Monday, September 29, 2008

Visual sleeping-pill (Another economics post)

I was going to call a moratorium on economic posts here, since they’re hard to write, hard to read, and bloody boring, but I can’t let the latest round of blame-gaming go by without at least a cursory commentary.

I’ve seen numerous posts on sites both left and right finger-pointing at the other side. There’s the obvious leftist view that “this proves that capitalism doesn’t work” to the rightist view “Carter and Clinton caused this”

The first view asks you to view this as emblematic of what happens when you de-regulate, leave supply-and-demand control the price of assets and the second asks you to view the banks as pawns of government who will do what you tell them.

My view? Neither is correct. For a start, governments, central banks and regulation tweak the market on an almost daily basis. The Market is monstrously complicated, and simply taking the view that it “doesn’t work” ignores the legion ways in which it does.

As for Carter and Clinton implementing legislation that “forces” banks to lend to borrowers who can’t afford it, let me tell you something now, from a former insiders perspective; if a bank doesn’t want to give you money, a bank doesn’t give you money. Q, E & D. If they don’t want to give you money – even if the numbers stack up in your favour, they won’t. All they have to have – legally – is a reason not to. And it’s pretty damn easy to find a reason, regardless of any legislation that may be in place, to knock someone back if you are so inclined.

And even if you threaten to fine them, they’ll still knock it back, because it costs them too much in bad-debt provisions not to.

I’ve been involved in implementing lending policies and procedures at three different financial institutions, and the one thing I took away from all three was a sense of wonder at how different people assess the same application, even when they’ve got the same policies and procedures to work off.

On the flip-side, if a financial institution wants to lend, it will find a way. Low doc and No-doc loans are the perfect example. Low-Doc loans and their bastard son the No-Doc loan basically allow you to specify how much you earn on a declaration that is used as “proof” that you can afford to re-pay a loan. Now, I’ve worked in a setting where I had the say on whether these loans went through, and when I was declining “too many”, it was pointed out to me that the policy was to approve No-Doc loans that had a signed declaration regardless of whether I had reason to think the borrower could not afford it

Low-Doc and No-Doc loans were originally formulated for business owners – particularly those in the first few years where it is difficult, if not impossible, to provide evidence that you can repay a loan. (My attitude on this, incidentally, is that whilst your accountant is showing you new and interesting ways of writing off almost every cent of your profit as a business loss they should inform you that if you tell the taxman your profit is $1.87 a year, it’s going to be damn difficult to get a loan at a decent interest rate)

Fine and dandy, but the problems started when financial institutions realised that the declaration itself (If it could not be proved that the financial institution told the borrower what to write on the form – and good luck with that) renders the clause in the Consumer Credit Code useless that tells a financial institution that they cannot lend to people they have reason to suspect cannot afford to borrow.

In short, you can’t tell a bank what to do for more than five minutes without them finding a way to circumvent that legislation. And because they are such big, powerful entities and (technically) own so many assets, they have the power to bring the economy to its knees.

And you know what? Yes, this is a crisis. But I’ll tell you what it isn’t:

New

Or, realistically, any one persons fault.

To suggest that one man, or even one administration, has that much power over entities that we know can bring the economy of the world to a teetering precipice is idiotic. No one piece of legislation has lead to this crisis. All of them have, by not wanting to acknowledge the fact that the measures they’ve taken have been insufficient.

7 comments:

Toaf said...

I reckon you're right to slap down both the "left" and "right" views which you've summarised. I would add, though, that "capitalism" is made up of much more than markets. It's about the profit motive, relations between producers and owners, and so on.

It's interesting that you've not mentioned derivatives or risk in this post, because the capitalism-in-crisis thesis (at least as I understand it), is built on an analysis of these things. It's not the market per se which has caused the problem, but the actions of powerful actors in relation to the market in pursuit of ever-higher profits.

The unproductive sector of the economy, as Marxists call it, has blown out of all proportion to the productive sector. Finance capital has ridden a long boom and forgotten that the past shows that all parties end in a hangover. I'm in the camp that holds the system of capitalism responsible for current events - not individuals, not ideologies, not institutions. It's a systemic crisis.

I agree with the thrust of your argument here concerning banks, government, markets, and how they all relate. I would stress, though, that an even broader view, a systemic view, shows that boom and bust are part of the profit cycle of the capitalist system. The bust is big because the boom was out of control, but it was not unpredictable.

Further, I reckon - and perhaps you'll agree - that the lessons of this crisis will be forgotten before too long, and yet another capitalist party will end in a miserable hangover which gives us all a headache.

Keri said...

"Further, I reckon - and perhaps you'll agree - that the lessons of this crisis will be forgotten before too long, and yet another capitalist party will end in a miserable hangover which gives us all a headache. "

Spot on, Toaf. Since the US hasn't learnt from the Japanese crisis (or, to a lesser extent, the crisis here in the 80's), it's unlikely anyone else will take on the lessons - possible exception, Europe, which regulates pretty well.

I left derivatives and risk out, mainly because I was trying to focus on the sub-prime side of things specifically. I guess because of the attitude of some on the right that "Clinton caused this with his legislation in 95", which specifically related to lending.

The leftist attitude I've seen at some sites seems to be so simplified I couldn't bring myself to focus on it. It just ignores too much to even deserve a rebuttal.

I'll probably do a risk post later in the week, certainly I'll be looking at futures trading in there as well - particularly with regards to commodities.

"It's not the market per se which has caused the problem, but the actions of powerful actors in relation to the market in pursuit of ever-higher profits"

It could also be argued that the market itself demands these higher profits, couldn't it, though? Certainly, a down-grade in profit-forcast or even a failure to upgrade has never done a company well on the board.

Toaf said...

The noises coming from European leaders like Sarkozy certainly suggest that more regulation is on the cards there, so I'd agree with you on that. Whether regulation is the answer is a debate for another day.

Your last point about the market demanding profits is a tricky one. Clearly the market, harnessed by the capitalist system, is placing demands on business to generate profit. But do markets necessarily have to be used in this way? That's the big question, I think. And I don't have an answer yet.

Fair call re risk. I didn't mean to be overly critical. I thought this was a good post. The leftist analysis I have read sounds a little different to those you've mentioned here.

BTW have you seen Pepe Esocbar's round-up of global responses to the crisis? He reckons many are calling it "cash for trash". He also has a swipe at Palin. Pepe's in top form. Have a gander when you have a tick. The clip shows Sarkozy's comments in detail. Very interesting.

Keri said...

Oh, I didn't think it was overly-critical. I might start the risk post early and get it over and done with for those who aren't interested. It can be onerous.

"Your last point about the market demanding profits is a tricky one. Clearly the market, harnessed by the capitalist system, is placing demands on business to generate profit. But do markets necessarily have to be used in this way? That's the big question, I think. And I don't have an answer yet."

It's the age old question, Toaf. For mine, I think there needs to be acknowledgement from all the competing interested parties - you've got customers expecting a certain level of service, shareholders expecting a certain level of profit, and legislators and officials expecting a certain level of responsibility. Any legislation that exists or is introduced needs to balance - and most importantly acknowledge - those competing imperatives. That's why I like the Australian (And to a certain extent the European) model much more than the American.

At the moment the market seems to be skewed entirely towards the shareholder. Problem is, shareholders are consumers or customers at some point as well.

It's the classic rob Peter to pay Paul scenario.

Keri said...

Oh, and on Sarkozy, he's very lucky to be the statesman of France. The French tendency to keep companies in private - family owned - hands will shield them quite nicely.

Germany, on the other hand, is fucked.

Leon Bertrand said...

Pretty much agreed with everything you said in that article Keri. It's refreshing to read a lefty who understands a thing or two about economics. Pity about your hatred of Margaret Thatcher though. If I could, I would make her the Queen of England, and only support Australia's becoming a republic after her death.

Toaf, I don't see it as a question of more or less regulation. I instead believe that regulation has to be well-targeted. I think that Australia's regulation of the financial industry more or less achieves this. Indeed, in spite of some blaming conservative governments for this crisis, it appears that we owe Peter Costello some credit on this one: http://www.theaustralian.news.com.au/story/0,25197,24415569-7583,00.html

Jason said...

Awesome! I don't think your economics posts are boring, FWIW. But I am a total nerd.