Amid the turmoil of the 2008 financial crisis a myriad of events unfolded that the general public knew nothing about, writes New York Times reporter Andrew Ross Sorkin in a new book titled “Too Big to Fail.”

Wall Street fell from the dizzying heights of good fortune to calamity in a matter of months. To a large degree it’s still to early to tell whether financiers and politicians involved made the right choices.

“At its core ‘Too Big to Fail’ is a chronicle of failure — a failure that brought the world to its knees and raised questions about the very nature of capitalism,” writes Sorkin in his behind-the-scenes account.

He spoke with Reuters before giving a lecture at the London School of Economics on Thursday.

When the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.

After Britain’s economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.

On the other hand, the Bank clearly believes that the worst is over for the economy and that recovery will come soon — even if it’s going to be weak.

Thursday’s decision means the central bank will keep buying government debt until February, but at only half the pace of before. This still amounts to around 2 billion pounds a week, not including the much smaller sums of corporate debt that the Bank is buying.

What the decision means for a typical household is harder to calculate. The Bank says that its quantitative easing programme has raised the price of government and corporate
bonds, making borrowing cheaper.

But for average firms and consumers looking for a loan, the benefit is harder to spot.

There is little clear evidence that banks are much more willing to lend than a few months ago — though the Bank would argue that quantitative easing has been instrumental in avoiding the recession turning into a depression.

In the longer term, the big unknown is the impact that quantitative easing will have on inflation. Sterling’s weakness against the dollar and the euro will push inflation up in the short term, and going forward the Bank of England said it faced a balancing act.

While rising unemployment and half-full shops and factories will keep a lid on prices, policymakers know that quantitative easing could exert upward pressure on demand and prices for months if not years after it has stopped.

That’s why they took the decision today which could mark the gradual phasing out of this unprecedented policy of asset purchases.

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it “fair” value. According to the efficient markets theory this would not happen.

If bubbles are a natural outcome of financial market activity it is relevant to ask whether the very loose fiscal and monetary policies of many central banks and governments are presently sowing the seeds of the next bubble.

Even though the real economies of the U.S., UK, Eurozone and Japan continue to be defined by expectations of rising unemployment and falling real wages, access to cheap money has already helped restore the profitability of many investment banks.

In turn, this has fed risk appetite which is evident in the rally in stocks since the spring, increased demand for “risky” currencies and a recovery in commodities prices. Brent oil has rallied by 128 percent from its 2009 low. The ability of oil to rally despite the existence of oil supplies well above the seasonal average suggests there is already speculative element in this market which could be in danger of driving prices above their fair value.

This week’s meetings of the Federal Reserve, the Bank of England and the European Central Bank have focussed attention not so much on rates, but on the extraordinary policy decisions taken by these central banks in the wake of the financial crisis and whether conditions are ripening in favour of a gradual withdrawal of some of these policies.

The Fed last week ended its $300 billion treasury bond purchasing plan, though it will carry on buying mortgage backed securities. The Bank of Japan last week announced that it will stop buying corporate bonds at year end. The Reserve Bank of India also removed emergency support measures last week.

This week there is speculation that the ECB could announce that it will hold no more 12-month cash tenders next year. By contrast the Bank of England is expected to increase quantitative easing at the November 5, Monetary Policy Committee meeting. Supporters of quantitative easing continue to stress that the lack of clear inflation pressures suggests there is room for these plans to be extended.

However, the lack of response in either money supply or inflation indices could equally be illustrating that these plans are not having a significant impact on the real economy and are therefore no longer appropriate. The paring back of these plans are likely to have an impact on the ability of some banks to turn an easy profit and thus should rein in risk appetite and limit speculative and “bubble” forming activity.

Unfortunately, a bubble can only be truly confirmed after it has burst; a characteristic with clear destabilising consequences. If bubbles are natural phenomena within financial markets, the need for tighter regulation and ongoing reviews of processes that oversee the financial system are absolutely necessary.

This conclusion, while in complete contrast to the implications of the efficient markets theory, ties in very well with the political desire to reform the banking regulatory framework in order to protect the tax payer from future hefty bank bail-out costs. The banking landscape, while already vastly different from just two years ago could continue its transformation for years.

researchEMEA@forrex.com

We’ll be covering live the Edelman debate on social media and UK politics.

So much for Barclays' ambitions to be a magnet for banking talent. When the British bank hired Frits Seegers, the Dutchman arrived with a big reputation and an even larger price tag -- the cost of buying him out of his previous job at Citigroup. Three years on, he's on his way, the main casualty of a management shake-up that leaves his main rival, Barclays president Bob Diamond, looking stronger than ever.

As ever, the reorganisation is not entirely without strategic merit. Barclays is shifting responsibility for the corporate bank from the retail side of the business to its Barclays Capital investment banking arm. The logic is that even small companies want to hedge foreign exchange and commodity risks -- products they are more likely to find in Barclays Capital. Besides, most rival banks have combined corporate and investment banking. There is something in this. Though it is hard to see Barclays' investment bankers wasting much time on small British businesses with a few million pounds in turnover.

The other argument for the move is that Barclays wants to give some of the thrusting managers coming through the organisation a place at the top table. So Barclays' executive committee, which previously had just four members, will now need to find another eight chairs for its meetings. This gives more executives direct access to the board, and provides plenty of choice when drawing up a shortlist of potential candidates to replace chief executive John Varley.

It is also true that Seegers' tenure was mixed. Several of Barclays' retail businesses, such as its Barclaycard credit card division, had already installed strong management teams before he arrived. His main achievement has been to expand Barclays in far-flung countries like Indonesia and Pakistan. Whether this flag-planting approach survives his departure remains to be seen.

The shake-up also speaks volumes about where Barclays sees its future growth. Diamond's empire used to include the Barclays Global Investors fund management arm until it was sold earlier this year to raise capital. But even after the successful acquisition of Lehman Brothers' U.S. operations, Varley still wants the investment bank to account for no more than a third of the bank's income. The latest reshuffle gives Diamond a bigger share of Barclays' remaining businesses. It also removes one of his few rivals for the top job.

Lloyds seems to be taking a leaf out of Vito Corleone's book: if you need someone to do something that they don't want to, you have to make them an offer they can't refuse. For the mafia boss in The Godfather, that meant decapitating a horse. For Lloyds, the UK bank whose logo is a black horse, it means threatening to cut off interest payments on your own debt.

Lloyds' plan is to convert subordinated debt into 7.5 billion pounds of contingent capital. These new-fangled securities pay out fixed coupons, but can be converted into shares in times of need. The exchange is part of Lloyds' efforts to avoid the government's asset protection scheme. Lloyds is likely to pull off this deal, but the jury is still out on whether this kind of capital will be widely used by other banks.

Regulators like the idea of contingent capital because it is better able to absorb losses than subordinated debt. The new Lloyds bonds are classified as lower tier two capital, but the Financial Services Authority includes them as part of the bank's core capital when conducting stress tests.

However, contingent capital is untested. It is not clear what price investors will demand to hold debt that carries a risk of turning into equity if things go wrong. The proposed exchange could also be problematic. Many fixed income investors aren't allowed to buy equity-linked debt.

As a result, Lloyds is paying up to get investors on board. They get to switch out of their existing debt into the new contingent capital at par, and get a coupon that is up to 2.5 percent higher than the one they're getting at the moment. For investors who bought the debt below par -- some Lloyds bonds traded as low as 15 percent of face value last March -- this means a healthy pay day.

The sweeter coupon alone probably wouldn't clinch it. Many investors would rather stick with what they have rather than accept an untested instrument which may trade poorly and could be forcibly converted into shares at a later date.

Enter the European Commission, with which Lloyds has been negotiating over state aid. The Commission is compelling Lloyds to cut off coupon payments for up to two years on bonds where it has the right to defer interest. This should help investors with any lingering doubts to make up their minds.

A healthy appetite for the bonds will be a boon for Lloyds, but it doesn't necessarily mean contingent capital will catch on. For one, it is very expensive: Lloyds is paying interest of up to 16 percent on its bonds. Not every bank will want to pay that.

The capital has other advantages: interest payments are likely to be tax-deductible, and is less dilutive to shareholders than issuing ordinary shares. Moreover, as regulators push banks to improve the quantity and quality of their capital, they will need to explore every possible source of funding.

Still, not every bank is in as dire a situation as Lloyds. Without mafia-style coercion, these kind of large-scale debt exchanges will be harder to pull off.

Recent U.S.  gross domestic product data show the world’s biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain’s economy contracted.

British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.

“We’ve poured money into the financial sector — by and large the financial sector in Britain is doing OK,” he said.  “But very little of that is getting through to small and medium-size businesses out there in the rest of the economy.”

British economist and author John Kay argues in “Narrow Banking: the reform of banking legislation” that the financial services industry should be restructured to ensure that regulation serves the interests of the public.

“A competitive marketplace is one in which well run businesses earn profits through domestic and international competition, and badly run businesses go to the wall,” he says.

“That is the process by which the market system promotes innovation and economic progress, and suppression of that process damages innovation and economic progress.”