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Magic Money, The Free Market Illusion


Not so long ago politicians and bankers were full of confidence bordering on hubris and they were telling us the good times could go on for ever. So where did it all go wrong. The finance industry blame politicians, politicians blame the finance industry and they all blame us as they try to dream up schemes that will enable the world to carry on prining worthless money and lending it to each other...


Magic Money, the great free market illusion.
by Ian R Thorpe
5 April 2009

At the height of summer, in those carefree days of endless sunshine and picnics in bee - loud, clover - scented meadows by languid steams (I’m writing in a metaphorical sense here obviously) it seemed the good times would go on forever. Like Keats’ Autumn the economy kept burgeoning, oblivious to setbacks. So how did it all go wrong so quickly? Sit down and I’ll tell you. You will be gobsmacked at the ineptitude of the bankers and the gullibility of those who fell for the scam. Oo-er, that's us isn't it? Maybe you will not find that so amusing.

The free market, the miracle that turned us into worshippers in the High Street Temple of consumerism, the perpetual motion engine that drove global economy was no more than an illusion. The world economy was based on magic money, dreamed up by politicians and bankers and underwritten by ridiculous asset values that bore no relation to reality.

In 1976, Jim Callaghan was the undertaker for the post-war social democratic order when he said: "We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that option no longer exists." Now, instead of thrashing around trying to find a way to rescue the bankers from the consequences of their folly, the prime minister should stand up and say: "We used to think you could borrow your way out of a recession and increase employment by increasing debt and setting the City free. I tell you in all candour that option no longer exists". It would bring the house down, literally.

A year after Callaghan faced his crisis, socialism was dead, its ideals of social justice hijacked by special interest groups advocating not fair treatment for all but advancing arguments for the preferential treatment of minorities. Into the political void stepped Margaret Thatcher, as much an illusionist as any other politician but one who claimed she could really perform magic. Having got her party elected and started an unnecessary war to arouse patriotic feelings and disguise the incompetence of her government she pulled her first rabbit out of the hat, giving council tenants the right to buy their homes.

Here next trick was to make the money raised from selling council properties disappear instead of investing it in new properties so that people could get on the ladder as young tenants and earn the right to buy their home later when their lives and incomes were more settled. The lack of available homes to rent created an artificial demand for property to buy at the bottom of the market which forces prices up to unrealistic levels. In turn this pushed up prices in the middle. Meanwhile a new, classless (in every sense) elite was created. These people wanted to live in exclusive neighbourhoods for the status they imagined that gave them. They were prepared to pay over the odds for property at the top of the market but wanted top money for their suburban semis.

The madness ought to have been regulated by lending restrictions but the newly deregulated financial institutions tore up the conventional financial wisdom of not lending more than people could afford to repay, “If customers default on the loan, we take the house” they said, smugly assuming that as long as there was demand in the market their investment was safe. They were wrong, so long as the madness continued and unrealistic values continued to be placed on properties used as collateral the illusion could be maintained. Once economies slowed and earnings started to fall more and more people started to default on loans. Very soon panic set in.

The recession of the early 1990s was deep, swift and painful. It ought to have taught us about Magic Money but very soon more rabbits were being pulled out of hats this time based on a notion of The Internet changing everything in a way that would enable us to become rich by giving stuff away for free, the dotcom bubble. Ridiculous values were put on startup companies with no track record, no revenue stream and in some cases no product to sell. The first dotcom startup to fall, in the month after its shares started to be traded on Stock Exchanges had had millions of hits on its web site but converted just three of these into sales.

No matter, the dotcom tycoons continued to spend their investors venture capital as if the end of the world was imminent and to behave like Conquistadors, treating the captains of traditional industries as if they were members of some stone age tribe.

Once the rot set in the dotcoms fell like dominoes.

Enter the superheroes who would save the world. The Free Market maniacs with their mathematical models, their structured investment vehicles and their billion pound bonuses. These people had learned a new trick, not for them the tired old illusions like sawing the girl in half, making the monkey disappear, pulling the rabbit out of the hat. These guys has learned how to do transubstantiation. They were not interested in turning brad and wine into flesh and blood however. The new trick involved turning a liability into an asset.

When once people had bought a house the lender who financed the mortgage had a claim on the house which secured the debt, thus balancing the account. Thanks to a piece of financial sleight of hand which was possibly invented by the people who brought you the Enron and Worldcom corporate bankruptcies, in the brave new world of creative accounting a mortgage became a double asset for the lender. They owned the house and they owned a slice of the borrower’s future income ‘til the debt was paid.

Suddenly the balance sheets of mortgage lenders showed a doubling in the asset value of the organisation. Value of their shares rocketed and on paper they had oceans on money to lend. And lend it they did, to anybody, because every loan they made immediately doubled in value on their balance sheet. And that really was magic.

So as you stand surveying the wreckage, should you hear anyone ask “What went wrong, where did all the money go?” you can tell them; “There never was any money, it was all done with smoke and mirrors.”

Ian thinks he is the first poet out of the starting gate with poems on the meltdown:
Holy City
Chasing Bubbles

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Lord Marland, an Energy minister, hit out at the cost of so-called feed-in tariffs, which the Government has axed as part of the cuts programme. Last week Court of Appeal ruled that the sudden axing of the tariffs ...

Goodbye Great Britain
Recently, there have been two powerful challenges to the conventional wisdom about the United States. First, Robert Kagan published a lengthy essay in The New Republic, arguing that predictions of America's decline as a global power are woefully premature. .Is it possible, I found myself wondering, to do something similar for Britain? Robert Colvile has a go in this Daily Telegraph article ...

Our rising debt levels are becoming unsustainable – soon we may be talking about wealth confiscation (By Daniel Knowles, Daily Telegraph)
Debt, debt, debt; we’re drowning in it. This morning, the Office for National Statistics published the latest estimates of public sector borrowing. Though borrowing is falling faster than anticipated, thanks to the fact that spending cuts are finally beginning to kick in, the national debt has risen to 64.2 per cent of GDP. More significantly,…

The Obama administration knifes Britain in the back again over the Falklands - By Nile Gardiner World
In yet another display of disdain for the Anglo-American Special Relationship, the Obama administration has weighed in on the mounting tensions between Great Britain and Argentina over the Falkland Islands. Just two days after Prime Minister David Cameron issued a robust statement in the House of Commons vowing to defend the sovereignty of the Falklands,…

Drones In The Hands Of The Paparrazi - It's an ethical minefield
America's use of drones for targeted killings is serious enough. But commercial and law enforcement uses are on the horizon. Whether you view them as model aeroplanes for grown-ups or the handmaidens of the killer robot, unmanned aerial vehicles (UAVs), commonly known as drones, are taking off in earnest. ...

The Observer uncritically regurgitates Trotskyist smears against Katharine Birbalsingh- By Toby Young, Daily Telegraph
There’s a disgraceful attempt to smear Katharine Birbalsingh in this morning’s Observer. Under the headline “Katharine Birbalsingh criticised over ‘wasteful’ free school project“, the paper’s policy editor Daniel Boffey tries to create the impression that there’s growing local opposition to the Michaela Community School – Birbalsingh’s free school – which is due to open in…

We’re being sent the bill for the euro crisis again – this time by the IMF - By Daniel Hannan First it was individual banks; then whole industries; then entire countries; now it’s the world. Western leaders have reacted to the failure of each bailout by decreeing a bigger one. Unable to admit their mistake, slaves to the defunct economist whose thinking dominates our economics faculties and central banks, they act like so many Nick Leesons,…

The Three Parent Family More on the progressive left's war on the family and the scientific dictaorship's attempts to dehumanize us all. Babies with three biological parents could be born within three years. Scientists have come up with an IVF technique that uses the undamaged DNA of a third party when couples risk giving their children a genetic conditions such as muscular dystrophy or ataxia. The Wellcome Trust has funded the research (the figures vary between £4 million and six million …

As Obama Positions Himself For A War In Syria We Learn That Like Gadaffi, Assad Is Popular With His People
Most Syrians back President Assad, but you'd never know from western mediaAssad's popularity, Arab League observers, US military involvement: all distorted in the west's propaganda war. Suppose a respectable opinion poll found that most Syrians are in favour of Bashar al-Assad remaining as president, would that not be major news? Well one did and we never heard a word of it in the Obama felching western media ...

Bullshit Sherlock
While other blogs are full of how great the cliff - faller ending of Sherlock Holmes was I felt a bit let down. The fake suicide was telegraphed all through the show. And the coda assured us Sherlock had survived. We should not forget of course it was the habit of ...

Will bringing back grammar schools boost social mobility? by Toby Young Daily Telegraph
The possibility that England may shortly see its first new grammar school in over 50 years has, predictably enough, re-opened the debate about selective education. Yesterday, for instance, Allison Pearson came down firmly in favour, while Fiona Millar shot back with an instant rebuttal. I’ll get into that argument in a moment, but first let’s be…

So Why Read Books Anymore
There is great “truth and beauty” in Homer’s Iliad, but I would not try to make his sale on such platitudes. Gibbon’s The History of the Decline and Fall of the Roman Empire remains a classic. But I confess it can be hard to get through. Conrad’s Victory or Knut Hamsun’s Growth of the Soil, if authored by writer X this year, would be trashed on Amazon.So what are the reasons, in this age of ...

Eric Holder and the Chicago Way In America Obama's Brownshirts are getting hysterical as they try to make race the major issue in the election campaign.

Dystopian Prophecies Are Coming True - The Government Will Soon Choose Our Wives
Thinking of this entertaining new literary award – “the Hatchet Job of the Year” – it was natural to turn to Macaulay’s Essays, for few reviewers have ever been less reluctant to wound. I had in mind two long review-essays, one on Robert Montgomery’s Poems, the other on The State in its relations with ...
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