Mr Darling to the rescue

Britain it seems to me, has changed radically in the last few days.  We are no longer a free market economy - the package of measures put forward by Mr Darling mean, in effect, that Britain has become a command economy.   It is a bit ramshackle and ad hoc as command economies go.  We haven't become the Soviet Union overnight.  But we quite clearly aren't leaving things to the invisible hand of the market either.

Reading between the lines I think I can see what is being attempted.  At the height of the property boom about 8% of consumer spending was funded by what was called Mortgage Equity Withdrawl (MEW), i.e., borrowing against the increased equity in your property.  This source of new spending has, to say the least, become untenable.  The chancellor's proposals in the short run seem to amount to replacing this missing spending with government spending based on borrowing.

In so far as it goes, this sort of makes sense.  The shock of a sudden removal of spending would benefit nobody.  We need to get out of the debt dead-end we are in, but going cold turkey isn't the best strategy. 

Will it work?  I hope so, although there is a lot that can go wrong.  And I really don't think that in reality there was much alternative.  The big question is whether it is part of a sustained effort to redirect us to an economy based on generating real value.  I will wait and see.

Bail outs for car giants

The big news today is the big American car giants are tapping the US government for loans. These are big companies with big problems and they need big money. I forget the numbers even though I listened to it with great attention on the radio only this morning. But frankly, once it gets beyond billions it doesn't really register anyway. It is worth taking a step back to think about how these companies got into this state. American industrial strength was not the result of a quirk of history or uniquely favourable natural conditions on the North American continent. It goes back to the country's puritan roots.

From the days of its first settlement the Americans have been uniquely well organised, success orientated and probably most important of all hard working. The great corporations of the twentieth century that made the country great and bestrode the globe like colossi were above all great feats of management and organisation. Where did it go wrong? I think it was when they lost sight of the meaning of what the organisations were actually doing. Managers who understood the products were replaced with management scientists from the big universities. The top leaders became financial whizzes who understood money but not the actual products they were making. At first it didn't matter because the financiers understood the balance sheets. In fact they seemed, on paper, to be doing an even better job.

They started to become reliant on borrowed money. It went fine when things were going well in the economy. But it doesn't look so good when things turn down. Once again, debt is behind the destruction of wealth. Not maybe on the scale of the banking crisis, but the same principle is in play. Fortunately there is probably something to be salvaged from the wreck. There are still car plants, engineers and a skilled pool of workers that can be turned to some good purpose. It will probably turn out to be what you would least expect. But Ford and GM as organisations? They have had a great past but it is hard to see what keeping them alive is achieving.

If I were the next US president I would let them go as quickly as I could. 

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 http://www.californiapredatorsclub.com/lofiversion/index.php?t9754.html