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The System Is Ready To Blow

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http://www.guardian.co.uk/business/2011/aug/14/larry-elliott-global-financial-system

Larry Elliott tends to be a bit of a Cassandra - but then, in the legend Cassandra was right.

We've been warned: the system is ready to blow

Only a new way of managing the global economy can prevent more mayhem in the markets and on the streets

For the past two centuries and more, life in Britain has been governed by a simple concept: tomorrow will be better than today. Black August has given us a glimpse of a dystopia, one in which the financial markets buckle and the cities burn. Like Scrooge, we have been shown what might be to come unless we change our ways.

There were glimmers of hope amid last week's despair. Neighbourhoods rallied round in the face of the looting. The Muslim community in Birmingham showed incredible dignity after three young men were mown down by a car and killed during the riots. It was chastening to see consumerism laid bare. We have seen the future and we know it sucks. All of which is cause for cautious optimism – provided the right lessons are drawn.

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

To understand the mess we are in, it's important to know how we got here. Today marks the 40th anniversary of Richard Nixon's announcement that America was suspending the convertibility of the dollar into gold at $35 an ounce. Speculative attacks on the dollar had begun in the late 1960s as concerns mounted over America's rising trade deficit and the cost of the Vietnam war. Other countries were increasingly reluctant to take dollars in payment and demanded gold instead. Nixon called time on the Bretton Woods system of fixed but adjustable exchange rates, under which countries could use capital controls in order to stimulate their economies without fear of a run on their currency. It was also an era in which protectionist measures were used quite liberally: Nixon announced on 15 August 1971 that he was imposing a 10% tax on all imports into the US.

Four decades on, it is hard not to feel nostalgia for the Bretton Woods system. Imperfect though it was, it acted as an anchor for the global economy for more than a quarter of a century, and allowed individual countries to pursue full employment policies. It was a period devoid of systemic financial crises.

There have been big structural changes in the way the global economy has been managed since 1971, none of them especially beneficial. The fixed exchange rate system has been replaced by a hybrid system in which some currencies are pegged and others float. The currencies in the eurozone, for example, are fixed against each other, but the euro floats against the dollar, the pound and the Swiss franc. The Hong Kong dollar is tied to the US dollar, while Beijing has operated a system under which the yuan is allowed to appreciate against the greenback but at a rate much slower than economic fundamentals would suggest.

The system is an utter mess, particularly since almost every country in the world is now seeking to manipulate its currency downwards in order to make exports cheaper and imports dearer. This is clearly not possible. Sir Mervyn King noted last week that the solution to the crisis involved China and Germany reflating their economies so that debtor nations like the US and Britain could export more. Progress on that front has been painfully slow, and will remain so while the global currency system remains so dysfunctional. The solution is either a fully floating system under which countries stop manipulating their currencies or an attempt to recreate a new fixed exchange rate system using a basket of world currencies as its anchor.

The break-up of the Bretton Woods system paved the way for the liberalisation of financial markets. This began in the 1970s and picked up speed in the 1980s. Exchange controls were lifted and formal restrictions on credit abandoned. Policymakers were left with only one blunt instrument to control the availability of credit: interest rates.

For a while in the late 1980s, the easy availability of money provided the illusion of wealth but there was a shift from a debt-averse world where financial crises were virtually unknown to a debt-sodden world constantly teetering on the brink of banking armageddon.

Currency markets lost their anchor in 1971 when the US suspended dollar convertibility. Over the years, financial markets have lost their moral anchor, engaging not just in reckless but fraudulent behaviour. According to the US economist James Galbraith, increased complexity was the cover for blatant and widespread wrongdoing.

Looking back at the sub-prime mortgage scandal, in which millions of Americans were mis-sold home loans, Galbraith says there has been a complete breakdown in trust that is impairing the hopes of economic recovery.

"There was a private vocabulary, well-known in the industry, covering these loans and related financial products: liars' loans, Ninja loans (the borrowers had no income, no job or assets), neutron loans (loans that would explode, destroying the people but leaving the buildings intact), toxic waste (the residue of the securitisation process). I suggest that this tells you that those who sold these products knew or suspected that their line of work was not 100% honest. Think of the restaurant where the staff refers to the food as scum, sludge and sewage."

Finally, there has been a big change in the way that the spoils of economic success have been divvied up. Back when Nixon was berating the speculators attacking the dollar peg, there was an implicit social contract under which the individual was guaranteed a job and a decent wage that rose as the economy grew. The fruits of growth were shared with employers, and taxes were recycled into schools, health care and pensions. In return, individuals obeyed the law and encouraged their children to do the same. The assumption was that each generation would have a better life than the last.

This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.

A crisis that has been four decades in the making will not be solved overnight. It will be difficult to recast the global monetary system to ensure that the next few years see gradual recovery rather than depression. Wall Street and the City will resist all attempts at clipping their wings. There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.

But this is a fork in the road. History suggests there is no iron law of progress and there have been periods when things have got worse not better. Together, the global imbalances, the manic-depressive behaviour of stock markets, the venality of the financial sector, the growing gulf between rich and poor, the high levels of unemployment, the naked consumerism and the riots are telling us something.

This is a system in deep trouble and it is waiting to blow.

Edited: Reason for edit: remove superfluous second URL. Reason/s for original error: Monday morning, not had coffee yet.

Edited by Snugglybear

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http://www.guardian....inancial-system

Larry Elliott tends to be a bit of a Cassandra - but then, in the legend Cassandra was right.

http://www.guardian....inancial-system

Like this paragraph ...

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

Maybe the day when the bankers are tried and sent to prison is a bit closer ....

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The MSM is getting warmer...

I have been feeling over the last few days/weeks that we are now beyond the point of no return. Over the last years, I thought it may be possible to turn things around, but I overestimated the courage of our politicians (easily done, I suppose! ;) ).

IMO, we should embrace state failure and acknowledge that democracy has failed us. Monopolised/centralised power and organisation, using theft and violence, which is at the mercy of easy corporate corruption, is not the answer.

Distributed power, using voluntary relationships and free association, would be morally superior and (arguably) more economically efficient.

I just hope that when state failure comes, people have found the right answers. We don't need more centralisation and more power in the hands of the few, as many will no doubt suggest. Rejecting democracy and centralised, violent, rule is key.

Edited by Traktion

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The difference between a looter and a banker is that the looter goes to jail, the banker gets a bonus and a taxpayer bailout.

It's more complicated than that.The serious looter doesn't go to jail because he doesn't get caught.The dopey ones who wander in through a smashed door and picks up a few pairs of flip flops gets caught.But they would never knock the door down in the first place and those who do will be clean away,home and hoodied.

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Like this paragraph ...

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

Maybe the day when the bankers are tried and sent to prison is a bit closer ....

...it wasn't just the City Banker ...it was on every High Street where they processed liar loans.... :rolleyes:

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Which group of individuals authorised the bailout?

I beleive it was the ones that thought an expenses system unique to them was inadequate, so they fiddled regardless.

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The difference between a looter and a banker is that the looter goes to jail, the banker gets a bonus and a taxpayer bailout.

And that is because the bankers always create the government that then enacts their legislation. Control of the currency is control of the society.

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Which group of individuals authorised the bailout?

indeed, the lefties are saying that only they can save us from the bankers

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And that is because the bankers always create the government that then enacts their legislation. Control of the currency is control of the society.

it is the demographic (boomers) that dominates the electorate that supports the govt that permit it tho, a particular set of cicumstances that do not persist forever

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Didnt Gordon Brown have a hand in this? He did lay claim to saving the world which suggests perhaps he might have been misled by his advisors ala the emperor has no clothes.

Likewise a flaw in Representative Democracy the system we have in the west and advocated around the world is that you only need to get to or work on one person to get them to do your work, where as direct democracy or social democracy is the way forward as dark forces need to work on everyone thus their power is spread is thinnly and becomes ineffective.

So therefore, to follow the argument, if it wasn't Gordon Brown it would be whoever else governed that would be bought off. There is no freedom of choice in the existing democratic political systen in the west at all. Quantitive democracy is meaningless unless there are absolute qualitative norms informing it, like the presumed post war concensus in the west until the seventies.

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http://www.guardian.co.uk/business/2011/aug/14/larry-elliott-global-financial-system

Larry Elliott tends to be a bit of a Cassandra - but then, in the legend Cassandra was right.

Edited: Reason for edit: remove superfluous second URL. Reason/s for original error: Monday morning, not had coffee yet.

Cassandra or not he and Dan Atkinson from the Daily Mail nailed the predicted the unravelling pretty accurately in their co authored book Fantasy Island published in May 2007

http://www.guardian.co.uk/books/2007/jun/24/politics

Interesting to read some of the other reviews of the book that were only to quick to dismiss it as scareamongering. Some of those critics must it painful that Google has preserved their hopelessly panglossian view of the economy for posterity.

Edited by stormymonday_2011

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This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.

A crisis that has been four decades in the making will not be solved overnight. It will be difficult to recast the global monetary system to ensure that the next few years see gradual recovery rather than depression. Wall Street and the City will resist all attempts at clipping their wings. There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.

The riots were certainly a wake-up call. I'll bet the coalition already had various meetings very early on in their term in which they looked at how to control the civil unrest that would result from so-called "austerity".

What they didn't expect was this sudden explosion of dissent right now before we've actually had the austerity measures the coalition planned/promised (although austerity is indeed happening in the form of rampant and largely disguised price inflation, which was not promised).

If you look at the comments in the Telegraph articles about the rioting, about half of them make the point that the looters and the bankers are more or less the same, at least from a moral perspective, with the politicians being no better. Now that's in the Telegraph, not the Guardian.

So where it's all headed doesn't look too good and seeing the politicians and police arguing about all this publicly doesn't help. The government need the police on their side if all out anarchy is to be avoided.

The riots seemed to have been sparked by one incident and the specifics of that have been overwhelmed by coverage of what then ensued. But this sequence of riots did not appear to have any particular common cause. Now, if the rioters were indeed given a common cause - which is what the article above gets to - the number of people involved could be astronomical. I wouldn't attend a planned riot as such, but I'd certainly attend demonstrations. And I've never been on one before.

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it is the demographic (boomers) that dominates the electorate that supports the govt that permit it tho, a particular set of cicumstances that do not persist forever

...your demographic band are clean....?.... :rolleyes:

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...your demographic band are clean....?.... :rolleyes:

But we're all in this together :)

And the boomers and pensioners aren't getting a great ride with rampant price inflation and their savings and investments being eroded.

At the present moment I can't really see any single social group who are benefitting or who are to benefit from the austerity measures should they ever come into force.

What I can see is, for instance, money being chanelled to property developers through special first time buyer schemes and liquidity schemes and other bungs to the banks.

The average rioter doesn't really need to understand all of this in order to see that every year they're worse off than they were before - and that's true for the people who are working too.

Osborne's main thrust at the moment appears to be reversing the 50p tax rate. Now I can't really see how any government can think it's reasonable to help themselves to much more than about 20% of anyone's earnings anyway, but you can see how the public mindset of who is winning from this develops.

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The difference between a looter and a banker is that the looter goes to jail, the banker gets a bonus and a taxpayer bailout.

The BANKERS weren't bailed out - the BANKS were. It was done to avoid ordinary people losing their savings.

The bankers would have got another banking job either way, once new banks were founded to replace the old.

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The difference between a looter and a banker is that the looter goes to jail, the banker gets a bonus and a taxpayer bailout.

Amazing what difference a snappy suit and a pair of shiny shoes can make :)

But we're all in this together :)

Yeah I can smell it and it ain't roses :unsure:

Edited by MrFlibble

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The BANKERS weren't bailed out - the BANKS were. It was done to avoid ordinary people losing their savings.

The bankers would have got another banking job either way, once new banks were founded to replace the old.

That is so far wide of the mark. The government could have rescued the savings and just let the banks die. They could have then taken RBS or whoever and set them up as a nationalised bank, job done.

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The BANKERS weren't bailed out - the BANKS were. It was done to avoid ordinary people losing their savings.

The bankers would have got another banking job either way, once new banks were founded to replace the old.

Not quite true. The BOE worked out that none of the bailouts would have been needed if any degree of restraint with regard to bonuses had been displayed in the prior years.

Of course here the "bankers" doesn't mean the average bod who sits at a counter accepting deposits, but those at the top of the organisations.

But since it's harder to get to them, I forsee a prolonged period of retail banks being trashed and smashed up.

So far as "losing their savings" is concerned, there is a depositor protection scheme. Except that unlike say the insurance industry who pay into a pot to fund it e.g. for disasters like flooding which take out whole towns so as to share the risk, the banks don't pay into any pot, so there isn't actually any pot there to pay out if a bank went under.

Whether it would have been cheaper to pay out all the depositors from taxpayer's funds, or cheaper to bail out the banks, is a calculation I have yet to see done. But even so, bailing out the banks brings with it the social moral hazard aspect which is central to all of this.

If people are expected to subscribe to capitalism as being a facilitator to some kind of meritocracy then we actually need to have a capitalist system in the first place, not what we have now.

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That is so far wide of the mark. The government could have rescued the savings and just let the banks die. They could have then taken RBS or whoever and set them up as a nationalised bank, job done.

The problem with rescuing the savings is this always seems to return a loss in their buying power.

There's no point me rescuing your wife if all I return to you is her leg. Even if you are a leg man this would not be enough of a return for you to accept and enjoy :)

Edited by MrFlibble

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