The big banking bail-out
02/10/08 15:04 Filed in: Economy | Economic Crisis
Here you are – a comprehensible background to the big banking bail-out in one blog post!
What’s the problem?
Apparently the main problem from a market and banker’s viewpoint is the accumulation of potential bad debt based largely on the USA mortgage market.
Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as at 17 July 2008.
The U.S. mortgage market is estimated at $12 trillion with approximately 9.2% of loans either delinquent or in foreclosure in August 2008.
Exposure to the bad debt risk means that a bank’s available liquid funds are reduced. This in turn has a negative impact on business that relies on bank credit to support its trading activities. In short, prospective bad debt has a negative impact on the bank’s ability to trade and lend.
The initial response of banks to the liquidity crisis was to attempt to generate more funds by increased share and stock issues. These were not fully subscribed and given their exposure to bad debt risk, their share prices fell.
In the UK, the stock market value of Halifax Bank of Scotland (HBOS) who were not known for reckless or sub-prime high risk lending, but who had heavy exposure to the UK mortgage market, looked as though it was heading for failure when its share price fell to 88 pence ($1.65) from a year high of approximately £7.78 ($15). The failure might be attributed to the bank’s lack of success in attempting to raise additional cash to support its liquidity via a rights share issue and a rumoured abortive attempt to gain funding from other sources (including the Bank of England). It was taken down more by negative market speculation rather than any actual deterioration in its trading position, although that is an unqualified personal opinion. Its lending policies were thought to constitute a higher risk than some other more conservative UK banking institutions. It made conventional home mortgage loans to what might be described as “average families.”
So what’s the real problem?
The boom and bust housing market
A very significant part of the problem has been the “boom and bust” housing markets both in the USA and the UK. In the USA, house prices rose by 124% between 1997 and 2006.
As a result of booming house prices, there was excessive speculation in the market. In 2006, 36% of all USA house purchases were for investment purposes or vacation homes. (Source: National association of realtors) People moved into the housing markets and treated homes like stocks and shares.
In 2006, the US housing bubble burst. There had been massive overbuilding of homes to satisfy speculation in the market that caused an excess of supply which led to a fall in house prices.
Suddenly there were people everywhere who had made a mint of money based on the value of their home. In the UK, there was a glut of property millionaires. Many decided to cash in on their speculative gains taking out second mortgages that funded increased consumer spending. This was economic growth based on fool’s gold as no real new economic value had been created. Most increased consumer demand was based on increased borrowing and more consumer debt.
In the UK, it was a housing shortage that drove up prices. But prices surpassed affordability. They grew at rates far in excess of inflation and salary and wage increases. The continuing boom was unsustainable. Prices are now falling and their rate of decline is accelerating.
House prices in early 2008 were considered to be overvalued by 40% in the USA and 25% in the UK.
The decline of house prices is hitting borrowers hard. In the US, an estimated 8.8 million homeowners — nearly 10.8% of total homeowners — have zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This provides an incentive to "walk away" from the home, despite the negative credit rating impact.
The house price boom was a fool’s paradise.
Now for the bankers
Bankers cashed in on a growth market, but with little forethought or cautious consideration other than a regard for profit.
The sub-prime mortgage came into being for those who were unable to qualify for conventional home loans (for reasons of status, credit standing, low income etc.) and willing to pay the premium price by way of higher interest rates. Sub-prime mortgages are high-risk loans.
Bankers also sought to defray their exposure to risks via a process known as securitisation (credit default swaps – CDS) whereby they aimed to retain profit and sell parts of their security-backed debt to an insurer or another financial institution. Often this involved whole chains of transactions with companies passing on risk one to another, each believing that they had retained some element of profit.
The risk business is complex. Risk has several dimensions: in default (the credit risk), in the diminution of the asset value (the falling house price), and the counterparty risk (the risk of failure of the party under-writing the debt), and a risk in liquidity where companies have been able to gain access to short-term funding because of their perceived exposure to, or reducing market attractiveness within, the mortgage market.
So when the house boom went flat, banks found themselves holding securities that no one wanted to buy. This is a key fact. It’s not that homes became worthless or that massive numbers of people faced foreclosure. It’s about the way our financial and trading system works and no one is proposing to change that.
Here’s a big clue. I understand that Merrill Lynch was sitting on about $30 billion of sub-prime mortgage securities. No one wished to buy them. “Mark to market” accounting meant that they were required to value this asset at what the market was willing to pay for it. The value that the market gave to these securities was 78% below their face value. According to accounting conventions, Merrill Lynch had to mark their value down to 22% of their estimated original worth. Neither the quality of the homes nor the status of the debt determined whether that valuation was appropriate. It was what the market was willing to pay and suddenly Merrill Lynch was sitting on one enormous book loss. It did not reflect reality. I suspect any fool might have realised more than that market valuation of those securities in homes and mortgages in real terms. Consider HBOS. Markets are like casinos that value profit, mainly short-term profits. Reality has little to do with it.
No one knows if the bail-out fund of $700 billion is going to be big enough yet. Freddie, Fannie and AIG have already had the benefit of $300 billion of taxpayer funds taking the total bail-out cost to $1 trillion. This crisis and the sums of money involved get worse and larger by the day.
Here’s the big bail-out plan…
The bail-out plan appears to be simple. The US Government will buy distressed securities (mortgaged assets i.e. homes) in credit default from the mortgage provider or underwriter at a discounted value.
So home loan X is in default, government buys home that is the security at substantially less than its face value in the hope it may subsequently sell it back to market investors.
The bank’s take a loss on disposal of their security, but it’s a relatively small loss. Their balance sheet is cleared of the liability that represents a bigger exposure or loss to the bank. Their liquidity improves and as a result, trading confidence is restored.
I’ll just hold that thought one moment. In order for government’s intervention to be worth anything, it must pay a price for the troubled security above market valuation otherwise there would be no point in buying it. Hang on! Doesn’t that mean that the difference between the market price and the government price is profit? Correct. So might the bank’s share prices be increased for the benefit of its stock-holders as a result of this…what should I call it…liability alleviation or profit on market price? Yes. Will taxpayers get a chance to enjoy shareholder gains without participating in further risk therefore? No. Are there any legal instruments that would permit such participation in shareholder profits? Yes…but sssch…better keep quiet about those, else we’ll demoralise and disincentivise the shareholders.
The act says:
Its purpose is to:
“immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and to ensure that such authority and such facilities are used in a manner that:
(A) protects home values, college funds, retirement accounts, and life savings;
(B) preserves homeownership and promotes jobs and economic growth;
(C) maximizes overall returns to the taxpayers of the United States; and
(D) provides public accountability for the exercise of such authority.”
It all sounds laudable enough. Remember Merrill Lynch? So is government going to pay above the market valuation to stem the turmoil? Probably. I’m not sure how good government is at playing banker either. I have no confidence in it fulfilling that role. What if the house market doesn’t recover in the short term? Will government defy corporate convention and take a longer-term view? I doubt that too. US governments are in office for 4 years and that’s not long-term. Sadly I suspect what might happen is that the government sells back its securities to the market at a loss in which case the banks may make a further profit on their intervention. That sounds more likely. The market has no social conscience, nor does it have any regard for the taxpayer or their welfare. Whatever government sets out in its objectives, it is entering a market-driven game now.
Here’s another idea. I’m not in favour of the bail-out bill at all. But if USA must do it, then why not have government guarantee “distressed securities” rather than buy them. It serves the same purpose but forces banks to work with their problems and solve them, like grown-ups, rather than relieving them of their difficulties, like an errant child.
I have one big nagging doubt about the bail-out bill. It isn't only banks that are suffering economic hardship at present. The bill does nothing for the underlying economy or the collapsing housing market. It may be a very expensive remedy that achieves very little. I suspect that lack of market confidence may return in a relatively short time.
This is my view today. The world may have changed by tomorrow.
Till the next time…au revoir.
What’s the problem?
Apparently the main problem from a market and banker’s viewpoint is the accumulation of potential bad debt based largely on the USA mortgage market.
Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as at 17 July 2008.
The U.S. mortgage market is estimated at $12 trillion with approximately 9.2% of loans either delinquent or in foreclosure in August 2008.
Exposure to the bad debt risk means that a bank’s available liquid funds are reduced. This in turn has a negative impact on business that relies on bank credit to support its trading activities. In short, prospective bad debt has a negative impact on the bank’s ability to trade and lend.
The initial response of banks to the liquidity crisis was to attempt to generate more funds by increased share and stock issues. These were not fully subscribed and given their exposure to bad debt risk, their share prices fell.
In the UK, the stock market value of Halifax Bank of Scotland (HBOS) who were not known for reckless or sub-prime high risk lending, but who had heavy exposure to the UK mortgage market, looked as though it was heading for failure when its share price fell to 88 pence ($1.65) from a year high of approximately £7.78 ($15). The failure might be attributed to the bank’s lack of success in attempting to raise additional cash to support its liquidity via a rights share issue and a rumoured abortive attempt to gain funding from other sources (including the Bank of England). It was taken down more by negative market speculation rather than any actual deterioration in its trading position, although that is an unqualified personal opinion. Its lending policies were thought to constitute a higher risk than some other more conservative UK banking institutions. It made conventional home mortgage loans to what might be described as “average families.”
So what’s the real problem?
The boom and bust housing market
A very significant part of the problem has been the “boom and bust” housing markets both in the USA and the UK. In the USA, house prices rose by 124% between 1997 and 2006.
As a result of booming house prices, there was excessive speculation in the market. In 2006, 36% of all USA house purchases were for investment purposes or vacation homes. (Source: National association of realtors) People moved into the housing markets and treated homes like stocks and shares.
In 2006, the US housing bubble burst. There had been massive overbuilding of homes to satisfy speculation in the market that caused an excess of supply which led to a fall in house prices.
Suddenly there were people everywhere who had made a mint of money based on the value of their home. In the UK, there was a glut of property millionaires. Many decided to cash in on their speculative gains taking out second mortgages that funded increased consumer spending. This was economic growth based on fool’s gold as no real new economic value had been created. Most increased consumer demand was based on increased borrowing and more consumer debt.
In the UK, it was a housing shortage that drove up prices. But prices surpassed affordability. They grew at rates far in excess of inflation and salary and wage increases. The continuing boom was unsustainable. Prices are now falling and their rate of decline is accelerating.
House prices in early 2008 were considered to be overvalued by 40% in the USA and 25% in the UK.
The decline of house prices is hitting borrowers hard. In the US, an estimated 8.8 million homeowners — nearly 10.8% of total homeowners — have zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This provides an incentive to "walk away" from the home, despite the negative credit rating impact.
The house price boom was a fool’s paradise.
Now for the bankers
Bankers cashed in on a growth market, but with little forethought or cautious consideration other than a regard for profit.
The sub-prime mortgage came into being for those who were unable to qualify for conventional home loans (for reasons of status, credit standing, low income etc.) and willing to pay the premium price by way of higher interest rates. Sub-prime mortgages are high-risk loans.
Bankers also sought to defray their exposure to risks via a process known as securitisation (credit default swaps – CDS) whereby they aimed to retain profit and sell parts of their security-backed debt to an insurer or another financial institution. Often this involved whole chains of transactions with companies passing on risk one to another, each believing that they had retained some element of profit.
The risk business is complex. Risk has several dimensions: in default (the credit risk), in the diminution of the asset value (the falling house price), and the counterparty risk (the risk of failure of the party under-writing the debt), and a risk in liquidity where companies have been able to gain access to short-term funding because of their perceived exposure to, or reducing market attractiveness within, the mortgage market.
So when the house boom went flat, banks found themselves holding securities that no one wanted to buy. This is a key fact. It’s not that homes became worthless or that massive numbers of people faced foreclosure. It’s about the way our financial and trading system works and no one is proposing to change that.
Here’s a big clue. I understand that Merrill Lynch was sitting on about $30 billion of sub-prime mortgage securities. No one wished to buy them. “Mark to market” accounting meant that they were required to value this asset at what the market was willing to pay for it. The value that the market gave to these securities was 78% below their face value. According to accounting conventions, Merrill Lynch had to mark their value down to 22% of their estimated original worth. Neither the quality of the homes nor the status of the debt determined whether that valuation was appropriate. It was what the market was willing to pay and suddenly Merrill Lynch was sitting on one enormous book loss. It did not reflect reality. I suspect any fool might have realised more than that market valuation of those securities in homes and mortgages in real terms. Consider HBOS. Markets are like casinos that value profit, mainly short-term profits. Reality has little to do with it.
No one knows if the bail-out fund of $700 billion is going to be big enough yet. Freddie, Fannie and AIG have already had the benefit of $300 billion of taxpayer funds taking the total bail-out cost to $1 trillion. This crisis and the sums of money involved get worse and larger by the day.
Here’s the big bail-out plan…
The bail-out plan appears to be simple. The US Government will buy distressed securities (mortgaged assets i.e. homes) in credit default from the mortgage provider or underwriter at a discounted value.
So home loan X is in default, government buys home that is the security at substantially less than its face value in the hope it may subsequently sell it back to market investors.
The bank’s take a loss on disposal of their security, but it’s a relatively small loss. Their balance sheet is cleared of the liability that represents a bigger exposure or loss to the bank. Their liquidity improves and as a result, trading confidence is restored.
I’ll just hold that thought one moment. In order for government’s intervention to be worth anything, it must pay a price for the troubled security above market valuation otherwise there would be no point in buying it. Hang on! Doesn’t that mean that the difference between the market price and the government price is profit? Correct. So might the bank’s share prices be increased for the benefit of its stock-holders as a result of this…what should I call it…liability alleviation or profit on market price? Yes. Will taxpayers get a chance to enjoy shareholder gains without participating in further risk therefore? No. Are there any legal instruments that would permit such participation in shareholder profits? Yes…but sssch…better keep quiet about those, else we’ll demoralise and disincentivise the shareholders.
The act says:
Its purpose is to:
“immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and to ensure that such authority and such facilities are used in a manner that:
(A) protects home values, college funds, retirement accounts, and life savings;
(B) preserves homeownership and promotes jobs and economic growth;
(C) maximizes overall returns to the taxpayers of the United States; and
(D) provides public accountability for the exercise of such authority.”
It all sounds laudable enough. Remember Merrill Lynch? So is government going to pay above the market valuation to stem the turmoil? Probably. I’m not sure how good government is at playing banker either. I have no confidence in it fulfilling that role. What if the house market doesn’t recover in the short term? Will government defy corporate convention and take a longer-term view? I doubt that too. US governments are in office for 4 years and that’s not long-term. Sadly I suspect what might happen is that the government sells back its securities to the market at a loss in which case the banks may make a further profit on their intervention. That sounds more likely. The market has no social conscience, nor does it have any regard for the taxpayer or their welfare. Whatever government sets out in its objectives, it is entering a market-driven game now.
Here’s another idea. I’m not in favour of the bail-out bill at all. But if USA must do it, then why not have government guarantee “distressed securities” rather than buy them. It serves the same purpose but forces banks to work with their problems and solve them, like grown-ups, rather than relieving them of their difficulties, like an errant child.
I have one big nagging doubt about the bail-out bill. It isn't only banks that are suffering economic hardship at present. The bill does nothing for the underlying economy or the collapsing housing market. It may be a very expensive remedy that achieves very little. I suspect that lack of market confidence may return in a relatively short time.
This is my view today. The world may have changed by tomorrow.
Till the next time…au revoir.
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Bloggers Unite for Human Rights!
15/05/08 18:52 Filed in: Human rights
This is not about stuff that is happening in faraway places, but in the United Kingdom and the USA now.
It is reported that in 2008 in the UK, people are dying almost every day, sometimes in difficult or unusual circumstances, while being detained in secure mental hospitals, but that their deaths are not being investigated. In that respect, they have fewer rights than a criminal or prisoner who dies in custody. Unlike prisoners, the families of dead patients are not automatically entitled to an inquest. The chief executive of the UK mental health charity MIND Paul Farmer said, “We are talking about the ultimate injustice; people go into hospital for a mental illness and are coming out dead.”
The problem doesn’t stop here. Jane Harris from the mental health charity Rethink has it about right, “This situation is indicative of how few rights mental health patients have. They have done nothing wrong; their only crime is to suffer from an illness, yet they have fewer rights than criminals.”
Over a third of the homeless on the streets of Britain are mentally ill. Frequently they experience difficulties in obtaining care in a system set up to address the health needs of the articulate middle class. Everyone has a right to a home. They also have a right to appropriate medical care too.
The abuse of the mentally ill and vulnerable is well-documented: Sexual assault and rape, the over-use or misuse of electro-convulsive therapy, the misuse of powerful psychotropic drugs to pacify and contain the elderly, widespread discrimination by the police and the health services...The list goes on and on.
A person who is compulsorily detained in hospital under the mental health act in the UK may appeal against their detention. But who allows that person access to an appeal? Who will hear them? Who will act for them?
People are afraid of the mentally ill. The media promulgates the view that they are dangerous or violent. Let’s squash that myth now. People who are mentally ill are no more violent than any other section of society. There are notable exceptions, madmen slaughterers like Harold Shipman and Peter Sutcliffe, the Yorkshire Ripper. But Harold Shipman was not thought to be mentally ill when he systematically slaughtered more than 200 of his patients as a practising medical doctor. It’s the exception like the “Ripper” we always hear about. But exceptions never prove the rule. I have met hundreds of people who have been diagnosed as mentally ill and have witnessed violence perhaps once or twice.
Sanity is a finely balanced state of mind. Almost everyone, every family in Britain and America, knows of someone who has suffered mental illness. At least one person in every four families in the UK and USA will suffer from a mental illness or disorder. It is very commonplace even though we might not like to look at it or think that it may happen to us.
It is way past time that we conferred the same human rights on the mentally ill as are offered to the rest of society. This includes holding carers and the health services to account for those in their care, especially if they die during the provision of that care.
Back to the future, part 3
On reading parts 1 and 2 of this blog, a friend said to me, "Do you think the world can be changed by a minority of conscious people, when so many are content to remain blinkered?"
I'm going to answer this but I will try and do it as factually as I can. This is straight off the top of my head without the aid of textbooks.
Big changes in our world are on their way. You can either believe that or bury your head in the sand, but big changes will happen anyway. There is nothing we as individuals can do to prevent those. Here I'm going to focus on the economic and political outlook. I know a little about economics and I'll just give you the benefit of my limited education.
Let's say it's correct that soon world production capacity outstrips consumer demand. What happens then? That's simple enough to answer: Prices will fall as companies are forced to compete to protect their market share. As prices fall, profits are put under pressure. As profits come under pressure, markets fall. If markets fall long and hard enough, it's called a recession, or a slump or a crash. When that happens, unemployment increases. As unemployment increases, so does social unrest. So that's one hypothesis that may underpin social change.
Also at present the USA is the dominant political and economic power in the world. It is dominant, not because Americans are nice people or that they make good movies. It is dominant because it is one of the wealthiest nations in the world. It is sheer economic power that underpins the USA's power and influence, nothing else. This may change in the near future.
Despite what some people might say, George Bush is no fool. He has bolstered the American economy by allowing the dollar to devalue against other currencies by approximately 33% over the past five years. What that means effectively is that American goods are a third cheaper than they were five years ago in world markets, if the selling prices have remained the same. There has been some inflation in the USA too but nevertheless, this devaluation is very significant. A country cannot continue to devalue its currency indefinitely. In effect, it's reducing the price of the dollar and ultimately that has the same result as reducing the price of goods.
Let's go another way for a moment. I understand that the price of electrical, leisure and clothing goods have fallen in the UK over the past couple of years. I seem to remember that the price drops have been dramatic, like in double figure percentages. Two factors may be in play here: One is that supply may be outstripping demand in these areas already. The other might be the influence of China and its developing economy with its lower costs coming into play in the new global economy. Certainly we have benefited economically from the exploitation of lower cost labour from countries in Eastern Europe that have recently joined the European Union.
Now let's go to China. China's economy is in a very early stage of capitalist development. Its economic capacity is huge. It's vast and it's many times greater than that of the USA. So what happens if China becomes the new economic super-power of the 21st century? What will happen if China, not the USA, is pulling the strings on the world stage? There's another factor, the costs structures in China are perhaps below 10% of what they are here in the west. What happens to our markets if we reduce the cost of goods by 90%? Could you manage on 10% of your wages? These are rhetorical questions.
We could try and keep the Chinese at bay through tariff barriers and other means of market exclusion, but we left that kind of stuff behind twenty or so years ago. We're living in a global free capitalist economy now. No-one wants to get back high degrees of state regulation again, economically or otherwise. If anything they want the degree of State control reduced still further. That after all is what George Bush is actually doing at present!
There's the other factor too. Our western businesses need access to the Chinese markets to bolster their flagging profits and to realise growth. There is not too much more dramatic economic growth that can be achieved here in the west anymore. We have full supply already.
One last thing: Most of our economic development and most of our technology development in the west over the last sixty years have been caused by wars. It's no wonder that the Germans and the Japanese economies have grown to be so strong. Their countries had the opportunities to rebuild and modernise their economic infrastructures as a result of being completely devastated in the second world war. In the UK, we tried to keep doing the same old thing but then everything changed as international competition in world markets intensified, particularly during the last twenty years of the 20th century.
But think about all that new technology we have now, miniaturised electronics and the like. Most of our brave new world of electronics has been developed as a result of, or at least the pace of its development has been supported by, war. By going out and killing people! There was the cold war too, there were not too many people killed in that one, but it did have that certain feeling that if the cold war had gone hot, then we might reasonably have contemplated the end of the world in a nuclear holocaust.
I'll leave you with that thought again. What happens when and if China displaces the USA as the world's new economic and political superpower? Who becomes the third world then? If you know the answer, then let me know. I'll end with a quote from Napoleon Bonaparte who said, "Let China sleep, for when she awakes the whole world will know."
Well, it's wakey-wakey time in more ways than one!
Footnote: This was written originally in October last year before the collapse of the “sub-prime” mortgage market, the banking crisis – the extent of which is not yet known (and may not be known until after the US presidential elections), and the recent surge in oil prices.
I'm going to answer this but I will try and do it as factually as I can. This is straight off the top of my head without the aid of textbooks.
Big changes in our world are on their way. You can either believe that or bury your head in the sand, but big changes will happen anyway. There is nothing we as individuals can do to prevent those. Here I'm going to focus on the economic and political outlook. I know a little about economics and I'll just give you the benefit of my limited education.
Let's say it's correct that soon world production capacity outstrips consumer demand. What happens then? That's simple enough to answer: Prices will fall as companies are forced to compete to protect their market share. As prices fall, profits are put under pressure. As profits come under pressure, markets fall. If markets fall long and hard enough, it's called a recession, or a slump or a crash. When that happens, unemployment increases. As unemployment increases, so does social unrest. So that's one hypothesis that may underpin social change.
Also at present the USA is the dominant political and economic power in the world. It is dominant, not because Americans are nice people or that they make good movies. It is dominant because it is one of the wealthiest nations in the world. It is sheer economic power that underpins the USA's power and influence, nothing else. This may change in the near future.
Despite what some people might say, George Bush is no fool. He has bolstered the American economy by allowing the dollar to devalue against other currencies by approximately 33% over the past five years. What that means effectively is that American goods are a third cheaper than they were five years ago in world markets, if the selling prices have remained the same. There has been some inflation in the USA too but nevertheless, this devaluation is very significant. A country cannot continue to devalue its currency indefinitely. In effect, it's reducing the price of the dollar and ultimately that has the same result as reducing the price of goods.
Let's go another way for a moment. I understand that the price of electrical, leisure and clothing goods have fallen in the UK over the past couple of years. I seem to remember that the price drops have been dramatic, like in double figure percentages. Two factors may be in play here: One is that supply may be outstripping demand in these areas already. The other might be the influence of China and its developing economy with its lower costs coming into play in the new global economy. Certainly we have benefited economically from the exploitation of lower cost labour from countries in Eastern Europe that have recently joined the European Union.
Now let's go to China. China's economy is in a very early stage of capitalist development. Its economic capacity is huge. It's vast and it's many times greater than that of the USA. So what happens if China becomes the new economic super-power of the 21st century? What will happen if China, not the USA, is pulling the strings on the world stage? There's another factor, the costs structures in China are perhaps below 10% of what they are here in the west. What happens to our markets if we reduce the cost of goods by 90%? Could you manage on 10% of your wages? These are rhetorical questions.
We could try and keep the Chinese at bay through tariff barriers and other means of market exclusion, but we left that kind of stuff behind twenty or so years ago. We're living in a global free capitalist economy now. No-one wants to get back high degrees of state regulation again, economically or otherwise. If anything they want the degree of State control reduced still further. That after all is what George Bush is actually doing at present!
There's the other factor too. Our western businesses need access to the Chinese markets to bolster their flagging profits and to realise growth. There is not too much more dramatic economic growth that can be achieved here in the west anymore. We have full supply already.
One last thing: Most of our economic development and most of our technology development in the west over the last sixty years have been caused by wars. It's no wonder that the Germans and the Japanese economies have grown to be so strong. Their countries had the opportunities to rebuild and modernise their economic infrastructures as a result of being completely devastated in the second world war. In the UK, we tried to keep doing the same old thing but then everything changed as international competition in world markets intensified, particularly during the last twenty years of the 20th century.
But think about all that new technology we have now, miniaturised electronics and the like. Most of our brave new world of electronics has been developed as a result of, or at least the pace of its development has been supported by, war. By going out and killing people! There was the cold war too, there were not too many people killed in that one, but it did have that certain feeling that if the cold war had gone hot, then we might reasonably have contemplated the end of the world in a nuclear holocaust.
I'll leave you with that thought again. What happens when and if China displaces the USA as the world's new economic and political superpower? Who becomes the third world then? If you know the answer, then let me know. I'll end with a quote from Napoleon Bonaparte who said, "Let China sleep, for when she awakes the whole world will know."
Well, it's wakey-wakey time in more ways than one!
Footnote: This was written originally in October last year before the collapse of the “sub-prime” mortgage market, the banking crisis – the extent of which is not yet known (and may not be known until after the US presidential elections), and the recent surge in oil prices.