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Tag Archives: GFC

Money Is No Object!

Paul Sheahan wrote something rather interesting today…

Well, that’s incorrect. He wrote something that caught my eye. And I’m trying to work out whether the man suffers from memory problems or is simply lying. He wrote:

“In politics, the Rudd Labor government went berserk on deficit spending to remain popular.”

Now, I’m happy for someone to debate whether the Rudd government’s policies were effective, or whether they just postponed the inevitable recession. I’m happy for someone to debate whether the money could have been better spent. I’m even happy for them to debate whether or not the pink batts problems were caused by socialism or unchecked capitalism.

But to suggest that the deficit spending was all about “being popular” just strikes me as a total rewriting of history. Even at the time, much of the spending wasn’t popular. The Liberals were telling us that Labor had gone too hard, too early and there’d be no money left when we were actually in recession – which they assured us was unavoidable.. Many asserted that the $900 would be wasted on alcohol and pokies.

(On a side note, isn’t it interesting that when Labor tried to introduce a voluntary pre-commitment amount for pokies, the Liberals teamed up the Clubs and screamed “nanny state”, but the Ceduna trial of a welfare card which can’t be spent on alcohol or gambling is just fine and dandy.)

Anyway, Paul Sheahan thinks that all the Rudd government’s spending was only to make his government “popular”. And I’d like to point out that he does specifically say the “Rudd Labor government”, so he is talking about the spending that was done at the height of the GFC. This not about things like the NBN or the National Disability Scheme.

Sheahan is one of people who like to remind us of that factoid that there’s a limited amount of money. (Note the use of the word “factoid” which, as I pointed out when Christopher Pyne used the word in parliament, means something that’s repeated often enough for people to take it as fact.)

The problem when we discuss “money” is that many people take it as synonymous with “cash” of which there is a limited amount at any given moment. “Money”, on the other hand, is a measure rather than being a thing in itself. Money tells you how much of the limited resources of the world you can access should you convert your money into something else. Of course, should everyone decide to convert their money into things at the same time, then we’d have inflation. And if they all decided to convert their money into the same thing – such as tulips – we’d have a bubble. (See Dutch Tulip Bubble.) We have people telling us that bubbles are inevitable and just part of the capitalist system.

As banks and governments can create money with the stroke of a computer key. money is infinite. Of course, if they do create an excessive amount of extra money, then the existing values of the “money” will diminish. There are a limited amount of tulips and if there’s suddenly an extra trillion dollars in the tulip market that million dollars for a bulb is going to look like a bargain.

Perhaps a good way to look at it is to use a sporting analogy. Money is the score and while sometimes scoring is hard, that’s only because there’s a team that keeps taking the ball of us and trying to score themselves. In the unusual event that we all decide that we’d rather see a good fast, high-scoring game and we start kicking for the same end, scoring becomes a lot easier. Of course, in real life, this doesn’t happen very often, and many people who are scoring like it’s a basketball game, wonder why the soccer players are finding it so hard to score and conclude that it’s because they’re lazy.

So when people start talking about there being a limited amount of money, what they actually mean is that there are a limited amount of resources. However, if governments can use money to reorganise the economy so that more “resources” are being created then it can actually add to the wealth of the country. If a person is working instead of being unemployed or underemployed, then that adds to the overall pool of “resources”.

The question is not whether such things can be done. Of course they can. The question is what is the most effective and worthwhile way to do it. Will reducing unemployment by two percent create a wages breakout? And a tulip bubble which leads to problems down the track? Will increasing unemployment by one percent mean that we have a tulip glut on our hands? Or is it better to have a regulated tulip market and stop all this speculation.

Creating more money was more or less what the Rudd Labor government did in the early days of the GFC. It was about economic management. Given that we were in danger of recession, there was little prospect of inflation.

So the idea that it was about popularity is another one of those little factoids that certain columnists are so fond of helping to create.

 

The election: hope versus fear

Hope Versus Fear

Abbott is gearing up for an election. First he wants to ensure he will be the leader who takes the Liberal National Coalition to an election, and this is by no means a done deal. And then he is convinced that he can sloganeer away the poll deficit he needs to win a second term. Or rather, his strategists are convinced they can come up with effective slogans to take Abbott to victory, and Abbott is happy to believe them.

As reported in the Guardian this week, Lynton Crosby of campaign strategist firm Crosby Textor, is confident he can use the Liberal staple of simplistic messaging around ‘economic competence’ to convince a not-very-interested-in-politics electorate to forgive everything Abbott’s wrecked with his wrecking ball, and to have permission to fire up an even bigger wrecking ball in a second term. But the question is, will the electorate fall for what basically comes down to a dirty, negative, fear campaign again? Because that’s what Crosby really means when he says Abbott needs to rely on a simple message focused on economic competence. He really means that Abbott needs to scare the electorate into thinking they’ll lose their jobs, they’ll lose their homes, they’ll be destitute and on the street if they don’t do what they’re told and vote for Abbott’s Liberals. It really is as simple as that apparently.

But are Australians going to fall for this again? Are the Turkeys really going to vote for Christmas? Will Australians again drink up ‘Great Big Tax’, ‘Axe the Tax’, ‘Stop The Boats’ and more recently ‘Jobs and Growth’ – the bogan slogans that make Abbott sound like a 2 year old whose just learned a new word and wants to wear it out on his parents?

This is where I pause from typing and I sit back and worry. It doesn’t make rational sense that Australia would be so gullible to fall hook-line-and-sinker for such an obvious, shallow, implausible slogan to scare them into making the second biggest mistake of their lives after their first mistake elected Abbott in the first place. But there is nothing rational about politics. Especially when you mix irrationality with fear, a fear that experts like Crosby and Textor are very good at whipping up. This is why the re-election of Cameron in the UK sent chills down my spine. Cameron was just as unpopular as Abbott and resided over just as big an austerity-caused-badly-managed-economy with high unemployment and barely any growth. Yet he still was given the keys to the country again to wreak more havoc on not just the UK economy, but also to hammer the UK health system, education and social welfare system. But Crosby and Textor helped the very-easily-frightened electorate to forget about all this havoc and they’ve given Cameron a mandate to make the situation even worse. Fear really does make people do stupid things.

It seems like a simple problem to solve, however, it’s not. If you were working as a campaign strategist for Labor, you would think you could just point out to voters how utterly hollow Abbott’s ‘economic competence’ slogan is, how unfounded in reality, and how dangerous it would be to let Abbott’s economic incompetence continue to hurt the economy and to destroy jobs. The statistics are easy to quote – Abbott’s unemployment rate of 6.34% is the highest in 13 years, growth is stagnant and even Abbott’s favourite stick to beat Labor with – government debt – is up $100 billion since Abbott took over the job. The ironic thing is that Australia’s debt and deficit wasn’t even a major problem when Abbott turned it into a vote-winning-slogan, and yet he’s gone on to make this debt even larger. Yet still his strategists feel confident that they can run a fear campaign based on the strongly held electoral perception that Liberal governments are better economic managers than Labor governments. Even after Labor saved the country from a recession during the GFC, a GFC the Liberals claimed never happened, which Labor says didn’t happen to Australia because of Labor’s good economic management, which the Liberals now say is the reason the Australian economy isn’t strong – because the world economy still hasn’t recovered. See how irrational politics is? Facts are irrelevant when it comes to emotional responses to fear campaigns. Labor strategists have hopefully worked this out.

But what’s the answer then? If you can’t convince the electorate that Abbott’s claims of economic competence are as baseless as all the promises he made during the election, which have now been broken, how does Labor ensure that Abbott doesn’t win a second term?

I suggest Labor should learn from Abbott’s success and forget about quoting facts. Facts are really good at convincing people they are right when they can use them to back up their own preconceived, emotional beliefs. For instance – I know Abbott’s the most incompetent and unproductive Prime Minister Australia has ever had, and this article gives me the facts to prove it. A swing voter, on the other hand, doesn’t care about such analysis. So what Labor needs to do is forget about facts and appeal to emotions. In doing so they have two options: the first is to use the dark-arts of Crosby and Textor by scaring people about the prospect of an Abbott second term. This should be relatively easy. The very thought of such a thing terrifies me and although I know I’m not your average swing voter, surely Abbott has done enough scary things in the last two years for Labor to be able to convincingly show how things could get much scarier if Abbott has another go? And surely he’s given enough hints about what he might do in a second term – such as his promise not to increase the GST this term or to make any industrial relations changes this term – to scare people off living this reality?

The second option is to rise above the negative fear campaign of what an Abbott second term would look like, and to appeal to a much more savoury emotion – hope. Labor’s ‘hope for the future’ campaign could focus on all the things Abbott is interested in wrecking that Labor wants to invest in. Jobs of the future. Technologies of the future. The educational needs for jobs of the future. A safer environment for the future. Energy needs and industries of the future. I love the idea of a ‘rise above’ campaign, but I also recognise it’s naïve to think the electorate is ready to put long term progress ahead of short term Abbott-opportunism. So really there is a third option; a little from column A and a little from column B. Simplistically it looks something like this – ‘Abbott will wreck everything, so vote Labor for a brighter future’. Sounds good doesn’t it. If only it was so simple.

 

Are the TPP and TiSA the beginning of the globalisation of health care?

“It’s hard not feel that we are being attacked at from all angles with corporations eying off developing and developed countries public health services for profit. With an Australian government seemingly hell bent on dismantling its Medicare system with outsourcing payments while introducing co-payments, it’s looking clearer now as to what the current Australian government has planned” writes Mel Mac.

I recently wrote about the TPP and now I think it’s time that we take a look at the Trade in Services Agreement (TiSA). It’s a services-only free trade agreement (FTA) that began in 2012 with exploratory discussions between Australia, US and the European Union (EU) for a year and with formal discussions beginning in early 2013. Australia, US and the EU take it in turns to chair the negotiations in Geneva. The services sector accounts for around 70% of Australia’s economic activity and accounts for around 17% of Australia’s total exports. Current countries negotiating the TiSA are Australia, Canada, Chile, Chinese Taipei, Colombia, Costa Rica, The European Union (representing its 28 Member States), Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey and the United States. These countries also account for around 70% of global trade in services. China and Uruguay have expressed interest but have yet to be invited, it’s also worth mentioning that the Brazil, Russia, India, China and South Africa (BRICS) bloc have not been invited.

The World Trade Organization (WTO) deals with the global rules of trade between nations and the General Agreement on Trade in Services (GATS) came into effect in April 1994, and involves all WTO members. The TiSA’s aim is to be compatible with GATS yet, set a new standard in services trade that covers all service sectors including health and public services; financial services; ICT services (including telecommunications and e-commerce); professional services; maritime transport services; air transport services; competitive delivery services; energy services; temporary entry of business persons; government procurement; and new rules on domestic regulation to ensure regulatory settings do not operate as a barrier to trade in services. The discussions are held behind closed doors as per other trade agreements, Wikileaks managed to leak draft text from the April 2014 round of discussions involving further deregulation of global financial services markets, despite the Global Financial Crisis (GFC). The draft Financial Services Annex sets rules to assist the expansion of financial multi-nationals into other nations by preventing regulatory barriers. The leaked draft also shows that the US is particularly keen on boosting cross-border data flow, allowing the uninhibited exchange of personal and financial data.

The Australian government has a web page for it’s involvement in TiSA and in the sixth April/May round that Australia also chaired, more than 140 negotiators and sector-specific government experts attended. There were advanced discussions in all areas of the negotiations, including on new and enhanced disciplines (trade rules) for financial services, domestic regulation and transparency, e-commerce and telecommunications, and maritime transport. TiSA parties also agreed to move to a negotiating text for air transport and market access negotiations also continued. The Global Services Coalition or “Team TiSA” organised a substantial industry presence in the margins of the negotiations and as the name suggests is pro the TiSA for the US. Trading in services has grown at a faster pace than trading in goods since the 1980s. The United Nations Conference on Trade And Development (UNCTAD) estimates that in 2013 global services exports reached $4.7 trillion and grew at an annual rate of 5%. Overall, the services trade has grown by 95% since 2000. World Bank research shows that the services sector has become the dominant driver of economic growth in developing countries, delivering both GDP growth and poverty reduction. In 2011, the services sector accounted for a massive 49% of GDP in low income countries and 47% in least developed countries. Team TiSA has every right to be cheering for it as it would benefit the US greatly. The US is the world’s largest single-country exporter and importer of services and they generate more than 75% of their national economic output. In 2013 the US exported over $681bn in services, resulting in a $231 billion surplus. Services exports in 2013 grew by $31.8 bn and services imports in 2013 grew by $12.9bn.

Australia chaired the ninth round early last December and this time it was attended by more than 200 negotiators and sector-specific government experts. Good progress was made in advancing the enhanced disciplines (trade rules) for e-commerce and telecommunications, domestic regulation and transparency, financial services, temporary entry of business persons, professional services, maritime and air transport services and delivery services. There was also further discussion of proposals on government procurement, environmental and energy services, and the facilitation of patient mobility. Parties reported on progress in bilateral market access discussions held since the September round and committed to advance these further in 2015. Besides the vagueness and secretiveness above and what it all means for every day Australians, one thing leaps out and that is the facilitation of patient mobility. Luckily another leak was sprung, the proposal was titled ‘A concept paper on health care services within TISA Negotiations’ and it states there is ‘huge untapped potential for the globalisation of healthcare services’ mainly because ‘health care services is (sic) funded and provided by state or welfare organisations and is of virtually no interest for foreign competitors due to lack of market-orientated scope for activity’. It was allegedly a proposal put forward by Turkey, and was discussed by TiSA members in the September round of discussions. And there are justifiable fears that they want to commodify health services globally as well as to promote “medical tourism” for patients.

Experts, such as Dr Odile Frank of Public Services International (PSI) say, ‘The proposal would raise health care costs in developing countries and lower quality in developed countries in Europe, North America, Australia and elsewhere’. Rosa Pavanelli, PSI General Secretary, also commented that ‘Health is a human right and is not for sale or for trade. The health system exists to keep our families safe and healthy, not to ensure the profits of large corporations’. The proposal could see patients being treated in other TiSA countries for reasons such as long waiting times in their home country or a lack of expertise for specific medical problems. The patients’s costs would need to be reimbursed through their own countries social security system, private insurance coverage or other healthcare arrangements.

The beneficiaries of this are the large health corporations and insurance companies, the ones actually behind the negotiations, that would benefit from an approximate $USD 6 trillion business. Public services are designed to provide vital social and economic necessities such as health care and education affordably, universally and on the basis of need. They exist because markets can’t produce these outcomes. Furthermore, public services are fundamental to ensuring fair competition for business, and they provide effective regulation to avoid environmental, social and economic disasters, such as the GFC and global warming. Even the most die-hard supporters of FTA’s admit that there are winners and losers.

New South Wales (NSW) Australia, Nurses and Midwives’ Association organiser Michael Whaites said: “Prime Minister Tony Abbott and Treasurer Joe Hockey have been saying that healthcare expenditure is unsustainable, but Trade Minister Andrew Robb is quietly engaged in negotiations that could potentially see scarce healthcare dollars going overseas”, and that “You can ask whether the government is working in a co-ordinated manner, and indeed what is their real intention on the future of Medicare?” Professor Jane Kelsey, an expert on trade in services at the University of Auckland, warns that health-service-exporting countries such as Australia could find qualified staff being diverted to health export services “that often have better pay and facilities, eroding the personnel base for public facilities and perpetuating inequalities in the health care system”. Education and training investments could also be diverted “to benefit foreign healthcare users, rather than local citizens and taxpayers”.

In August 2014 the Australian Health Department called for expressions of interest from private players interested in taking over the payments of $29bn each year in health and pharmaceutical benefits currently being managed by the Human Services. Human Services Minister Marise Payne said much of the Department of Human Services (DHS) IT infrastructure for processing the payments was old and needed to be replaced and that the private sector might have cheaper solutions. The government claims it is merely testing the market with an initial expression of Interest process, not via cost analysis or efficiencies already provided. Australia Post stuck it’s hand up from the get go and other Australian corporations that are keen are – Eftpos and Stellar (Telstra) with overseas companies being Oracle, Fuji-Xerox, SAP, Accenture and Serco.

It’s hard not feel that we are being attacked at from all angles with corporations eying off developing and developed countries public health services for profit. With an Australian government seemingly hell bent on dismantling its Medicare system with outsourcing payments while introducing co-payments, it’s looking clearer now as to what the current Australian government has planned. The rise of corporations and their lust for profits no matter what the cost is, has to stop. Governments must get out of bed with them and understand that they don’t know best and an even mix of private and government is required sometimes, but not all of the time. The people elect governments to govern and make decisions, we do not elect corporations. Take some advice from them but if you give them an inch they will take a mile as we have been seeing in recent years. Greed is worming it’s way in globally under the guise of competition and job creation. I find this very hard to believe for your average person, for the corporations yes, they keep getting richer and the equality gap wider. Low income countries delivering GDP growth and poverty reduction will be hardest hit and that’s not fair with many only just recovering from the GFC. The US has the most to benefit from this and all other FTA’s, this also needs to stop, they aren’t the biggest power anymore and even if they were why should they get all of the advantages? People over profits, after all you can’t make profits without us and there’s no need to ruin everyone globally once again for it.

This article was originally published on Political Omniscience as Corporations want to profit from global health with TiSA and the TPP.

When will the truth be told about Fukushima?

Image courtesy of gizmodo.com

Image courtesy of gizmodo.com

Is the Japanese Government being honest about Fukushima? In this guest post by Rowan Douglas, Rowan thinks the answer is clear: No.

I’ve just finished watching a short film supplied by Tepco (a major Japanese electric utility company) on the removal of fuel rods from the stricken Fukushima Nuclear power plant.

The workers at Fukushima would have to be some of the bravest people on the planet, and there can be no doubt that they deserve far more recognition than they are receiving at the moment. These dedicated professionals are getting stuck into a job that few would even be prepared to contemplate, placing their lives at risk in order to fix just one of a plethora of problems requiring resolution. This newly-released film from Tepco highlighted to me just how much attention is being given to this reactor and its particular problems.

But maybe it’s what they are not focusing on that’s the real issue.

I started to research the Fukushima and the Chernobyl nuclear disasters in August this year. The company I worked for is planning on heading into Japan at the start of 2014, and it was, in fact, the way the company was not acknowledging the recent mainstream media reports coming out of Japan that got me researching this topic.

The company that I worked for is the prestigious entertainment production company Cirque Du Soleil.

Of late though, Cirque has been failing to attract the crowds it has become used to over its thirty-year history. It is a fact, in this particular production from Cirque, they have just had four months off due to not being able to find a market to successfully sell their product in. This has never happened in Cirque’s history. If they were not to take this production into the promoter market of Japan, then they would not have any place to take this show. Cirque has been relying increasingly upon promoter markets since the GFC in 2009. A promoter market is when a particular promoter pays for the Cirque product (show) upfront and then sells and promotes the product they have purchased. This has proven to be the most cost effective and profitable way for Cirque to run. I perceived their lack of acknowledgment of the change in the situation at Fukushima as trying to downplay the potential dangers presented in Japan. This being due to the fact that they have been hemorrhaging staff since the unpaid break of four months. I believed that they were putting the lives of their employees and their families at risk in order to keep the production alive and make millions of dollars profit from the Japanese promoter market.

What worried me further, after looking into it more deeply, is the fact that the promoter for Cirque in Japan is the television network Fuji, which if you do not know, is the largest television network in Japan. This is the very same television network that is participating in the media black out of Fukushima. After Cirque’s initial non-acknowledgment of the situation and my awareness of who the promoter Fuji actually was, I felt I had no safe choice but to resign from my position. At this point I need to make it clear that Cirque has since covered itself and acknowledged the changing situation in Fukushima. It only did this after I sent out a company wide email addressing the change in the Fukushima situation.

During my own research into this topic I learned that the Japanese government and Tepco had been aware of the ongoing leakage of radioactive water into the ocean and had continued to keep this information concealed. I became incensed. How could a government lie to its people and to the world about such a perilous situation? I also discovered that they had been deceitful since the incident at Fukushima in saying that there had only been one meltdown when in fact there had been three.

The situation comes down to me now as a question of trust. Both the Government and Tepco has by their own admission been deceiving the public since the very beginning, so why should I or anyone trust anything they say now?

During the period I was researching, Tokyo was named host of the 2020 Olympics. I was astounded. How could a country that has just undergone the worst nuclear disaster in history, and really only just begun the process of cleaning it up, be awarded this privilege?

It was all a little strange and far too coincidental for me.

The Japanese Government has assured the world that they have this disaster under control. Obviously ‘control’, at least by the Japanese government’s definition, means releasing 350-400 tons of radioactive waste into the ocean on a daily basis.

The Olympic committee seems to be satisfied with this explanation. The world’s mainstream media seem to be satisfied as well. They have gone strangely quiet since the Olympic announcement. It is like someone has waved a magic wand. All reports of water leakage and ‘ice walls’ seemed to have vanished. They have been replaced by short pieces on the work being done on removing the fuel rods from the spent fuel pools at reactor no.4. Personally, I have only come across one piece on the water leakage since the announcement.

I turned my attention instead to the underground media on the Internet. A common theme I immediately found among these many sites was a huge amount of fear. Most of the fear centres around the potential for a huge nuclear release from the moving of the fuel rods. It seems strange to me that everyone is focusing solely on the potential for something that may or may not happen. Shouldn’t we be focusing on the range of problems holistically and then dealing with all of them as such? Is not like independent sources have not been offering Tepco other solutions to the water leakage either. During my research I came across Arni Gundersen from the energy watchdog Fairewinds. He approached Tepco with the following solution two years ago ‘Surround the plant with a trench filled with material called zeolite. That’s just the volcanic ash. The volcanic ash is very good at absorbing radiation. But the solution isn’t to keep the water from getting out. The solution is to keep the water from getting in. So, outside the trench that they surround the plant, if they pull the water level down (the clean water outside the trench) that would prevent further water from leaking into the Daiichi site.’ Why then are Tepco only focusing on reactor no. 4?

It feels like the same charade that governments and corporations play the world over. The old sleight of hand parlour trick. While we have our attention on something that may happen, they continue to do nothing about what actually is happening. This raises further questions. Is it because the problem is so huge and will cost so much money that they cannot afford to fix it? Is it simply something that cannot be fixed by any known technology or science? Or is it that we cannot see the damage being done so therefore it is easier to not to focus on it?

These are just some of the questions that I feel the world’s media should be asking. As an aware citizen I believe we have a right to the truth, especially when it comes to issues such as these. Governments have a responsibility to their people and to the rest of the world to tell the truth no matter how bad or incompetent they look.

One thing I do know for sure is that the truth always prevails. How long this will take and how much damage will be done until such a time, it seems, is up to the Japanese government.

The very same government that has been lying since the beginning.

So, you see, for me it is not a question of truth any more.

It is a question of when.

When is the world’s media going to start asking these questions?

When will someone have the guts to stand up to the obfuscation peddled by the authorities and demand cold hard facts?

When is the actual truth going to be told?

See more from Rowan Douglas on his blogsite Time to Share, Time to Act.

GFC, Bubbles and Pricks.

CHARLIE: How about our money, George? Where’s our money?

GEORGE: Now, come on, now, please! Now, wait a minute, now! Listen to me! Now, you’re thinking of this place all wrong. Your money’s not here!

CROWD: (ad-libs) What?

GEORGE: Wait a minute, now, let me tell you. Let me tell you. Your money’s in people’s houses! In the Kennedy house, and the MacClaren house, and in your house, and a hundred others. Now, what are you going to do? Foreclose on them?

From “It’s A Wonderful Life”

You’ve probably read somewhere about the Global Financial Crisis. And you’ve probably heard how it was caused by a collapse in the housing bubble. Some of you may even have read how it was a program initiated by the Democrats of helping “poor people” – you know, the sort who really don’t deserve a place of their own – to buy their own homes.

It sent the world into recession – but not Australia (so all that money Kevin Rudd borrowed was just wasted) – and threatened the worst crisis since the Great Depression.

Of course, one wonders how something as simple as a reduction in house prices could lead to such potential devastation. Particularly when everyone seems to agree that houses were over-priced. Surely, that should have been just part of the capitalist “boom and bust” cycle we know and love. I mean, the total In 2007, the total value of home sales was less than two trillion, which is only about five percent of the value of shares traded on the US stock exchange that year.

To understand why this happened, you need to first gain an understanding of leveraging, and before you do that, you first need to understand money.

The online dictionary lists seven different meanings for money, so it’s a word that means different things in different contexts but for simplicity let’s look at the Wikipedia (thank you, Greg Hunt) explanation.

“Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills (sic) these functions can be considered money.”

and

“The largest part of the world’s money exists only as accounting numbers which are transferred between financial computers. Various plastic cards and other devices give individual consumers the power to electronically transfer such money to and from their bank accounts, without the use of currency.”

Money is a concept. Money is an agreement. Some of you will even argue that money is a fiction.

But basically most money, these days, is simply an entry in a bank’s computer system. As most of you are probably aware, actual cash is just a fraction of this. And a few billion dollars off the price of houses, should have had no more effect on the rest of the system than you dropping your wallet with $1,000 in cash off a bridge.

So, why couldn’t the system withstand a drop in the price of houses in the US?

Because of the way the assets were being used to back up the Potemkin village that the financial system had become.

Someone once suggested that to make drivers drive more safely, instead of installing airbags and seat belts, we should have a large spike in the steering wheel, pointing at their chest. Who wants to brake suddenly in those circumstances? Prior to the GFC, banks and other financial institutions were running around with the belief that they not only had airbags and seat belts, but they were encased in a hardy shell. The large spike in the steering will was simply ignored.

Part of the trouble was the way in which the whole system is interconnected. In order to provide protection against defaults, financial institutions rely on Credit Default Swaps*. which in simple terms work like a form of insurance.

Now the idea of insurance is that it should reduce your risk. So why didn’t this work in the GFC? Quite simply, there were too many risky bonds and investments which had “insured” with agencies that had a high credit rating. When the defaults started to happen, the agencies with the high credit ratings were either downgraded, or ran the risk of being downgraded, unless they could offload their riskier bonds. So, suddenly, you have large numbers trying to sell off their “assets”, causing a need for more “assets” to be sold because this sell-off was leading to a drop in value. And this drop in value of the riskier items flowed through to all assets.

And, of course, some firms found themselves downgraded anyway. Which meant that they found it impossible or, at the very least, more expensive to borrow.

Ideally, firms should have the sort of balance that enables them to balance potential losses against potential gains. Sort of like going to the roulette wheel and betting on all the numbers because you’re being given odds of 40 to 1. Because there are less than forty numbers on the wheel, you’ll make a profit every time. The problem arises when you suddenly discover that a handful of the numbers don’t pay out at all. This wouldn’t be a problem, except you’ve lent out some of your potential wins to others, so that they can bet on other roulette wheels at the same casino. And while you try to grab as much back as you can, you’re discovering that with each passing spin, more of the numbers are being declared duds.

Each downgrade leads to more downgrades, which in turn makes everyone reluctant to lend. As credit dries up, firms go to the wall, which leads to more downgrades. And then the heavyweights start to falter. Some even go under. The Butterfly Effect!

The USA falls into recession.

This could be bigger than the Great Depression, we’re told.

But then governments start to bail out the private sector. Some argue that this shouldn’t happen, but most don’t feel like it’s the time for debate.

The ship is steadied. We continue on our way. We’ve learned our lesson.

But it’s unclear what the lesson is.

Is it that sometimes only Government intervention can help?

Or is it that some of the regulations that were there from the 1930’s until recently, actually worked?

Or is it that maybe financial markets are too inter-related?

Or is it that we should take away the safety bags and make financial institutions drive with a large spike pointing straight at their heart?

Whatever, I’m sure we’ve learned our lesson and it’ll never happen again.

*Wikipedia on Credit Default Swaps.

“A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in 1994.

In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan.[1] However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called “naked” CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction; the payment received is usually substantially less than the face value of the loan”