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OK Prime Minister - what about the long term?

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Paul Mason | 11:13 UK time, Wednesday, 8 October 2008

I've just been in the press conference with Gordon Brown and Alistair Darling. I asked them: "As you are the ultimate stewards of the financial system don't you owe the British people an apology for the fear, financial panic and silent bank run of the last 48 hours"

Gordon Brown told me that once I understood the long term aspect, the restructuring of the banking system involved here, I would "rethink the question".

I then went to a "non-attributable technical briefing" with ministers and civil servants at the Treasury.

I asked: "Can you point me to any technical aspects of today's deal that are part of the long term restructure of the financial system: bearing in mind that the 250bn liquidity access cannot be long-term?"

The non-attributable answer was basically, that's for another day.

I think however this long term issue overhangs all the dramatic proceedings of the past two days. If in the medium term we end up with a banking system that is part state-capitalised, with dividends - ie profits - depressed, bonuses heavily suppressed, predatory cynical manipulation of customer churn and rip off credit card practices are actually banned, what is going to be the driving spring of the banking system?

A part-socialised banking system has to have a social goal wider than saving the markets from collapse. What is it to be? What is it to look like?

There has been a theme running through both government and opposition statements that "it'll be better regulated during the next asset price bubble". But I thought I saw in the PM's eye a glint - and it was a steely glint this morning, betokening the fact that he thinks he's pulled something off of global significance - of a vision of a system where asset price bubbles become impossible.

Today will be a day for poring over the details but I think - at the price of near system destroying chaos and several high-flying careers - the government bought itself time to think. We now need to hear the results of that thinking.

PS. It is now clear that another reason they took so long is that the banks resisted it. I am hearing the words HSBC a lot in the discussions. As I have had 4 hours sleep I will now have a Blueberry smoothie and try and read all the stuff. If you are in the markets, or a customer, or a government insider who wants to give me something of a more useful non-attributable briefing about all this, do write, text or call.

Comments

  • Comment number 1.

    ...what is going to be the driving spring of the banking system?....

    its usually called making things then selling them? This creates a steady if 'unexciting' [in terms of bonuses and 'performance'] income.

    it was the attempt to short circuit that model by lending to anyone anything just to get the months figures looking good that took us down the garden path?

    Nick Leeson had to spend several years in jail for breaking one bank. What happens to those who broke system itself? it is amazing that breaking the banking system is not 'illegal'?

    So we need wealth creation industries in the uk to which banks can lend and so get a return. We know a two way grid creates hundreds of thousands of jobs, generates billions in incom, lowers bills and makes the economy more energy efficient. The uk is one of the few countries not to have one. Maybe we don't need that kind of wealth creation in the uk?

    The uk is still short of housing of all types. The depressed market being a function of a tougher mortgage market.

    There are big infrastructure projects that need doing from railways, bridges, energy storage not forgetting the olympics etc.

    So there is plenty about to start moving wealth around the uk and into people's pockets so they can spend it in the shops?

    However the Govt have resolutely dismissed that sound economic model especially on the two way grid.

  • Comment number 2.

    Asset-price bubbles are merely a manifestation of inflation.

    Inflation is controlled through interest rate levels and money supply.

    Therefore, the only way to prevent future asset-price bubbles is for interest rates always to remain at appropriate levels, and for the money supply to be responsibly controlled.

    Today's emergency co-ordinated rate cuts by central banks around the world demonstrate why all the actions taken so far to address the current economic and financial crises are fundamentally flawed, since all these rescue packages have low interest rates as a key premise. (They are also fixated on economic growth: there is no economic growth, and there won't be for some time, so another way in which they are fundamentally flawed.)

    So, now we have the prospect of a new asset bubble: my money is on commodities. This will be far more damaging than bubbles in other asset classes - think food prices and energy prices.

  • Comment number 3.

    The only actual action taken today is to punish savers by reducing rates - how will that help? All savers will have lost 10 percent of their income and spending power in a stroke!

    The banks are still bust and now there will be even less spending power in the economy - is this sane? Interest rates should not have been cut!

  • Comment number 4.

    Paul, You mentioned my bank HSBC. Could you tell us why we never see them mentioned over our British Banking crisis?
    I know technically it is a "foreign" bank based in the Far East, but surely they have the same "toxic waste" as other banks.

    Or can I sit smugly by and think that it is a good job all my money is with them?
    Actually all their money is with me!!! (in loans, credit card and overdrafts)

    Can I get them to wipe off my toxic waste?

  • Comment number 5.

    The Future

    Fact: (or de facto) today we have a socialised banking system and thus a socialised economy.

    Voters may force politicians to take inappropriate decisions (like lowering interest rates but more so.) This will result in a vicious devaluation currency pressure and cycle unless the value of money is restored and this means interest rates raised - pronto (or as soon as possible) things will go from bad today to far worse.

    There is a real risk of hyperinflation - to avoid this it is essential that the bad loans are removed from the financial system as soon as possible. The borrowers of non performing mortgages must have their homes repossessed and the homes sold to put the correct, and very necessary downward pressure of house prices.

    Home prices must not be permitted to exceed 3.5 times average income in any area ever again.

    In the short term to get the economy going again a reduction in interest rates might have been a good cosmetcic action but it will not work - above all it must be made clear that a regime of continuing low interest rates will never again be allowed.

  • Comment number 6.

    I'm not quite clear on how the new structures are going to work but it does seem to me that via the liquidity being supplied and guarantees on interbank lending, the government has levers over the money supply beyond setting interest rates.

    Is there an intention to control asset price bubbles (which are inflation by any other name) through this mechanism, in other words by direct intervention in the money markets?

  • Comment number 7.

    People to be fired:

    Prime Minister, Chancellor, Chairman of Bank of England, Head of the FSA, the boards and senior management of the major banks. They connived to dig the hole we are all in even through a large number of people warned of the oncoming disaster. (Alas it will not happen!)

    The problem is that these people have so effectively censored all opposition in a manner worthy of any half-efficient tin-pot dictator that there are also no replacements available. But the people are right to be very angry.

    Take away the pensions and assets of all the current managers of the economy over the last fifteen years. (A financial tarring and feathering! - feature their destitute situation on a TV reality show.) (I do sort of begrudge putting them in Prison as it will then cost us 80,000 a year each!)

    In reality a National Government needs to be formed and a sensible regime of checks and balance put in place - but I am willing to bet that the majority of the British people (just like the Americans) would like to see more draconian steps!!

  • Comment number 8.

    interest rates is a red herring. confidence is the problem and that is cured by time. ie performance and stability over a period of weeks.

    confidence by definition relates to the long term not short term. So no one thing will change that.

    most traders report not trading [seriously] for 3 weeks. the drops in the markets are created by forced liquidation through margin calls into a market with weak buying.

    to buy the market means deciding there is a bottom in place. Who can say that? So people are waiting for technical signals that suggests support has been found.

  • Comment number 9.

    Paul,
    Get more sleep!

    My grandmother said this morning that she was popping down to Iceland to get some yorkshire puddings before they go bankrupt!

    This one will run and run.

  • Comment number 10.

    How to lose media folk and alienate voters even more...

    'I asked them: "As you are the ultimate stewards of the financial system don't you owe the British people an apology for the fear, financial panic and silent bank run of the last 48 hours"

    Gordon Brown told me that once I understood the long term aspect, the restructuring of the banking system involved here, I would "rethink the question".

    I am none the wiser what all the rest meant, much less what our government is up to and how it will affect my family's future, but that little exchange is deffo joining a now sadly long and growing list I have (including gems such as pure conjecture being deemed 'emerging truths' and downright porkies being 'mis-speaking') of utter tripe ladled with obfuscation that I have ever heard.

    As George Washington's Pop surveys the carnage in the garden and asks what the heck has happened, the wee moppet looks back and up, doe-eyed (or is that with a steely glint? Depends on your biographer, I guess) and, 'Poos... in Boots'-style, says: 'Let's just take a moment here, and once it has passed... and you have understood (you simple soul)... I am sure you will rethink the question'.

    Don't know about 'sure', but the country is surely in some some slippery sets of hands.. oh... whoops!

  • Comment number 11.

    A few points:

    We dont seem to have got much out of this deal, in terms of control.

    The Royal Bank of Scotland has been the big lender for PFI. I have been to events of investors, procurement and lender (RSB) and heard some really underhand stuff. PFI is going to be a big cost to a stretched, indebted national budget. With the big injection of govt funds with no public control - we are funding our own PFI demise.

    Darling would not change the rhetoric re 'guaranteeing' deposits, even though he is doing this.

    Not undermining the rhetoric of the neoliberal economic model we have had forced on us in the interests of transnational capital is obviously a top priority for the Government - to its shame.

    So it all still allows the corporatised trade agenda (with a strong emphasis on financial services and investment - dont go thinking its about widgets) to continue in the same direction, either when the boat stops rocking a bit, or, even more of a concern, precisely while it is rocking violently.

    Australia reduced its interest rate by 1% earlier this week. The Australian big banks have remained seemingly okay, due to financial regulation that they had tried to resist.

    The UK government likes to emphasise its emulation of Australian migration policy (even though it is failing), but hasn't drawn much attention to these aspects of regulation and economic policy.

    Keep going Paul. We need a change of political direction and, very importantly, we need it acknowledged.



  • Comment number 12.

    'USURY' - UM - SORRY ANNE, NO IDEA.

    In cartoons - and British governance is one of the best, (have you seen Private Eye lately?) - the character running scared, always dives into a cupboard, or a cave, where something worse is lurking. A disastrous short term strategy.

    Money has gone bad because underlying culture allowed it to. Monetary corrections do nothing about our 'bankrupt' culture.
    (How poignant such use of that word!)
    'Education, education, education' has seen to it that few now understand the point I am making.

  • Comment number 13.

    What is the long term future ?

    Today we may have seen two pieces of political theory conclusively disproved ;

    a) The Bank of England as an independent body which shepherds inflation by way of interest rate decisions.

    b) The idea of a market economy which acts according to whims of supply and demand, independent of government control.

    The long term structure of the economy could now rest with acceptance of a new paradigm.

    The danger lies in the temptation of refusing to accept the evidence of the need for a new policy for reasons of political and financial self interest.

    This will lead to the old Marxist vice of reformulating the existing dogma into something akin to a religous faith.

    Paul , please keep asking the question until you get an answer that is intelligeable, and not more of Brown's Newspeak.

  • Comment number 14.


    I see the government is modulating, but they need to make the leap.

    Disintermediation is the policy - all that is needed is a mechanism which can get operational fast enough to make
    disintermediation a next-day event.

    Assume that these banks are going to fail.

    (1) How exposed do we want to be? You do still want to pay the wages of schoolteachers and riot police?

    (2) How are we going to guarantee our ability to finance the real economy regardless of further adverse events in the market?

    The tool-and-die company, the hairdressing salon and the car dealership - these are the people being held hostage by the insolvents with the black hole derivative, madman contracts which represent unsalvageable, destitution-level,
    roof-collapsing liabilities.

    This is a matter of national survival. It's time to get ruthlessly logical and it's time to pull together.

    Create a joint venture for high-street business loans. And a BoE-funded entity to participate in it. The British Mutual.

    The British Mutual participates in a joint venture - like a Post Office concession - with all the major banks. They are invited into this joint-venture, Corleone-style. We use old-line banks to tap vetting and credit history and technical procedures and client referrals. British Mutual funds and revenure-shares.

    We have pretty much done nothing here except:

    (1) action, events, son et lumiere, signalled economic re-boot
    (2) control and granular visibility
    (3) profit-sharing
    (4) cost control
    (5) shored up a declining BoE balance sheet with assets and revenue

    This drip-feeds banks and allows us to clone and persist normal operations, without exposure to the black-hole CDS game-over nightmare.

    Ask yourself. Is there enough money to stop these banks failing and should we, in fact, rely on company law to limit
    liabilities - in the extremity of a private bank collapse - and end the matter where it began? And use the money where it
    counts? Give a few billion to Iceland and buy transferable oil prospecting licenses for ourselves and secure the North
    Atlantic arc Russia is shooting along, severing our lines of communication in the North Atlantic? Send some bright,
    working-class kids to a good school. Anything but waste it.

    What professional at either end of a CDS deal ever believed in the CDS, apart from logging their use with the risk-management
    dweeb in head-office and cashing in their bonus?

    And just use precious public reserves to capitalise a clean, ab-initio banking entity? Loans for the manufacturers, for the
    hair-dressing salons, and the car show-rooms. And write Brown into the history books with Peel, Pitt and the other great
    innovators of British public finances who mixed taxation with scary deficit spending and followed with redemptive, brilliant, daring recovery operations for a happy ending and put Darling on a new note rolling out of the British Mutual presses. I just went ahead and named it British Mutual. Get a Boadicea crest, if you can manage it. Pitt? Peel? A serious outlier, but still possible; I am being merciful, but fail to muster and recruit the brainpower to crack this and the public won't be merciful.

    Bear in mind that this is about what the situation will look like in a year's time. This isn't about socialism, nationalisation or any other old saw. This is about firewalling toxic debt and ensuring the money supply on the high street while leveraging incumbent knowledge and facilities and maintaining a reference point for the bank customer.

    And here's how to do it politically. An outlay of twenty-five billion will come to nothing unless the situation is tightly constructed and managed to public advantage. You must seize the initiative from the bankers. They cannot be conceded so readily the safe role of demanding theatre critics.

    You need news. Announcements. Details. Events. Wins. And you need to avoid running out of financial firepower. This is not the ideal geopolitical climate for ending up a helpless, bankrupt government, out of cash and out of options.

    Headlines for three day's time:

    Splashy headline: The public now own the Lloyds tower. As partial payment for what is extended by BoE (expressly for small
    business loans and manufacturers).

    The public now owns the part of the retail network (just the physical buildings) of another bank, Bank Y. And another part of
    the retail network of Bank Z. The State is a landlord on virtually every high-street and English county and conurbation - all as
    part of the operation. Announce the public is now receiving rent in the form of cash and shares - the shares a half and half
    mix of preferred and ordinary stock (preferred to preserve the value of rent received and ordinary stock to capture
    prospective gains - have a paragraph explaining preferred shares and how you negotiated the world's best share class - make it so - it will be a modest amount so max out the conditions and contingencies) The cash component is initially nominal but
    is resettable weekly at the discretion of Govt. This allows the government the lever it is looking for - the high-resolution,
    high-traction lever the government needs - when pumping money in for liquidity purposes but regulating the outcome daily.)
    You need a 'pull' to go with the liquidity 'push'. Per-company. Per-week. Fiscally specified, efficient and timely.

    Vary this as you please. But establishing the JV (and the pre-nationalised, untainted capital pool to participate in it) to
    keep lending up for the non-brick-composed section of the economy and keep clear of a rumbling tidal wave of liabilities -
    that ought to be the non-negotiable overarching objective.

    Disintermediation is the crucial step to avoid "pushing on a piece of string", to avoid expending fortunes on putrefying
    corporate shells, only to still leave British business and the British public unfinanced. Banking executive reassurances are
    worthless. Tax-paying voters in continued employment are priceless.

    To respect the cleverly constructed Green Paper outline you set out earlier (please forgive the manifest repetition - this is
    an occasion for emphasis):


    1. Yes and no.

    Depends. Are we allowing these banks to fail?

    If we don't want to look at assuming their destitution-level, roof-collapsing liabilities, yes, we guarantee all small individual and business depositors definitively and 100% up to an amount.
    The government doesn't want to be the source of the trouble. Or end up in trouble itself. Bank defaults are one
    thing. We do not have the global economic structure any longer in being to survive having a Western government in default.

    And bank management, who have been incredibly helpful to date (hmmph), do not need to know that a single corporate failure would trigger a trillion-pound bill for the State
    - that knowledge would practically usurp the latitude and authority of the Chancellor (just what the public want to
    see) and unbalance difficult negotiations.

    So, no, unless you have finished negotiating all arrangements and are satisfied with the cooperation and attitude of multi-millionaire executives. And we haven't and are not.

    Signing up for anything like the Irish guarantee (however deft and brilliant for their own case) could represent the first
    crucial step in a Gorbachev-style collapse of the public sector. Why? A default-intolerant level of risk? For 900 billion in in deposits? Actually, primarily, the reduction in bargaining power. Which is needed to get a --comprehensive-- deal. Colloquially speaking, keep your powder dry and your eyes sharp. This isn't over. 1 trillion is too much out of what the State will need to keep uncommitted to manipulate the outcome. We haven't faced our most acute prospective crisis yet.

    2. No. Their liabilities are their liabilities.

    3. Slash interest rates now? Big No. Not now. Destabilising. Remember, this is your political biography you're writing. You
    want a success in the glorious Volume II: Crisis and Heroes, not a it-looked-like-it-would-work Disaster in Technicolour.

    And would have no traction on the interest rate paid by the hairdressing salon and tool-and-die company trying to keep its
    staff off your dole queue. Which is what keeps people shopping in the high street, however cautiously. They all vote. And
    they want summer hols and moderate high street prices. Not to be handing over wheelbarrows of cash in return for milk-powder.

    4. No. Both anecdotally and realistically hopeless. The cash-calls on the banks are too large and too serious to be offset
    readily. The "banks" are no such thing. They have no capital. No credit. No alignment with national economic aims. And,
    again, they don't have any money. So, not a bank (certainly not looking up from a sheet with banking licence conditions and
    requirements written on it). We will ignore this partially (see joint-venture) but not to a suicidal level.

    Liquidity must be supplied generally by the retention of savers as well as overnight deposits from retail businesses etc.
    and 'revenue' from borrowers, i.e., realistic interest rates that reflect the essential value of money to the economy.

    5. Not generally. We are easing down from a shocking money supply situation on any measure you choose (M2 or M3).
    No printing money for mortgage finance - that would also qualify as "game over" insane.
    A small amount for small business lending only-- but only if an interest rate cut is firmly disallowed.
    If printing money, this is to be done exclusively for the brand-new British Mutual JV and pumping - disintermediated -
    into the high street. Switch to capital markets when stability is established and the opportunity for sanely-priced money
    arises. Or just squeeze it out of the hoarders, the professional bankers planning on taking it with them into the CDS vortex.

    6. Temporary nationalisation. The government-killer. The bear-trap. A definite No. To do what? Assume responsibility for
    their crazy, crippling debts? Pay the debts off and pass it back once the taxpayer has safely taken the debts into the
    poorhouse with his memories of having a public sector that wasn't bankrupt. A Gorbachev moment in the making.

    7. A clearing house for derivative products. In the UK, this is called LIFFE. It hasn't exactly contributed to the solution
    we face. The problem, perhaps.

    In the US, the clearing house is called TARP (I and II). Its prospects? Let's take a quote from Dr. Lawrence Lindsey (who
    was a governor of the Federal Reserve and a director of the National Economic Council):

    "Ultimately the bill will be a missed opportunity. No one with experience in these matters believes the Treasury purchase plan is workable."

    So, clearing house. No. Not unless you like being robbed blind. I doubt the government would (or should) be comfortable
    expending precious reserves going nowhere (which will become obvious fairly quickly). When the reserves become expended, you get the louder and more dangerous sequel, the Currency Crisis. Will ruin manufacturing industries. Will ruin pensioners. Pick your nightmare. It will realise itself in your town centre. Electorates do not forgive currency collapses. And that is what
    happens to countries with no balance sheet reserves.

    8. Closing down the Channel Islands? The Manx banks? Why don't we just give them an airline ticket to Lichtenstein? Not the
    time to enter into the nuances of this brainwave. No, not right now.

    9. I'd take a nuanced approach - that is to say, give the mob what they want. Engineer and trumpet a management clear-out, imperiously and from at a distance. Not formal power, just pressure. These gentlemen should never be left at your back. They are already sniping via proxies. And these banks are insolvent without intervention. So they waive their severance
    conditions. Headlines: Decisive Govt. demands heads roll. They can set up a negotiating phalanx for getting their desk
    contents into cardboard boxes and heading for the lift, if they want. Do we need Little-Bo-Peep-helpless saboteurs in charge of the economic channels? Um, I don't think so.

    10. Yep, pretty much apart from the amount X of deposit insurance and the --controlled-- levels of liquidity injection and a
    distracting array of reversible micro-measures. As a national survival priority, BoE reserves must be retained to dissuade
    anyone from incepting a currency crisis. Not wasted fruitlessly on black-hole derivative defaults. And, furthermore, all
    public reserves must be reserved for any future contingency (because the future will happen). Re-animating the corpses of defunct corporations is not one of those crucial aims. Learn the lesson of the Paulson plan that is slowly sinking in - disintermediation. And the strict rationing of Government firepower. It's going to be a long one. If you get the JV up and running, you can dial down the liquidity injections into the banks proper accordingly.

    The essence of rationality is the association of cause with effect. For long-term re-construction efforts, use one word:
    manufacturing. It made China rich and you desperate.

    Smoot was applying financial penalties to US customers. Does China buy your kettles? Your LCD monitors? Laptop computers from your assembly plants? No-one sane (and on your side) would trade First World standing for notional access to the Brazilian garbage collection business. Economic 'war cabinets' are for economic warfare and there is no such thing as non-protectionist economic warfare. 'Protectionism' must always exist on some carefully modulated basis. But you want a quick-fix holding action to stave off the circling predators.

    The JV is better than equity.

    The JV stake can be sold on later, liquidating the enterprise and re-capitalising the BoE. But that detail would be for a
    later, happier day.

  • Comment number 15.

    ..what is going to be the driving spring of the banking system?....
    The answer "Hawala" sometimes called Hundi - the alternative banking system. It already is the basis of pre-revenue business start-ups.

    Since 2000 banks and venture capitalists have staved creative people who turn up with a new invention or new business opportunity. They have instead gone for management buy-outs of existing profitable businesses. The only way to get a start-up going has been to bet your house on it and get family and friends to contribute.

    eBay was not funded by bankers - it got started using funding from friends and never needed bank finance during its pre-revenue stage. The future is going to be wealthy private investors who put their trust in individuals. And this has implications for different ethnic and socialgroups who, unless there are wealthy investors from their own community who target them, will end up with very variable access to venture capital finance.

    Personal reputation is going to be a premium currency from now on.

    Shyster

  • Comment number 16.

    I feel this has been a good plan, all in all.

    However, what's going to be the political effect when many small businesses go bust?

    Will the banks that sign up to the scheme have a clause that says they must reimburse clients who they charge out of business, a kind of insurance for the "real economy"?

    The Chancellor announced he intended to stay in for 3 years: if these shares are turning a profit, why would we want to get out? Sounds like Gold Reserves Part 2.

    I feel that the country has the opportunity to turn itself into a Banking Industry, the profits of which could be used to buy us out of the PFI garbage that hangs over our heads.

    And what better headline: Banking Dividends pay for Schools and Hospitals.

    Fundamentally, these banks are, in general, well-run, efficient, organisations, got (probably) on the cheap by the government. If sovereign wealth funds are good enough for other countries, why can't this be the beginning of a real investment fund for the country?

  • Comment number 17.

    Is there a safer place for your money? Here's a direct quotation from the ICESAVE website from Feb 08 (http://web.archive.org/web/20080214204816/www.icesave.co.uk/about-icesave.html):-

    * We had total assets of €33.4 billion and liquid assets of €8.9 billion (as at 31 December 2007)

    * We made a pre-tax profit for 2007 of €520 million

    * We have a liquidity and capital position amongst the strongest of any bank in Northern Europe

    * We have no direct or indirect exposure to the US sub-prime mortgage market or structured credit obligations

    * We have strong credit ratings from the leading international ratings agencies - Moody's and Fitch

    If they had no exposure to sub prime lending or structured credit obligations, then where exactly did all that money go?

  • Comment number 18.

    Re: #16 exlehmanxlmonkey


    If sovereign wealth funds are good enough for other countries, why can't this be the beginning of a real investment fund for the country?


    Errr... because we don't have the money???

    Correct me if I'm wrong, but the banks got into trouble by borrowing short term and lending long term. Now the Government is planning to do the same in order to "inject confidence" into the banking system? New Labour genius!

    Living beyond ones means is unsustainable, whether it be at a personal level, company level or national economic level. In other words, deficits matter. This country, like the US, has been running truly MASSIVE budget and trade deficits for years and years. Countries with sovereign wealth funds have been running corresponding huge surpluses, and have huge amounts of cash at their disposal. Notice that, whereas a few months ago SWFs were quite keen to take big chunks of western banks, they are particularly noticeable by their recent absence.

    The only long-term solution to the UK's problem is to stop living beyond our collective means. Huge and increasing debt levels are the problem. Now, reducing interest rates: will that encourage borrowers to: (a) reduce their borrowing levels, or (b) increase their borrowing levels?

    Alice in Wonderland economics. Or as stanilic called it on another blog: the Amy Winehouse school of economics.

  • Comment number 19.

    Labour and the FTSE....2nd May 19997 it was 4455.60 ------Today 4344.92

    Labour and the FTSE....2nd May 19997 it was 4455.60 ------Today 4344.92

    Labour and the FTSE....2nd May 19997 it was 4455.60 ------Today 4344.92

  • Comment number 20.

    Labour and the FTSE....2nd May 1997 it was 4455.60 ------Today 4344.92

    Labour and the FTSE....2nd May 1997 it was 4455.60 ------Today 4344.92

    Labour and the FTSE....2nd May 1997 it was 4455.60 ------Today 4344.92

  • Comment number 21.

    #17

    I don't think that reducing interest rates is likely to lead to banks lending huge amounts of money or people desiring to borrow huge amounts of money. But what it does allow banks to do is, as you say, borrow short term at lower rates and lend longer term at higher rates. And yes, I agree that this is part of what got us into this mess in the first place but that boat has long since sailed and we're left with the job of sorting out the carnage. Rebuilding banks balance sheets is a key part of the process and banks lending money to businesses is another and lowering interest rates helps achieve both these in my opinion.

  • Comment number 22.

    Sorry, the above was in response to #18.

  • Comment number 23.

    Fractional Reserve Banking.

  • Comment number 24.

    Just a few thought's.

    The interest rate cut is one of the most interesting facts of the day. Cutting rates in the US appears to have had zero effect in staving off the crisis. The risk to inflation was 'real' barely a month ago but now appears to be ignored.

    What happens if/when rates need to rise again - do we need to go through this painful transition every time there is a legitimate need to increase rates? Once they have been cut to 2/3%, how will the government be able to stimulate the economy (out of recession)? It certainly wont be tax cuts or public sector investment.

    The other worrying aspect is the 'distance' government clearly intends maintaining in the running of banks. This is not an option with the amount of money at stake - my fear is that this is being used in their intention to play the 'blame game' if/when things go wrong, just as they seem to do with all private/public sector contracts.

    This investment must ensure that lending and future investment is responsible - otherwise it's a case of good money after bad and we're left in an even bigger mess.

  • Comment number 25.

    'there is no guarantee' [it will work] seems to be the phrase in vogue. You have to have some kind of civil servant mindset to think in terms of guaranteed anything.

    risk takers think in probabilities and odds. If you have a system where the probability is 70:30 in producing winners then in the long run you will make money. So what are the probabilities and odds of success? They would have be at least 50:50.


    Drive on 5 live has been doing banking headline gags [ they even recycled the pigeon joke put up on here weeks ago].

    One i liked was 'The Japanese Bank of Origami has folded'.

    and

    'The Bank of Karate is for the chop'.

  • Comment number 26.

    'What about the long term?'

    Well, what about the long term!........how about a new banking system?

    The 'elephant sitting in the corner' that you are conveniently ignoring is the all consuming fraud that is.....

    FRACTIONAL RESERVE BANKING.

    Surely this subject can now be addressed; now that the government have effectively written a blank cheque for bank bailouts and thereby given a (de facto) guarantee that all deposits are now safe. There can be no run on a UK bank now.

    How about you try developing a spine and tackle this subject head-on?

    Or, is it case of Mason by name and Mason by nature.

  • Comment number 27.

    CHARLATANS ALL

    I feel the need to impotently record yet another indicator of the way the public are treated as stupid by our 'honourable' Westminsterites.

    Darling (and I have a feeling Brown too) is effectively declaring: 'you cannot criticise us for doing this bail-out, as doing nothing would be worse'. ('Nothing' is, of course, not the only other option.) One cannot help remembering Dubya's ghastly opportunism in: 'You are either with us or against us.' (It was also a Blair trick - but then it would be.)

    Are politicians as evil to their children, spouses, the local vicar, small furry animals et al? I think we shoudl be told. How about a new TV 'show': 'Just How Evil Is Your MP?'

    Newsnight: how about getting Paxo to ask all the usual suspects: "Just how evil are you minister?" Get Kirsty to try it on McCain and Obama - they are registering well on the Evilometer right now.

  • Comment number 28.

    Paul

    Having now had a quick look at the government's plan a few questions come to mind.

    a. The government intend to fund this incredible largess by borrowing money themselves. How do they intend to raise the sums required and who is going to lend it to them and at what cost both financial or otherwise to the government and thus to us ? IMF ? SWFs ? Market ?

    b. The government is intending to pump some £200B in short term loans to the Banks to address the liquidity problem. I am sure I read somewhere that the Banks have not as yet taken full advantage of the of the loan line already available from the BofE. If that is the case what's the point of making even more available ?

    c. The intent to address Bank solvency by investing £50B of capital into them seems generous but spread evenly across 8 or more institutions appears less so. Can such relatively small sums seriously change the market view about individual bank survivability. Moreover will the strings attached, particularly those relating to dividend pay-outs scare away private investors and boomerang upon the government ?

    d. The sum ring fenced for guarantees for inter-bank lending looks large in itself but how does that sum look, set against the normal / usual pre-crisis scale of inter-bank lending. What percentage of normal pre-crisis inter-bank lending does it represent ? Or how long would such pre-crisis inter-bank lending have run before the £250B ran out ?

  • Comment number 29.

    You had me worried for a minute there, Paul - I thought you were about to have a 'Will It Blend' style 'Blackberry Smoothie'...

  • Comment number 30.

    return to Marx

    It's the contradictions of capital that took us here.

    the credit speculation was analysed by him back in the day and its as real now as it was then.
    see here for a summation of Mar'x article http://www.fifthinternational.org/index.php?id=85,1329,0,0,1,0

    There is still so much that needs to be done in the world but the very idea of profit prevents us.

    If the banks get out of a recession without to much harm they will make the rest of us pay.

    We have to get on the streets to protest and start talking about a different way of organising society

  • Comment number 31.

    PROTESTING ON THE STREETS (#30)

    Done that. I got cold, Blair got his war and that medal. Lots of foreigners got killed.
    Stood outside Parliament for a referendum.
    Damn near froze. No referendum. I am going to kick around here on 'Newsnight Street' - it's equally ineffective - but warmer (till the gas runs out . . .)

  • Comment number 32.

    ...return to Marx...

    Groucho?

    They did a good summary of the free market in the film day at the races in the tutti frutti sketch.

    http://uk.youtube.com/watch?v=KKo6SNn0Htc


    when banks don't lend they lose profit so at some point one bank will break ranks and start to lend then they all will.





  • Comment number 33.

    #18 YummyCarolKirkwood

    I agree with you on the state of living beyond ones means, and the UK having no cash.

    At 30, i don't own my own home because as a singleton I could never afford a flat (even though I was working at a top investment bank *chortle* ) unless I wanted to go 5* with NR :), so I fully agree with not living beyond ones means.

    My point is this could be an opportunity to fix things of the long term. I'd rather not opine about how we got here (choosing CPI and not RPI as the inflation target has been the killer for me).

    #19 nice :)

  • Comment number 34.

    #31 'I am going to kick around here on 'Newsnight Street' - it's equally ineffective - but warmer (till the gas runs out . . .)'

    I'm with you, Barry, and get some small consolation in watching the charlatans working long hours and getting little sleep. I like to think it might be shortening their life expectancy :)

  • Comment number 35.

    I don't think the ideas will work. Japan had a huge stimulus package during the largest boom in history - they still struggled. In a global recession there's little chance. Why is there so little liquidity? Because the banks see massive bad debts. Has anyone suggested that those bad debts be gotten rid of in some way? No. Then what changes? Re-start the music? Where will banks invest for returns? There's nowhere left! Paper assets are overvalued! Houses have been sold to people with no jobs! Credit cards are given to teenagers! There is literally nowhere left to go with lending and hot money. So, what can solve that problem?

    This isn't a recession. This is a reset. All the Credit expansion from the last 60 years is now unwinding and we just have to see where we end up. Not a comforting prospect, but that's it. If Gordon Brown believes that he is going to instill a 'moral system' into the banking world, he fundamentally misunderstands capitalism and credit expansion. It is dynamic - it is irresponsible in its search for returns - it isn't moral. If it is made responsible and safe, it will be slower, less adventurous and less dynamic. We will still have to undergo a massive retraction of money to operate under such a system.

  • Comment number 36.

    THE WORST KIND OF MORALITY (#35)

    As a good churchman, J Gordon's morality is as imaginary as the money that disappeared. He can't instil it in anyone.
    JG is as big a mess as the Money Mess. He is far too needy of status, just as Blair was before him. Only the intensely driven, devious and craven achieve high office. Morality just doesn't cut it.

  • Comment number 37.

    #32 'when banks don't lend they lose profit so at some point one bank will break ranks and start to lend then they all will.'

    The banks have never stopped lending but maybe people are less willing to borrow. Banks still bombard me, daily, with junk mail offering personal loans, credit cards etc.

  • Comment number 38.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 39.

    call it what what you want at the end of the day this is how capitalism works and the only people who will suffer our the working class.

  • Comment number 40.

    "I am hearing the words HSBC..." But what did you expect? And why did you dissemble?

    Have you aided and abetted in the punishment of the good guys?

  • Comment number 41.

    (#30) Where (current) Trotskyites err is in not acknowledging the genetic basis of individual differences. Given the evidence, I fear this 'error' is both egregious and expeditious.

  • Comment number 42.

    Reason that modest interest rate cuts of 0.5-1.0% haven't had any effect is that LIBOR spreads have gone bananas in recent weeks, so real-world interest rates have gone up by 1.5-2% even when base rates have gone down a bit.

    Japan applied the stimulus too late, which is one reason it didn't work - and the other was that they needed massive reform to their system that they didn't have the courage to tackle.

    A Telegraph article from 05 Dec 2007 quotes ONS figures that the interbank market had gone from £640bn before the crunch to £249bn by last September, but I've not been able to figure out where the latest figures lurk on the ONS website.

  • Comment number 43.

    PS Billbradbury, the reason you don't hear about HSBC in this context is that their balance sheet is in much better shape than their competitors - their Tier 1 capital ratio is 7.7% compared to RBS' 5.7%. Which may not sound much, but is the difference between "OKish" and "a bit weak". Which is why RBS have been the only bank to ask the government for cash under the equity scheme. HSBC are also fairly good about funding their loans from their customers' savings, they only get about 10% of their capital from the markets (as opposed to Northern Rock who depended heavily on the markets for the financing, and were stuffed when those markets shut up shop). And finally they appear not to have too much of the toxic stuff - I've seen suggestions that they have £10 billion of structured finance trading assets, of which about 15% is subprime mortgages. HBOS had nearly 10x that exposure.

  • Comment number 44.

    Re: #21 ThereYouGoAgain


    I don't think that reducing interest rates is likely to lead to banks lending huge amounts of money or people desiring to borrow huge amounts of money... Rebuilding banks balance sheets is a key part of the process and banks lending money to businesses is another and lowering interest rates helps achieve both these in my opinion.


    So reducing rates won't increase lending, but lowering interest rates helps banks to lend to companies? You're contradicting yourself...

    I would also suggest that the experience of this millennium so far is precisely that low interest rates makes people desire to borrow huge amounts of money. I'm pretty financially responsible, but I'll tell you, I would borrow as much money as you would lend me if the interest rate were fixed at 1% for the rest of my lifetime.

    The simple point is that you can't solve over-indebtedness by increasing borrowing, which is exactly what lower interest rates is designed to encourage.

  • Comment number 45.

    i love(in the platonic sense) peston and mason, bbc has come up trumps with these two inteligent and funny editors who know their stuff and we need more of them, well done to you both, more of the same please

  • Comment number 46.

    #44

    There's no contradiction in what I'm saying. I completely agree that the binging that has gone on for the last decade and made us the most indebted country in the world has been a disaster. However, there's a danger that we will now see a catastrophic fall in lending and that's needs to be avoided. Some stimulation of the economy needs to occur to manage the economy downwards and spare the needless destruction of businesses.

    Rebuilding bank balance sheets and maintaining the supply of credit are essential to that happening.

  • Comment number 47.


    I heard something yesterday which I've been trying to find out more about with no luck so far.

    It might have been uttered by 'our Paul' and is this:

    "There is a one in twenty chance of the UK defaulting on its debts".

    I would like to know where that information came from and of course, would be interested to see how other countries rate regarding the odds on defaulting, such as the USA.

    So can anybody out there can provide a web reference?

  • Comment number 48.

    Paul
    For your interest, Dai Davies, independent MP for Blaenau Gwent has tabled this Early Day Motion today.
    Dr David Lowry


    EDM on Bankers’ remuneration and taxpayers’ money

    That this House regards the salaries and bonuses of the chief executives of the leading high street banks as totally unacceptable when pubic sector workers have had legitimate claims for wage rises rejected on the grounds that to grant them would increase inflation; notes that at the same time that ordinary bank-workers are themselves facing he uncertainty of possible job losses; further notes the respective salaries before bonuses last year of four of the leading high street banks were £4.19 m for Sir Fred Goodwin, chief executive of Royal Bank of Scotland; £2.8m for Eric Daniels, chief executive of Lloyds TSB; £2.4m for John Varley, chief executive of Barclays; and £1.9m for Andy Hornby, chief executive of HBOS; believes that the remuneration of the chief executives of each bank accepting taxpayers’ money for recapitalisation should be reduced to the equivalent to the average of all its employees with no end-of-year bonus; and that the Government should ensure that any bank that accepts taxpayers’ support should not make redundant any ordinary workers

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    And this EDM was tabled earlier in the week, with supporters so far listed below


    EDM no. 2160

    BANKERS' CONDUCT
    06.10.2008
    http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=36510&SESSION=891
    Flynn, Paul
    That this House believes that the financial crisis is the result of reckless overtrading by banks and their establishment of special purpose companies to evade regulations; notes that, unlike in the United States, no bankers in the United Kingdom have been investigated for possible criminal actions in the selling of sub-prime mortgages and other toxic financial products; calls on the Crown Prosecution Service and the Financial Services Authority to co-operate in investigating possible complicity of senior employees of Northern Rock and Bradford & Bingley banks in trading that was irresponsible and possibly illegal.
    Signatures( 18)

    Status



    Flynn, Paul
    Drew, David
    Jones, Lynne
    Prentice, Gordon
    Taylor, David
    Hopkins, Kelvin
    Holmes, Paul
    Cryer, Ann
    George, Andrew
    Simpson, David
    O'Hara, Edward
    Burgon, Colin
    Caton, Martin
    Dismore, Andrew
    Hancock, Mike
    Willis, Phil
    Devine, Jim
    Davies, Dai

  • Comment number 49.

    I am pleased to read that you are now asking serious questions commensurate with your job rather than shouting like a cub reporter at the Chancellor or Bank of England Governor as they make their way from their cars to the door of No10

 

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