The Banking Crisis 2007/08.

 

 

This page presents an account of the Banking Crisis 2007/08 which will be written between November 2008 and the publication of my book The Law of Finance to update that book on the changes which will undoubteldy take place between the completion of the manuscript and the end of the banking crisis - assuming it ever really ends. In the meantime, what stands for this page is the close section of my book from 1996 which demonstrates how this crisis was always on the cards and was simply waiting for a suitable concatenation of circumstances to bring it to a head. The remainder of this account will emerge around Christmas 2008.

 

 

"I told you so in 1996".

The following passage is taken from:- The Law on Financial Derivatives, by Alastair Hudson (Sweet & Maxwell, 1996), p.228.

"'In environments in which the financial system comes close to collapse, the only recourse of all institutions is to the capability of the authorities to manage the economy out of crisis.' - Dale

"This is the view of many on the manner in which regulators should treat the control of financial markets. In view of the risks to British Economy, there needs to be a more active management of the risks that are there in the economy. The 1980's paradigm that the markets should be left to themselves is clearly misguided. The financial markets have been handed the ability to regulate themselves. The paucity of convictions for the epidemic of insider trading is symptomatic of the inability to control the traders. The manner in which the trading floors of New York, London and Tokyo bounce currencies and base rates of interest as though they were rubber balls, is evidence of the fact that we need to be able to control the financial markets while we get on with the important business of leading the UK out of the pit into which 15 years of misrule has thrown it.

"The ultimate conclusion summing up this short treatise on the derivatives markets is that the global economy, as the critics of the markets have long maintained, is linked by a succession of crises which the financial system has to overcome. This strain of thinking has become unpopular in recent years as the economic markets appear to have become more stable: in that inflation is generally low and money supply can manage exchange rates. In fact, the global economy has seen a worsening of the quality of life of a large number of human beings.

"In short there has been a crisis which has not been described as such because prevailing economic theory cannot recognise it and because crises are supposed to come and go rather than hang around for a full decade or more. The FX markets and the derivatives markets, with all the sophistication they involve, do not therefore constitute an advance in capitalist money markets. Rather they demonstrate a deepening in the underlying crisis. Derivative instruments carry with them increased volatility and as such have direct effects on the national economy. They also carry business risks for the organisations which become involved in them because they are speculative as well as controlling risk.

"Derivatives are potentially a part of the problem. They constitute an essential element in the deepening of the crisis that has been with us ever since 1981."