extraction and waste utilisation.

    That doesn’t mean we all just sit at home and do nothing.

    Money has one main purpose – it is to motivate people to do useful work – and to save an enormous amount of time bartering.

    Tony

  • Strategist

    I thought the Lanchester article was very good too, my hat tip for pointing me to it is to Charlie McMenamin at Excuse Me While I Step Outside http://itslifejimbutnotaswknowit.blogspot.com/

    I have also just finished “Meltdown: The End of the age of greed” by Paul Mason (Economics Editor of BBC’s Newsnight) and I would highly recommend it to regulars here as a good clear exposition with some interesting thoughts about what next at the end.

    It is reviewed in this month’s Red Pepper magazine by the Guardian’s Economics Editor Larry Elliott.

  • Clark

    Tony_opmoc,

    I second your questions. I agree that we need to do useful work. I agree that we should stop buying stuff and throwing it away.

    Tip for users of Windows computers that seem to have become too slow to use – Rather than throwing your computer away, install Linux, a free, community developed operating system. Linux really is a phenomenal demonstration of what people can do by working together.

    We don’t need to be slaves to Big Money.

  • tony_opmoc

    Clark,

    I think Ubuntu is by far the best version of UNIX I have ever seen.

    I think my personal all time favourite Operating System was DEC VMS. IBM’s VM/SP and REXX was also Wonderful.

    VME/B and SCL was 10 Years Ahead of the lot of them.

    Over 10 Years Later I was working on IBM MVS and CICS and their JCL after Thatcher Closed Down The North of England and Norman Tebbit told me to get on my bike.

    I just couldn’t believe how incredibly primatively aweful and pathetic IBM’s Flagship Operating System MVS was.

    If the British Government had given more Support to ICL, I might still be working there in Manchester.

    I am not – but My Son – runs about 50% of his Business from Manchester Science Park – Just Down The Road from West Gorton – opposite where some of Shameless is Filmed.

    My Son is 21 Years Old – and he has grown his Business Organically – He just Re-invests virtually all his Profits into Expanding It – and takes hardly any Income.

    He is lucky living at home with His Mum and Dad and His Sister and His Girlfriend – cos we feed him, and his Mum washes his clothes and stuff – but he’s a Good Lad.

    This of course is completely off topic – but the really interesting posts usually are. No doubt Craig will delete this.

    But the weirdest thing was that I was actually communicating with Craig Murray on his wedding night past midnight.

    He didn’t have to read what I said – nor delete my comments at 1:00 am on his wedding night. If I had done that – then my tackle would be mincemeat.

    Nadira must be incredibly tolerant

    You can download Ubuntu and install it on top of Windows XP with virtually no technical knowledge.

    When you reboot – it will present you with a very simple menu. If you don’t answer the question it will simply reboot back into Windows XP

    If you select Ubuntu – it will boot your PC into the Ubuntu version of UNIX – and its basically just the same as XP – except everything Works – including my Wireless connection – automaticaaly picked it up – when XP was totally confused.

    Tony

  • OrwellianUK

    One thing that should be understood is that this economic crisis was not caused by ‘subprime’ mortgages or ‘Derivatives’, but by Peak Oil. The fraudulent financial system with its Fractional Reserve Banking that loans money into existence is merely an aspect of our mythical ‘growth forever’ paradigm, which has been almost entirely based on cheap and freely available fossil fuel energy. The price spike in the years leading up to the recession is the primary cause of the crash.

    The days of those sources of energy being cheap are now over. Another price spike (perhaps an unaffordable one for many) is about to hit us, due to the consequences of both the plateauing of supply, and the exponential drop in investment in energy infrastructure caused by the lack of available funds in this present financial crisis, which will more than negate the current drop in demand caused by that same crisis.

    Of course the financial system was always going to fail, as such a system required the creation of ever more debt-based currency annually, just to pay off the interest on the existing debt. It took the United States the first 100 years of its existence to create the first Trillion dollars, when currency was Gold based, now the same amount of dollars are created about every 4 months. This is the exponential model.

    There are $1600 Trillion dollars worldwide in derivatives alone, (never mind, property and other assets), yet only a maximum of $4 Trillion dollars in Gold and Silver.

    Note this though: for every 1 calorie of food we eat in the Western world, it takes 10 Calories of Fossil fuel energy to create. The arithmetic of this coupled with a Peak in Oil production is obvious – Scarcer and more expensive oil = Scarcer and more expensive food.

  • james_rh

    That is an excellent article by John Lanchester, but the question remains – and this looks like it’s getting to be a delicate point on this blog – were there deliberate machinations behind all this to bring about what happened.

    Eliot Spitzer, as Governor of New York, writing in the Washington Post, February 14, 2008:

    “Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices.

    What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

    Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

    Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

    In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.”

    http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

    Spitzer resigned after being ‘caught on tape arranging a hotel-room liaison with a high-priced call girl’.

  • Strategist

    Paul Mason makes the point that Wall St banks had private detectives spying and digging for dirt on Eliot Spitzer, and his downfall came just at the time when he was about to make arrests.

  • Jaded

    I have heard Mandelson ‘repeatedly’ parrot the line of ‘the government isn’t in the business of running banks’ on national news programmes. He says it like it is ridiculous to think that the government could do that. He never seems to give concrete reasons for making that statement though. Anyone know what his warped logic, if any, is?

  • tony_opmoc

    Craig,

    Forgive me for saying – but I used to Test Things in The Computer Industry

    I am almost certain that a significant percentage of attempts to communicate with – just your website – are being denied from the South Of England.

    I don’t know about the Rest of the UK -and The World – I could ask my Lad to do a detailed trace from Manchester & London & Houston – but he is too busy with his Girlfriend at the Moment – and Your Lack Of Communications is Not Affecting His Business or Customers.

    He is Independent

    Tony

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