The term “credit crunch” is very misleading for the current crisis. It suggests that the problem is merely one of confidence, that calm will return if liquidity is introduced to the system.

My view, though, is that the real issue is one of solvency. This is the systemic bankruptcy of 2008.

Mortgages are just the beginning.
At real rates of interest, with real expectations of a reasonable rate of return, many of the deals which have been done since 2003 just do not make economic sense. Thus far, the spotlight has been on one piece of that problem – bad mortgage loans – but I think we’ll see the problem areas expanding rapidly to include a lot of the private equity deals which were done on the basis of free money between 2003-2007. I remember a fatuous statement by some private equity genius that “everybody’s rushing to do the first $100bn deal”. Well, the chickens are coming home to roost. Expect a steady flood of announcements of setbacks, restructurings and bankruptcies as companies that were bought with borrowed money turn out to be unable to service their debt.

Lower interest rates will ease the symptoms only.
Dramatic easing of interest rates will help to slow down the pace at which we have to deal with the bankruptcies, but they won’t change the cold reality of the situation, and they run the very real risk of making things worse by encouraging another round of speculation based on free money. We are once again in a situation where the US discount rate is effectively a negative real rate of interest, as a gift to the banks, but staying there for any length of time puts us back into a state of addiction.

Interventions must target bank equity and leverage, not liquidity.
The latest move from the UK to buy equity stakes is the best response yet, I think. It dramatically improves the capitalisation of those institutions, it keeps the upside of that move in taxpayers hands (they are taking the pain and funding the bailout, it seems right to preserve the upside for them) and it dilutes the existing shareholders who allowed their institutions to become insolvent. Personally, I’d be inclined to do more than dilute those shareholders.

I don’t see the current $700bn deal making a real difference to US banks. I would expect the US to announce a deal similar to the UK deal soon, but the numbers would have to be larger. Scarily large. Much better for the US to make that move, than to wait for Asian and Middle-eastern sovereign wealth funds to step into the breach.

Depositors in regulated banks should be protected by the governments that run the regulators. Shareholders not so much. Bondholders… maybe.
I think the Irish and other countries who have guaranteed the deposits of individual users have done the right thing. Governments setup regulatory authorities, and banks advertise that they are regulated. The people who appoint those regulators need to stand by the approach they take – they should offer a guarantee that they will stand by their product, and when it fails, they will stand by the people who trusted in them. Depositors at banks in the UK really should not have to worry that the bank might fail – such a failure should at most affect the interest rate they receive, not the safety of their capital. Shareholders in those banks, however, should be very worried indeed. There’s an interesting question about bondholders and institutional depositors. By one argument they are sophisticated investors and should be responsible for their bonds. By another argument, they are the very people who can cause massive shifts in funds from bank paper to T-bills, and hence worth keeping pacified. I would lump them in with individual depositors too.

Executive compensation should be structured not fixed.
There has been a lot of discussion about limiting executive compensation. That’s just an invitation for armies of consultants and lawyers and accountants to work around whatever compensation limits are put in place. And frankly, I’m hard-pressed to understand how politicians, who constantly vote themselves bigger salaries and expense accounts, are qualified to set bank executive salaries. They effectively WERE in charge of Fannie and Freddie executive compensation, and that wasn’t a stellar success.

What I would say, however, is that financial institution earnings should only be recognised over a seven year period, and bonuses based on those earnings should be held in escrow until that seven year period is up. Imagine if we could now tap into the bonuses of investment bank employees over the past seven years in order to shore up the balance sheets of those banks. That would include the bonuses paid to Mr Fuld, Mr Greenberg, and Mr Greenspan. Anybody care to run the numbers? I think it would be material.

I’m nervous.
The big question I’m asking is which sidelines don’t have landmines? My team and I are fortunate to have stepped out of many markets before the current flood of fear. We stepped right into a few problems, but in large part dodged the cannonballs. So far so good. But what does it mean to have cash in the bank, when banks themselves are failing? What does it mean to hold dollars, when the dollar is being debased in a way that would feel familiar to the Reserve Bank of Zimbabwe? These are very dangerous times, and nobody should think otherwise.

67 comments:

  1. Ken says: (permalink)
    October 9th, 2008 at 10:26 pm

    Elect Cook County sheriff Tom Dart for president!

  2. Sam says: (permalink)
    October 9th, 2008 at 10:38 pm

    “Governments setup regulatory authorities, and banks advertise that they are regulated. The people who appoint those regulators need to stand by the approach they take” – This for me is the key issue, because I am highly preoccupied with my life-savings which are currently sat in an account with Icesave. An account that is currently, along with all others, frozen.

    Icesave is a UK based savings bank which is ultimately owned and operated by one of the Icelandic banks currently dieing a death. I deposited less than the advertised, regulator backed, “guaranteed” amount and hence thought my money was safe. It is a similar scheme to the FDIC one in the US system.

    But when the bank collapsed this week I found out that the UK regulator allowed the UK part of the bank to defer to its parent’s government compensation scheme for the first 20,000 euros. And of course that fund is as bust as the rest of Iceland.

    Thankfully the UK Government have announced that they will make payments to depositors and then pursue Iceland for the money if there is anyone left to pursue. But it shouldn’t be overlooked that the UK regulator was asleep at the wheel for years, we now know that the Iceland fund could NEVER have met all the UK deposits. In the event the fund was called upon by any of the major Icelandic banks they could not have met the obligations.

    I picked a UK based and regulator backed bank. I paid taxes on the interest I accumulated. I’m glad the UK government are apparently going to do the “right thing” but I’ve got little to no faith in the competence of the regulatory framework we’ve been operating under for God knows how long….

  3. informednetworker.com says: (permalink)
    October 9th, 2008 at 10:43 pm

    It’s a solvency problem, not a liquidity problem…

    October 2008 is a crisis of solvency, not simply a crisis of confidence and liquidity. Government responses need to focus on the equity and capitalisation of financial institutions, not on trying to paper over the lack of liquidity in money markets….

  4. jldugger says: (permalink)
    October 9th, 2008 at 10:51 pm

    It’s very unfortunate that McCain is promoting a solution to keep housing prices high. The economy overbuilt, and prices have to slide.

    Fundamentally, risk was underpriced. Banks lowered lending standards and down payments, credit default swaps (bond insurance, really) was underfunded by folks like AIG. People hedging credit default swaps underestimated the risk of their own insurance falling apart as a consequence. Executive pay in stock options encourages risky investment over dividend payouts. Clearly we have far more risk aversion today, but I’m not quite sure how to determine appropriate risk pricing in the future.

    Can you really tie executive pay to 7 year performance if they only expect to serve 4 or 5 years?

    Mark Shuttleworth says:Yes, and in cases where people leave it may be even better – very easy to tap into the bonuses of departed executives who’s deals have now come unstuck.

  5. David Holden says: (permalink)
    October 9th, 2008 at 10:53 pm

    Hello Mark, the real question is why does it need saying this is a solvency issue rather than a liquidity one. My opinion for economic analyst, journalist – people you would think would have a clue – is not very high at present.

    Consumers, business and governments have borrowed beyond their credit worthiness, the banks know that lots of the assets purchased with that *too easy* credit aren’t worth the values paid and its been such a credit binge that we have reached the point where the solvency of the banks themselves is now in question. Since we now have enonomies dominated by consumer spending and much of that spending was based on “too easy” credit its necessary withdrawal means we are in for a sharp correction.

    We’ve had a dot com bubble (from which at least we got some decent companies), now a housing bubble (from which we got a lot of social injustice), knowing that history repeats itself then at least we can look forward to a green energy boom..

  6. Alessandro says: (permalink)
    October 9th, 2008 at 11:49 pm

    Mark,

    these are very dangerous time indeed.

    The worst is that who is acting now to “solve” the crisis are the exact same people who created the problem in the first place and intend to use the exact same “solutions” that put us in this mess.

    If you have savings or wealth, the objective is to still have something 5 years from now. Or maybe two weeks from now, things are moving much faster than I was expecting. Too much faster.

    Good luck to you all.

  7. Ken says: (permalink)
    October 10th, 2008 at 12:06 am

    Hi Mark, Tom Dart is the only sensible politician I know who cares about the people losing the homes instead of caring about the banks and their rich execs.

  8. Eva says: (permalink)
    October 10th, 2008 at 1:00 am

    I completely agree with David. I guess, “Consumers, business and governments have borrowed beyond their credit worthiness” and “sharp CORRECTION” sum it best. I agree with you Mark that these are scary times but overall, in the long term, this is not a bad thing, its a correction towards what is truly valuable and towards a better economic efficiency. Many of my friends at banks are getting fired here in New York, but small businesses are finding unexpected competing advantages and growth opportunities, and if they present themselves with potential someone will give them the money to actualize that, and that someone might not be your typical large fat bank either, but someone with a little more individual touch and more picky for the actual product. The only problem I have in this is the “collateral damage” when economic inefficiency is brought to light, and tools should be in place only to keep checks and damage proportionate to “creative” risk takers.

  9. Eva says: (permalink)
    October 10th, 2008 at 1:09 am

    PS: The fact that people are alive, thinking and in need of consumption is my reassurance that the economy will pick up, at some point. The question is setting the more efficient rules for that demand – supply, where people are more confident to interact.

    And as many ways there might be to boost that confidence, the BEST ONE is having actual products which are valued and updated respectively.

  10. F. Heinsen says: (permalink)
    October 10th, 2008 at 1:52 am

    Mark –

    Right on the money. These are indeed dangerous times.

    For the past couple of years I’ve been worrying about financial safety, i.e., what are the safest instruments, assets, and/or places in which to keep one’s money so as to conserve the value of one’s principal? Unfortunately, I don’t yet have a good set of answers.

    I do think we’re lucky to have people like Hank Paulson and Ben Bernanke in power. They are doing everything within — and in some cases beyond — their power to get the basic mechanics of the financial system working again. (I shudder to think what things would be like if we had someone like an Andrew W. Mellon in the U.S. Treasury today — he’s the Treasury Secretary who let one out of every four U.S. banks fail in the early 1930′s.) I’m also encouraged to see that government injections of equity capital into financial institutions is on the table in a big way (not just in the UK, but also in the U.S. — e.g., see http://tinyurl.com/4vwngr).

    But in the end, I’m worried. If you have any ideas or suggestions, by all means please post them here!

  11. Ante says: (permalink)
    October 10th, 2008 at 7:59 am

    The only question there was couple of years ago was ‘When will this happen?’. Household mortgage loans are already 100% of US GDP. How can that be sustainable? It can’t. People now don’t realize the problem, since everybody is talking about banks, insurance companies, etc… Managers are those who are on the front line now, but that front line will move behind them, to workers, which will loose their jobs. This won’t be the end of world’s economy, but we’ll have to fix something.

    Right, having money in banks is dangerous behavior, investing it in mortgages is obviously non-working solution at the moment. Maybe oil? Oil will fall, since demand for it will fall dramatically. But will it achieve it’s highest prices in a year or two? I don’t think so, since the world is trying to move away from it (something we should’ve done ages ago). Will we return to the gold? :)

    I would say dramatic times :/

  12. Much Ado About Blogging » Blog Archive » Mark Shuttleworth on the financial crisis says: (permalink)
    October 10th, 2008 at 8:16 am

    [...] Mark Shuttleworth, the smart brain behind Thawte and Ubuntu, on the current economic situation: [...]

  13. Bernard says: (permalink)
    October 10th, 2008 at 8:24 am

    As David says>>
    the real question is why does it need saying this is a solvency issue rather than a liquidity one. My opinion for economic analyst, journalist – people you would think would have a clue – is not very high at present.
    <<

    This doesn’t surprise me at all. Journalism has basically died in the past 30 years. In my opinion they are too lazy (intellectually) to do more than offer the most cursory comment before regurgitating whatever press release they’ve been given. I’ve known for years that the housing market was the new bubble – my friend is a lawyer and the house he bought 20 years ago, for 15 years has been out of the reach of anyone similarly qualified. The only way that could have been fuelled was by people being lent 6 times their salary, or by them lying over what their base salary was — in both cases it was unsustainable. Now all that’s going on is politicians are trying to re-inflate this bubble, when in truth property prices need to fall to about 40% of what they currently are. I know of only 1 instance where this kind of mortgage-lending was reported in the past 10 years. Take the case of HIV/AIDS – the medicines work for some people, but only by trial and error (and they use the pharmaceutical equivalent of a shotgun – of course something works to kill something). The whole theory is riddled with contradictions, yet you never hear a single journalist criticise it (well, with the exception of one or two who get pilloried) See http://hivskeptic.wordpress.com/ . It’s the same with Iraq (president’s and prime ministers shown to have lied to justify a war). The pair of them should have been hounded out of office by the majority of the media since that was proven. But no, journalist’s just enjoy their cushy life — why rock the boat when you can make a good living summarizing a press release?

  14. dave says: (permalink)
    October 10th, 2008 at 8:49 am

    Interestingly, according to a Jon Udell blog I just read (http://blog.jonudell.net/2008/10/09/this-american-lifes-finest-hours/) the American’s are going to do the same as the British.

    Amusingly, while the plan originally got push-back from the Banks, ‘someone’ (and apparently no-one knows who) snuck language into the bill giving them the option to partly buy the banks, rather than buy those toxic debts. Interesting times.

  15. Memex 1.1 » Blog Archive » It’s a solvency problem, not a liquidity problem says: (permalink)
    October 10th, 2008 at 9:12 am

    [...] commentary on the banking crisis by Mark [...]

  16. André says: (permalink)
    October 10th, 2008 at 9:25 am

    Mark said:
    “What does it mean to hold dollars, when the dollar is being debased in a way that would feel familiar to the Reserve Bank of Zimbabwe? These are very dangerous times, and nobody should think otherwise.”

    Do you mean ‘dollar’ or “Federal Reserve Note”? (To explain the question, you can visit http://www.geocities.com/tthor.geo/debasedmoney.html )

    Why are these times more dangerous then the past 300 years? (Or am I 100% mistaken that only 1% of documentary’s like “The Money Masters”(215min) and “Money as debt” (47min) might be true?)

    André.

    PS: I am worried too. Merely because I don’t understand whats going on. Also I hope the internet will be the enabler for spreading the right information to face current crises (being it financial-, economical-, oil-, climate-, ecological- or whatever).

  17. Tom says: (permalink)
    October 10th, 2008 at 9:59 am

    Thanks for the (kinda scary) insight Mark. I was worried your funding might be in danger.

    OT: Congratulations! Having Wikipedia run on 8.04 is a _major_ archievement and the best marketing I can think of and it really fits the “Ubuntu idea” very well.
    Do you allow them to use Landscape?

  18. Artir says: (permalink)
    October 10th, 2008 at 2:32 pm

    It’s the end of capitalism!
    Karl Marx is probably laughing on his grave.

    XD

  19. Inez says: (permalink)
    October 10th, 2008 at 3:02 pm

    Hi Mark,
    I always enjoy reading your comments when I occasionally visit this site, because you seem to display important qualities which cannot be bought: wisdom, vision and common sense. But enough flattery.
    They say that fear of God is the beginning of wisdom. And whether you believe that to be true or not, certainly at it’s core, this statement reflects that our actions should be in reverence to life and times beyond our own. A life of construction and edification at the least. Or if you’ve seen “Gladiator”, Maximus encapsulates it with his warcry of “What we do in life, echoes in eternity.”
    So those who do, and those who don’t, live in reverence to the CEO of the Universe, must wonder whether bringing people to their proverbial knees on a grand and global scale has any purpose at all. And whether such a tidal wave of humility and desperation, will serve to turn you to- or away from His everlasting face?
    Inez

  20. Barton George says: (permalink)
    October 10th, 2008 at 3:37 pm

    I was waiting for you to weigh in ;)

  21. chrisco says: (permalink)
    October 10th, 2008 at 4:40 pm

    As discussed in detail by Nouriel Roubini on his over the past months. Here’s his review (from two days ago) of what he wrote in February:

    “Revisiting my February paper “The Risk of a Systemic Financial Meltdown: The 12 Steps to Financial Disaster”…And Some New Policy Recommendations to Avoid the Meltdown”:

    http://www.rgemonitor.com/roubini-monitor/253933/revisiting_my_february_paper_the_risk_of_a_systemic_financial_meltdown_the_12_steps_to_financial_disasterand_some_new_policy_recommendations_to_avoid_the_meltdown

  22. Rcb says: (permalink)
    October 10th, 2008 at 5:06 pm

    It was surprising to see some economic commentary on planet.ubuntu. And quite an insightful one as well, though I do not totally agree on the liquidity argument. Liquidity is a problem as well, banks won’t make loans to each other, nor to customers. The interest rates were too low, now they are too high. So in that sense, there is a problem with liquidity. The inability to refinance existing loans also causes solvability problems. But enough finance/economics.
    Although the outlook is pretty gloom, there is also a bright side to this. Maybe something you can not say, people might not take it kindly, but it might be good times for open source and thus ubuntu. Companies will try to save costs (citi bank already asking for double sided printing ;)), with ubuntu getting more mature every release, it becomes a viable and attractive alternative. And… low cost! People might even see past the microsoft sponsored total cost of ownership propaganda. So yes, for a lot of people the future might look pretty bad, maybe just not for ubuntu ;)

  23. Artir says: (permalink)
    October 10th, 2008 at 5:16 pm

    @Artir,
    Unfortunately capitalism won’t end by itself, it takes a gentle push from all the workers of the world to let it go. And yes, Marx’s laughs are still resounding, after more than a century of mistification of its brilliant analysis.

    Mark Shuttleworth says: I don’t think a socialist world would be better, in fact I think history suggests it would make far worse mistakes, and take much longer to acknowledge and fix them. Thanks for the comment, though, it sparked a thread which I’ll turn into another blog post soon :-)

  24. Flavio says: (permalink)
    October 10th, 2008 at 5:17 pm

    @Artir,
    Unfortunately capitalism won’t end by itself, it takes a gentle push from all the workers of the world to let it go. And yes, Marx’s laughs are still resounding, after more than a century of mistification of its brilliant analysis.

  25. jimcooncat says: (permalink)
    October 10th, 2008 at 5:46 pm

    It’s not the end of capitalism, nor is capitalism evil in and of itself. To those who expound, “the only goal of a corporation is to make money”, I say they are missing a huge point. Corporations are given a charter by the state. If the deeds of a corporation are detrimental to society, then the state should sue to have the charter revoked, thereby making the shareholders personally liable for the company’s actions.

    And that’s my point, is that shareholders don’t feel any responsibility; but they are entrusted to move the corporation towards progress. Too many are thinking short-term, and things like customer service and the environment take the back seat to high dividends or a pump-and-dump mindset.

    Let the bad ones fall. In a robust capitalist society, new competition will rise up to take their place. If some grow “too big to fail” for society’s welfare, then society needs to address its economic security when its based on what goes on behind closed doors, and take appropriate, bold action.

    I think it’s monopolies we have to watch out for, not capitalism.

  26. Flavio says: (permalink)
    October 10th, 2008 at 6:51 pm

    @jimcooncat
    Well, they said like this a century ago. You think capitalism is OK, but it was badly “handled”. This is completely false: things happen for a reason, and, in this case, monopolies are the natural product of capitalism. Just like pollution and wars. You can’t have capitalism without its intrisic “side effects”.

  27. Brad Jensen says: (permalink)
    October 10th, 2008 at 7:29 pm

    Mark,

    Months ago I sent you an E-mail asking for your opinion on a video I had. Sadly you never answered back.

    The video described that this was going to happen. You really need to visit http://www.campaignforliberty.com and pay attention to what Ron Paul has been saying about this crisis. Ron has been predicting and warning about this crisis for many years. The problem is that everyone seems to be apathetic of the whole situation.. At least until there is a large crisis staring them in the face.

    Another video that tells people exactly what they should be doing with their money is here:
    http://www.youtube.com/watch?v=xIsHD7nwTbU

    Regards,

    Brad Jensen

  28. Peng’s links for Friday, 10 October « I’m Just an Avatar says: (permalink)
    October 10th, 2008 at 8:53 pm

    [...] Shuttleworth: It’s a solvency problem, not a liquidity problem. The founder of Ubuntu looks at the current economic crisis, which is welcome seeing how he has [...]

  29. Steve says: (permalink)
    October 10th, 2008 at 10:25 pm

    I think your reasoning on executive compensation is flawed. The problems you outline are very real, but the root cause of them is not flawed performance evaluations; That is just a consequence of letting the executives set their own salaries, and of course we would all do the same if we were able to.

    The root cause is that we have failed to recognize the banks as what they really are; Vital public infrastructure. When we do understand this, and have nationalized all financial institutions (no, you do not need to be a communist to support this), we will be able to pay all executives what they truly deserve, and that is minimum wage.

    Just my 2 cents..

  30. Boycott Novell » IRC: #boycottnovell @ FreeNode: October 10th, 2008 - Part 2 says: (permalink)
    October 11th, 2008 at 7:21 am

    [...] Incidentally, Mark Shuttleworth blogged about it: http://beranger.org/index.php?page=diary&am&#8230; http://www.markshuttleworth.com/archives/220 [...]

  31. Artir says: (permalink)
    October 11th, 2008 at 10:10 am

    @Flavio

    I agree. What is happening right now is that the big banks are eating the little ones and the big companies, the small ones, effectively creating very powerful companies (More poweful than the goverments maybe?) and that’s not good.

  32. Charles on… anything that comes along » A graph to really scare you about another mortgage shock waiting in the US - and so, us says: (permalink)
    October 11th, 2008 at 3:19 pm

    [...] interest rates? Mark Shuttleworth (he flew to the moon, you know, and is behind Ubuntu) says it’s a solvency problem, not a liquidity problem: Dramatic easing of interest rates will help to slow down the pace at which we have to deal with [...]

  33. jc says: (permalink)
    October 11th, 2008 at 7:01 pm

    Did someone really mention Karl Marx laughing at us?

    It’s funny, capitalism supposedly “fails” when people lose a little bit of money. Yet communism kills 100 million people in the 20th century… it’s still good!

  34. Brian Sell says: (permalink)
    October 12th, 2008 at 2:02 am

    “What does it mean to hold dollars, when the dollar is being debased in a way that would feel familiar to the Reserve Bank of Zimbabwe?”

    Cash is king and the dollar is the currency nearly everyone wants right now. It’s hardly being debased, and is growing stronger in the global deflationary spiral. Only the yen is as strong as the dollar, not the euro and not the pound.

    Deleveraging will take a while and the partial nationalization of banks worldwide will help the crisis of confidence. Most banks are sound, at least in the U.S. Those that are not solvent will be shut down, those that are hurting will get recapitalized through equity injections.

    I disagree with one of the comments that we – those of us in the States – are lucky to have Hank Paulson as Treasury Secretary. One of the reasons this mess became much bigger than it should have was due to overleveraged investment banks. In 2004, Goldman Sachs, under Paulson, asked the SEC to set aside the net capital ratio requirements of $1 in assets for every $12 in debt. After the SEC acquiesced, every one of the major investment banks became massively indebted. This was one of the reasons Bear Stearns did not survive the run on its assets. The second reason why we aren’t lucky to have Paulson is the arrogance and flawed plan he requested of Congress where he demanded no oversight, a suspension of the rule of law, and a blank check where he could spend more than the $700 billion he originally requested to buy toxic assets only. Paulson was adamantly opposed to recapitalizing the financial institutions through the purchase of equity shares even though nearly every international economist on the planet agreed this was a much better solution than having the Treasury buy toxic assets at inflated prices. We are fortunate the Senate included that option in the revised legislation or the $700 billion would have been wasted.

  35. La distro marrone? « kazzim! says: (permalink)
    October 12th, 2008 at 8:02 am

    [...] «It’s a solvency problem, not a liquidity problem» [...]

  36. Boycott Novell » IRC: #boycottnovell @ FreeNode: October 11th, 2008 - Part 1 says: (permalink)
    October 12th, 2008 at 8:40 am

    [...] kentma: http://www.markshuttleworth.com/archives/220 [...]

  37. Callum says: (permalink)
    October 12th, 2008 at 12:32 pm

    Capitalism is a means of motivating people. It’s the idea that if allowed a reasonable amount of freedom, people collectively produce more than under one ruler, one system, one control. I think the results of that are pretty clear. Look at economic growth over the last 200 years. Capitalism wins. Period.

    Capitalism is not perfect by any means. People get too motivated, they get carried away, they get disconnected from the results of their actions, and they commit crimes. I believe the challenge is to close the gap between action and consequence. To make the true impact of choices clearer to the average person.

    When people really understand what it means to buy free range versus caged chicken, they choose the free range chicken if they can. People are inherently good, but they need to know the effects of their actions to make educated choices.

    Communication like the internet connects us with our actions more and more. The future looks bright. :)

  38. Alessandro says: (permalink)
    October 12th, 2008 at 2:12 pm

    Mark: “Imagine if we could now tap into the bonuses of investment bank employees over the past seven years in order to shore up the balance sheets of those banks. That would include the bonuses paid to Mr Fuld, Mr Greenberg, and Mr Greenspan. Anybody care to run the numbers? I think it would be material.”

    I didn’t run the numbers, but I pretty confident that even seizing the whole of Wall Street bonuses of the last 7 years will be a drop in the bucket. Just look at Merrill Lynch numbers, in just one year of losses they blew up one fourth of their total inflation adjusted profits since going public 36 years ago. See:

    http://www.ft.com/cms/s/0/10aa56f4-7532-11dd-ab30-0000779fd18c.html

    And they are probably not even half-way done with losses.

    How can that be? It’s called colossal mispricing of risk. The end result is that today’s losses much larger than all the profits in the bubble years.

    There is no way around that. The only question is who will bear the losses.

  39. Flavio says: (permalink)
    October 13th, 2008 at 9:23 am

    @Callum
    The future looks very dark. Your arguments prove nothing, we’re not “bashing” capitalism, it obviously has its merits. There’s no discussion about that. The point is that capitalism has outgrown itself and, at this point of science and technology evolution, we cannot handle its inherent “flaws”: war, pollution, periodic crisis. Or we avoid them or we die.
    People can be motivated even outside of the capitalist economy, they were motivated to invent fire, wheels, tools and survive incredibly difficult conditions well before capitalism existed. Profit is NOT the main motivation factor for people. A better life is. A life of harmony, cooperation and peace is what motivates people.
    All in all the point is: there’s no better capitalism than what we have today, drop your illusions about a “benevolent capitalism”.

  40. bitsenbloc » Blog Archive » Interessant (2008.10.13) says: (permalink)
    October 13th, 2008 at 10:02 am

    [...] Mark Shuttleworth » It’s a solvency problem, not a liquidity problem – The term “credit crunch” is very misleading for the current crisis. It suggests that the problem is merely one of confidence, that calm will return if liquidity is introduced to the system. [...]

  41. Eduardo Willians says: (permalink)
    October 13th, 2008 at 2:41 pm

    Once again, I’ve published your post in brazilian portuguese at my blog (holding your credits).

    Thanks.

  42. Eduardo Willians says: (permalink)
    October 13th, 2008 at 3:29 pm

    Could you talk some day about brazilian economy? Do we have a good future? Do we have great probabilities to take off of our shame past of poverty and corruption and walk ahead to reach good social indexes?

    Thanks again.

  43. sansimon says: (permalink)
    October 13th, 2008 at 3:58 pm

    Mark,
    I think that this aid to the banks is a great error. For example: if mine I negotiate here in Brazil to break, to declare insolvent, for incompetence or any another reason diminishes goes me to help, the state the banks and not even my family will to help me! It had que to have a punishment, instead of passing the hand in its heads.

    Good luck.

  44. Theo says: (permalink)
    October 13th, 2008 at 8:51 pm

    Mark, “solvency problem” and “liquidity problem” really are two sides of the same coin. The reason why there’s a liquidity problem (i.e. banks not lending to each other or to their clients) is exactly because there has been an erosion (or perceived erosion) in the solvency of borrowers. Who would lend money if there’s a far higher risk of the borrower defaulting?

    Similarly and conversely, without liquidity, any bank’s solvency (equity or net asset value) starts eroding, since they have to forcibly liquidate illiquid assets at prices (possibly) far below their intrinsic or hold-to-maturity value. You’ll hear a lot more about this in the coming years as so-called “mark-to-market accounting of illiquid assets” gets thoroughly reviewed and reformed (again!).

    Enjoyed the post.

  45. St Pet says: (permalink)
    October 14th, 2008 at 9:20 am

    Hi.
    Good thing to live in europe and in Sweden perticaularly since we already had things in place from the last Swedish crisis in the 90ties. Note though how the crisises come more and more often nowadays. Not a good sign at all indeed. Its a total systematic failure both this quater profit capitalism and goverments interfearing in the market because of a screwed up society model. That they (politicians) want to fix with unhealthy makret regulations or incentives. You don’t get homeless people of the street when they have low income jobs or who are unemployed with high intrest loans or even subsideced loans since when a down turn happens they wont be able to pay anyway. One good thing is to give people higher income in low vage jobs with health,social and unemployment benefits to match that insures them when a crisis hits.

    Still JOBS are the best way out of a crisis and to a better life.

    Most important thing still is that Swedish society modell still Rules!

    Actualy the Swedish Natioanl Bank have been the modell when countries now want to know how to stop the crisis.

    You can not keep on stepping on the break to get up and over a hill!

  46. Mat Tomaszewski says: (permalink)
    October 14th, 2008 at 10:15 am

    I think we’re heading towards a low end of a natural sinusoid – nothing to be overly concerned about, life itself consists of such cycles.
    On the other hand, what better times for collaboration on open and – most importantly – free software, than the times of crisis? It’s the big corporations that need to worry, open communities will survive.

  47. Biggest One day gain since 1933!! - Los Angeles Kings Hockey Fan Forum says: (permalink)
    October 14th, 2008 at 3:15 pm

    [...] Krugman – Op-Ed Columnist – New York Times Blog Here is another article that makes the point. Mark Shuttleworth Blog Archive It’s a solvency problem, not a liquidity problem To do, not to do – Paul Krugman – Op-Ed Columnist – New York Times Blog [...]

  48. jimcooncat says: (permalink)
    October 15th, 2008 at 2:40 pm

    @Flavio
    “Well, they said like this a century ago.” Sure, I don’t think anything’s really changed that much.

    “You think capitalism is OK, but it was badly ‘handled’.” Although I’m fairly well travelled, I haven’t much personal experience in other types of societies. Also, I don’t believe our generation has much alternative; we’ve inherited it so we have to deal with it. Yes, I think it was badly handled. More to the point, I think it was badly handled because shareholders are too lazy to actually care about the companies they invest in.

    “This is completely false:” What’s false? A. That I think capitalism is OK? It’s my opinion, and you’re certainly welcome to have a different one. B. That it was badly handled? I thought most agreed on that part.

    ” …things happen for a reason, and, in this case, monopolies are the natural product of capitalism. Just like pollution and wars. You can’t have capitalism without its intrinsic ‘side effects’.” Monopolies are in every social system; in some societies the government holds huge monopolies for itself. A lack of competition usually reduces efficiency and customer service; it sure does in my neighbourhood. Entrepreneurs seek out monopolies from which to extract their potential, whether these monopolies are caused geographical or logistic challenges, or they are ethereal such as trademarks and patents.

    I’m saying to watch out for monopolies. Too many times governments will create circumstances that will take a competitive area and turn it into a monopoly. And some monopolies no longer serve their purpose, they should be dissolved to foster competition. For example, many patents on the books.

    As far as pollution and wars go, these are products of short-sightedness. If you’re in it for the long haul, you realize that these luxuries are too costly to the bottom line. I’ll admit a lack of historical knowledge, but I’d bet a nickel these things happened prior to modern capitalism. Unfortunately, we’ve become more efficient at it.

    Yes, I believe there is a “better capitalism than what we have today”. I’m working to improve it. I respect that you don’t believe it; are you commiserating or do you have some better alternative?

  49. Rich says: (permalink)
    October 15th, 2008 at 8:38 pm

    @Alessandro

    While seizing bonuses won’t help us now, that kind of bonus structure would have been an incentive not to oversell and overvalue assets.

    @Callum

    Some people will buy battery eggs whatever their level of education on the risks to health, the environment, and the economy — not to mention the welfare of fellow earthlings. Some, in fact, will even demand such products. Some of us are simply not compassionate. Broadening the allegory once again, this illustrates how capitalism will always suffer at the hands of the greediest, even while it encourages greed: it is the free-market version of the tragedy of the commons.

    Great article, Mark. You have a knack for making complex things easy to understand.

  50. Shuttleworth: Bankerot, ikke krise | Modpress says: (permalink)
    October 15th, 2008 at 9:45 pm

    [...] Shuttleworth skriver: Mortgages are just the beginning. At real rates of interest, with real expectations of a reasonable rate of return, many of the deals which have been done since 2003 just do not make economic sense. Thus far, the spotlight has been on one piece of that problem – bad mortgage loans – but I think we’ll see the problem areas expanding rapidly to include a lot of the private equity deals which were done on the basis of free money between 2003-2007. I remember a fatuous statement by some private equity genius that “everybody’s rushing to do the first $100bn deal”. Well, the chickens are coming home to roost. Expect a steady flood of announcements of setbacks, restructurings and bankruptcies as companies that were bought with borrowed money turn out to be unable to service their debt. [...]

  51. Eva says: (permalink)
    October 16th, 2008 at 2:04 am

    http://palinaspresident.com/

  52. df says: (permalink)
    October 16th, 2008 at 4:37 pm

    “Gold” is the answer to your question…

  53. Nono says: (permalink)
    October 17th, 2008 at 7:53 am

    Mark,
    What will come: in a few years time we will have peak oil. Just when the recovery is around the corner we will be hit by the peaking of oil production. That will make this “solvency” problem a walk in the park.

    I don’t know what to do, don’t have money to do anything anyway. But you have money so be afraid of losing it and think very hard about how to hedge your self against the Oil crisis.

    If you want to know more about it pay attention to: Matt Simmons here an interview with this investment banker: http://www.youtube.com/watch?v=0Hrpv21Ubf8

    And for a technical discussion go to the http://theoildrum.com.

  54. Eva says: (permalink)
    October 17th, 2008 at 9:43 am

    http://www.cityofember.com/

  55. Kaul Mhd. Arie Eka Putra says: (permalink)
    October 18th, 2008 at 9:04 am

    Dear Mark,
    i am the ubuntu user from indonesia, and i love it so much, because its opensource and free.
    now, i want to be a linux programmer, but i have only small things knowledge about it.
    in this comment, i want your help,to increase my ability to be a programmer.
    one day, i want to be a part of ubuntu developer, and spread ubuntu in my place, my country, Indonesia
    i just want some help from you, maybe by give me some books for studying about ubuntu and programer
    i was 23 years old, my hobbies about computer,mostly ubuntu.but now i’m in accounting college, where i’m borred aboout it, i want to be a programer, and then join with you to develop ubuntu..
    please reply my comment to my email address, i’m waiting so much for it,
    thanks a lot

    aRie

  56. Petar says: (permalink)
    October 18th, 2008 at 10:53 pm

    ##SOLUTION

    1 > Buy small house with big garden
    2 > Buy big nasty dog
    3 > Buy big house for big nasty dog
    4 > Dig hole under big nasty dog’s house
    5 > Put money in hole
    6 > If hole repeat step 2 – 5

    #END :-)

    Relax Mark, the sun always comes out after the storm

    Cheers

  57. Wynand Meyering says: (permalink)
    October 21st, 2008 at 5:37 pm

    The average personal debt of US, UK and European consumers is astronomical: something like 1.42:1 debt vs. asset ratio for Americans, 1.32:1 for British and 1.03:1 for Germans. So people owe a lot more to banks than they own. That is probably why the US economy and world economy doesn’t want to grow much: because people are so heavily in debt. They spend a great portion of their income just repaying debt, meanwhile consumption has far outpaced production. So all the measures to increase consumption won’t really help until balance is restored. The US budget deficit is $500bn per year and its trade deficit is $700bn a year. So the US needs to restore the balance between production and consumption. The rest of the world can’t continue to loan it money indefinitely.

  58. The Big Winner » Entrepreneur and Ubuntu Foundation Founder Mark Shuttleworth says: (permalink)
    October 21st, 2008 at 10:30 pm

    [...] Source: http://www.markshuttleworth.com/archives/220 [...]

  59. Charlotte Steere says: (permalink)
    October 22nd, 2008 at 6:49 am

    Mark,

    Most women are experienced in nurturing vulnerable dependent legal personae, from helpless, into productive entities, with functional moral consciences.

    Why are there, by law or other agreement, not a significant number of women on every major corporate board.
    I believe that the domination of board rooms, by alpha males, intent on personal success, underpins and self perpetuates a tendency towards cyclical collapses.

    Women are more practiced in making and giving effect to tough decisions in the best interests of dependent third party legal personae.

    I have personally been ridiculed by boards, as a “confused and irrational woman” for supporting less profitable, but solid strategic interventions, over and above those that will deliver short term benefits.

    Charlotte Steere

  60. Irgendeiner says: (permalink)
    October 24th, 2008 at 1:29 pm

    Mark,

    I wonder that someone who made a fortune like you did, tells us not to know how to invest it.

    Every reputed swiss private banker will tell you:

    1/3 to raw materials (some gold, oil etc.)
    1/3 to AAA stock market diversified (worldwide)
    1/3 to government bonds diversified (swiss, german, far east)

    With such traditional strategy you will not make the best profits,
    but can sleep well in any circumstances, even wars etc.

  61. Davorin says: (permalink)
    October 25th, 2008 at 9:50 am

    @Callum “Capitalism is a means of motivating people.”

    And how does Linux fit into this picture? I guess not everything is about profit. Watch Zeitgeist Addendum, please.

  62. Tim says: (permalink)
    October 27th, 2008 at 4:26 am

    Kudos to you Mark for foreseeing that the markets would be atrocious and getting your money out. These are indeed scary times especially for a young entrepreneur like myself trying to find a foothold in this economy. I worry that this economy is going to turn around later than sooner for the reasons that you incurred in your post. There aren’t just one or two problems in the economy but a plethora to solve.

  63. Tough times indeed.. « The Melting Pot says: (permalink)
    October 27th, 2008 at 9:19 am

    [...] under Uncategorized | Tags: bad ugly |   I read Mark Shuttleworth’s blog just yesterday this post in particular, and came across this [...]

  64. Shuttleworth muss Ubuntu weiterhin sponsern | Linux Nachrichten - News und Meldungen rund um Linux / Open Source says: (permalink)
    October 29th, 2008 at 5:51 am

    [...] um in diesem Umfeld erfolgreich zu sein. Über die momentane wirtschaftliche Krise macht er sich in seinem Blog zwar Gedanken, kommt im Interview aber zu dem Schluss, dass sie dem Geschäftsmodell Linux eher helfe als [...]

  65. ProjectX Blog » Blog Archive » Xlinks digest - 4 / 11 / 2008 says: (permalink)
    November 3rd, 2008 at 9:21 pm

    [...] Mark Shuttleworth: Its a solvency problem not a liquidity problem Added on 10/13/2008 at 08:31PM [...]

  66. Peng’s links for 5 November « I’m Just an Avatar says: (permalink)
    November 5th, 2008 at 6:02 pm

    [...] Shuttleworth: This is not the end of capitalism. Our favorite spaceman has a follow-up on a post he wrote about the “economic unwinding of 2008″. Coming from a man who’s made many [...]

  67. Economist says: (permalink)
    January 8th, 2009 at 6:43 pm

    While reading your article, one that really understands the problem would realize that you’ve got no clue about what you’re saying.

    And don’t worry about your money, money doesn’t just evaporate.

    Like an Argentinian would say, “Vos, cierra el culo”.