Skip to main content

Market Power

As the forecast credit crunch continues, it is interesting to note the themes coming out of the Jackson Hole Fed conclave. While Central bankers like Axel Weber of the Bundesbank spoke of the reaction of the markets being "a classic bank run"- in fact the fear persists that under the crisis of liquidity there is a more fundamental real economic crisis. As my friend David Hale notes, there is in fact a "crisis of information"- and in uncertain times, the fear is becoming all too real and filling the information gap with horrible imaginings.

After the Great Crash of 1929, I believe that it was Alistair Cooke who first observed that the Everest in the markets achieved in 1929 was "a mountain of credit resting upon a molehill of actual money". Unfortunately, the asset bubble in US sub-prime mortgages rested upon an income stream that was too small to sustain the inflated valuations. Ultimately it became a giant game of pass the parcel- and the meltdown has undermined the security of global credit across the board.

Over the twentieth century, and particularly after the financial crises of the 1920s and 1930s, the system of central banks has managed to protect a credit system based upon banks. Reserve requirements, depositor insurance and the regulatory framework have been set to protect depositors, and the wider financial system, from major losses as the result of a loss of confidence. Just as important, the SEC was set up to police the excesses of the market place. After all, as Dr Henry Kissinger remarked, "The most powerful source of discipline we have around the world," he said, "is the power of the markets".

Even still, as the Chairman of the Swiss Central Bank, Jean-Pierre Roth remarked, with something close to disbelief in his tone: "People [in the US] who had neither income nor capital got credit with very attractive conditions that could only be tightened with time". Roth underlined that the situation was encouraged throughout the US economic system from financial institutions that set up structured products covering such lending, to ratings agencies that gave their seal of approval. "And now we are seeing that there isn't a market for such papers. Now reality is striking back. That leads to massive losses and there will be victims".

In other words, there may be something close to an old fashioned "run" on the financial system, but that does not mean it is not justified. Until the Markets know the full scale of the problems, they will be inclined to fear the worst.

Comments

Popular posts from this blog

Concert and Blues

Tallinn is full tonight... Big concerts on at the Song field The Weeknd and Bonnie Tyler (!). The place is buzzing and some sixty thousand concert goers have booked every bed for thirty miles around Tallinn. It should be a busy high summer, but it isn´t. Tourism is down sharply overall. Only 70 cruise ships calling this season, versus over 300 before Ukraine. Since no one goes to St Pete, demand has fallen, and of course people think that Estonia is not safe. We are tired. The economy is still under big pressure, and the fall of tourism is a significant part of that. The credit rating for Estonia has been downgraded as the government struggles with spending. The summer has been a little gloomy, and soon the long and slow autumn will drift into the dark of the year. Yesterday I met with more refugees: the usual horrible stories, the usual tears. I try to make myself immune, but I can´t. These people are wounded in spirit, carrying their grief in a terrible cradling. I try to project hop

Media misdirection

In the small print of the UK budget we find that the Chancellor of the Exchequer (the British Finance Minister) has allocated a further 15 billion Pounds to the funding for the UK track and trace system. This means that the cost of the UK´s track and trace system is now 37 billion Pounds.  That is approximately €43 billion or US$51 billion, which is to say that it is amount of money greater than the national GDP of over 110 countries, or if you prefer, it is roughly the same number as the combined GDP of the 34 smallest economies of the planet.  As at December 2020, 70% of the contracts for the track and trace system were awarded by the Conservative government without a competitive tender being made . The program is overseen by Dido Harding , who is not only a Conservative Life Peer, but the wife of a Conservative MP, John Penrose, and a contemporary of David Cameron and Boris Johnson at Oxford. Many of these untendered contracts have been given to companies that seem to have no notewo

Bournemouth absence

Although I had hoped to get down to the Liberal Democrat conference in Bournemouth this year, simple pressure of work has now made that impossible. I must admit to great disappointment. The last conference before the General Election was always likely to show a few fireworks, and indeed the conference has attracted more headlines than any other over the past three years. Some of these headlines show a significant change of course in terms of economic policy. Scepticism about the size of government expenditure has given way to concern and now it is clear that reducing government expenditure will need to be the most urgent priority of the next government. So far it has been the Liberal Democrats that have made the running, and although the Conservatives are now belatedly recognising that cuts will be required they continue to fail to provide even the slightest detail as to what they think should guide their decisions in this area. This political cowardice means that we are expected to ch