During WW2 the British government introduced a propaganda campaign called "Careless talk costs lives". The campaign was based around a set of posters aimed at ensuring that military secrets were kept secret, but moreover to prevent rumours from affecting the public psyche, at a time of very natural fear. One of the posters, for example, showed two women on a train having a chat to each other, in a standard morning commuting scene. In the background there is a German General in full military uniform sitting at the back of the carriage in earshot. The poster reads "Careless talk costs lives: You never know who's listening". I'm pretty sure it was unlikely that Himmler would have been commuting to the Reichstag on the 7.42 from Basingstoke, but the message in the campaign was pretty clear.
Given the week that the UK banking system has had, there maybe some quarters thinking that a similar campaign may be in order right now. And they might be right. The main problem seems to be that the careless talk isn't limited to the public - Gordon Brown has been participating freely himself, driving the UK banks closer to the nationalisation he doesn't want, by slagging them off openly. It might sound inane, but the self-fulfilling positivity that drove us to believe on the way up, is likely to create a considerable overshoot on the downside, and there doesn't seem to be a will from anyone other than Barack Obama to buck the trend and talk positively about the world. And even with his high global popularity, there are voices of dissent about his overly optimistic take on things.
Amongst the contenders for leading horsemen of the Apocalypse, the global journalist community is winning by a nose from the politicians, with the UK tabloid press one of the best jockeys. I'm not saying that the world isn't in a bad way, but the doom-mongering will only continue to be self-fulfilling. As an old rugby coach of mine used to say, "...if you think you can, or you think you can't, you're probably right." Perhaps, like at a wake, we need "closure" on this so that we can get on with reconstructing the future. Perhaps the best way to lift the gloom would be to invoke the philosophical thinking of that great theologian, Paris Hilton. "If you feel down and you put on a tiara or a cute sparkly headband, it, like totally, brightens up your day." Kant and Marx can't compete with this sort of insight.
Leaping from the ridiculous to the sublime, TS Eliott once wrote that "Humankind cannot bear very much reality", which is exactly how I felt after reading the various journalistic summaries of the UK banking crisis this week. In particular reading Jim Rogers' (who founded the Quantum Fund with George Soros) summary of UK plc was particularly uninspiring. According to Rogers, who I usually think has some pretty interesting things to say, "it's simple - the UK has nothing to sell". The foundations of the UK economy according to Rogers, were financial services and North Sea oil, neither of which are exactly flying currently. Consequently the precipitous fall of sterling is justified and the likelihood of complete nationalisation of the UK banking system is almost a given.
Rogers' is a well-listened to commentator on emerging and not so emerging markets. He's also, in market speak "talking his position" - i.e. he is short UK banks, and short sterling versus various Asian currencies, and has plenty to gain from the markets following his point of view. His very discussion of the topic, will push UK plc closer to insolvency. The market perception is that complete nationalisation of any of the UK banks will lead to all equity and qualifying Tier 1 capital holders being wiped out, so any thought of nationalisation is going to have a negative impact on the price of these. Every bank in the UK has taken write-downs against assets, so in order to restore their 'capital adequacy' they need to raise new capital, either through selling assets or raising new capital, or both.
The problem is that is that each time someone talks up nationalisation the cost of raising the required capital to avoid nationalisation, increases. Lloyds, for example raised £700mm worth of new Tier 1 capital this week - they cleared the deal presumably with big institutional UK investors (Prudential, Scottish Widows etc.) with a coupon of 13% and priced at 100. Before the bonds had actually hit the account of the institutional investors the market price was 60% of this sale price; a £300mm mark-to-market loss for the investors, before they actually received what they paid for. Not so much a problem for Lloyds, for now, as they have the money in their books from investors, but if they need to raise more capital in the future because of further falls in their capital adequacy then it would be a problem.
Currently, the likelihood is that they will have to raise more capital in the future, because the general perception is that there will be further falls in the book value of the assets on all banks books. There is a "negative feedback loop" between expectations and future capital requirements, that is being fuelled by media and governmental speculation. If that speculation is based on "fact" then, fine, but too often it overstates and manipulates information to be as gloomy as possible - sometimes in Jim Rogers case, because of an axe to grind, or in other cases because of incompetence.
The incompetence aspect of "careless talking", was demonstrated clearly to me by an article in the Irish Times this week, by another leading horseman of the Apocalypse, Morgan Kelly. The article was constructively entitled "Piling Anglo (Irish Bank) losses on to national debt risks bankrupting the State". He argues, perhaps rightly, that Anglo Irish is "poisoning the banking system and is of no systemic importance" and that "it must not be nationalised". He goes on to say that the proposed nationalisation marks a decisive watershed in Irish democracy. "With it", he says, "an Irish government has coolly looked its citizens in the eye and said: 'Sorry, but your priorities are not ours.'" I don't necessarily have an issue with his point of view, as he has been proved right about prior predications of the coming Irish property bust. What I do have an issue with is the premises he basis this argument on, which not to put too fine a point on it, are made up.
The "central point" of his argument against nationalisation is that it is a direct trade-off between protecting Irish taxpayers, and protecting "international bondholders". He claims that without nationalising the bank...
"...developers would have gone bust and commercial property would have become more or less worthless, but that is going to happen anyway, with or without Anglo Irish. Depositors of Anglo Irish would have been paid off in full, and the hit would have been taken by the international financial institutions that hold around Euros 22bn of its bonds. These bondholders are professional institutional investors who signed up for higher returns on Anglo debt in the knowledge that they were facing higher risks. They are, moreover, insured against their losses through insurance contracts called Credit Default Swaps. This is the central point about the bailout of Anglo Irish, and one that has not received any attention: the only effect of the a bailout is that the Irish taxpayer will make up the losses of Anglo Irish's bondholders instead of the insurers who had already been paid to underwrite the risk."
This is complete drivel. His claims that all international bondholders are insured against losses through "Credit Default Swaps" is just nonsense. Moreover, it's dangerous nonsense, because most of his readers (Irish taxpayers) will think that he knows what he is talking about, and will feel aggrieved accordingly. I have no major issue with the stance Kelly is talking on the cons of nationalisation of Anglo Irish Bank, but the credibility of his argument is completely lost on me because of the false arguments that he is using. The feedback loop that may be created is that in rural towns around Ireland, where Morgan Kelly is read, local businessmen may respond to the prophesied doom by bringing forward lay-offs they had been thinking about.
Comment is, of course, free in any democracy. We can yak and yak, and blog to our hearts content. We also wouldn't want to follow the example of South Korea, where a 30 year-old blogger called Park Dae-Sung is facing trial for being "too pessimistic" in his financial forecasts. Dae-Sung became a household name for his accurate forecasts of sharp falls in Korea's won currency, declines in the Seoul stock market and Lehman Brothers going belly-up. He faces up to five years in prison if found guilty of violating "communication laws".
I'm also not trying to deny that this crisis started because of "real issues" - poor credit, subprime loans and unsustainable leverage but panicked, and in many cases unsubstantiated reporting, has exacerbated matters. Markets move with the herd instinct, or with a perception of where the herd instinct is taking us. Rigorous reporting is one thing, but careless talk costs jobs (and lives). Richard Lambert, the former editor of the Financial Times, and now director of the CBI (Confederation of British Industry), gave a speech recently saying he had no problem with accurate reporting, but:
"At a time when careless headlines or injudicious reporting risk becoming self-fulfilling prophecies of a very serious nature, you might have thought that the industry's self-regulatory body (the Press Complaints Commission) would have had some guidance to offer about the special responsibility of business journalists as they pick their way through the dangerous minefields of the credit crunch. But of course the PCC is nowhere to be seen in this drama" he said.
One of the most striking of the reporting issues, that Lambert goes on to discuss, is in relation to house prices; which naturally enough is pretty key to the great owner occupying British public. Anyone who is willing to put their name to an estimate of the % drop in house prices for the year ahead is latched onto and heralded in an almost Messianic fashion. "House Prices to fall 50%" will be be leading headline, and somewhere within the subtext you will find that this quote is attributed to an "expert", who's expertise is at best questionable. When Nationwide releases it monthly house price movements for the country over the previous month, banner headlines will shout "House prices down record 3% on the month". I'm guessing the average stock market investor is thinking, "I wish my stock portfolio only fell 3% last month". House prices are a sensitive subject, but in context, house prices have tripled in value in the past 20 years on average across the UK, so a fall of 10, 20, or even 50% will still leave many people ahead of where they were when they bought the house. The media reporting on the subject plays up to the sensitivity, and has certainly added nothing to the confidence of the market on the way down, in the way that it did on the way up.
“I wish people would stop saying that this is a crisis of confidence,” said Steven Eisman, a portfolio manager and banking expert at FrontPoint Partners. “The loss of confidence is just a symptom of bad credit and over-leverage." I tend to agree with this, up to a point. As the crisis has transitioned into the "real economy", where it's affected the less financially educated "man on the street", the effect of careless talk will have an even greater impact. I think we all need to take a leaf out of Paris Hilton's book, and put on our sparkly tiaras to cheer ourselves up.
Sunday 25 January 2009
Sunday 18 January 2009
The Mis-Information Age
The whole nature of the way we absorb information as a society has to be one of the fastest and biggest changes of the last 50 years. The increase in information flow, though, has not necessarily been matched by an increase in the ability to process that information, and to separate the proverbial "wheat from the chaff". Often the "chaff" is more compelling, and simpler to understand, so that tends to be where large sections of society tend to get their context from, which doesn't necessarily mean that society is using increased information to make better decisions.
In the post WW2 world, merely getting access to information still remained key; channels of information were extremely limited, relative to today, and much of the flows of information were state or semi-state controlled, even in the 'democratized' West. On top of that it tended to be a relatively privileged class that would have domestic access to television, radio and even newspaper channels of communication at this point. In the UK the government funded BBC had a monopoly on television until 1955 and on radio until the 1970s. In the US, likewise, TV competition was limited to 3 channels, ABC, NBC and CBS into the 1950s. Radio was somewhat more widespread, as the cost of the "wireless" diminished over time, but still relatively limited. Newspapers had been the main form of information dispersion over the previous several hundred years, so were not new, but the number of different newspapers widely available, still relatively limited.
Today access to information is virtually universal. Seeing children on mobile phones in remote parts of the developing world is testament to that, and it would be a struggle to travel to a place in the world that couldn't provide at least some access to the Internet. I can read the Times of India, The New York Times and the Sydney Morning Herald all for free sitting in front of my computer, from pretty much any location in the world, and have 3 different global perspectives on the same piece of news.
The channels of communication and information transfer can be at least as numerous as the number of people in the world, with the range of media having developed from TV, radio and newspaper into a whole variety of offshoots of the digital age, with much of this content or 'information' user generated. Blogs, like this one can be accessed from anywhere in the world by typing in an address which is about a quarter of the length of any domestic address. Wikipedia, the online encyclopedia, now has 12 million articles written collaboratively by 'volunteers' (i.e. anyone who has an internet connection), and is currently the most popular general reference work on the Internet, yet its content is only "expert" because its 'volunteers' believe it to be so. One of the best known mis-uses of Wikipedias openness happened when in 2006, a US journalist complained that his Wikipedia entry implicated him in the assassination of President Kennedy. The decision of a member of the public, Brian Chase, to insert the claim "as a joke" to fool a colleague exposed the openness that Wikipedia is based on as potentially flawed.
The most valuable commodity a media company can attract now is user focus, whereby they establish means by which their content is always at the top of the pile, and that people look at the longest or the most number of times. Internet search engines make money, by charging internet content providers to appear at the top of the list when searches are carried out through their engine. The engine itself doesn't filter on the basis of quality of content, but on the basis of the words used in the search combined with who is paying money to Google in that category. As a consequence people tend to find out answers to their searches that they want to hear, as opposed to answers that are necessarily right. By way of example, with my wife being pregnant, and neither of knowing much about what we're doing, the internet can yield completely opposite answers to the same question both of which will be generated by remote, unaccountable, self proclaimed experts. Trying to decipher what is good information and what is bad, is quite difficult - particularly in this instance where we aren't experienced.
In contrast to 50 years ago the scale of competition for information "air-time" has changed dramatically. Institutions like the BBC were set-up with an almost paternalistic outlook in mind. The content they were producing was the biggest focus, and the controllers of the Beeb were the filtration device in terms of quality that is missing from search engines today. The lack of competition meant that it was less likely that someone would channel hop in the event that they didn't like what a program was about, or when they disagreed with it's opinion. Focus was a natural given, because alternatives were limited.
I recently re-watched the film Good Night, and Good Luck, which was made by George Clooney in 2005. The film takes place in the 1950s and plots the passage of anti-Communist sentiment which US senator Joseph McCarthy uses to both stifle political debate and push his own political status forward. The film focusses on the conflict between Senator McCarthy and Edward Murrow, who is a CBS news journalist, who had become popular on US radio broadcasts during the Second World War. In Murrow's Sunday evening editorial TV show, See It Now, he defies corporate and sponsorship pressures, and discredits the tactics used by McCarthy during his crusade to root out communist elements within the government.
Murrow first defends Milo Radulovich, who was facing removal from the US Air Force because of his sisters political leanings and because his father subscribed to a Serbian newspaper. A public feud develops when McCarthy responds by accusing Murrow of being a Communist, for his defence of Radulovich. Murrow is then accused of having been a member of the leftist union "Industrial Workers of the World", which Murrow rightly rejects as false. In a growing climate of fear and reprisal, with sponsors reluctant to be involved with CBS/ Murrow, there is pressure for Murrow to be taken off air. Thankfully he wasn't and he ultimately strikes a historic blow against McCarthy.
The reason Murrow was so important to this debate at that time, was that he was looking to inform US society, that the simplified tactics of McCarthy were not in the best interests of moving the US democracy forward. McCarthy tried to simplify the world for the US voter - Communists are evil, and I am going to root out evil from our society. Murrow was given the air time, to both say that things weren't that simple and also to try and re-open political debate about the unfairness of judging a citizen guilty before trial. The fact that people were willing to pay attention to Murrow, when he was flying in the face of sentiment at the time, I would say was in large part a result of the limited scope of broadcast media at the time. There wasn't much alternative but to listen to Murrow if you were watching TV at home on a Sunday evening. In the modern broadcast age viewer attention spans have dropped, and consequently Murrows quest to broaden the minds of a 2009 audience may have produced a channel switch to "I'm a D-list Celebrity, Get Me Out of Here", or a pre-programmed recording of "Big Brother".
Paul Saffo, who is a futurologist, is pessimistic about how society will be affected by the media revolution. "Each of us can create our own personal-media walled garden that surrounds us with comforting, confirming information and utterly shuts out anything that conflicts with our world view," he says. "This is social dynamite" and could lead to "the erosion of the intellectual commons holding society together. We risk huddling into tribes defined by shared prejudices".
Likewise, Michael Moritz, the venture capitalist who became famous for spotting both Yahoo! and Google, worries about "amplification of the internet soapbox" and imagines what role user-generated media would have played in "1931 in Munich, how easy it would have been to broadcast the message; I think the Nazis would have got to power quicker". He also believes Ed Murrow's stand against McCarthyism in the US in the 1950s, would have fallen on deaf ears. In essence, the herd mentality that seems to be central to the human condition isn't reduced by the apparently secular nature of news media in the 21st century, it is increased. People find their common ground with others, albeit that those "others" may not be their neighbours, or even from the same village or city. With more than 6bn people in the world, most of whom are "connected" the chances are that you will find someone out there who is happy to reinforce your views on the world, however daft they may be.
Both the Blair government in the UK, and George W. Bush's governments in the US were often criticized for a "dumbing down" and "simplified soundbite" approaches to politics. It was a successful strategy for winning at elections, but the longer term health of both democracies have probably suffered as a consequence. Instead of being encouraged to look deeper and have informed opinions, voter apathy was often willfully encouraged in order to create a more "manageable" electorate. This enthusiasm for apathy I think has spread wider than just the political spectrum, and was probably a contributing factor in the current financial crisis, through a form of collective ignorance. Donald Rumsfeld, who was a big advocate of this sort of governance, was once quoted as saying:
"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."
At a guess I would say that the scale of unknown unknowns has grown over the past 50 years. People think they know more than they actually do, because their prejudices are reinforced by access to "comforting, confirming information" which "shuts out anything that conflicts with their world view." Many of the financial decisions that have led to the current crisis come from a form of collective ignorance that was not diminished by more available information, but actually reinforced by it.
In the post WW2 world, merely getting access to information still remained key; channels of information were extremely limited, relative to today, and much of the flows of information were state or semi-state controlled, even in the 'democratized' West. On top of that it tended to be a relatively privileged class that would have domestic access to television, radio and even newspaper channels of communication at this point. In the UK the government funded BBC had a monopoly on television until 1955 and on radio until the 1970s. In the US, likewise, TV competition was limited to 3 channels, ABC, NBC and CBS into the 1950s. Radio was somewhat more widespread, as the cost of the "wireless" diminished over time, but still relatively limited. Newspapers had been the main form of information dispersion over the previous several hundred years, so were not new, but the number of different newspapers widely available, still relatively limited.
Today access to information is virtually universal. Seeing children on mobile phones in remote parts of the developing world is testament to that, and it would be a struggle to travel to a place in the world that couldn't provide at least some access to the Internet. I can read the Times of India, The New York Times and the Sydney Morning Herald all for free sitting in front of my computer, from pretty much any location in the world, and have 3 different global perspectives on the same piece of news.
The channels of communication and information transfer can be at least as numerous as the number of people in the world, with the range of media having developed from TV, radio and newspaper into a whole variety of offshoots of the digital age, with much of this content or 'information' user generated. Blogs, like this one can be accessed from anywhere in the world by typing in an address which is about a quarter of the length of any domestic address. Wikipedia, the online encyclopedia, now has 12 million articles written collaboratively by 'volunteers' (i.e. anyone who has an internet connection), and is currently the most popular general reference work on the Internet, yet its content is only "expert" because its 'volunteers' believe it to be so. One of the best known mis-uses of Wikipedias openness happened when in 2006, a US journalist complained that his Wikipedia entry implicated him in the assassination of President Kennedy. The decision of a member of the public, Brian Chase, to insert the claim "as a joke" to fool a colleague exposed the openness that Wikipedia is based on as potentially flawed.
The most valuable commodity a media company can attract now is user focus, whereby they establish means by which their content is always at the top of the pile, and that people look at the longest or the most number of times. Internet search engines make money, by charging internet content providers to appear at the top of the list when searches are carried out through their engine. The engine itself doesn't filter on the basis of quality of content, but on the basis of the words used in the search combined with who is paying money to Google in that category. As a consequence people tend to find out answers to their searches that they want to hear, as opposed to answers that are necessarily right. By way of example, with my wife being pregnant, and neither of knowing much about what we're doing, the internet can yield completely opposite answers to the same question both of which will be generated by remote, unaccountable, self proclaimed experts. Trying to decipher what is good information and what is bad, is quite difficult - particularly in this instance where we aren't experienced.
In contrast to 50 years ago the scale of competition for information "air-time" has changed dramatically. Institutions like the BBC were set-up with an almost paternalistic outlook in mind. The content they were producing was the biggest focus, and the controllers of the Beeb were the filtration device in terms of quality that is missing from search engines today. The lack of competition meant that it was less likely that someone would channel hop in the event that they didn't like what a program was about, or when they disagreed with it's opinion. Focus was a natural given, because alternatives were limited.
I recently re-watched the film Good Night, and Good Luck, which was made by George Clooney in 2005. The film takes place in the 1950s and plots the passage of anti-Communist sentiment which US senator Joseph McCarthy uses to both stifle political debate and push his own political status forward. The film focusses on the conflict between Senator McCarthy and Edward Murrow, who is a CBS news journalist, who had become popular on US radio broadcasts during the Second World War. In Murrow's Sunday evening editorial TV show, See It Now, he defies corporate and sponsorship pressures, and discredits the tactics used by McCarthy during his crusade to root out communist elements within the government.
Murrow first defends Milo Radulovich, who was facing removal from the US Air Force because of his sisters political leanings and because his father subscribed to a Serbian newspaper. A public feud develops when McCarthy responds by accusing Murrow of being a Communist, for his defence of Radulovich. Murrow is then accused of having been a member of the leftist union "Industrial Workers of the World", which Murrow rightly rejects as false. In a growing climate of fear and reprisal, with sponsors reluctant to be involved with CBS/ Murrow, there is pressure for Murrow to be taken off air. Thankfully he wasn't and he ultimately strikes a historic blow against McCarthy.
The reason Murrow was so important to this debate at that time, was that he was looking to inform US society, that the simplified tactics of McCarthy were not in the best interests of moving the US democracy forward. McCarthy tried to simplify the world for the US voter - Communists are evil, and I am going to root out evil from our society. Murrow was given the air time, to both say that things weren't that simple and also to try and re-open political debate about the unfairness of judging a citizen guilty before trial. The fact that people were willing to pay attention to Murrow, when he was flying in the face of sentiment at the time, I would say was in large part a result of the limited scope of broadcast media at the time. There wasn't much alternative but to listen to Murrow if you were watching TV at home on a Sunday evening. In the modern broadcast age viewer attention spans have dropped, and consequently Murrows quest to broaden the minds of a 2009 audience may have produced a channel switch to "I'm a D-list Celebrity, Get Me Out of Here", or a pre-programmed recording of "Big Brother".
Paul Saffo, who is a futurologist, is pessimistic about how society will be affected by the media revolution. "Each of us can create our own personal-media walled garden that surrounds us with comforting, confirming information and utterly shuts out anything that conflicts with our world view," he says. "This is social dynamite" and could lead to "the erosion of the intellectual commons holding society together. We risk huddling into tribes defined by shared prejudices".
Likewise, Michael Moritz, the venture capitalist who became famous for spotting both Yahoo! and Google, worries about "amplification of the internet soapbox" and imagines what role user-generated media would have played in "1931 in Munich, how easy it would have been to broadcast the message; I think the Nazis would have got to power quicker". He also believes Ed Murrow's stand against McCarthyism in the US in the 1950s, would have fallen on deaf ears. In essence, the herd mentality that seems to be central to the human condition isn't reduced by the apparently secular nature of news media in the 21st century, it is increased. People find their common ground with others, albeit that those "others" may not be their neighbours, or even from the same village or city. With more than 6bn people in the world, most of whom are "connected" the chances are that you will find someone out there who is happy to reinforce your views on the world, however daft they may be.
Both the Blair government in the UK, and George W. Bush's governments in the US were often criticized for a "dumbing down" and "simplified soundbite" approaches to politics. It was a successful strategy for winning at elections, but the longer term health of both democracies have probably suffered as a consequence. Instead of being encouraged to look deeper and have informed opinions, voter apathy was often willfully encouraged in order to create a more "manageable" electorate. This enthusiasm for apathy I think has spread wider than just the political spectrum, and was probably a contributing factor in the current financial crisis, through a form of collective ignorance. Donald Rumsfeld, who was a big advocate of this sort of governance, was once quoted as saying:
"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."
At a guess I would say that the scale of unknown unknowns has grown over the past 50 years. People think they know more than they actually do, because their prejudices are reinforced by access to "comforting, confirming information" which "shuts out anything that conflicts with their world view." Many of the financial decisions that have led to the current crisis come from a form of collective ignorance that was not diminished by more available information, but actually reinforced by it.
Sunday 11 January 2009
Cheeseburgers - the next legal tender?
This year the total amount of sovereign debt (that is national and state governments) that needs refinancing globally is estimated to be $3 trillion. In addition to that, the sums for future years are being added to daily by fiscal stimulus packages aimed at kick-starting waning economies. Taxable revenues are falling as unemployment is increasing - this past Friday saw non-farm payrolls in the US for December fall by over half a million for the second month in succession.
Also in the past week, investors chose not to take up all the debt on offer at a German Bund auction, leaving nearly €2bn of debt unsold. Across the board the price of insuring government debt is rising: it costs more to insure against US and UK government default with a credit default swap (an insurance policy against default) than against the collapse of McDonald's, the fast-food chain. This quirky situation is one of the easiest demonstrations of how the efficient markets theory that underlies our economic policy-making can be quite daft; any country with a central bank can always service its debt by printing money, and as of yet cheeseburgers albeit good value, aren't legal tender.
To be clear, however, investors have not sated their appetite for debt backed by strong governments. The "failed auction" was partly a quirk of the German bond sale process. Rather than holding a reverse auction for debts, it fixes a price. If debt is left unsold, it will try again on another day. It was certainly not good news, but is not a reason to panic. France, Spain and Ireland all held auctions after the Germans and these passed without incident (oversubscribed in some cases) while there was strong demand for Commerzbank's German-state-backed debt. Lenders still want large quantities of safe, liquid assets.
The municipal bond market in the US has not held up quite so well, and may well be a leading indicator of where some national governments may be heading. Rising bond expenses are forcing municipalities to postpone projects, with estimates that the backlog of offerings to fund public works has grown to more than $120 billion. Examples of project postponements are a growing subject category in local newspapers across the US (and around the world). The school district in Fort Bragg, California, a town of 6,600 located 170 miles north of San Francisco on the Pacific coast, put off construction at its high school and delayed a solar-power project after shelving a $7 million bond sale when interest rates jumped following the collapse of Lehman Brothers in September.
Worryingly the state of California, which if separated from the US would still be the 5th biggest economy in the world, saw its credit rating downgraded again last month (to A-). It now has the joint lowest credit rating of all of the US states, tied for that unenviable position with Louisiana, which more than 3 years later is still recovering from the devastation that was Hurricane Katrina. California's state shortfall will reach a record $41.8 billion over the next 19 months, and the State Controller has said the state could run out of cash within weeks. Consequently they may begin delaying tax refunds, student grants and vendor payments by the start of February if lawmakers do not resolve the States fiscal problems by then. Arnold Schwarzenegger has proposed to borrow $23.3 billion via the municipal bond markets to cover immediate liabilities, but the sense is that it would be impossible for the markets to clear that quantity of debt in any short time frame at any reasonable price.
The next stop for California, should the bond markets fail them directly, is not likely to be bankruptcy. They will almost certainly be tacked onto the growing list of targets for Federal level bailouts - Barack Obama is proposing that the Federal Reserve and the US Treasury Department together design a "funding backstop" for state and municipal debt that is similar to the Fed's program for commercial paper. "This new facility should be designed to protect taxpayer resources while ensuring that state and local governments can continue to provide vital services to their residents." said Obama. As a consequence the attractive yields on existing municipal bonds traded in the market should be a compelling alternative to US Treasuries, which as investors have been globally taking flight to their relative safety have seen yields drop precipitously. Nonetheless, given that California has a problem that is not isolated, and the US municipal bond market is close to $2trillion in size, it's disturbing to think how much could be tacked onto the overall US Federal bailout package, and the overall amount that will need to be raised via the bond markets to cover these liabilities.
To restate this; the UK is the worlds 5th largest economy (with GDP in 2008 at around $2.8trillion). California, if not part of the US would be the 5th biggest economy. Although it's not a comparison of like-for-like, as California does contribute to national tax revenue in the US, it is a scary proposition that an economy the size of the UKs cannot fund itself directly, and its liabilities are going to be assumed at a national level.
The US has a financing requirement in the next 12 months of $2trillion, based on current estimates. I think that figure will realistically be higher, as they grow the number and scale of their "funding backstops" to corporations (GM/Ford etc), to agencies (Fannie Mae, Freddie Mac), and to a growing number of municipal authorities (California, New York etc.). The $3trillion funding tag for sovereign borrowers globally this year, is in my view more likely to be closer to just the US portion of the funding requirement. Globally the real number could be substantially higher.
At current yields on benchmark government bonds in the "strong" nations of the world (US, Japan, Germany, France, UK etc.) the current cost of funding available is strikingly attractive. The US 10yr Treasury is trading at a yield of well under 2.5%, 10yr UK Gilts are yielding little over 3%, and likewise 10yr German Bunds, so borrowing costs at a Federal level are perfectly affordable. Given the asset price erosion across the board - stocks, real estate, corporate bonds etc. - it is understandable that there has been a "flight to safety" into government backed assets. However, given the scale of funding that is a requirement globally over the coming years, there must be a saturation point for investors. The ever growing list of liabilities being assumed by these governments will need to be accounted for in terms of either much higher yields or a complete unwillingness or even inability to invest.
In the Eurozone, there are similar situations where at a Federal level (i.e. from Brussels) there may be calls for bailouts of some of the peripheral, and even not-so-peripheral states. Already Italy and Greece, who were largely scale funders through the international bond markets are struggling to tap the markets at either reasonable rates, or at all. They may find that the value of their EU membership is greater than was previously thought if the likes of Germany, France and the UK play the role of providing similar "funding backstops" to those being proposed in the US. Perhaps more worrying about the European situation is that Italy and Greece, unlike California don't seem to be producing companies like Silicon Valley can in California, the Apples of the world; so tax revenues that would be used to pay off future liabilities will not be as forthcoming. For example the protracted process of privatising Alitalia will cost the Italian taxpayer more than Euros 3bn in written-off debt. The number of layoffs across the country in December was up 528% on last year, with the central provinces of Lazio and Abruzzo the worst affected; everything from steel to textiles is showing signs of weakness. In Greece, recent riots and proposed union strikes are commensurate with exponential rises in government bond yields. Greece has to rollover debt in 2009 that is greater than 20% of 2008 GDP, and the credit insurance market is pricing in a default probability of close to 20% over the next 5 years. It's highly questionable as to whether they can do this, without some explicit guarantees from their EU brethren.
As much as this is all very gloomy, the big issue I am looking to understand is why the yield on government bonds in "strong" countries is continuing to lower itself when the liabilities side of their collective balance sheets is growing and worsening at a pace of knots. In December the yield on 3 month Treasury Bills (i.e. short term US govt. debt) actually dipped below 0%, meaning that investors were actually willfully losing money to invest, but doing so on the basis that the speed of their loss would be slower than on any other store of value they could think of. In the future I would say that there is a great likelihood that as these same governments tried to stave off deflation, they will look at policy actions that could be hyper-inflationary further down the road. If government debts become so large, one easy way to reduce their cost is to pay bond investors with money the government has printed. In some cases this may be the only policy action that is left available to avoid default.
The fact that yields on government debt in "strong" countries are so low, is a consequence of how bad the world investment community views alternative asset classes. A taxi driver once said to my Dad as he jumped in a taxi to head to the airport in Las Vegas,
"How did you do?"
...to which Dad said: "O, I'm not really a gambler"
and the taxidriver said:
"Yep, I hear you. The best you can do is to lose slowly"
That seems to be the manner of thinking of those jumping headfirst into the apparent safety of the worlds government bond markets. But even the non-gamblers may be wrong.
Also in the past week, investors chose not to take up all the debt on offer at a German Bund auction, leaving nearly €2bn of debt unsold. Across the board the price of insuring government debt is rising: it costs more to insure against US and UK government default with a credit default swap (an insurance policy against default) than against the collapse of McDonald's, the fast-food chain. This quirky situation is one of the easiest demonstrations of how the efficient markets theory that underlies our economic policy-making can be quite daft; any country with a central bank can always service its debt by printing money, and as of yet cheeseburgers albeit good value, aren't legal tender.
To be clear, however, investors have not sated their appetite for debt backed by strong governments. The "failed auction" was partly a quirk of the German bond sale process. Rather than holding a reverse auction for debts, it fixes a price. If debt is left unsold, it will try again on another day. It was certainly not good news, but is not a reason to panic. France, Spain and Ireland all held auctions after the Germans and these passed without incident (oversubscribed in some cases) while there was strong demand for Commerzbank's German-state-backed debt. Lenders still want large quantities of safe, liquid assets.
The municipal bond market in the US has not held up quite so well, and may well be a leading indicator of where some national governments may be heading. Rising bond expenses are forcing municipalities to postpone projects, with estimates that the backlog of offerings to fund public works has grown to more than $120 billion. Examples of project postponements are a growing subject category in local newspapers across the US (and around the world). The school district in Fort Bragg, California, a town of 6,600 located 170 miles north of San Francisco on the Pacific coast, put off construction at its high school and delayed a solar-power project after shelving a $7 million bond sale when interest rates jumped following the collapse of Lehman Brothers in September.
Worryingly the state of California, which if separated from the US would still be the 5th biggest economy in the world, saw its credit rating downgraded again last month (to A-). It now has the joint lowest credit rating of all of the US states, tied for that unenviable position with Louisiana, which more than 3 years later is still recovering from the devastation that was Hurricane Katrina. California's state shortfall will reach a record $41.8 billion over the next 19 months, and the State Controller has said the state could run out of cash within weeks. Consequently they may begin delaying tax refunds, student grants and vendor payments by the start of February if lawmakers do not resolve the States fiscal problems by then. Arnold Schwarzenegger has proposed to borrow $23.3 billion via the municipal bond markets to cover immediate liabilities, but the sense is that it would be impossible for the markets to clear that quantity of debt in any short time frame at any reasonable price.
The next stop for California, should the bond markets fail them directly, is not likely to be bankruptcy. They will almost certainly be tacked onto the growing list of targets for Federal level bailouts - Barack Obama is proposing that the Federal Reserve and the US Treasury Department together design a "funding backstop" for state and municipal debt that is similar to the Fed's program for commercial paper. "This new facility should be designed to protect taxpayer resources while ensuring that state and local governments can continue to provide vital services to their residents." said Obama. As a consequence the attractive yields on existing municipal bonds traded in the market should be a compelling alternative to US Treasuries, which as investors have been globally taking flight to their relative safety have seen yields drop precipitously. Nonetheless, given that California has a problem that is not isolated, and the US municipal bond market is close to $2trillion in size, it's disturbing to think how much could be tacked onto the overall US Federal bailout package, and the overall amount that will need to be raised via the bond markets to cover these liabilities.
To restate this; the UK is the worlds 5th largest economy (with GDP in 2008 at around $2.8trillion). California, if not part of the US would be the 5th biggest economy. Although it's not a comparison of like-for-like, as California does contribute to national tax revenue in the US, it is a scary proposition that an economy the size of the UKs cannot fund itself directly, and its liabilities are going to be assumed at a national level.
The US has a financing requirement in the next 12 months of $2trillion, based on current estimates. I think that figure will realistically be higher, as they grow the number and scale of their "funding backstops" to corporations (GM/Ford etc), to agencies (Fannie Mae, Freddie Mac), and to a growing number of municipal authorities (California, New York etc.). The $3trillion funding tag for sovereign borrowers globally this year, is in my view more likely to be closer to just the US portion of the funding requirement. Globally the real number could be substantially higher.
At current yields on benchmark government bonds in the "strong" nations of the world (US, Japan, Germany, France, UK etc.) the current cost of funding available is strikingly attractive. The US 10yr Treasury is trading at a yield of well under 2.5%, 10yr UK Gilts are yielding little over 3%, and likewise 10yr German Bunds, so borrowing costs at a Federal level are perfectly affordable. Given the asset price erosion across the board - stocks, real estate, corporate bonds etc. - it is understandable that there has been a "flight to safety" into government backed assets. However, given the scale of funding that is a requirement globally over the coming years, there must be a saturation point for investors. The ever growing list of liabilities being assumed by these governments will need to be accounted for in terms of either much higher yields or a complete unwillingness or even inability to invest.
In the Eurozone, there are similar situations where at a Federal level (i.e. from Brussels) there may be calls for bailouts of some of the peripheral, and even not-so-peripheral states. Already Italy and Greece, who were largely scale funders through the international bond markets are struggling to tap the markets at either reasonable rates, or at all. They may find that the value of their EU membership is greater than was previously thought if the likes of Germany, France and the UK play the role of providing similar "funding backstops" to those being proposed in the US. Perhaps more worrying about the European situation is that Italy and Greece, unlike California don't seem to be producing companies like Silicon Valley can in California, the Apples of the world; so tax revenues that would be used to pay off future liabilities will not be as forthcoming. For example the protracted process of privatising Alitalia will cost the Italian taxpayer more than Euros 3bn in written-off debt. The number of layoffs across the country in December was up 528% on last year, with the central provinces of Lazio and Abruzzo the worst affected; everything from steel to textiles is showing signs of weakness. In Greece, recent riots and proposed union strikes are commensurate with exponential rises in government bond yields. Greece has to rollover debt in 2009 that is greater than 20% of 2008 GDP, and the credit insurance market is pricing in a default probability of close to 20% over the next 5 years. It's highly questionable as to whether they can do this, without some explicit guarantees from their EU brethren.
As much as this is all very gloomy, the big issue I am looking to understand is why the yield on government bonds in "strong" countries is continuing to lower itself when the liabilities side of their collective balance sheets is growing and worsening at a pace of knots. In December the yield on 3 month Treasury Bills (i.e. short term US govt. debt) actually dipped below 0%, meaning that investors were actually willfully losing money to invest, but doing so on the basis that the speed of their loss would be slower than on any other store of value they could think of. In the future I would say that there is a great likelihood that as these same governments tried to stave off deflation, they will look at policy actions that could be hyper-inflationary further down the road. If government debts become so large, one easy way to reduce their cost is to pay bond investors with money the government has printed. In some cases this may be the only policy action that is left available to avoid default.
The fact that yields on government debt in "strong" countries are so low, is a consequence of how bad the world investment community views alternative asset classes. A taxi driver once said to my Dad as he jumped in a taxi to head to the airport in Las Vegas,
"How did you do?"
...to which Dad said: "O, I'm not really a gambler"
and the taxidriver said:
"Yep, I hear you. The best you can do is to lose slowly"
That seems to be the manner of thinking of those jumping headfirst into the apparent safety of the worlds government bond markets. But even the non-gamblers may be wrong.
Sunday 4 January 2009
Why the Swedish are to blame for the credit crunch
The explanations for the current financial situation are wide ranging, but none so far seemed to have blamed the Swedish. So here goes.
Up until the formation of the Swedish Riksbank in 1656 the concept of what now is called "fractional reserve banking" didn't really exist. Most banking that had taken place up until that point was done where any loans were matched 1-for-1 against a metallic reserve (gold, silver etc.) whose price was typically pretty constant or fixed. The Spanish Conquistadors for example had pillaged and looted their way through the Inca Empire in the 16th century because precious metal was the only way in their minds to expand economically. The Spanish monarchy were the main beneficiaries of the conquests, but the way the gold and silver "money" was spent provided the entire continent with a stimulus. Precious metal had become the store of value, and the Spanish "pieces of eight" coins were the world's first reserve currency. As such, it allowed the Spanish to finance its empire building, it's wars in Europe and it's trade flows between Europe and Asia. Nevertheless, as an empire they were still limited by the amount of precious metal they could plunder; in modern banking terminology - the "money supply" could only grow as fast as they could plunder gold and silver.
The Swedish Riksbank a century or so later had figured that they could overcome this issue. They realised that they didn't really need gold or silver as "collateral" to match 100% against any deposits they had. They could profitably lend money that had been left on deposit, and since it was highly unlikely that depositors would ask for their deposits back en masse, only a fraction of the deposits would need to be left on reserve at any one time. This was the first large scale attempt of any bank to introduce the concept of credit creation.
Other banks followed over time, but even by the late 18th century many banks were still yet to transition to fractional reserving that made the Riksbank successful. By way of example, the Amsterdam Exchange Bank by 1760 still had close to a 100% ratio between its deposits and reserves of precious metal. In that year they had deposits of 19 million florins versus metallic reserves of 16 million. Any modern bank would call this ludicrous inefficiency, as they were missing out on a large quantum of lending and earning opportunities, but as is oft ignored, commensurately more liquidity risk (the risk that all of the depositors come looking for their funds at once - a bank "run"). Say for example that the Riksbank operated a 10% reserve policy, and received a deposit of 100 from the central bank. They would place 10 on reserve with the central bank, and lend on 90 to the Volksbank. The Volksbank also operated a 10% reserve ratio so they reserved 9 and lent out 81 to the Peoples Bank. After 3 rounds of lending the money supply has reached 271.
Two of the core definitions of modern monetary theory are covered above. M0 (known as the monetary base), is equal to the total liabilities of the central bank, that is, cash plus the reserves of private sector banks on deposit at the central bank, and M1(known as narrow money) which is equal to cash in circulation plus deposits at private sector banks. Prior to the Riksbanks move into the unchartered territory of fractional reserve banking, the difference between M0 and M1 would have been almost nil. In the example above, M0 is 100 and M1 is 271.
The point here is that with the spread through the Western world of fractional reserve banking the very nature of money changed in a profoundly important way. Now money represented the sum total of specific liabilities (deposits and reserves) incurred by banks. The newly established concept of credit, was quite simply the total of banks' loans. Some of this money might still consist of precious metal, though a rising proportion of that would be held in the central bank's vault (no longer in the UKs case, as Gordon Brown sold most of the UKs gold a few years ago at a terrible price versus where the market is today), but most of it would be made up of those banknotes and coins that made up legal tender along with the invisible money that existed only in deposit account records.
Was this progress? In many senses, of course this was progress. Credit creation has been essential in the process of capital formation, which drives entrepreneurship, creates jobs, and has been responsible for pulling literally billions of people out of poverty the world over. Good risk taking achieves the positive aspects to credit creation outlined above. Bad risk taking on the other hand will make it more likely the borrowers will go bankrupt, and consequently that a bank cannot make new loans, or that depositors will worry that there isn't enough in the kitty to pay them back, and might induce a bank run. In the US in 2007 98% of bankruptcy filings were classified as "non-business" (i.e. personal/ consumer debt). The principal driver of bankruptcy therefore was not failed attempts at entrepreneurship but personal indebtedness, not backed by corporate endeavour, but by hope. In 2007 US consumer debt hit $2.5trillion. In 1959 average mortgage debt was 54% of personal income and by 2007 it was 140%. That is not necessarily a bad thing, but it just makes any liquidity shocks that much more painful.
In the 1946 film It's a Wonderful Life, which has become Christmas-time staple viewing, we are led to feel a great deal of sympathy for the plight of George Bailey (Jimmy Stewart) as he tries to sustain the Building & Loan Association that he has taken over from his dead father. The loans made to the local working class are critical to the local economy, whom the Baileys treat with a greater respect and dignity than their competition. The film is set from 1928 onwards, so the fractional reserve system is universal at this point. At various points through the story-line, George Bailey is close to seeing his bank collapse, firstly through a bank run and secondly through a sizeable misplaced deposit, which I'm sure the Daily Mail wouldn't have been too sympathetic towards. In the end he is saved from committing suicide by Clarence, his guardian angel, as God thinks that George essentially is a good man with the right attitude towards people and life. The blasphemous alternative take on George Bailey's situation is that he was undercapitalised and too careless to operate under the fractional reserve system, though it would spoil what is such a magical film.
Since the Swedes embarked on their revolutionary banking model in 1656 the inescapable reality seems to be that breaking the link between money creation and a precious metal anchor has led to an unprecedented monetary expansion - with a credit boom the likes of which the world has never seen. The pace of the expansion has increased exponentially in the past 20 years, with technological innovations that have made global markets instantaneously accessible. At the same time the capital reserves (or "adequacy") of banks in the developed world has been steadily declining. In Europe bank capital is now equivalent to less than 10% of assets, compared with around 25% at the beginning of the twentieth century. Today banking assets (loans + deposits) in the world's major economies are equivalent to around 150% of those countries combined GDP. This figure doesn't take into consideration "the shadow banking system", whereby many banks assets aren't recorded on balance sheet, but they may become liabilities at some distressed point (like now) in the future. According to the Bank for International Settlements, total international banking assets (loans + deposits) were equivalent to around $30 trillion, which is roughly 63% of world GDP. $30 trillion was also the total value "credit crunched" off world stock markets this year. And all of this is the fault of the ambitious Swedish, circa 1656. Well at the very least that gives us someone to add to the list of who's to blame.
Up until the formation of the Swedish Riksbank in 1656 the concept of what now is called "fractional reserve banking" didn't really exist. Most banking that had taken place up until that point was done where any loans were matched 1-for-1 against a metallic reserve (gold, silver etc.) whose price was typically pretty constant or fixed. The Spanish Conquistadors for example had pillaged and looted their way through the Inca Empire in the 16th century because precious metal was the only way in their minds to expand economically. The Spanish monarchy were the main beneficiaries of the conquests, but the way the gold and silver "money" was spent provided the entire continent with a stimulus. Precious metal had become the store of value, and the Spanish "pieces of eight" coins were the world's first reserve currency. As such, it allowed the Spanish to finance its empire building, it's wars in Europe and it's trade flows between Europe and Asia. Nevertheless, as an empire they were still limited by the amount of precious metal they could plunder; in modern banking terminology - the "money supply" could only grow as fast as they could plunder gold and silver.
The Swedish Riksbank a century or so later had figured that they could overcome this issue. They realised that they didn't really need gold or silver as "collateral" to match 100% against any deposits they had. They could profitably lend money that had been left on deposit, and since it was highly unlikely that depositors would ask for their deposits back en masse, only a fraction of the deposits would need to be left on reserve at any one time. This was the first large scale attempt of any bank to introduce the concept of credit creation.
Other banks followed over time, but even by the late 18th century many banks were still yet to transition to fractional reserving that made the Riksbank successful. By way of example, the Amsterdam Exchange Bank by 1760 still had close to a 100% ratio between its deposits and reserves of precious metal. In that year they had deposits of 19 million florins versus metallic reserves of 16 million. Any modern bank would call this ludicrous inefficiency, as they were missing out on a large quantum of lending and earning opportunities, but as is oft ignored, commensurately more liquidity risk (the risk that all of the depositors come looking for their funds at once - a bank "run"). Say for example that the Riksbank operated a 10% reserve policy, and received a deposit of 100 from the central bank. They would place 10 on reserve with the central bank, and lend on 90 to the Volksbank. The Volksbank also operated a 10% reserve ratio so they reserved 9 and lent out 81 to the Peoples Bank. After 3 rounds of lending the money supply has reached 271.
Two of the core definitions of modern monetary theory are covered above. M0 (known as the monetary base), is equal to the total liabilities of the central bank, that is, cash plus the reserves of private sector banks on deposit at the central bank, and M1(known as narrow money) which is equal to cash in circulation plus deposits at private sector banks. Prior to the Riksbanks move into the unchartered territory of fractional reserve banking, the difference between M0 and M1 would have been almost nil. In the example above, M0 is 100 and M1 is 271.
The point here is that with the spread through the Western world of fractional reserve banking the very nature of money changed in a profoundly important way. Now money represented the sum total of specific liabilities (deposits and reserves) incurred by banks. The newly established concept of credit, was quite simply the total of banks' loans. Some of this money might still consist of precious metal, though a rising proportion of that would be held in the central bank's vault (no longer in the UKs case, as Gordon Brown sold most of the UKs gold a few years ago at a terrible price versus where the market is today), but most of it would be made up of those banknotes and coins that made up legal tender along with the invisible money that existed only in deposit account records.
Was this progress? In many senses, of course this was progress. Credit creation has been essential in the process of capital formation, which drives entrepreneurship, creates jobs, and has been responsible for pulling literally billions of people out of poverty the world over. Good risk taking achieves the positive aspects to credit creation outlined above. Bad risk taking on the other hand will make it more likely the borrowers will go bankrupt, and consequently that a bank cannot make new loans, or that depositors will worry that there isn't enough in the kitty to pay them back, and might induce a bank run. In the US in 2007 98% of bankruptcy filings were classified as "non-business" (i.e. personal/ consumer debt). The principal driver of bankruptcy therefore was not failed attempts at entrepreneurship but personal indebtedness, not backed by corporate endeavour, but by hope. In 2007 US consumer debt hit $2.5trillion. In 1959 average mortgage debt was 54% of personal income and by 2007 it was 140%. That is not necessarily a bad thing, but it just makes any liquidity shocks that much more painful.
In the 1946 film It's a Wonderful Life, which has become Christmas-time staple viewing, we are led to feel a great deal of sympathy for the plight of George Bailey (Jimmy Stewart) as he tries to sustain the Building & Loan Association that he has taken over from his dead father. The loans made to the local working class are critical to the local economy, whom the Baileys treat with a greater respect and dignity than their competition. The film is set from 1928 onwards, so the fractional reserve system is universal at this point. At various points through the story-line, George Bailey is close to seeing his bank collapse, firstly through a bank run and secondly through a sizeable misplaced deposit, which I'm sure the Daily Mail wouldn't have been too sympathetic towards. In the end he is saved from committing suicide by Clarence, his guardian angel, as God thinks that George essentially is a good man with the right attitude towards people and life. The blasphemous alternative take on George Bailey's situation is that he was undercapitalised and too careless to operate under the fractional reserve system, though it would spoil what is such a magical film.
Since the Swedes embarked on their revolutionary banking model in 1656 the inescapable reality seems to be that breaking the link between money creation and a precious metal anchor has led to an unprecedented monetary expansion - with a credit boom the likes of which the world has never seen. The pace of the expansion has increased exponentially in the past 20 years, with technological innovations that have made global markets instantaneously accessible. At the same time the capital reserves (or "adequacy") of banks in the developed world has been steadily declining. In Europe bank capital is now equivalent to less than 10% of assets, compared with around 25% at the beginning of the twentieth century. Today banking assets (loans + deposits) in the world's major economies are equivalent to around 150% of those countries combined GDP. This figure doesn't take into consideration "the shadow banking system", whereby many banks assets aren't recorded on balance sheet, but they may become liabilities at some distressed point (like now) in the future. According to the Bank for International Settlements, total international banking assets (loans + deposits) were equivalent to around $30 trillion, which is roughly 63% of world GDP. $30 trillion was also the total value "credit crunched" off world stock markets this year. And all of this is the fault of the ambitious Swedish, circa 1656. Well at the very least that gives us someone to add to the list of who's to blame.
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