The bankers are the beneficiaries, not the causes of the problem

Fund managers, and creators and traders in derivatives and in swaps and in futures, are lumped together with manager-underwriters of corporate mergers and with buyers and sellers of 'money' under the blanket designation as bankers. A significant majority of participants in those trading activities [including the huge volume that are simply gambling] have been content to receive incomes that are multiples of industrial wages for playing their market games under the delusion - shared by governments and stimulated by Economists - that 'markets' should predominate over the economy.

Economists have asserted - contrary to all the evidence - that 'markets' behave 'rationally'. Rationality is a function of human intelligence. It is not an emanation that emerges within inanimate trading spaces, which is what markets are. Markets have an immense range and diversity, from fish markets on riverbanks and at the side of harbours through the pre-1986 Stock Exchange to the complex interactivity that takes place in cyberspace. In recent days the media have been replete with repetitions of Keynes's dictum that both in periods of euphoria and of stress [such as is being experienced now in Europe] markets are dominated by 'animal spirits'. If any conventionally-qualified Economist can tell us how animal spirits - which Keynes also linked to 'waves of irrational psychology' - can be presented as an epitome of rationality in the contemporary context they should rush forward to do so. The proponent of any superficially plausible explanation will be a prime candidate to receive the pseudo-Nobel prize that Economists have handed to each other annually since the nineteen-sixties.

After the big bang of 1986 the bankers were freed to gamble and to gather their bonuses because politicians - on the recommendation of Economists  - created regulatory bodies that facilitated their fantastical creations.

 We are told that the fallout from the 2007-8 credit crunch is an unprecedented situation. It is generally presented as being the outcome of modern inventions in monetary policy, in regulation, in consumer empowerment and [above all] in computerised deployment of algorithmic methodology. But these are merely phenomena. Within the human beings who participate in markets - from fishmongers to creators of Credit Default Swaps - there exist the same abilities, tendencies, ambitions, urges and complexes as have existed in humans for the last dozen millennia. We don't have detailed records for the banking activities that almost certainly existed several centuries BC, but we do have Assyrian and other tax records and businessmens' notes on clay tablets which show that trade had become sophisticated before Roman times. We also have the comments that were made on people who became powerful in markets; and many of those observations fit with the attitude to 'bankers' that purportedly animates the sad crowd beside Saint Paul's Cathedral.

The Jews who established their first state under Saul, David and Solomon almost a thousand years BC inherited texts from their.own ancestors and from the surrounding [more mature] cultures, and one of the most marvellous products of the resulting culture is the Book of Psalms. One psalm, in particular - Psalm 73 - is an exposition of a decent human being's reaction to seeing:
"the wicked.......in such prosperity".
 Like the bankers of 2006:
"they do even what they lust......therefore fall the people unto them [and the mortgages and credit cards and derivatives and Credit Default Swaps that they provide] : and thereout suck they no small advantage. These prosper in the world, and these have riches in possession":
But they inevitably get their cum-uppance:
 "Oh how suddenly do they consume, perish and come to a fearful end!.......even like a dream, when one awaketh: so shalt thou [God]  make their image to vanish out of the city".
[Quotations from the Book of Common Prayer]

Religious belief is not necessary for a person to recognise that throughout history forces that exist deeply within the human spirit react as the psalmist did when the behaviour of self-identifying elites become seriously deviant from what is sensible. The crazy trading practices of 2001-7 have been allowed to continue until now, in the residual financial market that was patched together after governments had rescued most of the component firms. People in Greece and Italy are being forced to recognise that they have been set 'in slippery places': the economy has been 'cast down and destroyed' by what the regulators allowed the bankers to do. But it is not the regulators or their Economist cheerleaders who are being 'cast down and destroyed': the casualties are the politicians, the group under the media spotlight who are susceptible to democratic accountability.

In Greece and in Italy Economists - proven delusionists - have been given power without democratic responsibility. Their priority will be to support the core fantasy promulgated by their 'profession', the efficiency of autonomous 'markets'. Their first steps in power will be to squeeze living standards; which will work regressively, with the least articulate and least skilled people suffering the biggest proportionate attack on their standard of living. When the combination of increased rates of taxation, increased collection of taxes, frozen or reduced public sector salaries and pensions, failed firms and rising unemployment are seen to have worked adequately they will seek permission in European institutions to loosen the squeeze on money creation. Bankers will be encouraged to dissipate inflation through the economy, which will reduce the perceived 'value' of the debts that the bankers and the governments owe, while further reducing the real purchasing power of wages. Whether or not they will be allowed to get away with it is highly problematic: demos - the voters - must be allowed to decide whether or not they accept such a programme, both at its inception and as its impact becomes apparent. If the democratic sanction is not applied, riots and insurrections can confidently be predicted; even revolution. It will matter less what the revolutionaries promise than how effective they are in exposing the fallibilities of the Economists' policies.

The politicians are falling, the Economists will have their day and may succeed or not: the bankers will sail serenely on, providing essential services and engaging in their self-centred gambling. The people who take most of the blame from the populist media will bear the least of the pain.

Back to the Mighty Markets

The Morning Posting
Though the media are still saying that the European Union and the Eurozone are under all sorts of threats from 'the Markets', the immediacy and seriousness of the threat is being downgraded. Back in prehistory Harold Wilson said  that "a week's is a long time in politics": and time seems to be moving more quickly in this century. Commentators have not stopped mentioning the fact that 'markets' are a major source of pressure on the politicians and their advisers as they forgather again in Brussels; but they have been forced to respond to the demand of their readers and listeners for the nature of the threat to be specified. The press and broadcast commentators have begun to admit that the risk is not from 'markets' as such, but from individual users of and traders in financial instruments who tend to pursue a form of herd behaviour.

Throughout economic history there has been a series of 'bubbles' when far more investors have offered far more money than has seemed sensible after the event, for 'assets' that suddenly seem so attractive that almost every investor wants a slice of them. Nineteenth and Twentieth-century History regarded as absurd the boom in shares of ownership of black tulip genetics in seventeenth-century Holland: but it seems slightly less absurd today when it can be viewed as a 'false dawn' of the modern capabilities of genetic engineering. No doubt, there will be future bubbles in shares in businesses that make breakthroughs in the application of genetic science. Early in the eighteenth century, even though Scotland had already experienced a boom and a horrible bust of shares in a company for colonisation in Central America, the whole of the now-United Kingdom experienced a huge bubble in the value of shares in the South Sea Company. People who bought the shares early and then sold while the market was still rising made fortunes. Then far more people found their family nest-egg of gold or silver coins, or sold assets to get cash, which they became desperate to spend on shares: so there appeared people willing to create companies in which they sold shares - even including a company 'whose purposes will duly be disclosed'. Suddenly someone recognised that most of these companies had no real assets: some had paid dividends out of the money shareholders had given them, but there was no evidence that they would yield dividends even for a couple of years. The most percipient few investors were able to sell the shares for at least as much as they paid for them, but then more and more people tumbled to the truth and sought to sell: a sales panic ensued and most of the new companies vanished. The South Sea Company survived, in a much diminished state; then over the decades the lesson was shelved. The nineteenth century saw a succession of 'railway booms'  as that technology spread around the world; Brazil had a 'rubber boom' [ended when Brits stole rubber genetics and installed plantations in Malaysia and Ceylon]; and the twentieth century had alarming stock-market booms and crashes. The dawn of a new millennium brought the dot-com bubble, and then followed uncontrolled expansion of a huge range of financial instruments which inevitably led to the greatest crash of all.

In every case the markets in which assets have been sold were simply media: the booms and busts were caused by the human psyche. Economists and journalists have written extensively about 'sentiment' and 'animal spirits', which was wholly appropriate: they also wrote about 'market sentiment' which was absurd.A major complicating factor is the fact that investors' optimism or pessimism is influenced strongly by cheerleaders: media commentators, 'analysts', rating agencies, Central Banks' statements and actions, government policy, opposition warnings and the lucubrations of Warren Buffet and other 'sages' or 'gurus'.

Market participants' behaviour could become so irrational that they sold Euros or Italian Government Bonds regardless of how much of the purchase-price they had lost, ignoring the fact that Europe is more than rich enough broadly to maintain the exchange rate of the Euro against the US Dollar and the Yen; and Italy is rich enough to unwind any perceived excess of government debt over a period of years. Any such asset-sellers would hurt the funds for which they are responsible, perhaps irreparably. Thus it is in their interests to preserve the medium-term 'value' of their holdings. As long as the Eurozone governments can show that they have the capability of maintaining medium-term assets-in-being [having dumped Greece, which is an unsustainable basket-case] they do not need to assemble trillions of dollars-worth of cash-on-the-table today. So they won't pile the cash up pointlessly: they don't need to. Markets have nothing to do with it. Market participants need strong nerves and common sense, and if fund managers should begin to behave destructively their employers should get rid of them - without any bonus or severance packages beyond the statutory minimum.
Evening Posting
After this afternoon's  European Union 'summit' meeting no mighty new bail-out fund has been created, no immediate step has been taken towards 'fiscal union' of the Eurozone, and Italy has been forced into a humiliating promise to retrench further than had been intended by the busted Berlusconi government. The crunch on Greece is still being prepared; and there may yet  be weeks of chatter before the banks are softened-up sufficiently to take the write-down of Greek state debt that will be necessary whether or not some means are found to keep Greece in the Euro The German Parliament has accepted a minimalist proposal from the Chancellor, who is far more concerned about German public opinion than she is about relations with France [though her speech this morning bizarrely referred to a threat that there could be a return to the era of wars in Europe if the EU should collapse].
After this evening's non-news had broken the immediate reaction of participants in 'the markets' was to raise stock prices a little. The politicians have made it clear that they are concerned to preserve the Eurozone: but are nowhere near panicking: they would not be stampeded into the sort of measures that US politicians [in particular] have been demanding from them. The eurorats' favoured technique of proceeding at snails'-pace towards consolidation of all power and wealth in their own hands has worked again.