World markets "slump?"
Tuesday, September 30, 2008
Link: World markets slump as panic grips the banking sector | Business | guardian.co.uk.
I love the way the Guardian's journalists slag bloggers off as irresponsible and then write such tosh as the linked article. If I jumped off a cliff, fell 5% of the height and landed on a ledge, would you say I had "plunged". If you had a dollar and lost five cents of it, would you consider your wealth to have "slumped?"
I do not say markets will not fall further. Nor do I say that further banking institutions will not fail. Indeed, in my opinion, there are several that should. I simply feel the most interesting facts of the day are not being highlighted.
Firstly, American democracy works. Ours doesn't. We can debate whether the US voters were wrong not to want to pay $5,000 per man, woman and child to prop up failing banks around the world. When they called their Congressmen and told them what they thought, however, the politicians did as they were told. Show me a European country where the peoples' voice counts to that extent. In a way it's amusing. Had the vote gone through, I doubt any German bank shareholders would have said "danke." More likely they would have continued to bask in schadenfreude and talk about the end of "the anglo-saxon model." Now they can use their own money to prop up their banks, if that's what they believe is right.
Secondly, this is not a US phenomenon. Per capita, UK personal indebtedness is worse than that in the US. German, Belgian, British banks and those of many other nations were up to their eyebrows in practices which - if not unethical - were stupid. Standards of prudence fell in originating deals because securitisation meant the risk was immediately laid off to many others. Once the originating bank would have carried the risk itself. Americans invented these concepts (and though n0-one else will say so now, they were not entirely bad ones). Americans were not alone however in degrading those concepts by allowing prudential standards to fall.
Thirdly, this is not just about unemployed borrowers in Alabama. It is about doctors, dentists, lawyers and teachers in the English Shires re mortgaging their houses to pay for short term expenditures. Anyone who bought a 4x4 or paid a school fee with remortgage proceeds helped create the "toxic" securities that the press now howls about. Any dinner table wise guy who thought he was smart enough to become a buy-to-let rentier is responsible. Everyone thinks they can do real estate investment, just as everyone thinks they can manage a football team. No amateurs every seem to notice that both tasks more often than not make fools of experts. They rarely make experts of fools.
Fourthly, the falls in share values so far are not nearly enough. Banks in particular are overvalued to the extent that they have loaned to the uncreditworthy against overvalued security. Their shareholders need to take their cold bath in silence. Examine the relationship between increases in earnings and those in house prices, for example. Those two lines can never diverge much or for long - for obvious reasons. Yet they have behaved in the last decade as if they were entirely unrelated. If you want to know how much your house price will fall, calculate what it is worth when that relationship has been re-established. If that's bad news for you, I am afraid there is worse. Markets tend to over-correct.
However sorry I may be for you, it's YOUR bad news, not anyone else's. If you use your position as part of a large, suffering group to demand of politicians that they take money from others to bail you out, you are a thief. You are no less so for choosing that modus operandi than if you had broken into their houses and stolen the cash. The attempt was made in America and (for now) robust citizens have seen it off. The market reaction so far, suggests they may have been wiser than their political leaders. Only time will tell. For now, I just wish European democracies worked so well.