Comments on: Russian Debt And The Euro

By: Oliver

Oliver — Fri, 13 Feb 2009 09:34:50 +0000

I fear when this crisis will have been endured, the money used to soften the blow will have to come out of the printing press with the consequences this entails.
Nevertheless an abrupt fall of consumption a sudden cessation of credit would cause would be worse.

As far as the banking sector is concerned, mortgage backed securities are gone and so are credit default swaps. Things have changed. And the bankers won’t make the same mistake twice. We need to fear the new mistake they’ll make if not tightly regulated.

By: Ron Hulscher

Ron Hulscher — Thu, 12 Feb 2009 21:55:27 +0000

@ Oliver

“The financial world has already been altered beyond recognition”

I am afraid that I again disagree with you. The fundamentals of the economic system are still the same. The good functioning of the current system depends on grow and credit. In order to increase their profit, companies borrow money to invest in the production of new or more products. In order to sell all those products, especially in the USA, consumers were stimulated to buy on credit. But buying on credit means adding future income to your current income. So the same loan that is causing the rise of the amount of money they are able to spend today, is causing the decrease of their future income. Lets pretend that I am an average American citizen that lived two years ago, and I want to go with the flow, so I decide to go to live on credit. Lets say that I make 2000 dollar each month, So I take a loan that enables me to spend 2500 dollar for the next twelve months. But with the passing of the months, I get more and more worried. I think; in a few months I must start paying back this loan including the interest, one year long I have to pay 550 dollar to the bank. So my future income will be 1450 dollar instead of the 2500 I can spend now. I decide to bring a visit to my financial adviser. Don’t worry he said to me, because of you, and all the other Americans who are spending their credits, our economy is booming, so you will most probably have a rise of your salary, and when that’s not enough you can always take another mortgage on your house because the prices of the houses will always keep on rising, it is an endless source of money. And because I am an average American I am reassured, and happily I go back home.
Is this just an crazy story? Yes it is. But it is still the crazy reality on which the fundamentals of our economy still are build, even now. One of the measures of the Bush administration to fight the economic crises was to free billions of dollars to enable the Americans to get credits again. When I heard about this, I realized that they had nothing learned from this crisis. And when you look to the plans of the Obama administration, you cant find any basic difference from those of the Bush administration except from the fact that there is much more money involved (780 billion dollars). Wait a minute…. 780 billion dollar!? Where must this astronomical amount of money come from? The USA don’t have this money, they already have a lot of debts. Basically they have two options; or they barrow it (government bonds) or they going to print it. That last option is not so realistic because printing an extra 780 billion dollars will cause a giant inflation. So what about lending the money? That should be difficult because the countries were the USA is traditionally borrowing from like china and Saudi Arabia, are facing economic difficulties themselves. But if they succeed, how will they ever manage to pay it back? What do you think that they will answer when they are asked. Wouldn’t it be something like; don’t worry the economy will probably grow enough to bring in enough taxes, and if that’s not sufficient, we can always take another loan?
Ron.

By: Oliver

Oliver — Thu, 12 Feb 2009 15:37:39 +0000

The financial world has already been altered beyond recognition. Whole markets hyperactive a year ago are gone. For now the immediate problem must be solved.

Still in the long run, responsibility is useless. The scale of possible damage is too large. We need prevention. In this case severely strengthened regulation and supervision.
As the banking system has by necessity an implicit state guarantee, the owners of banks must accept abnormally low returns in exchange. Bright young people must again become engineers, scientists, doctors or programmers, not MBAs or lawyers.

By: Sir Hugo

Sir Hugo — Thu, 12 Feb 2009 13:56:36 +0000

@Miguel Ruiz
“Most vulnerable: Credit Suisse, UBS, Barclays, Erste Bank, Nordea, ING, Fortis and Banco Santander.”

What, no BNP Paribas?

By: Ron Hulscher

Ron Hulscher — Thu, 12 Feb 2009 13:51:21 +0000

@ Oliver

Punishment and responsibility are two different things. When I was little I asked my mother; “why does my fathers boss earn more money than my father does, is he working harder?” “No“, my mother explained, “he is not paid more because he is working harder, but because he has more responsibilities than your father has“. When you really mashed up the job that your doing, not making a little mistake, but when you and some of your colleague’s are responsible for the worldwide collapse of the branch that you are working in, will you take your responsibility accept it when they ask you to leave? Or do you resist in taking your responsibility, and will you claim to be indispensable? The problem is that the current financial leaders have proven to be not fit for their yob, and therefore we need other people to clean up the financial mess they made. And just don’t believe that these incompetent current leaders are indispensable. Think only about all those good financial experts who did disagree with the current leaders and therefore never were allowed into the world financial top. Punishment is something else, it is to the judge to decide if they deserve it. But even when those financial leaders who are responsible for this mash, are not prosecuted and are allowed to enjoy their million dollar mansions till their dying day, it wont hurt the rest of the world much. But when they are allowed to stay in power, the necessarily change in the financial world would not occur.
Ron.

By: Oliver

Oliver — Thu, 12 Feb 2009 08:43:59 +0000

That’s not fatalism. Something can be done. But it doesn’t involve punishment. We now need functional banks. That rules out replacing many people. We can cut their wages. That’s being done. But it doesn’t solve our current problem.

By: Ron Hulscher

Ron Hulscher — Thu, 12 Feb 2009 02:20:20 +0000

@ Oliver
“Finding out who is to blame afterwards is useless”

I don’t go along with your fatalism, I think it is really necessarily to find out who is responsible and then to replace these financial “experts” who created this financial chaos. But instead we can see today that the politicians are using an enormous amount of our tax-money to keep these managers and their company’s in their positions. And this is stupid, wrong and bad. We need a chance in the financial policies, and therefore this worlds financial management has to be replaced with trustworthy financial visionaries. Those analytical talents who in an early stage warned us for this crises and have a clear vision of how the financial world have to be chanced, must be made the new financial leaders. This does not mean that every top financial manager has to be replaced, because not all the banks and other financial institutes did trade in sub-prime assets, but a lot of them have.
Ron.

By: Oliver

Oliver — Wed, 11 Feb 2009 07:25:22 +0000

It would lighten my mood to make bankers pay. But it doesn’t help. Taking and selling everything they own, down to their underwear, would be a drop in the bucket.

Responsibility doesn’t help. Damage of this magnitude has to be prevented. Finding out who is to blame afterwards is useless.

By: Ron Hulscher

Ron Hulscher — Wed, 11 Feb 2009 00:01:11 +0000

That’s an important moral issue in this economic crisis; Who are to blame for this crises and did they take their responsibility?
In my opinion the most responsible for this crises are those people who made and trade the sub-prime loans. And almost non of them were forced to take his/her responsibility. You don’t have to be a banker to understand that it’s madness to provide everyone with a mortgage, who is just capable of placing his signature. And not to look if that persons income is sufficient to pay for it. Yes you always can sell the house to get your money back if that person is not capable of paying for his mortgage, but what is that house worth? In my opinion the value of a house is basically what it cost to build it, everything above this price is an speculative bubble. And exactly by giving an enormous amount of mortgages to people whose income was not sufficient, the bankers were pumping up this bubble sky-high. When the time of the forced selling of this enormous amount of houses begins, the bubble of course explode, and the crisis became a fact. People like my favourite financial radio-commenter Kees de Kort already predict this to happen, at a time when most of the others don’t even did think about a possibility of a big financial crisis. But were the banking managers not aware that this was going to happen? If Kees the Kort was aware of it, then they were probably also aware of it. It is an easy to understand phenomenal and I assume that bankers are intelligent people. But why did they invest in a system that they know it has to collapse sooner or later? The answer in my opinion is greed. The income of those bankers consists largely out of a bonus they received if the profit of the bank was increased over the year. The more the profit increases, the higher the bonus. So, for their personal income this bubble that they had created was very profitable. And it was in their personal interest to let this bubble grow as long as possible. This system of rewarding bankers for the short term results of their company instead of for a stable long term result, has proven to be catastrophically for the banking system. Also to blame are the bankers and managers of other institutes all over the world, who were buying packages of these sub-prime loans. Some of them are claiming now that they did not realized what they bought. But I find it hard to believe that they were spending millions of dollars on something the didn’t know what it was. Again they are intelligent people. And what happened with most of these bankers who made the whole world suffer from this crises? Nothing, because the governments are using enormous amounts of tax money to prevent that their banks will go broke. So you and me must pay for the faults of the bankers, we have to pay so the banks who are responsible for this crises will be saved. In my opinion this is immoral. It would be better to let the banks go broke and dismiss its managements who have caused this crises, and sell the good parts of these banks and bring those parts into a new financial institute headed with a new management. In this case the persons responsible for this crises would al lose their jobs, and it will not be the tax payers, but the share and bond holders of the former banks who have to pay. After all, share and bond holders are the providers of the risky capital for a company. They have taken the risk to invest in those banks and not the ordinary tax-payer. Inevitably, this solution will also bring misery to the common man, think only about the pension funds who will make great financial losses.
But the good thing is that that will speeding up the politically difficult but necessarily decision to increase the age when people may enjoy their pension.
Ron.

By: Hektor Bim

Hektor Bim — Tue, 10 Feb 2009 17:27:46 +0000

Fine, so we rescue the banks, blah, blah, blah. But this means no one in a position of responsibility in the banks gets bonuses and everyone has a salary cap. In fact, probably the upper management of all of these banks should be fired unless they can prove they have any idea what they are doing. We should reinstate strong antitrust protections and strong protections against speculation and risk-taking.

This is a bad situation. It doesn’t have anything to do with morality. It has to do with preventing this from happening again – the best way to do it is control the financial industry and limit pay at the top.