Trader speaks the truth to the BBC

The BBC has just put out a statement concerning yesterday's news channels interview with the trader Alessio Rastani.

"We've carried out detailed investigations and can't find any evidence to suggest that the interview with Alessio Rastani was a hoax. He is an independent market trader and one of a range of voices we've had on air to talk about the recession."

The trader told the BBC that he 'goes to bed every night dreaming of another recession"

Not the best way to make friends and influence in the current climate.The corporation has come under fire for airing the remarks and the internet has been ablaze with amazement at the remarks with people believing that the BBC had been the subject of a hoax.

Now that we know that these people really exist,one wonders whether he was actually speaking some sense such as.

The big money and the smart money…they are moving their money away to safer assets and that this economic crisis is like a cancer – if you just wait and wait hoping it’s gonna go away, just like a cancer it’s gonna grow and it’s gonna be too late.

No such thing as a Keynesian free lunch

A very interesting piece in the FT this morning from Niall Ferguson who argues that

it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies

According to his rational,

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

Voters have a new relationship with capitalism

There is a good piece in this morning's FT by Philip Stephens who tries to fathom out the vote in the European election in the face of recession

The policies of the left,ie insulation and protectionism were shunned in favour of laissez faire capitalism and any backlash came in the form of the protest vote for the right and in the UK for Ukip.

He concludes that

The voters want it both ways: protection against the unavoidable insecurities of economic integration and access to all the advantages of globalisation. But whoever said electorates were consistent? The answer is active rather than big government – calculated to preserve open markets while providing a buffer against the shocks.

Was Brown the saviour of the world?

I have just caught up with Andrew Rawnsley's documentary on Gordon Brown that was on Channel 4 on Monday night.

The one thing that struck me is that together with his Chancellor he probably did rescue the global economic system in the week after the collapse of Lehman Bros.

We were extremely close to the point where the cash machines were simply going to stop working.

Unfortunately for Brown he will not be remembered for that instead for a series of duff announcements and the man who failed to repair the roof whilst the sun was shining.

If you wanted proof of the man who saved the world,Stephen Foley over at Independent minds reports the opening remarks of the House overseeing committee.

I believe that committed people of good intentions, in both the private sector and the government, worked desperately hard in late 2008 to prevent a collapse of the global financial system that would have resonated throughout the global economy. Even six months later, it is easy to forget just how close to the brink our system came. I will never forget, and I believe those efforts will be well remembered long after any current controversy is forgotten.

Did the price of oil trigger the recession

Remarkable as it might sound the cheap price of oil in the 1990's may well have started a chain of events into which we are now being propelled.

That is at laest according to a paper presented at the Brookings Institution by James Hamilton.

Derek Thompson summarises it well in this piece at the Atlantic

Cheap gasoline from the 1990s into this decade encouraged families to set up their homes farther from the cities where they worked. But as the price of gas began to increase, it put a big strain of these families' commutes. With gas rising from $2 to $4, the price of these long drives doubled, straining those families' most expensive payments, namely: mortgages. When families realized they could not afford their exurban commutes, they sold their homes for a big loss. Voila: Their mortgage crisis became a bank crisis and the rest is our living history.

Time to bed down for another 18 months

One wonders whether Alistair Darling's interview in the Sunday Times is the first step in Labour's climb down over the recession.

Having smoothed the way following a successfil G20 it plans to ease the country into realising that we wil have to bed down for maybe a couple of years of grind.

The paper says that

The economy’s dive over the past six months had been steeper than the Treasury had expected, he said, making it inevitable that he would be forced to revise his forecast significantly. Britain’s gross domestic product slid by 1.6% in the final three months of last year, its biggest drop since the recession of the early 1980s.

As the article says

it is the first time Darling has publicly admitted that the government’s estimates were wrong, setting the scene for a difficult budget,

After the Lord Mayor's ball

After the glitz and glamour of yesterday people are starting to analyse the figures that came out of the G20.

As usual Wat Tyler is sceptical of it all at his Burning Our money blog and points out that

In terms of Cold Hard Cash, the actual new money pledged to the IMF amounts to $240bn, less than one-quarter of the $1.1 trillion in the G20 headline. That $240bn is coming from just three lenders - China ($40bn), Japan ($100bn), and the EU ($100bn). None is coming from the US, and the $100bn from Japan has already been announced once, in February. So real new money amounts to just $140bn, or less than 0.2% of world GDP (pre-Crash).

adding that

As we know, Gordo has a long and shameful record of numerical exaggeration and double-counting. Most of his budget speeches were crammed full of such stuff, and he's now taken precisely the same skills onto the G20 stage.

Is this the man who destroyed the world?

There is a fascinating article in the New York Magazine entitled How I helped build the bomb that blew up Wall Street.

The author is Michael Osinski who wrote the software that turned mortgages into bonds.

As Michael says

The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in.

It's a good read and don't be too hard on him

Government was correct in no bail out for Dunfermline

This morning's leader in the Indy makes a good point about the current ethos in this country.

Refering to the actions and words of the Dunfermline building society boss Jim Faulds,

Rather than recognising the manifest failings of himself and his colleagues in running this venerable business into the ground, Mr Faulds chose to harangue the Government for its failure to inject public cash to keep the business afloat. There was not even an acknowledgement of the fact that taxpayers will have to take responsibility for some of Dunfermline's bad loans as a condition of its sale.

I would argue that the malaise is not simply infecting the banking industry but is threatening to sweep across the commercial sector.

It seems that all business' now in trouble are expecing some form of governmenty bailout.For the government an easy line can be drawn.Support for those who have been undermined by the genreal economic climate but not for those who through bad business decisions are in trouble.

Yes I can here the shouts now about the banks themselves,but tey have to be a special case for their collapse would have meant the collapse of GB UK.

As for the Dunfermline it appears that these so called toxic loans include risky loans against commercial property as well as sub prime and a massive loss on its own IT system.

Merkel sets her stall ahead of the G20

There is an interview in this morning's FT with the German chancellor ahead of the G20 in which she rejects the advice that Germany like China should try to boost its internal demand to correct the world's economy.

Merkel believes that her country

is an over-indebted, export-oriented economy with an ageing, shrinking population. It cannot boost consumption at the expense of exports. “The German economy is very reliant on exports, and this is not something you can change in two years,” she said. “It is not something we even want to change.” Instead, it will try to sit through the turbulence while taking care not to lose too much industrial muscle so that it can ride the upturn when it comes.

However she is firmly of the opinion where the root for our troubles lies

misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system.

and is certain that the way out is not to spend more

“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable.

Soros warns the world and Brown

The Times carries an interview tomorrow with the financier George Soros who famously broke the Bank of England and made $1b during the Black Wednesday crisis in 1992.

Soros offers a warning both to Britain and the world.

For Britain,he says that there is a possibilty that we may have to go begging to the IMF for funds.

For the world,the warning is of the dangers of failure at the G20

next week's G20 summit in London was the last chance to avert a full-scale depression that could prove worse than that in the 1930s.

Should it be Cameron that should apologise

Everybody is blaming Gordon Brown for the recession.Gordon Brown is blaming America and who knows who American is blaming.

But how much are the Tories to blame for the unique situation that we find ourselves in.

Over at Labour Home,this posting looks at how Tory policy my have contributed to our unique problems.

1.The sale of council houses during Mrs Thatcher's administration which led to the upwards trend in house price inflation and fuelled the consumer boom.

2.Demutualising the building societies thus taking away a significant chunk of the banking sector from having to balance borrowings and savings.

3.The big bang of 1987 which set the climate for deregulation and the a divorce between asset prices and reality.

Gordon is made to cringe in Strasborg

It is not very often that someone gets to confront the Prime Minister in this way.

MEP Daniel Hannan takes Gordon to task over his management of the economy,the imagery to boats gouing into squalls is brilliant

Post capitalist world still has a long way to go

I was listening to a debate on Andrew Marr's Start the week programme on Radio 4 this morning.

It drifted into the sort of capitalist society that will come out on the other side of the global recession.

The argument said that it will become a more caring capitalism where the needs of wealth creation will be balanced against the needs of the society.For example it was quoted that parents will have more time for their children,people will become more localised etc etc.

Getting there may prove a trifle problematic if this article in the Washington Post is anything to go by.

It reflects that

With the recession forcing businesses to cut back on workers, employees are increasingly doing all they can to hang onto their jobs and are forgoing many of the benefits that once allowed them to balance the demands of work and family life.

adding that

In good times, workers frequently seized the opportunity to use "flex time" and family leave, to telecommute and to take paid sick days. But, according to workplace consultants, human resources specialists and employees themselves, those days are slipping away. More workers are giving up those arrangements, or resisting asking about them in the first place, out of fears that doing so will make them appear less committed to their work and therefore more expendable.

So a huge barrier to overcome,not least that people have to realise that we have to forgo some of the consumer society that we have craved for so long.Break that link and the importance of work is diminished.

Why did Goldman Sachs take $12b?

The real AIG scandal is that the company's trading partners are getting fully paid rather than taking a haircut.

That is according to Eliot Spitzer writing at Slate magazine as he looks into the transfer of $12.9b from the ailing insurance brokers to Goldman Sachs.

The papyment he says brings up an important point.

why was Goldman wise to AIG's declining position two years ago, but nobody else appears to have known? There is always the operating premise that Goldman is better than the rest in the field, but where were the federal agencies that should have been taking a look at AIG's leverage situation and general financial health?

Hold the G20 on facebook

Ross Clarke thinks that the G20 summit is a waste of money and should be cancelled.

Writing at Spectator.co.uk

Has anything come out of the meeting of G20 finance minsters in Horsham, or will come out of the follow-up heads-of-government summit in Docklands on 2 April, which could not have been achieved by phone, email or video-conference? Maybe the world’s leaders should have followed their usual platitudes about looking to the future and engaging the young by holding the whole thing on Facebook instead.

believing that it is all being held just to inflate Gordon Brown's ego adding that

As for the idea that G20 will provide the seed from which will rise the fabled green shoots of recovery in the global economy, forget it

What really happened at AIG

There are certainly indications that the mismangement at the insurance broker AIG far exceeded anything on the scale of Sir Fred Goodwin and this from a credit trader makes that wholly apparent.

1.From comments made by AIG executives it appears that the company fundamentally misunderstood the nature of risks that it was underwriting. Those risks were

a) much more highly correlated than they assumed (due to the nature of bonds in CDO structures as well as the likely performance of super-senior tranches in event of impairment)

b) actually mark-to-market risk, not default risk which made AIG’s business much riskier than it thought. This is because long before super-senior tranches became impaired (the only risk AIG was worried about), AIG will have had to post more collateral than the cash it had on hand effectively guaranteeing its bankruptcy.

2.The logical consequence of the previous point is that buying protection from AIG on ABS CDO’s is horribly wrong-way (discussed below) or, to use an analogy, akin to buying deep out-of-the-money puts from a company on its own stock. In other words, that protection is worthless. The consequences of this point are that

a) internal risk management groups inside investment banks were massively short AIG to compensate for the wrong-wayness of this exposure and

b) investment banks who bought protection from AIG, while fully aware of the zero value of the protection they were buying, were continuing the charade only in order to continue originating CDOs.

ht-andrew sullivan

Does democracy hinder long term solutions?

"our political system doesn’t deal well with gradual, long-term problems" that require "trading off up-front costs in exchange for long-term benefits."

Although Ezra Klein is talking about America he could be talking about any democratic system.

The problem is that government's have to face the electorate before the long term gains become apparent.

As Ezra continues

Few Congressmen want to raise taxes tomorrow to reduce carbon a decade from now. Lots of Congressmen don't want the economy to collapse if they have to run for reelection next year.

Ht-Mother Jones

Brown says sorry at least a sort of

So has the Guardian this morning got the scoop that the Prime minister accepts some responsibility for the economic crisis?

These are the words in the interview

"I take full responsibility for all my actions, but I think we're dealing with a bigger problem that is global in nature, as well as national. Perhaps 10 years ago after the Asian crisis when other countries thought these problems would go away, we should have been tougher ... keeping and forcing these issues on to the agenda like we did on debt relief and other issues of international policy."

and admits that things cannot return to the way they were

"Laissez-faire has had its day. People on the centre-left and the progressive agenda should be confident enough to say that the old idea that the markets were efficient and could work things out by themselves are gone"

One wonders though how much this interview was influenced by David Cameron's comments last week.

By admitting that he had taken his eye of the ball and joined the "cosy consensus",he was able to draw a line under Tory policy and perhaps this is what Browm is trying to do.

Expect a lot more on this as the news develops

A familiar story across the Atlantic

What we can do the Americans can do better.

The front pages of the US papers today suggest that AIG are planning to pay out $165 million in bonuses to 400 employees in its financial products division.

According to the New York Times,

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

Whilst the LA Times says that if the the bonuses are not paid

financial products employees who are denied payments could quit and that AIG's losses -- the insurer took the deepest bath in red ink in American history last quarter, losing $61.7 billion -- could spiral enormously if the only people who understand the company's convoluted dealings are not around to "unwind" the damage they have caused.