Wednesday, 29 October 2008

Banks - They always go bust

Every bank ends up going bust.

This seems to be as true as every man dies. The fact that there are some men still alive that haven't yet died doesn't disprove this. We know we are mortal and we ought to know that banks are as well. The fact that some banks haven't yet gone bust, though by the time you read this there may well be fewer than when I wrote it, likewise doesn't alter the inevitability of them going bust.

Banks collapsing here in the UK hadn't been very common until the last couple of years. The run on Northern Rock came as a real surprise to a lot of us. In fact, there had been a bank failure in the early nineties. BCCI, Bank of Credit and Commerce International was quite a spectacular failure but hadn't really directly impacted on people. The only run on a bank that had really made an impact had been the one in Mary Poppins.

But taking a longer view, bank failures are not only commonplace, they are an inevitable part and parcel of the way banks operate. One of the most illustrious banks in history was Barings. Despite being a British bank during the Napoleonic wars Barings played a key role in the financing of Napoleon's war effort. They really did believe in light touch regulation in those days! Amongst many notable activities they actually put up the money for the Louisiana purchase. This netted Napoleon some eight million dollars which he used to wage a series of disastrous wars across the continent. Still, I guess business was business. Napoleon himself was wary of the power of bankers -

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." -- Napoleon Bonaparte, 1815

We all need to get used to treating our relationships with our bank as a Faustian bargain with the Devil. We might get riches and success out of it, but there is always the prospect of ending up in Hell.

Postscript - a lot of people are scared by banks, see

Monday, 13 October 2008

Politicians - don't you just hate them?

Well no, actually I don't. I do find them annoying when they have been too well briefed and drilled and go on the telly or write in newspapers trying to work in phrases from focus groups and trot out what their PR consultant tells them we want to hear. It particularly grates when Liberal Democrats get on the telly and they fall over backwards to namedrop their leader. I understand why they do it. They need to raise their number one guy's profile. But that doesn't stop it getting on my nerves.

Political parties are very tribal things. At one time you voted Labour if you were working class and Conservative if you were middle class. You identify with your side and detest the other lot. I have certainly thought that way in the past. It is very comforting. Your side is right and the other lot are wrong. It works particularly well when your favourites are out of power. Anything that goes wrong can be blamed on the government and you can shrug your shoulders.

The trouble with this mindset, and the reason I have dropped it, is it is really dis-empowering. You might feel good, but it doesn't DO any good. I think it is much better to thank politicians from all the parties for what they do. The reality is that politicians, opposition as well as government, do us a great service. They bring up a lot of issues that are important and which we really ought to think about. I know that I would not do a good job of coming up with a programme that would get even the support of the members of my household let alone a majority of voters. It can be very interesting to listen to what politicians have to say. Even if you don't agree it with it at first hearing it is worthwhile to listen carefully and try to work out what they are really suggesting and why they are saying it.

I find it helpful to treat what they are saying as a valuable lesson in how the world works. They will have thought it through more than I will have time to - and they have resources they can draw on that I don't have. The fact that we have three big parties and a couple of smaller ones is a great asset to us as a country, and one that we don't appreciate very much.

I have adopted this attitude for about a year now. Has it changed the way I am going to vote. Well not much in the event, I still think the party I have always supported is the one I most want to vote for. But I can now conceive of voting for the other lot - though I probably never will.

How Do We Get Out of Debt?

It's easy for an individual to work out a strategy to get out of debt. Spend less than you earn and sooner or later your balance will get back in the black. It might be easier to say than to do, but it doesn't present any big intellectual problem.

But weaning society off debt is a bigger problem, and one that throws up all sorts of difficulties. The debtor might feel isolated and alone with his problem, but the fact is that there are a whole set of interested parties. For example, the bank will be keenly interested in how a bank loan gets paid off. If the loan goes according to plan and is paid off according to the agreement when the debt is going t be cleared. When it is the bank has lost its income from the loan and needs to either sell the same guy some more debt, or find a new customer. When the debt is paid off the debtor now has a choice. He can spend his new income on other goods, he can start saving or can raise another loan. What he decides will affect people around him. This all might seem a bit obvious - but it is worth thinking through just how big a difference this one person's decision can be.

Suppose he saves the money. If he puts in his bank he has now compounded their marketing problem. Not only have they lost him as a net contributor to their profits, but now they have to find the means to pay him interest on the money he has deposited with them. If everyone does the same the bank becomes a very dull business indeed. They won't run out of cash. In fact they have plenty of the stuff. But they are not going to be very profitable.

But if he doesn't save it he might decide to take out a huge mortgage to buy a bigger house. In this case the bank are laughing, just so long as they have the money to lend him.

But the chain of events doesn't stop there. If he uses his new big mortgage to buy a house at a higher price than has previously been paid on the street, he might increase the value of the whole road. All his new neighbours suddenly feel a lot richer. If the banker has a really lucky day a lot of them will be down raising new loans against the increased wealth in their houses.

This is all a bit simplistic but I think it shows that people's behaviour with their money is something that has a big impact not only on themselves but on those around them. No man is an island. Certainly no man is a financial island.

As I write this article governments around the world are ploughing huge sums of taxpayers' money into their banking systems. They have had to do this because there is a real risk that without this support the entire financial system will collapse. Even with this support there are some people who think that it might still go pop. The quantities involved are staggering and it is hard to see how this intervention isn't going to end up costing us dearly for years and even decades to come.

The thing that has surprised most people is the speed with which it has all blown up. But when you look at how big an effect the different options open to us as to what to do with our money, it is perhaps not that surprising that events can move so quickly.

But we need to get out of this situation. We need to escape our dependence on debt as a society and as individuals. And we need to do it gradually. There are many risks ahead, and one of them is that we all start saving all our money. If we all horde cash we will crash our economy even quicker than the credit crunch has managed so far. But we can't carry on living on tick either. We need to develop some social responsibility. Taking out a huge mortgage and paying out huge sums for a house is an anti-social act. But we need to come up with creative ways to allow people who need finance for projects of genuine value to be able to borrow the money they need too. Creative ideas are needed.

Friday, 10 October 2008

Financial Chaos

It seems like an age ago, but it is really only just over a year ago that the financial world seemed to be fairly stable. Since then we have all been watching the news with our jaws hitting the ground. For some reason Sunday evenings seem to be the preferred time for amazing stories to break, each one coming out of the blue and topping the one before.

There doesn't seem to be much doubt that we are heading into rising unemployment, increasing homelessness and its attendant rising crime. The general level of misery is likely to be increasing.

But strangely, I feel okay about all this. I am not naive: I remember previous recessions and I know that they are not a walk in the park. And even then, this one is shaping up to be the worst of my life. The situation is already being compared to the Great Depression. In fact if you look at the numbers it might well be worse statistically. If you buy the idea that it was the depression that led to World War II then there is every reason to be alarmed. I am not positively looking forward to all this - and there are going to be some grim times ahead.

So why am I so calm?

I think that what are now seeing is reality coming back into focus. For a long time now, certainly since I was a teenager in the seventies, credit has grown and grown. The flow of money from banks has been steady and we have filled our boots. Many people owe tens of thousands on their credit cards. Many people owe hundreds of thousands on their mortgages. Most of us have done it to some extent or other. There are very few of us who genuinely have no debts. Even if we don't have debts ourselves, our customers do. Or we work for companies that have debts and sell to others who have debts. The government borrows money on our behalf too. We have been in the red since we beat Napoleon.

Of course we all know this. You can't miss it. Many people spend their whole working lives in the debt business: selling it, counting it, moving it around. Some of our top mathematicians work out complicated deals with weird acronyms for businesses in the city. You can bet money you don't have on the future of a business in which you have no direct interest. Get it right and you can make more money than you can imagine.

Where will it all end, I used to wonder. But nothing seemed to happen. Years came and went and we all seemed to be getting richer. And there was a philosophy behind it. The market was king. Capitalism had triumphed over the Soviet Union and was now unstoppable. Economists concluded that the optimum distribution of resources was only obtainable from the free play of the market, so people should be left to get on with whatever they wanted. Bankers and hedge fund managers trousering millions? Just the free play of the market. Don't dare to interfere. Leave things be and it will all be alright.

This manner of thinking became all pervasive. Even the nominally socialist Labour Party bought into it. Tony Blair got rid of Clause 4 and embraced business. Social justice from now on was an afterthought.

I found all this to be profoundly dis-empowering. What was to be done? Nothing it seemed. Just let the market do its magic and we would all get rich together. Some of us richer than others, but that is just the way it is. In fact, it is the rich people to whom we should be grateful. They were the risk takers, the entrepreneurs, the ones who made it all happen. We just needed to let them get on with it and enjoy all the goodies they came up with.

But now the whole world has changed. Has the free operation of the market worked? Hardly. Look around the world. Chaos and confusion reign. Stock markets tumble wherever they are open. In many places they are closed. Assets, including the houses which many people have huge mortgages against, are losing their value at an astonishing rate. Banks are only prevented from collapsing by the injection of funds on a scale barely imaginable from central governments. And the traders and financiers look on stunned. Many are fearful. None of them know what is going to happen next and how this edifice that they have constructed is going work.

So by rights I should be fearful and worried. And in the sense that I see bad things coming I am. My job is perhaps a bit safer than most, but still highly precarious. And given my age and how specialised my skills are I am quite certain that if I were to lose it the chances are very slim of finding another one. But I don't feel any anxiety. What will happen will happen. But I do now feel for the first time since I was a teenager, that what I do really matters. We are in a dreadful state, but it is a state we can get out of. We know now that the financial masters of the universe have been owner operators of feet of clay for some time. They are bankrupt figuratively. Some of them are bankrupt literally. Most of them would be bankrupt without state intervention. And for the first time in years things seem clear to me. Yes the market works well for distributing oranges and fridges. But let the market to work on the very financial system itself and disaster ensues. One great depression can be put down to bad luck, but two smacks of a philosophy that just doesn't work. And what is more, there are things we can do to solve this problem. It is an easy problem to understand. Banks have too much power in a free market. And they use that power to promote that which is most profitable to themselves - debt. In a period when the banks are competing with one another, people and companies who take on that debt to acquire assets do well. As the assets rise in value these 'risk takers' see their risk taking rewarded. The more prudent who build businesses by creating value get left behind. A self reinforcing cycle is built up. The entrepreneurs bestride the world. Their enormous red bank balances are invisible - the tangible things that they have spent the money on dazzle us all. They become the heroes of the age. And ordinary people who own their own homes get to participate. Your house increases in value as the credit supply expands. You are richer. Until of course, it goes too far. Eventually the value of assets gets out of all proportion to the income you can derive from them. When you can earn millions simply by buying a few hundred houses and waiting for their value to appreciate whilst doing nothing of value to society, you know it is nearly over.

And now it is over. The credit bubble is not just deflating: it has popped. We have had all the fun, now we just have the debts. And debts are the problem. We live in a sea of debts. Many people owe a huge proportion of their likely future income. Significant numbers of people owe more money than they will ever be able to pay back. These are not just problems for the individuals. They are huge problems for all of us. The person who defaults on their debt takes a big chunk of spending power out of the economy. The bust company that does the same thing does it on a larger scale. A bank defaulting on its debt takes out a huge lump. In the end, we all pay. And boy are we going to pay.

But at least we can see the way forward. There are clear messages for how we should behave as individuals. how companies should behave and what the government should do.

We all need to look at our own financial affairs. We need to pay back what we owe. If you want something - save for it. Getting into debt is antisocial. It harms people around you and it undermines society. There are times when you have to, but take a deep breath and get out of it as quickly as you can. Remember Mr Micawber. If your net income is greater than your net expenditure the result is misery. When you are looking where to put your savings, it must be safety first. Don't look where you get the best return, look at where your money will be looked after. The ideal place is the local mutual building society - if there are any of these left anywhere. We need institutions like these to be recreated and we should praise the people who do, even if they don't get to appear on the Dragon's Den. And we should vote for parties that take a long term view and put prudence first. The retail banks need to be nationalised. They are simply too key to the economy to be left in the hands of unaccountable investors. Banking should be as boring as plumbing.

But for me the biggest thing to come out of this crisis is simply that what we do matters. If we want things to change, we need first to change our own individual behaviour. We need to think through the consequences of our actions. And if we want to be wealthy, we need to offer something of value. There are no quick easy ways to make money any more. And for that, if for nothing else, we should be pleased for the lesson the financial chaos has taught us. It has been an expensive lesson but maybe that was the price we had to pay.

Thursday, 9 October 2008

Raw Diet - I have learned a lot

I have learned a lot experimenting with the raw diet. I have failed to keep to it but I have changed my eating habits for the better, and I have learned a lot. In particular I have discovered that processed carbohydrates, yummy as they are to eat, really do play havoc with your energy levels and your mood.

I have looked into it in some depth and I think that moving in the direction of raw food is a good move. But really the key thing is to avoid overloading your bloodstream with big bursts of sugar.

Gödel's Incompleteness Theory

I am not a mathematician and I don't really have any particular knowledge of it beyond what I have picked up when working on statistics and the basic maths you use in science. Science generally, and particularly the kind of rough and ready development work that I do, is a pretty imprecise business. There is a lot of guesswork. There is something very impressive about maths. It is pure and logical and you can actually prove something. In science even the best theory is just sitting waiting for someone to come along and knock it off its perch.

So when I was driving to a symposium I was delighted to hear on Radio 4 a programme in Melvyn Bragg's In Our Time series on Kurt Godel's Incompleteness Theory. It seems that at the end of the nineteenth century mathematicians had come to the conclusion that they had nearly 'finished' setting maths onto its final form. A large conference was held in 1900 at Königsburg where David Hilbert issued a challenge. The structure of mathematics was impressive but it rested on some axioms that could sometimes be inconsistent or even paradoxical. These needed sorting. Then mathematics would be established as a logical coherent whole - a solid framework into which everything could fit.

But it didn't quite turn out that way. A maverick called Kurt Godel managed to prove, with some pretty advanced set theory, that it was possible to prove that it is impossible to have a logically self consistent logical set of theorums from any given set of axioms.

David Hilbert was really cheesed off. He never acknowledged Gödel's achievement, but he never worked in that area again tacitly accepting that his project was now known to be impossible.

I have always had a soft spot for Godel's Incompleteness Theorum. I once saw it in a bookshop in paperback. Just £5.95 for the whole thing. Think of it, the whole incompleteness theory for only just over a fiver. The perfect gift for the person who has everything. And not only does it solve that particular conundrum, I also find it comforting to live in a world in which it is possible to prove by algebra that somehow things will never completely make sense.

P.S., I have just realised,doing a bit of research, that it should be the incompleteness theorum, not the incompleteness theory. If you have got here from Google you have probably put the wrong search term in. Try instead. I don't know what the difference between a theorum and and a theory is.


Wednesday, 8 October 2008

What a turbulent couple of weeks

I have been distracted from just about every productive activity by the turmoil on the markets around the world. But it has had the most strange effect on me. Far from being worried and fearful I have a strange sense of relief and freedom and also a high level of motivation. I hope this last one continues because I have rather a lot to catch up on.

11.10.08 Update - I have written a full account of what I think all the financial chaos means to me and to all of us.