credit crunch

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pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

Having said that, if you think that markets are magically the solution to everything and have some kind of mystical inherent ability to always be right and to self-regulate in all conditions, all weathers, all extremities, and despite all unforeseen circumstances, well then, you are probably a neoliberal economist. This received wisdom about the superiority of the neoliberal model was destroyed by the recent credit crunch. One of the dogmas of this school is the idea that markets can solve any problem that markets create. What happened in the credit crunch was a flat contradiction of that dogma: markets created a problem that needed financial intervention from states on a historically unprecedented scale. This poses a problem for neoliberalism, and not just because of its faith in the idea that markets can self-regulate. Contained within the idea of self-regulation is the notion that markets are efficient.

During the daily process, each bank is asked the rate at which it could borrow money from other banks, “unsecured,” in other words backed only by its own creditworthiness rather than by specific collateral. The banks are asked, in effect, what would your credit be like today, if you had to ask? During the credit crunch, the if aspect of Libor became overpoweringly apparent, since the salient fact about the interbank market was that banks were refusing to lend money to each other. That, in essence, was what the credit crunch was—banks being too scared to lend to each other. In the very dry words of Mervyn King, the then governor of the Bank of England, Libor became “in many ways the rate at which banks do not lend to each other.” Euribor, the euro version of Libor, is at the moment even worse, since in very many cases these banks would be more likely to voluntarily turn themselves into lap-dancing clubs rather than make unsecured loans to each other.

Bailing out the banks, for instance, creates a classic form of moral hazard, because it exempts those banks from the consequences of their mistakes. Perhaps the most spectacular example during the credit crunch was the bailout/nationalization of AIG, the company that had insured most of the world’s credit default swaps, and as a result was on the brink of going broke. Banks had taken out insurance with AIG, and there was a case to be made for punishing them for being so stupid. Instead AIG got its bailout, which mainly involved direct transfers of cash to the banks that were its counterparties. The banks suffered no consequences for their mistakes, and so had no incentives to avoid such mistakes in the future—a textbook example of moral hazard. It was worry about moral hazard that made the Bank of England slow to act when the first signs of the credit crunch appeared with the collapse of the bank Northern Rock in autumn 2007.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

So David Simon and his colleagues made a five-part, sixty-episode work of art—in effect a huge televised novel, which, as many observers have remarked, is Balzacian in its scope and achievement—and still managed to miss out on one of the worst disasters to affect Baltimoreans in decades. The credit crunch has cost 33,000 householders in Baltimore their properties, victims of the wave of mortgage foreclosures. This in a city where the population has in recent decades fallen from around a million to about 300,000 less, and where 50,000 homes were already lying unoccupied. As you drive around past block after block of abandoned properties, boarded up, some of them mere shells, some of them—some of the saddest—leaving one or two occupied houses behind in their wake, clinging bravely or desperately to what used once to be a decent place to live—it’s hard not to think that this city looks as if it lost a war. It looked like that already before the credit crunch, but this city needed 33,000 home repossessions about as much as London needed the Luftwaffe during the Second World War.

He turned down the opportunity to participate in Madoff’s fund, a decision which cost him a good deal of political capital at his bank, until Madoff was exposed as a fraudster (and the banker who turned him down was promoted). Why did he turn down Madoff? “Because it just didn’t smell right.” Funny smells come in a variety of types. The funny smells surrounding the credit crunch were not for the most part to do with fraud—though having said that, a CDO investor who had had a long look at the way mortgages were being originated would have been gagging on fraud-related stench. Mainly, they were funny smells to do with things which were just too good to be true. That is a critically important category of funny smells, and it is the kind which is most relevant in the story of the credit crunch. It is a category of funny smell which involves an element of the willful, or of wishful thinking; or perhaps just of ignoring what’s in front of your nose. To adopt a metaphor I heard used by the chancellor of the Exchequer, Alistair Darling, it’s a bit like putting flowers in the hallway as a solution to the problem of dry rot.

There needs to be a general acceptance that the model has failed: the brakes-off, deregulate or die, privatize or stagnate, lunch is for wimps, greed is good, what’s good for the financial sector is good for the economy model; the “sack the bottom 10 percent,” bonusdriven, “if you can’t measure it, it isn’t real” model; the model which spread from the City to government and from there through the whole culture, in which the idea of value has gradually faded to be replaced by the idea of price. When the credit crunch first began—after the initial waves of panic and the moment when “this sucker could go down”—I thought that there might be a general reevaluation of where we all were. We wouldn’t notice and reflect just on the past decade of good times but on the whole question of what our societies had as their goals, where capitalism had brought us, and whether we wanted to keep working quite as hard as we had, in the direction of an always-receding vision of contentment. The “hedonic treadmill” is what this is called: as you have more and more, your idea of what it would take to be happy keeps receding just out of reach. It’s always the next pay raise, the next purchase, the next place you move to or go on holiday which will make you happy. The credit crunch could have been a moment to reflect on that.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low cost airline, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, Plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

Richard Koo’s thinking is informed by his close analysis of Japan’s credit crunch and post-credit crunch recession. He observes that Japanese firms in the 1990s and early 2000s changed their behaviour dramatically. They were no longer profit maximisers but debt minimisers. Between 1970 and the early 1990s, during the long ‘yang’ (sun or light) economic upswing, Japanese companies had steadily built up their debts to finance investment and growth. But from the early 1990s onwards they used every spare yen to pay off their debts. Even as interest rates fell to zero and firms were presented with numerous opportunities for growth, they still insisted on paying off their debts rather than investing in the future. The collapse in property prices that followed the credit crunch had traumatised them, because it meant that the value of their assets no longer matched their liabilities.

The Treasury has also provided some illustrative examples of the scale of the cumulative loss in wealth that today’s crisis has exposed, and it points to similar cumulative losses of output.2 Economic growth needs to accelerate to 3.25 per cent in the decades ahead – which would be a heroic achievement, given the structure of the economy and the rebalancing that must take place – in order for national output to reach its predicted level had the credit crunch and the recession not taken place. Even if that proves possible, full recovery will not be achieved before 2031. If the gap between where Britain thought it was going to be and where it actually will be is added up year by year from now until 2031, the total loss of output because of the crisis will be £2.3 trillion. But there is a more plausible scenario. If growth remains at 2.75 per cent (its average level in the years leading up to the credit crunch), then it might never recover sufficiently to converge with the old trajectory. In that case the cumulative loss of output would be over £4 trillion and would keep rising for ever.

The institute cites Japan as a warning of what might happen – as does Richard Koo, chief economist of Japan’s Nomura Research Institute.7 For more than a decade of his professional life, Koo has been exploring the fallout of Japan’s 1989–92 credit crunch on the $5 trillion Japanese economy. His prognosis is alarming, and confirms the McKinsey analysis: the Americans, the British and especially the mainland Europeans are far too complacent, Koo thinks. We do not recognise the sea-change in the behaviour of firms and economies after asset price bubbles, credit crunches and subsequent attempts to reduce leverage. The consensus expectation of a return to business as usual, albeit at lower growth rates, is at the optimistic end of what will happen. This is at the heart of the debate about the timing and depth of what economists euphemistically call ‘fiscal consolidation’ – that is, budget deficit cutting.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

"Robert Solow", affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, plutocrats, Plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

And as this new story about the nature of Wall Street and its products replaced the old story, the life drained out of the financial markets. The demand for the exotic products collapsed, and the credit crunch began. The credit crunch began for three separate reasons. First, and most obviously, a standard mode of financing had collapsed. Those who originated loans (mortgages, for instance) could no longer expect to be able to package them and pass them on easily to unsuspecting third parties. Now if they were going to originate those loans either they would have to keep them ultra-safe before they passed them on, or they would have to keep them themselves.5 The second reason for the credit crunch involves the relation between capital loss and leverage. Many of the institutions that held the loans or that originated them—depository banks, investment banks, and bank holding companies—had themselves invested in the new financial products.

The idea of targeting credit goes at least as far back as an article written by current Fed Chair Ben Bernanke and former Fed Vice-Chair Alan Blinder in 1988.8 (It should not be confused with economists’ discussions of targeting monetary policy, mainly by targeting the rate of inflation.9 That literature does not concern itself with how to countervail a credit crunch.) Achieving the credit target is urgent for several reasons. Most notably, firms that count on outside finance will go bankrupt if they cannot obtain credit. If the credit crunch continues and many firms go bankrupt, it would take an impossibly large fiscal and monetary policy stimulus to achieve full employment. There is the further problem that, as long as credit markets are frozen, the need for fiscal and monetary stimulation will continue. Using the appropriate fiscal and monetary stimulus, in sufficient amount, could possibly keep us at full employment. But to do so without relieving the credit crunch would be like propping a sick man up in bed so that he looks all right. He will collapse again just as soon as you remove the prop.

In the postscript to Chapter 7 we recommend that, in addressing the current crisis, the government have two targets. The first such target— and the only one that would be needed in a normal recession—would be a monetary policy and a fiscal policy that would be jointly sufficient to return the economy to full employment. But because of the severe credit crunch, which has been induced by the low state of confidence, such a stimulus is not enough. Indeed, in the face of the credit crunch, it might take very large increases in government expenditures or tax reductions to reach full employment. So we argue that government macroeconomic policy should have a second, intermediate target. Credit flows should also be targeted at the level that would normally prevail at full employment. In the postscript to Chapter 7 we shall describe how the Federal Reserve has developed clever schemes that could enable it to achieve such a target even in these dire times.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

Moreover, because unconventional policies lower the cost of government borrowing – they operate partly through central-bank purchases of either government or quasi-government debt, thereby increasing the supply of money – there is no great pressure on the US government to put its fiscal house in order. If the long-term costs of the credit crunch are persistently high budget deficits funded through resort to the printing press, holders of dollars elsewhere in the world have every right to be very worried indeed. US PROBLEMS AND SIXTEENTH-CENTURY SPAIN The US response to the credit crunch may be the last throw of the dice for a country that, for too long, has been able to live beyond its means. To understand what’s at stake, it’s worth going all the way back to the sixteenth century when, for a while, Spain was, like the US today, an all-conquering nation.

In practice, however, these cross-border capital flows are sometimes a source of inefficiency given that many of the biggest players are nation states that choose not to pursue commercial objectives but, instead, focus on meeting the interests of their various internal constituents: the US government is the world’s biggest borrower while the Chinese, Saudis and Russians are among the world’s biggest savers. It may be that the data simply do not exist to measure, calibrate and analyse these growing interactions between the developed and emerging worlds, but that does not mean to say they can be ignored. Regrettably, as with the 2007/8 credit crunch, they too often are. Even when they are taken into account, it’s often just one-way traffic. Plenty of economists spend their time trying to work out how developments in the United States affect the rest of the world. Few spend their time asking how the rest of the world and, in particular, the emerging nations affect the US. Yet, as I argue in this book, this second question needs to be asked more and more if we are to understand anything about developments in the world economy and in our own economies in the twenty-first century.

History, politics and geography matter. Too often, economists end up lost in a mathematical world of esoteric equations which cannot provide answers to the really big questions affecting society. At the British Academy in the summer of 2009, the great and the good of the UK economics profession met to discuss the drafting of a letter to Her Majesty the Queen intended to explain why economists had failed to spot the credit crunch. The letter subsequently delivered to Buckingham Palace ended as follows: In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole. A simpler conclusion might have been to say that many bright people had failed to learn the lessons of history, politics and geography.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

"Robert Solow", bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Having tried, with this historical digression, to convince the reader that describing former senior bankers as financially incompetent is not, ipso facto, an oxymoron, I can return to the narrative of more recent events. In the summer of 2008, the life-threatening phase of the credit crunch appeared to be ending. U.S. growth in the second quarter had just been revised upwards from 1.2 percent to 1.8 percent13 and the biggest worry was no longer the credit crunch but the threat of inflation caused by overly rapid growth in China, India, and other emerging nations. The credit crunch was turning out to be less damaging than generally expected for several reasons. One was the continuing growth of Asia and the seemingly inexhaustible supply of excess savings in that part of the world. These savings were made available by the Sovereign Wealth Funds (SWFs) of Abu Dhabi, Singapore, Korea, China, and other countries to Western financial institutions that needed to rebuild their capital after their initial subprime losses—which helped maintain financial stability throughout the first twelve months of the subprime crisis.

O’Rourke THE COLLAPSE OF LEHMAN on September 15, 2008, was the financial heart attack that turned a serious but manageable ailment in the U.S. mortgage market into a near-death experience for the global economy.1 Even before that fateful day, many banks and borrowers were in serious trouble, but the situation seemed to be improving and certainly not spinning out of control. The credit crunch that had begun in early 2007 could still be viewed as a severe but fairly normal cyclical correction, reversing some excesses in bank lending and property speculation that the world had seen many times before. The world economy was showing surprising resilience, and policymakers and investors worldwide suggested by their behavior that they genuinely believed the worst was over. Economic growth was still positive. House prices were stabilizing. Consumer and business confidence were recovering, as the price of oil fell back from the peak of $150 a barrel that it hit in response to speculative fears of excessive growth in China and other emerging economies. The biggest worry on the minds of most economists and businesspeople that summer was no longer the credit crunch but the threat of inflation caused by the earlier surge in the oil prices.

But if a single link in the debt-chains between financial institutions were broken, chaos would ensue. The risk of such breakdowns had been recognized by both regulators and bankers in the early days of the credit crunch and had been successfully handled (albeit at huge cost to bank shareholders) in 2007, when the mortgage-oriented hedge funds and Special Investment Vehicles set up by Bear Stearns, Citibank, UBS, HSBC, and many other major banks were bailed out by their sponsoring institutions. These bailouts were expensive to the bank shareholders but prevented systemic collapse by maintaining the integrity of all the links in the chain of mutual obligations in the financial system. This was a crucial lesson of the early phase of the credit crunch that the U.S. Treasury and the Fed recognized in the Bear Stearns deal but, in the autumn of 2008, decided to recklessly ignore.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

First, the US model looks not quite as attractive as it did in the late 1990s. The dotcom bubble burst in 2000 and then a housing boom ended in a credit crunch in 2007 and 2008. Critics argue that the American financial free-for-all leads to recurrent crises. Meanwhile, emerging countries like China and Russia showed it was possible to achieve rapid economic growth while still retaining a fair degree of government control. Having seen what the IMF could do to debtor countries, many developing nations focused on building up trade surpluses, so they would not be dependent on foreign money. Now it is the US which is dependent on the Asians and the oil producers to finance its deficit. Some argue that this imbalance created the conditions for the credit crunch. Americans used cheap money from abroad to speculate on their property market. GLOBALIZATION What is globalization?

The flight of this so-called ‘hot money’ can put real pressure on a government. The money markets were at the heart of the credit crunch. Banks became reluctant to lend to each other, and outside investors (such as money market funds) were also unwilling to lend to banks. The result was that Libor rose sharply. Instead of being a few hundredths of a percentage point above base rates, Libor was two or three percentage points higher. This raised the cost of borrowing for everyone, and prompted central banks to lend directly in the money markets to try to ease the pressure. The central banks had some limited success but the difficulty of obtaining money at a reasonable price was one reason why the credit crunch became so serious. Companies struggled to refinance themselves; speculators who had borrowed money to buy assets were forced to sell, sending prices sharply lower.

They take their cut as middlemen. That cut can come in three forms: banks can charge a higher interest rate to the people to whom they lend than they pay to the people from whom they borrow, or they can simply charge a fee for bringing lender and borrower, or issuer and investor, together. Over the last twenty years, they have increasingly added a third activity: trading assets. This contributed to the credit crunch that started in 2007. There is no doubt that financial institutions perform an immensely valuable service: imagine life without cashpoint cards, credit cards, mortgages and car loans. Even those Britons who do not have a bank account would never be paid if the companies for which they work did not have one. Indeed, the companies might not have been founded without loans from banks. It is important, when considering some of the practices discussed in this book, to remember that the business of financial institutions is the handling of money.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"Robert Solow", banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

The average Wall Street bonus in 2009—at the very height of the crisis—was close to its highest in history. Forbes counted a record number of 1210 billionaires in 2011, up by 28 per cent over 2007. Their combined wealth has risen from $3,500 billion in 2007 to $4,500 billion in 2010. Little more than a thousand individuals commanded a sum equivalent to a third of the output of the American economy. In the UK, the City bonus pool in 2010 came close to pre-credit crunch levels. The average pay of the chief executives of Britain’s largest 100 companies rose by 55 per cent in the first six months of 2010 to stand at almost £5 million. Big business is enjoying surging profit levels, with many of the nation’s largest conglomerates sitting on near-record levels of cash, most of it standing idle. In contrast to the rising fortunes at the top, living standards for most Britons, Americans and Europeans are on a downward slide.

Some of these have done much better than others—especially those working in well paid white collar professions outside of the corporate and City super-elite—such as lawyers, accountants and medics. But most have ended up in the slow lane of earnings growth, with earnings that have fallen way behind the growth of the economy.73 While incomes continued to rise sharply amongst the very top income groups in the decade before the credit crunch, real income growth amongst those lower down the income scale started to slow and at an accelerating rate. During Labour’s first term in power, much of the workforce enjoyed faster rises in take-home pay than in the previous 15 years. As a result, the wage share recovered some of its lost ground between 1996 and 2001. But the party did not last for long. The ‘feast’ years of the late 1990s gave way first to the ‘lean’ years of Labour’s second term and then the ‘famine’ years during its third.

In the three decades to 2008, the number of jobs in manufacturing fell from just over 7 to just over 3 million.103 As shown in figure 3.2, by 2007, manufacturing in the UK accounted for nearly 13 per cent of national output, down from a third in 1979. The share of output accounted for by finance, in contrast, doubled from around 5 per cent in the mid-1970s to slightly over ten per cent by 2008.104 The expansion of finance accelerated from the second half of the 1990s. In the three years to 2007—before the onset of the credit crunch—financial services accounted for a third of overall GDP growth (another third came from residential and commercial property) and had grown to play a bigger role in the economy than in any other comparable nation.105 Thus financial services accounts for 7.5 per cent of the US economy, 6.7 per cent in Japan, 4.6 per cent in France and 3.8 per cent in Germany. As became clear in the turmoil of 2008-9, it is not good for resilience to have such a heavily skewed pattern of economic activity.


Corbyn by Richard Seymour

anti-communist, banking crisis, battle of ideas, Bernie Sanders, Boris Johnson, British Empire, call centre, capital controls, centre right, collective bargaining, credit crunch, Donald Trump, eurozone crisis, first-past-the-post, full employment, gender pay gap, housing crisis, income inequality, knowledge economy, land value tax, liberal world order, mass immigration, means of production, moral panic, Naomi Klein, negative equity, Neil Kinnock, new economy, non-tariff barriers, Northern Rock, Occupy movement, offshore financial centre, pension reform, Philip Mirowski, precariat, quantitative easing, race to the bottom, rent control, Snapchat, stakhanovite, Washington Consensus, wealth creators, Winter of Discontent, Wolfgang Streeck, working-age population, éminence grise

The experiments from the late nineteenth and early twentieth century using microscopes, which disproved Newtonian mechanics, wouldn’t have been much use if people had excused the old laws of motion by saying, ‘Well, no one could have predicted black body radiation.’ It required years of painful rethinking and a fundamentally new view of the universe, replacing deterministic laws with probabilistic laws of motion, to account for the new data. Likewise, recent crises call for a paradigm shift, a fundamental rethinking of how politics works. This should really have been initiated after the credit crunch. Not only did economists fail to predict the cataclysmic event, the worst crisis for capitalism since the 1930s; also, their theories denied it could happen. Elaborate mathematical models, based on the assumption of efficient, self-regulating markets, were developed to guide academic theory and policy. They ignored obvious, common sense facts, such as that house prices could not indefinitely rise above the value of incomes without producing a crash.

The liberal journalist George Packer argued that ‘rejecting globalisation was like rejecting the sunrise’.1 And besides, it was benevolent: a rising tide would lift all boats, while judicious exertions of military force would iron out any wrinkles in an increasingly flat earth. But there are growing signs since the global financial crash that we have reached, as one of John McDonnell’s advisors, economist James Meadway, put it, ‘peak globalisation’. World trade is still growing, but far less rapidly than before the credit crunch, and more slowly than global GDP. According to the World Trade Organization, the ratio of trade growth to GDP growth fell to 0.6:1 in 2016. Financial internationalism, wherein banks extend their reach increasingly globally, is slowing down. Protectionism is on the rise across the G20, and various governments – notably the Chinese – have imposed capital controls.2 This is a crisis of globalisation, and, with that, a crisis of all the taken-for-granted wisdom about globalisation.

Birt brought in Peter Jay, the financial journalist who famously wrote Callaghan’s speech declaring a monetarist policy, and Evan Davis. Their journalistic beat was dry economics reporting. This treated the economy as something which a narrow subset of experts deal with. Then they had more populist business programmes on the Thatcherite model, promoting the idea of a nation of shareholders. ‘By the time of the credit crunch and the austerity projects, there was a consensus around neoliberalism. Particular centres of expertise were valued – for example, Jeff Randall had been brought in from the Telegraph to be the first business editor. So that when the crisis hit, the sources they had on television were people from the City, neoliberal think tanks and, of course, politicians who had been won over to neoliberalism.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

Ending this depression should be, could be, almost incredibly easy. So why aren’t we doing it? To answer that question, we have to look at some economic and, even more important, political history. First, however, let’s talk some more about the crisis of 2008, which plunged us into this depression. CHAPTER THREE THE MINSKY MOMENT Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings.

In January 2009, as the outlines of the plan became visible, sympathetic economists outside the administration were very publicly worried about what they feared would be the economic and political consequences of the half measures being contemplated; we know now that some economists inside the administration, including Christina Romer, the head of the Council of Economic Advisers, shared these sentiments. To be fair to Obama, his failure was more or less paralleled throughout the advanced world, as policy makers everywhere fell short. Governments and central banks stepped in with cheap-money policies and enough aid to the banks to prevent a repeat of the wholesale breakdown of finance that took place in the early 1930s, creating a three-year credit crunch that played a major role in causing the Great Depression. (There was a similar credit crunch in 2008–09, but it was much shorter-lived, lasting only from September 2008 to the late spring of 2009.) But policies were never remotely strong enough to avoid a huge and persistent rise in unemployment. And when the initial round of policy responses fell short, governments across the advanced world, far from acknowledging the shortfall, treated it as a demonstration that nothing more could or should be done to create jobs.

And since both conventional and shadow banks are highly leveraged, it didn’t take a lot of losses on this scale to call the solvency of many institutions into question. The seriousness of the situation began to sink in on August 9, 2007, when the French investment bank BNP Paribas told investors in two of its funds that they could no longer withdraw their money, because the markets in those assets had effectively shut down. A credit crunch began developing, as banks, worried about possible losses, became unwilling to lend to one another. The combined effects of the decline in home construction, weakening consumer spending as the fall in home prices took its toll, and this credit crunch pushed the U.S. economy into recession by the end of 2007. At first, however, it wasn’t that steep a downturn, and as late as September 2008 it was possible to hope that the economic downturn wouldn’t be all that severe. In fact, there were many who argued that America wasn’t really in recession.


pages: 354 words: 99,690

Thinking About It Only Makes It Worse: And Other Lessons From Modern Life by David Mitchell

bank run, Boris Johnson, British Empire, cognitive dissonance, collapse of Lehman Brothers, credit crunch, don't be evil, double helix, Downton Abbey, Etonian, eurozone crisis, haute cuisine, Julian Assange, lateral thinking, Northern Rock, offshore financial centre, payday loans, plutocrats, Plutocrats, profit motive, sensible shoes, Skype, The Wisdom of Crowds, WikiLeaks

No new toothy smiling suit had been swept to office, no nationally beloved beauty had been chased to death by photographers, no building had been blown up or completed, no new technology suddenly launched or discredited, no disease gone pandemic or been cured. But, as when a premiership football team runs on in front of an away crowd, and opposition fans reach vindictively for their 2ps, change was palpably in the air. In fact, this change was all about money. Money may not bring you happiness but, if there’s one thing the credit crunch of 2008 showed, no money brings a hell of a lot of grief. And that’s what we were at risk of experiencing that autumn: no money. Anywhere. At all. The sudden absence of money – its collapse as a human construct. Money isn’t really anything, after all. Humans don’t need money – we need food and shelter. Living the sophisticated life of the westerner, it appears that you need money in order to obtain food and shelter.

We despised one another, and of course the government, for the mistakes that had been made, but were also nostalgic for the prosperous feeling we’d had while it was happening. I realise the shine had been taken off New Labour long before 2008. That war in Iraq went down like a cup of cold piss, for a start. But I’m not sure that really upset Britain as much as we’re apt to think. The war made Britons shake their heads, but the credit crunch had us banging them against walls. You only have to look at Blair and Brown’s relative electoral fortunes: Blair won a general election after getting the country involved in an unpopular and unsuccessful war, a war of which he remained unashamedly in favour; yet Brown lost one after a global economic downturn which he admittedly failed to avert, but for which he certainly wasn’t primarily responsible.

Except if it’s football or a soap. TV has gone through hell in the last few years. Its existence has been threatened by a confluence of general economic gloom, consequent creative cowardice and, most of all, the bloody internet, which seems to change everything, but particularly seeks to change the way we have fun – and I’m not even talking about porn. The poor old entertainment media could really have done without the credit crunch and the internet happening at once. * It’s been a ridiculously long time coming but it’s here at last. What’s the guy been doing? He makes Kubrick look like Barbara Cartland. Doesn’t he understand the country’s in recession, the media in crisis? We need product – reliable product from an established name. He has fewer new ideas than Mel Brooks and Eric Idle put together! It’s a disgrace.


The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series) by Robert P. Baker

asset-backed security, bank run, banking crisis, Basel III, Black-Scholes formula, Brownian motion, business continuity plan, business process, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, diversification, fixed income, hiring and firing, implied volatility, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, margin call, market clearing, millennium bug, place-making, prediction markets, short selling, statistical model, stochastic process, the market place, the payments system, time value of money, too big to fail, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

She is aware of Claire’s concerns about the possible downside but Claire does have a reputation for being a little too cautious even in post-credit crunch times. Claire has worked in market risk control for ten years and been with her current bank for nine months. Since joining she has really tightened up the market risk department. Her strategy has been to strictly control all risky trades and to reverse the huge losses the bank suffered last year on bad trades. So far her approach has been warmly supported by managers keen to restore confidence in the bank. Claire knows the young trader Thomas and his reputation for being a little brash and arrogant. She has performed scenario analysis on his new trade idea and is People 199 sceptical because, if things go wrong, it could undo all her good work and return the bank to its risky trading culture prevalent before the credit crunch. In order to try to resolve the conflict Miriam calls a meeting for the three of them.

I feel a thorough end-to-end guide would be of interest to: anyone seeking work in the financial services industry people already in the industry who want to see how their work fits into the organisation as a whole those with an interest in the activities of a financial entity. They could include clients, academics, pension holders and people making investments of all sizes people selling products and services to the financial sector such as software vendors. The importance of the financial sector to the world economy has been brought into focus by many recent events: the credit crunch, the collapse of companies such as Lehman Brothers and a recession affecting most countries across the world. The result has been a demand for better inspection and regulation of trading activities. No longer is it sufficient for firms to return profits, they have to convince investors, shareholders and regulators that they are employing due diligence and managing risks. In writing about the trading process, my aim is to reveal all areas subject to potential risk.

As long as the potential risks are understood and estimated, it can be said that risk is being managed. 16 THE TRADE LIFECYCLE 2.6 PROBLEMS OF UNFORESEEN RISK No stakeholders in a business – investors, managers, employees and customers – want unforeseen risk. Due to its sudden effect, the organisation is ill-equipped to deal with it and its consequences are unknown. One of the major causes of the recent credit crunch was the failure of many organisations to take into account a particular risk: that so many American sub prime mortgage borrowers would be unable to repay their debt. Unforeseen risk points to poor management and supervision and reduces confidence in the financial entity. If risk is present, it should be identified and then sensible decisions can be taken about how to manage it. 2.7 SUMMARY A financial entity must accept that risks are an unavoidable part of the trading process.


pages: 859 words: 204,092

When China Rules the World: The End of the Western World and the Rise of the Middle Kingdom by Martin Jacques

Admiral Zheng, Asian financial crisis, Berlin Wall, Bob Geldof, Bretton Woods, BRICs, British Empire, credit crunch, Dava Sobel, deindustrialization, Deng Xiaoping, deskilling, discovery of the americas, Doha Development Round, energy security, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global reserve currency, global supply chain, illegal immigration, income per capita, invention of gunpowder, James Watt: steam engine, joint-stock company, Kenneth Rogoff, land reform, land tenure, lateral thinking, Malacca Straits, Martin Wolf, Naomi Klein, Nelson Mandela, new economy, New Urbanism, one-China policy, open economy, Pearl River Delta, pension reform, price stability, purchasing power parity, reserve currency, rising living standards, Ronald Reagan, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, spinning jenny, Spread Networks laid a new fibre optics cable between New York and Chicago, the scientific method, Thomas L Friedman, trade liberalization, urban planning, Washington Consensus, Westphalian system, Xiaogang Anhui farmers, zero-sum game

As the United States exports relatively little to China, the latter has enjoyed a large and rising trade surplus which has grown very rapidly since 1999.147 China has invested this surplus in various forms of US debt, including Treasury bonds, agency bonds and corporate bonds - in effect, a Chinese loan to the US - thereby enabling American interest rates to be kept artificially low to the benefit of American consumers and especially, until the credit crunch, holders of mortgages. Although the US was deeply in debt, China’s continuing large-scale purchase of Treasury bonds (which I will use as shorthand for various forms of US assets held by China) allowed Americans to continue with their spending spree, and then partially helped to cushion the impact of the credit crunch. In September 2008 China’s foreign currency reserves totalled $1.81 trillion - a sum greater than the annual economic output of all but nine countries.148 The rapid growth of its foreign exchange reserves has made China a colossus in the financial world.

In early 2007 the government announced the formation of the China Investment Corporation, a new state agency to oversee investment of $200 billion of China’s foreign currency reserves - similar to Temasek Holdings, the Singapore government’s successful investment agency, which manages a $108 billion global portfolio of investments.153 To test the water, the new agency placed $3 billion of its holdings with Blackstone, the US-based private equity group, thereby signalling Beijing’s intention to switch some of its investments from US Treasury bonds into more risky equity holdings.154 In fact it has since emerged that the State Administration of Foreign Exchange, which oversees China’s reserves, has itself been investing rather more widely than was previously believed.155 These moves herald China’s rise as a major global financial player.156 In the second half of 2007, as the credit crunch began to bite, China Development Bank took a significant stake in the UK-based Barclays Bank157 and Citic Securities formed a strategic alliance with the US investment bank Bear Stearns before the latter went bust.158 Three Chinese banks were also in talks about acquiring a stake in Standard Chartered, the UK-based emerging markets lender.159 But most of this came to nought as the Chinese increasingly realized the likely severity of the credit crunch and the potential threat it represented to any stakes in Western financial institutions that it might purchase. When the financial meltdown came in September 2008, the Chinese found themselves relatively little exposed.

The winners, above all the US corporate giants that have moved their manufacturing operations to China and the consumers who have benefited from China prices at home, still considerably outnumber the losers and in any case enjoy much greater power.143 But this could change. The political consequences of spiralling commodity prices, especially oil prices, which were brought to a premature end by the credit crunch, could, if they had continued, have turned American attitudes towards China in a more negative direction. More pertinently, the threat of a serious and prolonged depression is already leading to growing demands for protection.144 It is striking that, even before the credit crunch, the number of Americans who thought that trade with other countries was having a positive impact on the US fell sharply from 78 per cent in 2002 to only 59 per cent in 2007.145 In the longer term, as Chinese companies relentlessly climb the technology ladder, the US economy will face ever-widening competition from Chinese goods, no longer just at the low-value end, but also increasingly for high value-added products as well, just as happened earlier with Japanese and Korean firms.146 In that process, the proportion of losers is likely to increase rapidly, as will be the case in Europe too.


pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

asset allocation, asset-backed security, bank run, barriers to entry, business cycle, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, fixed income, intangible asset, London Interbank Offered Rate, performance metric, shareholder value, sovereign wealth fund, stocks for the long run, technology bubble, time value of money, transaction costs, yield curve

Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions is a highly accessible and authoritative book written by investment bankers that explains how to perform the valuation work at the core of the financial world. This book fills a noticeable gap in contemporary finance literature, which tends to focus on theory rather than practical application. In the aftermath of the subprime mortgage crisis and ensuing credit crunch, the world of finance is returning to the fundamentals of valuation and critical due diligence for mergers & acquisitions (M&A), capital markets, and investment opportunities. This involves the use of more realistic assumptions governing approach to risk as well as a wide range of valuation drivers, such as expected financial performance, discount rates, multiples, leverage levels, and financing terms.

The valuation implied for a target by a DCF is also known as its intrinsic value, as opposed to its market value, which is the value ascribed by the market at a given point in time. Therefore, a DCF serves as an important alternative to market-based valuation techniques such as comparable companies and precedent transactions, which can be distorted by a number of factors, including market aberrations (e.g., the post-subprime credit crunch). As such, a DCF plays a valuable role as a check on the prevailing market valuation for a publicly traded company. A DCF is also critical when there are limited (or no) “pure play” peer companies or comparable acquisitions. Part Two: Leveraged Buyouts (Chapters 4 & 5) Part Two focuses on leveraged buyouts, which comprised a large part of the capital markets and M&A landscape in the mid-2000s.

The multiples paid for companies during this period quickly became irrelevant for assessing value in the following era. Similarly, during the record low-rate debt financing environment of the mid- 2000s, acquirers (financial sponsors, in particular) were able to support higher than historical purchase prices due to the market’s willingness to supply abundant and inexpensive debt with favorable terms. In the ensuing credit crunch that began during the second half of 2007, however, debt financing became scarce and expensive, thereby dramatically changing value perceptions. As a result, the entire M&A landscape changed, including the volume of deals and buyers’ perspectives on valuation. Deal Dynamics Deal dynamics refer to the specific circumstances surrounding a given transaction. For example:• Was the acquirer a strategic buyer or a financial sponsor?


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

203; Regulation 204; Protected rights 205; The future for SIPPs 205; Postscript 206 177 Appendix: Contributors’ contact details Index Index of advertisers 183 191 199 207 212 214 private client services XII Trusts, probate and tax planning Residential property purchases and sales Relationships: formation and breakdown and the consequences Contact Ian Lane, Partner 020 7293 4801 ilane@dac.co.uk www.dac.co.uk/privateclient XIII ឣ Nil Rate Band Will Trusts: Are they still of value? Way back in October 2007 in the time before the banking crisis, ‘the credit crunch’, falling markets, massive job losses and recession (or is it depression!) the UK Government made a surprise announcement of a change to the inheritance tax legislation that was to have a profound effect on tax planning using Wills. This was the announcement of the introduction of the transferable Nil Rate Band. The announcement followed very quickly on a statement by the Conservative Party that, if elected, they were going to introduce a Nil Rate Band of £1m per person.

The work of IAAG is a competitive differentiator for Citi Private Bank, contributing to its intellectual leadership and forming the cornerstone of investment conversation with clients. Philip has been with Citi for eight years. His previous assignments have included working for the Corporate and Investment Bank in equity derivatives, where he performed diverse roles including senior profit and loss analysis, risk management and warrants trading. 1 Introduction In 2008 conventional private investor thinking was turned upside down following the ‘credit crunch’ and the ensuing stream of dismal revelations of imprudent bank lending, financial products based on the packaging of toxic debt and inadequate financial sector regulation. Previous conceptions of what were safe forms of investment and how diversified portfolios could be structured at acceptable levels of risk were tossed aside. High-net-worth individuals (HNWs) and others with significant capital assets, including pension pots, available for investment have had to rethink their investment strategies.

The final chapter in this section of the book is an explanation of the new ‘user-friendly’ private foundation vehicle now available in Jersey. Part Two addresses the disparate worlds of real estate and forestry. Tim Bowring of Citi Private Bank team offers definitions of the various property-backed funding alternatives and a frank analysis of the causes of the present market downturn that generated the credit crunch. James Price of Knight Frank describes the current condition of the overseas property market. In the two chapters that follow Alan Guy and Alastair Sandels of Fountains identify current opportunities in forestry investment and the risks of direct investment in forestry. In contrast, Guy Conroy of Oxigen Investments advocates timber in South-East Asia as both a profitable and ethical investment destination.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, fixed income, implied volatility, index fund, intangible asset, interest rate swap, inventory management, London Interbank Offered Rate, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

In this case, if the stock price exceeds $26 plus the premium that you received, your buy-write strategy has underperformed the TSJ shares. The Investopedia Guide to Wall Speak 57 Related Terms: • Call Option • Long (or Long Position) • Strike Price • Common Stock • Stock Option Credit Crunch What Does Credit Crunch Mean? An economic condition characterized by extreme difficulty in obtaining capital. Banks and investors become wary of lending funds to corporations, and that drives up the price of debt products for borrowers. Investopedia explains Credit Crunch Credit crunches usually occur during recessions. A credit crunch makes it nearly impossible for companies to borrow money because lenders are scared of bankruptcies or defaults and charge higher interest rates because of that fear. The result is a slowdown in growth that leads to a prolonged recession (or slower recovery), which is compounded as banks hold tight to the banking reserves.

Bankruptcy filings in the United States can fall under one of several chapters of the Bankruptcy Code: Chapter 7 (which involves liquidation of assets), Chapter 11 (company or individual “reorganizations”), and Chapter 13 (debt repayment with lowered debt covenants or payment plans). Bankruptcy filings vary widely from country to country, leading to higher or lower filing rates, depending on how easily a person or company can complete the process. Related Terms: • Bear Market • Credit Crunch • Subprime Loan • Chapter 11 • Debt Basis Point (BPS) What Does Basis Point (BPS) Mean? A unit equal to 1/100 of 1%; it is used to denote a change in a financial instrument (usually a fixed-income security). The basis point is used commonly for calculating changes in interest rates, equity indexes, and the yield of a fixed-income security. 20 The Investopedia Guide to Wall Speak Investopedia explains Basis Point (BPS) Converting percentage changes in basis points is done as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

A forbearance agreement is not a long-term solution for delinquent borrowers; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems. Investopedia explains Mortgage Forbearance Agreement Borrowers who are faced with mortgage financial problems such as having chosen an adjustable-rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable usually must seek remedies other than a forbearance agreement. Related Terms: • Bankruptcy • Liability • Subprime Meltdown • Credit Crunch • Mortgage Mortgage-Backed Securities (MBSs) What Does Mortgage-Backed Securities (MBSs) Mean? Refers to a type of asset-backed security secured by a mortgage or a collection of mortgages and grouped in one of the top two ratings as determined by a credit rating agency such as Moody’s; usually make periodic payments that are similar to coupon payments. Furthermore, the mortgages must have originated from a regulated and authorized financial institution.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

Yet the ratio of a bank’s capital to its assets, technical though it may sound, is of more than merely academic interest. After all, a ‘great contraction’ in the US banking system has convincingly been blamed for the outbreak and course of the Great Depression between 1929 and 1933, the worst economic disaster of modern history.7 If US banks have lost significantly more than the $255 billion to which they have so far admitted as a result of the subprime mortgage crisis and credit crunch, there is a real danger that a much larger - perhaps tenfold larger - contraction in credit may be necessary to shrink the banks’ balance sheets in proportion to the decline in their capital. If the shadow banking system of securitized debt and off-balance-sheet institutions is to be swept away completely by this crisis, the contraction could be still more severe. This has implications not just for the United States but for the world as a whole, since American output presently accounts for more than a quarter of total world production, while many European and Asian economies in particular are still heavily reliant on the United States as a market for their exports.

Europe already seems destined to experience a slowdown comparable with that of the United States, particularly in those countries (such as Britain and Spain) that have gone through similar housing bubbles. The extent to which Asia can ride out an American recession, in the way that America rode out the Asian crisis of 1997-8, remains uncertain. What is certain is that the efforts of the Federal Reserve to mitigate the credit crunch by cutting interest rates and targeting liquidity at the US banking system have put severe downward pressure on the external value of the dollar. The coincidence of a dollar slide and continuing Asian industrial growth has caused a spike in commodity prices comparable not merely with the 1970s but with the 1940s. It is not too much to say that in mid-2008 we witnessed the inflationary symptoms of a world war without the war itself.

Among them are many so-called distressed assets, which Griffin picks up from failed companies like Enron for knock-down prices. It would not be too much to say that Ken Griffin loves risk. He lives and breathes uncertainty. Since he began trading convertible bonds from his Harvard undergraduate dormitory, he has feasted on ‘fat tails’. Citadel’s main offshore fund has generated annual returns of 21 per cent since 1998.87 In 2007, when other financial institutions were losing billions in the credit crunch, he personally made more than a billion dollars. Among the artworks that decorate his penthouse apartment on North Michigan Avenue is Jasper Johns’s False Start, for which he paid $80 million, and a Cézanne which cost him $60 million. When Griffin got married, the wedding was at Versailles (the French château, not the small Illinois town of the same name).88 Hedging is clearly a good business in a risky world.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

"Robert Solow", accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

This is an incredibly simple system, but even at this point it can give us some insights into why Bernanke’s QE1 was far less effective than he had hoped – and why it would have been far more effective if the money had been given to the debtors rather than to the banks. A credit crunch The crisis of 2007 was not merely a credit crunch (where the problem is liquidity) but the end point in the process of Ponzi lending that made much of the US economy insolvent. However, the credit-crunch aspect of this crisis can be simulated in this model by halving the rate at which the bank lends from the vault, and doubling the speed at which firms try to repay their debts. The time constant for bank lending therefore drops from ½ to ¼ – so that the amount in the vault turns over every four years rather than every two – while that for repaying debts goes from 1/10 to 1/5 – so that loans are repaid every five years rather than every ten. The credit crunch has a drastic impact upon both bank account balances and incomes.

In the absence of instantaneous replacement cost pricing, firms must finance their increased working capital needs by increasing their borrowings from their banks or by running down their liquid assets. (Ibid.: 545) Banks therefore accommodate the need that businesses have for credit via additional lending – and if they did not, ordinary commerce would be subject to Lehman Brothers-style credit crunches on a daily basis. The Federal Reserve then accommodates the need for reserves that the additional lending implies – otherwise the Fed would cause a credit crunch: ‘Once deposits have been created by an act of lending, the central bank must somehow ensure that the required reserves are available at the settlement date. Otherwise the banks, no matter how hard they scramble for funds, could not in the aggregate meet their reserve requirements’ (ibid.: 544). Consequently, attempts to use the ‘Money Multiplier’ as a control mechanism – either to restrict credit growth as during the monetarist period of the late 1970s, or to cause a boom in lending during the Great Recession – are bound to fail.

This was followed by an era of increasing turbulence, which has continued until today’ (Minsky 1982: xiii). Minsky’s judgment was based largely on his financial interpretation of the US business cycle from that point on: The first serious break in the apparently tranquil progress was the credit crunch of 1966. Then, for the first time in the postwar era, the Federal Reserve intervened as a lender of last resort to refinance institutions – in this case banks – which were experiencing losses in an effort to meet liquidity requirements. The credit crunch was followed by a ‘growth’ recession, but the expansion of the Vietnam War promptly led to a large federal deficit which facilitated a recovery from the growth recession. The 1966 episode was characterized by four elements: (1) a disturbance in financial markets that led to lender-of-last-resort intervention by the monetary authorities; (2) a recession (a growth recession in 1966); (3) a sizable increase in the federal deficit; and (4) a recovery followed by an acceleration of inflation that set the stage for the next disturbance.


pages: 121 words: 31,813

The Art of Execution: How the World's Best Investors Get It Wrong and Still Make Millions by Lee Freeman-Shor

Black Swan, buy and hold, cognitive bias, collapse of Lehman Brothers, credit crunch, Daniel Kahneman / Amos Tversky, diversified portfolio, family office, I think there is a world market for maybe five computers, index fund, Isaac Newton, Jeff Bezos, Long Term Capital Management, loss aversion, Richard Thaler, Robert Shiller, Robert Shiller, rolodex, Skype, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, technology bubble, The Wisdom of Crowds, too big to fail, tulip mania, zero-sum game

Indeed, it is one of three banks, excluding the Bank of England, permitted to issue UK banknotes. Sadly, nowadays the Royal Bank of Scotland has become synonymous with the credit crunch because it needed to be bailed out by the government, a source of anger for many in the UK. It was deemed too big to fail. At the time of writing the government owns 82% of the shares outstanding, having been forced to recapitalise the bank in order to prevent a run on the banking system. An Assassin bought shares in the Royal Bank of Scotland on 30 May 2008, before the collapse of Lehman Brothers and the onset of the credit crunch, at £22.29. As the credit crisis broke, he actually moved quicker than his stop-loss, killing the investment on 3 October 2008 at £18.62, a loss of 16%. The stock then fell a further 82%.

CASE STUDY: BMW What is there not to love about a car maker that has captured the imaginations of everyone from corporate fleet managers, who lease 3 Series saloons in staggering numbers, to middle-class mums ferrying their children around in its SUVs? Not to mention middle-aged men who try to recapture their youth driving the executive 6 or 7 Series or the Z4 Roadster … One of my investors chose to invest in BMW on 11 April 2008 – just before the credit crunch hit – at a price of €34.95. He sold two months later on 23 June 2008 at a price of €32.35 for a loss of a mere 7%. Before you jump to conclusions, let me assure you that he did not sell because he foresaw the imminent credit crunch. He sold because a better idea had apparently presented itself. The stock went on to return 95% after he sold it. CASE STUDY: Pirelli Sticking to the motoring theme, we go from German automotive powerhouse to Italian tyre manufacturing behemoth Pirelli. It is the fifth-largest tyre manufacturer in the world, behind Bridgestone, Michelin, Goodyear and Continental.

If you have ever been turned down for a loan following a credit check, chances are that the report the loan officer used to make his or her decision was generated by Experian. This paints a picture of a rather bulletproof business model because so many companies rely on Experian’s reports in the day-to-day running of their businesses. What could possibly go wrong? A Hunter bought the stock on 13 June 2006, at an initial price of £9.02 per share. Despite holding out through the credit crunch, this Hunter subsequently sold his entire stake five years later on 1 September 2011 with the shares trading at £7.06 per share. Had he done nothing, his patience as a buy-and-hold investor would not have been rewarded and he would have realised a loss of 22%. So much for the saying, ‘Time is your friend when losing’. Fortunately, the Hunter had bought more shares in the company when they fell in price during that period.


pages: 401 words: 112,784

Hard Times: The Divisive Toll of the Economic Slump by Tom Clark, Anthony Heath

Affordable Care Act / Obamacare, British Empire, business cycle, Carmen Reinhart, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, deindustrialization, Etonian, eurozone crisis, falling living standards, full employment, Gini coefficient, hedonic treadmill, hiring and firing, income inequality, interest rate swap, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, low skilled workers, MITM: man-in-the-middle, mortgage debt, new economy, Northern Rock, obamacare, oil shock, plutocrats, Plutocrats, price stability, quantitative easing, Right to Buy, Ronald Reagan, science of happiness, statistical model, The Wealth of Nations by Adam Smith, unconventional monetary instruments, War on Poverty, We are the 99%, women in the workforce, working poor

(i) Cable, Vince (i) Cameron, David (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x) Campaniello, Giuseppe (i) Canada (i) ‘capability approach’ (i) capitalism (i), (ii), (iii) career ladder (i), (ii) Carney, Mark (i) casualisation (i), (ii), (iii) Census Bureau (i), (ii), (iii) Chamberlain, Neville (i) charities (i), (ii) child poverty (i), (ii) children (i), (ii), (iii), (iv), (v), (vi) Children's Society (i) Christoulas, Dimitris (i) church attendance (i), (ii), (iii) Churchill, Winston (i) cigarette sales (i) citizenship career (i) Citizenship Survey of England and Wales (i), (ii), (iii), (iv) The Civic Culture (Almond and Verba) (i) civic infrastructure (i), (ii), (iii), (iv), (v), (vi), (vii) class divide (i), (ii), (iii), (iv), (v), (vi), (vii) class rigidity (i), (ii) Clegg, Nick (i) Clinton, Bill (i), (ii) coalition government (UK) (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Coming Up for Air (Orwell) (i) community life long shadow of recession (i), (ii), (iii) Marienthal (i) post-recession agenda (i), (ii), (iii), (iv), (v) public policy (i) social networks (i), (ii), (iii), (iv), (v), (vi) community work (i) Congressional Budget Office (i) construction work (i) contract work (i), (ii), (iii), (iv), (v), (vi) council housing (i), (ii) CPS see Current Population Survey Credit-Anstalt (i) credit crunch (i), (ii), (iii), (iv) crime rates (i), (ii), (iii) Current Population Survey (CPS) (i), (ii) Dahl, Roald (i) death rates (i), (ii) debt austerity (i) credit crunch (i) Great Recession and Depression (i) human unhappiness (i), (ii) long shadow of recession (i), (ii), (iii), (iv) post-recession agenda (i) de Gaulle, Charles (i) democratic life (i) dependency culture (i), (ii), (iii) Depression (economic) see Great Depression depression (human) (i), (ii), (iii), (iv), (v) deprivation index (i) De Quincey, Thomas (i) disability (i), (ii) Disability Living Allowance (DLA) (i) disposable income (i), (ii), (iii), (iv), (v) divorce rate (i), (ii), (iii) domestic violence (i) Dorling, Danny (i) dropouts (i), (ii), (iii), (iv), (v), (vi) Duchenne smiles (i) Duncan Smith, Iain (i) Durkheim, Emile (i) economic growth economic gap (i) growth and national income (i), (ii) post-recession agenda (i), (ii) public policy (i) social security (i) UK (i), (ii), (iii) wages (i) economic insecurity see insecurity Economic Journal (i) education economic insecurity (i) job insecurity (i) marriage rates (i) social mobility (i), (ii), (iii) unemployment (i), (ii), (iii) elasticity of intergenerational income (i), (ii) Elder, Glen (i) Elder, James (i) elderly population (i), (ii), (iii) Emanuel, Rahm (i) Employee Benefits Research Institute (i) employment protection (i), (ii), (iii), (iv), (v), (vi) employment rates (i), (ii) Employment White Paper (1944) (i) Eton College (i) Eurobarometer (i) eurozone (i), (ii), (iii), (iv) expansionary fiscal contraction (i) expectations (i), (ii), (iii), (iv) faith (i) Faith Matters (i), (ii) family class divide (i) human unhappiness (i), (ii), (iii) post-recession agenda (i), (ii) public policy (i) relative financial standing (i), (ii) social networks (i), (ii) female employment (i), (ii), (iii), (iv), (v) Fingleton, Eamonn (i) Fitzgerald, F.

Most trudged along at two miles an hour, and nine out of every ten crossing the few hundred yards of their village would find an excuse to stop en route, often dithering along their brief way. The slump's poison had seeped out of silent factories, and ended up somewhere under the skin. We know all of this – and much more about daily life in this one tiny Austrian town in the 1930s – because pioneering young sociologists went there to find out what happens when everyone is thrown out of work, as virtually everyone had been when Marienthal's flax mill fell victim to the credit crunch of 1929.1 Eighty years later, a true economic hurricane again engulfed the rich world, for the first time since the 1930s. In the UK at least, the statistics confirm that national income took a bigger cumulative hit than during the Great Depression itself. You might imagine that there would be vast social consequences, but – thanks to the burgeoning of data and computers to crunch it – there is no need to rely on the imagination, or indeed on anecdotes from one village in the Austrian hills.

In his 2007 Budget speech, Chancellor Gordon Brown could boast that Britain was enjoying ‘the longest period of economic stability and sustained economic growth in our country's history’, just before he moved unchallenged into No. 10 Downing Street.1 The long expansion in the US economy had been briefly interrupted by 9/11, but felt just as assured. Few outside the financial sector discerned the first whispers of a credit crunch during that notably wet English summer,2 but then September brought something unseen since 1866 – a run on a British bank. It was not yet obvious that the queues of savers that formed outside branches of the smallish, provincial Northern Rock represented a threat to the financial universe as we knew it. But a year later – almost to the day – Lehman Brothers came crashing down in New York, heralding the start of the most catastrophic phase of the crisis.


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The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Allowing weak or insolvent banks to continue operating—and especially supporting them with loans or loan guarantees—is costly and inefficient.13 When large banks and even an entire banking system are in trouble, politicians and supervisors fear that strict enforcement could cause a credit crunch and a recession.14 They believe that the time is not ripe to resolve the problems. Instead they allow insolvent or highly distressed banks to continue operating, and, if necessary, they provide bailouts.15 Research on banking crises, however, has shown that failing to deal with banking problems early and forcefully often results in more serious crises and in more severe credit crunches and recessions later.16 Kicking the can down the road can be very expensive. Sometimes the concern is not just about the distress or hidden insolvency of individual banks. Individual banks may run into problems because there are too many banks in the market.

Regarding the contraction in repo lending, Krishnamurthy et al. (2012) show that lenders’ concerns about the value of the collateral could be traced to the private-sector issuers, in particular some key dealers such as Bear Stearns and Lehman Brothers. Krishnamurthy et al. (2012, 6) conclude that, in contrast to Gorton’s (2010) interpretation, the run on the repo markets “looks less like the analogue of a traditional bank run of depositors and more like a credit crunch in which dealers acted defensively given their own capital and liquidity problems, raising credit terms to their borrowers.” Credit crunches are actually due to the effect of debt overhang discussed in Chapter 3, which leads distressed lenders to avoid making loans that they would have made had they been less distressed. 55. As discussed by Skeel and Jackson (2012), rules from 1994 and their expansion in 2005 exempt repos and derivatives from automatic stays in bankruptcy and give them special preference.

The unprecedented decline in output in 2009 and the resulting loss of output have been valued in the trillions of dollars.19 The crisis has caused significant suffering for many.20 In light of these effects, warnings that greater financial stability would come at the expense of growth sound hollow. Warnings that bank lending would suffer also sound hollow. In 2008 and 2009, banks that were vulnerable because they had too much debt cut back sharply on their lending. The severe credit crunch was caused by banks’ having too much debt hanging over them. Why would restrictions on bank borrowing have any effect on bank lending at all? One argument was given in 2010 by the British Bankers’ Association, which claimed that new regulations would require U.K. banks to “hold an extra £600 billion of capital that might otherwise have been deployed as loans to businesses or households.”21 To anyone who does not know what the regulation is about, this argument may look plausible.


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, declining real wages, European colonialism, fiat currency, financial innovation, German hyperinflation, housing crisis, implied volatility, intangible asset, Kickstarter, large denomination, manufacturing employment, margin call, market bubble, market fundamentalism, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, short selling, sovereign wealth fund, too big to fail, transaction costs, universal basic income, value at risk, yield curve

To help alleviate the situation and build confidence, a number of major banks proposed joining forces and creating a fund that would aim to raise $75-100 billion for buying distressed subprime mortgage securities. Like other observers, we viewed it as a natural response to the credit crunch that would help to alleviate the risk of contagion. However, by the end of the year, efforts to establish this fund had been abandoned, as the collaborating banks decided that it was “not needed at this time.”15 Meanwhile, despite optimism at home, the credit crunch spread from the US to Europe through two main mechanisms. The first was that some European banks (most notably the British bank Northern Rock) had come to rely on money markets for short-term wholesale funding. When that source of funding began to dry up in the summer of 2007, Northern Rock experienced a classic “run,” with depositors lining up to withdraw funds for three straight days in the middle of September.16 The UK had a similar deposit insurance scheme as the US, but with a lower cap on insured deposits (£35,000).

“The Outlook, Policy Choices and Our Mandate” Remarks at the Society of American Business Editors and Writers Fall Conference, City University of New York, Graduate School of Journalism. New York City, October 1, 2010. https://www.newyorkfed.org/newsevents/speeches/2010/dud101001. Elliott, Larry and Jill Treanor. “The Day the Credit Crunch Began, Ten Years On: ‘The World Changed,’” The Guardian, August 3, 2017. https://www.theguardian.com/business/2017/aug/02/day-credit-crunch-began- 10-years-on-world-changed. Ellis, David and Ben Rooney. “Banks to Abandon ‘Super-SIV’ Fund,” CNNMoney.com, December 21, 2007. https://money.cnn.com/2007/12/21/news/companies/super_siv/index.htm?postversion=2007122116. Federal Reserve Bank, “2016 Survey of Consumer Finances Chartbook,” (October 16, 2017), 835. https://www. federalreserve.gov/econres/files/BulletinCharts.pdf.

Some of the money that is needed comes from the government (i.e., it is appropriated through the budget process) and some from the central banks (by “printing”). Governments inevitably do both, though in varying degrees. In addition to providing money to some essential banks, governments also typically provide money to some nonbank entities they consider essential. Next, they must ease the credit crunch and stimulate the overall economy. Since the government is likely having trouble raising funds through taxation and borrowing, central banks are forced to choose between “printing” still more money to buy their governments’ debts or allowing their governments and their private sector to compete for the limited supply of money, which will only tighten money further. Inevitably, they choose to print.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

By requiring AIG to post more collateral, the rating change deepened the company's woes to the point where death was averted only by an infusion of almost $130 billion in federal bailout money—a number that may grow. The banks' uncertainty about the value of their mortgage-related assets and swap insurance and the magnitude of their swap liabilities curtailed — indeed, until the government stepped in, froze— lending. That was the "credit crunch." It caused both an immediate drop in economic activity and, in reaction to that drop and in anticipation of a further drop in the near future, a precipitous decline in the stock market. It started the dangerous spiral that we're in. Ordinarily one would expect a credit crunch to be self-correcting. A shortage of capital for lending, due to the shrinkage of the banks' equity cushion, would attract new capital to banking, to rebuild the cushion. But that would depend on how much the cushion had shrunk and whether the crunch had so damaged the economy that the demand for loans would drop.

At least until the U.S. dollar ceases to be the world's principal reserve currency (a currency held by foreign banks as well as by the issuing country's own banks, and used as a major medium for international transactions), the federal government has almost unlimited capital because of its taxing, borrowing, and money-creating powers, and it is not constrained by having to make a profit or even cover its costs to survive. Government officials thought at first that the credit crunch was the result of a kind of panic —that the banks were scared to lend because they didn't know how thick their equity cushion was. If so, then by buying the mortgage-backed securities from the banks the government would dispel the panic and unfreeze lending. It would need to hold the securities that it had bought only until their value became clear; it would then sell them and recover the purchase price.

Other fortuities were a lame-duck Congress and a lame-duck President who seemed to lack interest or competence in handling economic issues and to prefer reminiscence, retirement planning, legacypolishing, and foreign travel to directing, and explaining to the public, the government's response to the biggest economic crisis in three quarters of a century. Still other fortuities were the indecisive, improvised, and inarticulate (though, eventually, aggressive) response to the crisis by government officials; a sudden collapse of much of the automobile industry as a delayed consequence of a surge in gasoline prices exacerbated by the credit crunch (two thirds of all cars are bought on credit); and the deepening of the economic crisis during a Christmas shopping season already foreshortened by a late Thanksgiving (November 27). Desperate to attract Christmas shoppers and avoid an inventory pileup, retailers offered unprecedented discounts. These discounts actually increased after Christmas, some reaching two thirds of the normal price.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

In the 1980s and 1990s, borrowing money was seen as a sign of economic shrewdness, rather than a matter of necessity. The developed world built an economic model on debt; consumers borrowed to finance their lifestyles, companies borrowed to enhance their returns, financial institutions borrowed more money to play the asset markets, countries borrowed money to tide economies over recessions. It may well be that the credit crunch of 2007 – 08 showed that this model had been tested to destruction. But what will replace it? RUNNING ROUND IN CIRCLES The Buddhists use a wheel of life to symbolize the cycle of life, death and rebirth. Religious scholars say that humans see everything from their own frame of reference, from their own point in the circle. Similarly, the economy flows in a circle, with money spent by one actor being received by the next.

The Thai crisis sapped confidence in the economies of other Asian nations and 1997 – 98 was a period of plunging crises, failed banks and recessions. Some countries were forced to turn to the IMF for assistance – a humiliation summed up in a picture of President Suharto of Indonesia signing a loan agreement in 1998, under the headmasterly eye of IMF officials. It was a determination to avoid a repeat of those events that led Asian nations to pursue their export-led policies in the 2000s; one of the factors that led to the credit crunch. Iceland’s was an even more incredible story. A country of just 300,000 people on a remote island in the North Atlantic, best known for its fishing grounds and volcanoes, suddenly became a global financial power house. The carry trade led to an influx of capital in the 2000s; a strong currency allowed its entrepreneurs to go on a shopping spree for European businesses (including the West Ham football team and Hamleys toyshop, London’s equivalent of FAO Schwarz in New York).

The Europeans sought to escape this problem by clubbing together in a single currency, but eventually the strains had to show. 7 Blowing Bubbles ‘Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.’ George Soros, hedge fund manager Where did all the money go? My father-in-law asked that question in the aftermath of the credit crunch of 2007 and 2008, when house prices, share prices and corporate bond prices all tumbled. It seemed a reasonable point. If all the assets in the world were worth, say, $3 trillion one year and $2 trillion the next, what happened to that missing trillion? To explain the answer, we have to turn to the career of Bernie Madoff, a convicted fraudster. Madoff was an American stockbroker who had a prominent role in the finance industry, serving as chairman of the board of directors of the National Association of Securities Dealers.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

One was in the Roaring Twenties, which led to a peak contribution by finance to the wider economy of nearly 6 per cent of GDP after the 1929 crash. The other was in the years before the recent credit crunch and subsequent collapse of Lehman Brothers. Even more impressive growth can be seen in the UK, where, over 160 years, financial services outstripped growth in the economy as a whole by 2 percentage points a year, accounting for no less than 9.4 per cent of GDP in 2006. In a less heavily regulated environment, UK bank balance sheets grew much faster than those in the US. Bank assets went from 50 per cent of GDP in the early 1970s to a phenomenal 500 per cent of GDP at the peak of the credit bubble. In both countries, national statistics point to a productivity miracle in the years before the credit crunch.68 There are some respectable reasons for the ascendancy of finance during the two spikes in financial activity.

The LSE backed down and took the money. 84 When Genius Failed: The Rise and Fall of Long-Term Capital Management, Random House Trade Paperbacks, 2000. 85 Dogs and Demons: The Fall of Modern Japan, Farrar, Straus & Giroux and Penguin Books, 2001. 86 ‘Letter from Chicago: After the Blow-up’, 11 January 2010. 87 In Going Off the Rails: Global Capital and the Crisis of Legitimacy, John Wiley, 2003, I argued that Federal Reserve chairman Alan Greenspan’s asymmetric and morally hazardous approach to monetary policymaking, which involved the repeated extension of a safety net to markets, was undermining capitalism’s immune system; the use of highly complex financial instruments meant that central banks and bank supervisors were over-dependent on experts in private banks to monitor the plumbing of the system and that supervision had been semi-privatised by default; financial institutions’ risk management was fundamentally flawed; financial innovation had failed to come up with any way of hedging against liquidity risk in banking; and the system’s pro-cyclicality was being exacerbated by the Basel capital adequacy regime. The book explained that the cycle would end with a credit crunch and system-wide deleveraging, creating severe deflationary pressure. In my columns at the FT before the credit crunch of 2007, I elaborated these arguments while highlighting excessive leverage in the system, the decline in bank lending standards and the risks inherent in the fast-growing shadow banking system. I did not, of course, accurately predict the timing of the bursting of the bubble. 88 ‘Expectations of Returns and Expected Returns’, 2012, http://www.hbs.edu/faculty/ Publication%20Files/expectedreturns20121020_00760bc1-693c-4b4f-b635-ded0e540e78c.pdf 89 Ibid. 90 http://www.economist.com/node/14165405 91 http://www.johnkay.com/2011/10/04/the-map-is-not-the-territory-an-essay-on-thestate-of-economics 92 Speech to the annual conference of the Institute for New Economic Thinking, quoted by Anatole Kaletsky in the International New York Times, April 2014. 93 Stabilizing an Unstable Economy, Yale University Press, 1986. 94 The Time of My Life, Penguin Books, 1990. 95 The trade-to-GDP ratio is the economy’s total trade of goods and services (exports plus imports) divided by GDP. 96 Politics, Book 7, Part 9, http://classics.mit.edu/Aristotle/politics.7.seven.html 97 http://classics.mit.edu/Plato/laws.html 98 Quote from Jerry Z.

This contributes to inequality both inside companies and in society at large, leading to the kinds of discontent and alienation expressed by the Occupy movement across America in 2011 and 2012, along with similar protests around the world. It is possible to put a case that manufacturing can shrink too far if international specialisation causes economies to suffer from a lack of diversity. That was the case with Britain, which was seriously under-diversified when the credit crunch struck in 2007. Back then, it derived more than 9 per cent of GDP from financial services. Yet it is also possible to suffer from a lack of diversification by dint of excessive exposure to manufacturing, as was the case with Germany at the same time. The Germans’ over-reliance on exports to drive economic growth meant that the collapse in world trade after the bankruptcy of Lehman Brothers in 2008 resulted in a greater percentage loss of output than in the US, which was the epicentre of the financial crisis.


pages: 348 words: 82,499

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future by Andy Bell

asset allocation, bank run, buy and hold, collapse of Lehman Brothers, credit crunch, diversification, diversified portfolio, estate planning, eurozone crisis, fixed income, high net worth, hiring and firing, Isaac Newton, Kickstarter, lateral thinking, money market fund, Northern Rock, passive investing, place-making, quantitative easing, selection bias, short selling, South Sea Bubble, technology bubble, transaction costs, Vanguard fund

One advantage of having at least some exposure to commercial property is the fact that the sector theoretically performs in different cycles to other parts of the economy, thereby dampening risk in your overall portfolio. Commercial property funds are generally considered less risky than equity funds. That said, commercial property funds performed terribly, along with virtually every other class, through the credit crunch, proving the theorists wrong when they fell around 40 per cent in around 15 months between 2007 and 2008. Asset values are yet to return to pre-2007 levels. Analysts’ views are split as to whether these lower valuations reflect a buying opportunity or a long-term negative trend as banks slowly unwind their debt mountains by drip-feeding commercial property back into the market. Most experts argue that high-quality commercial property in prime locations should continue to deliver, as securing quality tenants is easier.

Within living memory for anyone over the age of 50 is the crash of 1973 and 1974, which was caused by the devaluation of the US dollar and a spike in the price of oil. The UK fared worse than most in that crash, with the FT30, then the leading index in this country, falling 73 per cent top to bottom. Since then we have lived through 1987’s Black Monday, 1992’s Black Wednesday, 1997’s Asian Crisis, 1998’s Russian Crisis, 2000’s dot.com bubble, the 9/11 market falls and the 2002 downturn, among others. Then, of course, there was the credit crunch of 2008, kicked off by the collapse of Lehman Brothers, which triggered the global financial crisis that developed economies are still struggling to extricate themselves from to this day. And it is fairly certain there will be more along in the future. But don’t let that put you off. Easy to say, you might think, but with all that bad news, why would anyone want to invest in equities? Because equities are still expected to do what they have done for long-term investors ever since the 19th century – perform better than other asset classes.

If it falls, their price has fallen. These companies are the giants of the UK economy, dominating the stockmarket – their combined share value representing more than four-fifths of the entire value of all the quoted shares in the UK. The FTSE 100 was established in 1984, with a base price of 1,000. It peaked at 6,950 on the penultimate trading day of the last millennium, 30 December 1999. The post-credit crunch gloom took it to below 3,500 in March 2009. It is worth remembering that all the FTSE indices reflect only the value of the companies’ shares and not the income generated through the payment of dividends. So if, for example, the FTSE 100 stayed at 5,000 for a year, that does not mean investors would have made nothing at all over that period, as they would have received the dividends paid. The average dividend yield of the FTSE 100 through 2012 was around 3.6 per cent.


pages: 207 words: 86,639

The New Economics: A Bigger Picture by David Boyle, Andrew Simms

Asian financial crisis, back-to-the-land, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, carbon footprint, clean water, collateralized debt obligation, colonial rule, Community Supported Agriculture, congestion charging, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, deskilling, en.wikipedia.org, energy transition, financial deregulation, financial exclusion, financial innovation, full employment, garden city movement, happiness index / gross national happiness, if you build it, they will come, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Kickstarter, land reform, light touch regulation, loss aversion, mega-rich, microcredit, Mikhail Gorbachev, mortgage debt, neoliberal agenda, new economy, North Sea oil, Northern Rock, offshore financial centre, oil shock, peak oil, pensions crisis, profit motive, purchasing power parity, quantitative easing, Ronald Reagan, seigniorage, Simon Kuznets, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trickle-down economics, Vilfredo Pareto, Washington Consensus, wealth creators, working-age population

What they published in July 2008 was known as the ‘Green New Deal’, launched 75 years after President Roosevelt launched a New Deal to rescue the USA from financial crisis.5 The Green New Deal urged governments to embrace a comprehensive, selfreinforcing programme including to: • • • • • • • invest in a major programme of renewable energy and wider environmental transformation that would create thousands of new green collar jobs; build a new alliance between environmentalists, industry, agriculture and unions to put the interests of the real economy ahead of those of footloose finance; set up an Oil Legacy Fund, paid for by a windfall tax on the profits of oil and gas companies, as part of a wide-ranging package of financial innovations and incentives to assemble the tens of billions of pounds that need to be spent, including local authority green bonds, green gilts and green family savings bonds; make sure fossil fuel prices include the cost to the environment, and are high enough to tackle climate change by creating economic incentives to drive efficiency and bring alternative fuels to market; cut corporate tax evasion by clamping down on tax havens and corporate financial reporting; re-regulate the domestic financial system, inspired by reforms implemented in the 1930s, including cutting interest and much tighter regulation of the wider financial environment; break up the discredited financial institutions that have needed so much public money to prop them up in the latest credit crunch. Taken together, the Green New Deal urged a programme of re-regulating finance and taxation plus a huge transformational programme aimed at substantially reducing the use of fossil fuels and, in the process, tackling the unemployment and decline in demand caused by the credit crunch. It involved policies and new funding mechanisms that will reduce emissions and allow us to cope better with the coming energy shortages caused by peak oil. The importance was not so much the details of the plan, but its pattern. What the Green New Deal understood was that these crises needed to be tackled together, in a way that modern government finds difficulty doing.

Limit the amount people can borrow It is increasingly clear that using mortgages as the main way we inject money into the financial system has, at the very least, put an incredible strain on house prices. These have certainly risen because of a shortage of homes in places where people want to live and the influx of wealthy people into the UK – especially London – but mainly because of an inflationary increase in the amount of money that people can borrow for a mortgage. Before the credit crunch, this was anything up to six times their salary. It is no coincidence that the country that introduced ‘grandparent mortgages’, paid off by the generation after next (Japan), also suffers from the highest property prices in the world, and some people in Tokyo are reduced to living in what is little more than a tube. The best way of bringing prices down is credit controls. Reward people’s effort in the community We need institutions like time banks that are capable of drawing on the assets of other groups – including older people as foster grandparents, for example – to generate 92 THE NEW ECONOMICS better support systems for families and communities.

Evidence obtained from the insider trader Ivan Boesky led to Wall Street’s biggest criminal prosecution ever (at least until the Bernard Madoff affair in 2008), after which 98 indictments of fraud and racketeering were brought against Milkin. He was sentenced to ten years in jail and agreed to pay $600 million in fines. Without his leadership, the junk bonds faltered. It is widely believed that the temporary decline of the junk bond market led to a credit crunch that contributed to the 1990 recession. Milken was released from prison early because he had been given only 18 months to live, and now runs his own economic think tank. But one of the legacies of those years has been the defensive loading of companies WHY ARE MALAWI VILLAGERS PAYING THE MORTGAGES OF STOCKBROKERS? 143 with debt in order to stave off hostile takeovers, while those that have been successfully seized are anyway loaded with vast debt.15 Debt has, in short, become a way of life for corporations.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

Prior to 2008, as we now know, Wall Street had managed to set up a parallel monetary system, a form of private money, underwritten by the capital inflows toward the Global Minotaur. The global economy became hooked on that toxic money, which, by its nature, divided and multiplied unsustainably. So when it turned to ashes, world capitalism crashed. If it were not for the lessons that the central banks had learned from the Crash of 1929, the repercussions would have been unimaginable – as opposed to just frightful. Chronicle of a Crash foretold: Credit Crunch, bailouts and the socialization of nearly everything 2007 – The canaries in the mine April – New Century Financial, a mortgage company that had issued a great number of sub-prime mortgages, goes under, with reverberations throughout the sector. July – Bear Stearns, the respected merchant bank, announces that two of its hedge funds will not be able to pay their investors their dues. The new chairman of the Fed, Ben Bernanke (who had only recently replaced Alan Greenspan) announces that the sub-prime crisis is serious and its cost may rise to $100 billion.

Bush, gives the first indication of the world’s biggest government intervention (not excepting that of Lenin after the Russian Revolution). On 6 December, President Bush unveils a plan to help a million American homeowners avoid having their houses confiscated by the banks (i.e. avoid foreclosure, in American parlance). A few days later, the Fed gets together with another five central banks (including the ECB) to extend almost infinite credit to the banks. The aim? To address the Credit Crunch – i.e. the complete halt in inter-bank lending. 2008 – The main event January – The World Bank predicts a global recession, stock markets crash, the Fed drops interest rates to 3.5 per cent, and stock markets rebound in response. Before long, however, MBIA, an insurance company, announces that it has lost $2.3 billion from policies based on bonds containing sub-prime mortgages. These insurance policies suddenly become household names: they are known as credit default swaps, or CDSs.

Wall Street’s fifth-largest bank, Bear Stearns (which in 2007 was valued at $20 billion) is wiped out, absorbed by JPMorgan Chase, which pays the paltry sum of $240 million for it, with the taxpayer throwing in a subsidy in the order of $30 billion. April – It is reported that more than 20 per cent of mortgage ‘products’ in Britain are being withdrawn from the market, along with the option of taking out a 100 per cent mortgage. Meanwhile, the IMF estimates the cost of the Credit Crunch to be in excess of $1 trillion. The Bank of England replies with a further interest rate cut to 5 per cent and decides to offer £50 billion to banks burdened with problematic mortgages. A little later, the RBS attempts to stave off bankruptcy by trying to raise £12 billion from its shareholders, while at the same time admitting to having lost almost £6 billion in CDOs and the like. Around this time house prices start falling in Britain, Ireland and Spain, precipitating more defaults (as homeowners in trouble can no longer even pay back their mortgages by selling their houses at a price higher than their mortgage debt).


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

This book traces the rise and fall of free market ideology, which, as Greenspan said, is more than a set of opinions: it is a well-developed and all-encompassing way of thinking about the world. I have tried to combine a history of ideas, a narrative of the financial crisis, and a call to arms. It is my contention that you cannot comprehend recent events without taking into account the intellectual and historical context in which they unfolded. For those who want one, the first chapter and last third of the book contain a reasonably comprehensive account of the credit crunch of 2007–2009. But unlike other books on the subject, this one doesn’t focus on the firms and characters involved: my aim is to explore the underlying economics of the crisis and to explain how the rational pursuit of self-interest, which is the basis of free market economics, created and prolonged it. Greenspan isn’t the only one to whom the collapse of the subprime mortgage market and ensuing global slump came as a rude shock.

“The assumption of ‘rational expectations’ as a modeling device is now entirely orthodox,” Michael Woodford, one of the leading New Keynesians, wrote in 1999. The third-generation rational expectations models can be useful for exploring the old question of how central banks should set interest rates to achieve a low and stable rate of inflation, but they have virtually nothing to say about what policymakers should do to maintain financial stability. As in the original Lucas models, there is no role in them for stock market bubbles, credit crunches, or a drying up of liquidity. Indeed, recognizable financial markets don’t really exist. The illusions of harmony, stability, and predictability are maintained, and Hayek’s information processing machine does its job perfectly: at all times, prices reflect economic fundamentals and send the right signals to economic decision-makers. Even the creators of these models concede that they don’t provide any guidance for policymakers in times of financial turbulence.

Fearing that new borrowers will be more likely to default, banks have strong incentive to curtail lending. But if they do this, businesses will be deprived of credit; the economic downturn and the problem of adverse selection will only get more acute. In extreme circumstances, the entire lending market might freeze up. In solving one set of information problems, banks create others, of which the possibility of a credit crunch is but one example. Since banks don’t publish a list of all the loans they have made, the typical bank customer doesn’t really know if his bank is sound. If his deposits aren’t guaranteed, he has every incentive to withdraw his savings at the first sign of trouble. Since each depositor is in the same position, the possibility of a “run” on the bank is very real. Between 1929 and 1932, more than five thousand banks went out of business, and in early 1933, there was another big wave of failures as depositors in many states rushed to get out their money.


Norman Foster: A Life in Architecture by Deyan Sudjic

Buckminster Fuller, carbon footprint, credit crunch, cuban missile crisis, Frank Gehry, interchangeable parts, James Dyson, Jane Jacobs, low cost airline, Masdar, megacity, megastructure, Murano, Venice glass, Norman Mailer, Pearl River Delta, Peter Eisenman, sustainable-tourism, The Death and Life of Great American Cities, University of East Anglia, urban decay, urban renewal, white flight, young professional

Thus for all the swagger with which Foster’s tower is depicted on the bank’s currency notes, HSBC was always keenly aware of the need to present a face that is sensitive to local traditions. When the new banking hall opened for business, a specially produced gold-wrapped chocolate coin bearing the bank’s image was distributed to every member of staff as a good luck talisman. HSBC, however, is not simply a local institution; it has become one of the largest banks in the world, strong enough to withstand even the credit crunch of 2008 that saw its British competitors forced to seek government protection. This ambiguity partly accounts for the difficulty that Foster experienced in deciding what the most appropriate colour for the exterior was. Should the expressed steel structure, which ripples across the façade of the building like a prizefighter’s pectorals, be finished in red – in China, a colour traditionally associated with the emperor, and with good fortune – or in a more neutral, ‘international’ colour?

The tower would have been cone shaped, with a circular base as wide as Tokyo’s Olympic Stadium and the capacity to accommodate as many as 52,000 people. At the time it seemed like a fantastic, impossible speculation: the Petronas building in Kuala Lumpur was the world’s tallest tower under construction at the time, and the Japanese tower would have been a full 300 metres taller. Since then, things have changed enormously. When the overheated boom in Dubai was cut short by the credit crunch, the Burj al Arab tower actually finished thirty metres taller than Foster had proposed for the project. What we do not know yet is whether the Burj tower will come to be seen as a freakish one-off, left beached by the tide, as anomalous as the indoor ski slopes that Dubai built in its shopping malls, or whether it will serve as a pointer to the scale of a new generation of towers. Certainly the Japanese project would have been much more than a single building.

Interviewed during the course of the exhibition, Chigirinsky told the Moscow News he had chosen to work with Foster because ‘a new kind of consumer is emerging in Russia. People here want to know the world’s state of the art, and go one better. In the past, tastes were kitschy, in the “I want more gilt on that ceiling” style. But over the years, people not only got richer, their taste also evolved.’ By the end of 2008, however, the credit crunch put a stop to any speculative project that depended on bank finance. Chigirinsky’s plans to build with Foster were no exception, and came crashing to a sickening stop when the Georgian pulled out of the $3 billion Crystal City project, unable to raise the capital. The New Holland project had also come to a standstill. Legal wranglings stalled the old Rossiya Hotel site when Morab, one of the unsuccessful bidders, went to court to contest the tender process, claiming that Chigirinsky had insider knowledge of the deal.


pages: 379 words: 114,807

The Land Grabbers: The New Fight Over Who Owns the Earth by Fred Pearce

activist lawyer, Asian financial crisis, banking crisis, big-box store, blood diamonds, British Empire, Buy land – they’re not making it any more, Cape to Cairo, carbon footprint, clean water, corporate raider, credit crunch, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy security, farmers can use mobile phones to check market prices, index fund, Jeff Bezos, Kickstarter, land reform, land tenure, Mahatma Gandhi, market fundamentalism, megacity, Mohammed Bouazizi, Nelson Mandela, Nikolai Kondratiev, offshore financial centre, out of africa, quantitative easing, race to the bottom, Ronald Reagan, smart cities, structural adjustment programs, too big to fail, undersea cable, urban planning, urban sprawl, WikiLeaks

It also felt more like what has been going on in the real world in the past five years, as market prices for corn and rice, vegetable oil and coffee, wheat and sugar have yo-yoed like the stakes in some demented game. Perhaps I had misunderstood the hidden hand of the market, and my own hidden altruism? I hoped to find out more in the displays about the illustrious history of CBOT. But, strange to say, the timeline stopped just before some of the biggest events in this place’s history—the 2008 food price spike, the subsequent crash following the credit crunch, and the new surge in prices that was roaring as I toured the exchange in late 2010. I left confused and decided to go for a McDonald’s. I figured that, even more than the bowl of corn flakes, a Big Mac was now the ultimate modern consumer expression of the trading I had just watched. But, outside the exchange, my eye was caught by Harper’s magazine on a newsstand. The cover story was titled “The Food Bubble—How Goldman Sachs and Wall Street Starved Millions and Got Away with It.”

The distinguished Indian economist Jayati Ghosh said later: “From about late 2006, a lot of financial firms realized that there was really no more profit to be made in the US housing market.” They switched to commodities and began pushing up prices “so that what was a trickle in late 2006 becomes a flood from early 2007.” As the prices of shares, real estate, and other former wealth generators fell during the credit crunch of 2008, the prices of commodities index funds continued to rise, as investors poured in. This accelerated as governments in the United States and Europe tried to save the world banking system by pumping in new money—quantitative easing. Much of this new money, we now know, went straight into commodities. In 2003, there had been $13 billion in agricultural commodity funds. But by 2008, many commentators put the figure at over $300 billion.

The veteran chief minister of Sarawak, the Borneo province of Malaysia, was looking for Gulf investment in his “Halal hub,” 190,000 acres of former rain forest being turned into farms for him by a Taiwanese company. Abdul Taib Mahmud, who is old enough to remember the Japanese landing in Borneo during the Second World War, was undaunted by fears of a new land invasion. He returned with a promise of a billion dollars from Perigon Advisory, an investment fund based in Bahrain. For a while in 2009, Gulf investors showed signs of getting cold feet, as the credit crunch created the debt crisis that almost engulfed the region’s most visible totem of wealth, the desert megacity of Dubai. Some deals were quietly put on hold or dropped. Abu Dhabi’s Al Qudra Holding had promised in 2008 to acquire 1 million acres in a host of countries from Australia to Eritrea, Croatia to Thailand, and Ukraine to Pakistan. The first harvests, said CEO Mahmood Ebrahim Al Mahmood, would be shipped during 2011.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Over the 50 years that followed Ross Goobey's pitch, his predictions proved very successful. The annualised real total return to US equities (as a proxy) between 1956 and 2000 was 7%. Conditions, and forward expectations, began to change from the start of this century in the aftermath of the collapse in equity markets following the end of the technology bubble. In this post-bubble world, equity valuations fell from unrealistically high levels. The onset of the credit crunch, and the deleveraging of balance sheets in many developed economies that followed this, have punctured the confidence that once surrounded equities, and the pre-1960s scepticism about equity returns came back. Dividend yields once again rose above bond yields, and both historical and expected future returns have collapsed. An illustration of the secular shift in the bond versus equity valuation can be seen in exhibit 4.7 for the US, which compares the 10-year government bond yield with an estimated cash yield to shareholders in the equity market (taken here as the combination of the dividend yield and the buyback yield).

This resulted in two errors: first, investors capitalised future earnings at the then (very high) nominal rate rather than the real rate and, second, they failed to take account of the gains that were generated by depreciating the real value of nominal liabilities.4 Certainly, sharp rises in inflation in the 1970s had contributed to the collapse of valuations in both bond and equity markets. This inflationary era, which had been so damaging to financial markets, came to a close partly as a result of the so-called Volker credit crunch (a period known for the recession caused by the Fed tightening cycle that started in 1977), which took US Fed funds rates (policy rates) from about 10% to close to 20%. From that point, inflation started to fall around the world and, coupled with a vigorous recovery in economic activity from a deep recession, confidence – and asset valuations – started to rise. From August 1982 to December 1999, the compound real return on the Dow Jones Industrial Average was 15% per year, well in excess of long-run average returns or indeed the increase in earnings or book value over the period.5 Much of this secular bull market therefore reflected valuation expansion – a phenomenon that pushed up both equity and fixed income (bond) returns at the same time.

A third wave was felt mainly in Asia when, in August 2015, China devalued its currency against the US dollar following a period of weak growth. Commodity prices also collapsed, with Brent prices more than halving in value from nearly $100 per barrel in summer 2014 to $46 in January 2016. Three Waves of the Financial Crisis These waves can be described with reference to the causes of stress as they erupted in the different regions. Wave one in the US started with the housing market collapse and spread into a broader credit crunch, ending with Lehman Brothers filing for bankruptcy and the start of the Troubled Asset Relief Program (TARP) and quantitative easing (QE).4 Wave two in Europe began with the exposure of banks to leveraged losses in the US and spread to a sovereign crisis given the lack of a debt-sharing mechanism across the euro area. It peaked with the Greek debt crisis and the insistence that private investors should be ‘bailed in’ when it came to losses.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Rodriguez, “Credit Crisis,” FPA commentary, January 22, 2008. 23 Thomas A. Russo, “Credit Crunch: Where Do We Stand,” presented at World Economic Forum, January 2008, pp. 5, 6, 15. 24 Lehman Brothers filings and Blaine Frantz, interview with the author. The figures are for February 2008 (end of Lehman’s first quarter). The $49 billion in commercial real estate assets was down from $52 billion at the end of 2007. Leonard, “How Lehman Brothers Got Its Real Estate Fix,” cites a smaller figure. He apparently uses a less inclusive definition of commercial assets. 25 Yalman Onaran and John Helyar, “Fuld Solicited Buffett Offer CEO Could Refuse as Lehman Fizzled,” Bloomberg, November 10, 2008. 26 Russo, “Credit Crunch,” 15-16. 27 Susanne Craig, “Lehman’s Straight Shooter,” Wall Street Journal, May 17, 2008. 28 Steve Black, interview with the author. 29 Ken Auletta, Greed and Glory on Wall Street: The Fall of the House of Lehman (New York: Random House, 1986), 209.

Dugan began to push aggressively for regulatory guidance that would instruct banks to evaluate mortgage applicants on the basis of their ability to pay the eventual adjusted rate—not just the teaser. But Dugan needed the cooperation of the Fed, as well as the Federal Deposit Insurance Corporation and the Office of Thrift Supervision (OTS), which proved slow going. His fellow regulators—in particular the OTS, which supervised highfliers such as Countrywide and WaMu—worried that if they shut down or even narrowed the loan channel, they could precipitate a credit crunch. And Greenspan was philosophically, perhaps reflexively, opposed to restricting credit. By the end of 2005, Dugan had coaxed the group into issuing tentative rules, but these were subject to a comment period, and the mortgage industry was hotly opposed. For one, they said, if federally chartered banks were subject to tighter guidelines, applicants would seek out state banks and nonbanks. Also, banking executives reiterated that they were quickly selling the loans, removing the risk (or rather, transferring it to investors outside the OCC’s domain).

Perhaps he had cause, for Lehman suffered a near-death experience almost every market cycle. In 1998, when the hedge fund Long-Term Capital Management imploded, seeming to imperil Wall Street, Fuld valiantly went on the road to keep Lehman’s creditors from withdrawing their lines of credit; his efforts saved the firm. He had the daring of a gambler who believes, deep down, that he will always be able to play the last card—that if down markets or a credit crunch ever swamped his firm, he would find a way to steer it home. Fuld had attended the University of Colorado, and his middling education left him deeply insecure among polished Ivy League investment bankers. In other respects, he was a typical Wall Street CEO. His trader’s gruffness, his guttural barking, had been moneyed over. His ambition had been answered with a growing reputation, and with eight-figure paychecks and all they provided: his wife’s auction-quality art collection and board seat at the Museum of Modern Art; homes on Park Avenue and in Greenwich, Connecticut, Sun Valley, Idaho, and Jupiter Island in Florida.


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, plutocrats, Plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

Despite its obvious bias, the account is interesting because it was published in April 2008, five months before the dramatic fall of Lehman Brothers in September of that year, which was the moment when the crisis took on truly global dimensions. ‘The trigger for the credit crunch’, wrote Blackburn, ‘was rising defaults among US holders of subprime mortgages in the last quarter of 2006 and early 2007.’ This led to the failure of ‘several large mortgage brokers in February–March 2007’. The analysis shows the impact which the credit crunch had on a frightened world at the end of 2007. ‘The subprime debacle and the drying up of credit, themselves the consequences of deteriorating conditions, were hastening the slide to recession in the US and the global economy.’ The ‘credit crunch’ itself came as ‘the climax of a long period of gravity-defying global imbalances and asset bubbles’. It was ‘Fear of recession that had prompted the US Federal Reserve to keep interest rates low in 2001–06.’

Gold would reach an all-time high in January 1980 of US$850 an ounce, a level which would not be attained again for nearly twenty-five years.49 The Fed’s discount interest rate rose from 13.5 per cent to a new peak of 14.5 per cent in October 1979, and commercial banks like Chase Manhattan increased their rates in response. Controlling the money supply would prove challenging for the Federal Reserve. One considerable danger continued to be ‘the threat of an outright credit crunch’, in the words of Time magazine in its October 1979 piece. Such an eventuality would occur if the ‘Federal Reserve’s tightening up of money, and the resulting rise in interest rates, reach such levels that borrowers found it impossible to get money on almost any terms’.50 The situation outlined in this scenario was classical in its character. A rise in interest rates had notoriously forced Wall Street into the death spiral of the end of 1929.

It was widely accepted that tight money could strangle business investment, and that the most effective means of achieving this outcome was through an overly aggressive increase in interest rates. Time recalled that such a ‘squeeze [had] occurred in the summer and fall of 1974, and almost immediately forced businesses to lay off upwards of 2 million workers’. With admirable realism, the article proposed that ‘something like a credit crunch may be the only thing that can break the nation’s addiction to easy money’. Volcker, Time concluded, ‘had brought monetary policymaking fully into the fight to hold prices down’. The President had insisted at a press conference towards the end of October 1979 that ‘whatever it takes to control inflation, that’s what I’ll do’. This marked a change from the rhetoric with which he had begun his presidency, when the main worry was employment.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

The stability witnessed since World War II in the U.S. economy may ironically be a cause of economic instability, which could be deepened and extended in duration should cultural and political factors align in complete support of socialism. Whenever there has been a recession, rates have been lowered and liquidity injected such that the impact of credit default was diluted. Although this avoided long, deep recessions, it has encouraged greater and greater waves of risk taking. What did the American public know of the credit crunch? Amazingly, a survey of 1,361 homeowners released in August 2008 and conducted by Harris Interactive for Zillow, an Internet-based provider of home valuations derived from the collection of last sale public records and proprietary algorithms, revealed that 62 percent of homeowners thought their home value had increased or remained the same in the last year! In fact, 77 percent of U.S. homes lost value in the 12 months preceding the survey.

Its growth, periodic overexpansion, and contraction 46 ENDLESS MONEY became the DNA encoding cyclicality to the economic corpus, but the use of silver and gold at the base provided restraint that would reign in moral hazard and provide a safe haven for savers. However, when specie conversion was suspended, it would set the stage for even larger catastrophes, a point that might well be taken when evaluating the Fed’s actions in combating the credit crunch of 2008. The practice of using credit as currency had actually begun in England. Charles I borrowed gold on deposit from merchants at the mint to help finance a civil war. After this gold was returned, merchants sought to avoid the state’s involuntary usage of their wealth by keeping it at goldsmiths instead, who issued receipts for the inventory. The receipts were used as a form of currency and were issued in excess of the gold held, thus giving birth to “fractional reserve” banking at about the same time as the Massachusetts colony began its paper currency system.

Such a policy would also rescue failing financial institutions and further consolidate the financial industry, as well as eventually bail out homeowners. The Fed and the mortgage agencies in this context may be seen as supplementary organs of 120 ENDLESS MONEY government (such as the Supreme Court), which are moving to compliment the axis of dependency and the modern technocratic state. There was a great debate among market observers as the credit crunch became virulent in late 2008 between whether there would be deflation or inflation, assuming away the base case of muddling through for the moment. Those who rooted for the deflationist camp looked to the depression years and saw a consumer heavily laden with debt and a highly leveraged banking system wherein over half of its loans relate to real estate.6 They saw interest rates at generational lows already, with the Fed discount rate near zero by year-end 2008.


Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business cycle, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, different worldview, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, liberation theology, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

Currently, as infrastructure crumbles in the United States and in many other nations, and the availability of high-quality education and health care plummets, with massively underfunded liabilities, the stark statistics still don’t tell the full story of America’s sons and daughters and, indeed, the entire global family as it grapples with an uncertain future. The situation is particularly dire in Europe: Greece, Spain, Ireland, the United Kingdom, and Italy are in a credit crunch not seen in generations. Even in the countries that were up until recently considered booming, nations like the BRICs—Brazil, Russia, India, and China— development was highly uneven, with entire regions experiencing scarcity and need. Now it would appear that their economic bloom is wilting.10 Practically everywhere one finds many tales of how the highly competitive nature of the conventional money system influences our lives.

THE DASH FOR CASH Beyond the daily monetary mêlée that is playing out on the personal level, some 44 states in the Union are considering bankruptcy,20 and dozens of cities across the nation are faced with inevitable budget shortfalls.21 The river port city of Stockton, California, is the largest U.S. city to lately declare bankruptcy.22 In the meantime, at various levels of officialdom globally, it’s believed that the only way out of the current credit crunch, on the present trajectory, is the forfeiture of assets in the blaze of fire sales. Some 28 states have passed private public partnerships (PPPs) enabling statutes.23 Despite the benign-sounding label, these statutes mean that governments—at whatever level—are selling off existing infrastructure that has already been built and paid for with taxpayers’ money to reduce existing debt, if they are unable to meet current governmental expenses.

Prior to working with us, he had initiated a program in Uruguay and introduced IT and new technologies and other innovations. It turned out to be a very successful project that led to Uruguay being one of the most advanced countries in that business.”6 Van Arkel and he together designed a currency that would address the critical issue of cash flow facing small and medium-size enterprises when their suppliers extend credit for 30 days while their larger customers may not pay for 90 days. Often there’s a credit crunch, as banks refuse to provide bridge financing or do so subject to very onerous conditions. Furthermore, if the business is a new one, a credit line can be virtually impossible to secure. These problems are endemic in businesses in both developing and developed countries. The solution that emerged is called the Commercial Credit Circle, or C3 for short. The C3 plan uses insured invoices or other payment 122 PROSPERITY claims as backing for a liquid payment instrument within a businessto-business clearing network.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

Some hapless insurance syndicates discovered that they had insured Piper Alpha many times over. Parts of the spiral are still being unwound over two decades later. If this sounds familiar, it should. Within the first few days of the credit crunch in 2007, long before most people were aware of the scale of the trouble, the economist John Kay was pointing out the similarities between the crunch and the LMX spiral. As in the credit crunch, financial institutions and regulators told themselves that sophisticated new financial tools were diluting risk by spreading it to those best able to cope. As in the credit crunch, historical data suggested that the packaged reinsurance contracts were very safe. And as in the credit crunch, the participants found the true shape of the risk they were taking almost impossible to discern until after things had gone horribly wrong. In both cases, innovative financial techniques proved to be expensive failures.

This not only reduces the chance that an individual bank will fail, but also reduces the chance that the failure will spread. Banks will not voluntarily carry thick cushions of capital, so regulators have to force them, and there is a cost to this. Capital is expensive, so higher capital requirements are likely to make loans and insurance more costly. It is possible to have too much of a good thing, even capital. But the credit crunch made it clear that the banks were carrying too little. The second possible safety gate involves the curiously named ‘CoCo’ bonds – short for contingent convertible bonds. CoCos are debt, so under normal circumstances CoCo holders are paid interest and take priority over shareholders just as ordinary bank creditors do. But a CoCo is a bit like an airbag: if the bank crashes, it suddenly turns into a cushion, converting from bond to capital.

item_id=00000138 192 ‘When you look at the way the accident happened’: author interview with Philippe Jamet, 24 March 2010. 194 Turned back to concentrate on the Lehman Brothers problem: Andrew Ross Sorkin,Too Big to Fail (London: Allen Lane, 2009), pp. 235–7. 194 ‘Hold on, hold on’: Sorkin, Too Big to Fail, p. 372. 195 ‘We’re a million miles away from that at the moment’: Squam Lake Working Group on Financial Regulation, ‘A new information infrastructure for financial markets’, February 2009, http://www.cfr.org/publication/18568/new_information_infrastructure_for_financial_markets.html; and Andrew Haldane, ‘Rethinking the financial network’, speech given on 28 April 2009 to the Financial Student Association in Amsterdam, http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdf, and author interview with Andrew Haldane, August 2010. 196 And that man was Tony Lomas: for the account of Lehman’s bankruptcy in Europe, I have relied on the superb account by Jennifer Hughes, ‘Winding up Lehman Brothers’, FT Magazine,8 November 2008, http://www.ft.com/cms/s/2/e4223c20-aad1-11dd-897c-000077b07658.html 198 It had one million derivatives contracts open: Andrew Haldane, ‘The $100 billion question’, speech given at Institute of Regulation & Risk, Hong Kong, 30 March 2010, http://www.bankofengland.co.uk/publications/speeches/2010/speech433.pdf 199 The courts refused: Jane Croft, ‘Definition on Lehman client money sought’, Financial Times, 10 November 2009; and Anousha Sakoui & Jennifer Hughes, ‘Lehman creditors face long delays’, Financial Times, 14 September 2009. 199 It is quite possible that Lehman’s financial indicators: Henny Sender & Jeremy Lemer, ‘“epo 105” accounting in focus’, Financial Times, 12 March 2010, http://www.ft.com/cms/s/0/1be0aca2-2d79-11df-a262-00144feabdc0.html 199 About three years after the bankruptcy process began: Sakoui & Hughes, ‘Lehman creditors’. 200 Dominoes, unlike banks, are supposed to fall over: Andrew Haldane, ‘The $100 billion question’. 201 The job the poor bird had started: BBC News, ‘Sparrow death mars record attempt’, 19 November 2005, http://news.bbc.co.uk/1/hi/world/europe/4450958.stm; and embedded video at http://news.bbc.co.uk/player/nol/newsid_4450000/newsid_4452600/4452646.stm?bw=bb&mp=wm&news=1&bbcws=1 203 The credit crunch made it clear that the banks were carrying too little: ‘Reforming capital requirements for financial institutions’, Squam Lake Working Group Paper, April 2009, http://www.cfr.org/content/publications/attachments/Squam_Lake_Working_ Paper2.pdf 204 Those bonds should be held by private individuals: Lex, ‘CoCo bonds’, Financial Times, 11 November 2009, http://www.ft.com/cms/s/3/d7ae2d12-ced1-11de-8812-00144feabdc0.html; Gillian Tett, ‘A staple diet of CoCos is not the answer to bank failures’, Financial Times, 13 November 2009, http://www.ft.com/cms/s/0/d791f38a-cff4-11de-a36d-00144feabdc0.html; and interview with Raghuram Rajan, July 2010. 205 Worst possible decision is indecision: ‘Improving resolution options for systemically relevant financial institutions’, Squam Lake Working Group Paper, October 2009, http://www.cfr.org/content/publications/attachments/Squam_Lake_Working_Paper7.pdf 206 Bridge bank continues to support the smooth running: Willem Buiter, ‘Zombie solutions: good bank vs. bad bank approaches’, VoxEU, 14 March 2009, http://www.voxeu.org/index.php?


pages: 312 words: 93,836

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, price stability, profit maximization, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Y2K

I had hoped that this would only be temporary but the markets had continued to move against me. ‘How much are we talking about?’ he asked. ‘It could be 100 million.’ ‘Why didn’t you tell me?’ ‘I really don’t know,’ I replied. ‘But now I feel ashamed. I want to apologise.’ Having opened the floodgates, the questioning began. I was interrogated about risk, volatility, hedging, 2008, liquidity, the credit crunch, Lehman Brothers, Merrill Lynch, other people’s losses, price movements, my previous boss, Bank of America, bonuses, profits, honesty, 2009, management, pressure, smoothing of profit and loss, exhaustion. Towards the end of our 45-minute conversation he asked: ‘Could this be a momentary lapse of reason?’ ‘Yes,’ I replied. ‘This is obviously very serious,’ he said. ‘It could go all the way up to the FSA.’

For years I had thought that central banks were much less powerful than the public was led to believe. ‘Central banks are put at a constant disadvantage versus the market when it comes to implementing monetary policy,’ I scribbled down on a piece of paper in early 2009. ‘The LIBOR problem has implications as it delays information to policy makers who are supposed to steer LIBOR. This probably led to a very long delay in the rate-setting process after the credit crunch started in 2007,’ I then went on to write as I tried to formulate a research question for my PhD application. There was nothing wrong with the way central bankers saw the market, in theory. LIBOR should reflect the rate at which banks lent to each other, so the idea that the LIBOR–OIS spread was a kind of barometer of fear of bank insolvency was logical. The standard technique they then seemed to be using was to measure this fear in detail by quantifying each of the components that made up the LIBOR–OIS spread.

And in a market with so many unwritten rules and conventions, it was not totally clear where such routines originated – or how they spread. Moreover, how could they spread without other people knowing about it? To begin to understand why, I believe it is necessary to go back quite far in history – way before ‘Trader A’, ‘Trader B’ or ‘Broker D’ performed their first ever LIBOR trades. CHAPTER 4 THE LIBOR ILLUSION Since the credit crunch began, it has become clearer to all of us that LIBOR, not the Bank of England base rate, is what really governs saving and borrowing rates in the high street. It has always been relied on by the market as a reliable benchmark which is also the most transparent. It is appropriate in this global downturn to ensure the continued robustness of this pillar of our financial architecture.1 These were the words of the British Bankers’ Association (BBA) Chief Executive Angela Knight in a speech given on 18 December 2008.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, business cycle, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, MITM: man-in-the-middle, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Miller (Berlin: Springer, 2008), pp. 41–56. 26 THE CRISIS PASSED: Cook and Laroche, Instruments of the Money Market, p. 38. 27 “IT WAS THE BEGINNING OF THE END”: William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Touchstone, 1987), p. 319. 28 EVENTUALLY WRISTON PUBLISHED: Walter B. Wriston, Risk and Other Four-Letter Words (New York: Harper & Row, 1986). 29 “THESE NEW MONEY MARKET INSTRUMENTS”: Kaufman, Of Money and Markets, p. 253. 30 ONLY A CREDIT CRUNCH TRULY SLOWED: Albert Wojnilower, “The Central Role of Credit Crunches in Recent Financial History,” Brookings Papers on Economic Activity, vol. 2, 1980. 31 “I THOUGHT THE OLD REGULATIONS”: Author interview with Albert Wojnilower, July 2004. CHAPTER 2: MILTON FRIEDMAN 1 AFTER HE HAD GAINED WORLDWIDE FAME: Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), Preface, 1982 edition, p. xiv. 2 HIGH UNEMPLOYMENT OF 9 PERCENT: In fact, as we shall see, there was a major error in computing mortgage costs back then.

In 1961, the Federal Reserve was concerned that banks have enough funds to prevent an economic slowdown then under way from getting worse. When interest rates rose in an overheating economy—or were raised by the Fed to forestall inflation—depositors put their money elsewhere because banks could not raise their own rates under Regulation Q. This diversion of funds was known as disintermediation, and the result was a credit crunch as bank lending to businesses would dry up. Wriston realized that the Fed now feared disintermediation and the economy needed him as much as he needed the economy. But not all his competitors were in favor of the negotiable CD. Unlike Wriston, they feared challenging the Federal Reserve and were also concerned with a possible rate war, in which banks would keep raising rates competitively to attract depositors.

Now, with CDs, banks could more effectively compete. There were still restrictions on the rates paid, and the minimum size of a CD was $100,000, but bank credit increased far faster than the economy in these years, lending rising from $30 billion to $200 billion between 1962 and 1965. By the mid-1960s, new negotiable CDs were not adequate to ward off likely disintermediation and resulting credit crunches. Spending on the Vietnam War was pushing the federal budget into deficit at a time when the economy was growing strongly, new social programs were under way, and U.S. business was booming. The negotiable CDs actually contributed to higher inflation and interest rates, a fact that was not well recognized by either policymakers or economists. Even as rates rose, “banks began to bid for funds aggressively,” wrote Salomon Brothers’ influential former economist Henry Kaufman, “driving open market rates to the maximum allowable under Regulation Q.”


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, zero-sum game

For example, Senator Levin, at the Senate Permanent Subcommittee on Investigations hearings into ABACUS-AC1, raised a series of ethical questions, including the duty of care of investment banks to clients, and whether investment banks should sell products in which they do not believe. Much of the financial crisis was not novel It is also worth looking back at previous banking crises to assess how much of the recent crisis is novel, and whether there are ethical implications for investment banks. A number of the areas of concern in the credit crunch were clearly understood to be existing problems from previous crises: • The unreliability of credit ratings, including multi-notch downgrades and allegations of conflicts on interest was a major area of concern in the wake of the Enron and WorldCom credit downgrades and bankruptcies in 2001–2. These bankruptcies were not alone, as there was a series of failures in both the telecoms/cable and the independent power producer sectors.

Given the nature of a sovereign country, and its responsibilities (providing services such as health care, defence, education) for and from (e.g., tax raising) its citizens, the ethical position of trading in sovereign debt may have different characteristics than trading in corporate debt. • Strategies involving short-selling are not novel. George Soros was shorting the pound when he famously profited from the UK’s attempt to remain in the European Exchange Rate Mechanism (ERM) in 1992. • The proximate cause of the credit crunch – mis-selling of high-risk mortgages in the US – is reminiscent of other mis-selling problems in the past, such as the IPO of some dotcom stocks and the sale to retail customers of endowment plans in the UK, although the economic damage from the sub-prime crisis was significantly greater than in previous cases. 18 Ethics in Investment Banking The positive impact of investment banking Although investment banking has received much recent criticism, it has also made positive contributions to society both directly and indirectly.

Questions were also raised about investment banks’ attitudes to clients. Some investment banks’ high-risk operations, which contributed to causing a recession, also raised questions about the banks’ duties to society at large and their apparent lack of awareness of wider responsibilities. In a letter sent from the learned society, the British Academy, to Queen Elizabeth II in response to her question, “why had nobody noticed that the credit crunch was on its way?” its authors, Professors Tim Besley and Peter Hennessy, describe “a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the [economic] system as a whole”.2 The financial crisis also raised fundamental questions about the creation of complex financial instruments that contributed to market instability.


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

"Robert Solow", 23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, hedonic treadmill, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, Kickstarter, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, plutocrats, Plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, Thales and the olive presses, Thales of Miletus, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, Y2K, Yogi Berra, zero-sum game

They may occasionally use tools, they may occasionally shift their ecological niche, but they do not ‘raise their standard of living’, or experience ‘economic growth’. They do not encounter ‘poverty’ either. They do not progress from one mode of living to another – nor do they deplore doing so. They do not experience agricultural, urban, commercial, industrial and information revolutions, let alone Renaissances, Reformations, Depressions, Demographic Transitions, civil wars, cold wars, culture wars and credit crunches. As I sit here at my desk, I am surrounded by things – telephones, books, computers, photographs, paper clips, coffee mugs – that no monkey has ever come close to making. I am spilling digital information on to a screen in a way that no dolphin has ever managed. I am aware of abstract concepts – the date, the weather forecast, the second law of thermodynamics – that no parrot could begin to grasp.

Japan spent the first half of the twentieth century jealously seeking to grab resources and ended up in ruins; it spent the second half of the century trading and selling without resources and ended up topping the lifespan league. In the 2000s the West misspent much of the cheap windfall of Chinese savings that the United States Federal Reserve sluiced our way. So long as somebody allocates sufficient capital to innovation, then the credit crunch will not in the long run prevent the relentless upward march of human living standards. If you look at a graph of world per capita GDP, the Great Depression of the 1930s is just a dip in the slope. By 1939 even the worst-affected countries, America and Germany, were richer than they were in 1930. All sorts of new products and industries were born during the Depression: by 1937, 40 per cent of DuPont’s sales came from products that had not even existed before 1929, such as rayon, enamels and cellulose film.

He is not necessarily wrong about some speculative markets in capital and in assets, but he is about markets in goods and services. The notion of synergy, of both sides benefiting, just does not seem to come naturally to people. If sympathy is instinctive, synergy is not. For most people, therefore, the market does not feel like a virtuous place. It feels like an arena in which the consumer does battle with the producer to see who can win. Long before the credit crunch of 2008 most people saw capitalism (and therefore the market) as necessary evils, rather than inherent goods. It is almost an axiom of modern debate that free exchange encourages and demands selfishness, whereas people were kinder and gentler before their lives were commercialised, that putting a price on everything has fragmented society and cheapened souls. Perhaps this lies behind the extraordinarily widespread view that commerce is immoral, lucre filthy and that modern people are good despite being enmeshed in markets rather than because of it – a view that can be heard from almost any Anglican pulpit at any time.


pages: 317 words: 101,475

Chavs: The Demonization of the Working Class by Owen Jones

Asperger Syndrome, banking crisis, Berlin Wall, Boris Johnson, British Empire, call centre, collapse of Lehman Brothers, credit crunch, deindustrialization, Etonian, facts on the ground, falling living standards, first-past-the-post, ghettoisation, Gini coefficient, hiring and firing, housing crisis, illegal immigration, income inequality, informal economy, low skilled workers, low-wage service sector, mass immigration, Neil Kinnock, Occupy movement, pension reform, place-making, plutocrats, Plutocrats, race to the bottom, Right to Buy, rising living standards, The Bell Curve by Richard Herrnstein and Charles Murray, The Spirit Level, too big to fail, unpaid internship, upwardly mobile, We are the 99%, wealth creators, Winter of Discontent, women in the workforce, working-age population

But the most disquieting part isn't the remark itself. It's the fact that no one else seems the slightest bit taken aback. You look around in vain, hoping for even a flicker of concern or the hint of a cringe. I had one of those moments at a friend's dinner in a gentrified part of East London one winter evening. The blackcurrant cheesecake was being carefully sliced and the conversation had drifted to the topic of the moment, the credit crunch. Suddenly, one of the hosts tried to raise the mood by throwing in a light-hearted joke. 'It's sad that Woolworth's is closing. Where will all the chavs buy their Christmas presents?' Now, he was not someone who would ever consider himself to be a bigot. Neither would anyone else present: for, after all, they were all educated and open-minded professionals. Sitting around the table were people from more than one ethnic group.

The crisis may have been caused by the greed of bankers, but manufacturing paid the price. It lost well over twice the proportion of jobs as finance and business services in the first year of the crisis. The City's share of the economy has actually grown since 2005, leaving us more dependent on the part of the economy that caused the crash in the first place. As former City economist Graham Turner puts it, it is 'a staggering outcome of this credit crunch'. With industrial jobs steadily drying up, it might seem bizarre that the British public stubbornly continues to self-identify as working class. Matthew Taylor recalls reactions to Blair's 'we're all middle class' speech: 'It was quickly pointed out that, interestingly, more people in Britain call themselves working class now than did in 1950.' Opinion polls show that over half the population consistently describes itself as working class, but one poll in 1949 recorded it as just 43 per cent.2That was a time when there were a million miners, most people worked in manual jobs and rationing was still in full swing.

The living standards of some working-class people are lower than they would have been if they were paying cheap council rents rather than often very expensive mortgages. Indeed, over half the people living in poverty are homeowners. There are actually more homeowners in the bottom 10 per cent (or decile) than there are in each of the two deciles above it. As we know, encouraging so many people to take on unaffordable levels of debt had a detonator role in the credit crunch. In any case, as more and more people have become priced out of home ownership, ithas gone into reverse: peaking at 71 per cent in 2002-03 and falling back to 68 per cent six years later. If it is not community, income or living arrangements that defines the working class, what isit? Neil Kinnock may be the Labour leader who laid the foundations for the party's dramatic swing to the right, but he still feels most comfortable with how Karl Marx put it.


pages: 267 words: 74,296

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed by John Peet, Anton La Guardia, The Economist

bank run, banking crisis, Berlin Wall, Bretton Woods, business cycle, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, market fundamentalism, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

And little matter that Europe could not project the same military force as the United States; Europe saw itself as a “normative power”, able to influence the world through its ability to set rules and standards. Some Europhiles even imagined that Europe would “run the 21st century”, as the title of one optimistic book put it.1 The collapse of subprime mortgages in the United States, and the credit crunch that followed, only confirmed such convictions. The single currency, the European Union’s most ambitious project, was seen as a shield against financial turbulence caused by runaway American “ultra-liberalism”, as the French liked to describe the faith in free markets. But when the financial storm blew in from across the Atlantic, the euro turned out to be a flimsy umbrella that flopped over in the wind and dragged away many of the weaker economies.

The real failing of the pact was that an obsession with budgets, especially the annual deficits, blinded ministers and officials to more serious underlying problems in the euro zone. “The whole system was looking at the economy through the keyhole of fiscal policy,” says one Commission veteran. By 2007 the fiscal situation had seemingly never been better. All members of the euro zone were out of the excessive deficit procedure (EDP) by mid-2008, and so formally deemed to have their public finances in order though the credit crunch was intensifying. The Commission boasted that reform of the pact had promoted discipline and national “ownership”. Even Greece was released from the EDP in 2007, despite persistent doubts about the reliability of its figures. But, rather as with the enforcement of the pact, governments would not hear of the Commission being given the power to audit their national figures. It is significant that, on the eve of the crisis, three of the five countries that would later have to be bailed out – Ireland, Spain and Cyprus – were virtuous by the standards of the stability and growth pact.

The violence seemed to reflect a deep malaise over high youth unemployment, a dynastic political system based on patronage, a kleptocratic and ineffective public administration, educational reforms – and the public bail-out of banks. Other European leaders worried that the rebelliousness might spread (Sarkozy cancelled a planned school reform, fearing “regicidal” mobs). The teetering Greek prime minister, Kostas Karamanlis, sacked his finance minister, George Alogoskoufis, a month later and then loosened the public purse-strings ahead of an election. Greek bond yields had been drifting upward from the start of the credit crunch in 2007. But with the riots the spread over German bonds blew out, rising from about 160 to 300 basis points in late January 2009, after Standard & Poor’s had downgraded Greece’s debt. The European Commission placed Greece (and five others) under surveillance for breaching the 3% deficit limit. It said Greece and Ireland should step up deficit-cutting. Senior French and German officials held secret meetings about how to respond should Greece lose access to bond markets.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, business cycle, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

Anyway, the middle-office risk manager will select the four or five most plausible stresses that could cause sudden $50 million losses to the firm. To the extent possible, the stresses should be independent rather than things likely to occur together. For a financial firm a typical set might be stock market crash, credit crunch, commodity price spike, interest rate spike, and liquidity squeeze. The risk manager works through plausible scenarios of how each stress would affect other markets, not just the stress itself but the likely follow-on effects. This considers only the immediate effects, not the future effects. For example, a credit crunch means there will be more defaults. But those won’t happen right away. The credit stress might begin with a major bankruptcy, but rather than guessing how many follow-on bankruptcies there will be, the risk manager estimates the effect of increased credit spreads on all the firm’s positions.

A financial professional’s instinct is always to do a spread trade. If she’s afraid credit is going to get worse, she buys protection on BBB-rated securities—these are the bonds just above junk bonds on the credit rating scale. Junk bonds can default in good times and bad, but a significant increase in BBB default rates tells you there’s a credit crunch. Of course, increases in default rates of higher-rated bonds—bonds with A, AA, or AAA ratings—tell you even more loudly that there’s a credit crunch. But the BBB spreads start to increase first, so it’s a good place to set your first line of hedging defense. If you start making money on your BBB hedge, you can use the profits to buy higher-rated protection. The BBB protection is an insurance policy that pays off in severe credit downturns, but doesn’t pay any extra for historic downturns.

Its only risks now are that there might be some problem with the futures clearinghouse or some mismatch between the Treasuries it holds and the Treasuries deliverable under the futures contracts. Otherwise, it does not care if Treasury prices go up or down, or even if the U.S. government defaults. We always knew there were some risks to this kind of leverage, but they seemed much smaller than the risks you eliminated by hedging. We learned that was not necessarily true. In a severe credit crunch and liquidity crisis, even good leverage, the kind that offsets your risks, could kill. The next step is to think like a frequentist. What things did other people learn that were really just fluctuations in a random walk? U.S. Treasury bonds did great during the crisis, but that might not happen next time. A lot of people decided that illiquid investments were bad, without distinguishing carefully between the disaster of investments that were supposed to be liquid but weren’t versus investments everyone knew were illiquid all along.


pages: 471 words: 127,852

Londongrad: From Russia With Cash; The Inside Story of the Oligarchs by Mark Hollingsworth, Stewart Lansley

Berlin Wall, Big bang: deregulation of the City of London, Bob Geldof, business intelligence, corporate governance, corporate raider, credit crunch, crony capitalism, Donald Trump, energy security, Etonian, F. W. de Klerk, income inequality, kremlinology, mass immigration, mega-rich, Mikhail Gorbachev, offshore financial centre, paper trading, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, rent-seeking, Ronald Reagan, Skype, Sloane Ranger

For a while some Russians already well rooted in London even contemplated building larger property empires. Before the credit crunch started to seriously bite in the late summer of 2008, the residential division at Knight Frank received a number of inquiries from Russian clients wanting to do just that. ‘For a while, some Russians were inquiring about buying a number of apartments, possibly several in a single block, for investment’, according to an agent then working on the Russian desk at Knight Frank. ‘This was a small group, still cash-rich, who had already put down roots in London; they felt comfortable here, their children had finished their education, and this was a natural next step for them. The arrival of the credit crunch put a stop to such ambitions.’ Meanwhile, there was new intrigue within the Londongrad community.

Born in Uzbekistan and raised in Israel from the age of fifteen, Leviev became a billionaire courtesy of the controversial world of diamond trading. By 2007, the 51-year-old was rich enough to spend £35 million on one of the most expensive new houses in Britain, a Hampstead mansion that boasts a Versailles-style stone staircase, indoor pool and spa, and a carved replica of a chimneypiece at Cliveden House in Buckinghamshire. Even by the summer of 2008, there were only minimal signs of a slowdown in the diamond trade. In June, as the credit crunch was starting to be felt and property and share prices plunged, Chopard launched London’s most expensive cocktail at the Westbury Hotel in Mayfair. At £225 per glass, the Chopardissimo - a vodka martini with Beluga caviar - was served up to 100 of the company’s best customers. There are few areas of London’s highly developed consumerist culture that have not been touched by the Russians. Chauffeur firms thrived.

Nevertheless, by the spring of 2008 Deripaska’s hopes of a London float seemed to be dead in the water, sunk in the wake of uncertainty over the future of Rusal and the High Court’s decision to allow the Cherney v Deripaska case to proceed in London. Instead, he decided to turn to Hong Kong to launch his IPO. There would be fewer ‘legal’ difficulties there than in London, he said. By the summer of 2008, a new cloud was appearing on the horizon - the unfolding economic fallout from the credit crunch. Among those swept up in the gathering global storm were the oligarchs. * * * *Mandelson wrote to The Times on 25 October 2008, ‘The Director-General for Trade in the European Commission, David O’Sullivan, confirmed…that I made no personal intervention to support the commercial interests of Mr Deripaska. Mr O’Sullivan explained…that in respect to both the nine-year debate in the EU over tariffs on raw aluminium and to anti-dumping duties on Russian aluminium, the decisions were made ‘after the usual consultation procedures had taken place, including with industry and all 27 European member states, and were based on sound facts.’


Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

asset-backed security, bank run, barriers to entry, Bretton Woods, business cycle, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, fixed income, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor, zero-sum game

FHA Commissioner Philip Brownstein believed that “our innovations and aggressive thrusts against blight and deterioration, our massive efforts on behalf of the needy, will be lost without an adequate continuing supply of mortgage funds.”4 In a novel move, policymakers seeking a way to fund an expansion of stabilizing home ownership in the cities turned to those same securities markets for new sources of mortgage funds.5 Using markets as sources of capital defined the Great Society approach. Rather than distributing existing mortgages through resale networks as New Deal–era institutions did, markets would guarantee that credit crunches would not interrupt urban development. With the mortgage-backed security, Great Society policymakers tried to harness changes in capitalism to fit its programs rather than trying to regulate capitalism to fit its agenda. Beyond the immediate crisis of the Credit Crunch of 1966, the old system of buying and selling individual government-insured mortgages through personal connections had already begun to break down over the 1960s. The instruments and institutions through which Americans saved had changed. Beginning in the late 1950s, the big growth in American savings was through pension funds.

While in theory the mortgage-backed security allow borrowers to bypass financial institutions and borrow directly from capital markets, in practice, a long chain of financial institutions still mediated the connection between borrower and lender, and it was the way in which the mortgage-backed security fit those institutional needs that made it such a success. Making the mortgage-backed security work required adjusting the financial institutions that constituted the mortgage market—mortgage companies, institutional investors, and the FNMA. The FNMA existed before the credit crunch, but the Congressional response to the credit crunch remade FNMA into a new kind of institution, even more privatized and market-oriented—with a new kind of financial instrument containing great possibilities. Created in the New Deal to buy and sell government-insured mortgages across the country, FNMA had forged a national secondary market for mortgages offered through the FHA. During the 1960s, however, the federal government had created more and more socially oriented, specialized housing programs that relaxed the FHA’s lending requirements, especially in the inner city.

Toward that end, federal policy fashioned the financial innovation that made possible America’s debt explosion—the asset-backed security—that expanded well beyond its original purpose. Solving the urban crisis would require solving the housing crisis. But to fix the housing crisis, radical financial innovation would have to occur to maintain the capital flows into mortgages. As the urban riots became the urban crisis, however, mortgage markets had a crisis of their own. American mortgage markets had abruptly frozen—the so-called Credit Crunch of 1966—as investors rapidly withdrew their deposits from banks and put their money in the securities markets. Stocks and bonds offered greater returns than the Federal Reserve–regulated rates available at banks3 Without these deposits, banks could not lend mortgage money. FHA Commissioner Philip Brownstein believed that “our innovations and aggressive thrusts against blight and deterioration, our massive efforts on behalf of the needy, will be lost without an adequate continuing supply of mortgage funds.”4 In a novel move, policymakers seeking a way to fund an expansion of stabilizing home ownership in the cities turned to those same securities markets for new sources of mortgage funds.5 Using markets as sources of capital defined the Great Society approach.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

In response, the German government announced a 500-billion-euro bank-bailout fund in late 2008. Germany got nervous again in 2009 when several Landesbanken, Germany’s public-private regional development banks, which had, it turned out, also been investing in toxic US assets, got into trouble. But their losses, too, were easily dealt with. By the end of 2009, the German banking system was stable, if not healthy. What worried the Germans was how the global credit crunch would affect their exports—their growth machine—not exposure to US subprime mortgage bonds. Those fears seemed justified when, in the fourth quarter of 2008, German exports contributed 8.1 percent of an overall 9.4 percent annualized decline in GDP.5 By mid-2009, the Bundesbank was forecasting a 6 percent GDP contraction by the end of the year. Surprisingly robust demand in Asia, however, made up for declines in the Euro Area.

And while everyone seemed to know that the explosion had something to do with asset bubbles and banks, at the start of the crisis few had a convincing story about how the banks had caused it. This is where the Austrians came back in. Their writings from the 1930s seemed to describe the 2008 financial crisis perfectly. Its aftermath, and what to do about it, was to prove another matter entirely. The Hayek/Mises Model of Credit Crunches and Collapses Writing in the 1920s, Hayek and Mises drew attention to the rather obvious fact that banks make money from the extension of credit. And while each bank may wish to be prudential, each has an incentive to expand credit beyond its base (at that time, gold) reserves to stay in business against more aggressive banks and/or capture market share. Moreover, banks are encouraged to do so by the presence of a central bank that backstops the financial system with liquidity.

All that was needed to make this whole system explode was a detonator—and the foreign banks provided that too. Yet Another Banking Crisis The 2008 crisis hit the REBLLs as a combination of a current account crisis—exports slumped as financing for imports dried up and deficits, already large, exploded—and the bursting of real estate bubbles once the foreign banks that owned their financial sectors tried to cover their losses in the credit crunch. As we discussed back in chapter 2, when a bank makes a loss in one part of its portfolio, it looks to liquidate assets elsewhere in the portfolio to cover those losses.161 The REBLLs were the very definition of “elsewhere in the portfolio.” Worried about the solvency of their home-base operations in the aftermath of the Lehman crisis, the parent banks of these REBLL banks let it be known to the REBLL governments that they were considering pulling out of their countries to supply much-needed liquidity to their core (home) operations.162 Given the extremely open and market-friendly economic institutions of the REBLLs, these states had no way to keep capital at home.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

The Western World’s Two Distinct Problems The first problem the OECD faces is that from 2000 to 2010 the private sector created a lot of assets (real estate in the United States, Spain, the United Kingdom, Ireland, etc.) against which a considerable amount of debt has been collateralized by commercial banks. As the prices of these assets fall, a Fisher-like “debt deflation” looms. The second problem is that, for structural reasons, a growing number of OECD countries are confronting a very challenging budgetary situation. The credit crunch, bank bailouts, and recession only account for 9 percent of the increase in long-term public debt burdens in major advanced economies. The remaining 91 percent of the long-term fiscal pressure is due to the growth of public spending on pensions, and health and long-term care. In other words, the credit crunch and recession did not create the present pressures on public borrowing and spending. They merely brought forward an age-related fiscal crisis that would have become inevitable once a majority of the baby boomers retired around 2020. The solution to the first problem is simple monetary economics 101: Central banks have to buy assets in the hope of preventing a collapse in asset prices.

The recovery has taken many by surprise because of the severity of the crisis in the financial markets in late 2008. The stock market fell sharply. The commercial paper market froze. Bond spreads rose to unprecedented levels. Bankers cut credit lines. Consumers reacted to these shocks by slashing their spending, especially in up-market retailers. Corporations sharply curtailed capital spending. As the credit crunch hit the global economy, exports fell sharply as well. How Government Intervention Ended the Financial Crisis Government intervention rescued the economy. The Federal Reserve slashed interest rates to zero and expanded its balance sheet from $900 billion to $2.2 trillion by injecting large amounts of liquidity into the financial system. After the Lehman Brothers bankruptcy, the Treasury Department persuaded Congress to approve the $700 billion TARP rescue package.

Looking at the eurozone as a whole, the fiscal outlook also contrasted favorably with that of the United States, Britain, and Japan. Public spending control had been surprisingly effective in most of Europe during the recession, and indeed in the decade before, in contrast to the free-spending policies advocated in the United States by the Obama administration, and practiced covertly by the Bush administration and the Brown government in Britain in the years leading up to the credit crunch. None of this means, however, that the eurozone is about to emerge in 2011 from its long period of economic underperformance in relation to the United States and Britain. Neither does the recent contrast between the bullish sentiment in Europe and the pervasive gloom in the United States and Britain imply that Anglo-Saxon macroeconomic policies of aggressive monetary and fiscal stimulus were counterproductive.


pages: 436 words: 114,278

Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally

American energy revolution, Asian financial crisis, banking crisis, barriers to entry, Bretton Woods, collective bargaining, credit crunch, energy security, energy transition, housing crisis, hydraulic fracturing, index fund, Induced demand, interchangeable parts, invisible hand, joint-stock company, market clearing, market fundamentalism, moral hazard, North Sea oil, oil rush, oil shale / tar sands, oil shock, peak oil, price discrimination, price stability, sovereign wealth fund, transfer pricing

., 2008. Hamilton, James D. Causes and Consequences of the Oil Shock of 2007–2008. San Diego, Calif.: UC San Diego, Department of Economics, 2009. Hammes, David, and Douglas Wills. Black Gold: The End of Bretton Woods and the Oil Price Shocks of the 1970s. Available at SSRN: http://ssrn.com/abstract=388283. Harrington, Mark. “Oil Credit Crunch Could Be Worse than the Housing Crisis.” CNBC Commentary. January 14, 2016. http://www.cnbc.com/2016/01/14/oil-credit-crunch-could-be-worse-than-the-housing-crisis-commentary.html. Harvey, Fiona. “World’s Climate Pledges Not Yet Enough to Avoid Dangerous Warming–UN.” Guardian, October 30, 2015. http://www.theguardian.com/environment/2015/oct/30/worlds-climate-pledges-likely-to-lead-to-less-than-3c-of-warming-un. Heil, Emily. “Heard on the Hill: Bar Brawl.”

The collapse of the U.S. securities firm Bear Stearns in March 2008 intensified concerns about a financial crisis, and September brought more foreboding signs as Washington was forced to seize the government-sponsored housing lenders Fannie Mae and Freddie Mac.92 On September 14, 2008, the U.S. subprime mortgage crisis erupted into a global financial emergency when Lehman Brothers—the fourth-largest investment bank in the country—declared bankruptcy. Like many other financial institutions, Lehman held enormous amounts of low quality household debt securities. Its failure prompted contagion risk and a widespread collapse in market confidence. In October some $10 trillion of global equity value vaporized, in the largest monthly loss ever recorded.93 The world was quickly engulfed in a global credit crunch and economic growth screeched to a halt. We know that consumers don’t quickly adjust their consumption of gasoline when oil prices change—but they do when their income changes. An employed worker has little choice but to pay whatever the pump price is to drive to work, but after losing his job, an unemployed person’s need to drive drops quickly. In 2008 incomes were collapsing and oil demand along with them, falling by 0.7 mb/d in 2008 and by 1.1 mb/d in 2009.94 As it became clear that the world was entering a massive recession, oil prices plummeted.

The Bank for International Settlements noted an “intense debate” about how falling oil prices would impact economies, flagging in particular the high debt burden of the oil and gas sector, which had grown by 250 percent from 2006 to 2015 and stood at roughly $2.5 trillion.99 Some worried that crashing oil prices could trigger a banking crisis and downturn as the Lehman crisis had spectacularly done six years earlier. “Oil credit crunch could be worse than the housing crisis,” blared one commentary headline on CNBC.100 Others noted that while the oil crisis was leading to losses at Wall Street banks that had lent producers sizable sums, comparisons with the mortgage crisis were overblown as the scale, complexity, and direct economic impacts were less severe in the case of shale oil debt.101 Whatever the true extent of the risk, crashing oil prices in January and early February 2016 exhibited a reminder that there is a downside to price busts, even for economies that ought to benefit from cheaper oil prices.


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial innovation, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, savings glut, short selling, sovereign wealth fund, special drawing rights, The Great Moderation, too big to fail

“But I think that we need to avoid the urge to play Mr. Fix-It.” But the Fed exists to act when credit markets freeze. Economies wither when people can’t get home loans, car loans, student loans, or business loans. The hawks believed inflation was a more serious danger, and kept believing that even as the crisis heated up. From Ben’s perspective, though, the Fed’s obsession with inflation and moral hazard during a credit crunch had already created one depression. He didn’t intend to let it create another. These debates were an early indicator of the messy politics of financial crises. French president Nicolas Sarkozy advised Hank to find a convenient villain to deflect the inevitable public backlash; he suggested scapegoating the ratings agencies that had slapped triple-A ratings on shoddy securities. “You need a simple story, and I know you won’t want to blame the bankers,” Sarkozy teased him.

In the end, a long and steady economic recovery might be the most successful housing program. Home prices stabilized after the Great Recession ended, gradually eliminating trillions of dollars of negative equity, lifting millions of underwater home owners above water. The better economy made almost everything better. U.S. annual auto sales had plunged to 10 million in 2009, but they were back up to pre-crisis levels of 17 million by 2015. The credit crunch ended for most consumers and businesses, although banks remained skittish about lending for longer than we would have liked, especially to potential home buyers. Unemployment came down rapidly from a peak of 10.0 percent in late 2009 to 3.7 percent as we write, and the economy that was shedding more than 2 million jobs a quarter in early 2009 has added some 19 million jobs over a record ninety-seven consecutive months.

and expansion of crisis, 46 and expansion of emergency authorities, 79 and Fannie Mae/Freddie Mac conservatorship, 58, 59 and onset of financial crisis, 1 and politics of crisis management, 9 and TARP, 80, 93–94, 95, 105 capitalism, 36–37, 74, 110 capital levels capitalization strategies, 164 and current state of financial system, 6 and Fannie Mae/Freddie Mac conservatorship, 56, 59 and onset of financial crisis, 30 and policy responses to crisis, 174–82 and politics of crisis management, 126 and post-crisis reforms, 117 and shortcomings of U.S. regulatory regime, 25–26, 27 and TARP, 89–90 Capital Purchase Program (CPP), 163, 176, 177, 208 “CDOs-Squared,” 19 central banks and arsenal for dealing with future crises, 119–20, 123 and Bear Stearns rescue, 48–49 and coordinated interest rate cuts, 197 and Fed liquidity programs, 217n and Lehman failure, 69 and policy responses to crisis, 33, 103–4, 162, 163 and politics of crisis management, 126 and post-crisis reforms, 118 and quantitative easing, 104 and swap lines, 42–43, 196, 217n and TARP, 89 and theoretical approaches to financial crises, 34–36, 38 CEOs and executives of financial institutions, 40–41, 52, 73–74, 82, 91, 101 Chrysler, 95, 97, 105, 208 Citigroup and acceleration of crisis, 21 and federal asset guarantees, 178 government investment in, 176, 177 and Lehman failure, 69 management firings, 73 and policy responses to crisis, 97 private capital raised during crisis, 175, 181 and stress tests, 180 structured investment vehicles, 41 and TARP, 94–95, 96, 101 and taxpayer profit from rescue, 208 and Wachovia crisis, 81, 82 write-down of troubled assets, 40–41 collateral and acceleration of crisis, 20–22, 24 and AIG rescue, 72, 73 and arsenal for dealing with future crises, 118–19 and Bear Stearns rescue, 47, 52 collateralized debt obligations (CDOs), 19, 41 collateralized funding, 24 and Countrywide sale, 42 and Lehman failure, 62, 63, 68, 69 and TARP, 94 and Term Securities Lending Facility, 45 and triage process, 40 commercial banks, 5, 126–27, 173 Commercial Paper Funding Facility (CPFF), 88, 163, 168, 208 commercial paper market, 88 Commodity Futures Trading Commission (CFTC), 23, 116 complacency, 26, 146 Consumer Financial Protection Bureau, 116 consumer lending and debt, 94, 116, 120–21, 149, 169 Continuing Extension Act, 187 corporate bonds, 75 corporate financing, 22 Council of Economic Advisers, 28 Countrywide Financial and AIG rescue, 71 and Bear Stearns rescue, 48, 52 crisis and sale of, 38–40 and expansion of crisis, 46–47 management firings, 73 and onset of financial crisis, 31, 155 and oversight of nonbanks, 23 and post-crisis reforms, 115, 116 and spark of crisis, 18 creative destruction, 36–37 credit booms, 3–4, 12, 13, 16, 117, 150 credit crunch, 36, 108 credit default swaps (CDS) and AIG rescue, 72 and effect of stabilization efforts, 201 and expansion of crisis, 75 and Lehman failure, 69 and phases of financial crisis, 153 and policy responses to crisis, 173 currency exchanges, 42–43, 196 Darling, Alistair, 67–68 debt bank debt, 90 and causes of financial crisis, 3 collateralized debt obligations (CDOs), 19, 41 federal debt levels, 124 household debt levels, 16, 149 Latin American debt crisis, 37 and post-crisis reforms, 112 “runnable” forms of debt, 12, 112 and spark of crisis, 16, 19 and TARP, 87 Debt Guarantee Program, 217n defaults, 22 Defense Appropriations Act, 187 deficit spending, 104, 124–25, 128 Democratic Party, 5, 80, 83, 104–5, 129 deposit insurance, 14–15, 22–23, 34, 162, 163, 172 Deposit Insurance Fund, 81, 88 derivatives and acceleration of crisis, 24 and AIG rescue, 71–72 and Bear Stearns rescue, 48, 53 and Lehman failure, 63 and post-crisis reforms, 112, 114, 116–17 and roots of financial crisis, 13 and shortcomings of U.S. regulatory regime, 26, 28–29 and spark of crisis, 20 Diamond, Bob, 67 Dimon, Jamie, 50 discount window lending and acceleration of crisis, 22 and Countrywide sale, 39 failure to ease crisis, 42 and Fed liquidity programs, 217n and policy responses to crisis, 162, 166, 167 stigma associated with Fed borrowing, 40 and theoretical approaches to financial crises, 34, 35 dividends, 41 Dodd, Christopher, 56, 79–80 Dodd-Frank Wall Street Reform and Consumer Protection Act, 113–16, 120–21, 127, 172 “Doomsday Book,” 118 dot-com bubble, 21 Dugan, John, 91 E. coli effect, 31, 42 economic output, 207 Economic Stimulus Act, 185 electronic banking, 15 Emergency Economic Stabilization Act, 172 emergency powers arsenal for dealing with future crises, 118–25, 211 and Bear Stearns rescue, 49–51 and Countrywide sale, 39 expansion of emergency authorities, 78–83 and onset of financial crisis, 44–45 and TARP, 94 employment levels, 4, 92, 95, 108, 110, 141, 202 Enhanced Leverage Fund, 31 entitlement programs, 124 European banking, 91, 182 European Central Bank (ECB), 35, 42, 89, 196, 197 European recovery, 206 European sovereign debt crisis, 123 Exchange Stabilization Fund, 76–77 executive compensation, 80, 82 FAA Air Transportation Act, 187 failure of financial firms, 8, 36–37.


pages: 717 words: 150,288

Cities Under Siege: The New Military Urbanism by Stephen Graham

addicted to oil, airport security, anti-communist, autonomous vehicles, Berlin Wall, call centre, carbon footprint, clean water, congestion charging, creative destruction, credit crunch, DARPA: Urban Challenge, defense in depth, deindustrialization, digital map, edge city, energy security, European colonialism, failed state, Food sovereignty, Gini coefficient, global supply chain, Google Earth, illegal immigration, income inequality, knowledge economy, late capitalism, loose coupling, market fundamentalism, mass incarceration, McMansion, megacity, moral panic, mutually assured destruction, Naomi Klein, New Urbanism, offshore financial centre, one-state solution, pattern recognition, peak oil, planetary scale, private military company, Project for a New American Century, RAND corporation, RFID, Richard Florida, Scramble for Africa, Silicon Valley, smart transportation, surplus humans, The Bell Curve by Richard Herrnstein and Charles Murray, urban decay, urban planning, urban renewal, urban sprawl, Washington Consensus, white flight, white picket fence

., 18. 156 Mark Lynas, ‘Food Crisis: How the Rich Starved the World’, RedOrbit.Com, 22 April 2008. 157 As Mark Lynas points out in ‘Food Crisis’, in the 2007–8 period, the world population was growing by 78 million a year. 158 George Monbiot, ‘Credit Crunch? The Real Crisis is Global Hunger. And if You Care, Eat Less’, Guardian, 15 April 2008. 159 Lynas, ‘Food Crisis’. 160 In 2008, major food riots occurred in Egypt, Haiti (at least four people were killed in the southern city of Les Cayes), Cote d’Ivoire, Cameroon (at least 40 deaths), Mozambique (at least four people killed), Senegal, Mauritania, Bolivia, Indonesia, Mexico, India, Burkina Faso, and Uzbekistan. See Lynas, ‘Food Crisis’. It is important to stress that one of the consequences of urbanization is that people are removed from direct involvement in growing their own food and so rely on food markets instead. These are becoming increasingly global and are organized by major corporate and agribusiness. See Monbiot, ‘Credit Crunch?’. 161 Aditya Chakrabortty, ‘Secret Report: Biofuel Caused Food Crisis’, Guardian, 4 July 2008. 162 Ibid. 163 Julian Borger, ‘US Attacked at Food Summit over Biofuels’, Guardian, 4 June 2008. 164 Almuth Ernsting, ‘Biofuels or Biofools?’

The fusion of entertainment, media and war into what James Der Derian calls the ‘military-industrial-media-entertainment network’ has been centrally important here.135 ‘With the advent of the so-called war on terror’, wrote Andrew Ross in 2004, ‘the US government’s legitimacy no longer derives from its capacity or willingness to ensure a decent standard of living for those citizens; it depends, instead, on the degree to which they can be successfully persuaded they are on the verge of being terrorized.’136 Even amid the chaos and devastation of the credit crunch, desperate Republican campaign managers widely depicted the Democratic presidential candidate, Barack Obama, as a lurking ally of that ultimate terrorist foe, Osama bin Laden. ‘THE CITIES ARE THE PROBLEM’ The future of warfare lies in the streets, sewers, high-rise buildings, industrial parks, and the sprawl of houses, shacks, and shelters that form the broken cities of our world.137 Urban sites and urban military operations increasingly take centre-stage in all these new conceptualizations of war.

From a base of only 7 per cent of the US car market in 1997, SUVs started to outsell conventional automobiles in the US by 2002.10 ‘In 2003, SUV or “light truck” sales in the US hit an all-time high of 8,865,894 pickups, vans, and SUVs. That worked out to 53.2 per cent of all new-vehicle sales, another all-time high. In the first month of 2004, the 70 or more SUV models’ share of the market grew even more, to 54.6 per cent’ of the total market, we learn from an Air War College publication.11 SUV sales declined rapidly in 2007–8 as a result of the US credit crunch and the hike in oil prices. As a result, many car-makers, accustomed to the SUV’s profitability, were now struggling to survive. But the skyrocketing, and hugely profitable, US SUV sales, which exploited massive loop-holes in both emissions regulation and taxation, provides a dramatic parallel to the increasingly aggressive US military incursions in the Persian Gulf between 1991 and 2010. Exemplifying the links between US and other western cities and colonial frontiers, the design and marketing of SUVs grew increasingly militarized as the US military’s imperial wars proliferated.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

In the eurozone, governments pledged in June 2012 to create a common banking supervisor, a responsibility that the ECB is finally due to assume in late 2014, albeit only for bigger banks, as will be discussed in Chapter 5. The hope is that the ECB will be more independent than national bank supervisors and more effective than the toothless EBA. Before the ECB takes on its new oversight role, it is due to conduct a review of the quality of banks’ assets. The EBA will follow through with what it promises will be rigorous stress tests. Credit crunch Meanwhile, zombie banks continue to drain life out of European economies. In Britain, banks’ outstanding loans to businesses fell by 5.4 per cent – £25 billion – in 2013.79 In the eurozone as a whole, bank credit to businesses fell by 3 per cent in 201380 – with a collapse of credit in southern Europe, notably Spain.81 When challenged, bankers typically claim that they would like to lend more, but that fewer borrowers want to borrow more.

It may be feasible for a tiny open economy to turn itself around in 2009–10 by slashing government spending and raising taxes because it could fill the gap through higher exports to its much larger trading partners whose economies happened to be buoyant at the time.227 But such a strategy can scarcely succeed for a continent-sized economy, especially when demand is weak in most of its major trading partners. To suggest otherwise is merely a version of the Alesina fallacy. Counting the cost How harmful has austerity been across the eurozone? It’s impossible to be sure, because the eurozone suffers from several problems and it is hard to disentangle, for instance, the depressing impact of austerity from the throttling effect of the credit crunch. For what it’s worth, the IMF calculates that in 2010–11 a fiscal squeeze of 1 per cent of GDP depressed the economy by between 0.9 per cent and 1.7 per cent.228 That is much more than in normal times, when it might shrink the economy by 0.5 per cent. Research by Jonathan Portes, formerly the head of the UK’s Government Economic Service and now director of the National Institute of Economic and Social Research, and his colleague Dawn Holland finds that the fiscal squeeze across the eurozone and Britain has been so harmful that it actually caused government debt to rise as a share of GDP.229 They reckon that the planned austerity in 2011–13 increased Greek government debt by more than 30 per cent of GDP!

Instead of stipulating that banks raise a specific sum of capital, they told them to hit a higher ratio of capital to assets. Since bank share prices were low and earnings meagre, banks opted to shrink their assets rather than raise additional capital. But since banks’ assets are primarily their loans to households and companies along with their government bond holdings, this led to a massive credit crunch and firesales of government bonds. By January 2012, EU leaders realised their mistake, but the damage was already done.287 Smaller businesses were hit hardest.288 Worse, policymakers were about to make an even bigger mistake. Mistake five: threatening to force Greece out of the euro What is there about international summits in France? The fifth huge policy mistake was the threat to force Greece out of the euro, initially made at the G20 summit in Cannes in early November 2011.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

Anxious to display my superior knowledge of the darkest corners of the shadow banking system, I replied: ‘Credit-default swaps on super-senior tranches of asset-backed, security-collateralised debt obligations.’ I thought I had come up with a pretty pithy answer. ‘No,’ he gently chided me. ‘The most dangerous financial product in the world,’ he paused a moment for effect, ‘is the mortgage.’ The mortgage: from the Old French words mort and gage. Disputed translation: ‘death contract’. Esther’s story In the middle of the credit-crunch crisis of 2008 I met Esther Spick, then a single 34-year-old mum with two kids living in a maisonette in Surrey. It was the first home she’d owned, bought with an entirely inappropriate mortgage in 2005. She had been living on a council estate in Kingston, Surrey, working day and night to get a deposit to get a mortgage for her £235,000 maisonette. It had been sold – or mis-sold – to her during the boom by Northern Rock, and now the mortgage payments had rocketed by £500 per month.

In Colwyn Bay, at Property Park Mortgages, regulators found that an adviser called Darren Button had altered a payslip with Tipp-Ex. Mark Thorogood, also at Property Park, managed to record the income of a family member at £130,000, a convenient extra digit over the actual figure of £30,000. A special prize must go to Mr Vigneswaran of Cherry Finance, Kingsbury, who was giving mortgage advice as an approved mortgage broker just as the credit crunch hit. The only thing was, he could not speak English. In fact, regulators discovered he knew little about Cherry Finance bar attending an opening ceremony. His son, already removed as an approved broker, had simply got the FSA to set his father up as a so-called ‘approved person’. Spokespersons for the mortgage industry suggest that such practices (and there are hundreds of similar stories) are just the work of a few bad apples.

The rent nowhere near covers the mortgage and it’s got worse when the rates are so high now.’ Inside Track was an extreme example of the dark underbelly of the property market. But the rapid growth of the buy-to-let (BTL) market brings together all the elements fuelling house prices. For a start, BTL changed the British housing dream from owning your own property into owning other people’s property too. Many expected the credit crunch and recession to put paid to BTL. But the cult of the amateur landlord did not just return in the crisis. It prospered. Property values have held, rents have surged, and there have only been a piddling number of repossessions. After the new coalition government slashed planning red tape, mortgage volumes have ballooned. A year after the crash, the old names in BTL lending were back in the game.


pages: 92

The Liberal Moment by Nick Clegg, Demos (organization : London, England)

banking crisis, credit crunch, failed state, housing crisis, income inequality, mass immigration, mass incarceration, Right to Buy, smart grid, too big to fail, Winter of Discontent

What is particularly worrying is that we know from past experience how long it takes for unemployment to fall significantly: in the 1990s, it took seven years for unemployment to return to pre-recession levels. And however long this recession may last one thing is already certain: we will be left with a legacy of massive public debt and the enormous challenge of eradicating a structural deficit that could be as high as 10 per cent of GDP. Britain is, of course, not alone. The whole world’s economy has suffered an enormous shock stemming from the credit crunch and banking crisis. It would be wrong to pretend that Britain is not suffering, in part, as a consequence of this global recession. However much political opponents may like to blame problems on the government of the day, it is only fair to acknowledge that Britain’s problems are not all home-grown. The British Treasury could not have prevented the collapse of the US housing market, the collapse of the Icelandic financial system or the failure of Lehman Brothers.

There are two significant mistakes Labour made – the first contributed to the global collapse, and the second worsened its domestic effects. Both the economic crisis errors of judgement can be traced to their illiberal attitude towards power in both politics and economics. First, they pushed for international deregulation, ignoring or even blocking moves toward better global regulation of international finance that could have prevented or limited the problems that led to the credit crunch. They welcomed with open arms hedge funds that left the US after the Sarbanes-Oxley regulations were imposed. They did all this out of their determination to protect what they saw as our vital competitive edge for the City and a healthy cash cow for Treasury coffers. They were swept up in the glamour and excitement of a gravitydefying City. Remember Gordon Brown’s pledge to a Mansion House dinner in 2004: ‘I want us to do even more to encourage the risk takers.’15 And, at the same event in 2003, while negotiating the EU Financial Services Action Plan, he pledged to financiers that ‘the government will continue to do all in its power to ensure that London remains the pre-eminent financial centre in Europe.’16 He was determined to ensure no international action threatened that status.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

But in what space does a revolutionary movement occur and how does it make space as it goes? That is the geographical question we now have to consider. 6 The Geography of It All The crisis that began in highly localised housing markets in the United States in 2007 quickly spread around the world via a tightly networked financial and trading system that was supposed to spread risk rather than financial mayhem. As the effects of the credit crunch spread, it had differential impacts from one place to another. Everything depended on the degree to which local banks and other institutions like pension funds had invested in the toxic assets being peddled from the United States; the degree to which banks elsewhere had copied US practices and pursued high-risk investments; the dependency of local firms and state institutions (such as municipal governments) upon open lines of credit to roll over their debts; the impact of rapidly falling consumer demand in the US and elsewhere on export-led economies; the ups and downs in the demand for and prices of raw materials (oil in particular); and the different structures of employment and of social support (including flows of remittances) and social provision prevailing in this place rather than that.

Santos, B. de Sousa (ed.), 2006, Another Production is Possible: Beyond the Capitalist Canon, London, Verso. Silver, B., 2003, Forces of Labor: Workers’ Movements and Globalization since 1870, Cambridge, Cambridge University Press. Smith, N., 2008 3rd edition, Uneven Development: Nature, Capital, and the Production of Space, Athens, GA, University of Georgia Press. Turner, G., 2008, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis, London, Pluto. United Nations Development Program, 1989–2009, Human Development Report (annual issues), New York, Palgrave Macmillan. Walker, R. and Storper, M., 1989, The Capitalist Imperative: Territory, Technology and Industrial Growth, Oxford, Wiley–Blackwell. Wang Hui, 2003, China’s New Order: Society, Politics and Economy in Transition, Cambridge, MA, Harvard University Press.

Useful websites Tomas Piketty and Emmanuel Saez on shifting income and wealth inequality in the United States: http://elsa.berkeley.edu/~saez/ Realtytrac compiles local and national US data on the foreclosures: http://www.realtytrac.com The Mortgage Bankers Association keeps tabs on US delinquencies and mortgage applications: www.mbaa.org/ For David Harvey on Marx’s Capital and the urban origins of the crisis: http://DavidHarvey.org International Monetary Fund global reports and data: http://www.imf.org Bank of International Settlements working papers and reports, particularly on the differential geographical impact of the crisis: http://www.bis.org World Bank comparable global data and reports: http://worldbank.org/ Asian Development Bank is a mine of information and reports on what is happening in the region: http://www.adb.org/Economics/ Brad DeLong’s website, which while far from being as fair and balanced as he claims, offers a lively debate from a conventional economist’s perspective on the crisis: http://delong.typepad.com/main/ The New York Times article archive: http://www.nytimes.com/ref/membercenter/nytarchive.html Le Monde Diplomatique offers global coverage of what the alternative globalisation movement is up to, along with critical discussions of a wide range of social, political, environmental and economic issues: http://www.monde.diplomatique.fr/ The Socialist Register over the years has thematically explored many of the topics taken up here. The archive can be accessed through http://socialistregister.com/index.php/srv/issue/archive The Monthly Review keeps a lively flow of critical commentary and contemporary information going. See http://www.monthlyreview.org/mrzine/ The materials on Japanese land prices are adapted from G. Turner, 2008, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis, London, Pluto Press. The data on page 27 on growth of GDP: The World and Major Regions come from A. Maddison, 2007, Contours of the World Economy, 1–2030 AD: Essays in Macro-Economic History, Oxford, Oxford University Press. Index Numbers in italics indicate Figures; those in bold indicate a Table. 11 September 2001 attacks 38, 41–2 subject to perpetual renewal and transformation 128 A Abu Dhabi 222 Académie Française 91 accumulation by dispossession 48–9, 244 acid deposition 75, 187 activity spheres 121–4, 128, 130 deindustrialised working-class area 151 and ‘green revolution’ 185–6 institutional and administrative arrangements 123 ‘mental conceptions of the world’ 123 patterns of relations between 196 production and labour processes 123 relations to nature 123 the reproduction of daily life and of the species 123 slums 152 social relations 123 subject to perpetual renewal and transformation 128 suburbs 150 technologies and organisational forms 123 uneven development between and among them 128–9 Adelphia 100 advertising industry 106 affective bonds 194 Afghanistan: US interventionism 210 Africa civil wars 148 land bought up in 220 neocolonialism 208 population growth 146 agribusiness 50 agriculture collectivisation of 250 diminishing returns in 72 ‘green revolution’ 185–6 ‘high farming’ 82 itinerant labourers 147 subsidies 79 AIG 5 alcoholism 151 Allen, Paul 98 Allende, Salvador 203 Amazonia 161, 188 American Bankers Association 8 American Revolution 61 anarchists 253, 254 anti-capitalist revolutionary movement 228 anti-racism 258 anti-Semitism 62 après moi le déluge 64, 71 Argentina Debt Crisis (2000–2002) 6, 243, 246, 261 Arizona, foreclosure wave in 1 Arrighi, Giovanni: The Long Twentieth Century 35, 204 asbestos 74 Asia Asian Currency Crisis (1997–98) 141, 261 collapse of export markets 141 growth 218 population growth 146 asset stripping 49, 50, 245 asset traders 40 asset values 1, 6, 21, 23, 26, 29, 46, 223, 261 Association of South East Asian Nations (ASEAN) 200 Athabaska tar sands, Canada 83 austerity programmes 246, 251 automobile industry 14, 15, 23, 56, 67, 68, 77, 121, 160–61 Detroit 5, 15, 16, 91, 108, 195, 216 autonomista movement 233, 234, 254 B Baader-Meinhof Gang 254 Bakunin, Michael 225 Balzac, Honoré 156 Bangalore, software development in 195 Bangkok 243 Bank of England 53, 54 massive liquidity injections in stock markets 261 Bank of International Settlements, Basel 51, 55, 200 Bank of New England 261 Bankers Trust 25 banking bail-outs 5, 218 bank shares become almost worthless 5 bankers’ pay and bonuses 12, 56, 218 ‘boutique investment banks’ 12 de-leveraging 30 debt-deposit ratio 30 deposit banks 20 French banks nationalised 198 international networks of finance houses 163 investment banks 2, 19, 20, 28, 219 irresponsible behaviour 10–11 lending 51 liquidity injections by central banks vii, 261 mysterious workings of central banks 54 ‘national bail-out’ 30–31 property market-led Nordic and Japanese bank crises 261 regional European banks 4 regular banks stash away cash 12, 220 rising tide of ‘moral hazard’ in international bank lending practices 19 ‘shadow banking’ system 8, 21, 24 sympathy with ‘Bonnie and Clyde’ bank robbers 56 Baran, Paul and Sweezey, Paul: Monopoly Capital 52, 113 Barings Bank 37, 100, 190 Baucus, Max 220 Bavaria, automotive engineering in 195 Beijing declaration (1995) 258 Berlin: cross-border leasing 14 Bernanke, Ben 236 ‘Big Bang’ (1986) 20, 37 Big Bang unification of global stock, options and currency trading markets 262 billionaire class 29, 110, 223 biodiversity 74, 251 biomass 78 biomedical engineering 98 biopiracy 245, 251 Birmingham 27 Bismarck, Prince Otto von 168 Black, Fischer 100 Blackstone 50 Blair, Tony 255 Blair government 197 blockbusting neighbourhoods 248 Bloomberg, Mayor Michael 20, 98, 174 Bolivarian movement 226, 256 bonuses, Wall Street 2, 12 Borlaug, Norman 186 bourgeoisie 48, 89, 95, 167, 176 ‘boutique investment banks’ 12 Brazil automobile industry 16 capital flight crisis (1999) 261 containerisation 16 an export-dominated economy 6 follows Japanese model 92 landless movement 257 lending to 19 the right to the city movement 257 workers’ party 256 Bretton Woods Agreement (1944) 31, 32, 51, 55, 171 British Academy 235 British empire 14 Brown, Gordon 27, 45 Budd, Alan 15 Buenos Aires 243 Buffett, Warren 173 building booms 173–4 Bush, George W. 5, 42, 45 business associations 195 C California, foreclosure wave in 1, 2 Canada, tightly regulated banks in 141 ‘cap and trade’ markets in pollution rights 221 capital bank 30 centralisation of 95, 110, 113 circulation of 90, 93, 108, 114, 116, 122, 124, 128, 158, 159, 182, 183, 191 cultural 21 devalued 46 embedded in the land 191 expansion of 58, 67, 68 exploitations of 102 export 19, 158 fixed 191, 213 industrial 40–41, 56 insufficient initial money capital 47 investment 93, 203 and labour 56, 88, 169–70 liquid money 20 mobility 59, 63, 64, 161–2, 191, 213 and nature 88 as a process 40 reproduction of 58 scarcity 50 surplus 16, 28, 29, 50–51, 84, 88, 100, 158, 166, 167, 172, 173, 174, 206, 215, 216, 217 capital accumulation 107, 108, 123, 182, 183, 191, 211 and the activity spheres 128 barriers to 12, 16, 47, 65–6, 69–70, 159 compound rate 28, 74, 75, 97, 126, 135, 215 continuity of endless 74 at the core of human evolutionary dynamics 121 dynamics of 188, 197 geographic landscape of 185 geographical dynamics of 67, 143 and governance 201 lagging 130 laws of 113, 154, 160 main centres of 192 market-based 180 Mumbai redevelopment 178 ‘nature’ affected by 122 and population growth 144–7 and social struggles 105 start of 159 capital circulation barriers to 45 continuity of 68 industrial/production capital 40–41 inherently risky 52 interruption in the process 41–2, 50 spatial movement 42 speculative 52, 53 capital controls 198 capital flow continuity 41, 47, 67, 117 defined vi global 20 importance of understanding vi, vii-viii interrupted, slowed down or suspended vi systematic misallocation of 70 taxation of vi wealth creation vi capital gains 112 capital strike 60 capital surplus absorption 31–2, 94, 97, 98, 101, 163 capital-labour relation 77 capitalism and communism 224–5 corporate 1691 ‘creative-destructive’ tendencies in 46 crisis of vi, 40, 42, 117, 130 end of 72 evolution of 117, 118, 120 expansion at a compound rate 45 first contradiction of 77 geographical development of 143 geographical mobility 161 global 36, 110 historical geography of 76, 117, 118, 121, 174, 180, 200, 202, 204 industrial 58, 109, 242 internal contradictions 115 irrationality of 11, 215, 246 market-led 203 positive and negative aspects 120 and poverty 72 relies on the beneficence of nature 71 removal of 260 rise of 135, 192, 194, 204, 228, 248–9, 258 ‘second contradiction of’ 77, 78 social relations in 101 and socialism 224 speculative 160 survival of 46, 57, 66, 86, 107, 112, 113, 116, 130, 144, 229, 246 uneven geographical development of 211, 213 volatile 145 Capitalism, Nature, Socialism journal 77 capitalist creed 103 capitalist development considered over time 121–4 ‘eras’ of 97 capitalist exploitation 104 capitalist logic 205 capitalist reinvestment 110–11 capitalists, types of 40 Carnegie, Andrew 98 Carnegie foundation 44 Carnegie Mellon University, Pittsburgh, Pennsylvania 195 Carson, Rachel: Silent Spring 187 Case Shiller Composite Indices SA 3 Catholic Church 194, 254 cell phones 131, 150, 152 Central American Free Trade Association (CAFTA) 200 centralisation 10, 11, 165, 201 Certificates of Deposit 262 chambers of commerce 195, 203 Channel Tunnel 50 Chiapas, Mexico 207, 226 Chicago Board Options Exchange 262 Chicago Currency Futures Market 262 ‘Chicago School’ 246 Chile, lending to 19 China ‘barefoot doctors’ 137 bilateral trade with Latin America 173 capital accumulation issue 70 cheap retail goods 64 collapse of communism 16 collapse of export markets 141 Cultural Revolution 137 Deng’s announcement 159 falling exports 6 follows Japanese model 92 ‘Great Leap Forward’ 137, 138 growth 35, 59, 137, 144–5, 213, 218, 222 health care 137 huge foreign exchange reserves 141, 206 infant mortality 59 infrastructural investment 222 labour income and household consumption (1980–2005) 14 market closed after communists took power (1949) 108 market forcibly opened 108 and oil market 83 one child per family policy 137, 146 one-party rule 199 opening-up of 58 plundering of wealth from 109, 113 proletarianisation 60 protests in 38 and rare earth metals 188 recession (1997) 172 ‘silk road’ 163 trading networks 163 unemployment 6 unrest in 66 urbanisation 172–3 and US consumerism 109 Chinese Central Bank 4, 173 Chinese Communist Party 180, 200, 256 chlorofluoral carbons (CFCs) 74, 76, 187 chronometer 91, 156 Church, the 249 CIA (Central Intelligence Agency) 169 circular and cumulative causation 196 Citibank 19 City Bank 261 city centres, Disneyfication of 131 City of London 20, 35, 45, 162, 219 class consciousness 232, 242, 244 class inequalities 240–41 class organisation 62 class politics 62 class power 10, 11, 12, 61, 130, 180 class relations, radical reconstitution of 98 class struggle 56, 63, 65, 96, 102, 127, 134, 193, 242, 258 Clausewitz, Carl von 213 Cleveland, foreclosure crisis in 2 Cleveland, foreclosures on housing in 1 Clinton, Bill 11, 12, 17, 44, 45 co-evolution 132, 136, 138, 168, 185, 186, 195, 197, 228, 232 in three cases 149–53 coal reserves 79, 188 coercive laws of competition see under competition Cold War 31, 34, 92 Collateralised Bond Obligations (CBOs) 262 Collateralised Debt Obligations (CDOs) 36, 142, 261, 262 Collateralised Mortgage Obligations (CMOs) 262 colonialism 212 communications, innovations in 42, 93 communism 228, 233, 242, 249 collapse of 16, 58, 63 compared with socialism 224 as a loaded term 259–60 orthodox communists 253 revolutionary 136 traditional institutionalised 259 companies joint stock 49 limited 49 comparative advantage 92 competition 15, 26, 43, 70 between financial centres 20 coercive laws of 43, 71, 90, 95, 158, 159, 161 and expansion of production 113 and falling prices 29, 116 fostering 52 global economic 92, 131 and innovation 90, 91 inter-capitalist 31 inter-state 209, 256 internalised 210 interterritorial 202 spatial 164 and the workforce 61 competitive advantage 109 computerised trading 262 computers 41, 99, 158–9 consortia 50, 220 consumerism 95, 109, 168, 175, 240 consumerist excess 176 credit-fuelled 118 niche 131 suburban 171 containerisation 16 Continental Illinois Bank 261 cooperatives 234, 242 corporate fraud 245 corruption 43, 69 cotton industry 67, 144, 162 credit cards fees vii, 245 rise of the industry 17 credit crunch 140 Credit Default swaps 262 Crédit Immobilièr 54 Crédit Mobilier 54 Crédit Mobilier and Immobilier 168 credit swaps 21 credit system and austerity programmes 246 crisis within 52 and the current crisis 118 and effective demand problem 112 an inadequate configuration of 52 predatory practices 245 role of 115 social and economic power in 115 crises crises of disproportionality 70 crisis of underconsumption 107, 111 east Asia (1997–8) 6, 8, 35, 49, 246 financial crisis of 1997–8 198, 206 financial crisis of 2008 34, 108, 114, 115 general 45–6 inevitable 71 language of crisis 27 legitimation 217 necessary 71 property market 8 role of 246–7 savings and loan crisis (US, 1984–92) 8 short sharp 8, 10 south-east Asia (1997–8) 6, 8, 35, 49, 246 cross-border leasing 142–3 cultural choice 238 ‘cultural industries’ 21 cultural preferences 73–4 Cultural Revolution 137 currency currency swaps 262 futures market 24, 32 global 32–3, 34 options markets on 262 customs barriers 42, 43 cyberspace 190 D Darwin, Charles 120 DDT 74, 187 de-leveraging 30 debt-financing 17, 131, 141, 169 decentralisation 165, 201 decolonisation 31, 208, 212 deficit financing 35, 111 deforestation 74, 143 deindustrialisation 33, 43, 88, 131, 150, 157, 243 Deleuze, Gilles 128 demand consumer 107, 109 effective 107, 110–14, 116, 118, 221, 222 lack of 47 worker 108 Democratic Party (US) 11 Deng Xiaoping 159 deregulation 11, 16, 54, 131 derivatives 8 currency 21 heavy losses in (US) 261 derivatives markets creation of 29, 85 unregulated 99, 100, 219 Descartes, René 156 desertification 74 Detroit auto industry 5, 15, 16, 91, 108, 195, 216 foreclosures on housing in 1 Deutsches Bank 20 devaluation 32, 47, 116 of bank capital 30 of prior investments 93 developing countries: transformation of daily lives 94–5 Developing Countries Debt Crisis 19, 261 development path building alliances 230 common objectives 230–31 development not the same as growth 229–30 impacts and feedbacks from other spaces in the global economy 230 Diamond, Jared: Guns, Germs and Steel 132–3, 154 diasporas 147, 155, 163 Dickens, Charles: Bleak House 90 disease 75, 85 dispossession anti-communist insurgent movements against 250–51 of arbitrary feudal institutions 249 of the capital class 260 China 179–80 first category 242–4 India 178–9, 180 movements against 247–52 second category 242, 244–5 Seoul 179 types of 247 under socialism and communism 250 Domar, Evsey 71 Dongguan, China 36 dot-com bubble 29, 261 Dow 35,000 prediction 21 drug trade 45, 49 Dubai: over-investment 10 Dubai World 174, 222 Durban conference on anti-racism (2009) 258 E ‘earth days’ 72, 171 east Asia crash of 1997–8 6, 8, 35, 49, 246 labour reserves 64 movement of production to 43 proletarianisation 62 state-centric economies 226 wage rates 62 eastern European countries 37 eBay 190 economic crisis (1848) 167 economists, and the current financial crisis 235–6 ecosystems 74, 75, 76 Ecuador, and remittances 38 education 59, 63, 127, 128, 221, 224, 257 electronics industry 68 Elizabeth II, Queen vi-vii, 235, 236, 238–9 employment casual part-time low-paid female 150 chronic job insecurity 93 culture of the workplace 104 deskilling 93 reskilling 93 services 149 Engels, Friedrich 89, 98, 115, 157, 237 The Housing Question 176–7, 178 Enron 8, 24, 52, 53, 100, 261 entertainment industries 41 environment: modified by human action 84–5 environmental movement 78 environmental sciences 186–7 equipment 58, 66–7 equity futures 262 equity index swaps 262 equity values 262 ethanol plants 80 ethnic cleansings 247 ethnicity issues 104 Eurodollars 262 Europe negative population growth in western Europe 146 reconstruction of economy after Second World War 202 rsouevolutions of 1848 243 European Union 200, 226 eastern European countries 37 elections (June 2009) 143 unemployment 140 evolution punctuated equilibrium theory of natural evolution 130 social 133 theory of 120, 129 exchange rates 24, 32, 198 exports, falling 141 external economies 162 F Factory Act (1848) 127 factory inspectors 127 ‘failed states’ 69 Fannie Mae (US government-chartered mortgage institution) 4, 17, 173, 223 fascism 169, 203, 233 Federal Deposit Insurance Corporation (FDIC) 8 rescue of Continental Illinois Bank 261 Federal Reserve System (the Fed) 2, 17, 54, 116, 219, 236, 248 and asset values 6 cuts interest rates 5, 261 massive liquidity injections in stock markets 261 rescue of Continental Illinois Bank 261 feminists, and colonisation of urban neighbourhoods 248 fertilisers 186 feudalism 135, 138, 228 finance capitalists 40 financial institutions awash with credit 17 bankruptcies 261 control of supply and demand for housing 17 nationalisations 261 financial services 99 Financial Times 12 financialisation 30, 35, 98, 245 Finland: Nordic cris (1992) 8 Flint strike, Michigan (1936–7) 243 Florida, foreclosure wave in 1, 2 Forbes magazine 29, 223 Ford, Henry 64, 98, 160, 161, 188, 189 Ford foundation 44, 186 Fordism 136 Fordlandia 188, 189 foreclosed businesses 245 foreclosed properties 220 fossil fuels 78 Foucault, Michel 134 Fourierists 168 France acceptance of state interventions 200 financial crisis (1868) 168 French banks nationalised 198 immigration 14 Paris Commune 168 pro-natal policies 59 strikes in 38 train network 28 Franco-Prussian War (1870) 168 fraud 43, 49 Freddie Mac (US government-chartered mortgage institution) 4, 17, 173, 223 free trade 10, 33, 90, 131 agreements 42 French Communist Party 52 French Revolution 61 Friedman, Thomas L.: The World is Flat 132 futures, energy 24 futures markets 21 Certificates of Deposit 262 currency 24 Eurodollars 262 Treasury instruments 262 G G7/G8/G20 51, 200 Galileo Galilei 89 Gates, Bill 98, 173, 221 Gates foundation 44 gays, and colonisation of urban neighbourhoods 247, 248 GDP growth (1950–2030) 27 Gehry, Frank 203 Geithner, Tim 11 gender issues 104, 151 General Motors 5 General Motors Acceptance Corporation 23 genetic engineering 84, 98 genetic modification 186 genetically modified organisms (GMOs) 186 gentrification 131, 256, 257 geographical determinism 210 geopolitics 209, 210, 213, 256 Germany acceptance of state interventions 199–200 cross-border leasing 142–3 an export-dominated economy 6 falling exports 141 invasion of US auto market 15 Nazi expansionism 209 neoliberal orthodoxies 141 Turkish immigrants 14 Weimar inflation 141 Glass-Steagall act (1933) 20 Global Crossing 100 global warming 73, 77, 121, 122, 187 globalisation 157 Glyn, Andrew et al: ‘British Capitalism, Workers and the Profits Squeeze’ 65 Goethe, Johann Wolfgang von 156 gold reserves 108, 112, 116 Goldman Sachs 5, 11, 20, 163, 173, 219 Google Earth 156 Gould, Stephen Jay 98, 130 governance 151, 197, 198, 199, 201, 208, 220 governmentality 134 GPS systems 156 Gramsci, Antonio 257 Grandin, Greg: Fordlandia 188, 189 grassroots organisations (GROS) 254 Great Depression (1920s) 46, 170 ‘Great Leap Forward’ 137, 138, 250 ‘Great Society’ anti-poverty programmes 32 Greater London Council 197 Greece sovereign debt 222 student unrest in 38 ‘green communes’ 130 Green Party (Germany) 256 ‘green revolution’ 185–6 Greenspan, Alan 44 Greider, William: Secrets of the Temple 54 growth balanced 71 compound 27, 28, 48, 50, 54, 70, 75, 78, 86 economic 70–71, 83, 138 negative 6 stop in 45 Guggenheim Museu, Bilbao 203 Gulf States collapse of oil-revenue based building boom 38 oil production 6 surplus petrodollars 19, 28 Gulf wars 210 gun trade 44 H habitat loss 74, 251 Haiti, and remittances 38 Hanseatic League 163 Harrison, John 91 Harrod, Roy 70–71 Harvey, David: A Brief History of Neoliberalism 130 Harvey, William vii Haushofer, Karl 209 Haussmann, Baron 49, 167–8, 169, 171, 176 Hawken, Paul: Blessed Unrest 133 Hayek, Friedrich 233 health care 28–9, 59, 63, 220, 221, 224 reneging on obligations 49 Health Care Bill 220 hedge funds 8, 21, 49, 261 managers 44 hedging 24, 36 Hegel, Georg Wilhelm Friedrich 133 hegemony 35–6, 212, 213, 216 Heidegger, Martin 234 Helú, Carlos Slim 29 heterogeneity 214 Hitler, Adolf 141 HIV/AIDS pandemic 1 Holloway, John: Change the World without Taking Power 133 homogeneity 214 Hong Kong excessive urban development 8 rise of (1970s) 35 sweatshops 16 horizontal networking 254 household debt 17 housing 146–7, 149, 150, 221, 224 asset value crisis 1, 174 foreclosure crises 1–2, 166 mortgage finance 170 values 1–2 HSBC 20, 163 Hubbert, M.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, disruptive innovation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

The dilemma of living in a Hamiltonian banking world without addressing the Jeffersonian nightmare of inequality has led to the current crisis of the unbanked. But there is a Hamiltonian solution to Jeffersonian fears: a public option in banking—a central bank for the poor. The core function of the central bank, or Federal Reserve, is to infuse liquidity into troubled banks so that they can withstand a temporary credit crunch and get back on their feet. A public option would provide the same short-term credit help to individuals so that they, too, can withstand a personal credit crunch and get back on their feet. Indeed, in the modern banking landscape, only a large, liquid lender is able to lower the costs of lending to the poor. Economies of scale and government backing can be used to bring down the costs of lending to the poor. The federal government is in a unique position to lend to the poor and cover its costs without having to answer to shareholder pressure to maximize profits.

Put simply, payday lenders, which consist of a handful of large corporations, get their loans from the largest commercial banks at low interest.7 These banks, of course, get most of their credit through customer deposits and the federal government. Even their use of our deposits, for which they pay virtually nothing, is made possible by an insurance scheme backed by the full faith and credit of the federal government.8 Banks also receive direct Federal Reserve money at a cool 1 percent interest, not to mention “discount window” loans, which help banks survive a credit crunch.9 When a bank, just like an individual, cannot pay its bills when they are due,10 the Federal Reserve gives the bank a short-term loan, so it can survive without having to sell off valuable assets. All this federal government support makes the banking sector unlike other businesses that must create their own wealth, without the use of other people’s money or cheap loans, when they fall short.

It takes money out of the economy by selling treasuries to banks, so they hold the government treasuries instead of all that cash. The second lever, the discount rate, or the “discount window,” is used to allow banks to survive a “run,” or a large number of depositors demanding their money all at once. This liquidity, or cheap loans, from the federal government allows banks to remain in business amid a short-term credit crunch or a panic. The third lever permitting the Fed to affect the availability of credit is the reserve requirement it imposes on banks. Banks are required to keep a certain amount of money in reserve that they do not lend out. Banks use this reserve to operate and meet the withdrawal needs of their customers, while the Federal Reserve uses this reserve to achieve its own policy goals of either expanding or contracting the money supply.


pages: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, bank run, banking crisis, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, break the buck, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, quantitative easing, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, wikimedia commons, yield curve

Was the downturn a buying opportunity or a warning to call off the whole venture? In public, it remained committed. Barclays announced half-yearly profits growth of 12 per cent on 2 August, referring to a strong performance in the very businesses where sub-prime mortgage problems would surface. A week later the dam broke. On Tuesday 7 August, afterwards widely acknowledged to be the start of the 2007 credit crunch, West LB Asset Management suspended investor redemptions from one of its asset backed securities funds and two days later BNP Paribas froze three of its hedge funds, indicating that they had no way of valuing the complex mortgage related derivatives in them. On 22 August, the credit agency S&P cut the rating on two mortgage backed funds arranged by Barclays and managed by Solent Capital Partners and Avendis Group, after investors refused to buy their debt.14 The funds were wound down and the securities that comprised them sold at a loss.

Former Barclays director Steel had recently become deputy mayor for economic development of New York City and said he was not ready to return to banking. That left Winters and Staley. Winters was an American who moved to London in 1992. Until 2009 he was J. P. Morgan’s boss Jamie Dimon’s most trusted lieutenant, running its investment bank. He was regarded as one of the finest risk managers in the industry, was widely credited with helping the US bank avoid the worst of the credit crunch and received a standing ovation from the bank’s London trading floor on the day his departure was announced after a rumoured disagreement with Dimon.7 He was chosen by Chancellor Osborne to serve on the Independent Commission on Banking and would have been a popular choice with regulators and shareholders. However, he had recently set up an asset management business and would be difficult to move.

Far from enabling the bank to put the matter behind it, Barclays and its chief executive had become synonymous with Libor, and in the public mind Libor had become synonymous with everything that was wrong with banking. It wasn’t as if he had failed. It turned out that the marks in Barclays’ balance sheet had been no worse than anyone else’s and the authorities’ suspicions had been ill-founded. The amount it wrote off as a percentage of total loans and advances to customers was the lowest of the major UK banks following the credit crunch. Barclays Capital’s £6.1 billion write-down on mortgage and other credit related exposures in 2009, the year the authorities were most worried about, was easily absorbed by a £7 billion increase in trading income that year. Then there was BGI. He had stopped the board from selling it in 2002 for just over $1 billion and had become executive chair himself. In the following seven years the profitability of BGI grew from just over $100 million a year to nearly $1 billion a year.


pages: 311 words: 99,699

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, Blythe Masters, break the buck, Bretton Woods, business climate, business cycle, buy and hold, collateralized debt obligation, commoditize, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, easy for humans, difficult for computers, financial innovation, fixed income, housing crisis, interest rate derivative, interest rate swap, Kickstarter, locking in a profit, Long Term Capital Management, McMansion, money market fund, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, Satyajit Das, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

ISDA had gathered in the same city two decades earlier, and Brickell considered that symbolically appropriate. Vienna was the home of the great free-market economist Friedrich von Hayek, Brickell’s hero. “[Twenty years ago] we set out to design a business guided by market discipline because we believed that it should be an even better guide to good behavior than regulatory proscription,” he observed. “The credit crunch gives good evidence that market discipline has guided the derivatives business better than regulation has steered housing finance.” Brickell remained as opposed as ever to the idea that governments should intervene. “Hayek [the Viennese economist] believed that markets would create a rhythm of their own, that they are self-healing. That is something we all should remember and honor today,” he told the audience.

Policy makers were alarmed and confused about what was going on. More trouble seemed imminent. One issue was that, as the problem came to be described, the tremors on Wall Street were now reverberating on Main Street. Banks buckling under their vast losses were slashing loans not just to hedge funds now, but to all sorts of companies. The crucial question now was one of timing: would the banks recover before the credit crunch threw the economy into recession? Solemnly, Paul Tucker, head of markets at the Bank of England, warned that “We face a race [against time]” to see whether “financial conditions…stabilise before macroeconomic slowdown, here and abroad, raises loan defaults.” The signs didn’t look good for recovery at the banks that quickly; the losses just continued to mount. By April, the total loss in the estimated prices of mortgage-linked CDOs and other securities had reached almost $400 billion, a dramatically larger figure than any of the earlier predicted subprime losses, which prompted the International Monetary Fund to estimate that the total “losses” from the credit crisis could reach $1 trillion.

On Friday morning he called the club to say he was unsure if he would play. Six months after the drama of the Bear Stearns deal, he sensed that more trouble and uncertainty were about to strike. On September 7, the Federal Reserve had put the two state-backed mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship,” a move tantamount to nationalization. By the summer, confidence that they would be able to weather the storm of mortgage defaults and the credit crunch had started to slip. The housing market was continuing to deteriorate fast, and the default rate on prime mortgages started to rise. Like the shadow banks and brokers, Fannie and Freddie had been operating with very high levels of assets relative to their equity. The move on September 7 temporarily calmed markets, but it also stoked more uncertainty about long-term prospects. As the implications of the conservatorship sank in, many investors realized they had suffered big losses.


pages: 261 words: 70,584

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Albert Einstein, asset allocation, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

Treating money differently, and in many cases recklessly, when a gain or profit is realized, is known as the house money effect. During the housing boom, millions of Americans used the equity in their homes like house money for home improvements, vacations, new cars, or even more houses.31 And now, for those who rode the perpetual rise of home appreciation, many bets are off. On the House Although there were myriad culprits behind the credit crunch, Boomer behavior such as the wealth effect and house money effect played a prominent role. Robert Shiller’s book Irrational Exuberance, published in 2000, detailed the trouble that awaited us all when the impending Nasdaq bubble burst. He argued that it was the artificial rise in home values, not the tech stock boom, that was creating the dangerous wealth effect. And that was in spite of the fact that demand was decreasing in important markets such as Silicon Valley.32 As tech stock values were pushed higher by a bubble, the wealth effect took hold and had people feeling wealthier than they were, and the same thing happened with the housing bubble that followed.

The term was coined by community activists who noted that the failure of banks to make loans in some low-income neighborhoods was so geographically distinct that it was easy to draw a red line on a map to delineate the practices.34 The CRA was proposed by Senator William Proxmire of Wisconsin for the purpose of eliminating the practices of redlining and “credit exportation,” where money is taken from a low-income community via deposits and lent to borrowers outside of the community.35 In spite of the bill’s laudable goals, it did have its share of opponents, who called it “thinly-disguised credit allocation” that “would represent a foot in the door toward the mandatory allocation of credit.”36 Following the Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1975, among others, the CRA laid the groundwork for a practice that some people would call “predatory lending”—others would more bluntly call it lending money to people who had no business borrowing. How predatory and irresponsible were the lending standards that helped create the credit crunch? Consider this excerpt from an article written in November 2008 by Michael Lewis,37 author of Liar’s Poker, regarding a loan company in California. “(It was) moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. (The company) specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible.

As respected financial reporter Jason Zweig has written, “Our investing brains often drive us to do things that make no logical sense—but make perfect emotional sense.”45 Improve Your Retirementology IQ If you start thinking about something that’s already as emotional as a home like it’s an investment, rather than shelter, you may do things that make no logical sense. When it comes to being smart with your house, the difference between boom and bust may well be doing your homework. Check Out Refinancing Options In response to the credit crunch, there’s been plenty of manipulation of interest rates. Today we have some historically low rates and plenty of homeowners who could do well to lower their monthly payments. The best thing any homeowner can do right now—especially a homeowner who has a solid credit history—is to call the company that presently owns his mortgage and see what sort of rates are available. There are a number of simple-to-use tools on the Internet to help you calculate whether refinancing is advantageous for your situation.


pages: 620 words: 214,639

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

asset-backed security, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Hyman Minsky, Irwin Jacobs, John Meriwether, Long Term Capital Management, margin call, merger arbitrage, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, savings glut, shareholder value, sovereign wealth fund, too big to fail, traveling salesman, Y2K, yield curve

A few hours later, the Labor Department announced that some sixty-three thousand jobs had been lost in February, far more than had been expected. “Godot has arrived,” wrote Edward Yardeni, an economist and Pulitzer Prize—winning author who had been one of Wall Street's most relentlessly upbeat forecasters. “I've been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy.” By March 7, the Carlyle hedge fund was hitting the wall, as more margin calls were pouring in and the fund could not meet them despite having a $150 million line of credit from the Carlyle Group in Washington. The fund's publicly traded shares were suspended. “Although the Company believed last week that it had sufficient liquidity, it was informed by its lenders this week that additional margin calls and increased collateral requirements would be significant and well in excess of the margin calls it received Wednesday,” John Stomber, the CEO, said in a statement.

By the time the Bear employees arrived at work the next day, some wag had already taped a $2 bill above the Bear Stearns logo on one of the revolving doors leading into 383 Madison Avenue. That image quickly became an apt metaphor for the brutal decline and fall of a once-proud firm, a firm that had survived every other crisis of the twentieth century, from the Depression to World War II to the market crash of 1987, without a single losing quarter but could not make it through the global credit crunch of 2007 and beyond. “Once you have a run on the bank, you are in a death spiral and your assets become worthless,” observed David Trone, a brokerage industry analyst at Fox-Pitt, Kelton. “Banks and brokerages are a house of cards built on the confidence of clients, creditors and counterparties. If you take chunks out of that confidence, things can go awry pretty quickly.” On Monday morning, as “firefighters in kilts and St.

“If he doesn't like it, he should do his future business elsewhere,” Greenberg told Landon Thomas Jr. of the New York Times in an inflammatory article that appeared on May 7. It was the first time that either man had spoken publicly about the events that destroyed the company with which they were so closely identified. Greenberg went on to blame Cayne for the demise of Bear Stearns. He said Cayne had not taken his advice as the credit crunch unfolded during the summer of 2007. “Jimmy was not interested in my point of view,” Greenberg said. “He was a one-man show—he didn't listen to anybody. That is when the real break took place.” When Thomas asked him to elaborate on specifically what he had recommended that Cayne do to alleviate the crisis at the firm, Greenberg said only, “You can read about it in my book.” He also criticized Cayne for bothering to still show up in his sixth-floor office.


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, housing crisis, inflation targeting, information asymmetry, London Interbank Offered Rate, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

Altered wording would have been seen as a signal that a rate cut was imminent, and Bernanke hadn’t maneuvered the committee to that point yet. “Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected,” the Fed said. (Translation: The odds of recession are growing, but we’re more worried that inflation will take off.) The statement implied that the Fed was shrugging off the unfolding credit crunch. There was no hint of Bernanke’s concern about the risks to the economy posed by disintegrating credit markets. So much for transparency. “Sometimes the role of the release is more to placate nineteen people sitting around the Board table in Washington and less to educate the public,” said ex-Fed staffer Vincent Reinhart, who helped write the statements for six years. The statement would quickly be overtaken by events — a reminder that behind the curtain at the Fed are a bunch of men and women, some smarter than others, trying to predict the course of an economy that stubbornly refuses to be predictable.

In contrast, in 2006, Bernanke’s impact was only double that of the next most influential speaker — and number two was attention-grabbing dissenter Bill Poole from St. Louis. Mishkin, meanwhile, was putting on his own version of a full-court press. He knew that his advocacy of aggressive rate cuts alarmed hawkish bank presidents like Hoenig, but he had allies heading into the December FOMC meeting: Geithner was nearly always more worried than anyone else about the credit crunch. San Francisco’s Yellen and Boston’s Rosengren were also both inclined to cut rates another half-percentage point. The federal funds futures market was betting on a half-point cut as well. Most regional Fed bank presidents, though, used their discount-rate requests as a signal that they were leaning toward a one-quarter point cut. A couple of the hawks — Richard Fisher in Dallas and Tom Hoenig in Kansas City — didn’t want any rate cut at all.

Although not nearly as quotable and thus not as prominent as some other presidents, Rosengren emerged as a thoughtful, low-profile Bernanke ally during the Great Panic. He and the Richmond Fed’s Jeff Lacker had gone to the same New Jersey high school, although they didn’t know each other then, and were graduate students in economics at the same time at the University of Wisconsin. Rosengren began his Fed career in the Boston Fed’s research department, focusing for a time on the credit crunch and banking woes of New England in the 1990s as well as Japan’s banking crisis. In 2000, he moved into the nitty-gritty of bank supervision and regulation, an unusual move for a Ph.D. economist but one that gave him highly relevant expertise during the Great Panic and a clear view that some fellow bank presidents lacked. Where others saw signs of hope, Rosengren saw “a deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill-functioning financial markets.”


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Chapter 8: Making the Transition The transition from the current monetary system to the reformed system is made in two distinct stages: 1) an overnight switchover, when the new rules and processes governing money creation and bank lending take place, and 2) a longer transition period, of around 10-20 years, as the economy recovers from the ‘hangover’ of debt from the current monetary system. Changes are made to the balance sheets of the Bank of England and commercial banks, and additional measures are taken to ensure that banks have adequate funds to lend immediately after the switchover so that there is no risk of a temporary credit crunch (however unlikely). The changes can be made without altering the quantity of money in circulation. The longer-term transition allows for a significant reduction in personal and household debt, as new money is injected into the economy and existing loan repayments to banks are recycled into the economy as debt-free money. The potential de-leveraging of the banking sector could be in excess of £1 trillion.

How the Money Creation Committee would work Each month, the Money Creation Committee would meet and decide whether to increase, decrease, or hold constant the level of money in the economy. During their monthly meetings the MCC would decide upon two figures: The amount of new money needed in order to maintain aggregate demand in line with the inflation target (similar to the setting of interest rates today), and; The amount of new lending needed in order to avoid a credit crunch in the real economy and therefore a fall in output and employment (discussed in section 7.6). Both figures would be determined, as is the case now when setting interest rates, by reference to appropriate macroeconomic data, including the Bank of England’s Credit Conditions Survey (a survey of business borrowing conditions, outlined in Box 7.C). Once a conclusion had been made on the two figures mentioned above, then the Money Creation Committee would authorise the creation of a specific amount of new money.

Because banks would only be able to lend out money that had already been deposited in Investment Accounts, a lack of customers willing to invest (perhaps due to a negative outlook for the economy) would negatively affect a banks’ ability to lend, with potentially harmful effects on the economy. The Credit Conditions Survey would help to forewarn the Bank of England if such a situation was imminent, giving it time to provide funding to banks (exclusively for lending to businesses) in order to avert a potential credit crunch. In the longer term the Bank of England could also monitor the interest rate charged on loans to businesses. Generally speaking, a higher interest rate would suggest the need for the Bank of England to intervene to provide funding to the banks. However, there are several drawbacks to this approach. Firstly, a rising interest rate may signal either a fall in the supply of funds in Investment Accounts or a rise in the demand for loans.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, plutocrats, Plutocrats, private military company, Republic of Letters, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, scientific worldview, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

There was a mad scramble to call in loans in order to comply. Seeing the danger, the authorities attempted to soften the edict by relaxing its terms and announcing a generous transitional period. But the measure came too late. The property market collapsed as mortgaged land was fire-sold to fund repayments. Mass bankruptcy threatened to engulf the financial system. With Rome in the grip of a credit crunch, the emperor was forced to implement a massive bailout. The Imperial treasury refinanced the overextended lenders with a 100-million sesterces programme of three-year, interest-free loans against security of deliberately overvalued real estate. To the Senate’s relief, it all ended happily: “Credit was thus restored, and gradually private lending resumed.”11 This first flowering of monetary society in Europe was not to last, however.

Readers rushed to consult the great financial historian, Charles Kindleberger.1 To learn of his discovery that “financial crises have tended to appear at roughly ten-year intervals for the last 400 years or so” was either disturbing or comforting, depending on one’s perspective.2 Within a couple of years, however, the economists Carmen Reinhart and Kenneth Rogoff had published an even more comprehensive investigation into the history of financial crises. Its ominous subtitle warned the reader to expect not just four but “Eight Centuries of Financial Folly.”3 And as Tactitus’ account of the credit crunch under the Emperor Tiberius shows, monetary society has been prone to the problem of growing indebtedness ending in a crisis of solvency for much longer even than that. The reason is that this instability is intrinsic to money’s miraculous promise to combine security and freedom. The distinctive claim of money was that it could combine social stability and social mobility in a way that traditional society, with its immutable social structure, never could.

The acute phase of the crisis began to subside, and though the demand for sovereign money remained unusually high for months following the crisis, the focus shifted to counting the casualties in the post-Overends era. These were considerable. Three English and one Anglo-Indian bank had been forced into liquidation—at a time when there was no deposit insurance. Dozens of bill brokers and finance companies had gone under. But as always, the real ramifications of the crisis were felt far beyond the medieval wards of the City of London and long after the acute panic had subsided. All over the country, the credit crunch resulting from the damage to confidence brought a severe contraction of business. More than a hundred and eighty bankruptcies were recorded in the three months following Black Friday.34 Unemployment rose from 2.6 per cent in 1866 to 6.3 per cent in 1867, and rose again in 1868 before a proper recovery took hold. Sectors that relied particularly heavily on credit, such as the global shipping industry operating from the wharfs of London’s East End, were especially badly affected: the annual report of the Poplar Hospital, a charitable institution for dockers, recorded that “there has never been a year so pregnant with disaster both public and private.”35 All in all, it had been the greatest financial crash since 1825—indeed, if only by virtue of the far more advanced development of the City and its international importance compared with that time, the greatest crash of all.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, plutocrats, Plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

From the hype, you'd also think the U.S. was leaving its major rivals in the dust, but comparisons of per capita GDP growth rates don't bear this out. At the end of 1997, the U.S. was tied with France at second in the growth league, behind Canada, and just tenths of a point ahead of the major European countries. Step back a bit, and the U.S. sags badly. For the 1989-95 period, when the U.S. was stuck in a credit crunch and a sputtering recovery, it was at the bottom of the G7 growth league, along with Canada and the U.K. Between 1979 and 1988, there's no contest, with the U.S. tying France for the worst numbers in the G-7. Comparisons with the pre-crisis Asian tigers are hardly worth making. It may be as capitalisms mature, financial surpluses break the bounds of regulated systems, and force an American-style loosening of the bonds.

This would require an extension of the central bank safety net to the entire financial matrix, not merely the commercial banks that were its legal charges. Fighting inflation might entail a terrible financial cost, and so the Fed would be forced to err on the side of indulgence whenever the credit system looked rocky. Perhaps Minsky was a little early — the first financial crisis of the post- WALL STREET 1945 period was the credit crunch of 1966 — but he described the mechanism perfectly: first the rising inflation of the 1960s and 1970s, followed by the Volcker clampdown, which was lifted when it looked like Mexico's default would bring the world banking system down. But the Volcker clampdown required driving interest rates far higher, and for a longer period of time, than anyone would have expected, to shut the economy down, so creative are the innovators at evading central bank restraints.

., 249-251, 297 Colby, William, 104 Colgate-Palmolive, 113 College Retirement Equities Fund (CREF), 289 Collier, Sophia, 310 Columbia Savings, 88 commercial banks, 81-84 commodity prices, futures markets and, 33; see also futures markets common stock, 12 Community Capital Bank, 311 community development banks, 311-314 community development organizations, co-optation of, 315 community land trusts, 314-315 compensatory borrowing, 65 competition managerialist view of, 260 return of, 1970s, 260 Comstock, Lyndon, 311 Conant, Charles, 94-95 Conference Board, 136, 291 consciousness credit and, 236-237 rentier, profit with passage of time, 238 consensus, 133 consumer credit, 64-66, 77 in a Marxian light, 234 in 1930s depression, 156-157 rare in Keynes's day, 242 see also households Consumer Expenditure Survey, 70 consumption, 189 contracts, 249; see afao transactions-cost economics control. 5ee corporations, governance cooperatives, 321 managers hired by workers, 239 weaknesses of ownership structure, 88 corporate control, market for, 277-282 Manne on, 278 corporations debt distribution of, 1980s, 159 and early 1990s slump, 158-161 development, and stock market, 14 emergence, and Federal Reserve, 92-96 emergence of complex ownership, 188 evolution, 253 form as presaging worker control (Marx), 239-240 importance of railroads in emergence, 188 localist critique of, 241 managers' concern for stock price, 171 multinational evolution, and financial markets, 112-113 investment clusters, 111-112 nonfinancial, 72-76 finances (table), 75 financial interests, 262 refinancing in early 1990s, l6l role in economic analysis, 248 shareholders conribute nothing or less, 238 soulful, 258, 263; see afeo social investing stock markets' role in constitution of, 254 transforming, 320-321 virtues of size, 282 corporations, governance, 246-294 Baran and Sweezy on, 258 Berle and Means on, 252-258 abuse of owners by managers, 254 interest-group model, 257-258 Berle on collective capitalism, 253-254 boaids of directors, 27-29, 246, 257, 259, 263, 272 financial representatives on, 265 keiretsu, 275 of a "Morganized" firm, 264 rentier agenda, 290 structure, 299 competition's obsolescence/return, 260 debt and equity, differences, 247 EM theory and Jensenism as unified field theory, 276 financial control 359 WALL STREET meaning, 264 theories of, rebirth in 1970s, 260-263 financial interests asserted in crisis, 265 financial upsurge since 1980s, 263-265 Fitch/Oppenheimer controversy, 261-262 Galbraith on, 258-260 Golden Age managerialism, 258-260 Herman on, 260 influence vs. ownership, 264—265 international comparisons, 248 Jensenism. 5eeJensen, Michael market for corporate control, 277-282 narrowness of debate, 246 Rathenau on, 256 shareholder activism of 1990s, 288-291 Smith on, 255-256 Spencer on, 256-257 stockholder-bondholder conflicts, 248 theoretical taxonomy, 251-252 transactions cost economics, 248-251 transformation, 320-321 useless shareholders, 291-294 correlation coefficient, 116 correlation vs. causation, 145 cost of capital, 184, 298 Council of Institutional Investors, 290 Cowles, Alfred, 164 crack spread, 31 Cramer, James, 103 crank, 243 credit/credit markets assets, holders of, 59-61 as barrier to growth, 237 as boundary-smasher (Marx), 235 centrality of, 118-121 and consciousness, 236-237 European vs. U.S. theories of, 137 function, 59 as "fundamental" (Marx), 244 information asymmetry, 172 market share by lending institution, 81 structure, 58-62 subordination to production (Marx), 237 U.S. international position, 61 see also bond markets; debt; money, psychology of credit crunch 0989-92), 158-161 credit gratuitiVioudhon), 302 credit rationing, 172 in Keynes's Treatise, 193-194 crime, business, 252 crises, corporate, financial interests assert power during, 265 crises, financial, 265 financiers' political uses of, 294-297 increasing prominence starting in 1970s, 222 money and, 93-94 Keynes, 202-205 Marx, 232-236 Third World, 110, 294-295 see also bailouts Crotty, James, 229 crowd psychology, 176-177, 185 currency markets, 41^9 crises, economic causes, 44 gold, 46-49 history, 41^4 mechanics and trading volume, 45—46 during trading week, 130-131 underlying values, 44-45 currency swaps, 35 Dale, James Davidson, 104 Davidson, Paul, 242, 243 Debreu, Gerard, 139 debt appropriate underlying assets, 247 as conservatizing force, 66 ideal level, pre-MM, 150 and 1930s depression, 155-158 and political power, 4, 23 reasons to shun, 149 by sector, 58-59 by type (table), 60 see also credit/credit markets; specific sectors debt deflation (Fisher), 157 modern absence of, 234-235 why there was none in early 1990s, 158-161 deficit financing, 297 deflations.


pages: 309 words: 78,361

Plenitude: The New Economics of True Wealth by Juliet B. Schor

Asian financial crisis, big-box store, business climate, business cycle, carbon footprint, cleantech, Community Supported Agriculture, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, decarbonisation, dematerialisation, demographic transition, deskilling, Edward Glaeser, en.wikipedia.org, Gini coefficient, global village, IKEA effect, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Joseph Schumpeter, Kenneth Arrow, knowledge economy, life extension, McMansion, new economy, peak oil, pink-collar, post-industrial society, prediction markets, purchasing power parity, ride hailing / ride sharing, Robert Shiller, Robert Shiller, sharing economy, Simon Kuznets, single-payer health, smart grid, The Chicago School, Thomas L Friedman, Thomas Malthus, too big to fail, transaction costs, Zipcar

Review of Environmental Economics and Policy 2 (1) (Winter): 61-76. Stevenson, Betsey, and Justin Wolfers. 2008a. Economic growth and subjective well-being: Reassessing the Easterlin paradox. Brookings Papers on Economic Activity 1: 1-87. ———.2008b. Happiness inequality in the United States. The Journal of Legal Studies 37 (s2) (June): S33-S79. Stewart, Heather. 2009. This is how we let the credit crunch happen, ma’am . . . The Guardian, July 26. Available from http://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunch (accessed July 27, 2009). Stiglitz, Joseph E., Amartya Sen, and Jean-Paul Fitoussi. 2009. Report by the commission on the measurement of economic performance and social progress. Available from www.stiglitz-sen-fitoussi.fr (accessed September 28, 2009). Stutzer, Alois. 2003. The role of income aspirations in individual happiness.

Green businesses will provide only a limited number of jobs, especially right now. If you’re lucky enough to land a good-paying job with a thriving green company, you may want to dive in headfirst. However, as we learned in the 1990s tech boom, there can be an ephemeral quality to a rapidly emerging sector, even for some of the highest-flying companies. In 2008 the surging renewable-energy sector ground to a halt, stymied by the credit crunch. And much of what’s passing as green today is sustainable in one, rather than all, of its dimensions. Hybrid vehicles emit less carbon, but their batteries are toxic. They’re better than BAU vehicles, but cannot yet be produced in large quantities without negative eco-impacts. So while they’re essential, today’s green products and technologies are not a magic bullet. And if the broader economy does recover soon, and global expansion gets back on track?


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, Kenneth Rogoff, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

While I chuckled at the time, it was interesting and scary how fast the world moves into panic mode, even without an obvious trigger like war, epidemics or natural disasters. This was a panic caused by the falling house of cards that most of us had helped build through the creation, purchase, regulation, complicity, or ignorance of a crazy, headless, expansion of credit. (I recommend How I Caused the Credit Crunch by Tetsuya Ishikawa (2009, Icon Books). Tets, who was very involved with crisis events while at Goldman and Morgan, has written a funny book about the financial crises.) As bad as things were at the worst point of the 2008–09 crisis they could clearly have been much worse. There were still functioning financial markets, no governments had defaulted (they had in fact been able to oversee large and necessary bailouts), there was no hyperinflation or threats of war, and there was no widespread civil unrest.

Index accountants active managers compared with index trackers, 2nd performance over time active personal portfolio management adding up the costs of advisory charges age life stages of financial planning and risk profile AIG allocations see investment allocations alternative investments alternative weightings ‘angel’ investing, 2nd annuities IRR (internal rate of return), 2nd apocalypse investing avoiding fraud and financial disasters and gold as security assets asset classes to avoid concentration risk customisation and noninvestment growth of, and overpayment of fees and institutional investors intangible and liabilities and portfolio theory in the rational portfolio, assets split tangible see also minimal risk assets avoiding fraud banks bailouts cash deposits with and financial disaster and gold as security and property investment Barclays US High Yield index Bernstein, William The Intelligent Asset Allocator bid/offer spread black swan events, 2nd, 3rd Bogle, John bonds bond indices, 2nd dollar domination of ETFs, 2nd and financial planning income from coupon payments indices and the rational portfolio adding other bonds to risk preferences, 2nd rebalancing your portfolio ‘risky’ bonds and liquidity shortterm, 2nd see also corporate bonds; government bonds; minimal risk assets Brazil government bonds broad-based portfolios and liquidity world equities, 2nd, 3rd, 4th, 5th Buffett, Warren, 2nd fee structure capital gains tax (CGT), 2nd, 3rd and gifts car insurance Case-Shiller House Price index, 2nd cash deposits deposit insurance government guarantees risk of CGT see capital gains tax (CGT) civil unrest collectibles commercial property market commodities, 2nd returns form company shares comparison sites, 2nd enhanced independent Contagion (film) corporate bonds adding to minimal risk assets, 2nd, 3rd and financial planning and credit quality ETFs, 2nd and financial planning liquidity of and minimal risk assets and portfolio theory, 2nd and the rational portfolio, 2nd, 3rd adjusting allocations, 2nd risk preferences real return expectations world corporate debt yields, 2nd costs see fees and expenses CRB Commodity index CRB Total Return index, 2nd credit ratings government bonds, 2nd, 3rd, 4th adding to minimal risk assets currency and government bonds, 2nd, 3rd, 4th matching and world equities currency-hedged investment products custody charges customisation Cyprus defined benefits pension schemes defined contribution pension schemes diversification and assets benefits of and corporate bonds, 2nd and equity market risk geographical and government bonds, 2nd and the rational portfolio, 2nd and world equities, 2nd Dow Jones index Industrial Average recovery from losses drop dead allocation early savers edge over the markets see investment edge efficiency frontiers EIS (Enterprise Investment Schemes) Elton, Edwin Modern Portfolio Theory and Investment Analysis emerging market companies listed on Western exchanges Enterprise Investment Schemes (EIS) equities and government and corporate bonds performance and portfolio theory and property investment and the rational portfolio allocations risk preferences, 2nd rebalancing your portfolio risk of diversification and false sense of security recovering from large losses standard deviation, 2nd, 3rd view that markets will always bounce back see also world equities equity risk premium and financial planning ETFs (exchange traded funds), 2nd, 3rd, 4th advantages to owning buying bonds, 2nd, 3rd commodity trading customisation fees and expenses in global property and gold trading implementing and index funds leveraged maturities and minimal risk bonds, 2nd physical or synthetic rebalancing your portfolio and taxes total expense ratio (TER) tracking errors European Union bonds, 2nd expenses see fees and expenses fat tails fees and expenses, 2nd adding up costs alternative investments benefits of paying lower fees and comparison websites financial advisers index trackers compared with active managers and investment edge pension plans and performance impact over time mutual funds, 2nd and the rational investor and the rational portfolio, 2nd rebalancing your portfolio Ferri, Richard All About Asset Allocation financial advisers, 2nd and comparison websites financial crisis 2008–09 and commodities trading and currency matching and government bonds yields and high risk preferences and liquidity and longterm financial planning, 2nd and market risk, 2nd, 3rd, 4th financial planning building your savings and the financial crisis 2008–09, 2nd and investment allocations, 2nd, 3rd and life stages and risk, 2nd risk surveys rules of thumb to consider supercautious savers financial software packages France government bonds fraud, avoiding frequent trading FTSE All-Share index FTSE All-Share Tracker fund FTSE NAREIT Global index, 2nd, 3rd fund pickers future performance mutual funds GDP and corporate bonds and world equity market value, 2nd Germany government bonds gifts and capital gains tax gold, 2nd as security Goldman Sachs government bonds adding to minimal risk assets, 2nd and financial planning and bank deposits banks and government defaults buying in base currency, 2nd credit ratings, 2nd, 3rd, 4th and diversification earnings ETFs, 2nd and the financial crisis (2008) and financial planning inflationprotected liquidity of longerterm maturity minimal risk and world equities, 2nd, 3rd and portfolio theory, 2nd, 3rd and the rational portfolio, 2nd, 3rd adjusting, 2nd, 3rd allocations, 2nd risk preferences real return expectations time horizons yields Greece government debt and bond yields hedge funds, 2nd, 3rd, 4th Japanese government bonds and liquidity high risk preferences home markets overinvestment in Icelandic banks income tax index funds, 2nd and ETFs and government bonds implementing maturities and minimal risk bonds, 2nd total expense ratio (TER) tracking errors index-tracking products, 2nd and active managers adding bonds to a portfolio compared with active managers, 2nd comparison sites, 2nd enhanced independent costs of fund changes and taxes future product development implementing license fees for and liquidity and mutual funds and the rational portfolio, 2nd, 3rd different risk preferences total expense ratio (TER), 2nd versus mutual fund returns over time world equities, 2nd see also ETFs (exchange traded funds); index funds India government bonds inflation earnings from minimal risk bonds inflation-adjusted government bonds inflation-protected bonds returns on world equities information/research costs institutional investors insurance buying deposit insurance schemes intangible assets interest rates cash deposits in banks government bonds, 2nd international investment investment allocations adding other government and corporate bonds and financial planning, 2nd, 3rd flexibility of financial goals life stages rebalancing your portfolio, 2nd investment edge, 2nd absence of, 2nd adding up the costs asset classes to avoid and commodities trading, 2nd and the competition different ways of having and expenses and performance picking your moment and private investments and the rational portfolio reconsidering your edge and world equities ‘invisible hand’ of the market IOUs (promissory notes) IRR (internal rate of return) annuities, 2nd iShares, 2nd Ishikawa, Tets How I Caused the Credit Crunch Japan commodities trading government bonds Nikkei index jewellery leverage ETFs and mortgages portfolios liabilities and the rational portfolio life insurance, 2nd life stages and financial planning liquidity equity portfolio and ‘risky’ bonds and ETFs minimal risk and private investments and the rational portfolio, 2nd, 3rd returns on illiquid investments selling your investment, 2nd localised risks avoiding and noninvestment assets Madoff, Bernie market capitalisation and world equities, 2nd market efficiency and inefficiency Mexico government bonds Microsoft investors, 2nd, 3rd and liquidity, 2nd mid-life savers minimal risk assets, 2nd adding other bonds to corporate bonds, 2nd, 3rd government bonds, 2nd adjusting the risk profile asset classes to avoid buying and diversification and equity markets ETFs and financial planning 50/50 split with world equities, 2nd, 3rd allocations government bonds earnings inflation-protected time horizons of inflationprotected bonds and liquidity as optimal portfolio and portfolio theory, 2nd in the rational portfolio, 2nd, 3rd, 4th, 5th, 6th real return expectations and world equities, 2nd Morgan Stanley mortgages and currency matching and leverage MSCI World Index, 2nd, 3rd, 4th mutual funds fees and performance, 2nd and index trackers national economies and equity market risk OEICs (openended investment companies) oil trading, 2nd optimal portfolio theory minimal risk asset past performance and future performance Paulson, John pension funds, 2nd, 3rd benefits and charges defined benefits schemes underfunded performance and fees index trackers versus active managers versus mutual funds portfolio theory and government bonds optimal and the rational investor price impact private equity capital, 2nd private investments, 2nd and liquidity privatisations and world equities professional investment managers property market investments, 2nd avoiding and financial disasters institutional investors and liquidity and the rational portfolio US subprime housing markets, 2nd, 3rd rational investing, 2nd core of ongoing tasks of rational portfolio adding other bonds to adjusting allocations and equity risk return expectations asset classes to avoid assets and liabilities assets split checklist corporate bonds, 2nd diversification financial benefits of and financial disasters geographical diversification government bonds, 2nd, 3rd, 4th, 5th implementation incorporating other assets and investment edge key components of a and liquidity, 2nd, 3rd and pension plans and portfolio theory and risk preferences risk/return profile, 2nd, 3rd, 4th tailoring to specific needs and circumstances tax adjustments tax benefits of holding and tax efficiency, 2nd, 3rd, 4th world equities, 2nd, 3rd, 4th see also minimal risk assets rebalancing your portfolio ticket size REITs (Real Estate Investment Trusts) residential property market retirees investment allocation retirement annuities and financial planning risk cash deposits credit risk and corporate bonds of equity markets equity risk premium high risk preferences and longterm financial planning, 2nd and the optimised market and the rational portfolio, 2nd, 3rd asset split risk preferences risk expertise websites risk surveys risk/return profile equity markets and financial planning, 2nd, 3rd and long-term financial planning minimal risk assets adding government and corporate bonds to pension plans and portfolio theory and the rational portfolio, 2nd, 3rd, 4th, 5th rebalancing your portfolio world equities riskless investment choice, 2nd S&P 500 index and the CRB Commodity index Index Tracker Portfolio standard deviation stocks volatility savings ‘doing nothing’ with and long-term financial planning life stages SD see standard deviation (SD) selling investments and liquidity software packages Spain government bonds standard deviation (SD) building your savings and equity market risk, 2nd, 3rd synthetic ETFs Taleb, Nassim Nicholas The Black Swan, 2nd tangency points tangible assets tax efficient proxies tax wrappers, 2nd taxes, 2nd advisers or accountants questions to ask benefits of the rational portfolio capital gains tax (CGT), 2nd, 3rd, 4th creating trading lots and financial disaster and pension plans, 2nd rational portfolio adjustment realising losses against tax advice websites tax efficiency and the rational portfolio, 2nd, 3rd, 4th tax schemes tax-sheltered or optimised products transaction tax, 2nd technology-focused funds, 2nd TER (total expense ratio), 2nd This Time is Different: Eight Centuries of Financial Folly (Reinhart and Rogoff) total expense ratio (TER), 2nd transaction taxes, 2nd, 3rd transfer charges turnover costs unit trusts, 2nd United Kingdom bank deposits and credit guarantee equities government bonds credit rating earnings from sterling investors United States corporate bonds, 2nd Dow Jones index, 2nd equity market, 2nd risk, 2nd, 3rd and total expense ratio government bonds credit ratings dollar investors earnings from versus property investment sub-prime housing market, 2nd, 3rd Vanguard, 2nd, 3rd, 4th, 5th, 6th FTSE AllShare index venture capital, 2nd Virgin FTSE All-Share Tracker fund volatility and financial planning predicting future Waal, Edmund de The Hare with Amber Eyes world equities adjusting the rational portfolio alternative weightings defining diversification benefits, 2nd, 3rd ETFs expected returns and financial planning 50/50 split with minimal risk assets, 2nd, 3rd investment allocation and high risk preferences indices liquidity of market value and minimal risk assets, 2nd overweighing ‘home’ equities and portfolio theory and the rational portfolio, 2nd, 3rd, 4th allocations risk preferences real return expectations US market, 2nd ‘Investing Demystified delivers, with great clarity and lucidity, the best possible advice you can get when it comes to personal investments and financial planning.’

You just need to understand how to look for them and how to put them together. Investing Demystified offers invaluable help in doing this.’ Paul Amery, Index Universe ‘In a world complicated by an over-zealous finance industry, it is refreshing to read Investing Demystified, a great and easy read that reveals the simple truth behind successful investments.’ Tets Ishikawa, author of How I Caused the Credit Crunch ‘Doing something is better than doing nothing if you want to retire in comfort. But what can we do if we don’t have an edge in the market? Lars Kroijer takes a refreshing look at how everyday people can improve their fortunes by taking some simple investing steps. But if you want to do better than that, then you will need to find yourself an edge.’ Dr David Kuo, The Motley Fool ‘In a world of the next big investment fad, Lars Kroijer takes us back to the essence of smart investing: diversify, diversify, diversify.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

While recognizing that historical credit spreads overstate the expected return advantage, these spreads are a natural starting point for assessing corporates’ likely expected return advantage over governments. Figure 10.6 displays spread histories dating back to 1926 to show that Great Depression era spreads have still not been matched or exceeded even during the stagflationary recessions between 1973 and 1982 or during the 2008 Credit Crunch. I include a recession “dummy” variable (recessions are shaded) to highlight the strong countercyclicality in spreads. While Baa–Aaa and Aaa–Treasury spreads move together, lower rated bonds (as shown by the Baa–Aaa spread) exhibit more pronounced countercyclical variation than top-rated bonds. Figure 10.6. Long-dated credit spreads since the 1920s. Sources: Bloomberg, Moody’s, Ibbotson Associates (Morningstar), Federal Reserve Board, National Bureau of Economic Analysis.

The average realized excess return of MBSs between 1990 and 2009 is 40% of the average OAS level (28 bp vs. 69 bp). This realized performance is clearly disappointing. Some performance attribution gymnastics are needed to understand why. The downtrend in yields and unexpectedly efficient refinancings, some increase in volatilities, and a sharp widening of swap spreads and MBS spreads during the Credit Crunch have all contributed. Arora–Heike–Mattu propose a five-factor empirical model to explain the monthly excess returns on MBSs over Treasuries. The factors include realized and implied volatilities, swap–Treasury spread changes (a liquidity proxy), prepayment surprises, and spread directionality. All factors except prepayment risk should be hedgeable and there is unresolved debate whether prepayment model uncertainty (i.e., the possibility of model error) should be or is priced as a systematic risk factor.

The contrast between the empirical success of cross-country carry trading and lesser long-run profits in within-country carry trading—notably in credits or securitized debt—is striking. I consider the convenience of carry trading and the degree of systematic risk as alternative explanations:• One reason for the poor performance of credit carry is the headwind nature of the sample period (with some net widening of credit spreads between December 1992 and December 2009). Even if we study performance histories ending before the 2007–2008 Credit Crunch, however, long-run excess returns to credit carry are modest. I conjecture that corporate bonds have been the obvious easy way to chase yield, and as a result have tended to be structurally overpriced. Although the currency carry strategy did become overcrowded a few years ago, it was evident for a long time that less speculative capital was allocated to cross-country trading than to within-country opportunities


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

C1. 16 Alan Katz and Ian Katz, “Greenspan Slept as Off-Balance Sheet Toxic Debt Evaded Scrutiny,” Bloomberg News, Oct. 30, 2008. 17 Mark Pitman, “Evil Wall Street Exports Boomed with Fools Born to Buy Debt,” Bloomberg News, October 27, 2008. 18 “Fed Chief Warns of Housing Froth,” Washington Post, June 10, 2005. 19 Michael Lewis, “The End,” Portfolio, November 11, 2008. 20 Gretchen Morgenson, “How the Thundering Herd Faltered and Fell,” New York Times, November 9, 2008, page BU 1. 21 American Theocracy, p. 296. 22 Ibid, p. 292. 23 Katz and Katz, “Greenspan Slept.” 24 Pitman, “Evil Wall Street Exports Boomed.” 25 “A Quiet Windfall for U.S. Banks,” Washington Post, November 10, 2008. 26 “In Praise of a Rocky Transition,” The Nation, December 1, 2008. 27 “Truth or Consequences,” Barron’s, December 29, 2008, and “Credit Crunch: What Credit Crunch?” Reuters, December 11, 2008. 28 “Fed Official: Bank Mergers Must Not Lead to ‘Financial Oligarchy,’ ” Bloomberg News, October 13, 2008. 29 “Up and Down Wall Street,” Barron’s, December 8, 2008. 30 William E. Leuchtenburg, “George, You Were No Herbert Hoover,” The New Republic, October 22, 2008. 31 “Mr. Risk Goes to Washington,” BusinessWeek, June 2, 2006. 32 “Bernanke Is Fighting the Last War,” Wall Street Journal, October 18, 2008. 33 Ibid. 34 “Wall Street Bailout Questioned at Fed Event,” Associated Press, August 23, 2008. 35 Gretchen Morgenson, “What a Deal: Trash for Treasuries,” New York Times, May 18, 2008. 36 Ibid., and Gretchen Morgenson, “Regulators in Need of Rehab,” New York Times, October 12, 2008. 37 “A Chaotic Sunday Opens Wall Street’s Week” and “AIG Scrambles to Raise Cash, Talks to Fed,” Wall Street Journal, September 15, 2008, p.

There he had been an enthusiast of Bush economic policies, including upper-bracket tax cuts, Social Security privatization, “securitization” of assets, and “safe” financial derivatives. No expert on exotic finance, he was an academic specialist in monetary policy—a man held out to Congress and the public as understanding how to prevent or ameliorate a great depression. The Fed, in Bernanke’s view, would have to expand the money supply or extend liquidity enough to overcome any credit crunch. As a card-carrying monetarist, he also insisted that no meaningful inflation was building in 2007 and early 2008 even though global commodity price indexes had begun to soar. Thus, and without foresight, did a hapless George W. Bush assemble his last economic team. They would pick up where the original bubble-blower, Alan Greenspan, Fed Chairman between 1987 and early 2006, had left off. Together, the two would steer U.S. policy toward a blend of experimentation and panic—an outcome not unlike Hoover’s, albeit reached through new biases and myopia.

Andrews, “Fed and Regulators Shrugged as the Subprime Crisis Spread,” New York Times, December 18, 2007. 17 “Credit Turmoil ‘Has Hallmarks of Bank Run,’ ” Financial Times, September 2, 2007. 18 Mohamed El-Erian, “In the New Liquidity Factories, Buyers Must Still Beware,” Financial Times, March 22, 2007. 19 David W. Tice, “Report to Shareholders,” Prudent Bear Funds, Inc., April 30, 2007. 20 Satyajit Das, “Credit Crunch: The New Diet Snack of Financial Markets,” www.prudentbear.com, September 5, 2007. 21 Bill Gross, “What Do They Know?”Investment Outlook, www.pimco.com, October 2007. 22 “Testimony of Robert J. Shiller Before the Joint Economic Committee of Congress,” Washington, D.C., September 19, 2007, pp. 1-2. 23 “The R-Word Surfaces on Wall Street,” Financial Times, September 10, 2007. 24 Ibid. 25 “A New Light on Housing’s Role in U.S.


pages: 385 words: 118,314

Cities Are Good for You: The Genius of the Metropolis by Leo Hollis

Airbnb, banking crisis, Berlin Wall, Boris Johnson, Broken windows theory, Buckminster Fuller, call centre, car-free, carbon footprint, cellular automata, clean water, cloud computing, complexity theory, congestion charging, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, Deng Xiaoping, digital map, East Village, Edward Glaeser, Enrique Peñalosa, Firefox, Frank Gehry, Geoffrey West, Santa Fe Institute, Gini coefficient, Google Earth, Guggenheim Bilbao, haute couture, Hernando de Soto, housing crisis, illegal immigration, income inequality, informal economy, Internet of things, invisible hand, Jane Jacobs, Kickstarter, knowledge economy, knowledge worker, Long Term Capital Management, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, Masdar, mass immigration, megacity, negative equity, new economy, New Urbanism, Occupy movement, openstreetmap, packet switching, Panopticon Jeremy Bentham, place-making, Ray Oldenburg, Richard Florida, sharing economy, Silicon Valley, Skype, smart cities, smart grid, spice trade, Steve Jobs, technoutopianism, the built environment, The Chicago School, The Death and Life of Great American Cities, The Great Good Place, the High Line, The Spirit Level, The Wisdom of Crowds, Thomas Malthus, trade route, traveling salesman, urban planning, urban renewal, urban sprawl, walkable city, white flight, Y2K, Yom Kippur War

As John Howkins, who coined the phrase ‘creative economy’, states: ‘Creativity is not new and neither is economics, but what is new is the nature and the extent of the relationship between creativity and economics.’8 In 2001 Howkins predicted that the creativity business was worth $2.2 trillion worldwide and was set to grow 5 per cent a year; he was almost right. This sector was the one area of the global economy that was least affected by the credit crunch; in 2008 it generated $592 billion, more than double its turnover in 2002, which suggests an annual growth of 14 per cent. The knowledge economy forces us to think again about how we work, and what we do; it could also allow us to think about the city anew. According to Richard Florida, the extent of the creative classes is having a profound impact on the success of cities. Using the broadest definition of the knowledge economy as possible – ‘science and technology, arts and design, entertainment and media, law, finance, management, healthcare and education’9 – Florida shows that since the decline of industry in the west, this new class of worker has risen at a gallop: 5 per cent of all employment in 1900, 10 per cent in 1950, 15 per cent in 1980 and more than 30 per cent by 2005.

They are tolerant of people who are different from themselves and believe that dealing with strangers opens up opportunities more than it entails risks.’8 But it seems increasingly difficult to expect to find trust within our everyday lives; this generalised trust has, for some reason, plummeted in the past decades. Most of the time the consequences are not as dire as the death of Trayvon Martin but the effects are as invidious. We have become accustomed to expect people to act selfishly, and as a result do so ourselves. This loss of trust has consequences which we can find all around us. In 2011, following the collapse of the banks in the aftermath of the credit crunch, the revelations of MPs’ expenses in the UK, as well as the phone-hacking scandal that forced News International to admit that it had illegally listened into thousands of private messages, Ipsos MORI conducted a poll on behalf of the UK Office of National Statistics to measure levels of trust within the major professions. As expected, it made for grim reading. In response to the question ‘Would you tell me whether you generally trust them to tell the truth or not?’

In particular, he stressed that the right to be part of the city should not solely be determined by the ownership of property alone. During the housing boom, he argued, it was only the desires of homeowners that mattered. As a result, those who do not own property, or those who cannot afford a deposit, have no stake in the city. In response Harvey offered a simple solution that could be found in the ruins of the housing collapse itself. Following the 2008 credit crunch where so many homes were foreclosed because of the owners’ inability to pay the mortgage, families lost everything and were forced to move away while the bank got little back on their investment. But this makes little sense – it ruins families, destroys communities and weakens cities. If the banks and municipalities were able to rethink this situation, a more hopeful future was possible. For example, the city could buy the property from the banks at a good price, creating manageable housing cooperatives, guaranteeing that families can stay where they are and maintain their participation in the life of the city.35 Consider this scenario in the case of Detroit, which today faces the crisis of ‘right-sizing’ as a result of the death of communities driven away by foreclosures, leaving large tracts of the city empty and ripe for decay.


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Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

asset-backed security, bank run, Basel III, beat the dealer, Big bang: deregulation of the City of London, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial innovation, G4S, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk

On 9 August 2007, as RBS raced to buy ABN Amro and the CDO business melted down, the ‘credit crunch’ began properly. That day Robert Peston, on his BBC blog, diagnosed the decision of the French bank BNP Paribas to suspend three of its investment funds as a pivotal moment.10 The funds contained sub-prime material that it was impossible to value, meaning it was impossible to sell. It was junk. A freeze began in the funding markets, with lenders uncertain whom to trust. Who held this rubbish and in what quantities? It was suddenly, frighteningly, unclear. In such circumstances those banks such as RBS needing to fund themselves with a lot of borrowing were going to find the cost going up. By mid-September the credit crunch spread to the British high street and there were queues outside branches of Northern Rock, as an old-fashioned bank run got under way.

The RBS chief executive was uptight and agitated. The liquidity problem was making life very difficult, he explained to Darling, and the Governor of the Bank of England had to do something or little Northern Rock would be the least of their problems. But Mervyn King would not listen, said Goodwin. Darling knew this to be true, as he had had similar conversations with King since the beginning of the credit crunch. King’s view was that the banks had got themselves into this mess and that it would introduce ‘moral hazard’ and ‘rewards for failure’ if the taxpayer were to start bailing them out. It was a fine academic theory, Darling felt, but not much use if the banking system ran out of money in the middle of a panic and then crashed the economy. Darling was also curious to know why Goodwin had gone ahead and paid so much for ABN Amro, when the signs were that it was overvalued at the top of the market.

., ref 1, ref 2, ref 3 Bush, Laura, ref 1 Butler, Lord, ref 1 Cable, Vince, ref 1 Caledonia, naming of, ref 1 Cameron, Donald, ref 1 Cameron, Johnny, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 passim, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9 passim, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 and ABN Amro, ref 1, ref 2, ref 3, ref 4 FG stands by, ref 1 FSA investigates, ref 1, ref 2 at Gogarburn opening, ref 1 and hedging exposure, ref 1 and worsening liquidity situation, ref 1 Camerons of Locheal, ref 1, ref 2, ref 3, ref 4 Campbell, Archibald, see Ilay, Earl of Campbell, John, ref 1, ref 2, ref 3 Canary Wharf, ref 1 Caplan, Rick, ref 1, ref 2, ref 3, ref 4, ref 5 Carpenter, Ben, ref 1, ref 2, ref 3 Charles, Prince of Wales, ref 1, ref 2, ref 3 Charter One, ref 1, ref 2 Chase, ref 1 Chirac, Jacques, ref 1 Chisholm, Andy, ref 1 Churchill, ref 1, ref 2 Churchill, Winston, ref 1 Cicutto, Frank, ref 1, ref 2, ref 3 Citibank, ref 1 Citigroup, ref 1, ref 2, ref 3 Citizens Bank, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12 and Mellon, ref 1 new CEO for, ref 1 City of Glasgow Bank, ref 1 City of London, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12, ref 13, ref 14, ref 15 modernisation of, ref 1 see also banks Clarke, Charles, ref 1 Clarke, Ken, ref 1 Clinton, Bill, ref 1, ref 2, ref 3 Clydesdale Bank, ref 1, ref 2, ref 3, ref 4, ref 5 away days of, ref 1 celebrations at, as FG leaves, ref 1 FG becomes CEO of, ref 1 Cochrane, Alan, ref 1 Cole-Hamilton, Richard, ref 1 Coleman, David, ref 1, ref 2 collateralised debt obligations (CDOs), ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11 index of, ref 1 varieties of, ref 1 see also sub-prime mortgages Commonwealth Bancorp, ref 1 Community Bancorp, ref 1 Compagnie Bancaire, ref 1 Company of Scotland, ref 1 founding of, ref 1 ‘Competition in UK Banking’, ref 1 Connolly, John, ref 1, ref 2, ref 3, ref 4, ref 5 ConocoPhillips, ref 1 Conservatives, see Tories consumer debt, ref 1 Conti, Tom, ref 1 Cooper, Yvette, ref 1, ref 2 Corbett, R.Y., ref 1 Cornwall, Duchess of, ref 1 Countrywide Financial, ref 1 County NatWest, ref 1, ref 2 Coutts, ref 1, ref 2, ref 3, ref 4, ref 5 Cox, Archie, ref 1 credit crunch, see financial crisis credit default swaps (CDSs), ref 1 Crosby, James, ref 1, ref 2, ref 3, ref 4, ref 5 knighthood lost by, ref 1 Crowe, Brian, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12 and CDOs, ref 1 and hedging exposure, ref 1 moved to ABN Amro, ref 1 ordination of, ref 1, ref 2 withdrawn from ABN Amro, ref 1 and worsening liquidity situation, ref 1 Crowe, Russell, ref 1 Cruickshank, Don, ref 1 Crutchley, John-Paul, ref 1 Cryan, John, ref 1, ref 2 Cummings, Peter, FSA fines, ref 1 Cummins, John, ref 1 Currie, Jim, ref 1 Daily Telegraph, ref 1, ref 2 Daniels, Eric, ref 1 Darien Scheme, ref 1, ref 2, ref 3, ref 4 Caledonia emerges from, ref 1 Darling, Alistair, ref 1, ref 2 and bank bailouts, ref 1, ref 2, ref 3 banks’ CEOs meet with, ref 1 and Brown–George spat, ref 1 Brown joint press conference with, ref 1 at ECOFIN meeting, ref 1 and FG knighthood, ref 1 and FG pension, ref 1, ref 2, ref 3 FSA and BoE meet with, ref 1 at Gogarburn opening, ref 1 Goodwin meets (2007), ref 1 King follows plan of, ref 1 King relationships with, ref 1 memoirs of, ref 1 MPs briefed on financial crisis by, ref 1 RBS bailout announced by, ref 1, ref 2 and RBS collapse, ref 1 Treasury meeting called by, ref 1 UK banks supported by, ref 1 Darroch, Kim, ref 1 Davidson, Joanna, ref 1, ref 2 Davies, Howard, ref 1, ref 2 Davos, ref 1 de la Renta, Oscar, ref 1 deficit, sharp rise in, ref 1 Deloitte & Touche, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 Deutsche Bank, ref 1, ref 2 Dewar, Donald, ref 1 Diamond, Bob, ref 1, ref 2, ref 3 forced out of post, ref 1 Dickinson, Alan, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12, ref 13 Dime Bancorp, ref 1 Direct Line, ref 1, ref 2, ref 3 District Bank, ref 1 Dixon Motors, ref 1 Dixon, Paul, ref 1 Dixon, Simon, ref 1 dotcom bubble, ref 1 Dow Jones, ref 1 Drake-Brockman, Symon, ref 1 Dresdner Kleinwort Wasserstein, ref 1, ref 2 ‘Drivers for Growth’ conference, ref 1 Drummond Bank, ref 1, ref 2, ref 3 Dundas, Lawrence, ref 1 Dundee Banking Company, ref 1 Dutch Central Bank, ref 1 Duthie, Robin, ref 1 East India Company, ref 1 Economic and Financial Affairs Council (ECOFIN), ref 1, ref 2 Economist, ref 1, ref 2 Eden, James, ref 1, ref 2 Elizabeth II, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 emerging economies, ref 1 Emirates Stadium, ref 1 Enron, ref 1, ref 2 Equitable Life, ref 1 Equivalent Company, ref 1 Ernst & Young, ref 1 euro, see single currency Exchange Rate Mechanism (ERM), ref 1, ref 2 ‘failure of the Royal Bank of Scotland, The’ (FSA), ref 1, ref 2 Fastow, Andy, ref 1 Federal Reserve, ref 1, ref 2, ref 3 Ferguson, Adam, ref 1 Ferguson, Alex, ref 1 Ferguson, William, ref 1 Ferrovial, ref 1 Fidelity, ref 1 Fildes, Christopher, ref 1 Financial Conduct Authority., ref 1 financial crisis: beginning of, ref 1 Darling updates Commons on, ref 1 government spending at start of, ref 1 insurers crack under weight of, ref 1 recessions follow, ref 1 spreads to UK high street, ref 1 studies and reports of, ref 1 Financial Services Authority (FSA), ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9, ref 10, ref 11, ref 12 ‘Arrow’ reports of, ref 1 and auditors, ref 1 and RBS collapse, ref 1 RBS on watch-list of, ref 1 self-investigation by, ref 1 successors to, ref 1 and tripartite regulation, ref 1, ref 2, ref 3, ref 4, ref 5; see also Bank of England Financial Times, ref 1, ref 2 First Active, ref 1 Fish, Larry, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9 chairs RBS Americas, ref 1 criticised, ref 1 pension of, ref 1 Fisher, Mark, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7 at Gogarburn opening, ref 1 moved to ABN Amro, ref 1 Fitch Ratings, ref 1, ref 2 Fleming, Ian, ref 1 Fletcher, Andrew, ref 1 Forbes, ref 1 foreign exchange, ref 1, ref 2 Formula 1, ref 1, ref 2 Fortis, ref 1, ref 2, ref 3 Fountain Workshop, ref 1 Franklyn Resources, ref 1 Freshfields, ref 1 Friedrich, Bill, ref 1, ref 2 Fuld, Dick, ref 1 Gaddafi, Muammar, ref 1 Gartmore, ref 1 GE, ref 1 George II, ref 1 George, Eddie, ref 1, ref 2, ref 3, ref 4 Gibson, Mel, ref 1, ref 2 Gieve, John, ref 1 Giles, Chris, ref 1 Gladiator, ref 1 Glass–Steagall Act, ref 1 global financial crisis, see financial crisis Global Transaction Services, ref 1, ref 2 Glyn, Mills & Co., ref 1, ref 2 Goldman Sachs, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6, ref 7, ref 8, ref 9 Goodwin, Andrew (brother), ref 1 Goodwin, Dale (sister), ref 1 Goodwin, Fred: affair of, ref 1, ref 2, ref 3, ref 4 after RBS, ref 1 and away days, ref 1, ref 2 bailout terms heard by, ref 1 Barclays hated by, ref 1 becomes Clydesdale CEO, ref 1 becomes RBS CEO, ref 1 birth of, ref 1 Brown compared to, ref 1 Brown likes, ref 1 Bush dinner guest, ref 1 and car dealership, ref 1 CDO presentation by, ref 1 at CEOs–Darling meeting, ref 1 at CEOs meeting, ref 1 Chequers invitation to, ref 1 ‘classic bully’, ref 1 cleanliness campaigns of, ref 1 at Clydesdale, see Clydesdale Bank colleagues testify to abilities of, ref 1 cult status of, ref 1 at Darling 2008 meeting, ref 1 Darling visited by (2007), ref 1 document criticises management of, ref 1 early life of, ref 1, ref 2 extraordinary general meeting appearance of, ref 1 face-to-face firing disliked by, ref 1, ref 2, ref 3 first job of, ref 1 fixation on detail by, ref 1, ref 2, ref 3, ref 4, ref 5, ref 6 and Forbes, ref 1 ‘Fred the Shred’ nickname of, ref 1, ref 2, ref 3, ref 4 and FSA, ref 1, ref 2 at Gogarburn opening, ref 1 Harvard study on, ref 1, ref 2 ‘has shut out the world’, ref 1 Hester view of, ref 1 ‘I want to be bigger than J.


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Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Albert Einstein, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, if you build it, they will come, income inequality, Isaac Newton, job automation, Long Term Capital Management, margin call, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, VA Linux, Y2K, yield curve

In feeding frenzies caused by excess availability of funds, recognizing and resisting this trend seems to be beyond the ability of the majority of market participants. This is one of the many reasons why the aftermath of an overly generous capital market includes losses, economic contraction, and a subsequent unwillingness to lend. The bottom line of all of the above is that generous credit markets usually are associated with elevated asset prices and subsequent losses, while credit crunches produce bargain-basement prices and great profit opportunities. (“Open and Shut”) ∾ The ultimate purpose of this book isn’t to help you understand cycles after they’ve taken place, like the Global Financial Crisis as described at such great length. Rather it is to enable you to sense where we stand in the various cycles in real time, and thus to take the appropriate action. The key to dealing with the credit cycle lies in recognizing that it reaches its apex when things have been going well for a while, news has been good, risk aversion is low, and investors are eager.

This is the unwise extension of credit. This process, as noted earlier, “stacks the logs in the fireplace” for the next bonfire. But that’s only the first half the process. Even after the fuel for a bonfire has been assembled, there won’t be a conflagration until the second ingredient arrives: an igniter. It usually comes in the form of a recession, which causes corporate profits to decline. This is often accompanied by a credit crunch—the slamming shut of the credit window—such that existing debt can’t be refinanced and goes into default instead. And often conditions are exacerbated by exogenous events that sap confidence and damage the economy and the financial markets. In 1990 these consisted of: the Gulf War, which was set off by the Iraqi invasion of Kuwait; the bankruptcy of many of the prominent, highly levered buyouts of the 1980s; and the imprisonment of Michael Milken (the principal investment banker behind high yield bonds) and the collapse of Drexel Burnham (Milken’s employer and the investment bank most closely associated with high yield bonds).

See Global Financial Crisis of 2007–08 Crutchley, John- Paul, 124 cycles, 3 causation and progression, 30–32, 283, 297–98 cessation of, 178, 180, 285–88, 290 cycle of success, 270–71 definitions of, 40–41 elements of, 18–19, 25–27, 208–10 excess and corrections, 29, 85–86, 293, 299, 307–9 interaction of, 32–33, 167, 186–89, 199–201 listening to, 3–5, 309 major cycles, 267 midpoint and aberrations, 24–29, 266, 296–97 regularity and irregularity, 40–42, 172, 217, 244–45 timing and extent, 24, 39, 145, 282, 295–96 understanding, 17, 22–24, 118, 239, 314–15 See also credit cycle “Death of Equities, The,” 49, 277–78 D Demosthenes, 222, 227, 284 Dimson, Elroy, 13–14, 239 distressed debt investments, 161–62 credit crunch and, 164–66 role of high yield bonds, 163–64 understanding opportunities, 163, 166–67, 241–42, 282 Dow 36,000 (Glassman & Hassett), 219 Dowd, Timothy, 255 Drexel Burnham, 165 Drunkard’s Walk, The (Mlodinow), 42 E economic cycles, 46–47, 64–66, 167 long and short term, 29–30 repetition and fluctuation, 24–25, 97, 135 short-term, 47, 58, 61 economic forecasts, 61–63, 208 Economics and Portfolio Strategy, 13 Economist, The, 141 Eichholtz, Piet, 182 Einstein, Albert, 36 Ellis, Charlie, 5 emotion/psychology, 3, 31, 34, 37, 167 “bubble” and “crash,” 196–98 contrarianism, 133, 135, 142, 234, 244, 301–4 credulousness and skepticism, 90–91, 133, 227 definition of insanity, 36 effect on economic cycles, 83–86, 97–99, 211, 228, 289–92, 298–299 emotionalism or objectivity, 95–96 euphoria and depression, 89, 94, 99, 125, 211, 222, 305, 312 extremes, 113–16, 265 fear, effect on consumption, 59 fear and/or greed, 87–89, 92–93, 114, 221–22, 233–35, 303 humility and confidence, 271–73 investment psychology, 40–42, 93–94, 186–88, 190–91, 214–15, 244 optimism and pessimism, 89–90, 133, 299–301, 302–3 “silver bullet,” 227 F falling knives, 8, 156, 202, 235–36 Federal Reserve Bank, 68, 119, 180, 231 Feynman, Richard, 289 Financial Times, 122, 124 Frank, Barney, 151 Friedman, Milton, 62 fundamentals, 185–87, 189, 209 valuation metrics, 211 future prediction macro prediction, 10 opinions and likelihood, 15, 102, 208, 263–65 qualitative awareness, 214–15 South Sea Bubble, 195–96 G Galbraith, John Kenneth, 5, 34, 63, 125, 178–79, 222 Geithner, Timothy, 155, 239, 287 Glass-Steagall Act, 120, 128 Global Financial Crisis of 2007–08, 36, 59, 119–22, 127–32, 147–57, 180, 233 bear market stages, 193–94 effect on real estate market, 177 lessons from, 239–40 Treasury guarantee of commercial paper, 139–40, 155, 233 Goldman, William, 43 Goldman Sachs, 155 government deficits and national debt, 71–73 economic management tools, 71–73 Graduate School of Business, University of Chicago, 103 Graham, Ben, 189 Greenblatt, Joel, 5 Greenspan, Alan, 217 gross domestic product (GDP) consumption, 59–60 definition of, 47 recession (negative growth), 48 See also productivity H high yield bonds, 44, 106, 108, 131–32, 157, 281–82 history and memory, 34, 42, 178 Arab oil embargo, 292 blue chips or small-capitalization, 274 brevity of, 222 convertible arbitrage, 275 growth and tech stocks, 274 mortgage defaults, 229 one house in Amsterdam, 181–82 permanent prosperity, 288–89 poor performance of stocks, 276–77 projections of the future, 286–87, 311–12 History of the Peloponnesian War (Thucydides), 37–38 Hoover, Herbert, 287 I intrinsic value, 11, 92, 133, 194, 200, 205 when to buy, 237 investing aggressive or defensive, 248, 250–53, 259–60, 295 asset selection, 248, 255–59 bargains or popularity, 273–78 capitulation, 34–35, 194–95 cycle positioning, 248, 250, 252, 254–55, 312–14 definition of, 101–2, 262 fluctuation in, 186–87 growth stocks, 197–98 long or short securities sales, 8 market cycle, return, 204–6 overpayment, 144, 169, 179 philosophy, 4–5, 197, 207 security analysis and value investing, 11 skill or luck, 249, 253–54, 258–59, 272–73 “weighing machine,” 189 See also fundamentals; psychology investment indices, 232t, 238t “it’s different this time,” 37, 197–99 J Jain, Ajit, 5, 276 Janjigian, Jahan, 280 junk bonds.


pages: 312 words: 83,998

Testosterone Rex: Myths of Sex, Science, and Society by Cordelia Fine

assortative mating, Cass Sunstein, credit crunch, Donald Trump, Downton Abbey, Drosophila, epigenetics, experimental economics, gender pay gap, George Akerlof, glass ceiling, helicopter parent, longitudinal study, meta analysis, meta-analysis, phenotype, publication bias, risk tolerance

Probability values and human values in evaluating single-sex education. Sex Roles, 72(9–10), 401–426. Quoted on p. 415. CHAPTER 7: THE MYTH OF THE LEHMAN SISTERS 1. Herbert, J. (2015). Testosterone: Sex, power, and the will to win. Oxford, UK: Oxford University Press. Quoted on pp. 116–118, reference removed. 2. Sunderland, R. (January 18, 2009). The real victims of this credit crunch? Women. The Observer. Retrieved from http://www.theguardian.com/lifeandstyle/2009/jan/18/women-credit-crunch-ruth-sunderland on January 15, 2015. 3. Prügl, E. (2012). “If Lehman Brothers had been Lehman Sisters …”: Gender and myth in the aftermath of the financial crisis. International Political Sociology, 6(1), 21–35. Quoted on p. 21. 4. John Coates, interviewed in Adams, T. (June 18, 2011). Testosterone and high finance do not mix: So bring on the women.

The nature of trading incorporates all the features for which young males are biologically adapted… . The whole set-up seems to have been designed for young men. All the actions of testosterone are echoed by the qualities of a successful trader. It does seem remarkable that the artificial world of financial trading should so suit the innate characteristics of young males. —JOE HERBERT, Testosterone1 “IF LEHMAN BROTHERS HAD BEEN LEHMAN SISTERS, RUN BY WOMEN instead of men, would the credit crunch have happened?”2 This question, posed by a Guardian business editor, triggered a “frenzied engagement in the international media with the gender question in international finance.”3 Some commentators, drawing on research reporting links between testosterone levels and risk taking, argued an urgent need for a greater “diversity of hormones”:4 more women (and older men) would make for less testosterone.


pages: 430 words: 140,405

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson

asset-backed security, bank run, business cycle, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk

Here he was, the head of fixed income, the only expert on the subject on the entire executive committee, and his recommendations to protect the firm were being resolutely ignored. Mike warned them of the coming credit crunch. He warned them of the lethal danger of that $15 trillion to $18 trillion of leverage out there, the credit derivatives issued between 2001 and 2007. It was a paper phantom that Lehman had done more than its fair share to create. At one meeting he pounded the table and shouted, “This is not going to be just a credit crunch. This is going to be the granddaddy of all credit crunches. And you’re trying to buy into a giant global asset bubble.” This took place in the middle of a Dick Fuld–inspired attempt to buy yet another inflated hedge fund. And again Mike voted no. He voted no—no—no, over and over.

There was no possibility of anyone securing a loan for anything, especially the investment banks. The short-term paper market ceased to exist. The safest, most solid banks in the world were unable to borrow money. This was not just a difficult time, with banks stopping to catch their breath. This was a meltdown, and commerce in the United States was rapidly stalling. Hank Paulson was facing the beginning of the global credit crunch, the very same one Mike Gelband had warned him about on the telephone from Dick Fuld’s office seventeen months before. Just then Hank was gazing with horror at one of those mysterious Wall Street insider’s charts known in the trade as the TED spread, a measure that perceived credit risk in the general economy. It’s the difference between the interest rates for three-month U.S. Treasury contracts—risk-free T-bills paying roughly 1.5 percent—and the interest banks charge each other for short-term loans, LIBOR, around 2 percent.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

bank run, Blythe Masters, Bonfire of the Vanities, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, G4S, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

Morgan Stanley’s CEO, John Mack, told shareholders that the subprime crisis was in the eighth or ninth inning. Goldman Sachs’s CEO, Lloyd Blankfein, ventured the opinion that the markets were in the third quarter of the game. Dimon himself was optimistic that the credit crunch might be easing, but he was still disturbed by the weakening economy: “I told my investment banking friends, ‘Lucky for you, you’re probably through a big part of your pain. It’s continuing for some of us with real credit exposures to consumers.’” Although Dimon was right on that last point, all three were wrong about the credit crunch. By the summer, Lehman and Merrill were fighting for their lives. Lehman Brothers got in a pitched public battle with the hedge fund manager David Einhorn, who aggressively shorted the company’s shares, convinced that its accounting couldn’t be trusted.

It wasn’t only Commercial Credit’s customer base that made its business markedly different from that of most banks. Whereas typical banks borrowed money over short periods and lent it over long ones—making them extremely vulnerable to rising interest rates—Commercial Credit lent over short periods while borrowing at long. The advantage of this model was that the company didn’t have to worry about a credit crunch. Its disadvantage was that if rates fell and Commercial Credit was already locked into long-term borrowings, it was vulnerable to being unable to reinvest those borrowings at their longterm cost of capital. In any event, it was a markedly different beast from a neighborhood branch banking business. Not long after the issue of Fortune with Loomis’s article in it hit the newsstands, Weill received a call from Bob Volland, the treasurer at Commercial Credit.

The stock market itself had stabilized, but the world of high finance had a new, much more ominous problem on its hands. The availability of short-term credit had dried up overnight. When France’s biggest bank, BNP Paribas, halted withdrawals of three funds on August 8, because it couldn’t “fairly” value their holdings, panic set in. Despite a $130 billion injection of funds into the market on August 10 by the European Central Bank, a credit crunch had begun in which no one entrusted his money to anyone else anymore, and the normally fluid overnight lending markets evaporated. The Latin root of “credit” is credere, “to believe.” Belief had been obliterated. What comes next is common to all historical financial panics. Individuals who act rationally (i.e., they try to sell, in order to protect their own interests) have an aggregate effect that is ultimately irrational (i.e., with all sellers and no buyers, assets that do have an inherent value are nevertheless deemed worthless).


pages: 309 words: 96,434

Ground Control: Fear and Happiness in the Twenty First Century City by Anna Minton

Albert Einstein, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Broken windows theory, call centre, crack epidemic, credit crunch, deindustrialization, East Village, energy security, Francis Fukuyama: the end of history, ghettoisation, hiring and firing, housing crisis, illegal immigration, invisible hand, Jane Jacobs, Jaron Lanier, Kickstarter, moral panic, new economy, New Urbanism, race to the bottom, rent control, Richard Florida, Right to Buy, Silicon Valley, Steven Pinker, the built environment, The Death and Life of Great American Cities, The Spirit Level, trickle-down economics, University of East Anglia, urban decay, urban renewal, white flight, white picket fence, World Values Survey, young professional

They were also exceptional places – areas where business modelled the area in its own image in what are, after all, finance districts. Now, a generation later, what began specifically to serve the needs of business has become the standard model for the creation of every new place in towns and cities across the country. Previously, the government and local councils ‘owned’ the city on behalf of us, the people. Now more and more of the city is owned by investors, and its central purpose is profit. The credit crunch may have slowed the sell-off, but every former inner-city industrial area is trying to emulate this model, from the waterfronts of Salford Quays and Cardiff to the controversial demolition programmes of the old industrial northern cities. This is the architecture of post-industrial New Labour, a government which witnessed the largest amount of construction in Britain since the post-war period.

A microcosm of what was later rolled out with Pathfinder across the north, Going for Growth was Newcastle city council’s twenty-year strategy to reverse population loss by demolishing thousands of homes and ‘remodelling’ parts of the city – the ‘inner core’, which also happened to have stunning riverside views – into ‘urban villages’, which would attract the middle-income people leaving the city for the suburbs and the green belt. Today there are huge swathes of green areas where hundreds of homes once were, with new plans for Scotswood, in the West End, stalled. The controversial proposals were hit when the Labour council failed to be re-elected in 2004 and were dealt a further blow by the credit crunch. In an echo of the conversations I later had in Derker and in Liverpool, Rose McCourt, from Save our Scotswood, the local campaign protesting against Going for Growth, had described to me how there had been no consultation with residents about the plans to demolish their homes. ‘We first heard about Going for Growth with a phone call from the Newcastle Journal, when the reporter told us street by street which homes were earmarked for demolition.’

The consequence is that house building has crashed to its lowest level since 1945. It might seem reasonable to expect that as prices come down, the affordability crisis will ease, but because housing relies on mortgage finance, it doesn’t work like that. The economic downturn has led to falling house prices, but it has been nowhere near the level needed to allow people on lower incomes on to the housing ladder, particularly because the credit crunch means mortgages are much harder to obtain, leading to the lowest number of first-time buyers since records began. At the same time there have been bizarre and unexpected impacts on other parts of the housing market, the downturn colliding with the Pathfinder policy and the extreme shortage of housing. In hindsight, although no one predicted it, it seems obvious that homelessness and overcrowding would be the result of the demolition of so many thousands of homes, with the result that homelessness and waiting lists for housing have soared across the Pathfinder areas.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, beat the dealer, Bernie Madoff, Black-Scholes formula, British Empire, business cycle, buy and hold, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, Edward Thorp, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

As I am presenting this speech, I find myself giving this huge rant about how I believed there was going to be a global credit crunch. I said, “Asking people in the credit market how they feel is like asking someone who has jumped out of the 50th floor window how he feels as he passes floor 10. He is currently all right, but he is not going to be soon.” I heard myself coming out with this stream of consciousness. You didn’t plan this talk? I never plan talks. I went on and on about how the credit markets are ready to implode. There are about 200 people in the room. When I finished, there was dead silence. They really thought I had gone off the deep end. What did you predict was going to happen? I said there was going to be a total credit crunch, an equity market meltdown, and a flight to quality bonds. Had you adjusted your portfolio to reflect these expectations?

Had you adjusted your portfolio to reflect these expectations? No, it just dawned on me as I was giving the speech. I went back to the office and thought, $9 billion of stocks going into a credit crunch; I don’t want any of this crap. I got the fund manager into my office and said, “Look, August was not that great.” The strategy was down about 5 percent in August. I continued, “Honestly, I don’t believe in this anymore. There’s going to be a credit crunch, and the stuff you’ve got is going to be absolutely toxic. Let’s shut the strategy down.” Even though it was market neutral? Yes, because I was afraid of a lack of liquidity. Actually, August 2007 was the month when many statistical arbitrage and some market neutral funds got killed. A 5 percent loss for a market neutral fund that month is not really that extreme.

One thing that brings my blood to a boiling point is when an absolute return guy starts talking about his return relative to anything. My response was, “You are not relative to anything, my friend. You can’t be in the relative game just when it suits you and in the absolute game just when it suits you. You are in the absolute return game, and the fact that you use the word relative means that I don’t want you anymore.” What made you so convinced of an impending credit crunch? It was just the huge excess leverage in the system everywhere you looked, and when LIBOR jumped by 10 basis points, it was like seeing the first crack. What happened to LIBOR liquidity after that point? It went straight down. The LIBOR–OIS spread started to widen. What is the OIS? The OIS is the overnight index swap, which is a weighted average of overnight lending rates. The LIBOR-OIS spread reflects the illiquidity premium.


pages: 166 words: 49,639

Start It Up: Why Running Your Own Business Is Easier Than You Think by Luke Johnson

Albert Einstein, barriers to entry, Bernie Madoff, business cycle, collapse of Lehman Brothers, corporate governance, corporate social responsibility, creative destruction, credit crunch, Grace Hopper, happiness index / gross national happiness, high net worth, James Dyson, Jarndyce and Jarndyce, Jarndyce and Jarndyce, Kickstarter, mass immigration, mittelstand, Network effects, North Sea oil, Northern Rock, patent troll, plutocrats, Plutocrats, Ponzi scheme, profit motive, Ralph Waldo Emerson, Silicon Valley, software patent, stealth mode startup, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, traveling salesman, tulip mania, Vilfredo Pareto, wealth creators

More recently, the wild property and share speculation in Japan in the 1980s helped create the horrific pile of perhaps $1.5 trillion of bad loans in their banking system. Cheap money stimulated pointless over-investment, which has added to the woes. This reckless squandering has seen Japan’s economy steadily slither into virtual slump, record levels of unemployment, decimated share and property markets and a painful credit crunch. Chancellor’s book quotes the extraordinary story of Mrs Onoue, a lowly Osaka restaurateur who in the midst of the bubble was allowed to borrow a total of $23 billion to buy shares. Reportedly her portfolio was controlled by a ceramic toad, which was said to receive trading tips from the gods. It was quite a draw at her restaurant. One is constantly reminded that during periods of rapidly rising prosperity, people start behaving strangely and believing odd things.

In these circumstances, audit committee meetings are prolonged and tense because the auditors do not want to be sued if things go horribly wrong in six months, and no one wants to be prosecuted for misleading shareholders. And, for the indebted, there are bank covenants – promises made to the bank in return for obtaining a loan. Covenants keep finance directors up at night. My contacts at the major lenders tell me many hundreds of corporate borrowers breached covenants in the credit crunch, especially in sectors such as retailing, construction and capital goods. But the banks cannot call in all their debts and appoint administrators – the wave of insolvencies would drown them. Instead, banks raise rates and charge big fees. ‘This is no time for ease and comfort. It is the time to dare and endure’ Winston Churchill It becomes apparent that many leaders are really just suited to the good times.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” (Financial Crisis Inquiry Commission, January 2011), 150–53, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf. 29. “Global Credit Crunch: Deutsche Bank Head Calls for Government Help,” Der Spiegel, March 18, 2008, http://www.spiegel.de/international/business/global-credit-crunch-deutsche-bank-head-calls-for-government-help-a-542140.html. 30. Martin Wolf, “The Rescue of Bear Stearns Marks Liberalization’s Limit,” Financial Times, March 26, 2008, http://www.ft.com/intl/cms/s/0/8ced5202-fa94-11dc-aa46-000077b07658.html#axzz3ZBRa IhqN. 31. Alan Greenspan, “The Fed Is Blameless on the Property Bubble,” Financial Times, April 7, 2008, http://www.ft.com/intl/cms/s/0/81c05200-03f2-11dd-b28b-000077b07658.html#axzz 3ZBRaIhqN. 32.

The essence of the Ford presidency, Greenspan argued at a White House meeting on September 25, should be to reverse this self-reinforcing pattern of softheaded decisions.64 Other Ford advisers agreed in principle with Greenspan, but they worried that New York’s bankruptcy could trigger knock-on problems for the economy. Burns in particular predicted havoc. Banks were stuffed with New York bonds whose value would collapse, leaving banks too weak to lend; a credit crunch would follow. Even if the banks proved unexpectedly resilient, there were other possible channels of contagion. For one thing, a default in New York could destroy financial confidence in other American cities. Finding it hard to borrow, municipal governments would lay off police officers and teachers. As workers tightened their belts, business would fall off and the economy would spiral downward.65 It was not just Ford’s advisers who feared the consequences of Greenspan’s hard line.

With the White House and the Treasury likewise clamoring for lower interest rates, an uprising against Greenspan could not be ruled out. Volcker had been outvoted by his fellow governors at the Fed. Greenspan could not take dominance for granted. A few days after Andrea set off with Cheney, on August 21, Greenspan presided over the next FOMC meeting. The case for cutting interest rates was in one sense stronger than ever: if the U.S. economy had been flailing under the impact of the credit crunch before Kuwait’s invasion, the outlook now was surely worsening. Rising oil prices would claim a growing share of Americans’ spending, leaving less demand for U.S. products; and geopolitical uncertainty would hurt bonds and stocks, raising the cost of capital to companies. Already a falling bond market had raised long-term borrowing costs by more than 50 basis points: Saddam Hussein had effectively tightened U.S. monetary policy without the Fed’s doing anything.7 But rather than supporting the economy and countering the Saddam effect by cutting short-term interest rates, Greenspan wanted to be tough.


pages: 382 words: 100,127

The Road to Somewhere: The Populist Revolt and the Future of Politics by David Goodhart

Affordable Care Act / Obamacare, agricultural Revolution, assortative mating, Big bang: deregulation of the City of London, borderless world, Boris Johnson, Branko Milanovic, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, central bank independence, centre right, coherent worldview, corporate governance, credit crunch, deglobalization, deindustrialization, Donald Trump, Downton Abbey, Edward Glaeser, en.wikipedia.org, Etonian, European colonialism, eurozone crisis, falling living standards, first-past-the-post, gender pay gap, gig economy, glass ceiling, global supply chain, global village, illegal immigration, income inequality, informal economy, job satisfaction, knowledge economy, labour market flexibility, low skilled workers, market friction, mass immigration, mittelstand, Neil Kinnock, New Urbanism, non-tariff barriers, North Sea oil, obamacare, old-boy network, open borders, Peter Singer: altruism, post-industrial society, post-materialism, postnationalism / post nation state, race to the bottom, Richard Florida, Ronald Reagan, selection bias, shareholder value, Skype, Sloane Ranger, stem cell, Thomas L Friedman, transaction costs, trickle-down economics, ultimatum game, upwardly mobile, wages for housework, white flight, women in the workforce, working poor, working-age population, World Values Survey

He also thinks there was at times a triumphant atmosphere in Brussels at the end of the Cold War, a feeling that Europe could step up as an equal of the US. The strict rules that required countries to have budget deficits of no more than 3 per cent of GDP and debt to GDP ratios of no more than 60 per cent were allowed to slip soon after the Euro’s launch and then blown apart when the sovereign debt crisis struck in 2009. Unlike the 2007/8 credit crunch, the Eurozone crisis was one of the most widely predicted economic disasters of modern times. The apparently reduced risk of lending in hard Euros to weaker economies and governments like Greece and Spain created unsustainable government deficits in the case of Greece and an unsustainable property bubble in Spain (and Ireland). The no bail out rule was quickly abandoned after the economic crisis made several states insolvent, and the Eurozone economy has been living in a twilight zone ever since.

All large companies have to present ‘social plans’ when they are making workers redundant and the plans have to be approved by worker representatives. It is often cheaper to retrain a worker for another line of business than to sack him or her. Despite all the familiar failings described above, Britons have seen a steady improvement in their conditions of life in the last seventy years—at least until the credit crunch of 2007/2008. The standard reformist critiques of the modern capitalist economy and society in terms of inequality and job insecurity turn out to be only part of the story—and, as we have seen, often rather exaggerated. What these critiques, and their associated policy prescriptions are missing, is a sense of the dislocation—as much psychological as income-related—created by the shift from an industrial to a knowledge-based economy.

.: product lines of, 86 Appiah, Kwame Anthony: 117 assortative mating: 188 Aston University: 164 austerity: 98, 200 Australia: 4, 160 Austria: 56, 69–70 authoritarianism: 8, 12, 30, 33, 44, 57; concept of, 57; hard, 45 Baggini, Julian: observations of British class system, 59 Bangladesh: 130 Bank of England: personnel of, 86 Bartels, Larry: Democracy for Realists, 61 Bartlett, Jamie: Radicals, 64 Basel Accords: 85 BASF: 176 Bayer: 176 Belgium: 73, 75, 101; Brussels, 53, 89, 93, 95, 98 Berlusconi, Silvio: 65 birther movement: 68 Bischof, Bob: head of German-British Forum, 174 Blair, Tony: 10, 76, 159, 189; administration of, 218; foreign policy of, 96; speeches of, 3, 7, 49; support for Bulgarian and Romanian EU accession, 26; unravelling of legacy, 221 Bloomsbury Group: 34 Bogdanor, Vernon: concept of ‘exam-passing classes’, 3 Boyle, Danny: Summer Olympics opening ceremony (2012), 111, 222 Branson, Richard: 11 Brexit (EU Referendum)(2016): 1–2, 19, 27, 81, 89, 93, 99–100, 125, 233; negotiations, 103; polling prior to voting, 30, 64; Remainers, 2, 19–20, 52–3, 132; sociological implications of, 4–7, 13, 53–4, 118, 126, 167–8, 225; Stronger In campaign, 61; Vote Leave campaign, 42, 53, 72, 91, 132; voting pattern in, 7–9, 19–20, 23, 26, 36, 52, 55–6, 60, 71, 74, 215, 218 British Broadcasting Corporation (BBC): 112, 145; Newsnight, 60; personnel of, 15; Radio 4, 31, 227; Today, 60 British Empire: 107 British National Party: European election performance of (2009), 119; supporters of, 38 British Future: 19 British Private Equity and Venture Capital Association: personnel of, 135 British Social Attitudes (BSA) surveys: 153; authoritarian-libertarian scale, 44–5; findings of, 38–9, 44, 106–7, 120, 202, 206–7, 218; immigration survey (2013), 44; personnel of, 218–19 British Values Survey: establishment of (1973), 43; groups in, 43 Brooks, Greg: Sheffield report, 155 Brown, Belinda: 205, 207–8 Brown, Gordon: 106; abolition of Married Couples Allowance, 204; budget of (2006), 147–8; political rhetoric of, 16–17 Brummer, Alex: Britain for Sale, 173 Bulgaria: 26; accession to EU, 225 (2007); migrants from, 126; population levels of, 102 Burgess, Simon: 131 Burggraf, Shirley: Feminine Economy and Economic Man, The, 194 Cahn, Andrew: 98 Callaghan, Jim: Ruskin College speech (1976), 154 Callan, Eamonn: 191 Callan, Samantha: 202, 212 Cambridge University: 35, 179, 186; faculty of, 37; students of, 158–9 Cameron, David: 71, 103, 179, 183, 189; administration of, 226; cabinet of, 187 Canada: 160; mass immigration in, 119 capital: 9, 100; cultural, 190; human, 34; liberalisation of controls, 97; social, 110 capitalism: 7, 11; organised, 159 Care (Christian Action Research & Education): 203 Carswell, Douglas: 13 Case, Anne: 67 Casey, Louise: review of opportunity and integration, 129 Catholicism: 15, 213; original sin, 57 Cautres, Bruno: 72 Center for Humans and Nature: 30 Centre for Social Justice: 206; personnel of, 202 chauvinism: 33; decline in prevalence of, 39; violent, 106 China, People’s Republic of: 10, 95, 104, 160; accession to WTO (2001), 88; manufacturing sector of, 86; steel industry of, 87 Chirac, Jacques: electoral victory of (2002), 49 Christianity: 33, 69, 83, 156 citizenship: 68, 121–2; democratic, 7; global, 114; legislation, 103; national, 5; relationship with migration, 126; shared, 113; temporary, 126 Clarke, Charles: British Home Secretary, 84 Clarke, Ken: education reforms of, 158–9 Clegg, Nick: 11, 13, 189 Cliffe, Jeremy: 10–11; ‘Britain’s Cosmopolitan Future’ 216; observations of social conservatism, 217 Clinton, Bill: 29, 76; administration of, 218 Clinton, Hillary: electoral defeat of (2016), 67–8 Coalition Government (UK) (2010–16): 13, 54, 226; cabinet members of, 16; immigration policies of, 124–5 Cold War: end of, 83, 92, 95, 98 Collier, Paul: 110; view of potential reform of UNHCR, 84 colonialism: 87; European, 105 communism: 58 Communist Party of France: 72 Confederation of British Industry (CBI): 164 confirmation bias: concept of, 30 Conservative Party (Tories)(UK): 19, 207; dismantling of apprenticeship system by, 157; ideology of, 76, 196; members of, 31, 164, 187; Party Conference (2016), 226; Red Toryism, 63; supporters of, 24, 35, 77, 143, 216–17 conservatism: 4, 9; cultural, 58; social, 217; Somewhere, 7–8; working-class, 8 Corbyn, Jeremy: elected as leader of Labour Party, 20, 53, 59, 75, 78 Cowley, Philip: 35 Crosland, Tony: Secretary of Education, 36; two-tier higher education system proposed by, 158 Crossrail 2: 228; spending on, 143 Czech Republic: 69, 73 D66: supporters of, 76 Dade, Pat: 43–4, 219; role in establishment of British Values Survey, 43, 218–19 Daily Mail: 227; reader base of, 4 Danish Peoples’ Party: 55, 69–70, 73; ideology of, 73 Darwin, Charles: 28 death penalty: 44; support for, 39, 216–17 Deaton, Angus: 67 deference, end of: 63 Delors, Jacques: 96, 103–4; President of European Commission, 94 Democratic Party: ideology of, 62, 65; shortcomings of engagement strategies of, 66–7 Demos: 137 Dench, Geoff: 207; concept of ‘quality with pluralism’, 214; Transforming Men, 209 Denmark: 69, 71, 99; education levels in, 156 Diana, Princess of Wales: death of (1997), 107 double liberalism: 1, 11, 63 Duffy, Gillian: 124 Dyson: 173; Dyson effect, 173 Economist: 10, 210, 216 Eden, Anthony: administration of, 187 Eichengreen, Barry: 91 Elias, Norbert: 119 Employer Skills Survey: 163 Engineering Employers Federation: 166 Englishness: 111 Erdogan, Recep Tayyip: 218 Essex Man/Woman: 186 Estonia: population levels of, 102 Eton College: 179, 187 Euro (currency): 100–1; accession of countries to, 98–9 European Commission: 26, 97 European Convention on Human Rights: 83–4 European Court of Justice (ECJ): 103 European Economic Community (EEC): 92; British accession to (1973), 93; Treaty of Rome (1957), 101 European Exchange Rate Mechanism (ERM): 97–8 European Parliament: elections (2009), 71–2; elections (2014), 72 European Union (EU): 10, 25, 53, 76, 89, 92–4, 99–100, 120, 124, 160, 215, 221–2, 229, 233; Amsterdam Treaty (1997), 94; Common Agricultural Policy, 92, 96; establishment of (1957), 91–2; freedom of movement principles, 100–1, 163–4; Humanitarian Protection Directive (2004), 83; integration, 50, 98–9, 173; Lisbon Treaty (2009), 94; Maastricht Treaty (1992), 94, 96, 103; members states of, 16, 31, 55, 71, 216; personnel of, 128; Schengen Agreement (1985), 94–5, 99, 117; Single European Act (1986), 94; Treaty of Nice (2000), 94 Euroscepticism: 69 Eurozone Crisis (2008–): 92, 99 Evening Standard: 143–5 Facebook: 86 family culture: 196–7; childcare, 202–3; cohabitation, 196, 211; divorce figures, 196–7; gender roles, 206–13; legislation impacting, 195–6; lone parents, 196; married couples tax allowance, 225; relationship with state intrusion, 200–2; tax burdens, 203–4; tax credit systems, 202, 204–5, 225 Farage, Nigel: 11; leader of UKIP, 72; political rhetoric of, 20 Fawcett Society: surveys conducted by, 195–6 federalism: 69 feminism: 185, 199, 205; gender pay gap, 198–9; orthodox, 194 Fidesz: 69, 71, 73 Fillon, François: 73 Financial Times: 91, 108, 115, 138, 145, 147 Finkelstein, Daniel: 34 Five Star Movement: 53, 55, 64, 70, 73 Florida, Richard: concept of ‘Creative Class’, 136 Foges, Clare: 183 food sector: 17, 102, 125, 126 Ford, Robert: 35, 150 foreign ownership: 172–74, 230 Fortuyn, Pim: assassination of (2002), 50, 69 France: 69, 75, 94–6, 101, 173; agricultural sector of, 96; compulsory insurance system of, 222; Paris, 104, 143; high-skill/low-skill job disappearance in, 151; Revolution (1789–99), 106 Frank, Thomas: concept of ‘liberalism of the rich’, 62 Franzen, Jonathan: 110 free trade agreements: opposition to, 62 Freedom Party: 69; electoral defeat of (2016), 70; ideology of, 73; supporters of, 70 French Colonial Empire (1534–1980): 107 Friedman, Sam: ‘Introducing the Class Ceiling: Social Mobility and Britain’s Elite Occupations’, 187 Friedman, Thomas: World is Flat, The, 85 Front National (FN): 53, 69, 72–3; European electoral performance of (2014), 72; founding of (1973), 72; supporters of, 72 Gallup: polls conducted by, 65 Ganesh, Janan: 115, 145 gay marriage: 5, 76; opposition to, 46–7; support for, 26, 220 General Electric Company (GEC) plc: 172, 175 German-British Forum: members of, 174 Germany: 70, 73, 86, 94, 96, 100–1, 173–4, 209; automobile industry of, 96; chemical industry of, 176; compulsory insurance system of, 222; education sector of, 166; high-skill/low-skill job disappearance in, 151; labour market of, 147; Leipzig, 58; Ludwigshafen, 176; Reunification (1990), 96, 147, 176; Ruhr, 176–7 Ghemawat, Prof Pankaj: 85–6 Gilens, Martin: study of American public policy and public preferences, 61–2 Glasman, Maurice: 227 Global Financial Crisis (2007–9): 56, 169–70, 177; Credit Crunch (2007–8), 98, 177 Global Villagers: 31–2, 44–5, 160, 226; characteristics of, 46; political representation of, 75; political views of, 109, 112 globalisation: 9–10, 50–2, 81–2, 85, 87–8, 90–1, 105–6, 148; economic, 9; global trade development, 86–7; growth of, 85–6; hyperglobalisation, 88–9; relationship with nation states, 85–6; sane, 90 Golden Dawn: 74; growth of, 105 Goldman Sachs: personnel of, 31 Goldthorpe, John: 184–5, 189–90 Goodhart, David: 12 Goodwin, Fred: 168 Goodwin, Matthew: 150 Gordon, Ian: 137–8, 140 Gould, Philip: 220 Gove, Michael: 64, 91 great liberalisation: 39–40, 47; effect of, 40 Greater London Authority (GLA): 143 Greece: 53, 56, 69, 74, 99, 105; Athens, 143; government of, 98 Green, Francis: 163 Green Party (UK): supporters of, 38 Group of Twenty (G20): 89 Guardian: 14, 210 Habsburg Empire (Austro-Hungarian Empire): collapse of (1918), 107 Haidt, Jonathan: 11, 30, 33, 133; Righteous Mind, The, 28–9 Hakim, Catharine: 205 Hall, Stuart: 14–15 Hames, Tim: 135–6 Hampstead/Hartlepool alliance: 75 Hanson Trust: subsidiaries of, 175 Hard Authoritarian: 43–7, 51, 119, 220; characteristics of, 24–5; political views of, 109 Harris, Gareth: 137; ‘Changing Places’, 137 Harvard University: faculty of, 57 Heath, Edward: foreign policy of, 96 Higgins, Les: role in establishment of British Values Survey, 43 High Speed 2 (HS2): 228 High Speed 3 (HS3): aims of, 151, 228 Hitler, Adolf: 94 Hoescht: 176 Hofstadter, Richard: ‘Everyone is Talking About Populism, But No One Can Define It’ (1967), 54 Holmes, Chris: 151 homophobia: observations in BSA surveys, 39; societal views of, 39–40, 216 Honig, Bonnie: concept of ‘objects of public love’, 111 Huguenots: 121 Huhne, Chris: 16, 32 human rights: 5, 10, 55, 113; courts, 113; legislation, 5, 83–4, 109, 112; rhetoric, 112–13 Hungary: 53, 64, 69, 71, 73–4, 99, 218; Budapest, 218 Ignatieff, Michael: leader of Liberal Party (Canada), 13 Imperial Chemical Industries (ICI): 172, 174–5; personnel of, 169; subsidiaries of, 175 Inbetweeners: 4, 25, 46, 109; political views of, 109 India: 104 Inglehart, Ronald: theories of value change, 27 Insider Nation: concept of, 61, 64; evidence of, 61–2 Institute for Fiscal Studies (IFS): 201; findings of, 211–12 International Monetary Fund (IMF): 86–7, 102 interracial marriage: societal views of, 40 India: 10, 160 Ipsos MORI: polls conducted by, 42, 122 Iraq: 84; Operation Iraqi Freedom (2003–11), 82 Islam: 50; Ahmadiyya, 84; conservative, 131; Halal, 68; hostility to, 73; Qur’an, 50 Islamism: 130 Islamophobia: 130 Italy: 55, 64, 69–70, 73, 96; migrants from, 125 Jamaica: 14 Japan: 86; request for League of Nations racial equality protocol (1919), 109 Jews/Judaism: 121, 259; orthodox, 131; persecution of, 17 jingoism: 8 Jobbik: 53, 64, 74 Johnson, Boris: 145 Jones, Sir John Harvey: death of (2008), 169 Jordan, Hashemite Kingdom of: government of, 84 Jospin, Lionel: defeat in final round of French presidential elections (2002), 49 Judah, Ben: This is London: Life and Death in the World City, 145 Kaufmann, Eric: 8–9, 131, 219, 227; ‘Changing Places’, 137 Kellner, Peter: 78 King, Mervyn: Governor of Bank of England, 86 Kinnock, Neil: 98 knowledge economy: 147, 149, 154, 166, 221 Kohl, Helmut: 94 Kotleba: 74 Krastev, Ivan: 55, 65, 82–3 labour: 9, 89–90, 149; eastern European, 125–6; gender division of, 197; hourglass labour market, 150, 191; living wage, 26, 152; market, 95, 101–2, 124, 140, 147–8, 150–2, 156–7, 181, 225 Labour Party (Denmark): 77 Labour Party (Netherlands): 50; supporters of, 76 Labour Party (UK): 2, 23, 53, 57, 72, 123, 157, 159, 207; Blue Labour, 63; electoral performance of (2015), 75; European election performance (2014), 72; expansion of welfare state under, 199–200; members of, 14, 20, 36, 59, 61, 77–8, 84; Momentum, 53; New Labour, 33, 75, 107, 123, 155, 159, 167, 196, 207, 220, 226, 232; Party Conference (2005), 7; social media presence of, 79; supporters of, 17, 35, 75, 77, 143, 221; voting patterns in Brexit vote, 19 Lakner, Christoph: concept of elephant curve, 87 Lamy, Pascal: 97 Latvia: adoption of Euro, 98–9; migrants from, 25–6 Laurison, Daniel: ‘Introducing the Class Ceiling: Social Mobility and Britain’s Elite Occupations’, 187 Law and Justice Party: 69, 71, 73 Lawson, Nigel: 205 Le Pen, Jean-Marie: victory in final round of French presidential elections (2002), 49, 69 Le Pen, Marine: 53; electoral strategies of, 73 Leadbeater, Charles: 53 League of Nations: protocols of, 109 left-behinders: 20 Lega Nord: 69 Levin, Yuval: Fractured Republic, The, 232 liberal democracy: 2, 31, 55 Liberal Democrats: 23, 53–4; members of, 16; supporters of, 38, 78 Liberal Party (Canada): members of, 13 liberalism: 4–5, 12–13, 29–31, 55, 76, 119, 127–8, 199, 233; Anywhere, 27–8; baby boomer, 6; double, 1, 63; economic, 11; graduate, 216–17; meritocratic, 34; metropolitan, 216; orthodox, 13–14; Pioneer, 44; social, 4, 11 libertarianism: 8, 11, 22, 39, 44 Libya: 84; Civil War (2011), 225 Lilla, Mark: 35 Lind, Michael: 105, 135 Livingstone, Ken: 136 Lloyd, John: 56 London School of Economics (LSE): 54, 137–8, 140, 183 Low Pay Commission: findings of, 170 Lucas Industries plc: 172 male breadwinner: 149, 194, 195, 198, 206, 207 Manchester University: faculty of, 131 Mandelson, Peter: British Home Secretary, 61; family of, 61 Mandler, Peter: 135 Marr, Andrew: 53, 181 Marshall Plan (1948): 92 mass immigration: 14, 55, 104–5, 118–19, 121–4, 126–7, 140, 228–9; accompanied infrastructure development, 137–9; brain-drain issue, 102; debate of issue, 81–2; freedom of movement debates, 100–3; housing levels issue, 138–9; impact on wages, 152; integration, 129–32, 140–2; non-EU, 124–5; opposition to, 16–17, 120, 220 May, Theresa: 63, 179, 183, 198–9; administration of, 173, 176, 187, 191, 230; British Home Secretary, 124–5; ‘Citizens of Nowhere’ speech (2016), 31; political rhetoric of, 15, 31, 226 McCain, John: electoral defeat of (2008), 68 meritocracy: 152, 179–80, 190; critiques of, 180–1; perceptions of, 182–3 Merkel, Angela: reaction to refugee crisis (2015), 71 Mexico: borders of, 21 migration flows: global rates, 82, 87; non-refugee, 82 Milanovic, Branko: 126; concept of elephant curve, 87 Miliband, Ed: 78, 189 Mill, John Stuart: ‘harm principle’ of, 11–12 Millennium Cohort Study: 159 Miller, David: concept of ‘weak cosmopolitanism’, 109 Mills, Colin: 185 Mitterand, François: 94, 97 mobility: 8, 11, 20, 23, 36, 37, 38, 153, 167, 219; capital: 86, 88; geographical, 4, 6; social, 6, 33, 58, 152, 168, 179, 180, 182, 183–191, 213, 215, 220, 226, 231 Moderate Party: members of, 70 Monnet, Jean: 94–5, 97, 103–4 Morgan Stanley: 171 Mudde, Cas: observations of populism, 57 multiculturalism: 14, 50, 141–2; conceptualisation of, 106; laissez-faire, 132 narodniki: 54 national identity: 14, 38, 41, 111–12; conceptualisations of, 45; indifference to, 41, 46, 106, 114; polling on, 41 nationalism: 38, 46–7, 105; chauvinistic, 107, 120; civic, 23, 53; extreme, 104; moderate, 228; modern, 112; post-, 8, 105–6, 112; Scottish, 221 nativism: 57 Neave, Guy: 36 net migration: 126; White British, 136 Netherlands: 13–14, 50, 69, 73, 75, 99–100; Amsterdam, 49, 51; immigrant/minority population of, 50–1; Moroccan population of, 50–1 Netmums: surveys conducted by, 205–6 New Culture Forum: members of, 144 New Jerusalem: 105 New Society/Opinion Research Centre: polling conducted by, 33 New Zealand: 160 Nextdoor: 114 non-governmental organizations (NGOs): 21; refugee, 82 Norris, Pippa: 57 North American Free Trade Agreement (NAFTA): 91; opposition to, 62 North Atlantic Treaty Organization (NATO): 85, 92; personnel of, 84 Norway: 69 Nuttall, Paul: leader of UKIP, 72; Obama, Barack: 67; approval ratings of, 60; electoral victory of (2012), 68; healthcare policies of, 22–3; target of birther movement, 68 O’Donnell, Gus: background of, 15–16; British Cabinet Secretary, 15 O’Leary, Duncan: 232 Open University: Centre for Research on Socio-Cultural Change (CRESC), 172–3 Operation Iraqi Freedom (2003–11): political impact of, 56 Orbán, Victor: 69, 218 Organisation for Economic Co-operation and Development (OECD): 201, 204; report on education levels (2016), 155–6; start-ups ranking, 173 Orwell, George: Nineteen Eighty-Four, 108–9 Osborne, George: 189; economic policies of, 4, 226 Oswald, Andrew: 171 Ottoman Empire: collapse of (1923), 107 outsider nation: concept of, 61, 64 Owen, David: 99 Oxford University: 15, 35, 179, 186; Centre on Skills, Knowledge and Organisational Performance, 151; faculty of, 31, 151; Nuffield College, 32 Pakistan: persecution of Ahmadiyya Muslims in, 84 Parris, Matthew: 115 Parsons, Talcott: concept of ‘achieved’ identities, 115 Party of Freedom (PVV): 69; ideology of, 73; supporters of, 50, 76 Paxman, Jeremy: 42 Pearson: ownership of Higher National Certificates (HNCs)/Higher National Diplomas (HNDs), 157 Pegida: ideology of, 73 Pessoa, Joao Paulo: 88 Phalange: 74 Phillips, Trevor: 133 Pioneers: characteristics of, 43–4 Plaid Cymru: supporters of, 38 Podemos: 53, 64 Poland: 56, 69, 73; migrants from, 25–6, 121 Policy Exchange: ‘Bittersweet Success’, 188 political elites: media representation of, 63–4 populism: 1, 5, 13–14, 49–52, 55–6, 60, 64, 67, 69–74, 81; American, 54, 65; British, 63; decent, 6, 55, 71, 73, 219–20, 222, 227, 233; definitions of, 54; European, 49, 53, 65, 68–9, 74; left-wing, 54, 56; opposition to, 74; right-wing, 33, 51, 54 Populists: 54 Portillo, Michael: 31 Portugal: migrants from, 121, 125 post-industrialism: 6 post-nationalism: 105 poverty: 83, 168; child, 183–4, 200, 204; extreme, 87; reduction of, 78, 200; wages, 231 Powell, Enoch: ‘Rivers of Blood’ speech (1968), 127 Professionalisation of politics: 59 Progress Party: 69 progressive individualism: 5 Progressive Party: founding of (1912), 54 proportional representation: support for, 228 Prospect: 14, 91, 136 Prospectors: characteristics of, 43 Protestantism: 8, 213 Putin, Vladimir: 218 Putnam, Robert: 22; theory of social capital, 110 racism: 32, 73–4, 134; observations in BSA surveys, 39; societal views of, 39; violent, 127 Rashid, Sammy: Sheffield report, 155 Reagan, Ronald: 58, 63; approval ratings of, 60 Recchi, Ettore: 104 Refugee Crisis (2015–): 83–4; charitable efforts targeting, 21–2; government funds provided to aid, 83; political reactions to, 71 Relationships Foundation: 202 Republic of Ireland: 99; high-skill/low-skill job disappearance in, 151; property bubble in, 98 Republican Party: ideology of, 62, 65; members of, 68 Resolution Foundation: 87–8; concept of ‘squeezed middle’, 168–9; reports of, 171 Ricardo, David: trade theory of, 101 Robinson, Eric: 36 Rodrik, Dani: 82, 89; concept of ‘hyperglobalisation’, 88; theory of ‘sane globalisation’, 90 Romania: 26; accession to EU, 225 (2007); migrants from, 102, 126 Romney, Mitt: electoral defeat of (2012), 68 Roosevelt, Theodore: leader of Progressive Party, 54 Rousseau, Jean-Jacques: 156 Rowthorn, Bob: 149 Royal Bank of Scotland (RBS): personnel of, 168 Royal College of Nursing: 140 Rudd, Amber: foreign worker list conflict (2016), 17 Ruhs, Martin: 126 Russell Group: 55; culture of, 37; student demographics of, 130–1, 191 Russian Federation: 2, 92; Moscow, 218; St Petersburg, 218 Rwanda: Genocide (1994), 82 Saffy factor: concept of, 199, 221–2 Scheffer, Paul: 85; ‘Multicultural Tragedy, The’ (2000), 49–50 Schumann, Robert: 94 Sciences Po: personnel of, 104 Scottish National Party (SNP): 1, 23, 54, 112; electoral performance of (2015), 75; ideology of, 53 Second World War (1939–45): 105, 194; Holocaust, 109 Security and identity issues: 41, 78, 81 Settlers: characteristics of, 43 Sikhism: 131 Singapore: 101, 128; education levels in, 156 Slovakia: 69, 73–4 Slovenia: adoption of Euro, 98–9 Smer: 69, 73 Smith, Zadie: 141–2 Social Democratic Party: supporters of, 75–6 social mobility: 6, 33, 58, 179–80, 183, 187, 189–91, 220; absolute mobility, 184, 188; relative mobility, 184; slow, 168; upward, 152 Social Mobility Commission: 161, 179–80 socialism: 49, 72, 183, 190 Somewheres: 3–5, 12–13, 17–18, 20, 41–3, 45, 115, 177, 180, 191, 214, 223, 228; characteristics of, 5–6, 2, 32; conflict with Anywheres, 23, 79, 81, 193, 215; conservatism, 7–8; employment of, 11; European, 103; immigration of, 106; moral institutions, 223–4; political representation/voting patterns of, 13–14, 24–6, 36, 53–5, 77–9, 124, 227; political views of, 71, 76, 109, 112, 119, 199, 218, 224–6, 232; potential coalition with Anywheres, 220, 222, 225–6, 233; view of migrant integration, 134 Sorrell, Martin: 31 Soskice, David: 159 South Korea: 86 Soviet Union (USSR): 92, 188; collapse of (1991), 82, 107 Sowell, Thomas: 30; A Conflict of Visions, 29 Spain: 53, 56, 64, 74; government of, 98; migrants from, 125; property bubble in, 98 Steinem, Gloria: 198 Stenner, Karen: 30, 44, 122, 133, 227; Authoritarian Dynamic, The, 30–1 Stephens, Philip: 108 Sun, The: 227 Sutherland, Peter: 31–2 Sutton Trust: end of mobility thesis, 183–5 Swaziland: 135 Sweden: 56, 70, 100; general elections (2014), 70; Stockholm, 143; taxation system of, 222 Sweden Democrats: 70; electoral performance of (2014), 70; ideology of, 73 Switzerland: 37 Syria: Civil War (2009–), 82, 84 Syriza: 53, 69 Taiwan: 86 Teeside University: 164 terrorism: jihadi, 71, 74, 129 Thatcher, Margaret: 58, 63, 95, 189, 205; administration of, 169; economic policies of, 176 Third Reich (1933–45): 104; persecution of Jews in, 17 Times Education Supplement: 37 Timmermans, Frans: EU Commissioner, 128 Thompson, Mark: Director-General of BBC, 15 trade theory: principles of, 101 Transatlantic Trade and Investment Partnership (TTIP): 89; support for, 225 Trump, Donald: 50, 62, 74, 85; electoral victory of (2016), 1–3, 5–7, 13, 27, 30, 64–8, 81, 232; political rhetoric of, 14, 22–3, 51, 54, 66–7; supporters of, 56, 67 Tube Investments (TI): 172 Turkey: 218 Twitter: use for political activism, 79 Uber: 140 UK Independence Party (UKIP): 53, 55, 63–4, 69, 71–3, 228; electoral performance of (2015), 75; European election performance (2009), 71–2; members of, 13; origins of, 72; supporters of, 24, 35, 38, 72, 75, 143, 168, 216, 222 ultimatum game: 52 Understanding Society: surveys conducted by, 37–8, 202 unemployment: 101–2; gender divide of, 208–9; not in employment, education or training (Neets), 151–2, 190; youth, 139, 151–2, 166 Unilever: 175 United Kingdom (UK): 1–3, 8, 11–12, 21, 27–8, 31, 33, 41, 44, 59–60, 69, 73, 75, 81, 83, 91, 111–12, 147, 165, 173, 180, 193–5, 199, 204, 217, 227; Aberdeen, 136; accession to EEC (1973), 93; Adult Skills budget of, 161, 225; apprenticeship system of, 154, 157, 162–3, 166; Birmingham, 7, 123, 166; Boston, 121; Bradford, 133, 136; Bristol, 136; British Indian population of, 77; Burnley, 151; Cambridge, 136; City of London, 95, 106, 174; class system in, 58–9, 75, 123, 135–6, 149–52, 172, 182–3, 186, 195; Dagenham, 136; Department for Education, 206; Department for International Development (DfID), 224; Divorce Law Reform Act (1969), 196; economy of, 152, 170; Edinburgh, 54, 136; education sector of, 35, 147, 154–8; ethnic Chinese population of, 77; EU citizens in, 101; Finance Act (2014), 211; Foreign and Commonwealth Office (FCO), 224; Glasgow, 136; high-skill/low-skill job disappearance in, 150–1; higher education sector of, 35–7, 47, 159–62, 164–7, 179, 208, 230–1; Home Office, 17; House of Commons, 162; general election in (2015), 60; House of Lords, 31; Human Rights Act, 123, 225; income inequality levels in, 169–70, 172, 177, 184–5; labour market of, 16, 26, 124, 140–1, 148, 150–1, 152, 225; Leicester, 133; Leeds, 161; London, 3–4, 7, 10–11, 18–19, 24, 26, 34, 37, 59, 79, 101, 114–15, 119, 123, 131, 133–45, 151, 168, 216, 218, 226, 228, 232–3; Manchester, 123, 136, 151, 161, 228; manufacturing sector of, 17, 88; mass immigration in, 122–4, 126–7, 228–9; Muslim immigration in, 41–2, 44; Muslim population of, 127, 130; National Health Service (NHS), 72, 91, 111, 120, 140, 144, 200–1, 229; National Insurance system of, 204; Newcastle, 131, 136, 161; Northern Ireland, 38; Office for Fair Access, 180; Office for Standards in Education, Children’s Services and Skills (Ofsted), 155; Office of National Statistics (ONS), 138, 144–5; Oldham, 133; Olympic Games (2012), 111, 143, 222; Oxford, 136; Parliamentary expenses scandal (2009), 56, 168; Plymouth, 131; public sector employment in, 171, 208–9, 229–30; regional identities in, 3–4, 186; Rochdale, 124; Scotland, 110, 138; Scottish independence referendum (2014), 53, 110; self-employment levels in, 171; Sheffield, 161; Slough, 131, 133; social mobility rate in, 58, 184–5, 187; start-ups in, 173–4; Stoke, 121; Sunderland, 52, 172; Supreme Court, 66; taxation system of, 222; Treasury, 16; UK Border Agency, 108; vocational education in, 163; voting patterns for Brexit vote, 7–9, 19–20, 23, 26, 36, 52; wage levels in, 168; Wales, 138; welfare state in, 199–203, 223–4, 231–2; Westminster, 54, 58, 60; youth unemployment in, 151–2 United Nations (UN): 102, 198; Conference on Trade and Development (UNCTAD), 10; Declaration of Human Rights (1948), 109; Geneva Convention (1951), 82–4; High Commission for Refugees (UNHCR), 82, 84; Security Council, 99 United States of America (USA): 1–2, 6–7, 22–3, 36–7, 51, 57, 60, 74, 86, 89, 94, 128, 168, 193, 208, 227; 9/11 Attacks, 130; Agency for International Development (USAID), 224; Asian population of, 68; borders of, 21; Chinese Exclusion Act (1882), 54; class identity in, 65–6; Congress, 67; Constitution of, 57; education system of, 166; higher education sector of, 167; Hispanic population of, 67–8, 85; House of Representatives, 67; immigration debate in, 67–8; Ivy League, 36, 61; New York, 135; political divisions in, 65; Senate, 67 University College London (UCL): Imagining the Future City: London 2061, 137, 139 University of California: 165 University of Kent: 36 University of Sussex: 36 University of Warwick: 36; faculty of, 171 Vietnam War (1955–75): 29 Visegrad Group: 69, 73, 99 Vlaams Belang: ideology of, 73 wages for housework: 194 Walzer, Michael: 117–18 War on Drugs: 62 WEIRD (Western, Educated, Industrialised, Rich and Democratic): 27 Welzel, Christian: Freedom Rising, 27 Westminster University: 165 white flight: 129, 134, 136 white identity politics: 9, 67 white supremacy: 8, 68, 73–4 Whittle, Peter: 144 Wilders, Geert: 50, 76 Willetts, David: 164, 185 Wilson, Harold: electoral victory of (1964), 150 Wolf, Prof Alison: 162, 164–5; XX Factor, The, 189, 198 working class: 2–4, 6, 51–2, 59, 61, 65; conservatism, 8 political representation/views of, 8, 52, 58, 63, 70, 72; progressives, 78–9; voting patterns of, 15, 52, 75–6; white, 19, 68 World Bank: 84 World Trade Organisation (WTO): 10, 85, 89–90, 97; accession of China to (2001), 88 World Values Survey: 27 xenophobia: 2, 14, 50–1, 57, 71, 119, 121, 141, 144, 225 York, Peter: 138 York University: 36 YouGov: personnel of, 78; polls conducted by, 16–17, 42, 66, 79, 114, 132, 141 Young, Hugo: 93 Young, Michael: 119, 190; Rise of the Meritocracy, The, 180–1 Yugoslav Wars (1991–2001): 97 Yugoslavia: 97 Zeman, Milos: President of Czech Republic, 73


pages: 220

Startupland: How Three Guys Risked Everything to Turn an Idea Into a Global Business by Mikkel Svane, Carlye Adler

Airbnb, Ben Horowitz, Burning Man, business process, call centre, Chuck Templeton: OpenTable:, cloud computing, credit crunch, David Heinemeier Hansson, Elon Musk, housing crisis, Jeff Bezos, Kickstarter, Menlo Park, remote working, Ruby on Rails, Sand Hill Road, Silicon Valley, Silicon Valley startup, Skype, software as a service, South of Market, San Francisco, Steve Jobs, subscription business, Tesla Model S, web application

And yet, despite all of this, these people, family, friends— maybe fools—wanted to invest anyway. I was surprised by the level of interest but also so heartened. They wanted to invest because they believed in us. They believed in the crazy idea that we could make something out of nothing. It’s also just as true that we were really lucky with the timing. The climate for individual investors was perfect. We were still months away from the credit crunch in 2008. Real estate in Denmark was crazy hot. People had equity in their houses, and they had disposable money. They saw this as another opportunity. My old friend Michael Hansen, the big-hearted, bigmouthed so-called king of Denmark, invested a bit. My friend Joachim, a television producer, invested and told his boss, who also invested. In fact, his boss wanted to invest more than our round allowed.

Even Facebook recognizes that when it comes to relationships, sometimes “It’s complicated.” 86 Page 86 Svane c05.tex V3 - 10/24/2014 8:34 P.M. The Game Is Not Over Second Chances Again! We weren’t desperate for money at this point, but we did want capital to grow the business, and we didn’t have a lot of choices. Denmark still didn’t have any real investment scene, U.S. venture capital firms weren’t routinely investing in small Danish startups, and the credit crunch was still casting a shadow—making it even less likely to get funding. It was just before the New Year. I had spent so much of 2008 on the road trying to get money. Now we would enter 2009 without anything to show for it. Devdutt had graciously left the door open, and now going back to CRV looked like the best option—the only option. Devdutt had been so stable all along; even with all of the turbulence in the markets, he remained dedicated and committed.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Austerity and the collusion between politicians and the finance sector opened up political space for right-wing, populist political parties like Donald Trump and the Tea Party in the US, the National Front in France, and Golden Dawn in Greece. These were among the social and political consequences of democratic politicians enacting policies that enrich the few while impoverishing the majority; policies based on the interests of the robber barons and on the flawed theories of ‘defunct’ economists. As this goes to press, almost nine years have passed since the ‘credit crunch’ of August 2007. Yet the global economy struggled to recover from that crisis and the easy (unregulated) credit-fuelled bubbles that were violently burst by rising real rates of interest. Instead of recovery, the crisis simply rolled around the global economy. It was at its most intense at the core – the US and the UK – but subsequently moved across to Europe and in particular the Eurozone. Then the crisis moved to emerging markets, and China in particular.

CHAPTER 5 Class Interests and the Moulding of Schools of Economic Thought Economic fundamentals are all sound; it’s a good time for tighter credit conditions … the recent sell-off in financial markets is good news … The world economy is strong enough to cope with the consequences. The Economist, 4–10 August 2007 Editors and journalists at the Economist magazine were not the only professional economists to make entirely the wrong call in the week that inter-bank credit ‘crunched’ and the 2007–09 global financial crisis began in earnest.1 Most academic economists shared their blind spot for the likely impact of financial deregulation on the financial system, the global economy and societies around the world. A great deal of the power exercised by financiers operating in financial markets derives from the studied indifference of orthodox academic economists to the production of money and the social construct that is the rate of interest on money.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

See also specie CoinLab, 369 Coinye West, 370n40 Coleman, James, 287n collateralized debt obligations (CDOs), 123, 214 Collège de Sociologie (College of Sociology), 165, 172–73, 203 Collins, Daryl, 289–90 Collins, Randall, 292 colonialism, 60, 64, 230, 240, 243 Commerzbank, 258n38 commodity fetishism, 72, 195, 215, 273, 299, 340 commodity money, 23, 53, 83 commodity theory of money, 236, 359 commons, 249, 268, 380 communism, 49, 84, 250, 361 complementary currency, 5, 14, 214, 237, 315, 360 compound interest, 146–47, 153, 156, 159 Comte, Auguste, 316 conceptual utopia, 317, 328, 330 confidence, 16, 31n24, 45, 124, 353, 362, 374n, 383, 387; and Ponzi finance, 58, 117–18; in society, 137 consumerism, 171, 197, 341; militant, 338 consumers, 65, 307, 310, 355; and debt, 91, 110, 128; and deflation, 72; in Hardt and Negri, 247, 249; and inflation, 72; and just pricing, 356; and local currencies, 374n; versus producers, 109, 375; and unequal pricing, 326, 327, 328–29; wasteful, 164n; as workers, 81, 86, 356 contactless, payment, 377 contagion, financial, 2, 43n, 77; and violence, 44 cool money, 193–94, 391 Cooley, Charles, 276 cooperatives, 84, 86, 345 Copernican revolution, 169 counterfeit money, in Baudelaire, 182, 185; in Derrida, 165, 182, 185, 186, 188, 198, 209; and finance, 199; in Nietzsche, 137; as simulacra, 200; and sovereignty, 224, 226; and war, 43 countergift, 25 cowrie shells, 21, 300 credit, 6, 11; versus cash, 104; and colonialism, 64; debt free, 356; in Harvey, 67–68; versus money, 73; mutual, 316, 353; old-style versus interest-bearing, 94; and social peace, 96–97. See also credit creation; free credit Crédit Agricole, 258 credit contraction, 57, 61, 79, 118–19, 134. See also credit crisis; credit crunch credit creation, 74, 374 credit crisis, 52, 56, 57, 61, 70–71, 73, 76, 79, 88; and social inequality, 79. See also credit contraction; credit crunch credit crunch, 50, 58. See also credit contraction; credit crisis credit inflation, in Marx, 56–57, 58, 61; in Minsky, 117 credit money, 12, 52, 65, 80, 81, 344, 376; accumulation of, 55, 69, 73; in Baudrillard, 194; versus commodity money, 51, 62, 73, 78, 96, 100; as debt, 58–59; defined, 55; in Deleuze and Guattari, 234–35; and the financial system, 56, 108, 218; and gold, 73–74; and hoarding, 54, 58; Marx’s theory of, 55–59; and the monetary base, 78–79; in Minsky, 121; private forms of, 121; and regular money, 55, 87; versus token money, 54–55, 58; and trust, 97, 98 credit money regime, 98–99 Crédit Mutuel, 365 credit rating agencies, 132 credit ratings, 43n, 124 credit theory of money, 93, 104–5, 236, 359 creditworthiness, 91, 106; institutionalization of, 218–19 creolization, 302 Crouch, Colin, 76 cryptoanarchism, 363 cryptography, 42; and Bitcoin, 362 cultural labor, 76 cultural sociology, of prices, 62n24 cultural turn, 81 culture, 13; and money, 13–14 cumal (slave-girls), 97 currency, 73; versus money, 5.

Marx’s prediction was also given a leading role in a best-selling account of the subprime crisis, The Storm, whose author (Vince Cable) subsequently became (as Business Secretary) a member of the Coalition Government in the United Kingdom (Cable 2009: 8). The quotation was a fake.4 Marx’s presence in this crisis has been compelling.5 Had he really told us so, as the placard proclaimed? Did his arguments capture the underlying causes of the credit crunch? Could a theory of money based on his work—formulated in the nineteenth century—really help to explain the global imbalances that fueled the subprime crisis, as well as the various other crises (e.g., the crisis in the Eurozone) that followed? Three and a half years after the Lehman bankruptcy, the Financial Times ran a series of articles under the heading “Capitalism in Crisis.” The first article picked out “greedy bankers, overpaid executives, anaemic growth, stubbornly high unemployment” as key factors driving the Occupy protests and causing “the wider public in the developed world to become disgruntled about capitalism,” which is “widely perceived to be failing to deliver” (Plender 2012).

Third, hoarding creates the need for credit money, as well as for fiat money, as alternative means of circulation to real money (or hard cash). Fourth, credit money creates the illusion that capital is self-expanding and leads to the formation of fictitious capital. Fifth, the existence of fictitious capital makes the cycle of speculative bubbles and crashes an inevitable feature of capitalism. Sixth, a credit crunch always follows from the formation of a speculative bubble, creating a sudden demand for real money, or hard cash. When reading through these steps, it is not difficult to see how one could imagine Marx saying, “I told you so.” In the 2007–8 crisis, we saw a sudden credit depreciation trigger a flight from risk, whereby investors sought to offload financial instruments in a rush for the safe haven of money, or at the very least, the higher rated sovereign bonds, such as U.S.


pages: 215 words: 55,212

The Mesh: Why the Future of Business Is Sharing by Lisa Gansky

Airbnb, Amazon Mechanical Turk, Amazon Web Services, banking crisis, barriers to entry, carbon footprint, Chuck Templeton: OpenTable:, cloud computing, credit crunch, crowdsourcing, diversification, Firefox, fixed income, Google Earth, industrial cluster, Internet of things, Joi Ito, Kickstarter, late fees, Network effects, new economy, peer-to-peer lending, recommendation engine, RFID, Richard Florida, Richard Thaler, ride hailing / ride sharing, sharing economy, Silicon Valley, smart grid, social web, software as a service, TaskRabbit, the built environment, walkable city, yield management, young professional, Zipcar

While we may not have been wildly discussing this book per se, Tim O’Reilly, Dale Dougherty, Bill McDonough, Bob Epstein, Larry Lessig, Esther Dyson, Jane Goodall, and Paul Hawken have left me frequently provoked, and for that I thank you. The Mesh References Adams, Anna. “Sharing Gardens to Grow Veg.” BBC News, February 26, 2009, http://news.bbc.co.uk/2/hi/uk_news/7911975.stm (accessed March 17, 2010). Adejobi, Alicia. “Credit Crunch Forces Smart Shopping: UK Boutiques and Clothes Swapping Parties.” Orato, August 18, 2009, http://www.orato.com/home-family/credit-crunch-forces-smart-shopping (accessed March 16, 2010). Alexander, Christopher. The Timeless Way of Building. New York: Oxford University Press, 1979. Alter, Lloyd. “9 Hip Housing Alternatives to the Mortgaged Single Family Home.” Planet Green, November 3, 2009, http://planetgreen.discovery.com/home-garden/hip-housing-alternatives. html (accessed March 17, 2010).


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

accounting loophole / creative accounting, asset-backed security, banking crisis, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, forensic accounting, Frederick Winslow Taylor, G4S, intangible asset, Internet of things, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

Ignoring it, as might now happen, could make a bank look sound when it was really a basket case. The chairman of one FTSE100 company reportedly thought the scope for abuse so great that the new standard was a ‘rogues’ charter’.24 (And an academic study after the crisis would find that most finance professionals thought the standard ‘had undermined UK financial reporting integrity before the credit crunch’.)25 At precisely the wrong time, prudence became a poor accounting relation indeed. THE FALLING ROCK The first bank to fall as a result was Northern Rock. The solidly named bank that emerged from a building society set up in the nineteenth century for workers in the north-east of England was, by the early twenty-first, a less circumspect outfit. Its business model now entailed shipping out as many new mortgage loans as possible, using cash raised on the short-term money markets, securitizing and selling off the loans to repay the debt, and then repeating the process.

Of this, £13m was for consultancy and accounting advice on the bank’s largely ill-fated new ventures.47 In the year that RBS finally collapsed, Deloitte would pocket £59m, taking its total earnings from the bank to more than £200m. But increasing his firm’s fee income was what Connolly had been elected by his partners to do. Nobody could argue that he didn’t deliver, from RBS and other clients. In the year of the financial crisis, The Times would report that he had ‘steered Deloitte to a credit-crunch-busting 16% jump in 2008 pre-tax profits to £654 million’. His own pay vaulted 22% to £5.7m.48 Bean counters didn’t make that kind of money by giving clients a hard time, and from the outset, a closeness with the RBS boardroom was apparent. ‘The relationship between Fred Goodwin and Deloitte & Touche was inappropriate, ineffective and incestuous,’ one senior RBS executive from the time later recalled.49 Numbers that emerged in the wake of the crash certainly suggested this was one of the less demanding auditor–client relationships.

‘The relationship between Fred Goodwin and Deloitte & Touche was inappropriate, ineffective and incestuous,’ one senior RBS executive from the time later recalled.49 Numbers that emerged in the wake of the crash certainly suggested this was one of the less demanding auditor–client relationships. When in 2011 the Financial Services Authority reported on the failure of RBS, it revealed that the bank had been consistently valuing CDOs and other asset-backed securities more generously than its peers. At the end of 2007, with the credit crunch now gripping the markets, European banks were assessing so-called ‘super senior’ CDO tranches (once considered safe) as worth 72% of their nominal value, while US banks were marking them at just 53%. RBS had them on its books at 90%. The regulator concluded that ‘there was a bias to optimism by RBS senior management in its approach to CDO valuation issues at end 2007 and the start of 2008, and an acceptance of that optimism by RBS’s auditors . . . which with hindsight is difficult to justify’.50 This was, however, insufficient to warrant any sanction for the bankers ‘in light of Deloitte’s sign-off of the accounts’.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Thomson, “Europe’s Banker Talks Tough,” Wall Street Journal, February 24, 2012; for more extended comments by Draghi on unemployment, see M. Draghi, “Unemployment in the Euro Area,” https://www.kansascityfed.org/publicat/sympos/2014/2014Draghi.pdf. 73. For this and the following see Barber and Atkins, FT interview transcript: Mario Draghi. 74. Bastasin, Saving Europe, 343–345. 75. E. Kuehnen, “ECB Wall of Cash Averts Credit Crunch,” Reuters, February 27, 2012, https://uk.reuters.com/article/us-ecb-m3/ecb-wall-of-cash-averts-credit-crunch-idUSTRE81Q0XP20120227. 76. J. Cotterill, “Keep On Carrying On LTROs,” Financial Times, October 7, 2011; and “ECB Announces Details of Refinancing Operations from October 2011,” http://www.ecb.europa.eu/press/pr/date/2011/html/pr111006_4.en.html. 77. R. Atkins and T. Alloway, “ECB Launches New Support for Banks,” Financial Times, December 8, 2011. 78.

As America’s home prices almost doubled in the ten years leading to 2006, this raised household wealth by $6.5 trillion, delivering a giant boost not just to the United States but to the world economy.2 As US consumer spending surged toward $10 trillion, it added $937 billion to global demand between 2000 and 2007.3 Fluctuations on such huge scales can clearly help account for a business-cycle downturn in 2007. But to explain how this could trigger a financial crisis, with bank failures spreading panic and a credit crunch across the world, there is one crucial thing to add: Real estate is not only the largest single form of wealth, it is also the most important form of collateral for borrowing.4 It is mortgage debt that both amplifies the broader economic cycle and links the house price cycle to the financial crisis.5 Between the 1990s and the outbreak of the crisis in 2007, American housing finance was turned into a dynamic and destabilizing force by a fourfold transformation—the securitization of mortgages, their incorporation into expansive and high-risk strategies of banking growth, the mobilization of new funding sources and internationalization.

It was the scale and urgency of this action that finally brought home to Ben Bernanke and Hank Paulson the true severity of the situation. As Larry Elliott, economics editor of the Guardian, commented: “As far as the financial markets are concerned, August 9 2007 has all the resonance of August 4 1914. It marks the cut-off point between ‘an Edwardian summer’ of prosperity and tranquility and the trench warfare of the credit crunch—the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit.”9 Quite how bad things were soon going to get was suggested three weeks later, when on September 14, Northern Rock, one of Britain’s largest mortgage lenders, failed. On TV screens, the Northern Rock panic looked like a classic bank run. Anxious depositors queued up outside beleaguered bank branches to retrieve their funds.


pages: 251 words: 63,630

The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World by Shaun Rein

business climate, credit crunch, Deng Xiaoping, Donald Trump, facts on the ground, glass ceiling, high net worth, illegal immigration, income per capita, indoor plumbing, job-hopping, Maui Hawaii, price stability, quantitative easing, Silicon Valley, Skype, South China Sea, Steve Jobs, thinkpad, trade route, trickle-down economics, upwardly mobile, urban planning, women in the workforce, young professional, zero-sum game

All seemed to have the intensity of Olympic athletes about to compete. Optimism and confidence, born from being raised with nothing but making it big through their own sweat and grit, seemed to ooze from their pores. They knew they could overcome any challenges with enough hard work and patience. To my left a number of the executives gathered to talk about joining forces to lobby the government more. They were worried about a credit crunch hitting small and medium enterprises, and they wanted to join together to present their case to the government to remedy the situation. Concerns about underground banks, loan sharks really, calling in loans was starting to become a topic of conversation. Listening to the discussion, it was clear these were some of the savviest businessmen not just in China but in the world. I have advised chief executives of Fortune 500 firms and trailblazing entrepreneurs whose innovations change the world, but these Chinese entrepreneurs were as impressive as any executive or thinker I had ever met, and perhaps even more so, considering the filthy poverty and chaos they had grown up in just a few decades before.

Japanese economic growth driven by future ideas on high-speed train scandal Ningbo’s bridge risks of too much subway construction superiority of consumer activism consumer electronics consumer market, Chinese growth of taste preferences of consumption American’s addiction to in China, optimism and China’s economy and Chinese women’s influence on in U.S. fueled by cheap labor wealth and increase in See also luxury brands copper, demand for corn, demand for corruption, in China as barrier to China’s rise in central vs. local governments China vs. Middle East educational reform and food production safety and in government government eradication attempts high-speed train scandal credit crunch. See debt; financial crisis Crichton, Michael CTRIP cultural imperialists Cultural Revolution freedom and, perception of government rules, reactions to and impact on society optimism in China and Red Guards scholars, harassment of turmoil and pain during universities closed during Ye Xiangzhen, suffering during younger vs. older generation, views on currency Australian dollar, appreciation of Chinese renminbi, appreciation of U.S. dollar, decline in D dairy industry Mengniu Dairy milk scandal Yili Dairy dairy scandal Dalai Lama Dalian, China Danone Da Vinci furniture Davis, Bette debit cards debt American’s addiction to of China Europe, debt crisis in of Japan for real estate, limits on in China United States, downgrading of young Chinese, acceptance of See also financial crisis Dell Dell, Michael Deloitte Deng Pufang Deng Xiaoping deportations, U.S.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Ben Bernanke, who served two terms as the chairman of the Federal Reserve between 2006 and 2014, and oversaw the US central bank’s response to the 2008 global financial crisis, was previously an academic economist and scholar of the Great Depression. In an article published in 1983 he claimed to have rescued the Fisher debt-deflation hypothesis by adding the idea of the credit crunch.17 This would be the missing link between deflation and dramatic declines in nominal incomes. As prices fall, the real debt burden of debtors rises; but, far from benefiting, it actually hurts creditors because falling asset prices, rising loan impairments and bankruptcies lead to a fall in the value of assets on bank balance sheets. These collateral effects lessen the incentive for creditors to lend, resulting in a credit crunch, which then hits aggregate demand in the economy through a fall in consumption and investment. This idea goes to the heart of the ‘financial accelerator’ concept, which describes how financial conditions tend to propagate business cycles.

Buccleuch, Henry Scott, 3rd Duke of budget deficits and austerity Burns, Arthur Burns, Mary business cycle theory Fisher Hayek Schumpeter Callaghan, James Cambridge School see also Keynes, John Maynard; Marshall, Alfred; Robinson, Joan Cambridge University Girton College Kings College Newnham College St Johns and women Canon capital accumulation capital investment capitalism in aftermath of 2008 financial crisis and communism derivation of term and Engels and the financial crisis of 2008 free-market and Hayek inequality and capitalist economies laissez-faire see laissez-faire and Marx and the Occupy movement and Schumpeterian ‘creative destruction’ socialism vs welfare state capitalism car industry Carney, Mark Carter, Jimmy Case, Elizabeth central banks Bank of England Bank of Japan European Central Bank Fed see Federal Reserve forward guidance macroprudential policy monetary policy tools see also quantitative easing (QE) Chamberlin, Edward Chicago School see also Friedman, Milton Chile China 1949 revolution asset management companies banking system Beijing Consensus Communist Party corporate debt Cultural Revolution domestic innovation economic transformation ‘effect’/‘price’ employment system entrepreneurs exports Five Year Plan (1953) foreign direct investment (FDI) and Germany industrialization and reindustrialization inequality innovation challenge legal institutions manufacturing Maoism and Marx national debt openness ‘paradox’ poverty reduction privatization R&D investment regional free trade agreement renminbi (RMB) as second largest economy services sector shadow banking smartphones social networks trade-to GDP ratio and the USSR wage increases women Churchill, Winston class Engels’ The Condition of the Working Class in England and Marx middle see middle class and Ricardo wage earner class Classical School of economics see also Mill, John Stuart; Ricardo, David; Smith, Adam Clinton, Bill Clinton, Hillary cloth clothing Coase, Ronald Cold War Collectivist Economic Planning collectivization Collier, Paul Columbia University communism Bolshevik Party and capitalism Chinese Communist League First International Marxism see Marxism and Robinson Socialist/Second International Third International USSR see Soviet Union Vietnamese vs welfare state capitalism Communist League comparative advantage theory competition ‘competing down’ (Schumpeter) imperfect between money providers perfect and Robinson wages and competitiveness computers Conard, Ed construction consultancy firms consumerism consumption and comparative advantage theory consumer spending and marginal utility analysis convergence hypothesis corn, free trade in Corn Laws repeal and Ricardo corporate debt Cowles Commission Crafts, Nicholas crafts credit crunch credit default swaps (CDS) credit rating Crimean War crypto-currencies currency crises first-generation second-generation third-generation currency stability Cyprus death duties debt Chinese corporate debt-deflation spiral and government bonds indexation and protection from and Minsky’s financial instability hypothesis mortgage debt national see national debt private corporate as share of GDP decentralization defence deflation debt-deflation spiral Fisher and combating deflation Japan self-fulfilling deindustrialization and globalization premature reversing/reindustrialization and trade US Deng Xiaoping depression see Great Depression (1930s); Long Depression (1880s); recession/depression diminishing returns to capital distributive lag model Douglas, David, Lord Reston Douglas, Janet DuPont East Asian ‘tiger’ economies see also Hong Kong; Singapore; South Korea; Taiwan eastern Europe Eastman Kodak Econometric Society Econometrica economic development challenges and Beijing Consensus financial/currency crises and institutions and Lewis model Myanmar and North and path dependence poverty eradication/reduction South Africa Sustainable Development Goals Vietnam and Washington Consensus economic equilibrium economic freedom economic growth and austerity barriers convergence hypothesis development challenges see economic development challenges drivers of 2 see also innovation; institutions; public investment; technology endogenous growth theories inclusive growth through investment Japan’s growth and Japan’s ‘lost decades’ Lewis model mercantilist doctrine of and new technologies policy debates on raising and poverty reduction and productivity debate/challenge slow growth and the future Solow model UK government’s renewed focus on and unemployment Economic Journal economic rent Ricardo’s theory of economies ‘animal spirits’ of crises see financial crises deflation see deflation emerging see emerging economies equilibrium in GDP see gross domestic product global macroeconomic imbalances growth of see economic growth inequality and capitalist economies inflation see inflation and international trade and investment see investment; public investment national debt see national debt QE see quantitative easing rebalancing of recession see recession/depression services economy see services sector and stagnant wages state intervention Economist education higher role in reducing inequality universal Eliot, T.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

Figure 1.2: The US federal deficit, 1990–2012 Source: Congressional Budget Office. Data for 2011 and 2012 represent CBO projections. In the George W. Bush years, things got worse. The federal government became habituated to borrowing. Taxes never covered spending‌—‌but still, even in 2004, the worst of those years, federal borrowing never breached the $500 billion level. And just as well: $500 billion is a lot of money. Then came the credit crunch. Lehman, AIG, General Motors‌—‌the first, most colorful phase of the current credit crisis. In 2008, the deficit hovered close to $500 billion. The following year, it was approaching $1,500 billion, or $1.5 trillion if you prefer. Just pause for a moment to consider how much money that is. Numbers that large become difficult to comprehend, because of the absence of obvious comparisons. So let’s look at some big numbers.

We’re about to start examining the scale of possible losses still to come in the current credit crisis; but before we do so, I need to make a couple of important points. They cut two ways. First, it is not only the banking system which holds poor-quality assets. Many of those assets will have ended up with insurance companies, pension funds, and central banks, for example. In the 2008–9 phase of the credit crunch, about two-thirds of the total losses ended up being absorbed by the banking system, and about a third by insurance companies and other investors.4 In the absence of a better guess, I’d say that the same division of probable losses to come still holds true. That first point is helpful. Systemic risks stem largely from the banking sector, so if losses are shared more widely, the banking sector is that little bit more robust.

For the first quarter of 2011‌—‌and bear in mind that only twenty-seven banks were involved in this study‌—‌the total of nonperforming loans was some $200 billion as compared with the reported total of $129 billion.12 That’s potentially as much as $70 billion smuggled away in games of extend and pretend. Misrepresentation on that scale is somewhat alarming, to put it mildly. On the other hand, in the context of the figures we’ve been looking at so far, $70 billion sounds manageable. But don’t be fooled. The IMF estimated the total losses arising from the first phase (2007–10) of the credit crunch (more on this at the end of the chapter). Excluding sovereign losses (which didn’t play a part in that phase) and residential mortgages (which we’ve already covered), the IMF estimated that losses in the corporate and other consumer sectors amounted to approximately $2.2 trillion, of which about $1.4 trillion ended up pounding bank balance sheets. If there is a new global recession unfolding now, or soon, I’d expect it to be more severe than last time, simply because the effects of the previous collapse were cushioned so heavily by governments borrowing and printing money.


pages: 222 words: 50,318

The Option of Urbanism: Investing in a New American Dream by Christopher B. Leinberger

addicted to oil, American Society of Civil Engineers: Report Card, asset allocation, big-box store, centre right, commoditize, credit crunch, David Brooks, desegregation, Donald Trump, drive until you qualify, edge city, full employment, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, knowledge economy, McMansion, mortgage tax deduction, new economy, New Urbanism, peak oil, Ponzi scheme, postindustrial economy, RAND corporation, Report Card for America’s Infrastructure, reserve currency, Richard Florida, Seaside, Florida, the built environment, transit-oriented development, urban planning, urban renewal, urban sprawl, walkable city, white flight

Congress set up a bail-out agency, the Resolution Trust Corporation (RTC), in 1989, to assume title to the hundreds of billions of dollars of real estate assets and bad loans from failed S&Ls and banks. The lending ban on the industry severely limited construction in the country. The Urban Land Institute, a leading real estate think tank, set up the Credit Crunch Task Force to work with the Federal Reserve to lift the ban. The reaction of the Federal Reserve to the Credit Crunch Task Force, according to Bob Larson, a senior executive with the Wall Street investment banking firm of Lazard Feres & Company, and a member of the task force, was “the Fed told us ‘real estate . . . we know the industry is huge but we know very little about it. Put together some economic information about its impact on the economy.’” The Fed was aware neither of the actual size of the real estate industry nor the importance of the industry to the economy—an amazing but true admission.


pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

A post-crash genre of books had sprung up with titles promising drugs, sex and extravagantly bad behaviour: Binge Trading: The Real Inside Story of Cash, Cocaine and Corruption in the City; Gross Misconduct: My Year of Excess in the City; Confessions of a City Girl: The Devil Wears Pinstripes. Barbara Stcherbatcheff’s story starts in a strip club, which also occupies significant sections of Tetsuya Ishikawa’s How I Caused the Credit Crunch: A Vivid and Personal Account of Banking Excess. The best known of those books is Cityboy: Beer and Loathing in the Square Mile by Geraint Anderson. In this semi-fictional autobiography, he spends 200 pages drinking, snorting coke, ogling strippers, chasing whores and, above all, complaining about hangovers. It is an entertaining read. It was also immensely lucrative for its author – according to Anderson, Cityboy has sold a quarter of a million copies.

(Davies) 1 financial sector (see also bankers; banks; City; global financial crisis): amorality in 1, 2, 3, 4 ‘animal’ types within 1 blame culture in 1 blog’s negative comments on 1 Brown’s praise for 1 and caveat emptor 1, 2, 3, 4, 5, 6 and charity donations 1 code of silence governs 1, 2, 3, 4 competition vs co-operation in 1 countries/blocs played against each other by 1 ethical dilemmas in 1 immune to exposure 1 and insider jokes 1 IT’s role in 1, 2 and patches and workarounds 1 ‘map’ of 1 and mergers and acquisitions 1, 2, 3, 4 countries’ legal systems affected by 1 number of employees in 1 politicians identify with 1 post-crash books about 1, 2 PR people within 1, 2 and project finance 1 protest demonstrations against 1 regulators identify with 1 remuneration in 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 bonuses 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and leisure-time spending 1 restructuring in 1 scandals within 1, 2, 3 (see also rogue traders) Barings 1 FX 1, 2 HSBC 1, 2 JP Morgan 1, 2 LIBOR 1, 2, 3 London Whale, see Iksil, Bruno Société Générale 1 UBS 1 sport and war analogies within 1 whistle blowers within 1, 2, 3 women in, men’s attitudes towards 1 Financial Services Authority 1 Financial Times 1, 2 F9 model monkeys 1 Fool’s Gold (Tett) 1 Freud, Sigmund 1 Fukushima 1 FX scandal 1 GDP (gross domestic product) 1 Geithner, Timothy 1 Gekko, Gordon (film character) 1, 2 global financial crisis, see financial crash Goldman Sachs 1, 2, 3 as exception to short-termism 1 Geithner’s and Clinton’s lucrative speeches to 1 London trading floor of, a ‘toxic and destructive environment’ 1 as ‘pure’ investment bank 1 banking licence subsequently acquired by 1 Smith’s book on 1 Smith’s NYT piece on 1, 2 Goodfellas 1 greed 1, 2, 3, 4, 5, 6 gross domestic product (GDP) 1 Gross Misconduct: My Year of Excess in the City (Thompson) 1 Guardian: distrust of 1 finance blog of: first interviews posted on 1 ‘Going native …’ subtitle of 1 readers’ comments posted on 1, 2, 3, 4, 5, 6, 7, 8 responses to interviews on 1, 2 traditional banking said to be under-represented on 1 guardiannews.com/jlbankingblog, see under Guardian Haldane, Andrew 1 Halliburton 1 Hancock, Matthew 1 Harrington, William J 1 hedge funds 1, 2, 3 and ‘unorthodox’ investment strategies 1 high-frequency trading 1, 2, 3, 4 high-net-worth individuals 1 house prices 1 How I Caused the Credit Crunch: A Vivid and Personal Account of Banking Excess (Ishikawa) 1 HSBC 1 annual results announcement of 1, 2 and drugs money 1, 2 mixed investment–commercial nature of 1 human resources (HR) (see also recruitment), and redundancy 1, 2 Iksil, Bruno (‘London Whale’) 1, 2 incentives: and accountancy firms 1 ‘perverse’ 1, 2, 3, 4, 5 need to remove 1 short-termism encouraged by 1 Initial Public Offering (IPO) 1, 2 insurance: banking’s overlap with 1 enormous reach of 1 investment banks (see also banks): ‘animal’ types within 1 books about 1 as ‘casinos’ 1, 2, 3 and ‘castes’ 1 vs commercial 1, 2 commercial banks begin to take over 1 culpability of, in global financial crash 1 daily routine of 1, 2, 3 definition of, clarified 1 and dot-com bubble 1, 2, 3 job titles within 1, 2, 3 radically changed ownership structure of 1 and risk and compliance 1, 2, 3, 4, 5, 6 (see also regulators) risk-taker–risk-bearer dichotomy in 1 and ‘rock’n’roll trader’ 1 speculation by 1 subcultures engendered by 1 Iraq 1 Ishikawa, Tetsuya 1 IT 1, 2 jlbankingblog, see under Guardian job titles, in investment banks 1, 2, 3 JP Morgan 1 Blair’s role in 1, 2, 3 rogue trader at 1, 2 Kerviel, Jérôme 1 KPMG 1 Krugman, Paul 1 Lagarde, Christine 1 Large Hadron Collider 1 Leeson, Nick 1 Lehman Brothers: capital buffers of 1 collapse of 1, 2, 3, 4, 5 inadequate buffers of 1 as ‘pure’ investment bank 1 Lewis, Michael 1 Liar’s Poker (Lewis) 1, 2 LIBOR scandal 1, 2, 3 Lloyds, annual results announcement of 1, 2 London riots 1 London Stock Exchange, and ‘my word is my bond’ 1, 2 London Whale, see Iksil, Bruno Master of the Universe 1, 2, 3 Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature (Hancock, Zahawi) 1 Masters of the Universe 1 passim, 1, 2 (see also banker types) cold fish’s scorn for 1 criticism of sector resented by 1 sector readily defended by 1 megabanks 1 (see also banks) mergers and acquisitions 1, 2, 3, 4 countries’ legal systems affected by 1 Merrill Lynch 1 middle office 1, 2, 3, 4, 5 more power and status in, post-crash 1 Monkey Business: Swinging through the Wall Street Jungle (Rolfe, Troob) 1 Moody’s 1, 2 Morgan Grenfell 1 My Life as a Quant (Derman) 1 ‘my word is my bond’ 1, 2 neutrals 1, 2, 3, 4, 5, 6, 7 (see also banker types) in political parties 1 New York Times 1, 2, 3, 4 9, 5 trader exploits 1 Nissen, George 1 Occupy London 1 operational risk 1 The Origin of Financial Crises (Cooper) 1 ‘other people’s money’ mentality 1 Oxfam 1 Paulson, Hank 1 Permanent Subcommittee on Investigations (US) 1 politicians: as best chance to wrest power from financial sector 1 identification of, with financial sector 1 justified cynicism about 1 neutrals among 1 powerlessness of, in face of global finance 1 private schools formerly attended by 1 teeth grinders among 1 project finance 1, 2 prop trading 1, 2, 3, 4 Prudential Regulation Authority 1 PwC 1 quants (quantitative analysts) 1, 2, 3, 4 ‘animal’ types among 1 with Asperger’s 1, 2 geeks among 1 rating agencies 1, 2, 3, 4, 5 and CDOs 1 Moody’s 1, 2 ‘oligopoly’ of 1 paid by banks 1 RBS, annual results announcement of 1, 2 recruitment 1, 2 (see also redundancy) and short-termism 1 redundancy 1, 2, 3, 4, 5, 6 (see also recruitment) as ‘enhanced severance’ 1 as rite of passage 1 termed ‘the cull’ 1 in UK vs US 1, 2 and work-related visas 1 regulators 1 fighting symptoms rather than cause 1 and Financial Services Authority, Financial Conduct Authority, Prudential Regulation Authority 1 identification of, with financial sector 1 ‘idiots’ description applied to 1, 2 ‘losing people at all levels’ post-crash 1 numbers working for 1 and self-declaration 1 religion 1 remuneration 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 bonuses 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and leisure-time spending 1 restructuring 1 riots, in London 1 risk: ability to weigh 1 and departmental specialisations 1 managers, salaries of 1 operational 1 sovereign 1 takers of vs bearers of 1 risk and compliance 1, 2, 3, 4, 5, 6 (see also regulators) disparaged 1 and self-declaration 1 ‘rock’n’roll trader’ 1 rogue traders 1 at Barings 1, 2 at JP Morgan 1 at Société Générale 1 at UBS 1, 2 Rosenbaum, Ron 1 Rubin, Robert 1 Rusbridger, Alan 1 Saddam Hussein 1 Salomon Brothers 1 Samuel Montagu 1 Sants, Hector 1 scandals 1, 2, 3 (see also rogue traders) Barings 1 FX 1, 2 HSBC 1, 2 JP Morgan 1, 2 LIBOR 1, 2, 3 London Whale, see Iksil, Bruno Société Générale 1 UBS 1 school system, UK 1 Schroders 1 Schumer, Charles E 1 short-termism 1, 2 Sid (trader, broker) 1 passim, 1, 2 Smith Brothers 1 Smith, Greg 1, 2, 3, 4 social Darwinism 1 Société Générale 1 mixed investment–commercial nature of 1 Sorkin, Andrew Ross 1 sovereign risk 1 Sports Illustrated 1 Square Mile, see City Stcherbatcheff, Barbara 1 Stock Exchange, former 1 Summer, Lawrence 1 ‘tax optimisation’ 1 technical analysis 1 teeth grinders 1, 2, 3, 4 (see also banker types) in political parties 1 Tett, Gillian 1 ‘too big to fail’ 1, 2, 3, 4 and ability to blackmail 1 ‘too big to manage’ 1 Traders, Guns and Money (Das) 1 Twin Towers: terrorist attacks on 1, 2 trader exploits 1 UBS 1 rogue trader at 1 van Ees, Peter 1 Van Rompuy, Herman 1 venture capitalists 1 Verey, Michael 1 volatility 1 Voss, Rainer 1, 2, 3 Wall Street 1, 2, 3 Watergate 1 Wawoe, Kilian 1, 2 Weber, Axel 1 Weiser, Stanley 1 whistle blowers 1, 2, 3 ‘Why I Am Leaving Goldman Sachs’ (Smith) 1, 2 Why I Left Goldman Sachs (Smith) 1 The Wolf of Wall Street 1 Wolfe, Tom 1 working hours 1, 2, 3 World Trade Center: terrorist attacks on 1, 2 trader exploits 1 Zahawi, Nadhim 1 About the Author Joris Luyendijk was born in Amsterdam.


pages: 247 words: 68,918

The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global reserve currency, global supply chain, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, shareholder value, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

In any case, pure capitalism has never existed in the real world, and only the most ideologically committed of economic anarchists believe that it should. Markets can’t meet every human need, fear and greed ensure that markets will never work perfectly, and no market participant enjoys perfect information. Market failure didn’t begin with the global recession of 2009, the bank failures of 2008, the credit crunch of 2007, the savings-and-loan crisis of the 1980s,3 or even the stock market crash of 1929. Those investing heavily in the South Sea Company in 1720, the victims of irrational exuberance over the firm’s monopoly on trade in the South Seas, might have saved themselves some heartache had they learned the lessons of the Dutch tulip mania of 1637.4 Each successive market meltdown creates a temporary surge of momentum behind government efforts to ensure that it never happens again.

Together they dominate Abu Dhabi’s business community, in part via an organization known as the UAE Offsets Group, a collection of thirty to forty men with ties to both the al-Nahyans and the UAE’s largest companies and development projects. For many years, relations between the al-Maktoums of Dubai and al-Nahyans of Abu Dhabi have generated friction, competition, and rivalry. The financial crisis and credit crunch of 2008 hit Dubai especially hard, fundamentally shifting the balance of power within the UAE toward Abu Dhabi and the al-Nahyans. As money stopped flowing into Dubai from abroad, large-scale infrastructure projects ground to a halt, shrinking the local labor force. Thousands of foreigners lost work permits in the construction sector. Thousands more, saddled with loans they could no longer repay, simply abandoned their property and left the country.


pages: 351 words: 102,379

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

affirmative action, Andy Kessler, Asian financial crisis, Berlin Wall, break the buck, BRICs, business cycle, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Emanuel Derman, Fall of the Berlin Wall, fear of failure, fixed income, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise

In addition to tough questions about what had come to be known as “Bear Weekend,” he knew another subject was likely to arise: Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises that bought up mortgages. The GSEs, which were blamed for inflating the housing bubble, had been political and ideological hot buttons for decades, but never more so than at that moment. With Bear Stearns’ failure, the senators might even begin connecting the dots. One of the first causalities of the credit crunch was two Bear Stearns hedge funds that had invested heavily in securities backed by subprime mortgages. It was those mortgages that were now undermining confidence in the housing market—a market that Fannie and Freddie dominated, underwriting more than 40 percent of all mortgages, most of which were quickly losing value. That, in turn, was infecting bank lending everywhere. “Their securities move like water among all of the financial institutions,” Paulson had said of Fannie and Freddie.

“I don’t care who you are”: Fuld, as reported by Gary Silverman and Charles Pretzlik, “Richard Fuld—A Cunning Player Shows His Hand,” Financial Times, August 17, 2001. As he fumed to the Washington Post: Ianthe Jeanne Dugan, “Battling Rumors on Wall St.; Lehman Brothers Chairman Launches Aggressive Defense,” Washington Post, October 10, 1998. “We learned we need a lot of liquidity”: Fuld, in an interview with Craig, “Lehman Finds Itself,” Wall Street Journal. white paper he presented in Davos: Russo’s presentation, titled “Credit Crunch: Where Do We Stand?,” was originally given at the Group of Thirty meeting on November 30, 2007. He updated the paper for the World Economic Forum in January 2008. See http://www.group30.org/pubs/pub_1401.htm. for $21 million were finished: A broker told the New York Post: “It’s got great bones, but it needs tons of work,” estimating that the renovation of Fuld’s apartment would cost $10 million more.

To the Japanese Nikkei Report on April 3, he said: “We have plenty of capital going forward, and we don’t need to come back into the equity market.” At a news conference in Mumbai on May 7: “We have no present intention of raising any more capital.” See Nick Antonovics, “Merrill CEO Says Won’t Need More Capital,” Reuters, March 8, 2008; “Full Text of Interview with Merrill Lynch CEO John Thain,” Nikkei Report, April 4, 2008; John Satish Kumar, “Credit Crunch: Merrill’s Thain Backs Auction-Rate Securities,” Wall Street Journal, May 8, 2008. as “the most vulnerable brokerage after Lehman”: Reinhardt Krause, “Lehman Bros. Extends Slide as Wall St. Doubts Future,” Investor’s Business Daily, June 13, 2008. For a single day John Thain had the job he had wanted for his entire career: Kassenaar and Onaran, “Merrill’s Repairman,” Bloomberg Markets. Craig Horowitz, “The Deal He Made,” New York, July 10, 2005.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

A front-page headline from the January 31, 1990, New York Times read: “Recession Chances Have Diminished, Greenspan Says.”33 In August of 1990, he pronounced, “ ‘those who argue that we are already in a recession are reasonably certain to be wrong.’”34 The recession’s official starting date was July 1, 1990.35 Greenspan never mentioned the existence of a recession until four years later. In 1994, Alan Greenspan produced a history lesson that served the interests of Alan Greenspan. He spoke of a credit crunch in the spring of 1989. The Federal Reserve chairman had anticipated the problem: “In an endeavor to defuse these financial strains, we moved short-term rates lower in a long series of steps in the summer of 1992, and we held them at unusually low levels until the end of 1993—both absolutely, and, importantly, relative to inflation.”36 Greenspan’s reconstruction of his own actions grew more heroic: “Lower interest rates fostered a dramatic improvement in the financial condition of borrowers and lenders.

Beckner, Back from the Brink: The Greenspan Years (New York: John Wiley & Sons, 1996), p. 215. 3 James Grant, The Trouble with Prosperity: The Loss of Fear, the Rise of Speculation, and the Risk to American Savings (New York: Times Books, 1996), p. 192. 4 Beckner, Back from the Brink, p. 245. In early 1991, Greenspan told the Senate Banking Committee that the Fed had seriously considered buying commercial bank loans to ease the credit crunch. The looming question, Greenspan explained, was whether the Fed should become “effectively a commercial banker.” Ibid., p. 226. 5 Ibid., p. 432: “Bush made what is known as a recess appointment while Congress was not in session. Greenspan’s term as chairman expired on August 11, 1991, and his term as governor on January 31, 1992. Announced August 9, the recess appointment took effect August 10.

In London, he told the Daily Telegraph that “Britain is more exposed than we are [to mortgage defaults]—in the sense that you have a good deal more adjustable-rate mortgages.”17 That would seem to contradict his variable-rate advice in February 2004, when he advised Americans to look overseas, “where adjustable-rate mortgages are far more common.”18 His statement to the Telegraph was on September 17, in the midst of a bank run on Northern Rock, a British bank. He may not have heightened the hysteria sweeping Britain, but he could have kept his mouth shut. 14 Interview with Leslie Stahl, 60 Minutes, September 16, 2007. 15 Jane Wardell, “Greenspan Defends Subprime,” Associated Press, October 2, 2007. 16“World Markets Still Affected by Fear: Greenspan,” Le Figaro, September 23, 2007. 17“UK More Vulnerable than America to the Credit Crunch, Greenspan says,” Daily Te l eg raph (London), September 18, 2007. After Britain, he was seen in Vienna, where he said, “[T]here is no doubt about the fact that low interest rates for longterm government bonds have caused the real estate bubble in the US” and “[real estate] prices are going to fall much lower yet.”19 In Amsterdam, Greenspan fueled a cabinet crisis (about unemployment) when he told the press and ING Bank’s guests that the unemployment numbers are so low in the United States because it’s easy to fire an employee and it’s also easy to find a job. 20 The author grew more defensive.


The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, Bernie Madoff, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, minimum wage unemployment, moral hazard, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, shareholder value, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

If my failure jeopardizes your possibilities for success, there is a negative externality. Clearly, there is an externality in banking since failure by any one bank negatively affects the reputation of all banks – and not just banks’ reputations with households; it even affects their reputations with each other. For example, in the 2008/09 crisis banks became so suspicious of each other that they refused to lend to each other – exacerbating the credit crunch. This is often referred to as a ‘systemic externality’ since problems at one bank have implications for the banking system as a whole. Limited rationality Real estate and stock market bubbles are driven by investor overconfidence. Akerlof and Shiller (2009) argue that this overconfidence is fed by ‘stories’ that gain such widespread acceptance that they seem undeniably true. For ex­ample, in the 1990s it was commonly believed that real estate was the single best investment anyone could make, because land is limited while the population (and hence the demand for land) is constantly growing.

Financial institutions find themselves not only short of liquidity, but also short of capital. Many of them in the 2008/09 crisis had liabilities far exceeding the (now reduced) value of their assets and were effectively insolvent – hence the call for massive government bailouts. In such circumstances even sound businesses are unable to find the funding they require and may be forced into bankruptcy. This is what is meant by a ‘credit crunch’. Interest rates may be low (even approaching zero) but loans are difficult to obtain – especially if you need the money! This is a classic case of how the demand and supply model is inadequate to explain the credit market. 258 Stiglitz (2003) argues that the main problems were caused by deregulation. In the early 1930s the Roosevelt administration enacted three key pieces of legislation in an effort to avoid a repeat of the Great Depression.

., 179–80 climate change, 112, 152–3, 154–7, 165, 253; denial of, 156 closed-end mutual funds, 147 coffee, price of, 233–4 cognitive dissonance, 162 Cohen, Avi, 105, 106, 181, 182–3 Colander, David, 116, 132, 141, 154, 206, 232 collective good, 111, 152 see also public goods Colombia, US military aid to, 240 Commercial Alert, 82, 84 Commodity Futures Modernization Act (CFMA) (2000), 262 common resources, use of, 152 communities, destruction of, 16, 18 community: notion of, 25–6; omitted from analysis, 251–3; relation to individual, 17–18 comparative advantage, 28–30, 222, 224, 227, 230–1; evaluation of, 43–5; technological change and, 228 comparative static analysis, 48–9, 64 compensation principle, 225–6, 245 competition, 13; imperfect, model of, 66, 106; perfect, 46, 53, 54–7, 60, 65, 93, 102, 104, 107–8, 130, 131, 132, 138, 169, 194, 204, 230 (analysis of, 118–22; efficiency of, 121–2; flawed nature of, 135–8; in labour markets, 63; incompatible requirements of, 65–6; limits of, 118–49; overemphasis on, 247–8) competitive market, definition of, 46 competitive model, 106; as useful approximation, 57–62; empirical testing of, 184–5; inconsistency of, 64–5 computer waste, disposal of, 232 conspicuous consumption, 90, 158, 205 consumer loans, 260 consumer’s surplus, 75–6, 221 consumerism, 79, 248; formation of, 74 see also conspicuous consumption consumers, people as, 74–92 contracts, 60; perceived costlessness of, 245–6; relational, 141–2, 250, 256 conventions, 169 Cook, P. J., 186 cooperation, importance of, 21 cooperative (or collusive) behaviour, 129–30 cooperative firms, 116 coronary heart disease, in civil service, 214 corporations, power of, 84, 110–14; relation to individual, 18–20 see also multinational corporations costs, private versus social, 150–3 costs of production, theories of, 94–100, 102–6; empirical support lacking, 105–6 Cowell, Frank, 207 credit crunch, 258 credit default swaps (CDS), 257, 261–2 credit markets, in USA, 256 crime rates, 20 Crusoe, Robinson, 27–8, 91 cycles, 15, 147–8 Daly, Herman, 253 Dasgupta, Partha, 231, 232 Davis, Lance, 240 Dayton-Johnson, J., 26 deadweight loss, 125, 136, 137, 138, 139–40 Deaton, Angus, 88–9 demand: relation with marginal revenue, 101; theory of, 74–81 demand and supply model, 53 demand curve, 46–7, 76, 77, 104, 107, 131 democracy, 21, 86, 91, 115–16, 167, 217; economic, 116, 234 Denmark, taxation in, 210–11 deregulation, 143, 144, 261–2; impact of, 259–61 Dewald, W.


pages: 756 words: 120,818

The Levelling: What’s Next After Globalization by Michael O’sullivan

"Robert Solow", 3D printing, Airbnb, algorithmic trading, bank run, banking crisis, barriers to entry, Bernie Sanders, bitcoin, Black Swan, blockchain, Boris Johnson, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, capital controls, Celtic Tiger, central bank independence, cloud computing, continuation of politics by other means, corporate governance, credit crunch, cryptocurrency, deglobalization, deindustrialization, disruptive innovation, distributed ledger, Donald Trump, eurozone crisis, financial innovation, first-past-the-post, fixed income, Geoffrey West, Santa Fe Institute, Gini coefficient, global value chain, housing crisis, income inequality, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, pattern recognition, Peace of Westphalia, performance metric, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

What I mean by this is that the emphasis would probably be on minimizing the political consequences of the credit shock and, consistent with this, on minimizing unemployment. Such an approach would be unlike that used in the United States after the global financial crisis and in Europe in the aftermath of the eurozone crisis, both of which left socioeconomic carnage in their wakes. To a certain extent the Chinese authorities have been taking actions that appear consistent with a realization of the dangers of a credit crunch and have been becoming steadily more adept at acting and communicating than some Western policy makers in the run-up to the global financial crisis. This increasingly vigilant attitude is in contrast to the attentiveness of UK politicians like Alistair Darling, who as the UK’s chancellor of the exchequer found out about the global financial crisis when passing the newsstand of a Majorca supermarket.

“Rheinish capitalism” refers to the European approach to corporate finance, which relies more heavily on the financing of business by banks than by debt and equity markets, on dual board structures, and on a lesser emphasis on mergers and acquisitions.33 In China, and more broadly in Asia, a homegrown approach to finance would probably take some time to crystallize, and its success would depend on the severity of a Chinese credit crunch. A third reason to involve China in a debt conference is geostrategic. China may wish to participate in a debt conference as a means of further opening itself up to international markets and of influencing debt restructuring in other economies across Asia. Equally, mindful of how the Washington Consensus (a liberal, promarket policy approach to countries that is associated with the IMF of the 1990s) has led many economies astray, China may prefer not to have the imprint of Western policy on its economy.

Buckles, Hungermann, and Lugauer, “Is Fertility a Leading Economic Indicator?.” 16. Freedman, The Future of War, 264. 17. R. Dornbusch, “Expectations and Exchange Rate Dynamics,” Journal of Political Economy 84 (1976): 1161–1176; R. Dornbusch, “Exchange Rate Expectations and Monetary Policy,” Journal of International Economics 6 (1976): 231–244. 18. A. Pierce, “The Queen Asks Why No One Saw the Credit Crunch Coming,” Daily Telegraph, November 5, 2008. 19. P. Krugman, “How Did Economists Get It So Wrong?,” New York Times Magazine, September 2, 2009, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html. 20. P. Romer, “The Trouble with Macroeconomics,” working paper, September 14, 2016, 15, https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf; N. Taleb, “The Intellectual Yet Idiot,” Incerto (blog), Medium, September 16, 2018, https://medium.com/@nntaleb/the-intellectual-yet-idiot-13211e2d0577#.hicytcdpb; K.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, plutocrats, Plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

All a bank needed was highly skilled (or lucky) traders. No pesky customers were needed for deposits—you simply bought OPM in the interbank market. The benchmark rate became know as LIBOR—the London Interbank Offered Rate—and remains the most important single interest rate in the financial world. This is why, when LIBOR went through the roof in August 2007, it was the canary in the mineshaft signaling the start of a global credit crunch that morphed into a full-fledged crisis: Interbank lending had seized up because banks The Natural History of Financial Folly wouldn’t trust each other with even short-term placements. This was a shock from which the system only recovered slowly and tentatively. DANGEROUS CUSTOMERS The third source of danger for bankers gone wild was keeping bad company. Governments or government enterprises from the very beginning of the Euromarkets were vastly more important than other borrowers.

The industry lost over $45 billion in just 3 years between 1985 and l987. Between 1980 and 1992, a total of 1,142 savings and loan associations and 1,395 banks were closed, and many others were forced to merge. States as large as Texas effectively had their entire indigenous banking system fail and fall into out-of-state control. Bailouts cost the Treasury hundreds of billions, and a severe credit crunch and collapse in real estate values helped trigger and extend a recession in 1990 to 1992. CAPITAL MARKETS TAKE OVER The same decade that saw the banking industry enter its perfect storm saw the beginning of the longest bull market in Wall Street history. The 25-year bull market that ended in 2008 coincides with a vast increase in pension fund assets under professional management. Some of this merely reflects demography as the Baby Boomers began to accumulate wealth.


The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg) by Liam Vaughan, Gavin Finch

asset allocation, asset-backed security, bank run, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, buy low sell high, call centre, central bank independence, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, eurozone crisis, fear of failure, financial deregulation, financial innovation, fixed income, interest rate derivative, interest rate swap, Kickstarter, light touch regulation, London Interbank Offered Rate, London Whale, mortgage debt, Northern Rock, performance metric, Ponzi scheme, Ronald Reagan, social intelligence, sovereign wealth fund, urban sprawl

That afternoon Stephen Green, HSBC’s chairman and an ordained clergyman, presented the paper on the opening day of the BBA’s annual conference to some 350 bankers and finance professionals who had gathered among the marble columns and crystal chandeliers of the 19th-century Gibson Hall. It read: Since its inception in 1985, BBA Libor has enjoyed a reputation for accuracy. However, just as the credit crunch has led to stress in the markets, and the breakdown of longstanding correlations in the pricing of assets, as a barometer of these markets, it has also been stressed. This has led to discussion of some of the BBA Libor currency fixes—particularly the dollar fix—within the financial community. This proper discussion has overflowed into commentary No One’s Clean-Clean 59 in the media, and the BBA believes that it needs to correct a number of misunderstandings and misperceptions.

Regina v. Tom Hayes, evidence. The revelations may actually have cost borrowers money. On a 30-year £1 million mortgage tied to Libor, the two-day increase equated to an extra £146 a month. “Meeting of the Federal Open Market Committee on April 29– 30, 2008”, Federal Reserve, http://www.federalreserve.gov/monetarypolicy/ files/FOMC20080430meeting.pdf. Peter Taylor, “Libor credibility questioned as credit crunch deepens”, Daily Telegraph, April 17, 2008, http://www.telegraph.co.uk/finance/newsbysector/ banksandfinance/2788384/Libor-credibility-questioned-as-credit-crunchdeepens.html. Carrick Mollenkamp, “Libor surges after scrutiny does, too”, The Wall Street Journal, April 18, 2008, http://www.wsj.com/articles/ SB120846842484224287. Regina v. Darrell Read and Others, evidence. Peter Madigan, “Libor under attack”, Risk Magazine, June 1, 2008, http://www. risk.net/risk-magazine/feature/1497684/libor-attack.


pages: 477 words: 75,408

The Economic Singularity: Artificial Intelligence and the Death of Capitalism by Calum Chace

3D printing, additive manufacturing, agricultural Revolution, AI winter, Airbnb, artificial general intelligence, augmented reality, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Berlin Wall, Bernie Sanders, bitcoin, blockchain, call centre, Chris Urmson, congestion charging, credit crunch, David Ricardo: comparative advantage, Douglas Engelbart, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Flynn Effect, full employment, future of work, gender pay gap, gig economy, Google Glasses, Google X / Alphabet X, ImageNet competition, income inequality, industrial robot, Internet of things, invention of the telephone, invisible hand, James Watt: steam engine, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kevin Kelly, knowledge worker, lifelogging, lump of labour, Lyft, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Milgram experiment, Narrative Science, natural language processing, new economy, Occupy movement, Oculus Rift, PageRank, pattern recognition, post scarcity, post-industrial society, post-work, precariat, prediction markets, QWERTY keyboard, railway mania, RAND corporation, Ray Kurzweil, RFID, Rodney Brooks, Sam Altman, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, software is eating the world, speech recognition, Stephen Hawking, Steve Jobs, TaskRabbit, technological singularity, The Future of Employment, Thomas Malthus, transaction costs, Tyler Cowen: Great Stagnation, Uber for X, uber lyft, universal basic income, Vernor Vinge, working-age population, Y Combinator, young professional

Haldane avoided putting a specific timescale on this, and also avoided saying what would happen after that undisclosed period. Martin Wolf As the main financial columnist and associate editor at the Financial Times, Martin Wolf is the very epitome of a City establishment figure. He was described by US Treasury Secretary Larry Summers as “probably the most deeply thoughtful and professionally informed economic journalist in the world.”[xlvii] Although the credit crunch and subsequent recession have re-kindled his youthful enthusiasm for Keynesian economics, it is still a surprise to read him advocating income redistribution and universal basic income, as he did in this article from February 2014: “If Mr Frey and Prof Osborne [see below] are right [about automation]… we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. ...

[xxxii] http://fortune.com/2015/11/10/us-unemployment-rate-economy/ [xxxiii] This and the other quotes in this paragraph and the next one are from Chapter 10: Toward a New Economic Paradigm. [xxxiv] Brynjolfsson is the director of the MIT Center for Digital Business and McAfee is a principal research scientist there. [xxxv] The word “inequality” crops up 42 times in the book, including in the titles of sources, but the authors never explicitly connect it with “spread”. [xxxvi] The loosely-organised protest organisation that sprang up after the 2008 credit crunch to campaign against inequality. [xxxvii] Chapter 12: Learning to Race with the Machines: Recommendations for Individuals. [xxxviii] Chapter 13: Policy Recommendations. [xxxix] Chapter 14: Long-Term Recommendations. [xl] http://www.susskind.com/ [xli] http://www.scottsantens.com/ [xlii] https://www.reddit.com/r/BasicIncome/ and https://www.reddit.com/r/basicincome/wiki/index [xliii] https://www.youtube.com/watch?


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The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

active measures, affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, disruptive innovation, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial cluster, industrial robot, intangible asset, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, Paul Samuelson, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shared worldview, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor, zero-sum game

MG Rover engineers, production managers, and technical staff were also hired to help improve production and strengthen their design and innovation capabilities. The China Development Bank (CDB) and Temesek Holdings from Singapore, both state-owned corporations, bought into Barclays Capital, originally to support its takeover bid for the Dutch investment bank ABN AMRO. Luckily for them, the bid failed and Royal Bank of Scotland struck a deal with ABN AMRO and subsequently lost 96 percent of its share value following the credit crunch. In our interviews with some of the leading players and commentators in this bid, it is clear that the China Development Bank had linked up with Temesek because it had far wider experience in this area and because of the learning and experience that the CDB would acquire with positions on the board of Barclays. There has also been increasing use of state “sovereign funds” that have enabled countries including China, Russia, Singapore, and the Arab states to accumulate large reserves of U.S. dollars, giving them the financial resources to buy into overseas companies.

Likewise, human capital assumptions about the returns to knowledge workers rest on an outdated understanding of the global economy, as the proportion of wealth creation accruing to the workforce rather than shareholders has declined. Global sourcing can be used to play off different groups 110 The Global Auction of knowledge professionals scattered around the globe whether within the same or different organizations. Stephen Roach, chief economist at Morgan Stanley, reported that the win-win scenario for globalization was in serious trouble well before the credit crunch. While he believed that some workers in the developing world were benefiting from global trade agreements, this was not the case for many workers in the rich developed world, as most of the benefits had accrued to owners of capital at the expense of labor. He observed a powerful asymmetry in the impact of globalization on the world’s major industrial economies that led to record highs in the returns accruing to capital and record lows in the rewards going to labor.


pages: 280 words: 76,376

How to Write Your Will: The Complete Guide to Structuring Your Will, Inheritance Tax Planning, Probate and Administering an Estate by Marlene Garsia

Asperger Syndrome, Berlin Wall, call centre, clean water, credit crunch, estate planning

World Cancer Research Fund receives no government funding for its scientific research programmes, so this vital work is only made possible through the generosity of individual donations, with legacies being a very important means of support. Leaving a gift in your will to us would help ensure less people are affected by this terrible disease and what better legacy to leave to your loved ones – a future free from cancer. Your legacy could help stop cancer before it starts. advertisement feature Why Do You Need a Will? ■ 15 The wealth of this nation has dramatically increased over the past 15 years despite the current credit crunch. It is not just the privileged few who have money and assets to leave to their family and friends. The increase in house prices was one of the most significant adjustments to personal wealth in the early to mid 2000s. In addition, increasing numbers of the second generation are inheriting a property or indeed have purchased a second home. And a few may own yet another property in this country or overseas, which may be rented out.

Certainly, a valuation of the business as at the date of death is needed and the business’s accountants will need to be involved. In the case of intestacy, as an administrator you might need a solicitor if complications arise, such as difficulties in tracing missing relatives or living relatives residing overseas. This problem is a fairly common one and solicitors know the many ways to have relatives traced. 136 Time to update your will A knock on effect of the credit crunch is that wills written in healthier economic times are going out of date and thousands could be in urgent need of updating. Making a will is particularly important if you are not married to your partner but are cohabiting. With home values plummeting and other investments struggling, many assets in a person’s will have lost value. Those wanting to leave friends and family in a secure position after they pass away might find that what they have left in their will has considerably less value than when their solicitor wrote it.


pages: 258 words: 71,880

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly

bank run, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, fixed income, housing crisis, index arbitrage, Long Term Capital Management, margin call, moral hazard, quantitative hedge fund, Renaissance Technologies, risk-adjusted returns, shareholder value, technology bubble, too big to fail, traveling salesman

He had already spoken to J.P. Morgan himself. “We can’t buy this thing tonight,” Dimon had told Geithner shortly after he’d heard from Schwartz. “Go in and look at the thing, and let’s talk,” Geithner said. Something had to be done. He was eager to know what J.P. Morgan was finding. Steve Black, cohead of J.P. Morgan’s enormous investment bank, had been looking forward to a real vacation. Since the credit crunch had first ballooned the prior spring, Black had had several holidays either canceled or interrupted by business, and this time he was hoping to wind down properly. He was at a restaurant in Anguilla with his wife, Debbie, when a man from the kitchen walked over to the table. “Oh, shit,” Black muttered as he approached. “Are you Mr. Black?” asked the man. Black nodded. “Mr. Dimon is on the phone for you,” the man responded.

., Form 10-K, February 27, 2004. 146 richest chief executive: Susanne Craig, “The Biggest Fish on Wall Street? Probably Not Who You Think,” Wall Street Journal, May 9, 2006. 147 famously told associates: Kelly, “Bear CEO’s Handling of Crisis,” Wall Street Journal, November 1, 2007. 148 when Lewis began loading up on Bear shares: Roddy Boyd, “Lewis Raises Cayne—Helps Bridge Gap,” New York Post, September 12, 2007. 148 forced him to buy: Cassell Bryan-Low and Kate Kelly, “Credit Crunch: Bear Succumbs,” Wall Street Journal, March 17, 2008. 153 accompanied by friends: Kelly, “Bear CEO’s Handling of Crisis,” Wall Street Journal, November 1, 2007. 157 Cayne gave an interview: Landon Thomas, Jr., “Salvaging a Prudent Name,” New York Times, June 29, 2007. 158 Spector had personally authorized: Cohan, “The Rise and Fall,” Fortune, August 18, 2008. 160 “important to be seen”: Kate Kelly and Dana Cimilluca, “Can New CEO Repair Bear?


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Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

County and city governments are having similar problems, and we’re likely to see the largest municipal bankruptcy in American history very soon, in the county in Alabama where Birmingham is, which will I think be about twice the size of the Orange County bankruptcy of about 10 years ago. So this is having real world effects. And when governments can’t borrow they have to cut services and lay people off. So this is very, very real stuff here. Now this is a credit crunch, so it’s not about the price of credit, the interest rate, but the availability of it. I’ve heard several responses to this, and let me just deal with a couple of them. I’ve heard several people say it’s a hoax. No, it’s not: the credit freeze is not like WMDs in Iraq, it’s visible in real stats that are quoted daily, weekly, or even quoted in real time in Bloomberg terminals around the world.

The Obama team is compelled to engage. Nonetheless, it is an ambitious deadline. It took nearly two years of discussion before there was sufficient agreement to attempt the 1944 Bretton Woods Conference in New Hampshire that famously established the post-war international financial system and to which the current summit process is being compared. But shared awareness that the system is broken and that the world risks a credit-crunch-induced global depression is concentrating minds wonderfully. Where to start? The architects of Bretton Woods I knew they had to avoid the beggar-my-neighbor policies of the 1930s—economic autarchy and hyper-militarization—and that if the U.S. and Britain could clinch a deal, then everybody else would have to follow. Even then it was a struggle. The question then, as now, is how much are governments prepared to pool economic sovereignty and accept fiscal disciplines in order to produce the greater global public good?


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