I very rarely attend to conspiracy theories, when I do it’s just for entertainment value, so I am surprised to find myself writing this, but something smells odd about this credit crunch and I can’t just ignore it. Anyway you judge for yourself and correct me if you see mistakes.
I have read a lot about the credit crunch to try to understand it. Apparently it was precipitated when many more US borrowers than expected were not able to repay their residential property loans. Lenders belatedly reacted by tightening their lending criteria and something like hysteria broke out among them, restricting lending more widely and so impacting the economy as a whole. This spread to the UK and around the world via global financial institutions. I know this is a gross simplification of the situation, but documenting the hyperfine nature and causes of the credit crunch is not my task here; this is a good enough understanding for this post. For a deeper exploration see my earlier post: Understand the Credit Crunch.
For years I observed a property price bubble forming in the UK and for a while was surprised at its extent. Had I been in the US I think I would have experienced something similar. Lenders employ actuaries to do mathematical analysis and must know quite accurately at which point to restrict lending to maximise profits. So the lenders must have seen problems coming; even using the crude metric of house price growth against wage growth one could see that the situation was well away from the norm. Naturally lenders are happy with larger percentages of earnings going to them, but concerned that this extra thick slice of the pie does not get eaten away by bad debt. So how did things get so out of kilter? There are several possible scenarios:
1, the outcome is approximately what the lenders intended.
2, the actuaries got it wrong.
3, the people running the companies ignored their actuaries.
4, exceptional events confounded all the experts.
Certainly the first scenario is not claimed by anyone, so we can leave that for the moment. The second scenario does not seem likely. Actuaries are bright people that do exactly this type of mathematics for a living and they have many years of examples to draw from. Even I could see anecdotally the inevitability of most of the problems (at a course grained level obviously) only the spread of lending restrictions between financials was not obvious to me. The third scenario does have something of a ring of truth about it, because we have seen high profile heads role, but nothing like the clearout one might expect. Can the heads of so many large organisations have been so bad at their jobs? It could be self interested short-term planning by executives looking for a few years of exception bonuses and a golden goodbye. Perhaps the purge is not yet complete, or perhaps the top jobs are safe regardless. The absence of large numbers of high profile sackings implies that the financial institutions don’t attribute the problems to their executives ability or probity. The fourth scenario is also receiving some backing; in particular creative sales people supposedly managed to slip many billions of unwise lending through the system without anyone noticing. This seems more than a little improbable. I am sure that this happens on a very limited scale, but not in such amounts for so long. That would imply that nobody had noticed even the broadest of indicators looking dodgy and I feel confident that people must have been monitoring them. Perhaps I am missing one or more scenarios, but if not where does this leave us?
There is doubtless a combination of factors from the scenarios, but as much as the property price bubble was obviously forming, none of these scenarios or a combination of them is obviously causal. That leaves me reconsidering the first scenario. Perhaps we are broadly where the money lenders expected us to be. Not only have they grabbed a larger slice of the economic pie for themselves, they are seeking even more from state / central banks as support and that eventually translates into taxation. This reminds me of the old saying about owing a lot of money to the bank implies the bank owns you, but owing an amount the bank can’t afford to lose implies you own the bank. Do the lenders own us all? Are they using the state / central banks as proxies to extract even more through extra taxation on their behalf. Certainly the wealth extracted so far by them either was not created yet and that is what needs correcting, or it did and is now somewhere. If it didn’t exist that implies serious strategic mismanagement on a colossal scale, which again would be easy for the actuaries to spot. If it did exist where is it now? Have we been intentionally cleaned out by the lenders? Certainly the outcome seems to be the same.
I know that some of you will say that hindsight provides perfect vision and that the financial institutions were heading into this blind. To that I would say property price bubbles are nothing new, we have seen them before, their outcome is broadly similar. How can a property price bubble have exceptional or unexpected consequences when we have seen them before? Is something different? Well if it is simply that the scale of the thing is bigger then it should have been more obvious as it formed. It was obviously a problem building to me as a casual observer. Admittedly I did not foresee the lenders restricting credit to one another, but then it was not my concern to look out for such a problem.
Perhaps I have misunderstood or not noticed something, if so I am sure someone will put me right and that is what I think is most likely, but until I have that understanding I have to say things look suspicious.
What did all these world leaders discuss at the G8 Summit – nothing – nothing was agreed or was it ? –
Did these world leaders maybe decide that the planet was heading on a major collision course with disaster because everyone and theyre dog was diging it up and reselling it. So why not create a situation where, due to lack of global funds the spending stops, the house building slows down, the consumpution of fuel slows down because it is so damn expensive and people without jobs dont consume as much. So maybe these world leaders thought ( as we are all expendable )lets think about the children, lets think about the survival of the human race, lets create the greatest depression of our time and get back to basis.
Everyone can do theyre bit for the planet, because they have to, after all they always mostly seem to have a hippy daisy shoe side to theyre personality, so we are sure they can deal with a more grassroots existance.
After all most people didnt want a war in afganistan or iraq, and most of these people were right, after all all these wars proved was that terrorists are fannies and western governments like to make and explode weapons,casue its fun!
Maybe thats the way to go, however theyre are quite a few powererful position people who are going to benefit immensly by this stealing of the populations wealth.
So maybe its time for everyone to pull theyre money out of banks.
That would cripple the world economy quicker than anything else.
So lets embrace a new leaner less capital expenditure existance and save the planet
+ maybe mankind the down to earth variety might realise we are being conned by power hungry assholes
Comment by someone from glasgow — November 23, 2008 @ 1:17 am
I have been a casual observer like yourself of the events. Since 2002 I have been telling people that the maths did not add up. The housing boom was not sustainable and we would have to pay a price for the mad spending frenzy. Most people said I was being negative. I consider I was being truthful and realistic. The surreal thing for me was the way events were dragged out. I am so sure that the brakes could have been applied long before now to prevent what is now happening. There are two possibilities for me; (i) All the experts and people in authority were in a very deep sleep at the wheel, or (ii) Deception on a large scale has been carried out, by whom I do not know.
I did notice over the years when someone spoke out in public they were trampled on by the politicians, banks, estate agents, developers etc.
While Gordon is now playing ’saviour’let us not forget where it all started. The sub prime crisis may have come from the USA but the housing boom started in the UK. We exported the fashion.
Where has all the money gone?
Who is controlling it?
Is this a further decline of Western culture?
How long before we go the way of the Romans, Egyptians, Aztecs etc.?
Everything is cyclical.
Comment by M — November 23, 2008 @ 9:02 pm
Most (90%?) or so of the money used to exchange goods is credit. Banks have a charter that allows them to lend up to 10 times the real value of their deposits and their holdings (value of their high street buildings etc). These charters started in England when the banks gave letters of credit against gold held in their vaults in the 17th century. They found they could get away with lending (using paper promise-to-pay notes)7 to 10 times what they held in real gold. Because people preferred paper promise-to-pay notes to heavy gold – when they trusted the banker. Now, this is the neat bit. Charging 10% interest per year on ten times the value of the £1000 gold sitting in the vault gives an income of £1000. Yes folks, its true – every £1000 you deposit in the bank can be lent out ten times over by the bank! And yet you only get a lousy 2% interest. They tell you a rotten sob story that they “buy/obtain” money on the money markets at a small percentage below what they lend it out at. Bollocks! From your £1000 and also from any other £1000 they manage to scrape into their credit books a bank with a charter will lend out £10,000 at 10% interest = £1000. Yup, they make £1000 and give you a lousy £20 interest. They have been doing this for 300 years. Now do you feel sorry for them? So you can see how most of the “money” in “circulation” is not solid, backed-up money as you are led to believe. It is credit. Credit that is bought off the banks at 10% (10% = average interest rate over the years). This credit has taken the place of the money that should have been circulated by governemnts in order to represent the value of all the goods and chattels that the state possesses – to facilitate trade. The state has absolved itself of the responsibility of workin it out and allowed market forces to provide the “correct” amount of money by selling credit. Hmmm, shome mishtake there I think. I mean, why the hell should we pay for our means of exchange? Is that not exactly what governments are for?
Now how does this cause a credit crunch? Well the long-standing banks know what happens if you have this system. They are waiting and expecting these conditions to occur;
First Stage: Rapid inflation as the initial £1000 deposit is geared 10 times over.
Second Stage: Some reduction in the inflation as £1000 interest is paid on the £10,000 of loans.
Third Stage: More inflation as the £1000 of deposited interest payments are lent out ten times over again.
And so on, and so on. The amounts of money very quickly build up into millions and then billions rushing in and out of banks. In other words a rhythm builds up of inflation and deflation. It is called by the UK chancellor as the “economic cycle”. It is an inevitable result of having a money supply based on credit attracting interest payments. And so on, and so on. The amounts of money very quickly build up into millions and then billions rushing in and out of banks. In other words a rhythm builds up of inflation and deflation. Inflation is the boom, and deflation the bust – normally a recession contained within an individual country. It is called by the UK chancellor as the “economic cycle”. It is the inevitable result of having a money supply 90% based on usury.
But why is this credit crunch so bad compared to most recessions? Well, think about all those 10% interest payments. At first, in the 17th century those 10% interest payments to Mr Barclay/Lloyds and his chums were not a significant part of the whole money supply of the country. So they were absorbed with only a little bit of inflation/deflation, and remember, Mr Barclay/Lloyds was merrily lending out 10 times his deposits to re-inflate the money supply all the time. But after a while MOST of the “money” circulating was credit. Then it became significant. At the end of the day, if almost all the money is credit where the hell does the interest to pay for the credit come from? Yup, you got it – from more credit!
So although intitially the supply of money via credit geared 10 times over from real deposits is inflationary, it is massively deflationary in the long run. Sooner or later something upsets the cycle and credit (money supply)dries up. When this happens within one country alone, the rest of the world’s credit supply tends to fill the gap, but sometimes – especially in a globalised system, the huge quantities of interest payments that need to be paid swamp the whole worlds’ finances. This is a depression. And that is what is possibly coming now, which is why the governor of the bank of Engand is looking so miserable and saying it will be worse than you expect.
You will notice that the banks still expect their interest payments despite stopping their bit of the bargain of supplying money for trade and investment. What’s more, when their greed inevitably leads to one or two of them overeaching themselves and going bust, they squeal to the government and demand our taxes to bail them out!
Now, the real question is whether all this credit fueled inflation/deflation/credit-crunch lark is a guided conspiracy on the part of the banks or just incompetence. I think in England it just happened pushed by events. But then, when the banks realised what a good thing they were onto they powerfully pushed the government into severly restricting the numbers of banks with a charter allowing them to lend 10 times the amount in their deposits. So a happy little cabal of European bankers emerged, well in bed with the governments of the day. After all, as long as they agreed to lend the government money when required for wars etc, the banks were literally allowed to print money for themselves.
What about the US Federal Reserve founded in 1913? Well, it seems to me that any group of folks who can pursuade a democratic government to hand over control of the peoples money supply to a few unelected bankers are not stupid people. They well knew the consequences of the credit-money-supply system they introduced. And they must have known how mind bogglingly deflationary it would ultimately be if they encouraged the system. But they did encourage the system. Didn’t they just! And it led to the Great Depression as they expected.
But how can canny bankers benefit from a depression? Easy, forclosures.
If you can create money at the stroke of a pen in a ledger book what’s the point of it to a top banker? Bankers don’t need money. They want land and power and probably sex. So they create some “credit” by writing it in a ledger book, and lending itto you. Then you work your guts off paying off the interest on money that does not really exist. Now, you probably did not borrow all your house’s worth. But, by God you will pay double for it by the time you have paid 10% interest on it for 20 years and struggled to pay back the capital as well. If you cannot pay the interest and the bank forecloses on you he will get your house at half price. Then he can keep it or sell it at its full market value. Not a bad deal for the banker when you think that he created the credit out of thin air!
Do bankers deliberately conspire to manipulate the money supply to create depressions? I think the 1930’s depression in the USA was deliberately caused by the bankers running the Federal Reserve. I mean, nobody but nobody, could be that clever and then that stupid.
Is today’s credit crunch deliberate. I do not know. But I am sure that the Morgan Stanley’s and Goldman-Sachs of this world understand the system and run with it well ahead of the curve. I mean why not invent a really risky insurance scheme for derivatives and then off-load all the risk to Lehmans. Then when Lehmans go bust, buy them within a day, sack most of the Lehmans guys and get a billion dollars worth of skyscraper for nothing?
No wonder Warren Buffett bought a chunk of Goldman-Sachs.
Comment by Andy Peters — February 18, 2009 @ 10:08 pm
According to a programme I saw this week, the main problem was all these new-fangled investment packages people were coming up with. The problem was that no-one but the people who created them really understood them and the guys selling them did not want to appear dumb and admit their lack of knowledge over what they were selling, which in a nutshell was ‘good’ debt bundled together with bad debt! The property market then peaked and began to stagnate, insurers stopped wanting to back these investment packages ect.
Comment by David Brown — April 24, 2009 @ 5:20 pm
Here’s a conspiracy. If you want to take a country like Afganistan, devalue it, blow it to bits and then provide a system that you create and value that you choose if you get what I mean. So why not do the same thing in financial terms. Destroy everything financially, devalue the economy, call a huge bluff repossess huge amounts of assets at an absolute bargain then magically restore the market and sell at astronomical profits? A way to create more value when a product becomes that hard to make money from is to pretend on mass that it is worthless…
Comment by Brendan — May 7, 2009 @ 7:41 pm