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. 

How to cope with the Credit Crunch

Some parts of the media seem to be treating the current financial turmoil, the credit crunch, as if it is some kind of wierd abnormal happening that we don't understand and which will eventually be solved and we will all go back to normal.

I think this is completely the wrong way to look at it. I think the abnormal period has been the last seventy years. What is happening is that we are now returning to normal. Cheap fuel. cheap credit and widespread borrowing by governments, companies and individuals are not coming back. The World has changed and we need to change with it. There are some people suggesting we are heading towards deflation. I don't know enough to offer an opinion on how likely this is, except to say that when it comes to houses we are already seeing rapidly falling prices. If falling prices spreads from the housing market to the general economy then we are looking at huge problems, and problems that we are not used to. Saving up for something rather than buying it becomes the best strategy. The longer you save the lower the price and the more interest you receive. Of course if everyone does this then lots of jobs get lost. If you are one of the unlucky ones, you will find that losing your job in a deflationary world is no picnic. Prices are falling including the price of labour, i.e., your wages. You are unlikely to get a new job that pays as well as your last one, As unemployment mounts you will in any case be lucky to get a job at all. The good news is that your savings will last longer. The bad news is that if you need to sell something to raise some cash, you won't get much for it.

Of course there are other folks who say we are heading for rampant inflation as spent out governments cheerfully turn on the money printing presses to inflate away the value of their huge debts.

I am not an economist and I can't judge which scenario is more likely. Indeed I can imagine one following the other in baffling succession derailing the most conservative of personal financial policies. Got savings? Inflation can wipe them out. Got assets? Watch deflation turn them into illiquid liabilities.

In other words, I am saying that I think that the economic system has become so unstable that there is no way to guarantee a comfortable future simply by saving/spending/investing - though I dare say if you are very wealthy indeed you will probably be all right.

Is this a council of despair?  I really don't think so.  I think it is much more a call to look at what is really important.  Money in the bank is handy and a nice house is great, but at the end of the day what really makes us happy?  I think it is how we get on with people around us and how we feel about what we are doing.  If you lived in a small community where you knew everyone, would you really want to be the person who worked out how to skive while everyone else did all the work?  I know I wouldn't.  And I know what I would think about the people who dodged their share.  Of course, we are human and know that some people are brighter or stronger or just have more energy and imagination than others.  Of course these people are going to get more out of life - but they probably put more into it.

I think the way to live is to behave as if you live in a village and you want to be a good neighbour and to pull your weight in the community.  This means doing what you can to help other people.  It means keeping your skills and abilities at their highest level.  We might not live in small communities any more but we can still behave as if we do.  I think this is probably the best bet for our mental health, and it is probably the best option for our general well being as well.  We can't get out of the fact that we live in a world dominated by money - but that doesn't mean that we ourselves have to be dominated by money.   And when you look at what the world of money is likely to do to us over the next few years that may well be just as well.

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

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.

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.

Post 1 - What I am trying to do

Everyone and his dog now has a blog. I have had one for a couple of years devoted to one of my interests. It has been a pretty low key labour of love. I have been paying a modest sum for hosting but apart from that it has been all my own work. I was quite pleased with it and I have enjoyed tinkering with it. One of the things I did with it was try out Wordpress, and as part of that I started using a theme that I had downloaded from an Internet Marketing website. This was a theme designed for use with Adsense and as soon as I set it up the adverts started appearing. My initial reaction was to take them off but they made the blog appear a bit more professional so I left them where they were. Months rolled by and my traffic started to nudge up. I became curious as to whether the benificiary of the adverts (presumably the person whose website I got it from) was making any money out of my website. With a bit of fiddling around I set up my own Adsense account and started redirecting the revenue to me. I was pleasantly surprised to find that I was getting a few clicks a day and now had a new income stream. It has built up a little since I started and I find that I have now added an extra 0.25% to what I earn as a full time employee. Well it is unlikely to change my life, but I couldn't help thinking: what if I could create another similar blogs? That might make a big difference. I did a few back of the envelope calculations and quickly came to the conclusion that it was very unlikely that simply doing the same again would even generate the same level of income as a paper round. But the thought wouldn't go away that there might be a way of making some money from blogging. I haven't fully formulated my ideas yet, but I thought the best way to start was to blog about it. So here I am. If you are interested in my journey, this is the day it all started. (I have started writing this on the 9th of June 2008. As I type it I haven't yet actually set up the blog, so the post date might be a bit later.)