Beginning of the end or end of the beginning? (doomy gloomy thread warning)

[Callisto]

So the markets seem to have stabilised and gained back some of their losses and lots of money has been pumped into the banks to help kickstart lending BUT the housing market is static and house prices are falling (no bad thing imo, though I know many disagree), manufacturing is shrinking and the service industry has just self-destructed.

So do you think that the recession will be relatively shallow with things recovering quite quickly or do you think we are in for a very rocky ride with a recession/depression on the way that will resemble the 1930's? Your reasons for your opinion would be most welcome.

Well, at long fucking last, the media is finally using the R word.

R-E-C-E-S-S-I-O-N.

Of course, get Gordon Clown to admit it.

He's still trying to tell us that raising taxes bailing out is the answer to all our problems.

Talk to the hand, Gordo! Talk to the hand.

"The Conservatives will win the next election and sort out the mess and create a buoyany economy.... then labour will be voted back in and bring the country to its knees once again..." pmsl The Tories are responsible for this mess! Twas Maggie who gave the banks free rein to invest however and in whatever they so wished. If she hadn't done that, the banks wouldn't be in the mess they are in now.

smallwhitecat- please note that buying preference shares in banks and short term liquidity facilities for banks are NOT public spending even if they are risky assets on the govt's balance sheet.

Now public spending will overshoot- i will check precisely but I am sure that you will find that even the most up to date projections will not represent historic high. Govts CAN run deficits in the short term. Indeed many commentators (including John Redwood) are suggesting that now is precisely the wrong time to increase taxes and drastically reduce public spending. Doing so can be counter-productive for reasons already mentioned; overall this can further lower govt receipts and have a long term damaging effect. The normal penalties for the worsening of public finances include currency weakening BUT given that other countries are in the same boat or worse then this is much less of an issue due to relativity of fx rates.

If you are looking for solutions then my opinion is that the MPC has to start cutting rates aggressively. They have failed us through the entire circle by not having enough of a handle on forward inflation pressures. So in the boom they kept rates too low and now in a bust they are keeeping rates too high. They are now risking a depression if they don't move quickly.

Western govts should remember lessons from last depression.

The often referred to public spending deficit is not about govt outlay of cash. It is more analogous to Profit and Loss. SO if the govt buys gold or shares then that is not consumption/"public spending"? We need a public sector acctnt here.

In order to lend to the banks the govt will "borrow" but there is a difference between govt debt and public spending? The former is asset matched by liability.

(thatcher started all this...she did..it's true)

Has anyone noticed the financial press reporting that the UK govt has screwed bank shareholders (on UK public's behalf) much more than US Treasury vs US banks? Apparently the US public's acquisition of shares was more in favour of the shareholders. I expect the UK public to make a profit on the bank shares in a few years

We can attribute blame to the MPC, the FSA, Thatcher, Major, Blair, and Brown but we should also remember that economic cylces; boom and bust will recur even with the best controls in place. It will happen again in a few decades whatever the regulations are. Why are we so surprised that we are having a recession after 15 years of growth???!!! If we have to pick on anyone then surely it is the MPC's fault? Their job is to control inflation. They have all sorts of economic forecasting models and they keep missing the obvious: as house price boom in the UK fuels inflation so if hoouse prices are running away over a period of years then the MPC SHOULD PUT RATES UP. I asked this question and was given some academic answer that I still can't fully grasp.

And now that we are in a slump they should have cut rates aggressively by now BUT Mr King is very concerned about the morale dilemma. Well he can teach the market a lesson as we risk a depression. Well done Merv and thanks for the running commentary on the economy from the observation seat. Sometime before he retires he will understand that he is one of the market agents/actors!

'boom and bust will recur even with the best controls in place. It will happen again in a few decades whatever the regulations are. Why are we so surprised that we are having a recession after 15 years of growth???!!!'

BRAVO, TD! Amen!

I remember a very wise fund manager saying to me, during the bull market in the US of the late 90s, 'EIS, double-digit yields on ANY investment can never be sustained in any economy over the long-term.'

It is cyclical and as in any cycle, there are winners and losers.

Yes, repossessions and job losses are sad, but they do represent opportunities for some and losses for others.

That's how it works.

BUT; govt and central banks can try to reduce the volatility and harshness of the cycle like cutting rates and spending in a recession.

You've obviously all finished the chat on this. Personally feel that some bod trying to explain fractional reserve banking on the 'Today' problem is a sure sign that things ain't good.
This was completely predictable we have based a house sale and move to the other end of the country to weather the storm, on the back of information that was readily available. Do not mean that smugly at all - think it's going to be hard for everyone to get their heads round - and anyway - which is better a pile of bricks falling in value or a pile of paper falling in value? Have to say I think GB is to blame for not doing more to address the situation. Whatever Tories did in past he chose to set up the tri-partite system (with built-in guaranteed failure) and lets face it blaming the bankers is like blaming kids for nicking sweets out of a big bowl you've just left them alone with. You make sure it doesn't happen because you know they're greedy buggers with their eyes on the main chance.

3 Questions - (1)Auctions of the CDSs come up soon - Lehman's on 21st, Iceland Banski things round about 5th & 6th - Does this matter? (2) What about the brewing Alt-A crisis coming up in March? (3) As CDSs (Ithink) aren't regulated can they not just be dismissed by govt. doing something legal (think Argentina did this in 1990s) Oh another one - Are the Tories being crap at being opposition because they can't help it or on purpose? Have to say I can't see how it would be great to win in 2010 - think things could still be rather buggered up.

Sticks- i can't answer all your questions. I don't understand what the fuss is about David Cameron criticising Brown today. Politicians are opportunists and it surprises me that the held truce for so long.

CDS contracts are legal bi-lateral contracts. My understanding of the issue is that if the contracts were done with/via a central exchange then each company would simply pay/receive net cash amount under the terms of the CDS. However because they are bi-lateral contracts company A might have a long position (buy) with company B and a short position (sell) with company C. Now company doesn't have a net position ( "net flat" ) but is depending on receiving cash from company B to pay company C. If company B screws up cash payment to company A then company B is short of cash and therefore could default on company C. The default of company A is then a credit event and would trigger CDS contracts (credit insurance) written on company A.....and so.

Because they are bi-lateral instruments that have market value to individual , the govt would not be wise to tear these up.

Please note that CDS contracts are not specifically what the govt is buying out.
Here is the thing: derivatives allow you to take risk without necessarily having UPFRONT cash i.e. they are a form of "leverage". Much as you could have bought a house without a deposit. So that is why derivatives have acquired a bad name. But in fact "leverage" has been with us for decades. Any loan to buy an asset is a form of leverage.

What is confusing is that a complex form of CDSs (called CDOs or basket CDSs) were used to package up sub-prime mortgages and sold on as bonds linked to a mortgage pool. The valuation of these mortgage linked bonds (CMBS, RMBS etc) in hind sight was high dubious. People convinced themselves that they represented a diverse investment which we now know not to be the case.

......If company B screws up cash payment to company A then COMPANY A is left short of cash and therefore could default on company C. The default of company A is then a credit event and would trigger CDS contracts (credit insurance) written on company A.....and so.............

Thanks Tough Daddy - good explanation - Go on then what do you think will happen as a result of it all - Guardian has a handy cut out n' keep section on the possible result of current financial criss - options including v shaped, u shaped, w shaped, l shaped or last but not least financial armageddon. w or l maybe?

Sticks- conscious of not coming across as a know all on this thread. But I think it is a lop-sided w. The left side we have already had. The right side is just beginning; when we finish the right side we will flatline for a bit.

These things are difficult to predict and if the BoE (MPC) were to REALLY REALLY slash rates aggressively then that could have softening impact but I have herad Merv King go on and on about morale hazard and I suspect that the MPC's actions will be linked to their past decisions and so they will probably drag their feet on this a bit. I mean if you installed a new MPC today they would undoubtedly be very aggressive on slashing rates. Let's see what this lot does though before I start hanging them.

Darling has been on MNet