Crisis? Maybe.
Meltdown? Probably.
Doom? For some.
End of Capitalism? Don't bank on it.
The whole system of banking is inherently dodgy. The principle on which it operates, fractional reserve banking, means that there is never enough money to go round if everybody wants theirs at the same time.
The whole system of markets has its suspect moments as well, but the problem we face now stems from the explosion in the use of derivatives - i.e. the buying and selling of things that don't really exist for prices far in excess of any possible value. Derivatives trading is like playing pass the parcel. And now the music has stopped.
So should be have seen this coming?
Well we did..
The richest man in the world, Warren Buffett, foresaw all the problems way back in 2002, and stayed well clear. I suppose that's why he's the richest man in the world. He couldn't be clearer:
".. even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing I understand is that I don’t understand how much risk the institution is running.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
There are three things really going on here:
Wake up the people. It is still far preferable to own your own home, than to rent it privately or from the council. Not because it might or might not increase in value, but because if you own your own home you can do what you like within in, when you like. It is the individuals responsibility to take on debt they can afford, and if they can't afford it they pay the price. Blind belief in the ever spiralling price of your house, the ever cheaper cost of debt and the ever present obligation of someone else to sort out your mess should come to an end, and not a moment to soon. Capitalism is not a religion, although some worship it as such.
They hunt in packs. The goal of the men that run banks is to make money. The goal of the men that run hedge funds is to make money. The goal of the Treasury is to hang onto their money, the goal of the men in government is to post 'the 1000th consecutive quarter of economic growth.' No consideration of happiness, fulfillment or humanity, just money. But that's no different today than it was last week, last year, last decade - or next year.
The end of America. This is the real message of all this. In the land of the free, the government is going to end up owning the mortgages of half its citizens. Lenin would be laughing his head off. The trouble is America can't afford all this. The richest country that ever existed teeters on the brink of bankruptcy, its financial position shored up by the oil rich countries of the Middle East and China. Through the dubious instrument known as sovereign wealth funds, the Chinese government now owns the other half of US mortgages.
This is not the end of capitalism - but it is the end of freedom. The Chairman of Lloyds TSB said the chance to take over HBoS was the 'opportunity of a lifetime.' The propaganda machine makes it seems like he's doing us a favour, but actually he just sees how his enlarged company is going to clean up! This correction will concentrate power and wealth in the hands of the even fewer, who will then insist on regulation that stops this happening again, but also reinforces and entrenches their position.
Power, wealth and influence has drained away from America over the past decade. You may think that's a good thing, but consider the alternative. Capitalism is thriving in China, their people getting richer by the day, yet their people are not free, and they alone make the largest contribution to the destruction of the planet.
The sad fact is that none of this is any different today than it was yesterday, or last week, or even last year. Nothing has changed. It just continues to get worse.
What's the answer? I'm working on it...
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