Tag Archives: The financial crash of 2008′

Brexit myths 1 -that the rich well off campaigners for leave have nothing to fear from leaving the EU

What the financiers, right wing politicians and business who have backed Brexit believe is that they are immune from any of adverse consequences that might result from Brexit. A belief that can be rephrased as follows that, ’bad things don’t happen to the rich, only to the poor’. Only a person completely ignorant of the past and past economic crisis can believe such nonsense. These people  are of a generation that has no knowledge of the great economic depressions and financial crashes of the past. My generation of economists were told stories of financiers jumping out of the window of their offices to their death, as they could no live with the consequences of their business  failures and lost fortunes. Although this was a popular myth as Galbraith writes in his book on the great crash of 1929, what it does is through a popular myth convey a truth, there were many rich man who saw their fortune disappear with the financial crash of 1929. The Joseph Kennedy’s who had the foresight to get out of the stock market before the crash, where few and far between. After the crash there were many millionaires reduced to relative penury. A fact disguised by the terrible suffering of the less well off who lost homes and jobs, a fact which tended to dominate the popular imagination.

The misplaced confidence of the many rich right wing politicians is in part due to the fact that the crash of 2008/9 left them with their fortunes largely intact. The action of the government and the Bank of England prevented these people from suffering any real adverse consequences from the crash. When banks failed, the government through the Bank of England invested billions in the weakest banks to maintain confidence and preventing  a run on the banks developing and causing a more general  collapse of the market.  All banks and financiers had over invested in the property and equities markets and were at risk of seeing their assets fail catastrophically in value. As a consequence only the most reckless and unluckiest of banks failed, most were left relatively unaffected by the crash. A serious and catastrophic financial crash was averted  through the government being willing to back the banks with whatever money was needed to maintain the banks solvency.

What is not understood is that at the height of the crash the government was willing to pledge most of the country’s wealth to support the banks. Fortunately the credit of the British government was sufficiently high in the eyes of the banks major creditors that this money was never called on. If it had been the British population as a whole would have been reduced to abject poverty as major creditors would have wanted their money and it could only have been provided by taking it from the incomes of the people. The only consolation would have been that if the British economy crashed because the bank’s creditors doubted the credit worthiness of the banks, the world economy would have crashed because most of the developed world’s banks were as unsound as those of the British.

The world economy is subject to regular cyclical downturns, which seem to occur at intervals of every nine years. If this cycle continues as normal, the next downturn is due in 2017. In 2017 negotiations to leave the EU begin and the uncertainty generated by these negotiations will worsen any economic downturn.It is unlikely that the UK will go through 2017 without a significant downturn in economic activity, especially as now the leaked Treasury report on the negative impact of leaving the EU has been published, a report which confirms the fears of those doubting the wisdom of leaving the EU.

Many of the rich Brexiters have invested considerable proportions of their wealth into high paying and high risk financial investments. The high risk element is concealed by the continued upsurge in asset values, which makes all investments appear sound. When interest rates are low and prices are constantly rising it is possible for even the worst of investment managers to make money. What matters is belief or confidence, in 1928 investors bought into a project which promised to build houses on swamp land in Florida. They did not worry about the soundness or otherwise of the project, as they believed that they would be able to sell their investments in the scheme for a  sum higher than that which they invested. The financial markets today are brimming with misplaced confidence so that investment managers are making many investments that are ill advised. Unfortunately the opaqueness of so much financial accounting makes it almost impossible to judge which investment funds are the ‘dogs’ in the market.

Next year if not sooner such financial dogs will be revealed. The bull market will turn to a bear market as the fear regarding the when uncertainty about the future of the economy grows  when it becomes obvious that the Brexit negotiators have no realistic plans for offsetting the negative impact of leaving the EU. The negotiators at present are literally conjuring markets for British goods and services out  of nowhere and when the markets see that there is no substance to the optimism of the politicians prices of all assets will tumble. Then in a falling market the financial dogs will be revealed, some will inevitably be unable to meet their obligations and will collapse. Those unlucky wealthy politicians that have invested heavily in these companies will face substantial losses.* While I can  be very confident that next year, if not this will be one of financial crisis, it is impossible to predict how severe the crisis will be. If the crisis reveals that there are only a few dogs in the market it can be contained. What matters is how the collapse of a number of investment and property funds affects the confidence of the market. In a volatile market which is the financial market,falls can be substantial before the market recovers its nerve. All that can be said is that there will be a number of rich politicians next year who having lost substantial sums of money will be regretting their decision to campaign for an exit from the EU.

* The compensation schemes exist will be insufficient to compensate these rich investors for their losses, particularly as the government will need to spend its money elsewhere to minimise the negative impacts of Brexit.


What economists will never tell you and what politicians prefer not to know

Gordon Brown when  Chancellor of the Exchequer was responsible for the infamous quote, ‘No return to boom and bust’ and then when the economy went bust in 2008 he had to retract his words. There was even the Stalinist rewriting of history when all references to this quote were removed from the Treasury website. Possibly Gordon Brown is amongst the cleverest of  the Chancellors of the Exchequer that we have had this century, yet he got it all so wrong. 

What his Treasury advisors should have told him was that the trade cycle is an unavoidable feature of capitalist economies and that all politicians can do is ameliorate its worst effects. There are invariably periods of boom followed by bust. A quick glance at history would have shown Gordon Brown the truth of this. In 1990 there was the collapse of the property boom, which bankrupted many property companies and in 1999 there was the collapse of the dot.com bubble. The latter bankrupted GEC which at the time was Britain’s largest electrical engineering company. A bankruptcy caused by paying too much to purchase a series of over valued software businesses. It does seem that with the bust of 2008, these financial crisis’s seem to occur every nine years. Unfortunately the current Chancellor of the Exchequer seems to be demonstrating a similar naivety to his predecssor about the economy. He claims to have put the economy on a sound footing and his preventative measures will prevent a repeat of the crisis of 2008/9. If history repeats itself there will be a financial crisis in 2017, something of which he appears oblivious. 

Why is there this constant misreading of history? One reason is the arrogance of both economists and politicians. Economists having discovered in the free market the equivalent of the economists  philosopher’s stone cannot believe that there are times when the market will fail. If the free market is the best possible of organising economic activity and can’t be bettered, it is foolish to look for non-existent flaws. Any economic crisis is not caused by any dysfunction in the market it is the politicians who fail to implement policy correctly, it’s human not market failure. There are  economists who claim that the financial crash of 2008/9 was not due their lack of regulation in the financial markets failing to rein in  the irresponsible banks but through there being too much regulation of the banking industry. Although economic reality intrudes all too often when the economy takes a down turn, economists prefer to ignore this inconvenient fact.

Peter Cook in a scene from the film ‘The Rise and Rise of Michael Rimmer’

Economics should not shoulder all the blame for the belief in what can only be best described as a preference for the economics of fairy land. The message has to be doctored to meet the demands of the economist’s political masters. Economists must be on the message politicians only want good news.

The new politics can be best explained by reference to a Peter Cook film, ‘The Rise and Rise of Michael Rimmer’. In this film Michael Rimmer on becoming PM cuts the defence budget to finance a tax give away. When faced with the disgruntled generals he shows them a film of the marvellous new weapons that he has purchased for the military. The generals immediately praise him for his policies, even when he tells them that the weapons they have seen featured on a film don’t really exist. What matters is what appears to be, given the guarantee of their jobs and incomes the generals are only to happy to acquiesce in the disarming of Britain. All party leaders now have their coterie of ‘spin doctors’, whose job is to make bad appear good. Politics is increasingly coming to resemble the public relations industry and as a consequence policies are never subject to proper scrutiny, as any policy debate within a political party is increasingly seen as an example of disunity. It is one of the many assumed truths that voters don’t like political parties that appear disunited, so politicians will do all they can to avoid appearing disunited, so any of story will do as long as all party members stay on message. 

Not only is this a society in which appearances matter more than the truth, it’s also a society that prefers to avoid unpleasant truths. The economist or politician that disrupted the pleasant complacency by voicing inconvenient truths is vilified and silenced. When Alistair Darling (Chancellor of the Exchequer) in 2007 spoke of an impending financial crisis he found that he was a lone voice speaking the truth. There was no politician or economist who spoke in support of him. Some politicians and economists would have known he spoke the truth, yet all preferred the  pretence of the ’emperor’s new clothes’, that is were willing to keep up the pretence that all was well. Not even opposition politicians spoke in his defence, as they did not to be seen to be going against the preferred wisdom of the times.

What I am saying is that as economists and politicians have abolished the trade cycle, at least in their imaginations, any economic downturn will be the unexpected event that catchesus all by surprise. It should not have happened, it came out of nowhere, was the reaction to the crash of 2008/9.,Famously the Queen asked why no economist correctly predicted the crash. She failed to get any meaningful reply from the collectivity of academic economists, as any truthful response would have meant admitting that all their theorising and policy recommendations were wrong. 

“Untergang der Titanic”, conception by Willy Stöwer, 1912

Can I put it in terms of the Titanic metaphor, would the passengers of that ship wanted to know that it would shortly strike an iceberg, which would cause the ship to sink and most of them to drown? No they would have preferred ignorance, so as to enjoy the last moments of their life without it being spoilt by a knowledge of their impending doom. However what they would have wanted was the captain and crew to have prepared adequate means of evacuating the ship in the case of it sinking, so as the minimise the loss of human life. Economists by ignoring the existence of icebergs (economic downturns) fail to prepare adequately for them and fail minimise their negative effects on society.