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Time To Get 'real'


Gladys
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Looking at the topical threads an underlying theme seems to appear, that economic/finanical manipulation just doesn't work. From subsidisation of farming through to the very shaky banking bonanza, all are built on giving something that has no real or intrinsic value, a value. All well and good, until the house of cards has been built so high that its shaky foundations cease to support it, so it collapses.

 

Farming subsidies, for example, famously pay farmers to keep fields unproductive because that manipulates the supply, and price, to the market. Many will remember the scandalous EEC 'butter mountains' and 'wine lakes' of the 70's where perfectly edible food was stockpiled because it would 'distort' the market price. Yet, the very foods that were being stockpiled to protect prices were becoming prohibitively, or at least markedly, expensive to the ordinary EEC consumer, let alone feed the third world (as we called them then) who were lurching from one natural disaster, fuelled by corruption, war or multinational manipulation, to the next. We are now in the strange dilemma where it is cheaper to buy a fresh vegetable grown in another hemisphere and shipped here, still fresh, than to buy a vegetable (albeit less glamorous) grown in a field you most probably drive past every day.

 

Now, we have the economic/banking crisis, created in the main it would seem by 'financial products' which layered and packaged the underlying transactions to such an extent that no one really understood what they were investing in or what the real risks/assets were that underpinned the 'product'.

 

Additionally, we provide a ready market for producers in far flung places such as China, who can manufacture goods far cheaper than we can. To hell with the human cost of that (either to my home manufacturing base or to the sweatshops that I perpetuate), I can buy my Chinese electrical appliance or T shirt so much more cheaply than I could buy the equivalent manufactured more closely to home. So, that source of cheap supply is exploited, only to falter when the global economy takes a shiver because of the high reliance on generating hard currency.

 

So, isn't it time to put a proper worth on things? A worth that relates more directly to the real benefit derived from the thing in question, be it veg, investments or T shirts?

 

I look forward to the replies.

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Blimey, what a question Gladys!

 

Periodically, the whole finance system gets re-evaluated, changed, and moves onto the next level usually in response to a crisis, as is happening now. At such times the system gets exposed for what it really is.

 

IMO it is a system which has held human progress up by many thousands of years, because the whole system is generally geared up to support a majority that add little value to humanity e.g. shareholders, stockbrokers, estate agents, bankers etc. and all the other hangers on - at the expense of making progress. The system cannot survive by not adding artificial value to most things in order to support these hangers on - and it is mainly the hangers on that have the most say. As a result the whole model has become convoluted and tied into everything, so it is not so easy to simply say 'we shouldn't subsidise farmers' etc. in isolation - the consequnces and interactions are complex, especially when you consider how the model is tied in with, and operates in different ways in, different countries - especially farming.

 

What's a school worth? What's a hospital worth? It still has to be paid for, by creaming off money from the tangible, and because that is not enough, from the intangible and artificial values 'attached' to both, as do the 20% of people that are administrative civil servants that have to be paid for, many of whom are themselves employed to deal with collecting and processing many of the artificial values in the system.

 

Roll on the year 2345 or whatever and Star Trek, when the system will have been well and truly dumped, along with all the misery, war, poverty and indifference it has brought - and we start adding worth to humans and the pursuit of progress, and when science becomes the true currency - and religion as we know it dies out, and wealth is measured by human achievement and dedication to a useful vocation.

 

...and no, I'm not a commy, I'm an engineer. It's logical.

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Yes.

 

Let's have an end to all this smoke and mirrors economy, intangible and undesirable services touted as 'products' to generate short-term bonuses, let's say adios to marketing whizzkids, political correctness, the nanny state and management double-speak.

 

What we need are proper boilers made in Bolton, cutlery made in Sheffield, mustard (and sports cars) from Norfolk, kippers from Peel and an end to parasitic industries leeching on the efforts of the real producers.

 

I'm going to bed now. I think I almost just became a communist for a moment...

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Yes.

Let's have an end to all this smoke and mirrors economy, intangible and undesirable services touted as 'products' to generate short-term bonuses, let's say adios to marketing whizzkids, political correctness, the nanny state and management double-speak.

What we need are proper boilers made in Bolton, cutlery made in Sheffield, mustard (and sports cars) from Norfolk, kippers from Peel and an end to parasitic industries leeching on the efforts of the real producers.

 

I'm going to bed now. I think I almost just became a communist for a moment...

 

Stu: what's the real tangible value in what you do? Are you going to barter your skill at dealing with an 80 year old ranter on the radio with your weekly shopping and rent? Are you a "real producer"?

 

While there's been over-leveraging, unsustainable price inflation, and excessive risk taking, I'm not sure that equates to smoke and mirrors.

 

Lots of the losses as a knock on of the credit crisis are equity based. Equities are real, they have a value, they're shares of companies in real activities.

 

Certainly we need to get back to long term growth rather than short term booms, financial instruments that board members, risk departments and regulators can understand, but to declare the whole of finance as obsolete is ludicrous. There's simply not enough of us 'making stuff' and not enough of us only consuming 'stuff that's made' for our economy to operate in that way.

 

I agree with much of what Gladys and Albert say though, we need to find the 'real' cost for many things. It isn't cheaper to buy apples from half way round the world than british ones really, it just works out that way because of subsidies, zero tax on certain uses of hydrocarbons, etc.

Edited by ai_Droid
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Fair points Droid, although my current job has a history that probably goes back to the court jesters of mediaeval times. I'm one of the blokes people can laugh along with or throw rotten fruit at. Talk radio is cheaper than therapy and I believe fulfils an important role, certainly in the Isle of Man.

 

You're right of course - the entire financial industry isn't rotten and corrupt, and I expect parts of it provide a useful service. But (as an outsider) it strikes me that a lot of it is simply about gambling with other people's money. Nothing to lose for the players. The link between risk and reward should be reintroduced so that if you get it wrong, you lose your shirt rather than walk off with a golden handshake.

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Lots of the losses as a knock on of the credit crisis are equity based. Equities are real, they have a value, they're shares of companies in real activities.

 

Certainly we need to get back to long term growth rather than short term booms, financial instruments that board members, risk departments and regulators can understand, but to declare the whole of finance as obsolete is ludicrous. There's simply not enough of us 'making stuff' and not enough of us only consuming 'stuff that's made' for our economy to operate in that way.

 

I agree with much of what Gladys and Albert say though, we need to find the 'real' cost for many things. It isn't cheaper to buy apples from half way round the world than british ones really, it just works out that way because of subsidies, zero tax on certain uses of hydrocarbons, etc.

 

It would be impossible to find a 'real' cost, as if every product has a particular combination of factors which brought together give a currently hidden but real cost.

This is the problem with assessing the worth of a product. You cannot find out any true worth. Any pricing system has to be arbitrary, although it may be well thought out.

 

The link between risk and reward should be reintroduced so that if you get it wrong, you lose your shirt rather than walk off with a golden handshake.

 

You see I would go further. I say shoot them! Seriously. The small groups of men who make gambles and take risks do so with little concern to the costs to everyone else if the gambles don't turn out well. And if they make bad choices their lives are not going to made difficult. Fair enough, it is just the way the system works. If we want this system to continue we can hardly blame the risk takers. Let's blame the system. Why do we live in a society that condones an economic and financial system that has an inherent degree of instability. If this system must involve the taking of risks then unless the rest of society wishes to suffer when bad choices are made we must get rid of it or at least want rid of it.

 

IMO it is a system which has held human progress up by many thousands of years, because the whole system is generally geared up to support a majority that add little value to humanity e.g. shareholders, stockbrokers, estate agents, bankers etc. and all the other hangers on - at the expense of making progress. The system cannot survive by not adding artificial value to most things in order to support these hangers on - and it is mainly the hangers on that have the most say.

 

I think you are bang on. But this minority of hangers on are not just hangers on, when you talk of the people at the very top you are referring to those who own everything and own most people.

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IMO it is a system which has held human progress up by many thousands of years, because the whole system is generally geared up to support a majority that add little value to humanity e.g. shareholders, stockbrokers, estate agents, bankers etc. and all the other hangers on - at the expense of making progress. The system cannot survive by not adding artificial value to most things in order to support these hangers on - and it is mainly the hangers on that have the most say.

 

I think you are bang on. But this minority of hangers on are not just hangers on, when you talk of the people at the very top you are referring to those who own everything and own most people.

I don't think it's a minority of hangers on at all. I think the real figure is around 80% of the population in the current system.

 

The hangers on, and the system they have created, supports many other hangers on too - all supporting each other.

 

In star trek, there are no banks, no insurance companies, no finance companies, no estate agents, no salesmen, few lawyers and I've never seen a plumber as they have sonic ablutions - etcm etc. plus they have replicators to manufacture things.

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The above posts are interesting, but in determining the 'real value' of anything, it is more than just the intrinsic value, but the added value. So, for an estate agent, even though we all seem to hate them, they do provide a service - an added value, if you like, although that may be up for discussion.

 

Contrast that with the financial 'products' which have led to the banking crisis. As I understand it, and I am no expert, what has happened is poor quality lending has been layered and laid off to such an extent that these 'investment opportunities' were no more than financial onions; peel off the layers and all you have is layers of onion with a core of onion at their centre, with no real value being added by each successive layer other than, of course, a highly structured onion! The market is manipulated so that the price of the onion bears no relationship to its real value or benefit.

 

Then food production, prices are so manipulated that the price I pay bears no real relationship to the cost of production, or indeed the real value to me in my survival. Putting it very simply, in our natural state, we would invest, say, 80% of our energies to finding food (these percentages are plucked out of the air for illustrative purposes only and are based on a 40 year study of TV wildlife programmes) for ourselves and our offspring. Civilisation and co-operation has reduced that to around 40%, because there is a trade off between what food producers can provide against what I can provide food producers (estate agency services :P , social support, specialised skills, thatching rooves, bespoking cave paintings etc.), so half of my 'feeding time' is spent directly on obtaining food and the other half is providing the specialised contribution that I can make. In total, however, I am still spending 80% of my energies in meeting my family's food requirements.

 

Fast forward to 2008, and exactly how much of your daily toil is attributable to that basic need to nourish? I would say that less than 30% of earnings, or energies, go to feeding, but it still represents an 80% contribution to our well being and continued survival. Of course, we have other demands on our energies, such as housing, medical care and contributions to society, and there are many other factors to work into the picture. But it is still a bit of a breathtaker when you stop to consider how far we have moved away from the real intrinsic value of food, for example, in the distorted cost we pay. In nature, it seems there is a 'calories in' 'calories out' balance sheet, which isn't really balancing at the moment because of price distortion. Someone, somewhere, either now or in the future, is providing the balancing figure for that equation.

 

A bit of a long-winded contribution, but I thought I would throw it back into the pot.

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Fair points Droid, although my current job has a history that probably goes back to the court jesters of mediaeval times. I'm one of the blokes people can laugh along with or throw rotten fruit at. Talk radio is cheaper than therapy and I believe fulfils an important role, certainly in the Isle of Man.

 

Then I hope you agree that 'intangible and undesirable services' is largely a matter of perspective? Certainly when wealth management companies are making money for their clients they're considered desirable. You're not an outsider either, you want credit to buy cars, you need finance to provide the cash to transport the fuel around the world to allow you to drive it, you have insurance to cover the risks associated with driving, etc etc.

 

Interesting you compare yourself to a court jester, a position without any real value on the market so is funded by the state!

 

You're right of course - the entire financial industry isn't rotten and corrupt, and I expect parts of it provide a useful service. But (as an outsider) it strikes me that a lot of it is simply about gambling with other people's money. Nothing to lose for the players. The link between risk and reward should be reintroduced so that if you get it wrong, you lose your shirt rather than walk off with a golden handshake.

 

I think you're over-simplifying, though I agree that the decision makers should be more accountable, and I believe they will be in the future.

 

Gladys I think you're overstating the importance of the reselling of debt. That the debt existed is the real problem, not it's re-packaging in derivatives. Borrowing became very cheap post 9/11, and a bubble formed. When house prices started to tumble in the USA, that's when it popped. The scale of the problem is down to the risk management and lack of understanding of some of the instruments, but that's really not the core of the problem in my view.

 

I hope we're all beyond just needing to fulfil our basic needs too, it'd be a sad age that we just went back to that.

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Gladys I think you're overstating the importance of the reselling of debt. That the debt existed is the real problem, not it's re-packaging in derivatives. Borrowing became very cheap post 9/11, and a bubble formed. When house prices started to tumble in the USA, that's when it popped. The scale of the problem is down to the risk management and lack of understanding of some of the instruments, but that's really not the core of the problem in my view.

I sort of agree, but if the debt had been kept un-packaged it would have made the identification of the bad loans so much easier. The credit crunch has been all about banks refusing to loan money to each other as they had no reliable way to value the paper they were being offered.

 

That has pushed interest rates up and has had a very real effect on economic activity. Yes there was over expansion of credit, but also the way that expansion was packaged has doubled the problem. Both parts are important, and I wouldn't understate the way debt has been packaged: the Lehman's collapse was more to do with debt instruments than debt itself!

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Gladys I think you're overstating the importance of the reselling of debt. That the debt existed is the real problem, not it's re-packaging in derivatives. Borrowing became very cheap post 9/11, and a bubble formed. When house prices started to tumble in the USA, that's when it popped. The scale of the problem is down to the risk management and lack of understanding of some of the instruments, but that's really not the core of the problem in my view.

I sort of agree, but if the debt had been kept un-packaged it would have made the identification of the bad loans so much easier. The credit crunch has been all about banks refusing to loan money to each other as they had no reliable way to value the paper they were being offered.

 

That has pushed interest rates up and has had a very real effect on economic activity. Yes there was over expansion of credit, but also the way that expansion was packaged has doubled the problem. Both parts are important, and I wouldn't understate the way debt has been packaged: the Lehman's collapse was more to do with debt instruments than debt itself!

 

Robert Peston's blog today is more sober than usual. M King is clear that the property bubble is the real problem, but says he could do nothing about it. Time for GB to give back some teeth to the BoE, including authority to dictate capital ratios and the power to revoke banking licences (the threat would be enough).

 

S

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I sort of agree, but if the debt had been kept un-packaged it would have made the identification of the bad loans so much easier. The credit crunch has been all about banks refusing to loan money to each other as they had no reliable way to value the paper they were being offered.

 

That has pushed interest rates up and has had a very real effect on economic activity. Yes there was over expansion of credit, but also the way that expansion was packaged has doubled the problem. Both parts are important, and I wouldn't understate the way debt has been packaged: the Lehman's collapse was more to do with debt instruments than debt itself!

That is exactly the point, it was the ability to re-package the undesirable debt that enabled banks to lay it off and then enter into more risky lending.

 

As for a return to meeting basic needs, I am not advocating that, but using it as a way of measuring the real worth of something.

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Then food production, prices are so manipulated that the price I pay bears no real relationship to the cost of production, or indeed the real value to me in my survival. Putting it very simply, in our natural state, we would invest, say, 80% of our energies to finding food (these percentages are plucked out of the air for illustrative purposes only and are based on a 40 year study of TV wildlife programmes) for ourselves and our offspring. Civilisation and co-operation has reduced that to around 40%, because there is a trade off between what food producers can provide against what I can provide food producers (estate agency services :P , social support, specialised skills, thatching rooves, bespoking cave paintings etc.), so half of my 'feeding time' is spent directly on obtaining food and the other half is providing the specialised contribution that I can make. In total, however, I am still spending 80% of my energies in meeting my family's food requirements.

I do not understand, how are you still spending 80% of your time meeting your family's food requirements? Are you referring to the hours that you work?

 

Fast forward to 2008, and exactly how much of your daily toil is attributable to that basic need to nourish? I would say that less than 30% of earnings, or energies, go to feeding, but it still represents an 80% contribution to our well being and continued survival.

 

I do not understand, how are you still spending 80% of your time meeting your family's food requirements? Are you referring to the hours that you work?

 

Of course, we have other demands on our energies, such as housing, medical care and contributions to society, and there are many other factors to work into the picture. But it is still a bit of a breathtaker when you stop to consider how far we have moved away from the real intrinsic value of food, for example, in the distorted cost we pay. In nature, it seems there is a 'calories in' 'calories out' balance sheet, which isn't really balancing at the moment because of price distortion. Someone, somewhere, either now or in the future, is providing the balancing figure for that equation.

 

But this is the problem with a pricing system. Food has worth and value, it is of the utmost value to animals, but it's worth cannot be quanitified. Therefore, the worth of bread cannot be qualified by attaching a price to it.

The cost of the production of such food is again not something you can find the true worth of.

 

I think what you are saying about balancing makes perfect sense. But the problem is that although a balancing system could operate effectively there are many interferences that get in the way of a simple balance. Supermarkets for example are in the middle, they give the farmer money for his food and then sell it.

But the supermarkets are there to make profits! Their methods of bulk buying and offering stability in demand for farmers may keep food prices down but the requirement to make profits increases them again. Not sure if you would agree but I don't see it as a straightforward balance.

 

In terms of distortion I think that though there is enough land, enough farmers, and enough potential effort to give everyone in the world a good meal. Yet given the availability of food we are paying a high proportion of our wages on food in comparison with other products which remain more stable. It is just SO wrong that given the abundance of many foodstuffs and potential growth for others people are choosing to purchase very bad quality foods instead. I genuinely wonder whether shoplifting food might be the best temporary remedy to peoples financial woes.

 

I hope we're all beyond just needing to fulfil our basic needs too, it'd be a sad age that we just went back to that.

 

I think we need to return to a time where there was no money, no profiteering, and more community but I really am against the whole technophobe arguments that say we need to eschew all modern technologies. That would only make life difficult when it need not be.

 

Though the times we live in are still rather sad and there is little to be thankful about when considering the workings of the present economic and social system. Yes, we have more choice about what we can buy with our money and our basic needs are easily bought, but so much in the economy is wasteful activity to satisfy whimsical luxurys. Most people in society are enslaved to an employer and worse most get robbed every time they receive their salary. And then considering how much intellectually meaningless work is done by the majority of people they are robbed again by paying rent/mortgages and extortionate amounts for food. Given the costs involved in undertaking alienating work and in working long hours it is questionable whether in terms of happiness it would be better to have the ability to satisfy my basic needs.

 

At least if you are foraging for food you have purpose. You are looking after yourself, your community, and family. This is social and makes for meaningful work. But say I was in the finance sector. When I work I do not produce a social good. I simply make the rich richer but helping fleece the rest of society out of what money they were given for their work. Therefore, in terms of happiness I can see a lot of worth in looking after one's own.

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I sort of agree, but if the debt had been kept un-packaged it would have made the identification of the bad loans so much easier. The credit crunch has been all about banks refusing to loan money to each other as they had no reliable way to value the paper they were being offered.

That has pushed interest rates up and has had a very real effect on economic activity. Yes there was over expansion of credit, but also the way that expansion was packaged has doubled the problem. Both parts are important, and I wouldn't understate the way debt has been packaged: the Lehman's collapse was more to do with debt instruments than debt itself!

 

Yes, agreed. There was a chap on newsnight, can't remember who, who put the ongoing problems following sub-prime down to complicated derivatives that nobody understands, including board members, ratings agencies, auditors and regulators that were off balance-sheet.

 

So that creates mistrust between the banks once it's exposed. Add to that the unregulated insurance market in underwriting these deals and everyone realises how exposed they are and the money freezes up.

 

To fix it? Simplify the derivatives and regulate the insurance better. But you'd be fixing the symptoms, not the cause.

 

 

Robert Peston's blog today is more sober than usual. M King is clear that the property bubble is the real problem, but says he could do nothing about it. Time for GB to give back some teeth to the BoE, including authority to dictate capital ratios and the power to revoke banking licences (the threat would be enough).

 

Exactly, that's the root of the problem, they loaned too much based on cheap inter-bank credit. Then the cheap credit stopped and the assets they loaned against crash, and everything else falls over exposing other issues.

 

The biggest failing of the BOE in my mind is not considering house price inflation into the consumer price index. How daft is that given the way falling property prices have influenced so much. Anyone know why they're not in there?

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