19 June 2007

There's No Way Like the American Way

I spent a small but significant amount of time yesterday searching for a cost code to justify the spending of 60 pence. I mention this partly, I confess, to get the frustration and rage that caused me to scream in my office and cause consternation to my colleagues out of my system. But also to offer it as an example of how, in an era where the accountant is an unlikely king and accountability is espoused on all fronts, the petty is rigorously enforced whereas fraud on a grandiose scale is routinely ignored.

I am thinking, you will have guessed, of corporate fraud, of the type practised by Enron executives. Inflating the value of your stock by counting money you haven't received or even invoiced for yet. That particular techniques, known as counting 'unbilled receivables', was invented by the leading accountancy firm then called Arthur Anderson. Oil companies also engage in this creative accounting when, as Shell recently admitted it had done, they overestimate the value of their reserves, which, in oil companies terms, is the value of your company's assets and hence your stock.

It appears that the rule is, the more preposterous the fraud the more unlikely it is that we will notice. As Kierkegaard famously pointed out about Christianity, if you want to get a whole mass of believers you need to create a really big lie.

Which brings me to the money system: the biggest example of fraud that it is virtually impossible for us all to avoid. Galbraith pointed out that the gap between one financial collapse and the last is roughly equal to the length of time it takes those who suffered to forget about it. You can find it detailed in economics books, but who is daft enough to wade through those?

So, here is a brief quotation from Galbraith about how the last crash came about:

'Speculation begins when a price is going up and the presumptively wise expect a further increase. They buy and thus produce the inrease. More buy, and more and yet more are attracted. Each price increase affirms the good sense of those who have bought before. Those who doubt are reviled as creatures of defective imagination. The buying and the supporting mood continue until the available supply of mentally vulnerable, economically viable buyers is exhausted. Then come the changed views of the prospect, the rush to get out, the pressure now of creditors demanding repayment of the loans that financed purchase, thus forcing sale. In short, the crash.'

Sound familiar? I wouldn't be taking on too much debt if I were you. If you own bricks and mortar it is still yours after the crash. But if you own debt it will not be very much use to you.


  1. During the course of the debt-bubble, especially recently, there's been virtually no mainstream coverage of the effects of anyone-with-a-pulse lending on the plight of 'struggling first-time buyers' (who now seem to be more interesting to Brown and Cameron than 'hard working families').

    To the casual newspaper reader things like massive consumer debt are a side effect of a 'robust economy' and 'strong fundamentals' and house price hyper-inflation merely a failure of 'Stalinist planning regulations'.

    Yes, some sort of consumer debt meltdown looks in the offing but, heck, has it been slow in coming. I thought it was over in 2005 with a slowdown in consumer spending and minor falls in house prices before the MPC pulled out another 'Greenspan put', filled everyone's glasses, and restarted the party.

    The friends and aquiantances that used to make me roll my eyes with comments like 'there won't be a crash, they won't let it happen' seemed vindicated. I was also concerned that even as bad debt grew and the big banks wrote off billions, they really didn't seem to care - if profits are good, the write-offs are just another expense (never mind the social misery caused by debt).

    At the same time bankruptcy has become so much easier and, yes, you can even get a credit card in no time at all. The big banks obscure themselves behind a range of specialist brokers and hand out the smarties to bankrupts and poor credit ratings. I've even heard, 'Yeah, I might get loads of debt, bury gold in the garden, and go bankrupt' as jokey canteen banter.

    Could it really be, as the ever-chirpy economic pundits of in the press suggest, 'different this time'?

    On another note, in the absence of some kind of monetary reform, is the advocate of green economics a kind of reluctant monetarist, cursing rampant M4 growth and looking forward to a recessionary clear-out where the planet at least gets a break from debt-fueled consumers buying worthless landfill-in-waiting for a while?

  2. As I see it, the work of pundits and policy-makers these days is in deliberately facilitating and encouraging debt, e.g. by loosening mortgage restrictions and allowing tax loopholes for private equity firms. They are allowing ever more ingenious ways of hiding and squirreling away debt because the alternative--the crash--is too frightening to contemplate. As you point out, the cost of this is being borne by the planet, while it also ensures a more catastrophic collapse when it does come. Time to plant carrots!

  3. I've been predicting a house price crash for 5 years, so all of my friends and colleagues discounted my warnings in March that this time it was for real. It looks as though I was right this time.