Let Go Of The Rising Balloon

I recall being told the terrible story of some military personnel grabbing the ties on a hot air balloon that was threatening to leave the ground prematurely, only to be hauled into the air. One by one they faced the decision whether to drop off as it continued to rise, and some held on too long... I'm tempted to search for an accompanying YouTube clip. But you get the point, and Winnie the Pooh provides a more fitting illustration for the Eurozone politicians who face the same dilemma.

The latest proposal is that a €440bn European Financial Stability Fund be somehow swelled to €1 trillion, which in turn would be leveraged to €4 trillion using "distressed sovereign debt, and equity in distressed banks exposed to the very same sovereigns, as security".

That this is the equivalent of a rising balloon is not in doubt. Nor is it a surprise. Gillian Tett explained two years ago why sovereign debt could be "the new subprime". And the IMF's report on the subprime crisis has explained the problem with allowing the same $1 trillion in assets to be rehypothecated or 'churned' to 'secure' $4 trillion in borrowing by US banks in the lead up to the Lehman collapse... Noting the "surreal" circularity involved in the latest EU proposal, Satyajit Das also recently pointed out that the proposed structure is also flawed because it fails to recognise that the underlying bonds could lose 75% of their face value.

Martin Woolf discusses this process in terms of "How to keep the euro on the road" but I prefer the rising balloon analogy - as did Danny, the dealer in Withnail and I, when referring to the end of the '60s:

"Politics, man. If you're hanging onto a rising balloon, you're presented with a difficult decision - let go before it's too late or hang on and keep getting higher, posing the question: how long can you keep a grip on the rope? They're selling hippie wigs in Woolworths, man. The greatest decade in the history of mankind is over. And as Presuming Ed here has so consistently pointed out, we have failed to paint it black."

Time to let go. Greece first.

All Your Problems Solved - For Life

A new TV game show promises to solve all your problems for life - on the single toss of a coin.

A spokesperson for independent production company CoinToss Productions confirmed the show's ultimate promise, but refused to give further details. "We're still in stealth mode," she said, "and we don't know how this got out. But all will be explained in the launch."

Industry analysts were enthusiastic about the show's potential. One pundit, who preferred not to be named, suggested "this really captures the zeitgeist." Asked what he meant, he said, "it's a German word, and I'm not entirely sure what it means. But what's certain is this country is on its knees and the majority of people are employed by the government or receiving some kind of benefit. The entrepreneurial spirit, the get-up-and-go that created whole countries like America and Australia and... and... Fiji has been replaced by an entitlement culture the pinnacle of which is knocking a hole in a shop window to grab a telly, followed by a cheap lager and a bag of crisps down the local as a warm-up for the public sector strikes. I mean, a show like this will appeal to most people in the UK, of course, because it's just about basic human greed at the end of the day, isn't it? But it'll appeal particularly to those who expect it all on a plate and can't be bothered to take control of their own lives."

Sources say the show, which has the working title "Coin Toss", should be out in time for Christmas.



Image from Blackberrysites.

Of "Credit Easing" and P2P Finance

Source: Bank of England

The governments proposal to intervene directly in the corporate and small business funding markets shows how grave it is that lending to UK businesses is shrinking.

But it seems crazy for the taxpayer to prop up zombie banks - subsidising tax-free savings rates that allow banks an average margin of 11% - and then to use more public money to shunt aside nascent private competitors. Surely, the result will be a never-ending spiral of financial dependency on the public purse. 

As NESTA recently reported, there are more innovative ways to finance small business. But the current regulatory framework - ironically designed to protect us from the banks - makes it unduly painful in terms of time and money to start true competitors. Which is why the P2P Finance Association was formed to help inform the move to a new regulatory framework and pave the way for new entrants. Without any of the vast subsidies the banks receive, these new platforms will lend more than £100 million this year to individuals and small businesses - and they already account for over 2% of the UK personal loan market.

So why doesn't the government foster the growth and development of alternative means of finance, rather than use public money to put them at risk?

For instance, why not extend the ISA tax-free cash subsidy to lending via peer-to-peer platforms?

GreedTV

I believe that mainstream popular culture is a pretty good bellweather for the national state of mind. That's not to say there's necessarily a causative impact (apart from fads), merely reflective.

Last year, I was struck by Hollywood's happy ending to Money Never Sleeps, which celebrated the fraudulent success of one Gordon Gecko. Later, I wondered whether there is anything else we regard as socially more important than the accumulation of wealth?

This year, having already witnessed that greed and stupidity are winning, I've been struck again by greed-inducing TV programmes like The Million Pound Drop and Red or Black.

Maybe people need 'hope', but surely this sort of cheap route to fortune is merely setting us up for frustration.

What sort of film and TV would reflect a culture that has adjusted to our new economic reality?

In Brussels It's Always 3 Years Ago

Yesterday's speech from the European Commission President perfectly underscores Brussels' feeble grip on reality. 

Now is not the time, amidst multiple sovereign insolvencies - "a burning building with no exit" - to be debating (yet again) the need for a 'Tobin Tax' that might take effect in 2014. 

Now is not the time to be recommending legislation that might one day deliver greater centralised control. Nor is it timely - or wise, given the confessed lack of central control - to assert that solutions cannot be achieved by negotiations between governments. 

Surely, the EC President's role in such troubled times, if he ever really had one, was to do all he could with the structure he'd been given. Which would have included locking governments in a room until they did what was necessary.

Alas, that opportunity slipped by in 2008, if not before. "Europe" is an ex-parrot.

Even the news that German MPs have backed moves to bolster the Zerozone rescue fund is beside the point, as Satyajit Das explains in an excellent article today. The Zerozone central banking system simply does not have the capital to leverage itself, CDO-style, to the point at which the rescue mechanisms need to stretch:

"A 20 per cent first loss position may be too low. Unlike typical diversified CDO portfolios, the highly concentrated nature of the underlying investments (distressed sovereign debt and equity in distressed banks exposed to the very same sovereigns) and the high default correlation (reflecting the interrelated nature of the exposures) means potential losses could be much higher. Actual losses in sovereign debt restructuring are also variable and could be as high as 75 per cent of the face value of bonds."

We must get our heads around the fact that Europe's building will inevitably burn down.

So where will you be in 2014, Mr Barroso?

Images from Crisisboom and The Nation.