Banking Crisis

As someone who is not an Economist it is not always easy for me to comprehend completely what is happening at the moment in the world's financial markets and to understand what the implications of these events might be for the world at large. Nevertheless, an article in today's 'the Guardian' by Nils Pratley made extremely interesting reading. He began by saying that, "killed by complexity"1 will appear Wall Street's headstone should this be the end of that Wall Street that is familiar to all of us. He then goes on to describe how derivatives function or rather how they don't function in that they become extremely complex to value with expert auditors unable to agree even remotely as to their true value.2 Certainly, the idea sounds great; splittng up mortgages, cosmetically diversifying the product and pushing them onto someone else or, perhaps, taking out insurance if you are worried that your customers and trading partners might default. At the end of the day though it all becomes very very complicated and because the derivatives are hard to value traders are invariably encouraged to inflate earnings.
The above brings me to something that is directly linked to the above because it is not only the banks, insurances and building societies that have been unaware of their worth due to the above mentioned, it is also the great British public, with their remortgaging to pay debt and their buying with credit cards and even on direct debit cards that are funded by overdrafts and that is not to mention the ipods, LCD televisions, super-duper laptops etc bought on the "never, never". China is experiencing a slowdown in its economic growth because there is less money to spend on "Made in China" in the West. The Bank of China has reacted and decided to cut interest rates to encourage consumer spending. Now, we might want to criticise a lot of things about China but, as a rule, they do not live on the "never, never" and if they do borrow, they do so secure in the knowledge that they can pay it back. It might do the West no harm to start not only to simplify its financial systems but also to start teaching its people that you shouldn't really be spending money that you don't have.
1 'The Guardian', Tuesday 16, 2008 p2
2 Ibid p1