Thursday, 16 October 2008

Credit, Stock markets and the long term view

We are currently (Oct 16 2008) in the middle of a 'Fake Panic'. It has been generated from very little and has no real underlying reason for existing.

If you are driving along the motorway and it is very busy then if just one person panics and decides to slow down sharply, it has a knockon effect to the people behind, who brake harder, and before you know it the traffic has come to a standstill, or even worse, you have a pile-up.

It is the same with the financial institutions and stock markets. People get a bit nervous about one thing, and it knocks on and on, until everything grinds to a halt.

The main problem is we have created a financial infrastructure that allows panic to propogate in an incredibly short time, based on a total absence of cause.

Instead, we need to construct a financial system that has built in stability against the panic reasctions. The ways to do this include:

1. Have a minimum time for owning stocks of 12 months - only exceptions for insolvency and such like. Stock ownership was intended to build up companies, not make a quick buck.

2. Have a minimum time for 'wholesale' borrowing and lending, of at least 3 months. If an instituion finds itself needing to borrow huge amounts of money overnight or for a week, then it is doing something wrong and worse, something that builds instability into the financial infrastructure.

3. Disallow ANY form of house borrowing for more than 90% of the house value. We need people to be committed to sorting out their financial situation BEFORE they become a problem.

4. Radically re-think how bad loans are handled - foreclosure should be a last resort, and instead various soft landings should be provided for, with statutory support - for example, if someone loses their house, they are not allowed to just escape the debt and start over. They instead have a legal obligation to clear their debt, or at least reduce it, even if that is over the next 50 years.

5. Remember that there is NO SUCH THING AS A FREE LUNCH - bank executives taking hundreds of millions out of their organisations is almost tantamout to operating a pyramid scheme.

6. Educate the population about the meaning of words like recession. Almost by definition, what goes up must come down, when you talk about the real world. You can not have ever increasing prosperity - it will fluctuate. It is totally normal and acceptable to have 3 years of growth followed by 3 years of negative growth. However, it has somehow become an evil thing, given the name 'recession'. We need to get these things in the proper perspective.

I have long been disappointed at how easily we are influenced by the media into kneejerk reactions. It has to stop, because in this incredible and hugely interconnected world, it has become a deadly force, able to destroy lives, businesses, companies, countries and if it triggers some suffering country into crisis, possibly could destroy our civilisation - all because some stockbroker got nervous about losing a few quid one day...

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