Is There A 'Real World' Anymore?

I hadn't realised that there was a famous Economist who has been credited with predicting the world financial crisis. There is one and his name is Nouriel Roubini, from a New York University.

Although I know of several people, including myself, who reasonably accurately predicted that there would be, in my own terms, 'A hole in the economy', largely as we believed that asset values had lost all connection with the world's voracious creation of money, we had no idea of the real technical issues. There was one other minor problem - none of us were world famous or economists and therefore we were not allowed to have such opinions, express them in public or have any credence attached to them. That's just a fact.

In fact, even as a shareholder in RBS, Lloyds, Northern Rock and Bradford & Bingley I have no say as that shareholding is managed on 'our behalf' by UK Financial Investments plc, a company that has not issued share certificates to any of us or in which we have any rights to vote. I have an unnerving feeling that we probably will not not get full value for our 'stock holdings' as the staff associated with that company will not only get a salary but bonuses too. Just like the FSA who received bonuses to a person as the world economy melted down on their watch.

But we should be grateful, because the politicians who did not want my opinion then do not want them now - not because I would probably start each sentence with, 'I told you so' but because they really could not give a flying fig what people like me think, even if we are vaguely right. We are the 'programmables' - the people who are fed the information and soundbites and duly absorb and believe them. In a single weekend of spending our future tax to an extraordinary and unprecedented extent just to save the skins and bonuses of a group of greedy bankers to the tune of £1.5 trillion, the Government now believe that the enormous debt burden they have put us all under can be halved by 2014. Yeah, right.

It's complete cod's wallop and I know it. But they rely on the fact that no one will listen to me as I am not a world renowned economist and nor is anyone else in the front bar of a pub.

I have talked about Joseph Stiglitz before. He's not a personal friend, and you probably would not like to get caught in a lift with him, but I feel a kind of kinship with the Nobel Laureate for economics as he could have come into the front bar of most pubs and been greeted warmly as a person who we might have described as not having his head up his arse. And so too Nouriel Roubini. Again, I probably wouldn't recognise him if he walked into the White Lion in St Albans. I might have even nudged a friend and nodded toward him and said ,'Isn't that the bloke off Bergerac' and gained 10 points for a good lookalike, but if he joined into our conversation then we may forgive him that he knew nothing of rugby but as long as he could name at least 5 films with a memorable song in them then he probably would have got a fair hearing. If he spoke of the economy, then I would expect a hearty pat on the back and a pint of Black Sheep would be bought for him. Assuming, of course, that even a lowly economist would stump their round at some point.

Roubini is supposed to have predicted this financial meltdown. He also points out that we are not out of the current financial crisis yet as the world economy looks very weak - his words not mine but, without blowing my own trumpet, I would agree. He claims that in a general sense shoppers are 'shopped out' and 'debt burdened' - this despite the fact that last month saw the first reduction in the £1trillion unsecured debts that UK consumers have for years. Roubini believes that we all should 'cut back consumption and save more'.

Hear, hear from the front bar. Wise words, another round on the slate or my debit card, please. What? I can't have credit? Well Roubini then goes into techno-speak claiming that the financial system is damaged and that not much corporate spending on capital is going on. That's true - and most companies are reining in expenses too as credit is scarce as well as the markets depressed.

But here comes the real blow in his message. He reckons that US house prices have yet further to fall. That's a worrying comment as the problem of inflated asset prices was far more acute in the UK than in the US. Our prices had soared uncontrollably over the last 10 years and our drop has only really been 20% or so during the crisis. Enough to send everyone into a panic and many into negative equity exposing the stupidity of the markets for buying debt but there you go. So Roubini is saying we have not seen enough of a fall in house prices yet - that's really bad news. It's really bad as that is just about the only financial instrument that has propped up the economy for the last 10 years and is currently our barometer for recovery. Wages have fallen over that period and so household income in real terms fell, but we leveraged our rising assets a great deal to supplement our spending spree.

We lost sight of the 'real world' where you only spend according to what you earn. We participated in a new 'unreal world' where we all discovered the new banks - our homes - and the world of cheap credit it released. So when the financial system went into meltdown, our homes were right in the middle of it.

You see, while property prices in the US have fallen just 13%, there has not really been a corresponding spread of price decreases into the commercial property market. That would cause chaos as that is where the big pension funds that we invest in for our future have all the money. The chaos so far has affected those who largely backed only the housing world. Should the price of commercial properties also fall, then we will have a very gloomy world to live in.

Roubini clearly has, at some time, been in the front bar of a pub as he believes the current 'froth' in the world markets which has seen the FTSE rise some 40% in a year is due to the manipulation of the Federal Reserve and the Bank of England. As Roubini puts it, "There is a wall of liquidity cashing assets, but I think that there is a growing gap between what is the asset prices and the real economy."

The 'real' economy. The real world. That's really the issue. This is why armchair sages like me struggle to communicate our thoughts - we have no formal economic education, I am a humble scientist by training and a salesman at heart. The economy is something that I glaze over when people start mentioning the 'Broad Money Supply' and, to me, M4 is just a motorway I use to go and see my family in Wales.

But Roubini is right. We have disconnected what are the underlying economic things from the new world order where we can create money out of nothing, profit out of profit. Even our solution to the problem compounds it all as we create money out of nothing to buy our own debts as Quantitative Easing has done. There is a real concern in the US that Government Bonds will not get bought as interest rates are too low. Meanwhile, when our Government stops buying its own debt with fake money, will there be a market for our bonds?

What the solution to the global economic meltdown has been, across the board, is an exercise in saving a small number of wealthy individuals' careers and re-fund them to make more money for the future. In doing so we stopped a collapse that could have taken us all with it that's true, but in reality we have just resupplied these individuals with the means to carry on creating more of a fake economy, very distant from the real economy.

Instead of these individuals using our precious cash to provide credit to business they have used it to buy the reduced value 'toxic' debts at the very companies that crashed in order to rekindle the whole fake economy and get their bonus train going again, making vast profits from effectively barrow loads of manure - worthless debts. The one thing that could really exaggerate all this is if house prices do start to rise because this will just get us all back into the groove and contribute by withdrawing from our equity and forgetting that in real terms we are getting worse off - as we forgot for the last 10 years.

The likes of Roubini and Stiglitz are the 'turds in the swimming pool' of new economic thinking. Stiglitz may have offered his advice on the solution to the global economic problems for free but that was his mistake - Credit Suisse knew the British Government was willing to pay and so they made sure they bid accordingly and have been paid handsomely for their advice. You see, in the new world of economics your value is not perceived by the number of Nobel prizes you have won but by the pounds you can bill or the value of your bonus. Porsches and Bentleys count in that world and that's what Gordon Brown asked for and got. So it's little wonder that we have a set of solutions which effectively threw enough faeces against a wall until some stuck in the form of incredible sums of money instead of resetting the 'real' economy by making sure banks did what they were supposed to.

But that is the issue. The banks have carte blanche to carry on as before. Oh yes, we can posture about bonuses, we can moan about imposing taxes, we can even supposedly turn on our friends as Peter Mandelson has done and accuse them of the very things he applauded, benefited from and whose advice he has paid for not months ago, but until you get to the root of the problem banks will carry on producing a fake world in which only a very few benefit and the world becomes a far more precarious place to live in.

Has, indeed, the fake world of the new financial order taken over from the ;real' world of fundamental economics of supply and demand?

If we do not reform the whole banking industry, there will be more than money to pay in the future - as Roubini puts it, 'We are already planting the seeds of the next crisis'. At the heart of it is the stability of the world as, if the financial system does break to an extent where mere money cannot repair it, then those with the most valuable commodities will rule.

My God, David Icke WAS right.

The Stakes Are Getting Higher

President Obama is determined to do something, Gordon Brown is ‘appalled’ but no one has seemed to have gotten the real message of what is happening in the newly invigorated financial system.

More intelligent people than me, such as Joseph Stiglitz, the Nobel Laureate in Economics, have pointed out that the bank bailout has effectively wiped the slate clean for banks and they can now resume their high risk activities with new, cheap, even free money. In fact, Stiglitz presents the argument I put forward yesterday with real credibility – that now banks have been written a blank cheque they can gamble more freely and with less conscience as they now know that the Governments will never let them fail. With the odd exception as we celebrate Lehmans Day.

Stiglitz asserts that Obama’s failure to rein in Wall Street will lead to further disasters and we hear only talk of potential curbs on bonuses and tighter regulations but not one single country is prepared to take the lead as they don’t want to be the loner that effectively rings the bell on their financial centres by spoiling the party unilaterally. All the big leaders are talking up the importance of the forthcoming Pittsburgh G20 meeting but the chances of getting any consensus for concerted action is slim. Someone, somewhere will sense an opportunity to win on this and it will only take one to not toe the line.

In a snippet in the Guardian yesterday, Bethany McLean who authored the book ‘Enron: The smartest guys in the room’, argues that far from financiers losing too much, they in fact lost too little. Meaning, on a personal and even company level, we bailed them out to an extent that it did not hurt – not one iota. In fact, like Stiglitz, she argues, with the exception of Lehmans, the lack of loss has embolden banks to be more aggressive in their ‘talent acquisition’ activities, salaries and bonus schemes as now the stakes are much higher and the potential rewards much greater as we exit the financial crisis and experience the inevitable bounce back.

Both of these observers claim that there should have been wider losses than Lehmans and in the UK there should have been at least one, if not more of the financial institutions we so gleefully bailed out that should have been left to fold. Only then, they claim, could the banks have really been convinced of the folly of their system. In the real world, bondholders, shareholders and those involved in the derivative contracts should have been left to face the consequences of their mistakes as most of the casualties in the business have done during this recession. By allowing these special cases we have given an unfair business advantage to companies who already have business by the short and curlies. The same people who would have no qualms about shutting down companies who default on their loans to them. However, that opportunity as been missed and now all we can talk of is curbing bonuses when everyone knows that banks will find a way to pay the high rewards for the high risks, somehow.

It means that banks are more than ever gearing their strategies and reward schemes to short term profits. This newly fine-tuned mindset is based on the simple maxim that if there are incredible short term rewards to be gained for taking huge risks which ultimately makes the rest of us pay for them in the long term, then unless there is an obvious barrier placed, they will take them. Banks are now working in the secure knowledge that we cannot let them fail and that they will get their free rein as Governments are so dependent on them to sustain economic growth. In short, the Governments want the rewards of the high risks too and are prepared to stake our taxes as collateral should the bets not come off. It is a highly dangerous joint strategy and, while the growth figures may look fine in the short term, in the long term it means that we are all progressively worse off. Amid burgeoning deficits and borrowing, there will be ever greater cuts in public spending and higher taxes in order to pay for all this, while the business world will be a great deal more uncertain with much higher unemployment.

Some argue that as early as 2010 could see the next financial crash, we can only hope that is too early as Britain will not have peaked in terms of unemployment by then and the effects of cuts in public spending to reduce the budget deficit will have not even kicked in. There could only be one course of action – the ‘TUC way’ which is to raise taxes, and then some as the need for cuts would be immediate and huge. While the TUC has a point about the super rich avoiding paying tax, to the tune of perhaps £1bn, it is still a drop in the ocean and it will mean higher tax for all above average earners under any such new scheme. One can only hope that we can get a few years in of decent recovery before the next crisis hits but it surely will.

The only effective way to stop these high risk bets from being placed would be to go to the source of the issue which is the free flow of money based around derivative products which are effectively a work of fiction. Only when we take away such products from the system will we get some stability in it which can be sustained. It will inevitably mean a slowdown or stagnation in growth but you cannot have it all ways – if the system has no real growth in it, you cannot just create it based on no good principles. It is better we find a way to grow our economies based on sensible risk than to get ourselves repeatedly into the same mess while just a small number of people reap incredible rewards for which we have to pay over the long term.

The wide consensus of opinion is that political leaders have learnt few lessons from this economic crisis and that their collective inaction has allowed banks to gear themselves for even more risk. On the anniversary of the Lehmans crash, we have the bizarre sight of the restructuring adviser for Lehmans, Alvarez & Marsal, putting the remaining Lehmans funds back ‘in play’ and they have hired many former Lehmans traders to do so. It is not just a high risk strategy, it is totally counter intuitive to the role of liquidators whose sole purpose is to maximise the remaining assets to make some return to creditors, shareholders and the like. It is as if people view the remaining monies as lost anyway, so they may as well buy a bunch of lottery tickets or back a horse at the 5.30 at Kempton Park. It is that stupid but it is precisely indicative of the new era we have created. Far from learning from their mistakes, the banks think they now have the secret formula to beat the casino. Only there is no formula but there is an unlimited benefactor who will supply all the money they need should they incur incredible loses – the taxpayers. They are now, in their own eyes, unbeatable.

The other obvious learning point from the Lehmans crash that has not been heeded at all is that banks build up their structure like an intertwined morass of interdependencies which makes any kind of proper accounting and scrutiny almost impossible. Lehmans had a web of over 3,000 companies which owed each other enormous sums of money and we have the idiotic situation of British subsidiaries suing American ones for hundreds of billions of dollars while liquidators try to unravel the ball of string that was Lehmans structure. It is a feature of the whole financial industry to build such impenetrable webs and makes the nirvana of banks having some kind of ‘Living Will’ a complete pipe dream. There is a strong case that the situation has got over complicated and is designed to keep prying eyes out and to shield the fact that banks are not really making any profits at all but playing some over elaborate game of ‘fantasy trading’ in order to generate virtual profits. It all looks great on the computer screens and spreadsheets but does not have the same credence in the real world.

As I sat on the plane at an unearthly hour, the music over the tannoy was ‘Road to Hell’ and there was prophetic line in there about credit being just bits of paper which I forget but it seems very apt – it goes on to say ‘This ain’t no technological freeway, this is the road to hell.’ I’m sure it wasn’t written with all this in mind but it might just apply.

It will take a bold politician to break this Mexican stand off as the G20 leaders all look at one another to get a nod of synchronisation before they all move together in perfect harmony. It will be like herding cats. Even then, I think we will barely have paper over the cracks rather concoct real remedies to the ills of the financial world but I believe that’s because they believe they cannot afford to change it and sacrifice growth.

In this foolish and unholy alliance, the bankers know they have the upper hand and a blank cheque. We have created the conditions for catastrophic failure for the future.

Lightening Can Strike Twice

It is very unsusual that anyone agrees with me, even my wife, so imagine my surpise when I read that no lesser sage than former Federal Reserve boss, Alan Greenspan, goes on TV to agree with me.

Ok, so he didn't actually mention my name but he all but did. He was interviewed by the BBC for some series and he said, and I quote, 'The crisis will happen again but it will be different.' See, I told you so. Those eagle-eyed readers will know that I have repeatedly, not once only, said that the way we have dealt with this crisis has only papered over the cracks and so it will recur. Now two experienced individuals have publicly agreed with as I number Joseph Stiglitz, Nobel Laureate as another. He, again, rather strangely omitted my name in his announcements but the gist was the same.

Pedants among you will note that Greenspan is observing dryly that economic crashes come after prolonged periods of growth - and that is inevitable. That is not quite what I said - in fact, I said something very different but, heck, the result was the same. Greenspan even goes onto to say that sub-prime may have triggered the current crisis but it could have been any other of the weaknesses in the system that could have brought it on. In a roundabout way this again agrees with my personal thesis and I suspect for the same reasons this time. Sub-prime was just a manifestation of a flawed system. I think that's what Greenspan is saying and he probably nicked the idea from me.

Reading the article more thoroughly reveals that his opinions are pretty different and frankly, that's because he knows what he's talking about whereas I am guessing. However, it wasn't a bad guess - take note, Gordon, that plumb job as CEO of UK Financial Investments is up for grabs and I think anyone who gets even half of what Greenspan thought of right needs to be considered seriously particularly if there are nice bonuses associated with the job, old chum. Greenspan goes on to say that he thinks regulation should focus on fraud and capital requirements at banks to get them back on track.

To be honest, the sentiments are echoed by a real banker. I said banker, actually. Stephen Green, Chairman of HSBC, who has just levied a £25 per month on my HSBC Bank Account without warning and for no apparent reason, has actually come out and admitted what Adair Turner was barking on about the other day was right. Turner was two steps closer to the Funny Farm when he suggested that many of investment banks' activities 'served no social purpose' and Green may have saved him from the padded cell by agreeing. Further Green says that 'excessive' bonuses should be stopped too. I bet he got some nasty stares from his whizz kid traders when he got into the office today.

What Greenspan and Green are saying is that banks need to focus more on their core activities and make sure their basic fundamentals are right. In a much less reasoned way, I have said the same to anyone who would listen. Green says that 'Some parts of our industry have become overblown, and certain products and services failed the tests of usefulness, suitability and transparency'.

I think what Green is saying fits in with Turner's assessment. My personal take was that I think many products that banks traded so excessively in the last 10 years have been out of touch with any reality and I would assert that the profits made came out of thin air. Quite literally, taking one of these products as collateral to a restaurant to the pay the bill would be no better than me offering my lottery ticket to the waiter and saying this £1 ticket is for payment and you can have whatever it is worth as payment for the meal. The waiter would have a reasonable chance the ticket is worth £10 but a 1 in 14m chance it was worth a jackpot, plus all the probabalities in between. But the highest likely option would be that the ticket was not worth anything. Imagine the waiter taking that ticket and it being traded many times and each time the people who traded take some real money from the other party in return of a chance of a jackpot. Pretty soon, the ticket will have been traded so many times that whatever it is worth will never pay for the price paid. The trades have nothinbg to do with the ticket's worth.

It may be a bad example but it is not far off the truth. Some of the products the City trades serve no earthly purpose other than to line the people's pockets who trade them.

So I would stick my neck on the line and say to Greenspan, 'Actually, Alan, you are wrong. The crisis we saw did not come as an inevitable consequence of a prolonged period of prosperity, it came as a result of the vast increase in trading of spectulative products that had lost all touch with their origin and so were generating virtual, not real profits.'

I would further assert, that until we ban such products being traded, we will endure another cycle of fictional prosperity and spectacular bust bigger than before - unless we change the system fundamentally. It isn't about regulation and it isn't about capital reserves - it's about what banks trade. Sort that out and we get of that problem until they invent the next scam to make money. And one last note on this for all those virtual reality merchants in the City - the talent they so loyally protect, who they believe should have the freedom to earn as much as they like, have been trading only make-believe products. Frankly, any kid could have done it who had played Monopoly.

It's some day when you realise all the tripe you have written actually is getting close to the truth. Greenspan and Green, I salute you.

My Point Exactly

It really gives me no comfort to be right for just once in my life but it seems MPs in the Treasury Select Committee have confirmed my thoughts.

Namely, that the FSA and Government's new proposals on 'Macroprudential Regulation' are in fact just a rehash of the same regulatory policies in place prior to the Credit Crunch. It also confirms that that the FSA 'failed spectacularly' in monitoring banks in the lead up to the financial meltdown. It must come as a sick joke then that a) the same body and executives at the FSA remain in force, b) that they are responsible for re-writing the policy for the future and c) that a total of £17m was paid to the staff of the FSA in bonuses.

Oh yes, it wasn't just banks at the old bonus game - £17m amounts to nearly £8,000 for every one of the 2,500 FSA staff, of which Hector Sants, CEO of the FSA, alone gets over £100,000 bonus on top of an annual salary of over £900,000 while Lord Adair Turner gets over £200,000 for his part time work as Chairman.

It's a complete joke and a sham.

Central to the new policy, if it can be called new, is that the tripartite system involving the Bank of England, the FSA and the Treasury should remain intact. This may surprise most and even the MPs reckon it should stay but they have criticised the proposed reforms as merely being 'cosmetic'.

In fact, more alarming was the notion that in his evidence to the committee, the Governor of the Bank of England, Mervyn King, had 'no idea' what the Government's plans on reform were. This really smacks of another disaster in the making and having all just spent vast sums of money on bailing out the financial system to allow greedy banks to just do it all again, everyone seems to forget that there is a limit to the seemingly bottomless pit of money which is the taxpayers' pockets.

At no point does the system recognise that it is taxpayers who are at risk here. It seems that the safety net will always be the same and that we should just grin and bear it. Why there is not wholesale reform of the entire banking industry so that there are clear lines of differentiation between what forms of banks do that ring-fences risk so that the public does not have to pay for stupid mistakes is beyond me. Yes, it will slow the pace of growth and it will reduce the risks that are taken meaning economies will have to slow down but that IS THE CENTRAL ISSUE.

You cannot grow economies when the growth is not real.

The whole point of the last 10 years is that banks were making profits out just pushing debt around, all links to the values underpinning the debts were lost because no one cared. The profit was in trading the debt not in the debt being serviced. Traditional banking values have been lost after deregulation which has spawned a high risk gambling system which relies on no one asking questions just taking a profit on every, more convoluted trade.

The system requires fundamental overhaul and it will be painful because it is the responsibility of every official to make sure that the same weasels don't come kicking us for money again. What happened in the banking industry was our problem this time around because we were given so much credit based on poor asset assessments that we spent it all and craved more spawning a massive boom. Well, it is better we are told that credit will be tighter, more stringently managed and that the boom is over - and lump it.

Instead, the whole system is rigged to do exactly the same again and that is what the MPs have spotted. As Joseph Stiglitz has pointed out, by saving the system as it is we have just started the countdown to the next crunch, the next in a long term cycle of booms and spectacular busts and at each cycle the economies will get ever weaker so survival will be less likely.

I'm no economist but even I can see that.

Let it Fail, Let it Fail, Let it Fail

Sing the title of this entry to the tune of the Christmas song, 'Let it Snow' and we have a natty little anthem for the day.

I was pondering, at the beginning of all this banking fiasco, that had the Government stepped in at Northern Rock and just picked up the mortgage book and guaranteed all depositors, just what might have happened.

This was not my idea, no less an economist as Nobel Laureate, Joseph Stiglitz, suggested this some time ago. He was fixed on the fact that a contract for a Credit Default Swap or Collateralized Debt Obligation was in fact a two way contract or bargain jointly entered into by two companies fully aware of the consequences if something went wrong like part of the debt was toxic. Indeed, if they had had any sense, just prior to signing the deal they might have embarked on a bit of 'Due Diligence', that long lost phrase which went out of the window during the Enron scandal to have avoided such a calamity.

Stiglitz was of the opinion that if we had allowed the consequences of that failure to play out, only then could we have teased out what the true underlying liabilities were - not just at Northern Rock but in the entire banking system. True, many banks would have failed but he claimed that we could have used the shell of those old banks to build new ones with more secure procedures and tighter regulations to focus them on their core functions of providing credit and capital.

Further, Stiglitz asserted that the overall cost to the taxpayers would have been less in the long run as at least we would have known exactly what we were paying out for. His claim is that in the current scenario, we are propping up an already failed system, that part of the guarantees and loans that we have paid for will actually underwrite part of the 'good books' because no one is encouraged to itemise the toxic debt as it is being all paid for so why not ask for more and cover current good debt.

Sound wrong? Just look at the Enterprise Loan Guarantee Scheme from the Government meant to cover and encourage new lending - banks are taking existing loans, handing out small increments to qualify for the scheme and then getting 75% of the original debt covered. The amount of net new lending is trivial.

My view, which is with Stiglitz, is that banks should have played this all out. I dare say there would have been more sad cases like Mr. Kellerman in the US as bank executives were troubled with the terrible burdens of their greed, but I doubt it would have troubled them that much. There would have been a terrible loss of confidence in the banking system, have no doubt. That is what has been most protected in all this - banks must never fail, according to all Governments. The fact is that some banks do fail. Lehmans were left to fall and the repercussions were not that huge.

The problem we have bought for ourselves, as Stiglitz has pointed out, is that if all we do is reset the sail to catch the wind again, then all we have done is hidden the problems to manifest themselves again in the future. He now predicts we have set ourselves a course which will commit us to ever shortening cycles of peaks and terrible troughs in our economies with no chance of any kind of sustainable stability. There is no doubt that the alternative would have meant a period of recession possibly depression but we are in a different age now. No more the '30s where people could not eat, the majority would still have had some way of providing for themselves. It would have been a different kind of austerity that would have curtailed our wanton materialism - and would that have been such a bad thing? Besides, it could argued that this is exactly what we are going to get anyway.

As Stiglitz does, I think we have missed a massive opportunity to put this all right and start again, properly.

Banking Shambles

I don't think it's appropriate to mention that Wales defeated England 23-15 in a terrific game at Cardiff yesterday. So I won't.

I will, however, point out that I have blogged before on the subject that the series of knee-jerk, guessing-game responses to this whole financial crisis by the Government has cost the British taxpayer far more money than it should have done and I firmly believe that we are open to a great deal more liability in the road ahead. Nobel Laureate, Joseph Stiglitz, has said, we should have let banks fail and started again, properly cleared of the full effects of the Credit Crunch to get a fresh start. I do not agree that we should let all banks fail but I do believe that some were not worth rescuing.

HBOS is now a classic example of how it should not have been done. Ken Clarke has called it a 'Shotgun Marriage' and points out it was a reasonably plodding, secure Lloyds TSB which was forced upon HBOS. And he is right - this was a union which the moment it was proposed, Lloyds TSB started to squirm and doubt. The price wasn't right, the risks were not assessed, the climate and timing looked bad - but what made it occur were three things:

1) The Government in the form of the PM himself forced the issue and stepped in at the eleventh hour to ensure that doubting executives were made clear on the consequences if this did not happen, 2) Anti Competition rules were personally waived by the PM in order to prevent the move being blocked on the grounds it created a single banking group with an unhealthy 28% share of the UK mortgage market and 3) The Government shored up Lloyds TSB's balance sheet to enable it to afford the takeover even though its finances were not strong enough to do so.

Now we know why these moves were stupid and ill-advised. Ministers tell us there were no other courses of action and that not a single depositor or mortgage holder was affected. The fact was they simply did not consider an alternative and moves by the Government subsequently made sure that mortgage holders and depositors were protected anyway. This was a merger that exposed taxpayers to potentially higher costs as we took a 43% stake in the new Lloyds Banking Group and then find £10bn of losses which has slapped Alistair Darling in the face and almost greyed his eyebrows.

Bewilderment

Every single day, Darling, Brown and Mandelson seemed to have this bewildered look on their faces as they stutter and stumble out their excuses as to why Britain is worse off than in 1997. They tell us that if they had not done anything then the world would have lurched into disaster and banks as we know it would have failed. Heavyweight personal lender, Geoffrey Robinson, has been wheeled out to say effectively no matter what everyone criticises them for, at least there is still a banking system.

And that is the point. There is still the same banking system as before and it had failed previously and it was morally, if not legally, corrupt. What Brown and his Advisers have done is attempted to preserve that status quo and that's largely what we have got. Brown is now 'angry' that bank bonuses are still being proposed and paid - even £120m is proposed to be paid at Lloyds Banking Group which clocked up £10bn of losses, even Northern Rock, wallowing in losses, paid 10% of its wage bill again in bonuses just because they managed to pay back some of the money it borrowed on time - and we own them outright. And dear old RBS just cannot help itself - despite record losses it is paying executives £1b of bonuses, and we own over 70% of it.

And are we any better off due to this fantastic bail out and bank system-preservation?

With businesses failing daily, mortgages hard to get, house prices falling, unemployment rising, repossessions rising, we are far worse off. And it is because the Government, as I have said before, had zero idea what it was doing when it embarked down this course of action, no idea of the total cost, and little idea of how it would be paid back. But worse still, it had zero idea of the shape of the financial system it needed for the future. Ministers surrounded themselves with dodgy characters or 'advisers' many already besmirched by their companies' activities and whose intentions and agenda were simply to preserve their way of life.

I am not an expert, but it certainly makes me sick to the core to watch this unravel in front of us and listen to excuse after excuse - and the slapped-face innocent look with hurt-puppy eyes saying, 'What else could we have done?'

You could have popped down the pub for half an hour, guys, bought a couple of pints, listened and you could have saved us a fortune. Instead we'll be paying dearly for the mistakes of a few idiots for a generation.

Let Them Collapse!

I have to admit I am not a fan of wholesale rescuing of banks but I draw the line at letting a freefall for all happen, but this is the view of Nobel Economics Laureate, Joseph Stiglitz. He might know a thing or two.

I am glad that this week there has been a few notions in the press which support my often forlorn views on my blog and today saw Stiglitz questioning wholesale bail outs of banks and then there was an article questioning the freebie rides of Non Executive Directors.

Thank God - I thought I was going mad.

To Heck With The Lot of Them

Stiglitz was still at Davos and he was extolling his view that the Government should allow every distressed bank go bankrupt and set up a fresh banking system under the temporary control of the state rather than cripple the country with long term debt.

Stiglitz argues that the UK taxpayer should not have to fork out for the next 20 years and sacrifice our standard of living to undo the mistakes of a just a few executives who blew the system - and arguably continue to support their lifestyle. He further asserts that while it may cause turmoil in the short term, it is a cheaper way to deal with the whole issue in the end.

Stiglitz does say that the Government should underwrite all deposits to protect the UK's domestic credit system. It should also use the skeletons of the old banks to build a healthier structure - making the new banks more credible without the current liabilities.

He further claims the City would survive the shock of mega-default because it would uphold the principle of free market responsibility, i.e. the notion that any counter-party who entered into these voluntary agreements must also accept the consequences.

Wow!

I have to say it really echoes my thoughts on this but sadly I have no grounding to argue the points. However, I cannot contemplate the idea that all banks should be allowed to slide - the ensuing chaos may be too hard to bear. With precious few exceptions, it would argue that all UK banks, possibly with the exception of HSBC, would be in the firing line to go bust. Perhaps we should allow those with the most flawed model to go, but that does argue we would use a selective process and favour some companies over others - hardly fair and certainly not in the spirit of free market economy.

But I like Stiglitz's thinking. I also share his view that the best the bail outs, guaranatees and even a bad bank can achieve is saving the skins of failed bankers and possibly making sure Brown can survive his last years in power and cling to an ever decreasing hope of being re-elected.

Certainly, I think at last we have a credible alternative view to this senseless act of waste by Government, blindly following a theory which is unproven at best and wrong at worst. The sad fact is, as some argue right now, we have little hope of actually seeing when it it could be successful.

Non Executive Jamboree

The Telegraph today supports a big problem I have with modern corporations, sadly followed blindly by SMEs - the Non Executive Director freebie. Tiny Rowland famously described NXDs as like 'Baubles on a Christmas Tree' and I cannot think of a more apt description.

Firstly, it is a closed club. It is hard to get in unless you are a Politician, a Peer or a Senior Civil Servant or possibly a person with some notoriety from business. The whole gravy train that is NXD bypasses the raft of experienced, knowledgeable and highly successful business people who have far more skills to add value to companies than some of the idiots and hangers-on that occupy many such posts today - and that's probably being kind.

Secondly, many NXDs openly crafy a 'portfolio' of companies that they serve on the Boards of - as many as 9 or 10 at a time. At a day a month for each, what possible sustainable value can they add in such a short time? As thousands lose their jobs due to the lack of moral fibre, skill and time applied by these NXDs in questioning and guiding the companies they supposedly work with, these are the very characters who are impregnable and bear zero reponsibility for the performance of the company. They are the last to be booted out, if ever, which really must make those affected by redundancy furious.

Thirdly, once you are on the gravy train, it's a self perpetuating model. The more Boards you serve on, the higher your 'stock' and therfore the more you are sought after to serve on more. It's hilarious when you think of it but in reality it is actually very serious. Tony Blair is a classic case of former Politician serving in a non-position on a Board at Morgan Stanley earning £1.5m a year for precious little time. Here was a man who got paid less than £200,000 per annum for being a full time Prime Minister - he leaves Parliament and suddenly for no more than a day a month he is worth a pro-rata £30m a year should he do the job full time.

It's that stupid and that obscene.

There are moves afoot to get some change but back-scratching and cronyism is the hallmark of the NXD circuit and they are quite simply the easiest jobs in the world as they have zero responsibility.

In the wake of failed banks teetering on the edge oblivion, having lost billions of pounds, these NXDs served on the remuneration committees that actually allowed characters like Dick Fuld, Fred Goodwin and John Thain to hand out £ billions in executive bonuses even when they knew losses were being made on unprecedented scales. As banks worked ever increasingly dangerous models, not one of the NXDs associated with any of the banks at any time stepped in to curtail the executives and stop them driving the banks into oblivion. All will survive with not a jot of culpability and carry on serving on the Boards of corporate after corporate.

It's pointless having reviews and pretending it will change. It's the best gravy train in town and no one will stop it, least of all Politicians and Civil Servants as it is their retirement bonanzas on top of their fabulous index-linked pensions.

SFO Scams

The shiny new SFO chief, Richard Alderman, has a wave of positive press to prove he is the man to get things cracking. The sparkling articles paint the picture of a man on a mission - and currently the SFO is tackling cases worth £4 bn of fraud. Sadly, there is an estimated £14 bn of fraud committed in Britain every year but you have to make a start I suppose.

And that's the issue. There have been lots of allegations of cronyism in the SFO and after a hard-hitting review by former New York prosecutor, Jessica de Grazia, several top notch lawyers and executives have been cleared out when she questioned how the SFO operated.

Such lawyers had the last laugh as many were given large pay offs of up to £240,000, it is alleged, for the upset caused of losing the jobs given to them by benefactors. Not quite in Lord Mandelson league of compensation, but there is only one 'Dark Lord' and he can certainly look after himself one it comes to pay offs.

British Jobs For Foreign Workers

Good old Frank Field! He has echoed my mornful blast of last week by saying that the Government and more personally, Gordon Brown, is to blame for the systematic ignorance and bad handling of immigration and asylum policy. A long while ago, William Hague, lost an election campaign on this issue - and sure enough, after all the ridicules by Blair and Co, it has come back to haunt us. At the heart of the issue at the Total oil refinery in Lincolnshire is the problem of foreign immigrants and migrant workers taking British jobs and others who may end up causing strain on our welfare system.

It is not a race issue, as the Unions have pointed out, as back in those election days, the Chair of Commission for Racial Equality (Phillips?) backed Hague in saying border controls are crucial to protect the jobs and future of those already in the country, regardless of race.

If only the PM put as much time, effort and money in protecting the future of this country instead of just the skins of failed bankers perhaps we would get a more sensible approach to this crisis. He tells us that no Government has done more to saveguard jobs - he is talking rubbish.

Unemployment is now higher than when his party came to power. Then again, New Labour never did mind a lie getting in the way of a good story.

Bank Bail Outs - The Guessing Game

As the world's intelligentsia stay on for the World Economic Forum in Davos, we get more of a picture that the global financial bail outs are not much more than guessing games.

'No Clear Map'

Perhaps for the first time, Gordon Brown, admitted that there was 'No Clear Map' for this crisis, but he was swift to defend himself by saying this was the 'first financial crisis of the global age' and therefore there was no historical precedent for tackling it. It comes as cold comfort to taxpayers generally who really look to senior Politicians and their vast rafts of economic advisers to be showing not just leadership but knowledge of how to solve these problems, particularly when such vast sums of money are at stake.

I do not think I am alone in saying that when a Government throws £900bn of money we do not actually have at a problem of this magnitude, you would like to think that either they know what they are doing or they can be accountable for every penny.

It seems Brown is getting his excuses in early, after the first bank bail out did not work and the second seems to be just good money thrown after bad.

At the same Forum, John Monks, General Secretary for the European Trade Union Confederation, told the audience that Governments were, 'close to straining the patience of the public and voters'. I am glad to hear that there is someone in a significant position who is standing up and saying this.

Use of Money

It comes as further cold comfort that newly elected US President, Barack Obama, who is not attending the Forum, is concerned that much of the monies used in the bail out is actually going to fund bonuses for banks. He seemed shocked that some $18bn had been paid to New York bank executives for performance last year SINCE the start of the crisis and the subsequent bail outs. He criticised these executives heavily for such use of the money particularly when the world's eyes are upon the outcome and more importantly US taxpayers are funding the liability for bank excesses which caused the situation. He even had to step in to cancel Citigroup's $50m private jet order as executives there did not seem to have enough morals to work out it was not the time for corporate toys having laid off over 70,000 staff as a response to the crisis.

Bankers Solving Problems

It really comes back to central point I have been making. The crisis, and I think there is a global consensus here, was caused by the over-zealous money-making activities of banks which went unregulated and unchecked. Now, Governments are turning to the very same people to try and plot their ways out of the incredible mess they created - poachers turned gamekeepers.

I have a fundamental problem with this. Yes, I agree that credit, capital raising and lending fuel business and the economy and this is fundamental to the solution, but I do not believe that bankers have all the answers to the problems.

Here are some obvious outcomes that we see - $5 trillion globally has been put up to solve the problem yet there was zero caveat for any bank to stop paying bonuses, the absolute very heart of why the situation got as bad as it did. It almost is too stupid to think about and anyone with a mere thread of moral fabric would have had the sense to have made any bail out contingent on no bonuses.

But this is what you get when you ask bankers to solve the problems - they will tell you that you NEED to have this money-making hunger in the system in order to start up the engine again as it is essential 'oil to the machine'.

That Barack Obama is upset by this is indicative that the last President allowed banking executives to lead his thinking, led by former Goldman Sachs CEO, Hank Paulson. The heads of the Feds have similar problems. In the last week or so, a company bearing the Paulson name but we understand is not connected to Hank, made £90m shorting RBS shares.

Here's the rub - on the Board of Directors of this Hedge Fund is none other that Dr. Alan Greenspan - yes, the very man who dictated US Fiscal Policy for so long.

It comes as no surprise that after 10 years at the top of Government, driving policies that made a thin percentage of the world's population rich beyond all comprehension, that Tony Blair is rewarded with a £1.5m per year Non-Executive Directorship at Morgan Stanley to advise on 'Globalisation' - the very subject that Gordon Brown says we don't have enough experience on.

Breaking Links

It is way, way too common to see senior career Politicians and Civil Servants getting involved with banks, watchdogs, lobby groups and consultancies whose very purpose is to exploit their current or future positions. It is at the heart of the problems we have seen in the House of Lords recently which came as no surprise to the public just as the whole sordid Deripaska affair seems to slip by the moral attention of Government. It seems it goes with the job.

The bank bail outs are sums of monies far outside the understanding of common people yet we know that these bail outs are the supposed salvation of our way of life. So it is not too much to ask for that when such incredible amounts of money are spent it is a) done with our best interests at heart b) that none of the money is paid to any individual for bonus purposes and c) that the people who make the decisions are held accountable for every single penny.

Legacy

The legacy of these bails out, and there are likely to be more yet, is that the UK debt burden will last around 20 years according to the independent Institute for Fiscal Studies (IFS). Gordon Brown may scoff at such numbers but there is enough intelligent, independent thought that questions much of the global response to the crisis. Joseph Stiglitz, the Nobel Laureate for Economics, at the Forum has said that creating a Bad Bank is just 'Good money chasing after bad', labelling it 'cash for trash' and would leave economies picking up the bill for years of excess lending by the banks, depriving spending on other social needs.

So while Gordon Brown tells us blandly that he has no real idea how this crisis will pan out and be solved and he commits more and more cash to the whole business on our behalf, while others in the world have actually challenged the thinking so that the legacy to the world's taxpayers might actually be more manageable.

While taking the bad debt out of the system theoretically sidelines the problem so banks can again lend more freely is one way to solve the problem, it does mean that all that toxic debt is to be paid for by the taxpayers. There is zero long term clawback of bank future profits other than some kind of insurance premium to pay it back. It is 100% assumed the public will pick up the tab.

So I ask one question - what is going to stop banks doing all it again? For all the 'New World Order' and increased regulations promised, we did not even have enough sense to stop any bail out money being used as bonuses.