I have finally had enough. The return of the crunch, which somehow seems to have surprised the current batch of politicians and economists was so easy to see coming that I can no longer take them seriously.
While supposed world leaders dither and prevaricate, and economists pontificate from their ivory towers, the world is slowly collapsing.
They seem incapable of grasping this. Politicians are lost in ideology, economists are lost in academia and theory. Neither seem able to grasp how things really work.
The very idea that shifting private sector debts to government balance sheets would somehow make everything better is farcical. Governments still have to service and repay their debts. Their only method of funding is taxation. Ultimately the private sector was always going to foot the bill, and always will.
The view that adding extra debt to the existing stockpiles will somehow make things better is nonsensical.
The problem started with too much debt at too low interest rates chasing too few assets. How is the solution more debt, at lower interest rates buying up falling assets?
How did all this start? A combination of factors none of which on its own would have caused such a big crisis but together made a toxic mix.
Central Bankers were fooled by China exporting deflation to the world for 10 years as their factories ramped up production and slashed manufacturing costs globally. As a result rates were held down in the face of benign inflation, and consumers, investors, and speculators were encouraged to load up with cheap debt. If this was used to fund true investment - building factories, paying for training courses or further education, creating infrastructure then it would have been great. In fact what happened is consumers loaded up on plasma TVs, holidays and cars they couldn't afford, investors just kept on buying anything they could creating a self-feeding circle driving assets ever higher in price, and speculators piled into all markets to drive things further, with particularly devastating consequences in the housing market.
Western governments also payed a large part. In many countries, particularly in what the French disparagingly refer to as the anglo-saxon sphere, governments actively encouraged home-ownership in the belief it would create a stable and prosperous society. They created tax breaks from the mildly generous - no capital gains on sale proceeds from primary home for example in the UK - to the insane - A$7,000 grant to first time buyers to pay their deposit in Australia. And all the while in the US, the so-called bastion of capitalism and supposed nemesis of socialism, the ultimate socialist model was upheld - almost every mortgage in America ended up being bought by the the two Government Agencies Fannie Mae and Freddie Mac, who funded those purchases by relying on the Government Agency status to issue AAA-rated debt into the bond markets. Effectively the US government guaranteed your mortgage. To make matters worse in the US, starting with the Clinton era banks were obliged or encouraged to lend to all borrowers at almost the same rate irrespective of their ability to repay. The government wanted poor people to enter the housing market, believing rising property prices would create wealth and help lift them up the socio-economic ladder. What they did was create subprime.
Banks didn't want to make these loans but were obliged to. Imagine their pleasure then when they found that incompetent rating agencies would allow them bundle up these piles of crap into bonds and rate them at the top level - AAA - the same as the Governments of Germany and the US. The banks couldn't believe their luck. The AAA rating meant that not only could they sell the mortgages to Fannie Mae and Freddie Mac but also to pension funds, bond funds, corporate treasurers, parish councils and individual investors. They could lend as much as they felt like, keep a margin for themselves and just turn round and flog the mortgages as a bond. Originally they kept no skin in the game. They just onsold and kept their own balance sheets clean. Then they started to believe their own propaganda. Asset and house prices kept climbing, mortgage bond spreads kept falling, inflation remained low so Central Bank rates were low and hence funding was cheap. They decided to start buying the bonds themselves. Just as it all fell apart. So much for the geniusses in bank risk and economic departments.
Then finally the circus stopped. House prices in particular reached a level which was simply no longer sustainable even with the "creative" mortgages being offered. House prices started to plateau. That was all it took. So much was bought on the assumption of selling it in a month or 2 at a profit that even a few flat months was a killer. mortgage costs were unserviceable, prices were no longer rising. The forced selling started and it all started to unravel. Banks and investors everywhere were suddenly holding worthless bonds and mortgages as the defaults started.
And all the prices moved together. When one started to fall, they all did, as they all held similar mortgages and no one had any idea what individual loans were behind the bonds they held. Panic spread fast. Banks stopped trusting their own assets, then they stopped trusting each other when each realised it was not alone in holding worthless crap. The interbank funding market, where banks lend surplus cash to each other for periods from a few hours to a few weeks, dried up. Then the final nail - the repo market dried up. This is the market in which banks lend to each other using bonds they own as collateral. The problem was their lenders no longer trusted either the quality of the bonds they were holding as that collateral, or even that it would be delivered in time from institutions which could go insolvent before the agreed deal has taken place.
That killed Lehman. And we all know what happened then.
So where are we now? In a mess. The private sector is sensibly trying to pay down it's debt, but this terrifies politicians as it inevitably means slow, no or even less than zero growth. Keynes famous paradox of thrift - individual saving is good, whole society saving is bad as it causes demand to fall. Politicians need ever stronger growth to get themselves re-elected so they are pulling out all the stops in an effort to get people spending.
The result is governments have spent three years pouring other people's money into sectors of the economy where they deem demand to be inadequate - think cash-for-clunkers car schemes for example.
Each time they do this they get a short-term boost, but all they are doing is pulling forward future demand so that once the boost fades the downside is worse than before. Think of having a Red Bull or double espresso - you get a short term boost but at the expense of feeling like crap later.
But they are addicted to handing out these shots because the alternative is to admit that there is going to be economic pain. That is political and electoral suicide.
So they continue trying to get economic activity "back on track" and to boost asset prices "back to pre-crisis levels" despite both being patently illusions created by turbo-charging normal economic activity with huge amounts of debt. And all the time they have been using money they don't have to provide these shots. Government debt levels have gone though the roof. Fortunately the bond markets are now calling them out on this and some sanity is returning as austerity budgets are belatedly pushed through, but still none will admit to the inevitable slowdown this will cause.
Only the US has escaped the austerity push, partly because of political deadlock, partly because the US$ is the world's reserve currency and as such is held by most major Central Banks as their largest currency pool. The result is continuing demand for US$ assets as a "safe-haven", but even the US can't run ever growing deficits and debt levels for ever. If the Government gets to grips with it, then it can be dealt with relatively easily. If the markets force it on them then it will be a mess that makes today look like a walk in the park.
In conjunction with this we have economic theorists as Central Bankers promoting Quantitive Easing as the solution. The idea is that by the Central bank buying government, mortgage and corporate bonds they will pump money into the system and hold down long term rates at the same time.
The problem is that when the private sector is scared and paying down debt, the velocity of money - the speed with which it moves through the economy - collapses. People, banks and corporates save the money not spend it. This can be seen everywhere. Individual saving rates are climbing, banks are placing huge deposits with Central Banks, not lending, and corporates are sitting on record cash piles.
So QE doesn't work. It didn't work any of the times it was tried in Japan, it didn't work in QE1, it hasn't worked in QE2 and it won't work in QE3.
I'm not sure how many times it has to not work before they will admit defeat but whatever the number is we don't seem to be close to it.
So where do we go from here? That's the interesting bit, and I look forward to finding out, and commenting on it.
