Have we learnt anything from the credit crunch?

[zaph]

I will make a confession off the bat, my politics have always been left of centre, an old fashioned social-democrat. A viewpoint which has been depressing and frustrating to hold, because the world has been run by a new elite for the last twenty years or so. The gods of wall street and the city in London. While the wage of ordinary workers have stagnated, their's have sky-rocketed. In 1980 the average pay of a executive was 40 times that of an average worker, now it has passed 400 times that of an average worker. Ordinary people are told that they can't have pensions or decent holidays, because we have to compete with China. While the gods of wall street/ the city have paid themselves ever more lavish bonuses, perks like executive jets, and even massive pay-offs for massive failure. The rich are motivated by more money, the rest of us by less. Why can't we out source executives?
The most corrosive effect of this has been seen in politics, no public investment, no programs for the poor and vulnerable. Infrastructure left to rot, with train crashes on my side of the Atlantic, and highway bridges falling down in America. The rich are allowed to avoid tax, break unions, and no can complain. The standard response was, we create the wealth, we may take a greater share, but the pie has grown. Most of us live off crumbs thrown from their table, but there are more crumbs.
Then the credit crunch happened, it turned out that the wealth generated by this new elite was a lie. Sub prime loans being repackaged as high quality mortgaged backed securities. Sub prime lenders being encouraged to get as many borrowers on their books as possible, no income, no assets, no worries. Give them the loan, it won't matter, we will flog it on anyway. The whole boom was built on cheap money and lies. The lie that you manufacture cheap in China and sell in the wealthy west; and reap huge profits as a result. The lie that debt didn't matter, we could borrow as much as we liked, and never have to pay it off. The lie that an economy could survived on shopping malls, and call centres without having to make a thing.
Suddenly the new elite were all socialists, in the good times they didn't pay taxes and deserved massive rewards; because of all the risks they took. In the bad times they demanded that the very public sector and governments that they looked down on bailed them out. I don't how much has been spent in other countries, but it has cost the UK tax payer 1.2 billion pounds to clear up their mess. In return I expected humility, gratitude, an acceptance that things have to change.
A year on has anything like that happened? No, in London the buzz word in babs, bonuses are back. While the rich have cut everybody else pay, theirs has gone up 10%. That massive bill they left the taxpayer, are they going to pay for the demage they caused? The huge public spending that was required to stop them causing another great depression, and left governments with crippling debts.. Absolutely not, it is going to be the little people who pay again. With cut backs to schools, closure of the local library, extra charges for universities. The *******s in wall street/ the city won't even accept greater regulation, threatening to take their useless skills abroad if any rules are imposed. Let them, they can bankrupt someone else.
It just seems we haven't learnt a thing, that the world will go back to the way it was, until it the next time the economy implodes. Except next time their won't be any money to bail anybody out.

[Jnmcda0]

Originally Posted by zaph

Except next time their won't be any money to bail anybody out.

I don't know about the UK, but in the US, we didn't have the money for THIS bailout. We just borrowed trillions of dollars from the central banks and from China that we'll never pay back.

[Brightpaperwarewolf]

To be fair, the SEC and the CFTC (and the counterpart FSA in Britain I believe) are severely understaffed in comparison to market growth. They don't have the resources to effectively regulate clearing houses and derivative markets.

[zaph]

Originally Posted by Brightpaperwarewolf

To be fair, the SEC and the CFTC (and the counterpart FSA in Britain I believe) are severely understaffed in comparison to market growth. They don't have the resources to effectively regulate clearing houses and derivative markets.

Another problem is number of staff at the regulators who fancy a lucative job in the private sector aren't going to be vigorious in looking for problem at the banks. It was even fsa practice to let the banks under investigation rate the investigators, and base the bonuses of the investigators on that evaluation (http://business.timesonline.co.uk/to...cle5864476.ece). It was like letting the mafia do staff evaluations on fbi agents.

[Brightpaperwarewolf]

That's pretty disturbing but somehow, not one bit surprised.

[millenniumman75]

Originally Posted by Brightpaperwarewolf

To be fair, the SEC and the CFTC (and the counterpart FSA in Britain I believe) are severely understaffed in comparison to market growth. They don't have the resources to effectively regulate clearing houses and derivative markets.

We are becoming understaffed everywhere. Now, the phrase "lowered expectations" is starting to settle in. It's obvious that we cannot produce what we could with the extra employees, so they have lowered the bar.

My situation:
I did not get a raise this year - still being paid 2008 salary - no bonus for performance - 401K match was cut 50% for 18 months - three significant layoffs in the last seven months (thank God for his blessing that it wasn't me).

[WineKitty]

Originally Posted by millenniumman75

- three significant layoffs in the last seven months (thank God for his blessing that it wasn't me).

So God wasnt blessing the other people that got laid off then? Not trying to be a jerk, I just dont get it when people say that.

But, like you, I was also not given a raise, we are working with less people and doing more work, our hours are getting moved around; its BS. The modern day work place isnt a great place to be.

[WinterDave]

Good post and analysis of the situation Zaph! I pretty much agree with everything that you have said! It is just me, or did the quality if life for ordinary workers seem to go to hell right around the time that politicians started pushing all these 'Free Trade' initiatives like NAFTA etc., forming the WTO etc.Since then, multinational corporations are all about shipping jobs overseas to where the labor wages are cheapest and the pollution laws weakest.Breaking labor contracts and pension agreements by filing bankruptcy, suppressing labor unions, and forcing American workers to survive on poverty wages, and have them sign up for food stamps and state health insurance.

I love Walmart, always flying that flag in their commercials, as they destroy American small businesses, give their workers no benefits and lousy pay, pollute the environment, spy on employees who dare to organize, and import all their low quality goods from China!

There is no loyalty among these CEOs to their workers, home countries, neighbors, or even the companies that they work for! It's all about bonuses, global exploitation, and short term profits.They will sacrifice their own job, company, and even country, to make a quick buck.Rationalizing that they will be retired and living pretty when all the chickens from their financial malpractice, come home to roost!

Bonuses are up, and exactly nothing has changed from preventing another global, financial meltdown.I guess it's all right to endure another Great Depression, just so that these Wall Street types have enough toys to play with, and money to measure their self-worth by.

That nothing AT ALL has changed after all of this economic upheaval, just goes to show who has the REAL clout, and who CONTRIBUTES the most to election campaigns.I am really beginning to wonder if Democracy (Yes, I know that we actually live in a 'Republic') is a valid/functional model of government anymore.It doesn't seem to be able to accomplish anything concrete, sensible, for the common good, or longterm anymore in this world of lobbyists, lawyers, spin, focus groups, 24/7 sensationalized media, PACs, an apathetic and uniformed public with a memory of five minutes, politicians who only think about the next election and care only for their own party, voters who act like mindless followers of Jim Jones, CEOs who care about nothing but their own greed and gluttony etc. etc.

[UltraShy]

Originally Posted by Jnmcda0

I don't know about the UK, but in the US, we didn't have the money for THIS bailout. We just borrowed trillions of dollars from the central banks and from China that we'll never pay back.

There never should have been any bailout. All bailouts do is waste money and tell companies that you can mess up as much as you want since we're here to back you when you get into trouble. But be sure to mess up on a mega-scale, since we only bail out those that are "too big to fail."

Where is the incentive to run a company in a sane & prudent manner when you know the government will bail you out no matter how badly you mess up? You can take on insane levels of risk, since you're "too big to fail" and will be bailed out if that risk comes back to bite you in the butt.

Bailouts are handed out as a reward for horrible management and insane levels of risk-taking.

I hear endless complaints about the free market being the problem. This isn't a free market. In a free market companies fail and don't get bailed out. In a free market GM goes bankrupt instead of becoming Government Motors owned 60% by the American taxpayers reading this.

[zaph]

Originally Posted by UltraShy

There never should have been any bailout. All bailouts do is waste money and tell companies that you can mess up as much as you want since we're here to back you when you get into trouble. But be sure to mess up on a mega-scale, since we only bail out those that are "too big to fail."

Where is the incentive to run a company in a sane & prudent manner when you know the government will bail you out no matter how badly you mess up? You can take on insane levels of risk, since you're "too big to fail" and will be bailed out if that risk comes back to bite you in the butt.

Bailouts are handed out as a reward for horrible management and insane levels of risk-taking.

I hear endless complaints about the free market being the problem. This isn't a free market. In a free market companies fail and don't get bailed out. In a free market GM goes bankrupt instead of becoming Government Motors owned 60% by the American taxpayers reading this.

Well that is the point, the argument that I have heard for years against my views how the economy should be run. A mixed economy with room for both the public and private sector. Regulation to harness the private sector to generate value for all stakeholders, workers, shareholders and the wider community. Has been that the new super rich have reached their position by taking tremendous risks and deserve enormous rewards. They could fail any moment and besides they don't call on the state. They educate their kids privately, have private health cover and don't use public transport. Why should they be regulated and have to pay taxes? Then they do fail and ordinary people have to bail them out.

You would argue that we should just let the banks fail, but is that really viable? Remember it wasn't just wall street going under, the sort banks used by everyday people were bailed out as well. Could we have let millions of people loose their life savings and return to a world were people kept their money under their beds. Money which would no longer be available to invest in new factories, and provide mortgages. Especially when none of these people had a clue about the high risk games being played with their money.

Capitalism is the most successful economic model we have, but the life blood of capitalism is trust. That a person making an investment needs information to make an accurate and informed decision about the risk they are taking with their money. The problem with the credit crunch was that seemingly low risk investments, such as a normal bank account, turned out to be as risky as a ponzi scheme. Even big institutional investors panicked and refused to lend. Nobody had a clue what was risky and what wasn't; the credit markets froze. No bail out would have meant that even sound companies would have gone under, because of that freezing of credit. The bail out prevented another great depression. My beef is with who is picking up the tab and the refusal of the rich to curb the behaviour that caused the mess in the first place.

[millenniumman75]

Originally Posted by WineKitty

So God wasnt blessing the other people that got laid off then? Not trying to be a jerk, I just dont get it when people say that.

But, like you, I was also not given a raise, we are working with less people and doing more work, our hours are getting moved around; its BS. The modern day work place isnt a great place to be.

I have been on the other side - laid off in July, 2002 and could not find a job until June, 2004. This recession is different in my field this time. The tech industry got slammed the way the rest of the world got hit seven years ago.

It's a test of what we are made of - I have already proven that I can make it. I am still here even after severe SA in 2004. Our days of spending with reckless abandon are over.

[UltraShy]

^I'd add that years before Fannie & Freddie got in trouble with their subprime mortgages there was a bill introduced in Congress that would have EXPLICITLY stated that these two government-sponsored entities are NOT backed by the US government in any way. That bill never got anywhere.

They both got to borrow at lower rates than any fully-private enterprise ever could because their debt came with an implied guarantee. This low-cost credit helped them make home loans to people who could not afford a home. There was never any explicit guarantee, but everyone deemed them AAA credits due to the assumption (which turned out correct) that the government would bail them out if they got in trouble.

Many measured economic success by how many Americans owned a home and government pressured lenders to make loans to lower income individuals, so as to not discriminate. Well, they should have discriminated -- specifically against anybody who can't afford a home. What percentage of people own homes is a terribly flawed way to measure the health of an economy. What percentage of people own homes they can actually afford is the true measure of success.

[UltraShy]

Originally Posted by zaph

You would argue that we should just let the banks fail, but is that really viable? Remember it wasn't just wall street going under, the sort banks used by everyday people were bailed out as well. Could we have let millions of people loose their life savings and return to a world were people kept their money under their beds. Money which would no longer be available to invest in new factories, and provide mortgages. Especially when none of these people had a clue about the high risk games being played with their money.

I've yet to find any bank that isn't FDIC insured, so their accounts would have been insured up to at least $100,000 and I believe retirement accounts like IRAs are considered separately, so a married couple could potentially have several hundred thousand fully covered by FDIC insurance, fully backed by the US government so they'd never lose a cent even if the back went up in smoke.

And if you have the "problem" of having millions of dollars, well, then just use numerous banks with each account just under the FDIC limit.

Nobody would have lost their life savings.

Back in the late 1980s some people (including my brother) would make deposits in S&Ls that were on the brink and thus paying the highest rates to get deposits. He and all his fellow savers got ever cent bank as they were government insured deposits.

I'd also note that as investor I lost a significant chunk of my life savings in stocks & corporate bonds in 2008. Of course, stocks are up about 50% since their March 2009 lows, giving me back a fair amount of what I had lost. I stayed the course and did not bail out when the stock & corporate credit markets went into a nosedive last fall. Don't think I don't know what it's like to see life savings go up in smoke. I've seen it first hand and it's not pretty. The concept of risk doesn't truly hit most investors till they've seen 6 figures disappear from their portfolio over a month.

[zaph]

OK, assuming that you our correct, and in Britain the limit was £30000 so it was a different situation. Your proposal is viable, but still massively expensive. The institution whose recklessness caused the crash fail, the depositors are compensated. It still leaves the taxpayer with a massive bill. Not too mention the problem of rebuilding the bank system.

It would also leave us with a frozen interbank lending market, remember this is a market flooded with toxic assets. Which thanks to oh so clever risk mitigation strategies were mixed in with good assets. No one knew what was toxic and what was safe. The safest thing was to flee to liquidity. There is certainly merit in letting the bad apples fail, the avoidance of moral hazard for one. I just doubt it could have been done in the middle of a crisis without causing further damage. When was the last major bankruptcy going to happen? When would it be safe for banks to lend, companies to invest, consumers to spend? Markets aren't rational, there is a lot of psychology involved, what economists call confidence. The bailout provided security from the one economic actor strong enough to withstand all the shocks, the state.

As for loosing investments, fine if you have money to loose, and access to information to access risk. However the median average income in the UK is only £23000, and I doubt it is much higher in the US. Most people don't have money to loose, they live hand to mouth. Neither do they understand the markets, yet they are being encouraged to gamble in them like the professionals.

[UltraShy]

Originally Posted by zaph

Most people don't have money to loose, they live hand to mouth.

In one post you worry about people losing their life savings if a bank fails, when at a minimum $100,000 is insured (even more if retirement accounts and/or a spouse is involved with different account titles or the use of multiple banks.)

Now you tell me that most people don't have money to lose as they survive from paycheck to paycheck -- clearly they don't need to worry if the FDIC insurance limit is $100,000 since their account surely isn't going to get even close to that. And, as far as I know, the FDIC limit has been temporarily raised to $250,000 till the end of 2013 I believe. The largest bank balance I personally have is $1,100, so I'm more than $248,000 below that limit and won't worry.

Originally Posted by zaph

Neither do they understand the markets, yet they are being encouraged to gamble in them like the professionals.

Who exactly is encouraging such unsophisticated individuals to "gamble like professionals"? And what exactly does it even mean to gamble like a professional?

I have a degree in finance and 16 years of real world investment experience and I can tell you that the bulk of my equity investments are in broadly diversified index funds. My bond investments are mostly in broadly diversified mutual funds as well. I invest substantially all of my financial assets with Vanguard because they are the lowest cost fund company overall.

It doesn't take any great degree of sophistication to invest prudently. Many would be shocked to discover that academics who have spent a lifetime in their ivory tower studying financial economics tend to simply put their own money in low-cost index funds.

[zaph]

Originally Posted by UltraShy

Who exactly is encouraging such unsophisticated individuals to "gamble like professionals"? And what exactly does it even mean to gamble like a professional?

.

Instead of having final salary pension schemes, government funded university places, and public housing provision. Over the last 30 years or so we have been told that these things are too expensive. Governments can't provide pensions, and neither can firms. Education will have to be paid for by students, western nations need to get leaner, fitter to compete with countries like China.

However all will be OK, because all ordinary people have to do invest their money in stock market. The stock markets have been democratised, opened up to ordinary people. Which is great, except they don't have the same experience and insider knowledge as the wall street/city insiders. Remember the dot com boom, in public the shares were be lauded, in all the media the ordinary people would rely on. In private these shares were being called garbage, and worthless.

The point I was trying to make about low incomes, was that you said that you could afford to take looses, most people cannot. Yet if they want to retire, or aspire to see their children go to college, they have no option, but to risk their money on investments they can't afford and don't understand. It is another example of how the state how been rolled back and privatised. The great irony being that when the very advocates of this get into trouble themselves, they run to the taxpayer.