Global finance is a tricky business. If you want some quick cash you need to borrow it from a lender. That lender, with lots of other customers, probably needs to borrow some cash from some other lender, so it offsets the loan with a deal based on government or corporate bonds. The value of those bonds will depend on the government or the corporate entity having sufficient collateral and growth to guarantee a return on investment at least as good as the original cash loan rate. The lender also tops up its own capital base by making investments, in the form of equities, bonds or other more unusual instruments. The pension schemes operated by companies throughout the world invest in the same august bodies that the lenders loan virtual money to. Someone panics – he sees problems on the horizon, and advises his customers to sell stocks in the original lender. The value of that lender falls; other investors see the fall and sell their customers’ stocks; the lender’s stock falls quicker. Savers see the value of their bank falling and decide to pull money out of their accounts. A ‘crisis’ is announced. The regulators are blamed. The investors are blamed. The central bank is blamed. The government is blamed.
No one blames the system.
Look here. The Financial Times has a solution:
Currently liquid banks are reluctant to make interbank term loans today, even at nearly 7 per cent, because they fear they and their borrowers may be illiquid three months from now. The Bank should inject liquidity with a three-month maturity to reduce the liquidity premium and kick-start lending. Accepting a wider range of eligible collateral – punitively priced – would enhance the effectiveness of this.
Garbage, isn’t it?
Max Hastings, in the Guardian, get’s a little closer:
it must surely mean a reality check on the follies of recent years, in which tycoons and ticket collectors alike have splurged far more money than they could sensibly afford on buying companies or, at the humbler end of the scale, plasma TV screens so large that newsreaders’ warts show through their makeup.
But really, what is to blame is that the global financial institutions, and the governments of the industrialised world, have constructed a system wherebye growth is everything, and any attempt to inject a dose of common sense is batted away as not being sensible – or rather, not being “the way the system works”.
In 1992, I made a conscious decision to move my paltry student earned savings into a more ethically conscious bank. I am still with that bank, not because I agree with the financial system, but that I don’t have a choice to use any other system. If I decided to withdraw all my money and place it in a box, that money would, in relation to the rest of the money on Earth, shrink in value. Within 14 years – assuming world growth of 5% a year – it would have halved in value; even though the money would have stayed exactly the same. That growth, against which I am competing, is based on a combination of investments in spurious ideas and – more importantly – the continued, and accelerating, consumption of natural resources. Economic value is like energy, it cannot be created from nothing, it has to be extracted, usually at tremendous environmental cost.
The governments, financiers and corporations of the world have created this modern Tower of Babel, which is having its foundations progressively undermined by the diminishing availability of the natural resources it feeds off. No amount of re-engineering or embellishment will allow it to keep getting taller. Some day one brick too many will be removed and it will all have gone in a virtual puff of smoke.
There is a solution. But is anyone listening yet?
Keith Farnish
www.theearthblog.org
www.reduce3.com
And proud member of The Sietch