Are we in for a rough ride?

Sub-prime mortgages, packaged into asset backed securities, are sold to investment banks -- especially in London. The US property downturn results in negative equity and thus inadequate security. Liquidity troubles arise in the financial centres of the US and the UK as banks refuse to lend to each other, each fearing one anothers' creditworthiness amid prospects of bankruptcies from exposure to the sub-prime. Northern Rock, which had relied on a business model entirely dependent on inter-bank borrowing, looks set to collapse. The Bank of England does very little to alleviate the crisis, taking a traditional British laissez-faire approach. There's a run on the bank -- the first in the UK since the nineteenth century. Bear Stearns collapses, and the Fed reacts instantaneously to reassure the market. The UK government -- the same government that implemented sweeping reforms to the tax system in 1997 -- announces plans to scrap some of the keystones of those reforms. They will tax all foreigners living in the UK on worldwide income, whether or not it is ever brought into the country. The UK government also announces plans to raise taxes on share disposals by up to 80%. These measures, largely targetted at the very rich, and particularly at private equity, are the government's feeble answer to popular unrest at the gaping divide between the rich and the poor in the world's most successful financial centre. Unfortunately, the timing could not be worse.
With the UK economy slowing down, government spending increasing and tax revenues faltering, bitch-slapping entrepreneurs seems like a daft move.

So yes, I think we're in for a rough ride.

And how long will it last? Of course the wider global economy has a large part to play, but if we have any hope at all of avoiding a descent into unemployment and grinding poverty, the government (whether this one, or one which replaces it) will have its work cut out for it. This government did a great job in many ways, but it appears to have spent more money than it gathered in revenues for the last 10 years, during a period of strong economic growth. Any government which intends to do anything other than cripple the entire nation will have to be a government which is willing to make some very unpopular choices. Massive spending cuts would be in order.

I have no idea why this turned into a discussion about politics. I really intended just to welcome Sophia to the world (thanks for being born on my birthday), welcome Ben, Jaime and the girls to the UK (all this gloom probably means a better exchange rate), and to thank Mandy for putting up all of those pictures.

Oh, and to connect Mandy's picture of bad-ass Patches to Brad's blog:

http://wabasawki.blogspot.com/2006/04/patches-feline-cat-barely-alive.html