Markets. Why they are important.

But it doesn't matter what you spent the money on, you still have to pay it back.

On whilst we're on the subject of Greece can we just remind ourselves that the main problem in Greece has been corruption - money has been borrowed against the government but not spent in the way promised. Much of the money is currently absent from the Greek account books.

British debt is being invested in the country and can be accounted for.

It's a bit like the difference between a business borrowing money to buy machinery and take on new staff, and borrowing money to have a massive piss up.

Thanks Alouiseg, I for one really appreciate the time it must have taken you to write that.

On market regulation, I work for a financial institution, and I am totally for it. There needs to be better regulation, unfortunately the FSA has been particularly slack over the last few years. It is a pain - the Fed is much more active (though obviously they could have done more), and it does make things easier, particularly if you're in the position of having to say "no" to deals and transactions. If you can say "no - there will be legal and regulatory repurcussions", and there actually are, it is much better.

Ok.

So we have established that Gordon borrowed too much.

My next question is what did he spend it on?

This article expresses the problem for me, especially this bit;

"These bodies that see public debt as a burning issue today foresaw no problems with the unsustainable private debts of the banks investing in sub-prime holdings a few years ago. "The vast majority of the analysts at Moody's [one of the leading ratings agencies, and seen as the most likely to move on the UK's debt rating] are honest individuals who try hard to do their jobs," Eric Kolchinsky, a former managing director at Moody's told a US Senate subcommittee on investigations a few weeks ago. "However, the incentives in the market for rating agency services favoured, and still favour, short-term profits over credit quality."

There's a reason for this. These agencies are primarily funded by the banks that they are supposed to be rating, creating what several former officials testified was a fundamental conflict of interest. In the words of Upton Sinclair, "It is difficult to get a man to understand something when his job depends on not understanding it."

So the very sector we bailed out with public money, run by incompetent people who are once again paying themselves bonuses, is now threatening to destabilise the next government unless it fires thousands of low-paid workers, cuts their wages and withdraws the services to millions of mostly poor people.

It's as though you borrowed money against your home to save a wayward relative from penury only to have them roll up a week later in a brand new Porsche and tell you to cut your food bill or they'll repossess the property."

www.guardian.co.uk/commentisfree/2010/may/10/people-markets-democracy-capitalism

Alouiseg -- the trouble with a lack of regulation is that:
a) banks go bust and everyone loses their shirt
b) food gets adulterated and people die of poisoning
c) pharmaceuticals don't do what they're intended to do or said to be able to do and people die
d) planes fall out of the sky
etc etc

Sure, regulation is difficult, but in a very different context, someone once said: "It is not incumbent upon you to complete the work [of perfecting the world], but neither are you at liberty to desist from it"*. There's lots of good reasons why no country has ever experimented with a completely unregulated financial sector, despite the challenge of trying to keep up with large-brained and strongly-incentivised workaholics trying to earn more dosh.

On another note, your OP says that the UK has borrowed an enormous amount of money, and specifically mentions that we've borrowed more than Greece. You imply by that, that we've borrowed more than we should. I think that's right, but it's not proved just by showing we've borrowed a large amount. As the securities fans will say, what matters is the size of the debt relative to the income stream generated against it (plus the payback timing). The UK is a much bigger economy than Greece and hence its borrowings can be much bigger than those of Greece. But they can still be (and are) too big.

*Rabbi Tarfon

But having an overdraft/pension/cc etc equally shouldn't be taken to imply acquiescence in the notion that the bond markets should dictate to elected politians. As per my previous point to TheBride, I simply don't vote on financial considerations; I don't see a single good reason why I should. There are far more important things IMO.

The fact that we are, en masse, a credit-using population doesn't mean that we've had some sort of mass referendum in which we've agreed that the markets get to decide stuff. Although ignorance plays a certain part in this.

Yes, PW. That is pretty much the thought (but without the champagne) I had on the school run.

It is not the fact that the markets are important, we are all agreed on that. And the explanations on this thread have helped me understand that better.

It is the constant assertion that the pressure of the markets is the reason for pushing a Tory Government.

Governing a country is such a complex matter, it is disingenuous to reduce it to just one issue.

Thank you for this thread, has definitely helped me to understand the situation. My brother does this for a living and has tried to explain but didn't manage to be so lucid

Seems to me that for a moment we do have to take the markets into consideration, Gordon Brown has put us in that position by borrowing and by spending so much.
That doesn't mean that we just allow that situation to continue, and one of the best ways of doing that should be to ensure that future governments are more financially prudent so that we are not beholden so much to market forces that extend beyond our borders.

... meant to add to previous post: because those people have been predicting meltdown for the last four or five days, and guess what? No meltdown.

If there is anyone on here who has a job, a house, a mortgage, a pension, a credit card or an overdraft, borrowing to buy a car or indeed any other kind of econmic activity you are 'in the financial market' whether you like it or not.

Govt decisions will affect the financial markets' view of the UK and that will immedialey affect you and your financal positon. Voting for a Govt inevitably requires everyone to take account of their financial position.

Yes Lit we do. In the current situation, what particularly annoys me is people (usually observers/small-scale speculators without a great deal of influence - not a dig ABD though appreciate it might read that way) saying 'Clegg MUST decide or the markets will punish us!' when what they mean is, 'I wanted the Tories to win, I had the champagne in and everything, and I am beyond furious'.

exactly Litchick. If we'd never borrowed the money, the markets that lent it to us would never have mattered.

PW - I agree it is not beyond the wit of man, but isn't it too late?

At this juncture we have already borrowed the cash and have to deal wiht the things in the here and now.

I confess I am a speculator - but a nice one.

It seems to me that the time to decide that we didn't want the markets unduly influencing our political systems was before we borrowed all this money.

Once we did that, we hitched our fortunes to the City didn't we?

We can't have it both ways. Gordon borrowed to spend on public services. That money tied us to the markets.

(And yes, control of the market would have to be internationally-based, not nationally-based. Is a long way from being beyond the wit of man though.)

Also remember that the rate on government debt is the lowest investment rate of return in the country (it's seen as the risk free rate because governments- touch wood- tend not to default).

Other commerical lending rates are worked out at a premium to that rate, so if the rate on government debt is high, then investors require a higher return to invest in the country. This is bad.

If, say, a wind turbine manufacturer was thinking about a new plant, and one option was Germany and one was the Uk, but the Uk had a much higher rate of return than Germany due to it's higher risk free (gov) rate, it's less likely Wind Turbine plc would invest in us.

Therefore, ordinary joe who wants a job making wind turbines stays in the dole queue.

ABD I absolutely agree that GB should not have run up the deficit in the way he did, and that this has put the UK in a vulnerable position WRT the markets.

But I also think that there are plenty of things that could be done to bring speculation under control and make it a less anti-democratic force.

TheBride, it seems to me that the position you state is an outline of your own personal politics, not a universal state of affairs. I've never voted on the basis of my personal financial position, and I'm sure a great many other people would say the same.

MmeLindt - "..Germany, they have full books for the next year (after a catastrophic year last year) because the government is investing in building work"

The only reason the UK cannot do that is because we have already borrowed far to much. Germany has sound finances and so can afford to borow and stimulate its economy. We cannot. That is what the bond markets do. They call the shots if a country lives beyond its means.

policywonk - the fundamental problem with all socialism is that it wants to control everything including markets. Unfortunately, it cannot ultimately control the international financial markets.

Every single Labour administration this country has ever had has finished with a gigantic financial mess. The reason is clear. Labour Govts ultimately run out of other people's money and the bond markets an dtax payers eventualy say no.

I do not think we should allow the City to dominate our country in the way it has under this Labour Govt. The City has to pay its way and pay its taxes and work for the benefit of society. In that sense I agree with you but we still cannot ignore the markets. They are more powerful than any Govt and Nial Ferguson has written extensively on the long history of that over the centuries.