Please Jonathan, learn what words mean:
The Black Monday of 2008, which saw £77bn wiped off London share values, was matched at one point yesterday on Wall Street, where even a drastic emergency cut in interest rates could not prevent wild volatility.
Volatility means changes in prices. Both up and down. The aim of cutting interest rates was in fact to increase volatility: they wanted to make share prices go back up again after they had fallen. So they didn\’t in fact want to prevent wild volatility, they wanted to cause it. Sheesh.
For they suggest turbo-capitalism is not just unfair – it is dishonest and dangerous. If that sounds excessive, focus, if you will, on the banking sector at the heart of today\’s mess. It was the reckless gobbling up and selling on of shaky subprime loans – mortgages given to bad-risk customers – by American banks, and the threat that those debts would never be paid back, that triggered the entire loss of confidence that stopped banks lending to each other and caused the run on our own Northern Rock. Those sub-prime debts were dodgy, but they were wrapped up and sold on as if they were triple-A-rated, pukka debts, as solid as a government bond.
That was dishonest – and you need only look at the cost to the taxpayer of Northern Rock, £24bn in loans and another £30bn in guarantees, to see how dangerous it has been for our economy and, given the diversion of public money that could have gone elsewhere, for our entire society.
The American banks have already owned up to $100 billion in losses on such products: those who made the mistake (the dishonesty if you must) have paid the price: we\’re not going to see this particular mistake repeated in our lifetimes. Please also note that all of this has happened before the bureaucrats have finished sharpening their pencils. Yes, markets do go wrong, as does any other system inhabited by human beings. The question is, what system clears up such mistakes best? Markets or those guys still working away with the penknives on their pencils?
As to Northern Rock, I\’ve not heard that their own loans sold on (the Granite paper) have defaulted. That was a different mistake, one of borrowing short and lending long (which all banks do) on a larger scale than was prudent. What\’s made that problem greater than it could and should have been is precisely that we\’ve got the pencil sharpeners looking for a political solution. Twenty years ago there would have been some City heads knocked together (if indeed NR hadn\’t been stopped from pursuing the path it did in the first place) and we\’d have had a messy, but adequate, solution back in August.
You could argue that capitalism is always like this, parasitical on the state.
Well, some of us do indeed argue that, that capitalism, in the form of big business, always tries to be parasitical on the State. Seeking rents and privileges. Which is why we argue that the State should not have the power to grant such rents and privileges. But that\’s not I think what you are arguing.
Whether it\’s the internet businesses that would be nowhere had it not been for the government research and development that created the web,
Grr, grr. The internet and the web are two very different things. The internet was indeed trialled by the US DoD. The web was something very different indeed, knocked together by one man over a week or two. That Sir Tim Berners-Lee was working at CERN at the time is pretty much irrelevant.
or the vast agribusinesses and others dependent on the "corporate welfare" of state subsidy – an estimated $92bn a year in the US, according to the libertarian Cato Institute – it\’s time to admit there is no such thing as a free market.
No one rational ever tries to state that there is, ever has been or ever will be a free market in anything. Markets are always constrained: it might be by customs, by law, by habit, but there are always constraints. There must be, for how can you have a market without a delineation of property rights?
The argument isn\’t "free markets" or "not free markets". It is always "freer markets" or "less free markets". And one very important part of the argument for freer markets is that we want to reduce the ability of people, whether they be unions, corporations, individuals, classes, professions, whatever, to seek rents and privileges from the State.
It is of course lovely that you quote Cato: but it would be interesting if you understood the point that they\’re trying to make. Archers Midland Daniel is as much a danger to, a leech upon, freer markets as the minimum wage or the UAW. And Cato (along with people like the ASI) are one of the few groups who proclaim this evident truth loudly enough that even you should be able to hear it.
What do you mean by this:
“if indeed NR hadn’t been stopped from pursuing the path it did in the first place” ?
Tim adds: When the BoE was in charge of the financial markets (as opposed to the FSA currently) banks which followed such obviously dangerous course would be called in for a quiet chat and heads knocked together.
Anybody who takes the slightest interest in corporate failure knows that warning signs include a rapid expansion of business, overgearing and/or an unusual business model.
NR had been showing all these signs for quite a few years, it came from a negligible share of new mortgage lending up to about 20% of new lending or something staggering like that; it borrowed heavily (rather than taking deposits) and that in itself was an unusual business model.
NR’s share price had been sliding for six months before it went *pop*.
The current regulators should be taken out and shot, frankly.
Those sub-prime debts were dodgy, but they were wrapped up and sold on as if they were triple-A-rated, pukka debts, as solid as a government bond.
I hate the fact that journalists feel the need to comment on that which they have no clue. Credit derivatives are fairly basic things that even a journalist could understand if they bothered to read about them.
We will only know to what extent they were rated badly in a few years from now. The problem was caused primarily by a lack of liquidity, not by defaults on loans. Ratings do not promise you a liquid market, only that a borrower will be able to repay.
Moreover, did you get any of these sold to you by your bank? Are widows and orphans going hungry? Of course not, the investors that got stung were professionals. They knew the risks they were taking.
Finally, thanks to subprime lending, there are millions of folks in the USA who have become home owners. Do we think that they shouldn’t have had the chance?
This is with-hindsight nonsense:
“Such obviously dangerous course”
“NR had been showing all these signs for quite a few years”
Not so obvious that the City, which is made up of very highly-paid and highly-skilled analysts, noticed – Northern Rock’s share price peaked in Feb 2007, 50% higher than it had been at the start of 2006.
You’re basically saying that the governing authorities should have intervened in a company the City was valuing higher than any of its peers. I can’t imagine how over-excited this blog would have been then – idiotarians, statists, all the usual insults.
In fact this blog was still saying Northern Rock’s problem was one of liquidity not solvency even after the crisis broke, comparing it favourably (and entirely wrongly) with a German bank collapse.
Tim adds: NR’s problem still is one of liquidity, not solvency.
Matthew, it is not “with hindsight nonsense”, I have always taken a keen (morbid?) interest in these matters, I did a unit on business crimes at Uni that brought it into sharp focus (it’s the same pattern time and time again) and I have seen a few clients go under after showing all these signs.
All these facts were in the public domain, any FT reader should have noticed. I certainly did.
As you say, the shares peaked in Feb 07, in other words, they started going down again. Which is what I said, isn’t it?
“That Sir Tim Berners-Lee was working at CERN at the time is pretty much irrelevant.”
I don’t think so. It wasn’t really in his spare time, and his employer didn’t claim IP rights over the work. Not sure how easy that would be to replicate in a big (or small) corporation (back then, at least, when pioneering commercial Internet stuff was to charge £10/month for a dialup connection).
If you please, it is Archer Daniels Midland, not “Archers Midland Daniel”. But, yes, they are a leech upon the market, and no more so than in their 30-year history of lobbying for the gigantic political boondoggle that is corn-based ethanol. If you look up the term ‘rent-seeking’ in the dictionary, it shows you the ADM logo.
Dwayne Andreas, who was for 26 years CEO of ADM, was (in)famous for making gigantic donations of his own and ADM’s money to politicians of every party imaginable. He has donated large and comparable sums to every leading political candidate in US politics, from George Bush ’41 to Jesse Jackson, and everyone inbetween.
And it works. His quarter-century of giving has resulted in a quarter-century of gargantuan Federal and state subsidies for corn-based ethanol, which have channelled billions of dollars into the coffers of ADM. Corn-based ethanol remains marginally-effective (at best) at reducing GHGs and/or foreign oil dependence, and it is hopelessly uneconomic, but it has made ADM rich at the expense of ther US taxpayer.
Truly, when politicians decide what shall be bought and sold, and for how much, the first things to be bought and sold will be politicians. And the example of Dwayne Andreas and ADM shows that they can be bought and sold for cheap – a few million in campaign contributions yielded billions of Federal dollars for ADM.
llater,
llamas
“Corn-based ethanol remains marginally-effective (at best) at reducing GHGs and/or foreign oil dependence”
One day, though, we’ll have the enzymes that can digest the corn stalks, and then the equation will flip round.
Kay Tie wrote:
‘One day, though, we’ll have the enzymes that can digest the corn stalks, and then the equation will flip round.’
I understand what you’re saying, but do have to point out that we shouldn’t be planning to make cellulosic ethanol from corn stalks because
– corn stalks (stover) are far more useful when shredded and put right back onto the field (no-till and para-till)
– corn stalks are a poor-yielding source of cellulose (in terms of tons of cellulose per unit input)
– corn stalks take additional energy to harvest separately from the corn fruits.
If cellulosic ethanol has a future, it will be from a feedstock which gets around those problems. And commercially-viable enzymatic hydrolysis is still quite a ways away.
llater,
llamas
“I hate the fact that journalists feel the need to comment on that which they have no clue”
They have to say /something/….
Re: Northern Rock and hindsight.
I think it was very good that Northern Rock tried a new way of doing things. New things must be tried, risks must be taken. We didn’t *know* in advance whether it would work or not, and for quite a long time it seemed to work, but in the end it didn’t.
It is called Creative Destruction (from Schumpeter) – and it may be the greatest strength of capitalism – that it mostly fails.
Same as natural selection – most genetic mutations are harmful (indeed lethal) but without failures you never get adaptive evolution.
The work of Paul Ormerod http://www.paulormerod.com has measured the truly _vast_ level of failure in capitalism, especially in the most successful big capitalist economy over the long term (the US).
Of course, this means that Northern Rock must be allowed to fail, must not be rescued or nationalized (just as Tim has consistently argued).
But why can’t we say: it was good that Northern Rock thoroughly tried a bold new business model, and it will be good if they are allowed to fail.
(Good for most people in the long term, I mean – I live in Newcastle upon Tyne, and am friends with ex NR Chair Matt Ridley; so I am aware that there are – as always – local and short term harms from failure.)
Why do intelligent people bother to read, never mind write about, Jonathan ‘Sam’ Freedland? After 9/11 he warned on BBC’s Newsnight against attacking Afghanistan because it would ‘radicalise al-Qaeda (sic)’. It was the only time when I saw Richard Perle (another studio guest) lost for words.
But just look at the CiF comments that Freedland has generated.
Sub-Marxist claptrap by the mile.
That’s what I find so depressing about such debates; not that the author is misguided but that he’ll find umpteen cheerleaders and even a few who’ll say he hasn’t gone far enough.
Thes opinions are like vampires; they need a stake through the heart plus garlic and heaven kn ows what else to keep ’em check.
They come back, generation after generation, like the most persistent weeds.
He also claims that the system allows the Walton family to “gain an estimated $90bn in 2005 – as much as the bottom 40% of the entire US population, some 120 million people, did in the same year”
I interpret the words “gain” and “in the year” to imply he’s talking about income. Can’t see any other meaning of the words, really.
If it’s income, his comparison must be wrong. $90bn/120m = $750. That simply cannot be the per capita income of 40% of the US population. There’s no need even to look it up. It’s an order of magnitude out.
Not quite so sure, but $90bn for the Waltons also sounds too high. It would depend on the majority of their income coming from companies other than WalMart. Not impossible, but if I were an editor I’d want it fact-checked I think.
So he’s done something else here. Confused wealth and income would be my first guess.
Or he might have done a Worstall and confused decimals and percentages (sorry – couldn’t resist it).
You’re just grumpy ’cause llamas don’t eat corn.