kameraad mhambi

In case you don’t know. This afternoon is crucial if we are to stave off an event as calamitous as the great depression. That’s according to Robert Peston. If your not from the UK you might ask Peston wie?

And the question is, originally uploaded by SouthbankSteve.

Robert Peston - the BBC financial editor - has become a celebrity overnight in the UK because of his clear analysis and foresight as to what is going on in the financial markets.

But he is no ordinary reporter. His father was a well know economist. And he used to be banker, but gave up on that.

“God, it’s boring” he is reported to have said.

Peston broke the story that Northern Rock, a British Mortgage (Bond) lender was in trouble. He had been monitoring them for months. The Guardian reported last week on Peston’s rise on the back of the credit crunch.

“The BBC’s business editor had been observing Northern Rock’s balance sheets for a couple of years before he went on air at 8.30pm on September 13 2007, and announced that the country’s fifth biggest bank was technically insolvent.

‘What concerned me was this: here was a very basic business - it’s a retail bank, it’s taking in savers’ money and it’s providing mortgages - I mean there’s nothing revolutionary or different or particularly … innovative in any of that. Yet it was growing much, much, much faster than any of its competitors. And there are really only two ways in what you might call a mature, basic industry, to grow at that kind of speed. One is that you do actually find some incredible breakthrough - you’re a car manufacturer and you invent some amazingly new low-pollution engine. Or you take excessive risks that other organisations aren’t taking, and I looked at this business and I just thought this is a business that seems to be taking excessive risks. But for a couple of years I looked like a total idiot, because its share price kept going up and it seemed to be doing extremely well.’ “

Peston was on the button and first again when another UK bank HBOS was reported to be in trouble.

Today - a few minutes ago actually - he wrote this - A global solution needed - on his BBC blog.

“In the past 50 years, there haven’t been many - if any - meetings of the world’s seven richest developed nations as important as today’s.”

“If the leaders of rich Europe, Japan and North Amierica fail to find such a plan today or over the weekend, the painful consequences could scar a generation.”

Alarmist?

Well his arguments are simple:

“Markets are in meltdown. Investors are dumping almost any asset that can be sold for cash - and never mind the price.

It’s a vicious downward spiral.

When the prices of assets fall sharply, that triggers margin calls for other investors, a hideous, insidious form of feedback that triggers another round of asset liquidations.

Which in turn undermines the capital of banks - which forces them to dump yet more assets and call in more loans.”

Ever heard of the Minsky moment? Well the process Robert explained does have an end game.

“It’s a terrifying process, the precursor to a “Minsky Moment” - called such after the economist who described a breakdown of the entire financial system caused by a panicked mass liquidation of assets.”

Can anything be done?

“To ward off the Minsky Moment - which would have devastating economic consequences - a circuit breaker has to be found. And only taxpayers can provide that circuit breaker, by - inter alia - underwriting the banking system so that lenders to banks regain confidence that they’ll get their money back

I don’t mean just British taxpayers. We’ve been doing our bit. I mean the taxpayers of the developed world (because this is the developed world’s mess, our mess, whether we like it or not).

The problem is global so the solution has to be global.”

How would this effect South Africa if world leaders don’t agree on a solution today and we have a Minsky moment?

In spite of the good regulations that have kept our banks out of this crisis the indirect impact will be huge.

Imagine a huge drop in exports of commodities like steel, platinum and coal, of farming goods like wine and oranges, imagine no European holiday makers, no buyers of our cars manufactured in the Eastern Cape.

Imagine if all the Western money that that helps funds our current account deficit were to be withdrawn. The currency will fall. Imports will become very very dear.

That’s even if Jacob Zuma marries into the Oppeneimer family.