This article is adapted from a piece which appeared in Syntagma on February 27.

Banks are pulling back from the industrial securitization of risk that has blown up so spectacularly in their faces.

So called collateralized debt obligations (CDOs) are the supermarket sausages of the financial system — nobody knows what’s in them, and most prefer not to.

In the old days, banks took the risk of lending money on themselves and ensured that borrowers would be able to pay it back over time. Securitization means that they can lend to any Tom, Dick or Harriet, package up the debts into large parcels of small slices from many borrowers, and sell them onto other banks and finance houses.

When house prices are rising fast, and rates are low (thanks to the Iraq war — see yesterday’s post), there will be no problem. How quickly the weather can change.

Now there’s a rush back to caution and traditional virtues — and not before time.

The Private Equity industry is currently holding its global jamboree in Germany. What a difference a year makes. Just months ago (pre-August 9, to be precise) the Private Equity barons were borrowing billions to take over all manner of companies, many blue-chip, and some national strategic giants. Now the sources of funds are drying up and the world has become a much more anxious place.

Not so long ago, securitization of talent was the goal for what HG Wells called “originative intellectual workers” — the kind of people who work from a laptop and a cell phone, hot-desking from place to place. They were advised to raise money on future earnings by selling shares in themselves. Specialized markets were to spring up, something like the London Stock Exchange’s AIM market, to flog these things to admirers with more money than sense.

I suppose if you turned into a Bill Gates or the Google guys your investors would be happy — but how many of us do?

The whole notion of securitization is targeted on bypassing the present reality in favour of an unknown future, using other people’s money — often their pension funds or insurance pots. In essence it’s no different from betting on racehorses.

Now the bubble has burst and cold realism has dawned, even for the godlings of private equity and their blood brothers, venture capitalists.

The beneficiaries will be China, and the sovereign wealth funds of Asia, including the Middle East. Western financial centres have permitted power to pass from settled democracies under the rule of law, to the potentates of totalitarian regimes whose oil deposits or cheap, exploited labour will soon allow to rule over us in many covert ways yet to be revealed.

And why? The abandonment of risk management in the cause of easy pickings.

Who will hold the banks to account?

Nobody — it’s too risky.

This article is adapted from a piece which appeared in Syntagma on February 26.

The American economy is now in recession. A slew of new data clearly reveals both a marked downturn in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s.

Some economists expect a robust return to growth later in the year off the backs of aggressive rate cuts by the Fed, and a financial package from the President that will see cheques delivered to taxpayers — and others on low incomes — by June.

That may not be enough, especially as it’s now emerging that the Iraq war is the principal cause of worldwide recessionary trends from two directions : the rise in the price of oil, and the low interest rates that led to reckless lending to the sub-prime market.

A new book by Nobel prizewinning economist Joseph Stiglitz powerfully demonstrates these effects. The Three Trillion Dollar War — The True Cost Of The Iraq Conflict outlines the immense downside across the globe of what must now be deemed a policy catastrophe.

In terms of the current credit crunch, which arose out of the sub-prime mortgage fiasco, many — including Syntagma — had blamed Alan Greenspan, then Chairman of the U.S. Federal Reserve Bank, for keeping rates too low for too long. Combined with steeply rising house prices this gave the banks a one-way bet for lending to the trailer-park poor.

However, it’s becoming clear that the low-rate regime was engineered to mask the terrifying cost to the American economy of the wars in the Middle East.

We can now begin to assess the extent of the disaster to American interests the war is continuing to inflict. The conflicts have led to a strengthening of Gulf, Chinese and other sovereign wealth funds, which have bought up large chunks of prime U.S. assets, including blue-chip bank stock, while, in some cases, simultaneously enjoying a bonanza from higher and higher oil prices.

In ten years, bank stocks should prove exceptionally rich investments as they recover from current adverse credit conditions. The war has given secretive foreign funds a one-way bet.

It’s hard to estimate the effect all this will have on American power and influence around the world. A war that was meant to eliminate Al Qaeda and secure the world’s oil supplies, has had precisely the opposite effect.

Joseph Stiglitz works out the numbers and they make depressing reading.

The news that stagflation is reappearing on the scene is another blow for the West’s economic stability. Stiglitz’s book is required reading for all who want to understand the future of the global economy over the next two decades and the causes of the misery to come.

This is going to be a long haul.

This article is adapted from a piece which appeared in Syntagma on January 22.

A long, deep worldwide recession now looks more likely than not. Opinions are hardening among key players, principally in America and Britain.

Yesterday, the Wall Street Journal proclaimed : “U.S. warning signs point toward deep recession”.

Most economic analysts regard the stock market as an early indicator of economic conditions in a year or 18 months time. London’s market has lost more than 13 percent of its value in just three weeks. Wall Street was closed yesterday, but will doubtless catch up today.

The current consensus is that 2008 will be bad, but 2009 could be much worse. The second decade of this century may resemble the 1930s in the worst-case scenario.

Problems continue to pile up. Banks have been writing off around 14 percent of the 2006 batch of collaterallized debt obligations (CDOs). This percentage is currently being upgraded to 19 percent, ensuring more pain to come. The total exposure by banks could be as much as $500 billion.

Making matters worse, the insurance companies, or Monolines, that underwrite possible defaults, are also in trouble, with two of the biggest in the U.S. said to be close to Chapter 11 status (a form of bankruptcy protection against creditors).

Moreover, the very banks relied upon to rescue Western institutions, like the Bank of China, are also said to be exposed to the U.S. sub-prime slice and dice fantasy.

Another crushing problem — now endemic in developed countries — is the level of personal debt. A typical person now spends one-seventh of their income on debt repayments, compared to around 10 percent a decade ago. In Britain alone, household debt is running at an unprecedented £1.4 trillion ($2.75 trillion). Add to that the massive levels of public spending in recent years and it’s clear this can’t be sustained for much longer.

The principle of “moral hazard” means that sooner rather than later everyone has to face up to their debts and start paying them off. There are no lenders out there now who will aggregate them at a lower repayment level. The adjustment to lower debt levels is desperately needed.

Unhappily, it will represent very hard times for many, some very poor indeed, and a massive writedown of Western assets, many transferring to Asia. The loss of that income in future decades will materially affect the West’s ability to dominate as it has done in the past.

Many businesses are also going to be in deep shock this year and next. Those that survive will have low levels of debt, and shares in safe hands — not bankers, buyers or lenders who are desperate for cash to rebuild shattered balance sheets.

So, is a recession a good outcome or is it as disastrous as it seems? On one level it’s totally disastrous, especially to those innocently caught up in the credit crash. It’s also bad for the reason that we’re being pulled down by voracious greed. Greed by the banks for giving NINJA morgages (no income, no job, no assets) and then selling them on in bits and pieces. Greed also by the banks that bought them. And greed by consumers in running up such heavy debts in the good times, leaving little to repay them in the bad.

However, this can also be seen as a necessary correction to a self-inflicted train wreck. Moral hazard demands a reckoning. Our Faustian deal with the Devil has a repayment package at its fulfilment. Soon, we will know the worst.

Update : The Fed has just cut American base rates by an unusually large 75 basis points or 0.75 percent, a sign that Bernanke is serious about taking a machete to rates to head off a recession.

The White House has also indicated the President may increase his upcoming fiscal stimulus (tax cut) from the $150billion already announced.

Moneyizor will be open for business in a day or two following a major refit.

The site will concentrate on the big picture about money — what’s often referred to technically as “macroeconomics”, which is a major talking point during the ongoing global financial crisis.

Stay tuned for up-to-the-minute information.