Lunacy

The definition of lunacy is continuing the same actions over again and expecting a different outcome.

Gordon Brown was reported to be preparing to pump billions more pounds into the banking system amid mounting evidence that his £37 billion part-nationalisation has failed to get credit flowing to home-owners and businesses.

As banks continue to restrict lending, Alistair Darling, the Chancellor, has been considering a range of options including cash injections and offering banks state guarantees to raise money privately.

There\’s a school of thought that says we were due a credit crunch and a credit crunch we\’re going to have. Preserve the banking system, yes, so that when the great deleveraging has finished we still have a system able to intermediate between savers and borrowers. But that there\’s pretty much nothing that anyone can do to stop the actual deleveraging itself.

Not sure how true that actually is: this level of economics is well above my pay grade. But I have a feeling that we\’re about to find out how true it is.

10 comments on “Lunacy

  1. The definition of lunacy is continuing the same actions over again and expecting a different outcome.

    Slightly OT, I know, but this meme has been popping up around net quite a bit this year, especially in the last few months. Does anyone know where it comes from or who started it?

  2. It is actually far simpler than that.

    ‘Credit’ is easy to understand; it is a basic measure of the confidence that people have in the economy overall, more specifically, it is a measure of the degree of confidence that borrowers will be able to repay what they borrow; whether that is a store card, a mortgage or a business overdraft; or whether that is the confidence that people who provide money to banks that the banks will be able to repay.

    ‘Money’ as such is a) sub-set of credit and b) a way of measuring the volume thereof.

    For sure, governments and to some extent banks can create numbers on bits of paper (‘money’ in the narrower sense, see Zimbabwe, Weimar Republic) but they cannot do anything about confidence. As to recapitalising banks, this is a job for debt-for-equity- swaps, whatever the mechanics of this is in practice.

    That confidence is evaporating fast, for which the fancy term is ‘deleveraging’. The mechanics of deleveraging is that debits and credit get cancelled out – for example, people take money out of savings accounts and repay their mortgages – this is itself does not change net wealth in the accounting sense; it merely reflects the loss of confidence (aka ‘the credit crunch’).

    And basically, there is absolutely nothing that governments can do to restore the over-confidence that existed up until a year ago (aka the credit bubble) because the flipside of this was the property price bubble, which burst simulatenously with the credit bubble bursting.

    The least bad option is probably ‘do nothing’ – the quicker this all blows over the better, and then we can pick up the pieces and try and do it better next time.

  3. The prices of houses and certain other assets are still ridiculously high by any historical metric you care to mention. Before the economy can properly get going again, they need to reach something approaching fair value, liquid markets need to be reestablished, and banks need to become normal businesses with solvent balance sheets.

    You can either get there quickly – which is very painful but you end up with something resembling a functioning economy again fairly quickly – or you can get there slowly, in which all sorts of assets continue to be ludicrously mispriced, propped up banks full of bad assets continue to be a huge drain on the economy, and taxes and public debt turn into something even more ridiculous than they are now.

    I would have thought that the example of Japan would be helpful here, and that pointing at Japan over the last 20 years and screaming at the top of your lungs “IN THE NAME OF ALMIGHTY GOD, DON’T DO THAT” might have got some attention, but no. Nobody in power and few in the media seem to be paying any attention to that example at all. Perhaps they retain vestiges of late 1980s ideas of Japanese people as inscrutable little men whose superior management and long term planning behind closed doors in Tokyo is going to take over the world, and don’t really believe that Japan screwed up as badly as it did.

  4. Banks are desperate to lend; but the only people coming in asking to borrow aren’t good risks for paying back. Sensible people have stopped borrowing and at the same time, banks have got more sensible about who they lend to, net result: lending has stopped.

  5. I am surprised that people are wondering why banks are not lending again, even though they’ve received their bailout money. To my mind, this was perfectly predictable. If you don’t trust the books of possible customers to whom you might lend and you’re in debt yourself, what do you do with the bailout money?

    You recapitalize. This is not a difficult concept – I would think.

  6. I suspect that Einstein attracts attributions that are untrue (like Churchill, Jefferson, Mark Twain, Mark Twain’s Pappy, The Good Book, etc). But whether this particular one is bogus I have no idea.

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