ASteadyHand

Yesterday Lehman Brothers went bust, and Merrill Lynch was bought for $55 billion by The Bank of America, which is about a twentieth of what its bosses said it was worth less than a year ago. In fact Lehman Brothers were figured to have 110% of the liquidity it needed just one week ago. This is a fast moving avalanche of bad financial news that is set to run for a while. It hasn’t bottomed out as yet, and no one quite knows where it might end.

It is made even more frightening by the fact that thousands of jobs are beginning to be shred as the financial and other sectors of the economy begin to contract. This is the second leg of the nightmare scenario in which the entire economy collapses as it did during the Great Depression. As yet, thank the Lord, there is no new hunger to go with the job losses, companies closing and homes being lost, and let’s all hope it stays that way. But this is a hope, not a certainty as everything is up for grabs right now.

So what happened to make this, and much more happen? It’s very simple; there has been a break down of banker’s trust in each other. Regular people have begun to doubt big time and bankers, those pillars of our society, have lost their faith in each other.

This started about a year ago when the sub prime mortgage market began to implode. That started to show itself with min runs on banks in various countries such as the UK’s own Northern Rock. We saw that dreaded sight of people lining the street trying to get their savings out. Now in the States, with Fannie Mae and Freddie Mac we have more imposed nationalization that, on the surface seems the only way to go to save the situation, but also could be considered illegal. It does also mean that no sane investor in the world will invest anything in British or American banks and many others, until the situation has been brought under control.

One of the main agents of this breakdown of confidence and trust in our system is obvious but needs to be re-stated. The bankers paid themselves grotesque bonuses in London last year £17 billion ($30 billion+) after years of doing so. There is no other way of describing this except for the image of pigs at a trough. This is no different to similar size sums being paid in New York City and had all the hallmarks of people with no thought about the effect of their greed on others.

The American government clearly made a choice not to bail out Lehman Brothers after having done exactly the opposite in previous days with Fannie Mae and Freddie Mac. Were they right to do so, only time will tell?

This is the either worst financial situation since the 1930’s and is another Great Depression in the making or it’s a delevaraging that is long overdue. By which I mean that the financial sector is being downsized by market forces led by Wall Street and was perhaps long necessary. Put another way were there too many banks chasing too little business and therefore putting together untenable and insupportable deals.

In my view the main culprits are probably the central banks, which kept the interest rates too low for too long which resulted in too ample a money supply, and that made people reckless in their borrowing. This type of casino investing and banking has led to excessively liberal capitalism, which resulted in a bust like no other since the war. In other words there was not enough government intervention for a very long time and now there is going to be too much of the same thing.

Wholesale liquidation is what happened in the 1930’s and it was very painful and we are on the precipice again. For a market forces system to survive and prosper there must be trust in the system and therefore we all need, in fact demand an honest and transparent system from here on in.

In the UK exports are about 30% of output whereas in the States this figure is about 12% and as a consequence the UK, with sterling at a lower value will pull through quicker than most other countries.

It wasn’t long ago that I, amongst many others in this country felt that even if our pensions were becoming less and less valuable or workable, we did, at least, have financial security via our properties. Now that has been shot through by the sub prime market collapse, which is going to result in millions of properties going into negative equity.

The one thing we can all agree on is the urgent need for calm heads and steady hands at the tiller of our financial world. We could do a lot worse than look at history and realize that we simply cannot afford to make the same mistakes again.