Blog 2023 Malcolm Blair-Robinson

The answer is yes and no. The Yes is merely comparative. The No is fundamental.

Several commentators have remarked that a failure to save Lehman was the cause of the credit crunch. It was not. The cause of the credit crunch was excessive lending on inflated assets to people who had no prospect of repaying, reducing the value of securing assets to near worthless junk, which were then traded on more borrowed money, gearing over and over an insolvency of concept. The crash would have come. Lehman made it happen when it did. Saving Lehman would have put it off, but the crash would still have come, because it was systemic and had infected the entire economic structure of the West. Delay would have made it bigger.

Likewise Greece, but in reverse. Lending that country yet more money which it cannot possibly repay,  is merely putting off the first of what may be several sovereign debt defaults, which, because of a failure to tackle the financial issues now, will get worse not better. They will get worse because added to the sovereign debt will come a collapse of political consensus and widespread personal insolvency. This will hit the banks on two fronts at once. Losses on sovereign funds and losses on personal loans. Assets will nowhere match liabilities. But this time round the consensus necessary to invoke taxpayer bailouts will in some cases be missing, maybe  everywhere.

Sovereign debts exist because governments have spent way above revenue and borrowed more than their countries either can or are willing to repay. Euro Land finance ministers are relieved that the Greek parliament has passed, by fewer than a score of votes, the latest austerity package, but no economist can be found who thinks that default is any more than delayed and no political commentator believes the Greek government any longer has the authority or the power to put the measures into effect. There is a ghastly aura of re-arranging deckchairs on the decks of the Titanic, in preparation for a dawn the ship would never see.

But far down below water is flooding in. This metaphor aptly illustrates a crisis in the UK economy, just beginning to be noticed by those who keep watch below decks. There have been fewer insolvencies and re-possessions than feared because the banks have exercised forbearance and not foreclosed upon those in difficulty, in the hope they may recover financially. The facts are that many businesses and households are way over-borrowed and like Greece, have no realistic means of ever paying their debts. Moreover when interest rates rise, as rise they sooner or later must, those in trouble will not be able to meet the higher interest payments. The value of the assets securing these loans, mostly property, will be nowhere near enough to cover the borrowing.

The UK collectively owes more money than any other country in the world, apart from the US. But whereas the eye popping US total is around 90% of its GDP, that of the UK is 400% of it own GDP. Therefore the twin burden of sovereign and private debt in this country looks potentially impossible to repay. Devaluation can help sovereign debt, but the rest of it is mostly owed overseas and quoted in dollars, so devaluation makes it worse.

Striking unions need to get real. Their members may in the end count themselves lucky to get pensions at a fraction of those now on offer. Because this is not about what to do in the future. It is about how to escape from the past. The coalition’s strategy to escape from the yoke of the greatest financial folly in recorded history is correct, but it is an open question  whether the country has the human will and industrial resource to develop the financial velocity to escape its backward pull.

Bankers, politicians, union leaders and financiers must now stop looking for signs and signals. Their problems are real and have happened. It is no longer about the future. It is about the past and whether what has already been done in such folly will allow an orderly future to happen, or whether like a world war, there is no way to stop a vast financial collapse and conflagration, only out of the ashes of which, can a meaningful economic order be re-built.

This entry was posted on Thursday, June 30th, 2011 at 10:55 am and is filed under Malcolm Blair Robinson. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.