Thursday, 17 September 2015

Learning from mistakes and making criminals pay

Although the finance world is an interest of mine, I don’t write about it often because it usually makes me angry and I feel like a raving loon, someone sane but who claims to have been locked up in the asylum due to a clerical error. Today’s rant is long, but ultimately therapeutic, and that's all that matters to me. There are a few links toward the bottom that are probably more interesting than the blog post, so if you are looking for something worthwhile to read, I suggest you go there.

An analogy

Imagine that you buy a very expensive fishing boat.  You take out a sizeable loan to do so, one that you can afford to repay, IF you catch enough fish. The boat runs beautifully for a while, but the maintenance costs are much more than you expected and the fish are proving elusive. You refinance your loan and you max out every credit card you can get your hands on, stretching the truth on the application forms because you’re certain that things will get better soon.

The fish come back on the bite for a while and you pay off some of the credit cards, but then a crew-member drowns at sea and you can’t give his family the payout they are owed because you stopped paying insurance premiums ages ago - you couldn't afford not to.

You realise you’re in deep shit, so you go see your mate from school who’s now an acclaimed economist. He tells you that debt is nothing to worry about – he urges you to take out another loan, wherever and however you can get it from – the money will provide stimulus for your business and you can repay the debt when times are good.

You follow his advice, not just once, but 3 or 4 times over the next 5 years, because surely a profitable year is just around the corner.  Fish and profits don’t materialise, but what does is a significant injection of funds from the Government. As it happens, your deckhand knows someone with influence and a stimulus program is kick-started to help out struggling businesses like yours. The money is paid to you in the form of an interest free loan.

You use the money to buy 3 more boats because more boats in the water = more fish = more profits, right? But luck is not on your side because somewhere along the way, new competition enters the industry – cashed up computer programmers, tired of scamming the stock-markets, have come for a bit of a laugh and to make some money in seafood. They have designed algorithms and equipment that allow them to see and catch the fish before you do and take more than their quota without the authorities knowing. The Department of Fisheries is either too incompetent, corrupt or powerless to intervene.

In the ten years since you started the business, your debts now outweigh your assets by about 5 to 1 and you've been effectively trading insolvent for the last 5 years.

What do you do? Do you:

(a) default on your loans, declare bankruptcy, dissolve the business, and start again from scratch; or
(b) borrow, beg and steal more money to keep the business going.

I'm not a huge fan of analogies because, on close inspection, they often turn out to be stupid nonsense. The mangled one I just created is probably in that same category, but it’s the best I could come up with to describe my view of the current economic environment. You might argue that you can’t apply personal finance scenarios to the macroeconomic environment – but I just have, so there.

Personally, there’s not a chance in hell that I’d choose (b), subject myself to more stress and pain, and then pass on the debts and crippled business to my children, hoping that maybe one day my great, great, great-grandchildren will get something out of it. I made the mistakes and had the bad luck, so I would take the hit to my pride and move on.

More specifically, my opinion of what is going on, can be summarised as: 
  • There are many countries that have taken on debt they have no chance of paying off, or will take generations to do so;
  • Their central banks and Governments are of the mistaken belief that they can fix their economies by interfering.
  • A lot of people seem to think this interference will be successful.
  • Printing money, keeping interest rates at low levels or zero, selling bonds and bailing out banks is a foolish and ultimately doomed exercise.
  • Nothing has been learned from the 2007-08 crisis because the bankers are still rich, none of them are in jail and they are still playing the same games with ordinary people’s lives.
Stock markets are not efficient at the best of times, but especially not when they are being tampered with. “Fair value” means absolutely nothing if Central Banks are creating an environment where returns on conservative investments like cash are not keeping up with inflation. Investors are forced to put their personal and retirement savings in riskier assets to get returns that are better than “bugger all” - they are taking on risk they would otherwise avoid.

Throw in to the mix: 
  • high frequency traders manipulating markets;
  • the investment banks with their ‘dark pools’ and immoral and illegal conduct;
  • the impotent or incompetent regulators;
  • Governments that believe the bankruptcy of a large investment bank will prove catastrophic, but do nothing to reduce their size and power;
  • legal systems that make it too hard or too costly to imprison the psychopaths that run the banks;
and you get a system that is clearly broken and that only operates to make the divide between rich and poor, wider.

This broken system is being injected with adrenalin and kept on life support in the hope that the heart beat will miraculously kick back in to gear by itself. Or at least survive so long that, the puppet masters get so ridiculously rich and filter those riches into untouchable tax dodges, it doesn't matter.

Meanwhile the pawns and the mainstream media think – “things have been bad for so long, surely good times are just around the corner. Surely enough stimulus has been pumped in to have an effect.”

Whether the people in power truly believe the world would come to an end if a few ‘too big to fail’ corporations went bust, I don’t know, but from an observers’ point of view – investment bankers have done very well out of the decision to bail them out, the commoner in the street, not so much.

Considering the devastating effect that the financial crisis of 2007 and beyond had and is still having, and the obvious involvement (via incompetence, underhandedness or both) of the banks, that no-one of significance was given jail time is just plain ludicrous. It defies belief, and yet the mainstream media rarely think it worth a mention. They’re too busy writing bullshit articles about whether some stooge that runs the Federal Reserve will or won’t raise interest rates.

Spoiler alert – it doesn't matter what the Fed do, the markets will find some way of interpreting the decision to be “good news for stocks”, or “news so bad, more stimulus is required…which is good for stocks”.

When the “most powerful man in the world” stands by and allows the rich to keep taking and the poor to keep suffering, what hope is there? When this celebrity President gives the role of Attorney General to a banker lawyer by the name of Eric Holder, who then proceeds to facilitate the non-jailing of all the financial crisis criminals, and then calmly returns to the cesspool from which he came, how is that in any way logical, just or sane?

I think a rude shock is coming, but I've been thinking that for years, and like a broken clock, I’ll probably be ‘correct’ eventually, even though I've been wrong for quite a while. It doesn't really matter and I will get no joy from it, because by not learning from the last shock, I think “they” will make the same mistakes again. It certainly won’t be the rich people paying for it. They never do.

Here's a thought - let the banks fail. Jail the perpetrators and take their ill-gotten riches. Start from scratch, if necessary. What's the worst that could happen? 
The earth will still rotate
The animals won't give a shit
and I will still have very ugly feet.