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Here we go, again

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Paul Mason | 12:08 UK time, Saturday, 17 January 2009

I must, first, apologise for the long gap between my last blog posting and this one. I've been finishing off a book about the credit crunch and trying to write about the same subject in two different genres at once was too much for my brain.

But the book's finished, just in time for Round Two of the financial crisis, which opened on Thursday with the nationalisation of Anglo Irish Bank. Yesterday (Friday) we saw both Bank of America and Citigroup announce huge Q4 losses, and BoA get bailed out to the tune of $130bn.

The significance of this is that, back in September, both BoA and Citi seemed like part of the solution, not part of the problem. BoA chivalrously bought Mama Merrill, while Citi offered to buy the failed high-street bank Wachovia. Even back then it was obvious they were going to be victims of the crisis themselves - indeed victims is the wrong word: Citi alone was responsible for 25% of all "structured investment vehicles" in the shadow banking system at the time it collapsed.

And then, at precisely 1500 GMT, another "solution" bank, Barclays, saw its shares collapse by 25%. (Barclays remember bought part of Lehman and even looked at buying Merrill on 14 Sept). BARC's shares have lost 45% on the week, 80% on the year. The reason is (a) short selling was unbanned in Britain yesterday and (b) Barclays has repeatedly sprurned government cash in the bailout phase, going to the markets instead and in the process diluting the value of existing shares. Yesterday's collapse was prompted by the knowledge that another round of bailouts is a-coming, and by a boardroom scrap that saw deputy chairman Sir Nigel Rudd resign. The rumour (denied) was that the scrap concerned the way Barclays was valuing certain assets on its balance sheet.

Anyway, all that is just a hors d'ouvres for what is to come. Right now UK Treasury officials are at work on several overlapping schemes to try and re-bail-out the banks. Clearly the £37bn the taxpayer put in in October only worked to stabilise them; as all know, they took the money and decided that they would henceforth lend little, and at high interest rates, while taking as many deposits as possible at very low interest rates. This has hammered both borrowers and savers to the point where it is hardly worth doing either activity; as both borrowing and saving are crucial activities for the functioning of a capitalist economy, and banks - as we all learn in school - are there to encourage this, it's a bad situation.

But it's about to get worse if somebody does not do something...

We're all waiting for the impact of the recession to show up on bank profit and loss accounts; but it's now clear that the old problem, bad loans made during the structured finance boom, has not gone away: in fact both the part-nationalised banks, RBS and Lloyds/HBOS, are facing big Q4 losses. Gordon Brown has called for banks to come clean about their losses but this is hard to do.

So now, as far as my sources will tell me and the newspapers are speculating, we face the following:

a) In short order, a credit guarantee scheme for businesses to allow them to roll over their loans

b) A taxpayer funded cap on bank losses, so the banks can draw a line under the old crisis and start meeting the new (hopefully not with new excuses about why they cannot afford to lend)

c) If they can get away with it, and if the banks will stomach it, a TARP-style fund to buy up bad debts and but them into a "toxic" bank, owned by you and me.

d) And if this doesn't work, nationalisation. I mean real nationalisation. Gordon Brown refused to rule it out in his FT interview today and with the newly neoliberalised Libdems calling for it, it can hardly be portrayed as a left wing measure.


As a rough guide to politics over the next two weeks, you will now see the political class go to war in an attempt to avoid (d); but they will not agree over c) because it gives the banks something for nothing, nationalising their losses while their owners - in Barclays case mainly various Middle Eastern magnates and governments - trouser any profits.

Here's the paradox: for (c to be done in a way conforming to market doctrine - where those who take the risk reap the rewards - the taxpayer would have to take a stake in the rescued banks. But we already own 60% of RBS and 44% of Lloyds/HBOS (plus of course 100% of Northern Rock). And if the debt write-off or ring-fence is extended to all banks, then it means the so-called survivors - Standard Chartered, HSBC and Barclays - will have to surrender part ownership.

In a way, this brings us back to where the US government was in September 2008. Their plan to buy up toxic debts was first stymied by a vote in Congress and then passed so late, and with such conditions, that it never worked: it was abandoned in early December. Though there was bipartisan agreement on the British banking bailout I doubt there will be on measures c and d above.

For one thing, internal Conservative politics have changed. The David and George show has been quietly and subtly replaced by an ensemble performance in which one William has been shoved into the limelight and in which a certain Kenneth is waiting in the wings to make his entrance. One of the reasons the Tories have had an internal shakeup is that they don't feel they came off particularly well from the bipartisan episode.

Because they will face potential parliamentary opposition to any soft bailout of the banking system's debt - from the Labour left, the Libdems and possibly the Conservatives - the next problem the government faces is whether they put next week's bailout measures to a vote. In retrospect, doing a lot of little things over the past two weeks has had two benign effect s on the government's position: It's provided a constant stream of headlines and nothing has to be put to the vote. A bit like Heathrow really.

Comments

  • Comment number 1.

    Paul,
    Clearly I haven't read your book yet as I guess it has yet to be published. But as the football commentators are fond of saying "It is like deja vu all over again.."

    Is this not the 'moral hazard' of which we were warned ?? That said, we didn't have many choices last year - the brakes were being slammed on, and we needed the 'airbag' of a taxpayer bailout / nationalisation.

    But isn't the result that now the car is shooting off again, and the 'go pedal' is being pressed, with scant regard for the brakes ?

    Or is it that the Government is trying to 'throttle up' while the banks are keeping the handbrake on to prevent skidding off the road again ??

    Not sure, but it does seem that the banks think that whatever happens the taxpayer will come to the rescue, so the same risky policies as before will be followed.

    To mix metaphors again, the bets are being 'doubled up' to the point where eventually the taxpayer will simply not be able to bail out the banks, however much they are losing, as the currency will not stand it and the central banks will not be able to get the funding from elsewhere.

  • Comment number 2.

    MONEY GO ROUND

    I have read that rampant prosperity - effectively - depends on a web of debt, imaginary money, and the existence of a money market. I am tempted to say: "THEY would say that wouldn't they!" If it is true, it is unsustainable. Even if the death penalty were introduced for cheating or negligence, the sort of macho blokes who love risk, would flock all the more.

    It seems pretty obvious that in a world of declining moral values - one that ACCEPTS such decline - unless a totally different monetary ethos is established, we will just go round again.

    Paul - second time of asking - do you REALLY understand what is going on? Could you explain it to the Man on the Clapham Omnibus?

  • Comment number 3.

    I thought you could not advertise on the BBC? Well, unless you are a guess on the Jonathan Ross advertising your new film, DVD, book, pop song or cookery series?

    Oh well, as long as the book proceeds go towards helping down and out bankers, their coiffured wives and their organic-fed children in the style for which the rest of us have been paying fees, commission and taxes.

    The problem with writing anything on the depression now - it is about to become one is it not? - is that by the time anything is published it is already shockingly out of date. Traditional Meedja luvvies, journos and News presenters have prooved themselves to be very much behind the curve so far in what has happened compared to the various bloggers online such as those gallant Johnnys over at housepricecrash and other similar sites.

    One thing seems to be common-place though - so many highly paid bankers, CEOs and Economists appear to only able to make a profit during the biggest credit bubble in history but the moment things get a tad hairy they all seem to have been caught, to paraphase that now over-used phrase of Buffetts, with their pants when the tide went out. Yet, politicians and journos still do not appear to have cottoned on to this and are still holding many such people up as heroes and financial gurus.

    I wonder just how many 'famous' names will go bust, or even end up in gaol, before this bear is finishing lunching?

  • Comment number 4.

    Paul,

    Writing a book on the Credit Crunch faces the considerably problem that it will be out of date before it is published - I hope you publisher understands this! My advice is to spend the advance now before he can demand either a rewrite or its retrun!

    I see a remainder and pulping opportunity!

  • Comment number 5.

    Great to have you back PM & I'll definitely buy your book, assuming we still live in a money-based economy then. Otherwise I may have to barter with the onions I planted this afternoon...

  • Comment number 6.

    we the children of austerity, ration books and food deprevation have stood by and watched these nincompoops and charletans and political failures completely trash our whole economic system. We had austerity by the bucketload, the radio doctor telling us how if we had one ounce of cheese a week instead of two, grow our own cabbage and go in hock to the Yanks for millions until the mid seventies, lease lend I think they called it whilst France and Germany jumped out of the gutter and started to live a little. We thought the sacrifice worthwhile and were content that we were building a better future for our children and yet we have just watched the biggest borrowing bonanza in economic history go by and nobody said stop you stupid b..........s and because everyone had their trouts in the trough politicians thought 'why should we care, the value of their house is going through the roof' They didn't have an ounce of wisdom amongst the lot of them and now we have a situation in which our grandchildren will be paying of 'our' debts until the middle of the century. Lions led by donkeys indeed!

  • Comment number 7.

    AND WHERE'S MY FLIPPIN MEDAL? (#6)

    I'm with Leftie! I watched a bloke cutting down railings to be melted down to make war stuff; I used to climb on those! AND I could never get enough sweets to ruin my health.
    But what hurts most of all is that even though the Land Girls got honoured, we dragooned Evacuees (with our sh itty name) have got nothing. What about 'Evacuee Day'? Or better still an Evacuee Medal? I ain't dead yet!

  • Comment number 8.

    7. At 7:04pm on 17 Jan 2009, barriesingleton

    I ain't dead yet!


    Mind you, call this living?

  • Comment number 9.

    A MATTER OF PUBLIC RECORD (Exchange of the Year 2008?)

    "Mr Fox: Well, some of the pronouncements that I have seen suggested that the bonus system is responsible for excessive risk-taking and the collapse of financial institutions. Now, I do not think that is based on a well-informed analysis.

    Q588 Mr Mudie: We have heard that, Mr Fox, but you then go on to admit, when asked, that you do not know what caused it. You specifically said that, that you do not know what caused it, so, when we suggest something that you do not like, you say, "Well, that's not right", and then we say, "Well, come on. This is an inquiry where we are investigating to avoid this sort of thing happening again, so tell us", and then you say, "I don't know". Then you patronise us by saying, "If you knew more about financial matters, you would not be making these statements". We do not enjoy it and I do not think you really mean it, do you?

    Mr Fox: If anything I have said has been interpreted as being of a patronising nature, I apologise, it was not my intention to do that, but I do recognise ----

    Q589 Mr Mudie: But, if you turn round to us and say, "If you knew more about financial matters, you wouldn't be making this statement", what the hell do you think we will think you are doing to us?

    Mr Fox: I think there is a bona fide intention of finding out more about the way in which the City works and about what has gone wrong.

    Q590 Mr Mudie: Well, that is what we are trying to do.

    Mr Fox: That is driven by a desire to know more and it is one which I would like to help in and, therefore, I am giving evidence.

    Q591 Mr Mudie: Well, I am just an old Labour member of this Committee, just so that you know what you are dealing with! You say that something that has not been raised is something where we accept the world as it is, but I have got a list of the main banks here. Hornby earns £940,000, Daniels £960,000 - you did the figures - £640,000 to Steve Crawshaw, he has gone and it has gone up, John Varney £975,000 and Fred Goodwin £1.3 million. Now, I am just an ordinary old Labour bloke, an old trade union official, but why does someone on £1.3 million need to be incentivised to do their job? That is what we ask. Why do they need to be incentivised?

    Mr Fox: Because that is what the market is saying.

    Q592 Mr Mudie: So it is the market, we are back to the market. You told us that you are a free market man, untrammelled. That is what you said and it is on the record.

    Mr Fox: I think I said that, if you believe in the free market, then you must allow the market to operate. If you do not, then you ----

    Q593 Mr Mudie: Well, I absolutely do not, but you do, do you not? This is what you are saying about salaries, that it is nothing to do with ability, it is actually looking at what someone else or what some other country is paying and saying, "If we don't pay our chief executive, he'll go off to America or he'll go off here or there, so we have to pay him", but I will just come back to the first question that somebody out there must be asking. Why, if you are on £1.3 million annual salary, do you need incentivising?

    Mr Fox: I think many of us believe that some individuals earn much more than they should do.

    Q594 Mr Mudie: You are looking at us again!

    Mr Fox: No, I actually think that politicians ought to be paid more, you will be interested to hear, but many people think that the amounts earned by popstars or football players are way, way in excess of what they should be earning.

    Q595 Mr Mudie: Stick to the financial ones, the people who got us in this mess.

    Mr Fox: If you do not believe in the free market, then nothing that I say in relation to the operation of the free market will convince you, but you may say, "Well, why were people willing to pay that much?" but they were. They were because they thought that they were getting the best talent and they thought that other people would pay those amounts if they did not.

    Q596 Mr Mudie: That is good, so I put a question back to you which might percolate down to boardrooms, so let us see where you go with this. Yesterday, we interviewed a chief executive and we had the accounts in front of us, and we said to him, "What is the average bonus? You pay bonuses from you down to the cleaner?" "Yes." "What is the average?" and he said, "It is 9%." "But in your annual accounts your incentive scheme is from 50 to 150% for people who are senior executives." Now, the poor lass on the desk, earning £13,000 a year, to incentivise her you give her 9% of that, but the fellow earning yesterday £750,000 a year needs a 50 to 150% incentive. Now, tell me, for all that need to be incentivised, why does a cleaner only get 9% and the chief executive gets 150%?

    Mr Fox: I am going to say something which I hope will be understood in the spirit in which I say it. It is unfortunately not a fair world and the people who are well-remunerated and remunerated in a particular way are not necessarily those that you or I would choose to remunerate in a particular way, and then the market decided that certain people should receive more ----

    Q597 Mr Mudie: But you are the only one in the room who thinks that the market is important."

    Treasury Select Committee - The Banking Crisis - Hansard Uncorrected Oral Evidence - November 19th 2009.

    Five years earlier, CEOs of several of the major UK banks were warned that unless they did something about the egregious abuse of high APRs on credit card debt, the Government would legislate. These sessions were memorable for the MONTY SLATER event. So I find it very hard to believe that there were not many in positions to do something about this bubble-economy who could have done something about it. They didn't, because they were politically doing well out of 65 consecutive quarters of economic growth averaging 2.5% a year. But it was a big bubble-economy, and they knew this. For that reason they must be held responsible for non-government, i.e for anarchism. The social fall-out only comes when the bubble deflates, and that's only just starting, unless 16 x 2.5% growth can be rationally perception-management 'corrected' in the public's eyes. I suspect it can if the unhealthy sectors of the economy peddling fantasy/deceit/delusion are stripped out, but the vendors will kick and scream as children always do.

  • Comment number 10.

    book?

    will we get an acknowledgement? A free signed copy? :)

    the all seeing eye is the bond market. so what is going on there. Countries are finding it hard to raise the cash for all these bailouts and new deals. A recent german bond auction failed [they never fail].

    so either, [to compete against other countries] you raise interest rates to attract money or you print the money [inflation] or start a program of 'war bonds' ie selling direct to the public for specific projects.

    perhaps the big delusion is the economy can get back to where it was before. Booms funded by short term money is never coming back in our lifetime so even a recovery will feel like a recession. look how long it took the uk to get over ww2 ? 15 years?

  • Comment number 11.

    bookhimdano (#10) I reckon you were right on the button when you said not long ago that the essence of the current problem is not all that hard to grasp. The problem is the way that those in Government are now responding to it. Instead of facing up to the fact that what was happening in the past was seriously flawed (at an international level) with some taking profits whilst fraudulently dumping the risk on unwitting others, they appea rto be looking for alternative ways to continue saddling people, this time the public with toxic waste. Those in the financial sector have just looked upon those who they aren't concerned about except as consumers who they can indebt/profit from - in the past SIVs and securitization/SDOs/MBSs/CDSs etc were used to reduce their risks, and now, with all that exposed, it looks like it's going to be 'Government' owned vehicles, i.e dumb taxpayers years down the line instead. It's putting off the risk in time (which is just a Hyperbolic discounting function) as an alternative to spreading the waste thinly now. It still stinks, which is why the people proposing this look and sound so dodgy I suggest. There's been a cynical exploitation of basic fundings in Behavioural Economics in recent decades, i.e where one type of incentive is titrated against another, and individual and group differences in impulsivity (a developmental/IQ function) is exploited in marketing, whilst nonsense is peddled about here being no individual differences and Civil Rights have been championed instead. That's been peddled to lull people into a false sense of security as immigration has been encouraged and brighter people discouraged from having children via the lure of independence and ephemeral material benefits through spending longer in education.

  • Comment number 12.

    My personal views -

    I still think those that made bad investments should be protected from losses (Banks,Creditors and to a smaller degree the borrower).

    I don't fully understand CDS's , but I understand whatever happens we can not allow them to trigger in any sizeable number.
    I hope the Government is taking action to stop this practice, there should not be a way of investors insuring against all their investment risks.

    Not only should the Government who redesigned our regulatory system resign in shame but some people in the city must have known what was going on and should be investigated to see if any laws were broken.

    I don't agree with people saying no one foresaw the causes that have lead to today's economic fallout. People were speaking out (what to know more, find and read the report) , some with very impressive economic CV's. Sadly the pro-debt lobby drowned out the anti-debt lobby's words of reason.

    Changing the subject to American economic bail-outs, I found this video (Flash format) , to me a non economist or banker etc, it describes the mess we are in and who will end up paying for all this.

    Anyway "Things can only get better !".

  • Comment number 13.

    HERDING CATS

    Steve-London (#12) The problem is that many invest in blue-chip companies as reasonably safe long-term investments (for yield), and by many, I mean pension fund managers, theyre there for dividends. At least one of the big international banks has shown very little capital growth over the past 10-15 years and yet had been caught up in market turmoil as the sector has been hit and stock sold.

    To give credit where due, In the NN Special on the Credit Crunch, Irwin Stelzer said it all sadly when he sad that those who behave the way they do in the markets are not venal, what they do is legal. The problem as I see it is that the legislation which has been passed to oil the works of deregulation have rendered what was once both venal and illegal, now legal. That's why, back in 2003, the Committee could only warn the bank CEOs that unless they better self-regulated, the Government would legislate. I'm happy to be corrected, but that told me that the brakes were off, that there was very little in the way of government, that regulators were purposefully thin on the ground and that market forces were pretty much all that mattered. I've been appalled/worried for years as I thought it could only collapse under its own weight listening to the way people talked in The City and having seen a few odd events - that self-destruction is pretty much what Marxists predicted would happen if left to its own devices, and after the 'collapse' of the USRR (but not the much larger PRC of course) capitalism was unfettered - it's Keynsian/Quaker brakes before-hand were one of the reasons why the Soviets were not too fond of Keynes as I understand it.

    Now our Government appears to be trying to herd cats.

    I hope you're right in your last line, but I'm not optimistic.

  • Comment number 14.

    A couple of examples of class conflation and ensuing muddled talk in the Telegraph which don't help. First, at least one of these banks is an international bank which to the best of my knowledge didn't take up the UK Government's cash offer anyway. It has its HQ in the UK, but it's not essentially a British bank, it's international. Would it make sense for the UK Government to tell CITIBANK what to do? yet this persists in the UK media. Why?

  • Comment number 15.

    SHORT-SELLING, OTHER PEOPLE'S MONEY/PENSION FUNDS AND GOVERNMENT INTERESTS/REDISTRIBUTION OF WEALTH

    Maybe I'm paranoid, but I find it more than a bit worrying that the lifting of the ban on financial share short-delling is clearly in the interest of the Treasury given that the Government now wants equity in banks rather than preference shares.

    How many people appreciate that since electronic registration of shares, it's become all too easy for those who hold the shares (ostensibly in nominee accounts on behalf of the real owner) can and do, as I undrstand it, legally lend those shares for a fee to those who can and do drive down share price through short-selling. Those fees gon't go to the triue owner (after all, the shares will be registered to the nominee account manager), but to those who manage the nominee accounts. Guess who loses out as the capital/market value of the shares falls?

    Is this not venal?

  • Comment number 16.

    Paul:

    [I must, first, apologise for the long gap between my last blog posting and this one. I've been finishing off a book about the credit crunch and trying to write about the same subject in two different genres at once was too much for my brain.]

    No problems, when will the book be available to read...

    ~Dennis Junior~

  • Comment number 17.

    Paul

    Good to hear from you again. I had thought that your scrawl had mnoved beyond idle to non-existent.

    Taking up the comments at 10, when are the polticians going to own up to the fact that public spending (and therefore public services) will have to decrease substantially? We are being conned into thinking that a few years of reduced increases in public spending is all we will have to suffer. The reality is that there will be severe cuts beacuse (a) its all we can afford; and (b) any one buying govt debt will demand it.

    I'm looking forward to school classes of 40, increases in prescription charges, monthly bin collections, etc.

  • Comment number 18.

    Well hurrah with brass knobs on. welcome back, look forward to your book.

  • Comment number 19.

    Why aren't we seeing TV news crews door-stepping the bosses of the banks that today we have bailed out, and indebted ourselves and our children for decades to come for, and thoroughly grilling them about their part in the collapse of the banking system?

    Anyone else who is involved in far, far less news stories runs the risk of being door-stepped, of having cameras and microphones stuffed in their faces and being grilled by the likes of the BBC as to why, what, when, etc - why is this not happening to the people who have run our banks into the ground?

    I fear the BBC is making the mistake of thinking that a 'nice' 50-plus gentleman in a 'nice' pinstripe suit with a 'nice' title is somehow above the Law and should not be inconvenienced with such trifling things that lesser people have to put up with?

    Come on Newsnight, as PC Plod looks unlikely to be asking any tought questions any time soon, go and doorstep a few bankers and ask them the tough questions that millions of Brits want to know about what has gone on and where all the money has gone.

    Brown being angry about the banks not fully disclosing is simply not good enough - we have questions and we demand answers! Let's face it, we are paying enough for them!



  • Comment number 20.

    IT ISN'T SAFE OUT THERE ANYMORE SINCE WE DUMPED THE NANNY STATE FOR ANARCHISM

    tawes57 (#19) "Come on Newsnight, as PC Plod looks unlikely to be asking any tought questions any time soon, go and doorstep a few bankers and ask them the tough questions that millions of Brits want to know about what has gone on and where all the money has gone."

    What would be the point?

    Imagine if New Labour had repealed some of the Criminal Justice Acts during their administration so that robbery and rape were no longer the crimes they once were so it was more down to the public not to put themselves at risk (a variant of caveat emptor when they ventured out), and that New Labour had cut the number of officers (behaviour regulators) in the police forces. It wouldn't even be the case that the number of robberies and rapes went up as nobody would be recording them as crimes anymore. That's something like what's happened through de-regulation and trusting market-forces. Most people find that hard to believe because they don't go around raping and robbing, but it's been a field day for 'snakes in suits' in the Financial Services in recent times. It's sad that some international banks who have been playing fair get tared with the same brush, but then the market is largely made up of sheep (see #9, #11).

    Anarchists eh? Narcissistic adolescents...

  • Comment number 21.

    "What would be the point?"

    Caligua, Nero and others learnt the value of throwing Christians and others to the lions to appease the mobs.

    It distracts.

  • Comment number 22.

    tawse57 (#21) And the Roman empire collapsed (probably for much the same dysgenic reason that our culture is now in trouble) too did it not?

    What's needed is a little more attention to some of the harsher, albeit politically incorrect, truths I suggest, as anarchism and dysgenics tend to be familiar bed-fellows.

  • Comment number 23.

    I I I I I I I SAY - BLAH BLAH BLAH

    If Clarke brings to the Tory top table, all his trade-mark concern for the poor and dispirited, whome the Caring Cons now root for; the same huddled masses that he so adroitly served when in the tobacco industry; then the Conservatives should accrue a large uptake of addictive followers, and Our Ken's handsome remuneration will AGAIN be well 'deserved'.

    That he will perform head to head with that other 'relaxee of wealth' Lord Mandy, goes a long way to define the underlying ethos of the 2009, British political scene.

    Do they still take innocent school children to watch such men of status 'at work'?

  • Comment number 24.

    Paul,

    The REAL CRUNCH is still ahead when the US interest rates on all of the longer term
    adjustable mortgages readjust over the next 3 years. Check it out !

 

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