Wednesday, April 22, 2009


This from Seablogger

I’m reminded of a story I heard about one way the mob does business…they find a small businessman and “persuade” him to take a member as a “minority partner.” The partner proceeds to withdraw funds from the bank account, buy (and steal) inventory on credit, and generally loot the business, eventually leaving the proprietor with a bankrupted business and destroyed personal credit and reputation. Having pushed the limit on legitimate borrowing, is the US Government now using guile to loot the private savings and investments of even non-US investors?

Today Alistair Darling presents his UK budget for 2009/10. It comes the day after a warning from the IMF that the UK will have the hardest climb out of recession of any Western economy and the day after the retail price index went negative for the first time in 45 years.

It is hard to know how to interpret the financial position of the country. In one respect this is just another 'bubble' that has burst. In contrast to most of Europe, Britain has been a householding democracy. We showed our faith in the country by buying a bit of it. I noticed something was up when I took out buildings insurance on my house. The rebuild costs were far less than the market value of the house. Obviously someone was putting a high value on the land.

I wrote yesterday about £8 million houses in Sandbanks (pictured above). This is apparently the site of the fourth most expensive real estate in the world. England (as opposed to the UK) is the most densely populated country in Europe. Not only does everyone expect to own their own house, but a constant stream of immigrants form Eastern Europe, Iraq, Afghanistan, Somalia, India and Pakistan wants to own one to. Fine large houses from the twentieth century were being torn down and turned into one bedroom apartments. There was a lot of money to be made. Typically, a £400,000 house was demolished and an apartment block rebuilt at a building cost of £300,000. It would contain 14 apartments which retailed at £150,000 each. Do the sums. Who wouldn't want a piece of that? The banks offered 100% mortgages at 2% starting interest to rise to standard interest rates after 3 years. It looked like a good investment. You could get on the housing ladder, house prices could only rise, your salary would rise and in three years you could afford the higher interest rate and if you couldn't you could shop around for another fix.

The word 'fix' is a giveaway. It had become an addiction. the rising price of housing was a drug. People were bankrupting themselves to get a part of it. Legislation allowed the addicts to put their pension funds into housing. The elderly gave their life savings to their children to buy into the housing bubble. Unscrupulous bankers lent money to people who had no income. You can't buy a house on benefits no matter how generous they seem.

A secondary market in bad debts arose and there were plenty of suckers to buy them. The banks had a fail safe position. Nobody could contemplate bank failures - they remembered the great depression. Only the government could save the banks. The government has unlimited money. Wait a minute! The government has no money. It has a means of confiscating other people's money by taxation or by inflation or by devaluation of the currency.

People are not stupid. They may be short term stupid. Some of them are long term stupid. But you can't fool all of the people all of the time. I believe Bob Dylan said that(!) Harold Wilson, prime minister in the sixties and seventies, famously lied to us, "The pound in your pocket is not worth less." The pound has been devalued against the Euro and the dollar by about 25%. Now's the time to holiday in the UK.

It is predicted that the Budget will raise taxes and cut public spending. If that meant smaller government I would be all for it but it will probably mean cutting services and the services it will cut will not be the ones precious to the socialist heart.

Pensions will be hit since that will not really be felt for many years. The motorist will bear the brunt because it fits with the government's 'green' agenda. Speed limits will be reduced to save 'greenhouse gases'. There is no point in the government currying favor with the electorate even though an election is only 12 months away, since they are 19% behind in the opinion polls following the scurrilous e-mail scandal. They are now working towards the next election in 2015, trying to leave as big a mess as possible for the Tories to clean up. So the middle classes will be hit with tax rises.

That's one side of the argument. The conclusion is that the government should keep its nose out of business; it should let the market do its job. There were plenty of banks that did not buy into this reckless business model. If banks had failed depositors could have been protected (were protected up to a £50,000 maximum, and the warnings were there that investors should not have all their eggs in one basket) and these banks would have replaced the ones that failed. Some retailers like FW Woolworths in the UK have failed but, in truth, it was a shop that had lost its way and it deserved to fail. It lived on its history, but had nothing worthwhile to sell. Other retailers will move into its premesis and snap up its employees.

The Christian side of this argument says that Haggai (1:4-6) said it all "Is it a time for you yourselves to be living in your paneled houses, while this house remains a ruin? Now this is what the LORD Almighty says: "Give careful thought to your ways. You have planted much, but have harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it."

The House of God in the UK remains a ruin. I'm not talking about run down church buildings. The church is the people, and the people have had their fill of hedonism. Now is the time to seek sounder values.

The other side of the argument says that it is all about confidence. When I was 17 I was a keen but not very skillful footballer. I played center back for the 2nd eleven. The school was divided into four houses, two named after bishops (Beaufort and Wykham - spelled without the 'e') and two after Victorian novelists (Dickens and Kingsley). I was in Kingsley house together with a few other intellectuals and physical weaklings. Seizing my chance, I stood for Sports captain (we had no members of the 1st eleven at either football or cricket nor the 1st fifteen at Rugby. Our hero was a 4 minute 20 second miler who had left school six years previously). I was not elected; instead they chose a red-haired skinny boy who had transferred from the Catholic school at 16 and as a consequence nothing bad was known about him.

The house football championship was a disaster. We were on the end of drubbings from Wykham and Beaufort and had to face Dickens who had the captain of the 1st eleven and several other stars in their team. To make up a team we had recruited 14 and 15 year-olds and some bookish types who played in spectacles. Predictably, at half time playing down the slope and with the wind at our backs we were losing 3-0.

I don't remember what I said at half-time. Something about the other side not being Supermen. Something about how they would be complacent with such a large lead. Something about believing in ourselves. Something about a good little one beating a slow and over-confident big one. Something about opportunities. I only know that somehow the team played the second half with confidence. They played for each other. They remembered what they could do and forgot what they couldn't. We scored 5 goals in the second half, uphill and against the wind. The following week I was picked for the 1st eleven.

It was all fake, of course; we weren't a better football team than Dickens, any more that Bournemouth were a better football team than Manchester United when they knocked them out of the FA Cup in the 1980s. It is all about confidence.

This was how we escaped from the great depression. In Germany in the 1920s the currency was so devalued that you needed a wheelbarrow to carry home your wages in banknotes, and if you were robbed on the way home they would steal the wheelbarrow. Hitler restored confidence with oratory and military adventures. He got the German people believing in themselves after the calamitous defeat of the Great War and the punitive reparations of Versailles. He picked on a common enemy - the Jews - and united the people. In the States Roosevelt restored confidence in America, first by public works (which were not universally popular) but most importantly by the wartime expenditure. He created the Military-Industrial Complex which survived the Second World War by choosing another common enemy, communism. After Reagan there was no peace dividend. New enemies were discovered, Militant Islam and Greenhouse Gases.

Keynesian economics bought into this idea of confidence. Someone has to have it. Banks have to be confident enough to lend; industrialists have to be confident enough to borrow to invest and employ, consumers have to be confident enough to buy, retailers have to be confident enough to expand, consumers have to be confident enough to invest and so the cycle rotates. When everyone's confidence fails, government has to supply the fake confidence. It helps to have a great orator. Hitler, Churchill, Clinton and Blair all had that ability - so does Obama (in that respect Bush and Brown are and were disasters). They also need a compliant media and the blogosphere is a threat to that. We are not being surreptitiously fed propaganda by 'government sources'; we have to think for ourselves.

The Christian response to this side of the argument is that the real sufferers from the recession are the poor in Africa and Asia who have stopped growing food for home consumption and instead have been producing flowers for the rich man's wife, kiwi fruits for his low-calorie breakfast and fair trade coffee for his sore conscience. The rich man has been salving his conscience by cutting down on air freight greenhouse gases and tightening his belt because charity begins at home. And didn't Jesus say something about the poor being always with you. So the left-leaning Christian says spend, spend, spend, but direct your spending to the poor and needy.

As I said at the beginning of this lengthy piece I am ambivalent about what to do. In truth, I have been little affected by the recession. I have always thought that the inflated price put on my house was a joke. I paid £25,000 for it, which today wouldn't even buy a beach hut. For a while I seemed to be a paper dollar millionaire, though without a millionaire's life style. I have never spent all my income, and although my investments have gone down through the stock exchange fall, they are still probably worth more than I paid for them. My pension is large enough for me not to worry about money ever again. I don't believe that the left hand should know what the right hand is doing with donations so I will say nothing about this. Construe that as you will.

I am concerned about my grandchildren, but they all seem to be talented and they should make their way in the world, but Mr Darling's budget may well affect them. I would like to trust that he knows what he is doing, but the middle verse in the whole Bible (Psalm 118:8) says "It is better to take refuge in the LORD than to trust in man." (even a darling man). Incidentally, for those who like coincidences, 1188 is exactly the number of chapters in the Bible.

1 comment:

Anonymous said...

This is all very complicated, but even more frightening to me.

My own children thought that I worked too hard as a physician and chose to enter the business world (ironically enough, banking). Now I have (like so many who thought that they were prudent savers and "investors") lost a great deal of what I thought that I had accumulated.

More worrisome to me is that my children are working far harder than I ever did, with less to show for it and ever growing future burdens amassing on a daily basis.

I don't know about the political situation in the UK, but in the US we now have a situation where more of the electorate is on the receiving end of government largesse than are those who actually pay for things.

You are correct that the only money that the government has is that which it either prints (creating inflation) or confiscates (via taxation). When more than 50% of the voters get more benefits from the government than is taken from them it is axiomatic how things will progress.

I worry a great deal about my children and their children. Their talents certainly give me hope, but the government and it's growth brings me despair.

Well meaning politicians have the potential to do a lot of harm.