The World’s new hedge fund managers and bankers to meet in London

The meeting of the President and the Prime Minister at the G20 is a meeting of the new Masters of the Universe. Between them they wish to gear up the world economy with unprecedented levels of public borrowing on both sides of the Atlantic. They will privately chide the Europeans for not doing more of the same.

The President’s levered fund to buy toxic bank debt looks very like the old hedge fund model. The Prime Minister is stress testing UK public finances by adding as many wobbly financial institutions as possible to the nation’s balance sheet to see how much stretch it can take.

Both these men seem to have learned from the excesses of the private sector.They think the message is that it’s fun to borrow, and a good idea to gear yourself beyond the levels of normal prudence. They have obviously been dying to run a bank or three and to have a go running their very own hedge funds with public money.

Now the President favours a version of the pre-pack bankruptcy and newco for a couple of struggling car makers. Alternatively, he subscribes to the theory that if you merge one weak company with another weak company you create a strong one – just as Mr Brown thought if you merged an OK bank with a weak bank you would create a strong bank when he merged LLoyds and HBOS.

I fear they have learned the wrong lessons from the past. You cannot cure a crisis brought on by overborrowing, by borrowing more. You cannot create strong companies by merging weak one. We need a new more prudent model for finance – and that applies to governments as well as to banks and investment institutions.

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16 Comments

  1. StevenL
    Posted March 31, 2009 at 7:07 am | Permalink

    I hope the FSA are going to make sure Mr Jintao remains seated at all times between the delegates from the Brown Banking Group and the Obama Credit Opportunites fund. We wouldn’t want any more funny business now would we?

  2. Neil Craig
    Posted March 31, 2009 at 9:48 am | Permalink

    They are the masters of the universe right up to the moment the Chinese decide it is in their interests to pull the rug from under them. At which point they will find they have been trying to walk on water.

  3. Demetrius
    Posted March 31, 2009 at 10:22 am | Permalink

    For a little time now I have been trying to promote the idea that the fundamental intellectual structure of Government policy is a new development in economic theory.

    I call it Enronomics, after the company that was recently left by the US Government to collapse.

    Had they only waited a little time before they crashed out, they would now be bailed out and held up to us all as the very model of a modern major company.

  4. oldrightie
    Posted March 31, 2009 at 10:25 am | Permalink

    Hah! The Chinese will look at the American model and out perform, out manufacture and wreck it even further. How? They will be using reserves, not borrowing. When the wreckage that is Obi’s and Brownobi’s car crash of debt on debt, they will buy up or rescue swathes of American and failed economies. Their goal, to spread the communist message through the stupidity back door left open by these two “masters of the Universe”. Hopefully Germany, some irony here, will save us!

    • Steven_L
      Posted March 31, 2009 at 6:46 pm | Permalink

      Surely you mean they use currency manipulation and employment law jurisdictionary arbitrage?

      Look to me like the US are going to use inflation and if anyone objects too much they’ve always got the FA-22 Raptor to fall back on.

  5. Johnnydub
    Posted March 31, 2009 at 11:46 am | Permalink

    John,

    Have you thought about writing an analysis of the Geitner plan?

    From what I’ve seen its a straightforward transfer of capital from the taxpayers to the banks.. It makes Gordon’s massive capital injections into the banks look like the work of Solomon.

    Also congratulations regarding your partitcipation on Radio 5Live with Stephen Nolan. You made Derek Draper look like the ignorant student rabble-rouser he’s always been.

  6. Steve Cox
    Posted March 31, 2009 at 12:40 pm | Permalink

    I find the contrast between the British and Irish predicaments instructive. Both countries went totally overboard, and are now paying the price. Due to the disciplines of EMU, the Irish cannot devalue, inflate, or print their way out of the current problems. Instead, they have increased the pension contributions of government employees by an average of 7% (and 12% for senior employees).

    Personally, I’ve never been a fan of the Euro, but looking at the witch’s brew that Brown is concocting for future taxpayers, not to mention the disaster that the coming uncontrolled inflation will be for savers and pensioners, I have to admire the Irish for taking it on the chin. Don’t the aforementioned public sector pension increases (together with, say a temporary freeze on indexation of existing pensions?) sound like the sort of medicine that the the UK should be administering? Sadly, we don’t have the necessary discipline imposed on us by the masters of the Euro, the Germans. Hence it will be goodbye Sterling, goodbye savings, etc.. You know, I never though that I would say this, but I am starting to get converted to Euro membership. Our competitive devaluation so far has done absolutely zilch to help us, after all.

  7. Lola
    Posted March 31, 2009 at 2:34 pm | Permalink

    Obama and Brown want to run banks? They couldn’t run a whelk stall at a profit between them.

  8. mikestallard
    Posted March 31, 2009 at 4:29 pm | Permalink

    Have I got this right?
    The Chinese slave economy has, not surprisingly, outperformed the Western economies in clothing and toy production. It is also very efficient at turning out products which are designed and thought up in the West.
    The West at first managed this slave economy and then began to depend on it. At last, for a few years, it went heavily into debt to it and now it is broke. All its money has flowed into the slave economy, just as Marx and Ulysses Grant said it would in their societies. Those who own the means of production etc etc.
    Now what?

    • Steven_L
      Posted March 31, 2009 at 6:55 pm | Permalink

      Inflation sparked by the USA and UK. The Germans and French have no choice but to follow suit or see their currencies appreciate to undesirable levels. Consumer price inflation for pensioners, savings and lots of workers in the West to outpace wage inflation. Deleveraging of the consumer but drop in living standards compared to the last couple of decades. High unemployment by the standards of the credit boom years. Political instability relative to the last 30 years. Economic reform on energy policy, creating pain for some, opportunities for others. Creditor nations to gain concessions in terms of political participation.

    • SJB
      Posted March 31, 2009 at 9:18 pm | Permalink

      New start-ups. There are an extraordinary number of professional people claiming benefits: http://image.guardian.co.uk/sys-files/Guardian/documents/2009/03/19/20.03.09.Benefit.claimants.pdf

      Tessa Jowell on the BBC’s Question Time recently claimed that another £1 billion was going into JobcentrePlus so that more interviews could be conducted. But imagine if just a small percentage of that sum was instead applied to providing professional support to those unemployed professionals thinking of setting up their own business. E.g. quality sales & marketing advice, teaching them how to prepare cash flow forecast etc.

  9. Acorn
    Posted March 31, 2009 at 7:52 pm | Permalink

    Interesting debate today in Parliament (economy debate), unfortunately it did show up the lack of understanding, on the ZaNu benches, of financial matters.

    Redwoodians have posted previously on the “debt for equity swaps” concept. Swapping “preferred” bond holdings for “common” shares, (equity); bond holders are much higher in the food chain than the equity holders, when things go t*ts up. Also, bond holders are much more likely to be on first name terms with governments and their officials than common share holders!

    Can I recommend a couple of articles, US based, but coming to a government near you soon. The point to note is that government buying toxic assets from the banks, does nothing for the size of a banks balance sheet, unless you overpay for those assets. Obama’s latest toxic asset plan looks a real whiz, (see first link below).

    JR mentioned in parliament recently that if governments had to prepare accounts the same as any other large PLC, things would be a lot more transparent for us taxpayers. Unfortunately, our government would show a increasing operating loss, and burning cash it doesn’t have.

    http://www.hussmanfunds.com/wmc/wmc090323.htm

    http://www.hussmanfunds.com/wmc/wmc090330.htm

  10. Bernard Palmer
    Posted March 31, 2009 at 8:01 pm | Permalink

    John.

    I think this gathering of all the world leaders of Socialism is going to be historic because it possible could be the very last one ever.

    There is no cure for Socialism. It has to be put down and Atticus Finch Obama might be doing soon to the auto makers.

    The impending collapse of the US Automobile industry is scaring the hell out of the Japanese as they use the same components suppliers in the US. The end of Socialism could be really close.

    http://mdn.mainichi.jp/mdnnews/news/20090331p2g00m0dm005000c.html

  11. The Economic Voice
    Posted March 31, 2009 at 9:21 pm | Permalink

    TOTALLY off topic, but why was Obama, the Head of State for the US not met by Her Majesty, our Head of State, or one of her representatives on his first visit to the UK as President of the USA?

  12. chris
    Posted April 1, 2009 at 8:15 am | Permalink

    The masters of the universe are blinded by power. We are all going to suffer.

  13. Adrian Peirson
    Posted April 1, 2009 at 3:17 pm | Permalink

    Mr Redwood, can you suggest to Parliament they should hold the G20 summit in a Ladbrokes Casino, tell them we will pay the Bill.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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