I went from the Uk to Tuscany riding across France and Switzerland and one thing that I’ve come to realise- with horror- is how much people in general have no idea and no clue about what is going on in the economic world. Of course I herad it all and the explanations were varied. Most blame the US and their credit crunch- but when asked what they think the cause of the credit crunch is, you have a blur momentum. Some tell me that it is because banks lended money to people who couldn’t repay the loans. Some blame the traders who suddenly shorted the markets. Some said that banks had been to greedy. But the truth is that a big majority is reading, watching or listening to the media and not many of them knows right from wrong. Now I see on Yahoo that traders blame Greenspan as when he was at the head of the Fed he kept the interests low. But then you have also people like Clinton ( Bill, not the female of the species) who wanted to make housing more affordable to the mass. Seen now it looks like a greedy and stupid bet- how could workers who couldn’t repay a mortgage get access to one? Was it only a move to boost the economy as when you buy a house, you usually undertake some works on it such as painting, re roofing, adding bathrooms and washing machines and curtains and all these things are being sold by shops that employ people who then get more work because you have more spenders improving their homes so suddenly you expand your business because everything looks so good and in order to do so – you foresee a better future but you don’t want to save and wait as somebody else might have taken your spot by then- so you borrow some money too and hire some people to create your new business place and then hired some more people to work for and with you…Do you get it? Now you do. Was it greedy? Was it then common sense? But what happened then?
Well, nobody wanted to see the train even slow down. Greenspan kept the interests low so more people could afford what they wanted. But people wanted then more – it’s called human nature by the way- and instead of buying primary goods ( necessities if you prefer) such as a house or a car to go to work only, they started thinking that borrowing was so cheap and saving so useless ( not worth saving when interests are so low…) that they added to their burden holidays, boobs jobs and wedding bills. In the Uk I wouldn’t be surprised if booze was added as the alcohol consumption went through the roof- probably in order to forget that at the end of the month not so much was left on your bank account. Anyway the spiral went faster and before you know it, all sorts of weird ideas came up. Banks invented new ways of spreading the loans and sell them, disguise them and resell them to all sorts of companies. Bankers and traders and CEOs got all sorts of bonuses at the end of the year for no good reasons at all. Landlords grew out of every corner of the Uk as they started seing the light- aka, your home can become your retirement pension. Some noticing that they might end up with some cash but no roof above their heads decided to buy two houses – or more- and get the mortgage repaid by the rent of people who couldn’t or wouldn’t afford getting a loan. Between the big bonus and the low rates suddenly everybody and their cousins wanted a home, a secondary one and if possible another one for good measure – and the kids or whatever. Prices went up drastically but the complaints were silenced as all could see their investments grow almost by the hour. If you didn’t possess your house you were a loser.
Governements in all that were quite encouraging. You could hear Gordon Brown while he was a chancellor boasting about his great results. All that had to be done was keep the interest low, loosen up some regulations within the financial sector and borrow yourself up to your eyeballs and possibly beyond creating new jobs in the public sector, paid by ever increasing taxes, in order to get the economy expanding a little faster.
Of course this game is as old as the world. Some call it the pyramid, but it is better known by the airplane game name. The airplane game kept crawling back for a few decades until it was officially declared unlawful and illegal. the concept was simple: you took one head. He had to find 8 people ( for example- as sometimes it was 5, 6, 9, 17…It depended on the sums involved and the places) who would give him something like 100Â£ each. He would made himself 800Â£ just in a few phone calls. All these 8 people had to do was the same; they had to find each 8 guys or gals who would give them 100Â£. These guys would have to do the same. So the airplane would fill up quite quickly- until it would be so heavy that it would actually crashed. Because sooner or later, some of the guys wouldn’t find 8 people to participate or who wouldn’t have participated already. Sometimes a twist was added; at each new participant, a % would be passed on to the one who was in the position in front of you, forcing you to find new people in order to get a bigger %. I heard about that game for the first time when I was 13. I declined to get on board and I got a few angry friends. But that plane crashed soon enough and all the ones after this one, only faster. Nowadays you still see messages passing telling you to pass it on to a certain number of people you know otherwise you break the chain and you go to hell/ get some unlucky events happening to you/ will break someone’s heart. In case you don’t know, these are also illegal. But I disgress. My point is- knowing that even on a small scale the airplane game is bound to crash, how could well educated people and less well educated governments do the same at such higher scale?
So on my way to Tuscany ( which is in Italy…just saying that for the ones who believe that Zapatero is the same as Zapata), I stopped in France and Switzerland. And I discovered that the blame is well spread, but despite this, nobody’s too sure of what is happening. I’m going to be frank here, I’m no genius and I don’t know either ( it’s a trader’s rule. If you don’t know, you don’t have any preconceived idea, so you don’t have a set mind to ignore warning signals and get it awfully wrong. It has become second nature, I know now that I know nothing). But the degree of denial was staggering.
A friend of mine had to renew her mortgage loan this year. She called me and asked for advice, although she proffess that traders are similar to vultures and bring only doom upon the world. I think she once called us/ them ” useless bugs”. Anyway, she wanted to know if I had any advice. I said I had none, but…Well if it were me, I wouldn’t keep a variable rate in the UK as everything was definitely going down the drain ( we were at the beginning of 2008), including housing market, employment,with high energy prices and galoping inflation. The situation did look dire- and I said so. I expected to see the whole world dragged into it by the summer. She asked a few questions, thanked me and that was it. When I saw her five days ago, she told me she had opted for the variable rate as in switzerland it was still at 3.5% when the fixed one was at 5.5%. She thought it was madness and was proud of her skills. I didn’t say anything as- as you know by now- I don’t know anything anyway. i just wondered how high does her bank expect the rates to go up even they have already hitched the fixed rate 2% higher than the current one. In my view, this is extremely worrying. But maybe she did the right thing and maybe central banks are going to save the fiancial sector. Who knows? I just know that banks have been so far working for themselves, not for their clients, and as I had explained to this friend in particular, they are not a charity. she was pointing it out that the banks’ best interest resided in the fact that without loans, they wouldn’t make money. So they had to lend money to people in order for them to keep the business going and the whole wheel ( see above) to turn. That’s when I answered that banks are not charities. Some people – a lot of them now actually- can and have defaulted. Banks are losing money. They are going to try and recoup these losses- one by getting rid of the worst loans and repossessing, two by hiking their rates higher and keeping only the customers who are able to pay back. They will have to compensate their losses. Something most clients don’t get.
But these misunderstanding can go deeper. Lots of Swiss people have lost their savings in the current crisis. Their bank placed all they had in what they wanted and asked to be ” a safe investment” that turned out to be derivatives from Lehman brothers. Such investments it seems had been made as late as April 2008. The banks in question affirm that by then , they had no clue that Lehman was in trouble. I say…Excuse me? I knew in december 2007 that the trend was down and had a chat with my own banker by then. If a newbie like me with no knowledge in economics is able to tell, how come profsessionals alledgedly were unaware? One could think that they knew and simply palmed it off onto their customers. And as far as I’m concerned, derivatives have never seen as a risk avoidance technique by the fiancial world itself, so if I were one of those clients, I’d kick a hell of a lot of a fuss.
In Italy the ostrich method is on full display too. Everybody complains, nobody does anything about it. I heard a banker from my Unicredit office tell over the phone to a customer: ” Where did you hear that? On tv? Well you know with the credit crunch in the US you know with these stupid Americans who borrowed more than they should have and their banks that have given them money they couldn’t get back, well, it has scared a bit the rest of the world, but don’t you worry, here everything is fine, we keep doing business as usual and you should go out a bit more and not worry, and if you do, call me back but within office hours only, and you’ll see I’ll be telling you again how fine we are. Okay…?And your mama, she’s alright?Great, take care now, ciao”. Unicredit is having an extraordinary reunion this Sunday to discuss and set up a re capitalization among a few other problems. According to Berlusconi, nothing to worry about. If they do it now it is to avoid problems later- it is just routine. Who’s buying that when at the very same time European leaders are meeting up to discuss how they are going to bailout their financial sectors and rebuilt a drowning economy? But as my Italian lawyer put it, deficits and debts are not registered on the companies documentations and reports otherwise shareholders would soon get rid of their stocks and the company would probably have to be declared bankrupt within a week. Interesting twist.
My Swiss banker was wondering why gold was still so low and why credit card companies were still alive. According to him, that was the next step ( one I had told him about in August 2007 but I guess he didn’t hear me) and he was sure that the problem was quite well advanced and worrying that it even might be worse than predicted. I passed on the rumour that in the US credit card use might get suspended pretty soon, which obviously made him even more nervous. ” But the media are not talking about it” he said. ” Maybe they have been asked to keep schtum, I replied. After all, if they dish the dirt and we have another panic, what do you think would then happen? “. ” gold help us!” was his answer. ” Well, let’s be charitable here. Maybe they remain silent simply in order not give the idea to the ones who haven’t had it yet [ to pay their bills and debts with their credit card when they can’t reimbursed the money]”. I could feel him freak out over the phone. As for gold, hedge funds and big funds are trying to pay their margin calls, so how do you expect to raise the cash quickly? The momentaneous lift of the dollar is not helping either, but when you can’t buy shares because it is too dangerous, you don’t know where to invest because the whole world is slowly falling apart, what remains the safest bet? No, putting cash in your mattress is not safe anymore nowadays, not when you have inflation running that high- your money gets devaluated in no time ( just have a look at Zimbabwe if you don’t get it). Plus at the fast pace the Feds are printing their money at the moment, it is going to be hard to keep up!. So yes, gold is what everybody knows, since the end of time. I’m not saying you are going to make tons of money with it, I’m just saying that it will cover your ass.
I am going to go back to the UK next week. Looking forward to it, markets are extraordinary volatile at the moment and as an intraday trader, I like it. No swing trading as nobody really knows where we are heading. I have no clue either, I just see that even with a bailout on the cards we still have a housing market that keeps falling and a big bunch of people who are getting laid off, so I’m not sure the problem is being properly addressed. I see though that the system that has put up in this crap is being supported at the cost of the taxpayers ( say thank you taxpayers, now you have to pay your credit twice and as for me, who never ever made a loan in my life because I was told as a child that it would only bring you misery, I will have to pay for you too, so thank you twice), so I’m not sure that our dear leaders have a good grasp of the situation. What good is it to cure the symptoms when you don’t even look at the cause? May I suggest that instead of having a bunch of political leaders, some bankers and Feds and senators – the whole band of funny bunnies who created this mess in the first place- debating together, you get the same bunch, add a few normal people ( such as me) and to make good measure a good dozen of kids and you get them to explain to us what they intend to do in great details until we get it and WE AGREE? Because at the end of the day, it is us, the normal people, and them, our kids, who are going to pay ultimately the price of this. And if I pay, I’d like as well have my say.
After all, you know, if Palin can do it, why can’t I? I can give you the list of newspapers and magazines I read evry day, every week and every month, and I don’t have an ocean between my country and Russia, but I’ve had a passport since I was born and I made good use of it. Better still, I know that …I don’t anything. And I will do whatever it takes for the good not only of the Americans but also of the rest of the world.