Colin's Cornucopia

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Financial Meltdown

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September 2008 has seen the biggest financial melt down since 1928. The earlier one was caused mainly by artificially cheap interest rates that encouraged punters to buy shares. Sales on margin magnified this effect by many millions. The end result was a mountain of worthless shares backed by virtually no assets. This led to a depression that only ended, despite Roosevelt’s New Deal, when America started massive production for World War II. It is quite clear, incidentally, that you can spend your way out of a depression in the right circumstances, but it is to be hoped they never recur.

The present debacle has been caused by similarly ill-conceived actions within the financial institutions. In this instance the Bubble is in property. The dot-com bubble should have been sufficient warning for the present generation but, as usual, they chose to ignore the signs in order to make a quick buck. We have had Bubbles since Tulips in the eighteenth century through the South Sea Bubble, The Thirties Share bubble, The Dot Com Bubble and now the Property Bubble. There have been plenty of others of lesser import. They have all been caused by stupid greed.

Sub-prime lending in the USA and the buy-to-let market in the UK have caused the recent property bubbles. Agents, greedy for commission and offering loans and terms far beyond the ability of the punters to support, led the market in the US. Developers and agents selling flats to let in city centres and new developments led the way in the UK. In both cases the problem was that loans far exceeded the quality of the assets and the ability of the punters to support them. Many people were over exposed. Some Building Societies in the UK were offering mortgages of 110 percent of the property value. Most offered “cashback” deals and some house loans were offered at up to four times the total annual income of the purchasers. Even commercial but-to-let loans were offered at 100% in many cases. The result was to push property prices ever upward and it became clear to any idiot that it could not last. A significant proportion of the punters could not possibly support such loans.

Dr Donald Leech of Swansea recently summed up this matter succinctly “ - - it is easier to get rich lending money you do not have to people who cannot afford to repay it.” Nuff said.

The base cause of this bubble was effective de-regulation of the banks and building societies. Before I complete this theme I will tell you a personal story.

I ran my own manufacturing business for 40 years and grew it from nothing to amongst the top 5% of British sub-contract manufacturers. There were a number of people involved but it was essentially my company so this is my story. Eventually I negotiated a good contract supplying parts for Rolls Royce cars. They wanted me to double production and I had to invest around £350,000 in 1996, which was a very large amount for a small company. Production doubled and I made quite a lot of money. I needed three years to repay the loans but after one year BMW bought Rolls Royce and moved production to Eastern Europe. Within twelve months I was bankrupt. I managed to save a reasonable pension and then invested it according to Treasury requirements. Despite using the best financial advisers around I have lost significant amount to the vagaries of the stock market. My personal savings in building societies have done slightly better.

The lessons of this are firstly that I took a risk in business and it didn’t work. I think BMW treated me in a shitty way but that is life in the big city. The stock market has done me no favours but I knew the rules when I signed up to a pension scheme. The pension rules stink as they force me to fund adventurers but that is life in the big city. The one safe harbour for me has been the Banks and Building Societies. When I invested in my company I took a risk. When I invested in the stock market I took a risk. When I put my money in the bank I expected it to be safe.

The Government has de-regulated banks and turned them from a safe haven into a wealth manipulation machine that enables a very few senior managers to make vast fortunes for themselves while exposing the punters to all the risk. This is obscene.

The Prime Minister said very recently “We need these high-flyers to generate wealth”.

Bollocks! Firstly, we need financial manipulators who put our wealth at risk like we need a hole in the head.

Secondly, the financial institutions create not one penny of wealth. There is only one way to create wealth. You take materials from the earth and turn them into products that others will freely buy. We once used to hunt the products of the earth but this is now ineffective. We can harvest the bountiful products of nature and our wits or mine raw materials and forge them into products. We call these methods Farming and Manufacturing. They create wealth – nothing else does. The proper function of the financial markets is to fund Production and Farming. This has become an extremely complicated matter and there are many valid functions to be performed but these are not the things that have taken precedence of late. The manipulators are ignoring the funding aspect and are simply tapping into the huge flow of funds to manipulate a huge slice for themselves.

The nearest parallel I can use is that of certain countries that tax goods, and especially oil pipelines, running through their countries. The financial manipulators have now reached the stage where their cut actually exceeds the flow through the pipeline and the punters are left with nothing. Indeed the punters may often have to pick up the tab for this obscene feast. Now the pipeline is empty but notice who walks off with their pockets stuffed to the brim and who picks up the tab.

We now have a situation where the tail is wagging the dog and this has only been achieved by the carelessness and/or avarice of those in power – the politicians. The avarice of those who run large corporations is part of the deal and you know you take a risk when you buy shares. You should not have to take a risk when you deposit your money in a bank.

I have heard plaints that regulation is not the answer. I have been an advocate of Capitalism for many years and consider I acted accordingly when running my own company. The manipulation of our financial institutions for personal gain is not capitalism. It is plain criminal theft. If the managers of our banks want to speculate and play the market, let them set up their own companies and do it with their own money. The richest man on earth, and many others, did it this way. No one should be allowed to speculate with my bank deposits. That is not Capitalism. That is piracy. I believe the boss of one recently failed bank had come from the supermarket sector. It appears to me that he had carefully flogged off the family silver to boost the bottom line each year so that he and his cronies could pocket their fat bonuses. After three such years there was no family silver left to fund the bank when it got into trouble and the taxpayer has to pick up the tab. That is plain theft.

The Irish Government has today made a law that all bank deposits will be guaranteed. I hope they have the sense to regulate properly their bank managers. If these managers are allowed to carry on with their viciously avaricious ways together with a government backed guarantee, the Irish government will find itself exposed to a fiasco that even the European Union will not be able to fund,

I see that a European Union spokesman as said the Irish law is anti-competitive. Are we to assume, then, that the European Union expects banks to compete in the terms that Limited Liability Corporations compete? This is a recipe for utter disaster. Banks are places where we store our accumulated wealth, our pensions, our savings, and the stuff we need to survive when times get tough. We do not want them exposed to competitive pressures. We have enough of those in every other aspect of our lives. Banks are our one safe haven. The politicians who do not know, and are not prepared to learn, this will not find themselves in a job for much longer.

If I am asked if I am prepared to sacrifice some interest to guarantee safety I will say “yes” without hesitation. So, I suspect, will every other person in this country over 50. Anyone under that age who does not agree has a lot to learn. Those who want speculation have plenty of devices to achieve their expensive wish without putting my savings at risk.

On a different but related topic.

The massive problems caused by this meltdown are to be exacerbated by the other problem besetting the British economy. In 1974, or thereabouts, the Rt. Hon. Anthony Wedgewood Benn stood up in Parliament and spoke about using the wealth about to be generated by North Sea oil to re-invigorate British industry. It was not to be. Instead, the oil wealth pushed the value of the pound so high that all the old industries died because no one else on earth could afford to buy their products. The simultaneous universal introduction of container ships enabled the import of foreign goods at extremely low prices. British industry largely died. Now we are not a major player in the Production business. It is quite right that we should turn to secondary and tertiary functions to earn our living – but they still need regulating to ensure that they are run for the benefit of the people who invest in them and not a few very greedy manipulators. This is not advocacy of socialism or communism – it is simply a desire to order things politically so that I do not get taken to the cleaners by my bank manager.

The British people have had 40 years of a gas and oil bonanza that has been squandered to make the nation appear quite wealthy. No one except Mr Wedgewood Benn and I bothered to look to the inevitable future when the bonanza would end. Now it is time. We can all look forward to a very severe downturn in our wealth quite apart from the current temporary furore. Maybe we shall even be able to manufacture things again and create some real wealth - but that requires hard work – something few in this country are capable of now. The adjustment to the post-bonanza economy is going to be very difficult.

2nd October 2008

Colin Walker

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