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Financial Markets: What’s Next?
The social conservatives conservative socialists have now partly nationalized the major banks. That seems to have been the right thing to do, though I would have liked more strings attached to the move.
But what’s next?
The stock markets have regained a bit and some lending may eventually restart, but the underlying problems have yet to be solved.
There have been some $650 billion of losses from mortgage lending recognized within the banking system, but the IMF expects the total losses to be $1.4 trillion. When these additional losses will get recognized all the capital the governments just injected in these banks will not be enough to make up for them. The situation will then be the same as it was last Friday and require additional capital injection.
The shadow financial system of hedge funds and private equity funds still exists and will need to further deleverage to eventually dissolve. This guarantees another two to four quarters of quite massive selling in about any asset class but, maybe, treasuries.
The Main Street economy will go deep into recession and there are yet no plans on how to soften the fall and eventually restart growth. A big infrastructure program would certainly help.
(For my country, east Europe and Russia: a new fast-freight railroad from Hamburg to Shanghai.)
The collateral damage on pension funds, the Federal Deposit Insurances Corp, municipal funds etc is immense. Is there a way to repair them or do they need to be replaced?
All of the bad side effects from these current gigantic interventions need to be cleaned up. LIBOR manipulation is only one of them. The Fed and other central banks will need to mop up the additional liquidity they injected before it ignites serious inflation.
What we have seen so far can be exaggerated as ‘the poor got robbed so the rich can make more loans to the poor.’
Where is the social benefit?
Can we please have a plan for a financial system that is a service to the economy and not a drag – not a monster that depends on over-leveraged quant strategies nobody really understands?
This one sounds good to me:
[Berkshire Hathaway’s vice chairman] Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you’re dealing with the safest securities around."
…
To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that’s true to his spirit.
Banning derivatives is certainly not an impossible vision. Declare them illegal and send anyone to jail who uses them anyway. But even if we have plans to make banking as boring again as it should be, how do we get from here to there?
There seems to be no unified plan yet on how to tackle all the above problems. I am afraid the only idea people will come up with is to again inflate the system and feed cheap money into it until another bigger bubble of fantasy profits forms somewhere (alternative energies are a candidate). That was the Greenspan strategy which created the current problems.
The politicians seem to believe that now all is well and we can go again down the same old path.
That is wrong and we need better ideas. Those ideas will a first view seem radical or shrill. But a year ago socializing Wall Street was a shrill idea too.
I’ll try to come up with some policy ideas over the next days. Any suggestions are welcome. What are your’s?
Sumerians exchanged people -marriage, servants, slaves, children, etc., – labor and services, land, livestock, goods.
They had a clever accounting system, first material (tokens, exchanged hand to hand, but also filed and stored), then written, representing the tokens allowed more complex accounting and removed the need to make the tokens, the system allowed them to keep track of exchanges, promises, staggered payments (e.g. gradual payment of dowry), rents, and so on, contracts in short.
Their mathematical, numerical capacities – abstract, that is in the head and in the language, were high, better than their representative, symbolic tools (imho.)
An administrative/ruler class, salaried by taxation, took take care of all this, set up laws, standards, settled quarrels, smoothed economic relations.
The early currency (‘a standard’) used was an X of grain, barley. This proved unsatisfactory (impermanence, fluctuating exchange, etc. – so not a real standard) and in the *later* period silver equivalents were set up: silver could function as a yardstick; it could be amassed and stored; and while it had little real use, it became a sign of riches and status.. In this way, they converted the impermanent – 24 sheep! a wife! bolts of cloth, barrels of beer…to…’dollars’ in the bank.
They invented usury, or interest – only possible when value is stored, so that went hand in hand. Also investment, in the form of starting a business and then splitting the payments of the workers who ran it, and / or having a profit-sharing scheme.
Small town Sumerians may have griped they were being ripped off for grand projects – temples and the like; war, though afaik, the history doesn’t show that, but they were subject to money lenders who charged high interest (20 or more) and many fell into slavery, lost their land, and had to go work for the temple (like sharecroppers or prisoners, etc.)
Sumerians had no concept of sustainability.
They took from the environment what it provided in traditional ways and were primarily concerned with proper, *exchange* (debt relief, price of this or that good or service, priests stipends, etc. ) The environment was a backdrop, the scene on which all was set, and it afforded only, on occasions, nasty surprises (drought, floods…), deviations from the norm, for the rest, it was just ‘there’. Sunlight, water, agri, animal husbandry, territorial manipulations – irrigation, etc., so in daily life, for the energy punch, biomass and animal fats, animals and humans, often slaves, were used, all managed through ‘best practices’ of the times.
They had primitive forms of insurance (not clear about it for the mo.), paid for their military collectively, they often fought siege warfare (see contemporary Israel and Iraq.) Game playing (chess type games etc.) were divorced from finance and everyday life.
What has changed?
With the exploitation of oil, the combustion engine, and the understanding and use of electricity, nuclear power, the environment is still a stage that can be exploited mindlessly and will automatically furnish what it conventionally needed or ‘right’, expected, usual. ‘Money rents’ will, it is judged, perform, as the borrowers, through economic expansion, will be able to stump up (inflation etc. set aside), they are a good investment, usury pays – all forms of ‘credit’ and its ‘packaging’ honest or nefarious – upfront or diced and sliced and touted by pimps – are winners, a good deal, safe.
(What to do with debt slaves, once they cannot pay, is another matter. The Sumerians put them to work for the State, or powerful persons, as human labor was precious, useful, profitable. Not so for indebted students or prisoners today. They are removed from the labor market, of no use, surplus. It is the environment,with technology, that produces expansion – oil, coal, machines, etc.)
When the earth cannot provide for ‘growth’ any longer – then, for a while, it will be artificially created elsewhere. Mac Mansions will be built with funny money. Everybody running around on tick…and then… and then.. all those derivatives..
Posted by: Tangerine | Oct 16 2008 20:04 utc | 141
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