The Credit Crunch

[Mari]

They didn't publish that number here. I think they thought we (the Dutchies) might get even more riled up about it. The financial world is already quite upset by our minister of Finances' move to help out Fortis, because they feel that the government bought worthless shares: all the profit-giving parts of Fortis are to be sold. Or so they say.
That and the fact that the government used borrowed money to pay for it and not tax-money. (well, either would have led to protests, but to borrow money in order to bail out a bank in the current economic environment really might not have been the best move ever...)

[Jonathan]

Originally Posted by Eärniel

True, but you also need to be lucky that your banks are not too much connected to the American banks to feel the heat of their mistakes. 'Global economy is good for us', my eye.

Two banks here, Dexia and Fortis, have needed a big investment from three governments to pull through. I'm not so happy about it. Banks, in my eyes, make more than enough money, and they should bloody pay for their own mistakes. It doesn't help matters that with Fortis one of the high-placed managers who messed up and is let go, receives (if I got the numbers right) 200 million goodbye money. It's a bleeding shame.

One can contribute it to luck, or the fact that after the Scandinavian bank crisis, banks here have tended to be more careful and sceptical of subprime lending.

The relative quickness of France, Belgium and Luxemburg rescuing of Dexia and Fortis, is largely due to the close economic connections between the three countries. In this case things went smoothly but there has been concerns about who will come to the rescue of other European banks once they start collapsing. Whereas America's 50 states have a federal government that can take swift action, the EU lacks that.

It is also important to remember money poured into dying banks to revive them, is not "goodbye money". It's money that the investing countries might get back once the crisis is over and the banks start living up again.

[Earniel]

Originally Posted by Mari

They didn't publish that number here. I think they thought we (the Dutchies) might get even more riled up about it.

The prime minister said the manager wouldn't get that much of money. I'd like to see him try and stop that, though. It's in the manager's contract.

The financial world is already quite upset by our minister of Finances' move to help out Fortis, because they feel that the government bought worthless shares: all the profit-giving parts of Fortis are to be sold. Or so they say.

Fortis got into trouble because they just bought another bank (ABN Amro, I thought) and ended paying a little more than they could afford so that when the crisis arrived, they didn't have as much reserves as other banks. It got the shareholders quite upset. I seems a bit silly now, now that they've got to sell ABN Amro again, though.

That and the fact that the government used borrowed money to pay for it and not tax-money. (well, either would have led to protests, but to borrow money in order to bail out a bank in the current economic environment really might not have been the best move ever...)

Ouch, I don't think I want to know where all the money Belgium is pumping into it comes from... But be lucky the Netherlands only had to pour money into one bank, we get to do it in two. And now they're talking about a third one that needs money! *sigh*

Originally Posted by Jonathan

One can contribute it to luck, or the fact that after the Scandinavian bank crisis, banks here have tended to be more careful and sceptical of subprime lending.

It's not the subprime lending that got these two banks into trouble. Dexia had an American daughter-company and through that connection they got into trouble. Fortis just had to invest heavily in aquiring another bank, which wasn't well received among the shareholders leaving it in a not very strong position on the share market as well.

It is also important to remember money poured into dying banks to revive them, is not "goodbye money". It's money that the investing countries might get back once the crisis is over and the banks start living up again.

You misunderstand what I meant with 'goodbye money' or rather I didn't use the right term. How's it called properly... golden handshake? Dismissment fee? It's money someone gets when he gets fired. Big-shots managers often get it put in their contract that they get paid a sum of money in case they get fired, never mind whether they screwed up or not. For some big companies that sum is ludicrously high.

[The Gaffer]

For me, that "golden handshake" culture is part of the problem. These people need to be held personally responsible, then you would see pretty quick changes in practice. If they were doctors or engineers, they would be struck off or in jail.

I disagree that it's inherent to globalisation. It IS inherent to globalisation without governments talking to each other about regulation though. Places like London and Tokyo are "client states" of these massive organisations, whose turnover is more than many countries. They have had governments in the palm of their hand, competing with each other to provide the most favourable regulatory environment in which to run their operations.

What needs to happen is for politicians to finally realise that the only way you are going to regulate something like this is by co-operating internationally. I think there is an opportunity here for government (and therefore, sovereignty and democracy) to reassert itself. I just hope they don't wimp out (which they probably will).

[Coffeehouse]

Originally Posted by Eärniel

True, but you also need to be lucky that your banks are not too much connected to the American banks to feel the heat of their mistakes. 'Global economy is good for us', my eye.

Care to be more specific Earniel? Norwegian banks aren't connected to American banks?

Originally Posted by Eärniel

It's not the subprime lending that got these two banks into trouble.

How can you say that? It's the rootcause of this entire crisis. The subprime mortgage lending created the credit crunch that we're now seeing spread across the international financial system. The effect has been devastating, with the usual availability of loans evaporating, making every bank stand on its own feet, exposing the weakest.

[Mari]

No, in the case of Fortis they bought ABN Amro (my bank ) while their own finances were a bit shaky. Now that it has become difficult to borrow money and because it is unclear how much money that was invested in the now collapsing American market is lost, now they get in trouble.
For these banks it wasn't the subprime lending that was the problem per se. It is simply a small part of it.

[sisterandcousinandaunt]

Originally Posted by Coffeehouse

How can you say that? It's the rootcause of this entire crisis. The subprime mortgage lending created the credit crunch that we're now seeing spread across the international financial system. The effect has been devastating, with the usual availability of loans evaporating, making every bank stand on its own feet, exposing the weakest.

No, I have to bring an insight from Henry George, here.

I try not to do that, but it's so obvious, I must speak.

The problem is not sub-prime mortgage lending. The problem is the outrageous idea that people can individually own land. Land belongs to the community, and is needed for everything...the improvement in its value also belongs to the community.

People took reDICulous profits from the housing bubble. The same thing happened in Japan's bubbles, with the same result. When the bubble collapsed, the community bore the burden, but when the bubble goes well, the individual takes the goodies. You can't blame people with less opportunity for credit for trying to get in on the handout of community wealth.

The answer is not to restrict credit for the poor. The answer is to collect the true value of community improvements to land and use that money for the entire community that produces it. Stop the speculators.

[Coffeehouse]

Originally Posted by Mari

No, in the case of Fortis they bought ABN Amro (my bank ) while their own finances were a bit shaky. Now that it has become difficult to borrow money and because it is unclear how much money that was invested in the now collapsing American market is lost, now they get in trouble.
For these banks it wasn't the subprime lending that was the problem per se. It is simply a small part of it.

Mari, look, I understand that Fortis' plunge in value has been affected not only by the subprime mortgage crisis, but also by incompetence and high risk taking. But what has turned the knife in the wound on all of these casualties and led to their value plunging is the subprime mortgage crisis. You don't have to take my word for it, but here's what the International Herald Tribune wrote on March 7th this year.

"AMSTERDAM: Fortis became the latest European casualty of the U.S. subprime mortgage crisis on Friday, saying it booked €2.7 billion in impairments on mortgage-related investments in the fourth quarter."

http://www.iht.com/articles/2008/03/.../7fortisFW.php

[Insidious Rex]

Originally Posted by sisterandcousinandaunt

The problem is not sub-prime mortgage lending. The problem is the outrageous idea that people can individually own land. Land belongs to the community, and is needed for everything...the improvement in its value also belongs to the community.

I cant imagine that kind of thinking would ever fly in this country outside of revolution though. Ever since we stole the very first parcel of land from native Americans and declared it OURS, the mentality of land ownership has been sacrosanct in this country. And today we hold an almost religious zeal in our devotion to land ownership for profit. Capitalist manifest destiny! Its right up there with free speech, the right to bare arms and the right to use up a disproportionally large percentage of the worlds resources to live the American dream!

[Coffeehouse]

Came across an article in the Globe & Mail today that takes a look at the broader strokes of this financial crisis.

America's global fall from grace
Globe and Mail
October 1, 2008 at 12:00 AM EDT

Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power is being altered irrevocably. The era of U.S. global leadership, reaching back to the Second World War, is over.

You can see it in the way the United States' dominion has slipped away in its own backyard, with Venezuelan President Hugo Chavez taunting and ridiculing the superpower with impunity. Yet the setback of U.S. standing at the global level is even more striking. With the nationalization of crucial parts of the financial system, the U.S. free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.

Ever since the end of the Cold War, successive U.S. administrations have lectured other countries on the necessity of sound finance. Indonesia, Thailand, Argentina and several African states endured severe cuts in spending and deep recessions as the price of aid from the International Monetary Fund, which enforced the U.S. orthodoxy. China, in particular, was hectored relentlessly on the weakness of its banking system. But China's success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic that Chinese astronauts should take a spacewalk while the U.S. Treasury Secretary is on his knees.

Despite incessantly urging other countries to adopt its way of doing business, the United States has always had one economic policy for itself and another for the rest of the world. Throughout the years in which the United States was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its overstretched military commitments. Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the U.S. model of capitalism that will shape the United States' economic future.

Whichever version of the bailout of U.S. financial institutions cobbled together by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke is finally adopted is less important than what the bailout means for the U.S. position in the world. The populist rant about greedy banks that is being loudly ventilated in Congress is a distraction from the true causes of the crisis. The dire condition of U.S. financial markets is the result of U.S. banks operating in a free-for-all environment that these same legislators created. It is the U.S. political class that, by embracing the dangerously simplistic ideology of deregulation, has responsibility for the present mess.

In present circumstances, an unprecedented expansion of government is the only means of averting a market catastrophe. The consequence, however, will be that the United States will be even more starkly dependent on the world's new rising powers. The federal government is racking up even larger borrowings, which its creditors may rightly fear will never be repaid. It may well be tempted to inflate these debts away in a surge of inflation that would leave foreign investors with hefty losses. In these circumstances, will the governments of countries that buy large quantities of U.S. bonds - China, the Gulf States and Russia, for example - be ready to continue supporting the dollar's role as the world's reserve currency? Or will these countries see this as an opportunity to tilt the balance of economic power further in their favour? Either way, the control of events is no longer in U.S. hands.

The fate of empires is very often sealed by the interaction of war and debt. That was true of the British empire, whose finances deteriorated from the First World War onward, and of the Soviet Union. Defeat in Afghanistan and the economic burden of trying to respond to Ronald Reagan's technically flawed but politically extremely effective Star Wars program were vital factors in triggering the Soviet collapse. Despite its insistent exceptionalism, the United States is no different. The Iraq war and the credit bubble have fatally undermined U.S. economic primacy. The United States will continue to be the world's largest economy for a while longer, but it will be the new rising powers that, once the crisis is over, buy up what remains intact in the wreckage of the U.S. financial system.

There has been a good deal of talk in recent weeks about imminent economic Armageddon. In fact, this is far from being the end of capitalism. The frantic scrambling that is going on in Washington marks the passing of only one type of capitalism - the peculiar and highly unstable variety that has existed in the United States over the past 20 years. This experiment in financial laissez-faire has imploded. While the impact of the collapse will be felt everywhere, the market economies that resisted U.S.-style deregulation will best weather the storm. Britain, which has turned itself into a gigantic hedge fund, but of a kind that lacks the ability to profit from a downturn, is likely to be especially badly hit.

The irony of the post-Cold War period is that the fall of communism was followed by the rise of another utopian ideology. In the United States and Britain, and to a lesser extent other Western countries, a type of market fundamentalism became the guiding philosophy. The collapse of U.S. power that is under way is the predictable upshot. Like the Soviet collapse, it will have large geopolitical repercussions. An enfeebled economy cannot support the United States' overextended military commitments for much longer. Retrenchment is inevitable and it is unlikely to be gradual or well planned.

Meltdowns on the scale we are seeing are not slow-motion events. They are swift and chaotic, with rapidly spreading side effects. Consider Iraq. The success of the surge, which has been achieved by bribing the Sunnis while acquiescing in ongoing ethnic cleansing, has produced a condition of relative peace in parts of the country. How long will this last, given that the United States' current level of expenditure on the war can no longer be sustained?

A U.S. retreat from Iraq will leave Iran the regional victor. How will Saudi Arabia respond? Will military action to forestall Iran acquiring nuclear weapons be less or more likely? China's rulers have so far been silent during the unfolding crisis. Will U.S. weakness embolden them to assert China's power, or will China continue its cautious policy of "peaceful rise"? At present, none of these questions can be answered with any confidence. What is evident is that power is leaking from the United States at an accelerating rate. Georgia showed Russia redrawing the geopolitical map, with the United States an impotent spectator.

Outside the United States, most people have long accepted that the development of new economies that goes with globalization will undermine the country's central position in the world. They imagined that this would be a change in the United States' comparative standing, taking place incrementally over several decades or generations. Today, that looks an increasingly unrealistic assumption.

Having created the conditions that produced history's biggest bubble, U.S. political leaders appear unable to grasp the magnitude of the dangers the country now faces. Mired in their rancorous culture wars and squabbling among themselves, they seem oblivious to the fact that U.S. global leadership is fast ebbing away. A new world is coming into being almost unnoticed, where the United States is only one of several great powers, facing an uncertain future it can no longer shape.

John Gray is emeritus professor of European Thought at the London School of Economics

http://www.theglobeandmail.com/servl...alComment/home

[Earniel]

Originally Posted by Coffeehouse

Care to be more specific Earniel? Norwegian banks aren't connected to American banks?

Eh, that's not what I said. Considering the Dexia-bank got into trouble because of its American daughter company, and since you said confidence was high that Swedish banks could stand the heat, I assumed they were independant enough from the American banks to be able to weather this on their own.

How can you say that? It's the rootcause of this entire crisis. The subprime mortgage lending created the credit crunch that we're now seeing spread across the international financial system. The effect has been devastating, with the usual availability of loans evaporating, making every bank stand on its own feet, exposing the weakest.

But the Belgian banks weren't in trouble because they themselves overextended in subprime loans. Sure, subprime loans are ultimately the root of the whole problem, the very starting point of it all. But in the specific case of the two banks I was discussing, the resulting crisis, the domino effect is more to blame than solely their loan strategies.

[Mari]

Originally Posted by Eärniel

But the Belgian banks weren't in trouble because they themselves overextended in subprime loans. Sure, subprime loans are ultimately the root of the whole problem, the very starting point of it all. But in the specific case of the two banks I was discussing, the resulting crisis, the domino effect is more to blame than solely their loan strategies.

That's what I was trying to explain earlier, but I guess I did a bad job. Thanks Earn!

[Coffeehouse]

Originally Posted by Eärniel

Eh, that's not what I said. Considering the Dexia-bank got into trouble because of its American daughter company, and since you said confidence was high that Swedish banks could stand the heat, I assumed they were independant enough from the American banks to be able to weather this on their own.

Well for starters Swedish banks aren't Norwegian banks
You may be having a misunderstanding with the effects of this crisis, because although a relationship to the US market, through a daughter or parent company/bank certainly isn't helpful for f.ex. European companies/banks, the effects of this entire financial crisis will hit any country, be it Brazil, the Emirates, Belgium or Norway. It's a crisis with serious global consequences and so however independent a bank may be, what it boils down to are the legislative environments in individual countries coupled with to what extent banks in individual countries can get away with owning high risk obligations on Wall Street.
In the case of Norwegian banks there has been put in place laws that restrict such behaviour. There is also a quite healthy lending policy amongst the largest Norwegian banks, which makes it alot of easier for the Norwegian Bank, our central bank, to use an array of tools in dealing with interest rates as the crisis unfolds.

Originally Posted by Eärniel

But the Belgian banks weren't in trouble because they themselves overextended in subprime loans. Sure, subprime loans are ultimately the root of the whole problem, the very starting point of it all. But in the specific case of the two banks I was discussing, the resulting crisis, the domino effect is more to blame than solely their loan strategies.

Well obviously, but this is the credit crunch created by the subprime mortgage crisis that we are discussing here isn't it. That's the current financial meltdown that is happening. Glitnir, Fortis, Northern Rock; they've all acted carelessly and seen their profits and values plunge like a rock.

[Earniel]

Originally Posted by Coffeehouse

Well for starters Swedish banks aren't Norwegian banks

Well duh. But in my original post I wasn't talking about either of them.

You may be having a misunderstanding with the effects of this crisis, because although a relationship to the US market, through a daughter or parent company/bank certainly isn't helpful for f.ex. European companies/banks, the effects of this entire financial crisis will hit any country, be it Brazil, the Emirates, Belgium or Norway.

I think I am aware of the scope of the crisis, thank you. It is not because I mention one aspect in a post that I don't know about the other aspects/influences/consequences/whatnot.

[Coffeehouse]

Can never be too sure since you wrote this "I assumed they were independant enough from the American banks to be able to weather this on their own."

[Earniel]

Are we going to discuss post-history instead of the topic? Very well. You first posted that having a good legislation helps against getting in this sort of crisis. I then mentioned the best-not-to-be-too-closely-related-to-American-banks-either aspect because it drew one of our banks faster and deeper into the crisis. You then asked me to explain better, asking about Norwegian banks. (You know, I was wondering why Norwegian instead of Swedish all of a sudden, but it is not my place to comment when somebody seems to forget what country he's living in ) Only then did I apply my argument to the Swedish/Norwegian/whatever bank you really intended to refer to.

[Coffeehouse]

Originally Posted by Eärniel

Are we going to discuss post-history instead of the topic? Very well. You first posted that having a good legislation helps against getting in this sort of crisis. I then mentioned the best-not-to-be-too-closely-related-to-American-banks-either aspect because it drew one of our banks faster and deeper into the crisis. You then asked me to explain better, asking about Norwegian banks. (You know, I was wondering why Norwegian instead of Swedish all of a sudden, but it is not my place to comment when somebody seems to forget what country he's living in ) Only then did I apply my argument to the Swedish/Norwegian/whatever bank you really intended to refer to.

Post-history? Naw Earniel, I'm simply reacting to your own comments. That's called a discussion, but you know that!

Well it's fine that you think that, but that's not how you lay your words down so it appeared that you thought Norwegian banks would not be affected since they did not have a direct relationship with American banks. No need to backpeddle on what you wrote, simple misunderstanding only!

You were wondering why I commented on Swedish banks? Is there a reason I shouldn't?
"But it is not my place to comment when somebody seems to forget what country he's living in" I can't comment on my neighbouring country's banks? Too many balls in the air?

[Coffeehouse]

Just now I'm seeing the debate session of the Financial Intervention Plan, which of course is another name for the bail out package.

And there is signs of some bipartisanship, and I was impressed by what I heard from Senator Kay Bailey Hutchison, Republican from Texas. Says on the screen that she is the Ranking Member of the Commerce, Science & Transportation Cmte.
What she has to say was this (it's what I managed to scribble onto my labtop!)
"None of us would have written it [the bail out package] exactly as it is written", and then she argued but we need to push this through now.
She went on to say that "the government of the United States of America ought to be able to stabilize its markets, to show [the world] that can get our house in order" She pointed out that that she wanted to give "taxpayers an upside" and that in the package exists a passage aimed to "Increase the FDI seal limit", which is her saying that savers in banks have a greater security net for higher sums of money that they have put in said bank."

She also said that "This is a $250 billion package, [not $700 billion], with contingency [plans] and strings. It is a responsible, bipartisan effort to stand up for the economy of the United States of America, for every banker, and every investor, and every saver and every working person."

I think that's a start, and I don't know how this Senator usually votes, if she's conservative or a centrist. But it was a good speech and I'm persuaded that even some Republicans in Congress seem to be showing some coolness of thought!

[sisterandcousinandaunt]

The Globa and Mail piece made me laugh out loud.

[Coffeehouse]

So the bill passed the Senate by a comfortable majority, and the House will vote on it on Friday, a sort of reverse of usual practice where the lower house (House) usually votes before the upper house (Senate). I think they'll still struggle with getting across some of the diehard Republicans, but if even half of the Dems who voted no, now vote yes, then the bill passes.