Saturday, Feb 28, 2009
No problem
BBC: Brown promises to clean-up banks
Mr Brown told members of Labour's National Policy Forum that there had been "the biggest collapse in the banking system that the world had ever seen".
We are exploring all the legal action necessary to recover pension payments from people who received too much
Gordon Brown
He said: "Our task must be nothing less than to rebuild a financial system where it has failed, and then to create an economy in which banks are no longer serving themselves but are serving the public of this country."
Posted by devo @ 12:49 PM (2145 views) Add Comment
43 Comments
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1. devo said...
I work for a UK retail bank (an actuary - so about a conservative as they come), I can honestly say that the crisis toward the end of 08 really did nearly bring down the whole system. Banks are being "recapitalised" but the efforts haven't worked to date, and it looks very much as if they won't. The difference between this crisis and all the others is the vast degree of leverage involved, and specifically unregulated derivatives positions. There are estimates of outstanding positions of around the 200 trillion mark.
The standard arguements with derivatives used pre-crisis was that the actual outstanding amounts involved pale in comparison to the headline figure because many are hedged and each contract is two sided. The problem of course was that the issue of counter party default risk was completely ignored. In laymans terms, if you have an agreement with an insurer that should your house burns down they pay for it to be rebuilt and the insurer goes out of business (without adequate legislative protection) you are left with the loss of the premium and your house with no chance of recovery. This was the achilles heal of the whole financial system. Lehmans collapse basically brought the whole house of cards down and its been one massive fire fight since. The government can't shovel money fast enough into exponentially deeping holes created by unwinding leverage.
The "quantative easing" also raise the question on whether simple critical assumptions on the way banking operates have actually held true. The fraction in fractional reserve banking has effectively go to zero with either total relaxation or loopholes that have meant that banks could live off the credit markets, expanding credit _themselves_, and driving credit expansion, with central banks backstopping where required. This resulted in explosive asset inflation in a manner which we haven't seen before.
I think the critical issue that some people are missing is that the market is being prevented from self correction. Leverage needs to unwind, and fighting a problem of this scale isn't going to work. This is shown by the market increasing starting to question the credit ratings of goverments. Western governments - not old soviet block nations or south american nations... This whole issue has in fact caused massive debate within the actuarial world, with the whole question of what a risk-free rate is. US/UK Government Bonds in particular used to be considered default free. That assumption is now clearly broken with the visible reactions of the bond markets.
I can honestly say that I think that this will end one of two ways, when those in power realise that the broken system cannot be pieced back together again (which I think has actually already happened). They will effectively accept that they are going to have to effectively default on debt (through extreme inflation rather than true default) and they will write as many cheques as they can before then, or they will establish a new currency and devalue existing currencies across the board. There's a strong chance that that currency will not be a fiat currency.
hpc forum quote (meedge @ Feb 27 2009, 11:20 PM)
2. tudorian said...
Thanks for that comment Devo.
It is illuminating to hear the views and opinions of those within different area of the financial industries.
Though sadly, they're never upbeat / positive ...
3. Lord D'arcy Pew said...
I'll get him a bucket and a mop.
4. Eternal Sceptic said...
Can we also at the same time have the public sector and MP's trough jetwashed clean and given a very regular, public dose of antiseptic.
5. timmy t said...
Devo - thanks - very valuable! So, hypothetically speaking, if you had a couple hundred grand in the bank (in sterling) what would you do with it?
6. Rimmer said...
Devo a great post.
It does sound as though governments will have to let asset markets find their own way with this as untimately IRs will have to reflect printed money ( fact of life ) - when that happens who knows where HPC will go to ( short term ) certainly 50% easily and probably more.
I have always considered the Uk to be close to an IMF loan - if that happens IRs will go up over night.
One thing is clear to me although not naturally to the sheople is there will be one horrendus bill to pick up - times are going to get expensive, taxes will have to rocket..................People will then know what bailing the banks out actually meant
7. devo said...
3. timmy t
I can't speak for meedge but here's one alternative....
If you don't have at least a year's worth of cash in home (i.e. physically stuffed in the mattress), the time is rapidly approaching when it will be too late. Preferably, several years of cash. Five years+ is better, because that could last 10 years+ after the full effects of deflation kick in.
By "a year's worth" of cash I mean enough to cover all expenses, from food to shelter to gas. Everything you must spend to survive.
By "in home" I mean physical green cash inside your four walls. "Money in the bank" is as good as gone. Safe deposit boxes have a history of being raided by the U.S. government in times of depression.
Exactly when it will be too late to obtain cash is anyone's guess, but we do know that when we know it will too late. There is about $750B in green paper cash circulating in the entire world, minus what has already been put away, which is most of it. Compare that to about $20T in U.S. dollar denominated bank accounts.
Remember the Fed's own words about the Federal Reserve's own effectiveness during the last depression:
At the slightest hint of trouble, depositors would run to the bank and line up to withdraw their money. All too often, only the first few people in line had any hope of ever seeing their money again; others lost everything. " - Federal Reserve Bank of Boston
The rest of your money should already be in U.S. Treasuries. Defund all revolving interest bearing Treasury Bills, Bonds, and Notes to your C of I account within the Treasury. Never redeem to a bank account, until the money is desperately needed, and only then, as much as you need to transfer and no more.
fdralloveragain.blogspot.com/2009/02/basics.html
8. paul said...
Okay a full on raid on people's savings by the government is not going to happen like that.
Did you know that mervyn King has a £4.8m pension pot? Is he going to give that up for his part in the failure?
9. devo said...
Laura (not her real name) works for a commercial bank in London.
We are standing on the edge of the abyss - on one side is a quick decline into becoming managers of a declining portfolio and a winding down of the business and, on the other, the will to take risk by rejoining the land of the living and a sustainable future as a Bank.
Senior management have become so cowed by recent events that the easiest decision to make at the moment is to not make decisions at all. Are we really lending any new money? No. Does anyone want to make a leap of faith and break the Banks' perpetual self-flagellation over mistakes made? No. Can we continue as we are? No. Will anyone stick their neck out and personally make a decision to either give up or get on with business? Not likely...
If we can achieve the best capitalisation ratio by hardly lending will that stop our business being torn to shreds? If anything markets have proved to be more fickle than anyone suspected, so it won't be long before they return to wanting to make a decent return on their money which means growth. The movement of depositor money to nationalised banks is sucking the life out of the rest of us, and so a race to appease the rating agency gods continues in the vague hope that it will bring depositors back. We are being perversely punished for not being bailed out.
What is apparent to us 'cannon fodder' at the bottom is that this paralysis has to stop, but we are facing the classic prisoner's dilemma - he who jumps first may take the pain despite getting the long-term moral victory. Most managers are oblivious to reality due to being in a state of shell shock, but eventually the true horror of deferred leadership will dawn. I just hope it isn't too late.
http://news.bbc.co.uk/1/hi/business/7910769.stm
10. quiet guy said...
I've been thinking about this pensions business - clawing back Sir Fred's pension and so on. Although I am sickened by the fact that those responsible are being nicely rewarded for their incompetence, the fact is that if we change the law to confiscate somebody's pension, we are undermining private property rights. I'm sure most of us would be happy to cheer along while Sir fred is forced to hand back some of his money but who's next? Once a legal precedent has been set to take somebody's pension, it will be much easier to do it again. Considering the nature of this government, I'm not sure I want to go there. It stinks but the law isn't just for people we like.
11. plato said...
Thanks for your contribution devo.........
It gives us a lot more insight particularly from someone who deals wth risk as a profession.
Your two scenarios at the end of your first comment have been discussed on this site on many occasions.
Could you possibly give us an idea as to how both would affect personal pension funds? (not State)
I know this to be asking for an extremely complicated and drawn out answer. So basically would these be protected?
quiet guy........ Very good point and a precedent I don't believe we want to set.
12. Kudos said...
You might like to watch this...
http://video.google.com/videoplay?docid=7065205277695921912
http://video.google.com/videoplay?docid=-594683847743189197
13. shining wit said...
Devo.....or anyone...
Do you think the BOE would have prepared for more people extracting physical cash and have say £100 billion in reserve so that they can give it to people if they request it?
Surely it's only a matter of printing £5 billion £20 pound notes and storing them safely? That's not exactly an overly comlex task is it. Figures about how much physical cash in circulation are probably fairly accurate (maybe) but how much held in reserve would be kept extremely secret because the actual knowledge would throw open possible exploitation through worrying people that the cash had been prepared (and destabalise our economy) and the increased possiblity of a small mercenary force attempting to steal such large sums if the knew £x billions was stored soemwhere.
Then any possible run on a bank can be answered in cash, if needed.
Have I missed some point where cash is purely a printing exercise and that it's distribution is the difficult part. Could someone enlighten me as to this please.
14. stillthinking said...
devo, that is one great post. so you think there is a coming default. and you also seem to think the banking morphed into balance sheet endogenous money growth. But if they intend to default through inflation why is it necessary to keep money under the mattress? wouldn't money under the matress be more appropriate for an actual default(you don't get your money at all)?
quiet guy, I think that as well. confiscation of property and rewriting contract law seem bad developments to me.
devo, I hope you can post more.
15. bob1 said...
Devo: "they are going to have to effectively default on debt (through extreme inflation rather than true default) and they will write as many cheques as they can before then, or they will establish a new currency and devalue existing currencies across the board. There's a strong chance that that currency will not be a fiat currency"
So the future will either be extreme inflation or the establishment of a new non fiat currency? Are you hinting that Gold is a wise purchase?
16. bob1 said...
devo: what I really want to know is - as an actuary, what would you say is the % chance of the UK/US defaulting on their debt and what is the % percentage chance of their currncies being scrapped in favour of a new non fiat currency?
I would say about 1% chance of either
17. str 2007 said...
I read above with interest and if I'm honest a raised eyebrow of scepticism.
Surely (and please tell me I'm wrong) given the current circumstances banks haven't had to print all the money we have as the majority of transactions are carried out electronically.
Providing you have below £50k in a bank the government have guarenteed that money.
If Barclays for instance goes down they will simply print the amount savers had on deposit and re-allocate it electronically into another account.
They basically have to do that otherwise there would be a total breakdown in society.
I can understand that inflation can be created by overprinting a currency (this IMO being fairly easy). The 'huge' holes in the system are 'behind the scenes' derivative agreements etc.
A proportion of the population maybe over indebted but I just can't comprehend a total breakdown being allowed to happen within the realms of 'general publics' monies, by that I mean money on deposit and credit card and mortgage debt.
And may I pick up on what I perceive to be a contradiction in devos post.
1st post :- ''default on debt (through extreme inflation rather than true default)''
2nd post :- ''Preferably, several years of cash. Five years+ is better, because that could last 10 years+ after the full effects of deflation kick in.''
I'm confused inflation or deflation ?
Further if we need to take all our cash out and put it under the mattress surely if they inflate away any problems this will become worthless anyway.
Truth is in this scenario you are surely better off with your own house (and some stash) than renting a house. Maybe even with a huge mortgage because if the banks are going to default on your small amount of savings that pretty much gives you the right to default on the huge mortgage.
Or if in effect they devalue all currencies again you'd be better of with a huge mortgage than renting. The debt with high inflation and no doubt low interest rates keeping inflation high will quickly diminish, where as your rent will go through the roof.
Please feel free to correct me I am looking for answers and solutions.
18. letthemfall said...
Hmm. Are these Devo's views or, as they appear to be, reposts of someone else's?
If all bank deposits do disappear that means that the govt will be in default and there would be complete economic collapse, would there not? If that were indeed to happen then future events would be hard to predict. But that didn't happen in the thirties and I think the odds are against it happening now (hopefully not famous last words). Gold was confiscated in the thirties, however. I would have thought that holding a large sum of cash, or any valuable material such as gold, in the home would be extraordinarily unwise. But if such a calamity comes to pass then we'll all be in trouble one way or another.
Very high inflation is perhaps the worst case we can expect. But I can't predict the future.
19. shining wit said...
Another point on massive cash withdrawels.
If serious amounts of cash start moving out of the banks and into matresses, then surely a 'currency' scare , where the government says there was to much conterfeit money in circulation so they needed to 'redesign' say £10 and £20 notes, saying that in 3 months the notes would become invalid, then surely that would make all these people rush to the banks to either exchanges there notes, and in a lot of cases think about leaving them there again because they don't want to risk having the cash personally or the possiblity of the 'dud' note thing happenning again?
By the way STR, it wasn't beer last night but wine, very nice too. Don't think I should've opened the third bottle when the missus went to bed though! Good job I didn't have to drive today!
Anyone any ideas about my printing money scenario at point 12 ?
20. letthemfall said...
shining wit
As you suggest, I don't think physical cash is the problem; it would be the impact on the balance sheet and that would need to be covered by the Govt.
21. str 2007 said...
shining wit
I should think all this is the least of your worries if you're doing 3 bottles of wine in a session. You better start looking out for liver donars.
Re: the printing money/physical cash thing. I'm inclined to agree, I expect there's plenty about somewhere and they'll simply just print more as it's required in case of an uplift in withdrawel.
22. titaniccaptain said...
Bloody good points there STR2007.......the question is will the interest rates go up if inflation goes up.......or will the muppets find a reason to keep them low i.e. trying to make the housing market proportional to the inflation level.....
23. Psuk said...
devo: "There's a strong chance that that currency will not be a fiat currency."
Rubbish. The powers will do what ever they want, and if that means fiat currency, so be it.
ps. stop gold ramping (which is all your post is, to the trained eye).
24. str 2007 said...
tc
Without a shadow of a doubt interest rates will now stay low for a long time and if it looks as though inflation is starting to creap up they'll come up with a new way of measuring it.
I know a few of you think I'm on the point of breaking and an HPC sceptic, but I'm also looking to the future and see them supporting house prices by any means and inflating away debt if possible (in which case it's probably better to have some debt if they're likely to succeed). I'm struggling to see how it's difficult to create inflation.
25. shining wit said...
TC....
I think that they will attempt to drive inflation to over +10% a year, keeping IRs low and wipe off more than 10% a year from balance sheets and negative equity by hiding the HPC like they did in the 70s
STR.....
I didn't drink 3 myself. A friend and my better half helped with 2, I was however, responsible for almost all the 3rd.
26. devo said...
15. bob1 said... devo: what I really want to know is - as an actuary, what would you say is the % chance of the UK/US defaulting on their debt and what is the % percentage chance of their currncies being scrapped in favour of a new non fiat currency? I would say about 1% chance of either.
Ah, someone still in the denial phase I see.
27. titaniccaptain said...
@Str2007
All your doing is voicing what many on here wouldnt have the b@lls to myself included and also you keep an open mind and position yourself carefully whilst monitoring what is unfolding around us and moving accordingly without making knee jerk decisions............alot to be said for that
28. bob1 said...
devo: I also deny having any involvement with my secretary and my stomach is still the same size as it was twenty years ago
But the question stands. In your professional opinion (as an actuary), what is the % chance? (question from my post @ 15)
29. str 2007 said...
tc
Why thank you, I never thought of it quite like that.
Not knowing what I was talking about whilst floundering around in a state of paranoia, deciding what to do was my version - but I prefer yours - I'll use it in conversation to make me sound in control and aloof. As opposed to out of control and an oaf.
30. devo said...
The slide in sterling has turned "disorderly".
We can argue over whether or not the first phase of devaluation acted as a shock-absorber for a badly mismanaged economy, providing a cushion against debt deflation and the housing crash. But the latest dive has a very malign feel.
For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.
The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn.
If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to let its national debt jump in a crisis -- or a war -- perhaps even to 100pc of GDP. It is another to take on foreign debts on such a scale with no reserves. Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?
This is the moment when the "rubber hits the road" -- to borrow from American argot -- the moment when the reckless debt experiment of our economic and political leaders comes back to haunt.
We cannot even do what Iceland did to save its skin. Reykjavik refused to honour the foreign debts of its buccaneering banks. It let them default, parking the losses in Resolution Committees. Small islands can do that. Iceland has fish instead, and lots of metals.
Britain cannot follow suit. The debts are too big. If London takes such disastrous action it will set off global panic and lead to an asset death spiral, drawing the entire world into deep depression.
What have our leaders wrought? The reckless conduct of City, the fiscal incontinence of Gordon Brown (3pc deficit at the top of the cycle), and the pitiful regulation of the UK housing boom have all combined to bring the country to the brink of disaster.
England has not defaulted since the Middle Ages. There is a real risk it may do so now.
http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2009/01/20/seriously_alarmed
31. stillthinking said...
devo, in my ignorant way, I had assumed that although a british bank could lend in either a foreign currency or sterling, they would be much likelier to lend in sterling. Are you sure that UK bank liabilies are mainly in foreign currencies? I ask because I see no reason why they wouldn't lend in sterling and the borrower would convert as necessary.
surely if the UK defaults on foreign currency liabilities then that would be exported deflation?
32. str 2007 said...
shining wit
How have you positioned yourself for 10%+ inflation ?
Surely a big mortgage in these circumstances would be appropriate (providing you could cover the interest only payments of course). BTW does anyone actually know what level of your interest payments the government will cover if you're out of work etc ?
33. bob1 said...
devo, I am still in denial and still waiting for an answer. I was impressed by your confidence (particularly because you are an actuary) in predicting that the govt would default on its debt (directly or by extreme inflation) or create a new non fiat currency. As an actuary, what would you say is the % probability of this happening? A % range will do.
I still say the chance of a debt default is less than 1% and the chance of a new non fiat currency is far less than 1%
34. devo said...
31. bob1
I'll leave the guesswork to you.
35. Orcusmaximus said...
I agree that confiscating Sir Fred's pension would be illegal and a bad precedence.
However, what's wrong with suing him for every penny he's got? Surely we can claim quite significant damages against him? Do we have the equivalent of class action lawsuits in the UK?
36. str 2007 said...
as letthemfall said
''Hmm. Are these Devo's views or, as they appear to be, reposts of someone else's?
Davos
You didn't answer my questions either.
Your posts were interesting Davos and cause for thought, but were any of them your own words or words you read elsewhere.
I don't mind as they were interesting, but although you did put reference on the bottom of a couple of your posts, they were almost implied to be your own words. You didn't start the post with the reference or ''I read this elsewhere guys, what do you think ?''
37. troy said...
devo "as an acturay" came from a HPC forum post "When Is This Tsunami Going To Hit The Shore?" right?
would like like to clarify?
38. This comment has been removed as it was found to be in breach of our Blog Policies.
39. troy said...
bob1, devo may be acting (mischieveously) in good faith.
Cousin malct made similar mistakes although not so intentionally
there does seem an element of intent with devo which is less than honourable
hey devo! you're not malct are you?
40. This comment has been removed as it was found to be in breach of our Blog Policies.
41. Tenyearstogetmymoney Back said...
Shining Wit made various comments about printing money.
Without trying to be funny Zimbawe seems to have set the example.
Providing a country doesn't run out of paper and ink then there seems to be no limit.
If there is a paper shortage then you can always overprint the existing notes as the
Weimer Republic did.
There is no need for them to withdraw old notes as within weeks the old ones are worth
no more than the paper they are made from.
Coins are an entriely different matter. there have been cases of coin shortages in the past
(Italy springs to mind) when the value of the metal exceeded the currency.
42. Lucas said...
Can't believe people are even discussing these things. I remember predicting that there would be a massive property crash and recession around 2002 when debt was getting out of control and house prices went above fair value and we were in a bubble (I'm a trained economist and was a Reuters financial journalist!). People laughed at me, thought I was crazy, they kept on saying buy a property, and buy a property, and a flat will cost a million quid in 5 years. there will never be a crash! But it seems it was them who were crazy.
Although I expected things to be very bad when the crash came (HP down by 30%), I didn't think that we would talking about the collapse of the banking system or government bailing out banks/debtors or countries going to the IMF! Didn't think the ramifications of a crash would be as bad as this. At the time I thought a crash was needed to happen as people and governments were living in fantasy world (no more boom and bust - how delusional!), they needed a reality check but now I'm saddened and angry. Why did the government let people borrow these stupid amounts of money and why did they not cap mortgage lending, why did they remove house prices from the inflation target? The Bank of England warned several times that house prices had raised to fast and that chances of a crash were growing exponentially but the government did NOTHING to rein in lending. But now that prices are crashing they are doing everything to expand lending!
If the government had been economically competent, we would not be in such a mess. Brown has got to go down as one of the worst chancellors ever and now it looks like he will be one of the worst PMs ever who has ruined the lives of some of the people who pay his wages. Instead preaching to bankers about morality when it's 5 years too late, he should do the morally right thing and resign immediately. The longer he stays, the more he will be hated and the more bad policy decisions he will tackle out of desperation to win the next election.
43. p. doff said...
Devo isn't the Messiah, he's a very naughty boy!