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tomandlu

2008 Alternative Histories

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A question from my son - what would have happened if the banks hadn't been bailed in 2008 (particularly the negatives)? Answers on a postcard...

[edit]

A scenario where the banks are bailed, but at the price of nationalisation and full pay/perks/pensions review to bring them in line with other public sector workers, is also permissible.

Edited by tomandlu

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The first would be mass redundancies in the banks - tens of thousands laid off. Soon funding for many companies would dry up, governments' central banks would try to cover the shortfalls but the morass of companies in hoc would exceed all attempts to keep funding open, so you'd get mass redundancies in all sectors - tens of millions laid off. This would lead to people hoarding anything whilst the shops and cashpoints still had anything to supply. Soon they wouldn't as many of those companies supplying food would either be bankrupt or not have anything to supply as countries with farming would lock down exports. Society would break down as utility companies stopped receiving payments, roaming hoards of previously law-abiding men would take anything they could to feed their loved ones, any remaining trading companies would be ransacked of their goods and close down, epidemics break out and hospitals wouldn't be able to cope with no utilities or staff, martial law could only protect those with connections, all public services except the Armed Forces vanish, probably resulting in civil conflict and, ultimately, global wars over diminishing resources.

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The first would be mass redundancies in the banks ... and, ultimately, global wars over diminishing resources.

Srsly? (my irony-detector is going off like crazy, but I thought I'd better check)

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Seriously

I don't buy the apocalyptic scenario.

Significant redundancies in the finance sector sure, and some drying up of credit, but all this would have flushed out zombie banks/businesses from the economy and underscored the risk of excessive debt in the system & misallocation of capital etc, leading to an improvement in the economy in the longer term. Short term pain for long term gain.

What do we have instead? Continued excesses and imbalances, more debt, more zombies, greater risk of GFC mark 2, and arguably a greater risk of the apocalypse you suggest we avoided.

Yes, Iceland is an interesting case study in not believing the bankster fearmongering.

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Keynes, no less, once argued that if downturns were largely driven by investor sentiment and that if the behaviour of the economy was nonlinear (as he suspected but couldn't prove) reducing interest rates hard at the onset of recession would have little impact and might even be counter-productive. Better to drop rates slowly until it was thought that conditions had stopped deteriorating and then sharply to facilitate a sustainable recovery. He was, of course, ignored.

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I don't buy the apocalyptic scenario.

Significant redundancies in the finance sector sure, and some drying up of credit, but all this would have flushed out zombie banks/businesses from the economy and underscored the risk of excessive debt in the system & misallocation of capital etc, leading to an improvement in the economy in the longer term. Short term pain for long term gain.

What do we have instead? Continued excesses and imbalances, more debt, more zombies, greater risk of GFC mark 2, and arguably a greater risk of the apocalypse you suggest we avoided.

Yes, Iceland is an interesting case study in not believing the bankster fearmongering.

I grant you we don't have a Goldilocks scenario now, and the crisis was brought on by bankers not being as compliant and diligent as they could've been (much understatement there, just for laughs).

We can only talk in hypotheticals now of course, but comparing one country's banking system with a global banking system doesn't feel like a fair comparison. We can compare the GFC to the Great Depression of the 30s when CBs acted irrationally and let all the banks fail. That (arguably) led to World War II.

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Ask him to investigate what happened in Iceland and give us the answer in less than 200 words :P

Only a partial story: the zombie banks are global, so smother even Iceland in their shadow.

Oh, and the UK tax base could've better funded the depositor protection scheme than Iceland's.

Banks have gone bust before. Several at once would've done wonders for stimulating the market for alternative forms of finance. We can only speculate on what might have been: for example, maybe niche things like crowdfunding would've grown a whole lot more. For consumer banking, I expect consumer-facing businesses such as the retailers would've stepped in and provided a more comprehensive service.

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So where are we now:

Too much debt following reckless lending leads to crash in 2008.

Central banks step in, slash rates and print QE money for banks, trusting said banks will invest in companies and spark consumer lending, leading to renewed growth.

But instead, companies keep the money, buy their own shares back and take the proceeds.

The rich mop up all this QE money, buying cars, boats and other assets.

With no companies investing and no consumers buying, there’s no salary growth.

With flat salaries and debts to pay, consumers cut back further on spending.

Zero inflation, declining growth, and more QE will only lead to more asset growth, rich getting richer, flat or falling salaries and no consumer boom.

It might be time for helicopter QE...

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Srsly? (my irony-detector is going off like crazy, but I thought I'd better check)

Good grief, the poster probably thinks the Walking Dead is a documentary.

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So where are we now:

Too much debt following reckless lending leads to crash in 2008.

Central banks step in, slash rates and print QE money for banks, trusting said banks will invest in companies and spark consumer lending, leading to renewed growth.

But instead, companies keep the money, buy their own shares back and take the proceeds.

The rich mop up all this QE money, buying cars, boats and other assets.

With no companies investing and no consumers buying, there’s no salary growth.

With flat salaries and debts to pay, consumers cut back further on spending.

Zero inflation, declining growth, and more QE will only lead to more asset growth, rich getting richer, flat or falling salaries and no consumer boom.

It might be time for helicopter QE...

We also have millions of low-wage serfs in 'enlightened' and 'safe' countries like China and India, to provide us with cheap goods for a cost of next-to-nothing except their children's health and lifespans.

It's now so cheap to produce tat, the only way a company can get a decent return on anything is by buying its own shares.

The west's manufacturing sectors have been sent off to cheaper producers, the previously blue collar workers now have to work in a service industry which they're not suitable for, resulting in low-wage surfs in the west 'serving' us and resenting it.

With so many millions in countries like China and India entering the workforce, they are consuming power and commodities as fast as they can (nowhere near western rates), resulting in a dash to control countries which have little to do with global production except sitting on a fortune.

Those countries with commodities but no education or infrastructure to exploit them are falling under all manner of toxic crises, be it war, pollution, child labour, genocide and/or population explosions.

In the west we're living shorter lives, taking more drugs and seeing families and communities living broken and empty existences in front of a screen.

Helicopter QE won't help any of those.

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As I always mention, we'd spent the previous 20 years telling Japan to bite the bullet so it could get its crash over and done with, but when it was our turn, it suddenly didn't look so appealing.

I don't see why all the banks couldn't have been left to burn, and the QE used as necessary to found a national bank to pick up all the "real" financial transactions.

Edited by Steppenpig

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Good grief, the poster probably thinks the Walking Dead is a documentary.

Ha ha! I assume you're directing that pithy sentence at myself. I don't actually watch that series, the acting's terribly wooden. I read a lot more about economics than is healthy, probably a reason why I don't watch trashy TV. Anyway one economist who was well ahead of the game is Nouriel Roubini, he didn't write about as catastrophic an outcome as I did but his predictions were very accurate. See http://www.economonitor.com/nouriel/2008/02/05/the-rising-risk-of-a-systemic-financial-meltdown-the-twelve-steps-to-financial-disaster/ and http://www.economonitor.com/nouriel/2008/02/05/the-rising-risk-of-a-systemic-financial-meltdown-the-twelve-steps-to-financial-disaster/ from February 2008. He goes into detail about the mechanics of the crash.

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Ha ha! I assume you're directing that pithy sentence at myself. I don't actually watch that series, the acting's terribly wooden. I read a lot more about economics than is healthy, probably a reason why I don't watch trashy TV. Anyway one economist who was well ahead of the game is Nouriel Roubini, he didn't write about as catastrophic an outcome as I did but his predictions were very accurate. See http://www.economonitor.com/nouriel/2008/02/05/the-rising-risk-of-a-systemic-financial-meltdown-the-twelve-steps-to-financial-disaster/ and http://www.economonitor.com/nouriel/2008/02/05/the-rising-risk-of-a-systemic-financial-meltdown-the-twelve-steps-to-financial-disaster/ from February 2008. He goes into detail about the mechanics of the crash.

Yeah, don't worry, we've been there and done that a long time ago on HPC

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The first would be mass redundancies in the banks - tens of thousands laid off. Soon funding for many companies would dry up, governments' central banks would try to cover the shortfalls but the morass of companies in hoc would exceed all attempts to keep funding open, so you'd get mass redundancies in all sectors - tens of millions laid off. This would lead to people hoarding anything whilst the shops and cashpoints still had anything to supply. Soon they wouldn't as many of those companies supplying food would either be bankrupt or not have anything to supply as countries with farming would lock down exports. Society would break down as utility companies stopped receiving payments, roaming hoards of previously law-abiding men would take anything they could to feed their loved ones, any remaining trading companies would be ransacked of their goods and close down, epidemics break out and hospitals wouldn't be able to cope with no utilities or staff, martial law could only protect those with connections, all public services except the Armed Forces vanish, probably resulting in civil conflict and, ultimately, global wars over diminishing resources.

Thats what they were scared of....would never have happened....Iceland was fine..,we'd have been fine,.

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Yeah, don't worry, we've been there and done that a long time ago on HPC

Did the collective come to a unanimous conclusion on HPC, or was there a majority in favour of one, particular strain of events? I'm actually impressed by the accuracy of the films that have been made, although Oliver Stone's 'Wall Street: Money Never Sleeps' held back too much.

Thats what they were scared of....would never have happened....Iceland was fine..,we'd have been fine,.

Really? A conspiracy theory is mainstream now?

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The first would be mass redundancies in the banks - tens of thousands laid off. Soon funding for many companies would dry up, governments' central banks would try to cover the shortfalls but the morass of companies in hoc would exceed all attempts to keep funding open, so you'd get mass redundancies in all sectors - tens of millions laid off. This would lead to people hoarding anything whilst the shops and cashpoints still had anything to supply. Soon they wouldn't as many of those companies supplying food would either be bankrupt or not have anything to supply as countries with farming would lock down exports. Society would break down as utility companies stopped receiving payments, roaming hoards of previously law-abiding men would take anything they could to feed their loved ones, any remaining trading companies would be ransacked of their goods and close down, epidemics break out and hospitals wouldn't be able to cope with no utilities or staff, martial law could only protect those with connections, all public services except the Armed Forces vanish, probably resulting in civil conflict and, ultimately, global wars over diminishing resources.

So you saying it would be like living in Croydon?

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Some banks would have gone under. So what?

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." Von Mises

You can tell your son that things would have been a bit rough for a while, but not half as bad as when the whole currency system crashes. An experience which will be our little gift to him in the future for not having the balls to face the music. We even paid out Fred the shreds bonuses FFS!

Edited by SpectrumFX

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We'd all be in a much better place today.

Yup.

We should have let all banks fail --- and then lined up ALL those involved in ANY way with fraud & LIAR LOANS up against the wall --- and shot them all by firing squad. Let the world know that all fraudsters will be executed.

That would have been the best thing EVER that SHOULD have happened.

Edited by eric pebble

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