Tuesday, December 09, 2008

is this the End of Capitalism?

End of Capitalism
I have reading Robert Peston from the BBC today and he expects that a new capitalism will emerge from the current rubble of financial collapse.

Arguably the global economic crisis will turn out to be more significant for us and
other developed economies than the collapse of communism.

Households borrowed too much, £1200bn on mortgages alone. Big companies
borrowed too much, especially those taken off the stock market in private equity deals. Note however that for all the political fuss about the need for banks to maintain lines of credit to small companies, they're the unsung heroes of our tale of monumental financial folly: even today, the aggregated savings of small companies exceed their debt.

For the past decade, millions of Chinese slaved away on near subsistence wages and still managed to save, both as a nation (China has £1,400bn in foreign exchange reserves) and as individuals. And to a large extent they were working to improve our living standards, because they made more and more of the stuff we wanted at cheaper and cheaper prices - and clever bankers took their savings and lent the cash to us, so that we could buy the houses we cherished, the cars we desired, the flat-screen TVs.

So now we have a situation where you and I, as taxpayers, came to the rescue and filled the gap caused by the banks. Over just the past few months, British taxpayers have provided loans, commitments, guarantees and capital to our banks in excess of £600bn (in the US, the equivalent figure for taxpayer support is around £5,500bn). Which is probably just the beginning.

So whose fault is it?
Our own Government turned a blind eye to all the evidence that a rampant lending
binge was taking place, because the Exchequer was receiving all those lovely tax
revenues from the housing and City bubbles – and because there was kudos to be had
from the world renown of our financial services industry. But it is the banks and bankers – because they systematically failed to do what they were handsomely remunerated to do, which was to properly assess the risks of all that lending.

Why didn't the media shout louder about what was going on?
The media certainly could have shouted louder about the risks of all that debt being accumulated – but perhaps the volume control was set a little too low because of all the splendid advertising revenue that was generated by the property boom.

Now we have a a semi-permanent nationalisation of the banking system and will soon see significant taxpayer support for real companies in the real economy, then our banks and private- sector companies will have to work much harder to sustain the goodwill of those who are keeping them alive: millions and millions of taxpayers.

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