The Myth of Free Markets: Fundamentalists Exposed

I like this piece from Naked Capitalism.com. It talks about the issue of moral hazard and the interventionist policies of all the so called “capitalist” supporters like Reagan. History shows us that far from allowing markets to be free successive governments and central bank authorities have constantly intervened to keep the ship afloat, quite often to feather the nests of others.

As Jamesy commented in the previous post, the LTCM collapse was a good example. The rescue of LTCM was a huge earner to the banks that participated over the carcass and being there at the time I can confirm the glee that surrounded this bail out.

Free markets might actually be good if they were free, just like free trade and anything else with free attached to it. Control is everywhere and freedom is a myth. Just ask people servicing mortgages, caught in the grip of death.

Markets bomb: What’s next?

Well the 20% drop I predicted in December has happened pretty quickly but that’s coming off a big high. We’ve had liquidity injections, stimulus packages and now an emergency rate cut of 75bps.

So far so good but what happens next?  Well if this was a standard asset bubble/recession I would imagine a lowering of rates globally, a bond market rally, a rise in unemployment and so on. But this is different because its really a money crisis.

I say money instead of credit because to all extents and purposes money is credit. But whereas money is secured on confidence, credit is secured on assets. Those assets are now worth a lot less than previously imagined (another word for risk analysis!).

We’ve seen some major US banks bailed out, a major UK lender go bust and be bailed out and a complete collapse of the US sub-prime market. The stock market reaction is simply an inevitable response. But don’t let that distract us from the real crisis which is global financial insolvency.

So the next issue will be a major US (or other) financial institution going to the wall. I mean a big player simply collapsing. To prevent this the Fed and other central banks will have to underwrite the whole system of interbank credit. A major collapse simply cannot be allowed to happen.

We may not even hear much about it but right now credit lines are frozen solid and at some point that pressure will cause an explosion somewhere.

So I wouldn’t be getting too excited about cheap assets just yet

Holiday reflections

I’ve just spent some time up in the Abel Tasman National Park, one of my favourite places in New Zealand. It’s a stunning coastline Park with a lovely walking track and numerous bays and beaches to swim or kayak in. It also has a stunning eco-lodge for weary walkers to rest up in and relax.

As I walked, sam and lay on the beach I reflected on the past year and wondered where we were heading. Looking at the end of 2007 didn’t fill me with optimism: G7 financial system in a state of collapse, the biggest asset bubble since 1929, oil at record highs and conflicts continue in the middle east and africa.

And opening up 2008 with huge falls in global stock markets….why can’t they fall another 10-20%. No reason at all. Will the latest stimulus plan work? Who knows? There’s been so many I’ve lost count as well as interest.

A good film to watch now would be Paul Gringnon’s Money as Debt. You can also find it on Google video. I highly recommend it especially for the scene where the bankers try to re-inflate the economy for the umpteenth time.

There simply isn’t an answer to this.

It just has to play out.

2008 Markets: Out of order due to financial tsunami

Well Christmas brought some quiet stability to the markets but the New Year has seen an immediate stampede for the exit. What is so interesting about the current economic malaise is that it’s very hard to analyze with any clarity. No one really knows what is going to happen because we’ve never had a crisis of this magnitude before.

We know the credit bubble has well and truly burst. We’ve seen it before with Japan but that was really a closed market and the response was non existent thus causing a 15 year depression. We have Central Banks who are very keen and swift to act but will their actions just make things worse. Henry Paulson today said a correction was inevitable given the price increases of the last 5 years.

Nice to know the guys running the country are on top of things….crickey! Can anyone explain what a stable economic system looks like. Clearly the current bunch of economic leaders haven’t got a clue.

Ambrose Evans-Pritchard argues that we are experiencing a 1929 type situation. I think he is spot on. The bailouts we’ve seen recently could well become more widespread. If that happens then quite clearly the stock markets will fall another 10%. The impact on BRIC (Brazil, Russia, India, China) will decide whether the global financial system collapses or not.

Immediate rate cuts will be forthcoming from the Fed, BOE and maybe even the ECB. All this nonsense about watching inflation needs to be ignored. Inflation will keep being a problem but its a diversion. 2 years out and land prices could be off by 30% or more.

Investing now is for the brave hearted, foolish and very wealthy following the maxim “The way to make a small fortune is to start with a large one”.

Reverse Takeover: A Post-Imperial World?

I read today of Tata’s impending purchase of 2 of Ford’s great brands, Jaguar and Land Rover. Only last year Tata Steel paid $12bln for Anglo-Dutch steelmaker Corus. What’s going on here? What happened to the East India Company and all that? Queen Victoria would be spinning in her grave. It seems the plunder of Asia is over. And now it’s payback.

The Arabs are at it as well having bailed out Citibank not long ago and lets not forget the Chinese pumping in $5bln to keep Morgan Stanley afloat.

Those trade and petro dollars are finally being put to good use. The Arabs in the Emirates are showing their cousins the way foward by buying real assets instead of partying away the cash as they did in the 80s. The Chinese, always astute and long-term, are making obvious in roads into the US whilst continuing to make it hard the other way around.

Reverse colonialisation anyone?

The Ripple Effect - Money but not as you know it

The P2P lending sector is growing all the time with the main companies starting to increase custom and size. The rise of P2P lending is helping bring money and its nature into the wider consciousness. Alongside this sits other proposals for fully distributed money systems. Many of these revolve around traditional and tested complimentary currencies such as LETS, Time$ and other locally based systems.

One proposal is Ripple. It’s been around for a few years and there is some good information on the site including the initial paper from Ryan which I have posted up in the research section. There’s plenty of commentary around about it which is worth a look at. Essentially it proposes to replace bank created debt money with personally created credit through a fully distributed network based system. What is good about this proposal is that it takes the concept of local currency systems to its logical conclusion which is a globally based one with servers finding the right path to the appropriate relationship or network.

The most important part of this is identifying that most of what we think of as money is in fact simply an IOU. So why should banks create this? Well the main reason is trust. What Ripple proposes is the creation of that trust through networks, which as we know are already widely in use.

Jamesey proposes a further layer on top of this adding in microfinance structures and leveraging off the Paypal system.

We also have very well embedded and established credit card systems (Amex and Visa) who already have the distribution systems. So the trust system is going to be a key issue. Who is in your network? Who can you trust? I’d suggest and I hope that VortexDNA will play a role in helping this kind of global protocol to develop.

The main problem is the control of supply. One would like to think that a complex system, such as proposed, would regulate itself constantly adjusting to feedback. We know that the current system is close to imploding because of rampant money creation. So cculd it be any worse? Could governments participate also?

It’s open season and anything is possible.