Saturday, September 22, 2007

The feeling's mutual

Seems that while I was away the ongoing global financial crisis finally landed in Britain. Northern Rock. So what happened?
From a purely British perspective, Northern Rock were no longer able to borrow money from elsewhere to keep their commitments up. Panic ensues - a very British type of panic, that is, which involves a lot of orderly queuing - and every man and his dog tries to withdraw their savings at the same time. Obviously this would only exacerbate the situation as the bank would need to borrow more in order to pay people their own money. Naturally, Northern Rock chiefs plead with customers to leave their money where it is, but nobody wants to be among the last few punters who are left high and dry.
Not that Northern Rock are the only ones in trouble. Alliance and Leicester and Bradford and Bingley have also been bailed out by the Bank of England in order to keep themselves. The three troubled institutions have something in common. All are former mutuals who went chasing easy money by converting to plc status and dumping the building society ethos and becoming a bank. People are idiots and can't see the long term view when some hard cash is waved in front of them, which is what happens when a mutual converts to a bank. Essentially, if you have an account with a mutual, that's your share in the company. Float on the stock exchange and those holdings are converted to shares which you sell at your whim to make a wee bit of cash. Whoopee. If folk go chasing short term gain to the detriment of future security, then more fool them. They've fallen for the capitalism con and if you live by the sword, then you die by it too.

But. There's always a but. This whole thing isn't just the fault of carpetbaggers (people who set up accounts in soon-to-be-demutualised societies for profit). For the root cause, we must cast a gaze over the Atlantic. Ever heard of sub-prime loans? Neither had most of us outside the City until recently. Now, this is tricky, so I must consult elsewhere to precis the information. It stems from predatory lenders fishing for borrowers at the bottom of the market who can't really afford to borrow in the first place. This is a fundamental of the issue. Can you see a flaw? Big commissions, fat fees and tempting interest rates all cloud rational judgment. As long as borrowers owned their homes, they were fair game. The lenders then look to unload the risk to bigger banks or by selling the loans. Or - and this is where it descends into economic theory and paper-shuffling - you get the big institutions - Wall Street, the City - to package this up in an attractive looking bundle that investors will see only the returns and not the risks. One question could have brought the whole thing down - what if the borrowers at the bottom can't pay? And, inevitably, there came a point not long ago that the borrowers couldn't and the whole thing came tumbling down. And again, it's the people at the bottom that suffer. If you're suffering as a result of all this, you will no doubt be happy to see the commissions and bonuses being spent on massive yachts, flash motors etc etc while the bailiffs come round to turf you out of your house. There'll be no comeback on the conners. Only the connees.

Another example of the capitalist con is in the Channel Islands. Jersey has made itself quite a handy living attracting corporations there to take advantage of the zero corporation tax. However, this has left a hole in the protectorate's finances. Who could possibly have seen that coming? These corporations make billions, so who is it that the governors are seeking to sting in order to plug the gap? Anyone who wants to buy stuff. Levying a 3% goods and services tax (GST) on everything is the solution and, naturally, the peasants are revolting. That's still quite low compared to 17.5% VAT on the mainland, but wages are pegged in accordance to the cost of living and now the cost of living goes up without commensurate wage rises. The less able are being forced to cough up where the abundantly able pay nothing to the upkeep of Jersey because it would 'harm their competitive position'. Utter nonsense.

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