Monday, September 29, 2008

Britain's capitalist casino

George Osborne, Britain's opposition Conservative Party shadow chancellor (finance minister,) is in the papers today, warning city bankers they would have to pay for the mess they have made in the "capitalist casino."

We couldn't resist this - here's something we've just added to our quotations page, also from Britain's Conservative party, very recently:

"The last ten years in particular have been good years for the world economy as a whole. They have been characterised by two massively favourable trends. The first is an era of easy money. The main central banks worldwide have opted for low interest rates, the ready creation of credit, and tolerance of innovatory means of financing public and private sector activity through big increases in debt. It has been the era of public/private partnerships, specialised credit-based funds and funds of funds, collateralized debt obligations, collateralized loan obligations, credit default swaps, special purpose vehicles and many other similar ways of raising borrowing throughout the financial system.
Britain's Conservative Party, Policy document "Freeing Britain to compete", August 2007, amid the start of global economic turmoil triggered by collateralized debt obligations, collateralized loan obligations, credit default swaps, special purpose vehicles and many other similar ways of raising borrowing throughout the financial system."


London bears a large share of responsibility for much of the current mess, as this New York Times piece, looking into the fall of the insurer AIG, notes:

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

(Hat tip: Richard Murphy.)

Philip Blond, writing in The Independent, said this:

"We allowed a tax-evading, off-balance sheet, offshore economy to speculate with the savings and assets of an onshore, on-balance sheet, tax-paying public."


Quite. For more background on the financial crisis, see our recent blogs "Tax Havens and the Market Turmoil," Part One (an example from Dublin,) Part Two (how bad it is,) Part Three (what to do,) and Part Four (nation states) We plan to add to this series in due course.

1 Comments:

Anonymous Turner said...

What Went Wrong in the Capitalist Casino?

2:33 pm  

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