The End of Boom and Bust

Two little things kept coming to mind over the weekend: the idea that the UK might have to go back to the IMF; the reluctance of the US to wipe out bond holders.

These articles in the Telegraph (never that worried about the truth when it comes to Labour policy screw ups…) paint a pretty grim picture. Gordon Brown, having just hosted a summit which agreed to allocate $1.1 trillion to the IMF, is reportedly considering asking for a loan. Quite how it will be possible to spin (oh, how i hate that word!) that to not give the impression that the UK has attained banana republic / south american levels of failure is beyond me.

It has been nauseating enough watching minister after minister come out with the same line about this being an ‘international crisis, that originated in the U.S. credit markets’, but the idea of them coming out with some crap about it being merely a precaution to insure the stability of the economy, and not at all a mark of shame… 

He said: “Previously a country would only go if they were in a very bad state. It was a bit like going to accident and emergency to get urgent help.

“This new facility will not be like that. It is a bit more like getting wellbeing care or even like going to a spa to recuperate.”

Bucket please! If the IMF starts handing out money with no strings attached to the UK, can you imagine what the likes of Argentina, Belarus, Iceland, etc. are going to do?

The issue of the US reluctance to wipe out bond holders is, i suppose, somewhat related. As has been obvious for a long time, many of the largest financial institutions / banks of america are insolvent. In normal circumstances they would be put into receivership / bankruptcy proceedings. The stockholders would be wiped out, and the bondholders would be made whole to the extent that value could be extracted from the remaining assets. For example, the customers / deposits of a bank could be sold to another bank, and the proceeds used to pay off some section of the bond holders. Obviously, as the bank is insolvent, there will be a gap between the value of the assets and the outstanding debt. This gap defines the ‘haircut’ that the bond holders take.

All very normal… but it’s not happening. The official word is that these institutions are “too big to fail” (obviously wrong, their debts are so large that the opposite is true – they are too big to be allowed not to fail!) To a certain degree this makes sense; the fear is that the failure of one of these institutions will trigger events (think derivatives…) that will cascade, causing other institutions to fail (also the stated reason for saving AIG, although it becomes increasingly clear that AIG is actually just a conduit for stuffing money into the bank system). This same argument is used to explain what happened when Lehman went under, but it’s not very convincing – mostly because not very much did happen when Lehman failed. The bankers may be venal, but they are entirely stupid – a lot of the risk was hedged.

All of which raises the question: why not do what the law says should be done with insolvent banks – put them into bankruptcy?

My answer is that the US is trying to play a dangerous waiting game, that involves them attempting to increase the amount of debt in the short term, with the hope that the economy will recover, and they’ll be able to pay off the debt in the long term. In such a situation the last thing you want to do is piss off the people who are lending you money. And, unfortunately the people who have already lent you money are the ones you’re going back to cap in hand.

When the Chinese talk about America “guaranteeing the safety of their investment” this is what they are saying, “promise to payback the stuff you owe us or we’ll send you to the poor house!”

It will be no surprise to hear that i don’t think that there is a hope in hell of the UK avoiding another (humiliating) trip to the IMF (and not learning anything from it, just like last time). Or, that it doesn’t seem possible for the US to keep enough money in the debt bubble for as long as it will take for all the issues to work through the system. There are many people who don’t believe that housing prices will stabilise for at least three years. Just think what that is going to do to the return on all those mortgage backed securities. Unemployment is going to continue to rise for at least another year. Just think how many more homes that is is going to push in to foreclosure.

Actually, don’t think about those things. You’re already drinking too much.

The UK might actually have the better of this deal because it’s economy is small enough to be bailed out. The US seems like it is going to have to stop fucking about and face it’s dénouement… it’s coming regardless.

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Wise words...

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