Why Are We In Such A Mess?

[tomandlu]

1. Cheap goods from China were bought by consumers in the West
   
2. This caused a lot of money to flow East
   
3. This money was then lent back to the West
   
4. Because of the way banking works, more money was lent back to the West than the West had spent in the first place - aka 'Fractional Reserve Banking'
   
5. This credit boom resulted in HPI, since buyers could outbid each other using cheap credit
   
6. One day someone noticed that all this money didn't really exist - the flow of money from the West to the East and back again + the miracle of FRB meant that a small amount of 'real' money was being exponentially boosted into oodles and oodles of credit. Credit that was not backed by anything of real value.
   
7. TSHTF
   

Is that about right?

[200p]

It's not a mess, it's all going to plan! <shocker!>

[The Masked Tulip]

I think the buying cheap goods from the Chinese is a ruse or only part of it - let's all blame the Chinese

I think the major part of it was house prices. Basically, houses were ramped up beyond all reasonable value, the money created out of thin air to be lent to buy them and now, as we have seen in the US especially, virtually all houses were not worth anywhere near for what they have mortgages on them for.

[Kyoto]

I realised something the other day.

Say you buy a pair of Levi Jeans, Nike Trainers or an IPod.

Sure it's manufactured in China, but "the east" must get paid pennies on the dollar for this manufacturing compared to retail prices.

80% plus must stay in "the west" to pay for distribution, r&d, branding, retail etc.

Simple concept bit often overlooked in this debate.

Edited September 29, 2010 by Kyoto

[porca misèria]

1. Cheap goods from China were bought by consumers in the West

2. This caused a lot of money to flow East

3. This money was then lent back to the West

4. Because of the way banking works, more money was lent back to the West than the West had spent in the first place - aka 'Fractional Reserve Banking'

5. This credit boom resulted in HPI, since buyers could outbid each other using cheap credit

6. One day someone noticed that all this money didn't really exist - the flow of money from the West to the East and back again + the miracle of FRB meant that a small amount of 'real' money was being exponentially boosted into oodles and oodles of credit. Credit that was not backed by anything of real value.

7. TSHTF

Is that about right?

1. Cheap goods from China were bought by consumers.

2. UK monetary policy (interest rate) was tied to a measure of China's economy and currency.

3. A hugely inflationary credit boom passed unnoticed by policymakers because it was happening here not in China.

4. Perverse incentives in government policy and the banking system created rottenness and 'moral hazard'.

5. Money managers like Paulson noticed it and took big short positions.

6. The shorts won, 'cos economic fundamentals were on their side: there was more debt than could be repaid.

7. We woz robbed.

[robo1968]

I realised something the other day.

Say you buy a pair of Levi Jeans, Nike Trainers or an IPod.

Sure it's manufactured in China, but they must get paid pennies on the dollar compared to retail prices.

80% plus must stay in "the west" to pay for distribution, r&d, branding, retail etc.

Simple concept bit often overlooked in this debate.

Yes, true, don't forget the Government made 2-10% on duty on everything that arrived too

Costs of transport, logistics, finance and duties still account for a large amount of margin.

Next it'll be banking, finance and accounting, anything sent via email is duty and freight free, anyone who's been to Shanghai can't miss it

It comes to something when a plumbing supplier like Wolesley sets up head office in Switzerland for tax advantages!

Edited September 29, 2010 by robo1968

[porca misèria]

I realised something the other day.

Say you buy a pair of Levi Jeans, Nike Trainers or an IPod.

Sure it's manufactured in China, but "the east" must get paid pennies on the dollar for this manufacturing compared to retail prices.

80% plus must stay in "the west" to pay for distribution, r&d, branding, retail etc.

Simple concept bit often overlooked in this debate.

You're talking about fashion. The success of Tescos, Primark, Lidl, etc, tells us lots of people don't want to pay over the odds for a brand.

I spend £4 for a shirt in Primark that would've been £10 (more than a full day's pay for many) back in 1975. Etcetera. Primark runs on low margins because there's a big market for value: people who care more about a good product than the label. The fact many of us can (and do) do that is down to the rise of ....

Yeah, saying China is an oversimplification, when it might be Indonesia, or maybe Bangladesh.

[Injin]

1) Fiat money has no value.

2) All banking is fraud.

[VeryMeanReversion]

1. Cheap goods from China were bought by consumers in the West
   
2. This caused a lot of money to flow East
   
3. This money was then lent back to the West
   
4. Because of the way banking works, more money was lent back to the West than the West had spent in the first place - aka 'Fractional Reserve Banking'
   
5. This credit boom resulted in HPI, since buyers could outbid each other using cheap credit
   
6. One day someone noticed that all this money didn't really exist - the flow of money from the West to the East and back again + the miracle of FRB meant that a small amount of 'real' money was being exponentially boosted into oodles and oodles of credit. Credit that was not backed by anything of real value.
   
7. TSHTF
   

Is that about right?

I think that is about right, the fundamental problem is a long-term trade imbalance and we leveraged it into a credit boom.

Unfortunately, when I try and work out the consequences of a reversal, I pass through cognitive dissonance, depression and then settle on blissful ignorance.

Blah, blah, blah, I'm not listening any more. I feel better now.

[Kyoto]

You're talking about fashion. The success of Tescos, Primark, Lidl, etc, tells us lots of people don't want to pay over the odds for a brand.

I spend £4 for a shirt in Primark that would've been £10 (more than a full day's pay for many) back in 1975. Etcetera. Primark runs on low margins because there's a big market for value: people who care more about a good product than the label. The fact many of us can (and do) do that is down to the rise of ....

Yeah, saying China is an oversimplification, when it might be Indonesia, or maybe Bangladesh.

Good point.

Primark are obviously an extreme example though - very efficient and impossibly low margins.

The point is, all of this crap that we've imported from the east has created value, jobs, and wealth here at home. We're letting them do the work, and then leveraging it up many times over. Though not fair, this doesn't on the surface seem to be net destructive on our economy.

It's all so reliant on consumers having money in their pocket to spend though. If they stop or are unable to keep spending, the whole thing comes crumbling down and we're left unable to build our own wealth or leverage that created by our friends in the east.

[lets get it right]

I'm not sure what cheap imports from China has to do with this. As I see it:

In 1997 Gordon Brown changed who supervised banks - away from the BOE to the FSA

At about the same time the Assured Shorthold Tenancy legislation (introduced in the 1980s) was modified to make 6 months the statutory term

Property was cheap following the house price crash / recession that went on to about 1996/1997

A new wave of BTL landlord found they were suddenly able to buy property leveraging the equity in their own property - and that rents easily covered the mortgage payments. They then found they could leverage the equity in their BTL properties and the classic geometric progression began - they bought one, leverage the equity and bought 2, leveraged the equity and bought another 2, then 4, then 8 etc.

An industry rapidly grew exhorting everyone to build a portfolio of at least 50 properties and become what became known as a 'properdee miwllyonaire'

After the austerity of the first half of the 1990s banks starting lending money to anyone with breath in their body, as long as they were buying property with it. The FSA didn't notice or didn't care that banks seemed to have infinite amounts of money to lend.

House prices grew rapidly, at first in London and South East but, as soon as yields were too low (due to rising prices) the new breed of voracious BTL investor headed North and West and started buying houses everywhere - Wales, Scotland and places where, once upon a time, people wouldn't even dream of going to - like Bolton, Blackburn and (in the case of one chap I know personally) Wigan

The banks rubbed their hands and lent and lent and lent. When they ran out of money to lend (because, even under a Fractional Reserve Banking system (unless you are prepared to hold no capital), you must run out of savers' money to lend) - they started packaging up the debt they had already lent (by grouping a bunch of mortgages with a theoretical yield of, say, 5% together into a 'Mortgage Backed Security') and used that package of debt as collateral to borrow money from other banks.

Along with the BTL boom, the view became common that 'you could not lose with property' and an army of amateur developers got into the act - buying houses, tarting them up and selling them on for a profit. All based on debt.

All the banks jumped on the bandwagon and some of them lent money on more and more dubious terms. Northern Rock's insane 125% mortgages are the best example of a bank lending into a market that it had judged must always go up.

At some point in 2007 the banks suddenly got nervous about lending to each other. Someone obviously thought 'if they have been lending the same money out over and over again the same way we have, they are technically bankrupt and so are we. If the housing market corrects and debts are not repaid, we're fecked because we have no capital left'. LIBOR - the London Inter Bank Overnight Rate - (which as I understand it is the rate banks lend to each other overnight to balance their books (every bank balances its books at the end of every working day and either lends to, or borrows from, a central fund that means every bank can balance its books) - started rising dramatically.

There was a run on Northern Rock due to certain journalists beginning to raise the possibility that the banks were broke.

The government stepped in and bailed the banks out - but a credit crunch began as the banks stopped lending to each other as they had to rebuild their capital.

The banks are now involved in a balancing act - they have to lend otherwise the deck of cards will come down - but they can no longer afford risk - so they are very fussy about who they lend to and on what terms.

Notwithstanding all the above, the housing market has, so far, managed to miraculously defy gravity - presumably because, to date, there are no mass repossessions.

Edited September 29, 2010 by Let's get it right

[Snow Birds]

I realised something the other day.

Say you buy a pair of Levi Jeans, Nike Trainers or an IPod.

Sure it's manufactured in China, but "the east" must get paid pennies on the dollar for this manufacturing compared to retail prices.

80% plus must stay in "the west" to pay for distribution, r&d, branding, retail etc.

Simple concept bit often overlooked in this debate.

Sort of but you have missed a bit. When I make a widget in the UK and sell it in the UK then my profit is likely to be about 5%. The other 95% are costs paid to other people in the UK who use this money to buy widgets. If I buy the widget from China for 10% of my UK cost then double the cost and sell it at 50% of my old price then I multiply my profit by ten but there is no money given to anybody in UK to buy widgets with. The whole shebang works very well for a short time (until the money runs out). We are rapidly approaching the point where all the money is in China and they will have to sell widgets to themselves which is what we used to do. That leaves us with no widget production and no money to buy them with anyway. No-one can start a widget factory because if anybody has enough money, or even barter goods, to buy a widget they will buy it from China.

Result: We have no money and no widgets and we have to dream up a new way of living or protect ourselves from China by imposing tariffs. any other ideas?

[Alan B'Stard MP]

I'm not sure what cheap imports from China has to do with this. As I see it:

In 1997 Gordon Brown changed who supervised banks - away from the BOE to the FSA

At about the same time the Assured Shorthold Tenancy legislation (introduced in the 1980s) was modified to make 6 months the statutory term

Property was cheap following the house price crash / recession that went on to about 1996/1997

A new wave of BTL landlord found they were suddenly able to buy property leveraging the equity in their own property - and that rents easily covered the mortgage payments. They then found they could leverage the equity in their BTL properties and the classic geometric progression began - they bought one, leverage the equity and bought 2, leveraged the equity and bought another 2, then 4, then 8 etc.

An industry rapidly grew exhorting everyone to build a portfolio of at least 50 properties and become what became known as a 'properdee miwllyonaire'

After the austerity of the first half of the 1990s banks starting lending money to anyone with breath in their body, as long as they were buying property with it. The FSA didn't notice or didn't care that banks seemed to have infinite amounts of money to lend.

House prices grew rapidly, at first in London and South East but, as soon as yields were too low (due to rising prices) the new breed of voracious BTL investor headed North and West and started buying houses everywhere - Wales, Scotland and places where, once upon a time, people wouldn't even dream of going to - like Bolton, Blackburn and (in the case of one chap I know personally) Wigan

The banks rubbed their hands and lent and lent and lent. When they ran out of money to lend (because, even under a Fractional Reserve Banking system (unless you are prepared to hold no capital), you must run out of savers' money to lend) - they started packaging up the debt they had already lent (by grouping a bunch of mortgages with a theoretical yield of, say, 5% together into a 'Mortgage Backed Security') and used that package of debt as collateral to borrow money from other banks.

Along with the BTL boom, the view became common that 'you could not lose with property' and an army of amateur developers got into the act - buying houses, tarting them up and selling them on for a profit. All based on debt.

All the banks jumped on the bandwagon and some of them lent money on more and more dubious terms. Northern Rock's insane 125% mortgages are the best example of a bank lending into a market that it had judged must always go up.

At some point in 2007 the banks suddenly got nervous about lending to each other. Someone obviously thought 'if they have been lending the same money out over and over again the same way we have, they are technically bankrupt and so are we. If the housing market corrects and debts are not repaid, we're fecked because we have no capital left'. LIBOR - the London Inter Bank Overnight Rate - (which as I understand it is the rate banks lend to each other overnight to balance their books (every bank balances its books at the end of every working day and either lends to, or borrows from, a central fund that means every bank can balance its books) - started rising dramatically.

There was a run on Northern Rock due to certain journalists beginning to raise the possibility that the banks were broke.

The government stepped in and bailed the banks out - but a credit crunch began as the banks stopped lending to each other as they had to rebuild their capital.

The banks are now involved in a balancing act - they have to lend otherwise the deck of cards will come down - but they can no longer afford risk - so they are very fussy about who they lend to and on what terms.

Notwithstanding all the above, the housing market has, so far, managed to miraculously defy gravity - presumably because, to date, there are no mass repossessions.

All symptoms of a greater problem.

Banks lending is not a problem - provided it is matched (with some sustainable temporal difference) by bank unlending.

Edited September 29, 2010 by Alan B'Stard MP

[Minderbinder]

For a mere 12.73 quid Howard Davies, director of the London School of Economics and founding chairman of the Financial Services Authority will tell you the answers:

http://www.amazon.co.uk/Financial-Crisis-Who-blame/dp/074565164X

Apparently there were 38 causes.

Nod to Peston for pointing this out:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/09/cause_39_of_the_banking_crisis.html

[Authoritarian]

1) Government creates a cartel of landowners that MUST be paid off before anybody else is allowed to work/live

2) These people become enormously wealthy because they're able to monopolise rent collection.

3) The financial world notices this and gears itself towards real estate speculation.

4) Land prices become too high and suck the lifeblood out of the economy. The whole thing collapses, we experience recession, asset (land) prices adjust and economy sets itself up for the next 18 year cycle.

The stuff about China is just economic gobbledegook.

Edited September 29, 2010 by Chef

[R K]

I think that is about right, the fundamental problem is a long-term trade imbalance and we leveraged it into a credit boom.

Unfortunately, when I try and work out the consequences of a reversal, I pass through cognitive dissonance, depression and then settle on blissful ignorance.

Blah, blah, blah, I'm not listening any more. I feel better now.

Yep. There's a step 0 (zero) i.e. China coming on-stream into the glow ball economy in a major way bringing with it their slave labour and humungous manufacturing capacity causing western manufacturing to largely shut up shop.

China recycles the dollars earned form the trade deficit into govt. deficits to maintain currency advantage. Glow ball companies like it 'cause they get slave labour and no social benefits/consequences/costs. Result = deflationary impact on the West causing generational falls in yields and rises in asset prices.

Western govts. try to cover up the collapse of their economies by allowing asset prices to rise (house prices) as they know this stimulates demand and stops people realising they're getting poorer and will have no jobs anymore. Size of state inevitably grows as private sector can no longer make money unless they play the offshoring slave labour game.

Carries on until asset prices collapse under their own weight and have to be monetised by govts. whilst the reality of lower wages and fewer jobs is brought home via western Govt. 'Austerity' cuts.

China carries on regardless claiming if they allow their currency to appreciate (i.e. trade fairly) it will result in the collapse of their export economy and they'll have a civil war. Western glow ball corps agree. Western labour start to get restless and takes to the streets. Protectionism measures start to increase and govts. engage in currency wars to prevent China's excess capacity ending up with them.

Protectionism rises to the point either China backs down or West defaults on their debt (inflation or actual default). One way or another China (and Japan and also Germany, Switzerland, Norway etc etc) will have to write off their acrued losses and start to play fair else we'll have wars. I suspect we're already at 'war' but it's via the proxy of our currencies for the time being.

And they all lived happily ever after.

The End.

(Tiredofwaiting tells me this is a load of boll0x and argues everything was perfectly ok until Gordon Brown changed the inflation target to CPI and Chinese getting rich will be really good for him in 150 years time)

Edited September 29, 2010 by Frank Sidebottom

[Snow Birds]

I'm not sure what cheap imports from China has to do with this. As I see it:

In 1997 Gordon Brown changed who supervised banks - away from the BOE to the FSA

At about the same time the Assured Shorthold Tenancy legislation (introduced in the 1980s) was modified to make 6 months the statutory term

Property was cheap following the house price crash / recession that went on to about 1996/1997

A new wave of BTL landlord found they were suddenly able to buy property leveraging the equity in their own property - and that rents easily covered the mortgage payments. They then found they could leverage the equity in their BTL properties and the classic geometric progression began - they bought one, leverage the equity and bought 2, leveraged the equity and bought another 2, then 4, then 8 etc.

An industry rapidly grew exhorting everyone to build a portfolio of at least 50 properties and become what became known as a 'properdee miwllyonaire'

After the austerity of the first half of the 1990s banks starting lending money to anyone with breath in their body, as long as they were buying property with it. The FSA didn't notice or didn't care that banks seemed to have infinite amounts of money to lend.

House prices grew rapidly, at first in London and South East but, as soon as yields were too low (due to rising prices) the new breed of voracious BTL investor headed North and West and started buying houses everywhere - Wales, Scotland and places where, once upon a time, people wouldn't even dream of going to - like Bolton, Blackburn and (in the case of one chap I know personally) Wigan

The banks rubbed their hands and lent and lent and lent. When they ran out of money to lend (because, even under a Fractional Reserve Banking system (unless you are prepared to hold no capital), you must run out of savers' money to lend) - they started packaging up the debt they had already lent (by grouping a bunch of mortgages with a theoretical yield of, say, 5% together into a 'Mortgage Backed Security') and used that package of debt as collateral to borrow money from other banks.

Along with the BTL boom, the view became common that 'you could not lose with property' and an army of amateur developers got into the act - buying houses, tarting them up and selling them on for a profit. All based on debt.

All the banks jumped on the bandwagon and some of them lent money on more and more dubious terms. Northern Rock's insane 125% mortgages are the best example of a bank lending into a market that it had judged must always go up.

At some point in 2007 the banks suddenly got nervous about lending to each other. Someone obviously thought 'if they have been lending the same money out over and over again the same way we have, they are technically bankrupt and so are we. If the housing market corrects and debts are not repaid, we're fecked because we have no capital left'. LIBOR - the London Inter Bank Overnight Rate - (which as I understand it is the rate banks lend to each other overnight to balance their books (every bank balances its books at the end of every working day and either lends to, or borrows from, a central fund that means every bank can balance its books) - started rising dramatically.

There was a run on Northern Rock due to certain journalists beginning to raise the possibility that the banks were broke.

The government stepped in and bailed the banks out - but a credit crunch began as the banks stopped lending to each other as they had to rebuild their capital.

The banks are now involved in a balancing act - they have to lend otherwise the deck of cards will come down - but they can no longer afford risk - so they are very fussy about who they lend to and on what terms.

Notwithstanding all the above, the housing market has, so far, managed to miraculously defy gravity - presumably because, to date, there are no mass repossessions.

Very well said but there is nothing intrinsically wrong with buying houses and renting them out just so long as there are renters willing to rent. There is also nothing intrinsically wrong with lenders lending money (even money they don't have) just so long as it gets paid back. Both enterprises are sound if the economy is providing jobs which will pay rents and pay back loans. That is where the Chinese connection fits in. The Chinese took the jobs away so there are no jobs to pay wages to pay rents to pay loans and to pay taxes.

That is what the Chinese have to do with it!

[Executive Sadman]

1. Cheap goods from China were bought by consumers in the West

2. This caused a lot of money to flow East

3. This money was then lent back to the West

4. Because of the way banking works, more money was lent back to the West than the West had spent in the first place - aka 'Fractional Reserve Banking'

5. This credit boom resulted in HPI, since buyers could outbid each other using cheap credit

6. One day someone noticed that all this money didn't really exist - the flow of money from the West to the East and back again + the miracle of FRB meant that a small amount of 'real' money was being exponentially boosted into oodles and oodles of credit. Credit that was not backed by anything of real value.

7. TSHTF

Is that about right?

The bit that i dont get (at least i hope i dont get it, if i do get it, its a truly disgraceful thing thats going on) is if fractional reserve banking means £10 is lent out for every £1 deposited (at least thats what they said of the US in the secret of oz, IIRC), then the assets (ie houses) that £10 is spent on would have to drop 90% for the original depositor to lose his shirt. The 90% hit would be taken by the fools who dabbled in securitization, other unFSCS protected derivatives,CDOs, and, of course the banks.

Given that it would surely be fairly easy to pass legislation that puts depositors to the front of the queue in event of liquidation or default, and given prices would be unlikely to drop 90%+ (more likely around 50-60%) is all this designed purely to ensure the survival of the banking system?

Disgraceful if ive got this right.

[tomandlu]

The bit that i dont get (at least i hope i dont get it, if i do get it, its a truly disgraceful thing thats going on) is if fractional reserve banking means £10 is lent out for every £1 deposited (at least thats what they said of the US in the secret of oz, IIRC), then the assets (ie houses) that £10 is spent on would have to drop 90% for the original depositor to lose his shirt. The 90% hit would be taken by the fools who dabbled in securitization, other unFSCS protected derivatives,CDOs, and, of course the banks.

Given that it would surely be fairly easy to pass legislation that puts depositors to the front of the queue in event of liquidation or default, and given prices would be unlikely to drop 90%+ (more likely around 50-60%) is all this designed purely to ensure the survival of the banking system?

Disgraceful if ive got this right.

Funnily enough, I was wondering this just now as I wandered back from the shops... anyone?

[Tired of Waiting]

1. Cheap goods from China were bought by consumers in the West

2. This caused a lot of money to flow East

3. This money was then lent back to the West

4. Because of the way banking works, more money was lent back to the West than the West had spent in the first place - aka 'Fractional Reserve Banking'

5. This credit boom resulted in HPI, since buyers could outbid each other using cheap credit

6. One day someone noticed that all this money didn't really exist - the flow of money from the West to the East and back again + the miracle of FRB meant that a small amount of 'real' money was being exponentially boosted into oodles and oodles of credit. Credit that was not backed by anything of real value.

7. TSHTF

Is that about right?

The root cause was a credit bubble (and bigger here than anywhere else). This article explains well why it started: http://www.independent.co.uk/news/business/news/exgovernor-george-says-bank-deliberately-fuelled-consumer-boom-441160.html

After that, we will have to think why that growing bubble was never curbed.

[Authoritarian]

Yep. There's a step 0 (zero) i.e. China coming on-stream into the glow ball economy in a major way bringing with it their slave labour and humungous manufacturing capacity causing western manufacturing to largely shut up shop.

China recycles the dollars earned form the trade deficit into govt. deficits to maintain currency advantage. Glow ball companies like it 'cause they get slave labour and no social benefits/consequences/costs. Result = deflationary impact on the West causing generational falls in yields and rises in asset prices.

Western govts. try to cover up the collapse of their economies by allowing asset prices to rise (house prices) as they know this stimulates demand and stops people realising they're getting poorer and will have no jobs anymore. Size of state inevitably grows as private sector can no longer make money unless they play the offshoring slave labour game.

Carries on until asset prices collapse under their own weight and have to be monetised by govts. whilst the reality of lower wages and fewer jobs is brought home via western Govt. 'Austerity' cuts.

China carries on regardless claiming if they allow their currency to appreciate (i.e. trade fairly) it will result in the collapse of their export economy and they'll have a civil war. Western glow ball corps agree. Western labour start to get restless and takes to the streets. Protectionism measures start to increase and govts. engage in currency wars to prevent China's excess capacity ending up with them.

Protectionism rises to the point either China backs down or West defaults on their debt (inflation or actual default). One way or another China (and Japan and also Germany, Switzerland, Norway etc etc) will have to write off their acrued losses and start to play fair else we'll have wars. I suspect we're already at 'war' but it's via the proxy of our currencies for the time being.

And they all lived happily ever after.

The End.

(Tiredofwaiting tells me this is a load of boll0x and argues everything was perfectly ok until Gordon Brown changed the inflation target to CPI and Chinese getting rich will be really good for him in 150 years time)

Yes that's right, It's All China's Fault. They've ruined our economy with their cheap electrical goods, lol.

We don't have to compete with China for living standards like some sort of international keeping up with the Jones's. We can only ensure that we keep our own house in order, something that cannot be fixed with protectionism (which are effective subsidies for British manufacturers).

Pretending that an efficient distant economy doesn't exist sounds a bit delusional to me, pulling up the drawbridge only makes the UK poorer.

Edited September 29, 2010 by Chef

[lets get it right]

Very well said but there is nothing intrinsically wrong with buying houses and renting them out just so long as there are renters willing to rent. There is also nothing intrinsically wrong with lenders lending money (even money they don't have) just so long as it gets paid back. Both enterprises are sound if the economy is providing jobs which will pay rents and pay back loans. That is where the Chinese connection fits in. The Chinese took the jobs away so there are no jobs to pay wages to pay rents to pay loans and to pay taxes.

That is what the Chinese have to do with it!

That isn't what caused the tower of credit to collapse. Unemployment wasn't the reason. The reason was that Bank A looked at Bank B and thought 'have you been doing what we've been doing ...'

I think there is something intrinsically wrong with buying houses and renting them out - if it forces prices up and locks out other people from buying in a market with a tightly regulated supply. If everyone had a 50 property portfolio, only 1 person in 50 could own houses. Seems intrinsically wrong to me.

There is something intrinsically wrong with lenders lending money they don't have - it's called hyperinflation. If only we could all just magic some money into existence, lend it and live off the interest.

Edited September 29, 2010 by Let's get it right

[Guest_FaFa!_*]

Yes that's right, It's All China's Fault. They've ruined our economy with their cheap electrical goods, lol.

Red/Frank has got it right. I don't think believe in some sort of evil conspiracy by the Chinese - they have just been pursuing their competitive advantage. They run an enormous trade surplus and the foreign currency has to go somewhere. They don't want it to go into China because that will cause inflation and those smelly ******ing peasants will either rise up or, even worse, share in the wealth and move in next door. This happening was inevitable and its consequences are inevitable.

Those who do believe in some evil conspiracy by the Chinese could do well by reading Zhao Ziyang's book "Prisoner of the State". Zhao was the Premier during Tiananmen Square, spoke up for the students and was purged afterwards. He lived out his life under house arrest. Typically for the MSM they have marketed this as some sort of tell all about the massacre and altered the title (his title in the original Chinese was "The Course of Reform" - slightly less dramatic) when he says nothing surprising or new and the real juice is about Chinese domestic policy in the 80s, which is a real eye opener. They didn't have a fecking clue. They were and continue to be hidebound by ideology. Those in power for the last 20 years have been so due to playing their cards right in the aftermath of the protests and have been shackled by that.

http://www.amazon.co.uk/Prisoner-State-Premier-Zhao-Ziyang/dp/184739857X/ref=sr_1_2?s=gateway&ie=UTF8&qid=1285772863&sr=8-2

Edit: Another point - part of the reason the Chinese are running scared of inflation is due to the hefty inflation in the late 1980s that they experienced and which was one of the causes of the '89 protests

Edited September 29, 2010 by FaFa!

[Authoritarian]

Red/Frank has got it right. I don't think believe in some sort of evil conspiracy by the Chinese - they have just been pursuing their competitive advantage. They run an enormous trade surplus and the foreign currency has to go somewhere. They don't want it to go into China because that will cause inflation and those smelly ******ing peasants will either rise up or, even worse, share in the wealth and move in next door. This happening was inevitable and its consequences are inevitable.

But even if all that currency was flowing into British coffers it would still exist, and would still have been relent as mortgages/gilts to achieve a decent return. Most of the money that fuelled the bubble came from Western pension funds, both public and private, and it was mainly western financial institutions that felt the impact when asset prices dropped. It was only after the collapse that the Eastern sovereign wealth funds came into play, by bailing out companies such as Barclays etc.

Ultimately though the Chinese have earned their wealth because Western consumers have chosen to trade with them, this sticks in the craw of British socialists* who feel the state should decide who we're allowed to interact with. They already spend 50% of GDP, don't you think citizens deserve at least a little room to decide for themselves where the rest of their money goes?

*I'm not saying that protectionists are intentional socialists, but the methods they want to adopt are strikingly similar. The ultra leftist BNP are very protectionist for example, as is the North Korean state.

Edited September 29, 2010 by Chef

[Guest_FaFa!_*]

I dunno about Frank so cannot argue on his behalf, but I don't care about protectionism. Que sera, sera as Cilla once said. States will try to protect themselves, it will be a race to the bottom, it won't end well. I try not think about whether things are good or bad anymore. I just try to work out what is likely to happen and position myself accordingly.

Edit: by the way, thanks for the point on the western funds. I'd like to know more, do you have links?

Edited September 29, 2010 by FaFa!