Sunday, January 11, 2009

A Profound insight... well an Insight anyway.

A profound insight came to me as I was walking the Dog in the lashing rain and howling gale this morning.
As I walked towards the park, umbrella well down in front of me, I kept putting it up to see if anyone was walking towards me. Naturally, given the weather, no one was.
Then on the way back I held the umbrella behind me to stop the driving rain hitting my back. In other words, I could see what was coming towards me without having to raise or lower the umbrella.
It struck me that this is precisely what happens in markets, in crowds and in business. One lot are walking into the wind and rain, the other lot are walking with them. Some are selling, some are buying.
There are all sorts of books about " The Madness of Crowds" and how " The Wisdom of Crowds" is better than a panel of experts - and so it proves with my insight. Those walking with the wind and rain have a responsibility to avoid those walking into them.
At the moment we have two opposing views in this country, the Labour view being to borrow more, spend more, and to this end are berating the banks for not handing out more, never mind the consequences and the potential losses.
The opposite is what I will refer to as the Conservative view which is the direct opposite - save more.
Unfortunately, as this government does not have and never has had the first inkling about economics, markets, profit or anything else, including principles, we are left with a position where the banks are being forced to run into the wind and rain despite the damage this will do to them.
We, as responsible citizens, should be avoiding them.
As I keep saying, yes its painful, yes its going to be some time before things improve, but no we cannot continue to live as we have - and the banks certainly can't afford to lend as they did, with too much and incorrectly priced risk and too little profit. You may say what about all the bonuses and the huge profits the banks have wracked up over the past few years. My reply would be that the declared profits have all been completely false - the first whiff of problems and the entire banking industry has been nearly wiped out, so they not only had the wrong pricing, they didn't even put aside any reserves against future losses. More likely, the tax authorities wanted them not to put money aside as it meant the banks had to pay higher taxes, and Brown for one welcomed this with open arms and promptly did the fiscal equivalent of tearing the notes up and throwing them away.
So my insight today is that it is we the citizens ( perhaps classified in general as " The poor Bloody Infantry) who must get the world out of it's mess. Our instincts are to be frugal, to save, to pass something on to future generations.
Government should encourage these qualities.
I won't go on about Northern Rock and Bradford and Bingley, apart from saying that this clueless government has nationalised them in such a way that 25% of the total UK lending for property that they did in the past year or so has been completely wiped out. Yes they were lending imprudently, but at least they were lending. Now all that's happening is they are getting rid of good borrowers and are left with the bad ones. They may be paying back the Treasury their loans, but in the end the equity the government has put into them will be wiped out - and more.
See the excellent Tory poster here


Brian Boru said...

Individuals are inclined to batten down the hatches in tough economic times for various reasons including the fear of losing one's job, an expectation that prices may fall further or less avaalbility of credit. The problem is that whilst these are rational individual responses the combined effect is a large loss of aggregate demand which in turn will aggravate the situation for the economy. Keynes called this 'the paradox of thrift'. If individuals cannot or will not spend, then it behoves governments to take their place to boost aggregate demand and keep the economy afloat. Politics apart, this is the economist's angle on the situation we are facing.

Brian Boru said...

And I should have added, Happy New Year, yer Majesty. Keep your excellent blog running..........

kinglear said...

Hi BB, glad to see the house hasn't completely taken you over...
Yes the paradox of thrift is indeed a problem, and I freely acknowledge it. The problem is we NEED to drop aggregate demand, which will get the Banks balance sheets into some semblance of order PDQ - but also drop house prices, jobs, you name it.
But if we don't bite the bullet now we will be leaving our children and THEIR children burdens of taxation and debt that might never be paid off See the excellent Tory poster which is in the main post