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An investment vehicle that consistely produces above-average returns without fraud is as likely as a perpetual-motion machine.
Here in the prosperous (and yes, deep in a recession we are still prosperous) West we have come to believe in our right to a long retirement. We work like a dog for forty or forty-five years, then it all stops – and for for another twenty or thirty, we sit at home and do nothing.
Crazy, crazy notion.
Work is what makes us and defines us. We live in a society where “do” and “are” are interchangeable.
“What do you do?”
“I am a doctor”
Then, suddenly, at age sixty-five:
“What do you do?”
“I am retired, I used to be a doctor. Now I am a non-person.” But you are the same person as you were before you retired: only your occupation has changed.
When retirement pensions were introduced in the UK by Lloyd George, the retirement age for men was seventy. Most men died younger; few who retired drew their pension for long.
What has happened now is that our lifespan has increased and the retirement age has been forced down, politically. It is unsustainable. It doesn’t really matter what happens to pension funds and the stock market; the fact is, someone has to do the work.
We need to change our attitude to retirement. We need to enjoy work now, and expect to be working for as long as we are fit and able to do so. When, as it inevitably does, physical degeneration takes its toll, we should expect to cut down or change what we do. A civilised and prosperous society such as ours should provide the necessary social care in our final years, but it will only be able to afford to do so if we keep working – and paying taxes – as long as we can. Those of us who have money-purchase pension schemes will almost certainly have to do so anyway.
Since we cannot expect the long years of retirement that our parents enjoyed, if our lives are not to be one long spell of wage-slavery we therefore need also to be more flexible about work. Sabbaticals, career breaks and unpaid holidays should replace the emptiness of retirement, and good employers should encourage them. But perhaps we need to move beyond the idea of employment, of a nine-to-five job and a monthly paycheque. When we work “for” an organisation, we become part of it. It is up to us, therefore, to make our employers “good employers”, to influence and to change organisational culture. We might well work at several “jobs” simultaneously, some paid, some unpaid, some salaried, some dependent on what we sell. This variety in what we do will help us cope with the tedium of a life of nothing but work…
In yesterday’s post, I posited that the credit crunch which crushed Lehman has a lot to do with the adverse turnaround in US public finances as a result of the Iraq war, and I am sure that it is a factor, but it was not the thing that actually did for Lehman. The US fiscal account has been in substantial deficit before; the country only finished paying for the Vietnam war during the 1990s Clinton-era boom. Nevertheless, I think that we must always look at the fundamentals when trying to understand what is going on in an economy, and the combination of fiscal surplus/current account deficit produces surplus dollar capital and a boom in dollar-denominated asset prices, whereas twin deficits (as we have at the moment) will tend to depress dollar-denominated assets as the US Treasury absorbs the surplus dollar capital from the current account deficit. There is a substantial lag in this process, particularly around the downturn, because no one likes to sell an asset at a loss so notional asset values stay high until forced sales really make the fundamentals bite. I’m over-simplifying the process and there are other factors at play, including a change in international sentiment towards holding the dollar as a reserve currency, but asset prices are driven by capital flows. The burgeoning US current-account deficit helps explain how the proportion of US public debt in foreign hands is now at an all-time high.
But, macroeconomics 101 over, it’s time to talk about trust, which is what this blog is about, and if you read all the commentators, they are saying that the loss of trust between bankers is what really did for Lehman.
Up to a point, Lord Copper.
Lehman went to the wall because its finances were shot to pieces. It lost the trust of fellow bankers (to whom it is massively indebted) because its underlying positions were no longer trustworthy. It had borrowed from them to buy dollar-denominated property assets, by underwriting mortgage backed securities and buying commercial property. If these assets had continued to rise in price, the borrowing would have been easily repaid, and Lehman would have made a substantial profit, as it had done before. This is the genius of leveraging; the problem is, when assets fall in price, the loss is leveraged as well. Had it been smart, it would have seen the change in sentiment coming; but it didn’t – because the analysis of the fundamentals didn’t seem to match with experience on the ground in the early years of the decade when property prices were still booming. This usually means a bubble is building, but in the euphoria of a commission-driven sales culture, no one likes to admit that the bubble is about to burst. And the longer the bubble keeps growing, the more spectacular the burst. The fundamentals have been adverse for most of the decade, so the burst of the US property bubble has been spectacular.
What we now find is that no one actually knows whether Lehman is solvent or not. The realisable value of its commercial property and subprime mortgage books is not clear; if it’s more than the total that Lehman owes in bond and bank debt liabilities, Lehman could even emerge from chapter 11. This, however, is now highly unlikely. Like any major investment bank, Lehman is financed by a small amount of equity and large amount of bond and bank debt, which turns over as instruments mature and debt becomes repayable. Normally, it would just issue more debt to repay the maturing instruments; but since no one trusts it, that is no longer possible. So it has to realise its other assets, and their disposal becomes even more of a fire-sale. This is what the administrators are doing, who are now struggling to raise the cash to pay the current month’s salaries.
So could greater transparency have helped Lehman? Again, the answer is moot. Almost certainly, it would have precipitated the current crisis much earlier: lenders would have seen the dire state of the bank’s finances, and stopped lending long ago. But it might have been in time to stop Lehman racking up most of its excesses.