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Tuesday, 19 June 2012

Guff at the G20

Some of the people who are regarded as the most important 'leaders' and office-holders in the world have been to the seaside in Mexico with the ostensible purpose of stabilising the global economy. The slow-motion unwinding of the eurozone has been extended by the emergent powers placing additional credit with the International Monetary Fund so that it will be available to be pumped into Europe: conditions will be specified but it is most unlikely that these would be so draconian that they would ensure that the euro collapses. Low-grade politicians who hold on to power by default in countries outside the eurozone have again admonished those inside the common currency to get their act together; once more these focus on trying to bully Germany into dissipating its savings on helping other eurozone countries. So far, Germany has declined to obey, and the President of the EU Commission has blamed 'North America' for the crisis.

My analysis firmly locates the origin of the global financial crisis in London, England. With the 'big bang' of 1986.the Thatcher government smashed the traditional division of financial transactions in the City of London between stock brokers and jobbers, banks and merchant banks, separate exchanges for different types of transaction, self-regulation within each sector and ultimate oversight from the Bank of England [which preferred to steer market members into approved ways of working by winks and nods and secret meetings]. The phrase big bang had become central to theoretical physics, to describe the moment immediately after the creation of the universe when its great expansion and diversification began. By applying that phrase to the finance sector enthusiastic commentators implied that here was a new beginning in a newly structured market that could grow immeasurably and bring great profit to the participants: who could then be taxed to meet some of the growing deficit on government income as industry was destroyed while farming and fisheries were left to wallow under heavily protectionist EU regulations. The rapidly advancing capabilities of computers enabled the markets to be operated at speeds and with complexity far beyond the former trading patterns that had depended on word-of-mouth and typewriters. New types of 'product' - most obviously derivatives and new processes for securitisation - burgeoned on an almost astronomical scale, and old contract types such as futures were reformatted and used in vastly different new ways. The world's banks brought business to London and Wall Street looked set to lose the dominance of global markets that it had gained in the nineteen-thirties and consolidated through the Second World War, Marshall Aid and Cold War. Ferocious lobbying of the politicians in Washington led to the repeal of legislation that had mandated the separation of 'retail' and 'wholesale' banking,  and had differentiated banking from broking; with the specific intention of enabling Wall Street to compete with the City of London. Small differences in regulations led globalised businesses to put some business in New York, some in London and a little in other centres such as Hong Kong and Singapore.

Thus far the London big bang was the origin for the new pattern of trade; but then the US government decided to tap into the markets in the interests of social engineering. Given that such huge and flexible financial markets existed, surely they could be required to lend money to people who sat at the bottom of the heap in society. Let even the poorest become home-owners and thus gain some pride of possession and learn to earn the money necessary to service their mortgages and care for their homes. Mortgage lenders were required to allocate some of their funds to 'sub-prime' mortgage borrowers: two government-backed institutions underpinned the mortgage market, but the wholesale market practitioners became increasingly keen to securitise 'bundles' of mortgages and re-sell the securities into the general financial markets. After a very few years just about every bank and securities manager included some sub-prime mortgages buried within their so-called 'assets'. Once it was demonstrated that hundreds of thousands of feckless Americans were not paying their mortgage debts or maintaining their houses well, it was clear that some portion of the 'value' of many hundreds of thousands of 'assets' was non-existent. Thus the trigger for the crisis was squeezed in North America, but financial institutions from all over the world were deep in the mess and the resultant reckoning is ongoing. American sub-prime lending was the mechanism for the disaster; but its origin lay in the reckless gamble by the Thatcher government.

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