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Friday, 3 April 2009

3 April 2009

I’m going to keep this as simple as I can, mainly because it’s the only hope I have of understanding any of it. So here’s my take on the London summit …

Did it change anything? A bit. Will it make a difference? A bit. Does it mean the crisis will end sooner rather than later? No idea.

The first thing you need to do is ignore the headlines. All that stuff about “a historic meeting”, and “a new world order” – that’s just to keep the headline-writers happy.

And as for the trillion dollars, well, thanks to the Financial Times, I can do a bit of deconstructing for you. Half of it is made up of supposedly “new money” for the International Monetary Fund: $100 billion from Japan (announced last November), $75 billion from the EU (announced last month), $40 billion from China. Then there’s another $250 billion in Special Drawing Rights, which isn’t real money at all, but can be used as if it is – it’s the IMF’s version of “quantitative easing”, or, if you prefer, printing money.

Add in another $250 billion on trade finance guarantees (that’s the insurance policies that governments offer to exporters so that if they don’t get paid, they get their money anyway) – but like all insurance policies, the assumption is that they won’t have to pay out, and in any case, according to the FT, only $3-4 billion of new money has been committed.

And then there’s an extra $100 billion available for lending from multi-national development banks, much of which will in fact be borrowed from elsewhere.

In the words of the FT: “When all the sums are added together, rather than $1,100 billion, the new commitments appear to be below $100 billion, and most of those were in train without the G20 summit.”

So let’s get back to basics for a moment. This whole mess started when we discovered that our banks had lent out far too much money to people who couldn’t pay it back. They did this because they had gazillions of dollars swishing about in their vaults, thanks to the mega-surpluses built up by China, which has been selling us everything from computer chips to cameras.

Then the banks panicked, stopped lending anything to anyone, so we stopped buying, which meant that manufacturers couldn’t sell anything, which meant they either went out of business or started laying off staff. Meanwhile, we couldn’t get mortgages to buy houses with, so property prices stopped rising, so we stopped feeling richer.

Did the London summit change any of that? Er, not a lot. The banks are still spooked, because they still don’t know how much nasty stuff is lurking on their books – and the summiteers simply didn’t dare shine a spotlight.

All they could come up with was: “We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions.” Which sounds uncannily like what I exclusively predicted a week ago: “We reaffirm our commitment to work together to encourage a rapid end to the current crisis … and we reaffirm our faith in the power of motherhood and apple pie.”

Finally, an answer to a pub quiz question of the future: Why is there no photograph of all the summit leaders together? Answer: because the first time they tried, the Canadian prime minister Stephen Harper was otherwise engaged; and the second time, they couldn’t find the Italian prime minister Silvio Berlusconi.

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