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Bank of England must lend

Robert Peston | 00:00 UK time, Thursday, 25 September 2008

The reluctance of banks to lend longer than overnight to each other - as described in my earlier note on interbank hysteria - will surely force the Bank of England to take corrective action.

Bank of EnglandIf it does nothing, well then the cost of money for all of us - in the form of the interest rate we pay on loans - will soar. Which is not what we need when the economy is so weak.

Also an ever growing number of businesses and individuals perceived as even a slight credit risk will not be able to borrow at all.

Money will become painfully tight.

And there could be worse. As the weaker banks become ever more dependent on overnight loans, as they find it increasingly difficult to borrow for any length of time, so grows the danger that one or more of them could suffer a fatal run.

So I expect the Bank of England to provide some of the credit that the banks are unable or unwilling to provide to each other.

This would have to take the form of tens of billions of pounds of loans to the banks at maturities much longer than overnight, including a chunk of three month money.

Maybe the Bank of England will take this evasive action tomorrow. Maybe we'll have to wait a bit.

But with so much fear and uncertainty in the world, it's got to happen soon.

Comments

  • Comment number 1.

    I do believe I detect fear in your voice , it's gonna get hairy in the next 72 hours..great but horrible theatre

  • Comment number 2.

    Banking will soon reach the Groucho Marx level where the ten dollar bill is attached to a rubber band ...how proffitic

    Marx was ahead of the game for a laugh banking system


    As the legal eagle I C Loophole [in a day at the derivatives] he would accept a 2000 dollar cheque or 20 dollars cash

    I am optimistic that rigourmortgagis [the modern equivalent of a viking burial] for those who wish to think inside the box ,will sort it all out .

  • Comment number 3.

    We have got into this debacle primarily BECAUSE interest rates have been held too low for too long. This is what has driven the irrational exhuberance, first of the stock market, then the housing market. Now those malinvestments have grown so large, interest rates cannot find their equilibrium without threatening the entire monetary system. So all we are left to do is keep on printing money like mad, and we will destroy the value of our currencies (and destroy whats left of the wealth of the poor and middle classes) in the name of avoiding taking the medicine that was so badly needed years ago. How long will it be, and how much suffering must we endure before we finally accept that the great experiment of central banking has been an unmitigated disaster? Letting the price of credit be 'fixed' by political expediency will always lead to the very corner we've now backed ourselves into. Hopefully from the ashes of this collapse a more sensible monetary system than the fatally unsustainable Bretton Woods one can be built.

    "The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
    Ernest Hemingway

  • Comment number 4.

    I wonder if banks realise that the media story that they fear to lend to each other only increases fear in the minds of depositor customers.

    I wonder if it might not be safer to keep cash in a Eurozone bank these days.








  • Comment number 5.

    The bank of England will have to shut its doors to people who wish to make large overnight deposits ,unruly crowds with jolly roger hats and wooden legs will form dissorderly queues outside with wheelbarrows full of money.

    Those shouting" take my money" will be taken away under the prevention of terrorism act

    Only satirists from the milton keynes school of economics will be able to explain it in plain English without the use of elgarythms

    It reminds one of the ancient marriner


    Liquidity everywhere but not a drop to spend


    Revelation prophesied that the world would stop turning on its AAAxis and the stAAArs shall fall to earth ,well this is as good as it gets

    Divine pun ishment

  • Comment number 6.

    The wicked flee when no man persueth but the righteous are bold as a lion - Book of Proverbs 28:1

    It is so very true in this case !! Since the banks have made a mess of their original lendings at ridiculous terms, they have now opted to go in the opposite direction. Furthermore, because they still harbour rapacious thoughts of "easy profits" in their hearts, they think every other bank and banker will do the same. Therefore, they have very little faith in their fellow bankers !! Consequently, the only safe haven they can see is the BoE as the deposit-taker of last resort !!

    For this, we can thank the American "investment" banks that invest nothing and the mortgage lenders that "wisely" lent money to unsound persons/companies with insufficient collateral at ridiculous interest rates and then packaging those debts as sound security to be sold on to the greedy in the international money markets !!

    And all this is aided and abetted by unsound government financial decisions that placed popular media publicity above reality.

    And all this is exacerbated by Hank Poulson slanting the so-called bail-out package in such a manner that it will only benefit those of his "buddies" instead of all those affected by the toxic assets created by his fellow Americans !!

    By discriminating between banks, he has destroyed the trust between banks !! Thus we see the financial equivalent of banks "sharpening their swords and keeping their powder dry" !!

  • Comment number 7.

    No doubt these sound and careful Bankers have plenty of assets to put up as collateral to back up their forthcoming BoE taxpayer funded fire-salvage loans.

    eg

    Tulip Bulbs retained from their earlier venture into adoption of careful banking practices

    Share certificates left over from the 17thC South Sea bubble

    Capital raised from that company which issued a prospectus asking for funds for
    'a venture so secret that it cannot be divulged'

    Plus of course, all the cash from depositors which the Banks haven't yet gambled away on buying dodgy high yielding packages of mortgage loans which can never be repaid.

    ,,,and you think the BoE should be actually trusting these folk to pay the loans back ????

    No way.
    They will be back in 3 months time saying

    'We spent all of that loan on Bonuses and buying yet more of those not-so-high-yielding Mortgage Packages.'

    'Can we have another loan, only twice as large this time please ?'

    (meanwhile Gordon Brown having sold off the Gold Reserves and the Nuclear Power Industry at knock down prices, now sells off the Isle of Wight, Devon and Cornwall to pay for his 'Prudency' measures.

    Warren Buffet expresses interest if he is lent the money at 0% interest over 50 years and he gets to keep all the tax revenues from those living there.

    Brown doesn't understand the terms and conditions, so he agrees and calls it a PPP arrangement )

  • Comment number 8.

    It's amazing to see all this happening for real when plenty of people have been talking about it for so long and were made to feel like total loons.

    If only politicians and lawmakers had listened.

    It's quite clear that this is getting extremely hairy now.

  • Comment number 9.

    Robert,

    "What on earth is going on in the interbank market? "

    Before an alcoholic can attempt to control his addiction the first thing he must do psycologically is admit he's an alcoholic. That is the first step on the road to recovery. Clearly you are not at that step yet.

    So..

    Repeat after me....The system of debt-based fiat money compounded by Fractional Reserve Banking is collapsing. It needs to be replaced by 100% reserve banking in the hands of an elected government rather than an elite bunch of privateer banksters.

    There....there wasn't so hard after all. Go on...give it a try.

  • Comment number 10.

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

  • Comment number 11.

    OUCH! Thanks for cheering us all up, Robert.
    We have to save our banks, BUT WE DO NOT HAVE TO SAVE OUR BANKERS.

  • Comment number 12.

    So the hysteria grows as a prelude to us all getting conned again:

    Remember the Millenium Bug, or Weapons of Mass Distraction ? Well here we go again.

    For anyone who is interested in appreciating what the proposed bail out really amounts to have a look at Greshams Law -

    http://en.wikipedia.org/wiki/Gresham's_law

    The Fed wants US citizens good money to replace the it's own toxic kind. Will they all get fooled again?

  • Comment number 13.

    "Weapons of mass destruction?".
    We dont need inter-continental ballistic missiles, we've got British bankers.

  • Comment number 14.

    Dictionary definition

    "throw good money after bad =

    to spend more and more money on something that will never be successful"

    Hopefully American congress will realise this is futile. Bringing on the man who sold the lies about weapons of mass destruction etc wasn't a very clever idea.

    Let inter-banking rates rocket for a while. They will eventually come down when the banks know who to trust. Let the weak banks fold. In the long-term, we'll all be better off rather than a cosmetic fix to the problem.

  • Comment number 15.

    Come on Gordon. Get interest rates back under central control and jack them up.

    Your career as PM is toast anyway, you might as well do the right thing.

  • Comment number 16.

    Interest rates are likely to rise irrespective of government action, simply as a function of scarcity of liquidity.

    This may be no bad thing. Low interest rates - set entirely by reference to current inflation, with total disregard for the asset bubble - contributed to the mess that we are now in.

  • Comment number 17.

    Is this not a clear indication of one bank knowing how badly off it really is and assumes all other banks are in the same boat? In other words, each bank thinks 3 months is a long, long time, and is uncertain of it's abillity to survive that long.

    Now that is what I call worrying - Big time!

  • Comment number 18.

    It was interesting at the congressional hearing last night when some senator or other proposed that a veto be applied to banker's salaries such that a cap of 'only' $1Million per annum be applied.

    Old Hank didn't like this idea at all and said that the bail-out was 'not about vetos'.

    It seems to me that everyone involved with this masterplan is one way or another a banker, and they are never going to propose anything that might in the slightest way hurt them personally in the wallet.

    The tax-payers have a right to demand that the bankers put in their own personal funds as part of this bail-out. I am sure between them they are good for a few 10's of billions.

    I would suggest that Congress put this in as a proposed amnedment to the bill before agreeing to it.

  • Comment number 19.

    Perhaps you are expecting too much Robert. I do not get the impression that the Tri-partite set responsible for regulation is meeting "Cobra" like and making decisions as events happen. With no one really responsible it is unlikely that we will get ahead of the game and become creative in our solutions. We need to get inside the cycle of events. The system does not work. The Financial Services Authority's main aim is to "promote efficient, orderly and fair markets" It is very clear that it is impotent or incapable of doing so. When the dust settles we need an effective public enquiry into the form of regulation we need for the future. For the short term if someone does not take overall charge we could very well be doomed!

  • Comment number 20.

    Dear Robert
    The Bungling of Alistair Darling and the indecision by Brown, will lead to amajor share fall, BECAUSE, THE ALLEGATIONS regards the short selling in the City, have got the Bankers backs up.

  • Comment number 21.

    if Banks are unwilling to lend there is a reason for this it is because the risk of lending is just too great when adjusted for the risk. for the bank of england to lend it would interfere with the markets normal way of resolving these things, and pose and unwelcome risk to the bank of England. Moral Hazard or what... SLS is supposed to be the lender of last resort and its rubbish far tooo generous.

    These Banks are mostly insolvent. they need to be allowed to fail. the CEOs which made the bad decisions (HBOS et al) need to loose their jobs that is the justice we need.

  • Comment number 22.

    "Money will become painfully tight."

    Robert, you keep repeating this. But, please, isn't that totally expected and normal when there has been a prolonged period of reckless over-borrowing? It seems to me as inevitable as the hangover after excessive drinking. To me this is a healthy development. Money is tight exactly where it needs to be tight. This ensures that in the countries in question, like the UK, the excess in banking will disappear and will be replaced by productive workers in the long run. If you wake up with a hangover and the first thing you do is emptying a bottle of Gin, then you're a true alcoholic, with an extremely bleak future...

  • Comment number 23.

    How is it that we have all become so dependent on this money-go-round?

    The proposed bailout in the US is said to be upwards of $700 billion, and yet the original sub-prime defaults were estimated at $300 billion. It would have been cheaper to just pay these peoples mortgages: and cheaper still to have built the houses. Governments could even have charged them rent.

    But then council housing went out of fashion years ago: and maybe that started the housing bubble. So here's another idea: since the subsequent house price inflation was artificial, and everyone is stuck with far higher mortgages as a consequence, why doesn't everyone refuse to pay the excess?

    Who would suffer then? And why?

  • Comment number 24.

    As much as I loathe these bail-outs, unless the Yanks pump trillions in to the system RIGHT NOW, the system will fail IMMEDIATELY.

    That means no cash from your cashpoint, banks shut their doors, supermakets run out of food in a few hours and don't reopen.

    One way or another, our financial system that we know and love or loathe is OVER.

    TIN FOIL is HERE. NOW.

  • Comment number 25.

    I read this blog almost immediately it was put up and thought 'wow, he's spooked'. In my viewly between the post at 1700 and 2400 Robert picked up on a specifically UK story that frightened him.

  • Comment number 26.

    Robert,

    We Need a UK Credit Rating Agency

    You can't force Banks to lend. If a Bank has doubts about the accounts of a borrower it will be conservative and either charge higher rates or not lend.

    It is naïve to think that any action by the Bank of England, save that of guaranteeing all borrowers (clearly a non-starter) will make any difference.

    I would suggest that if it set up a UK credit ratings agency to pre vet loan applications (for a fee) then perhaps Banks could be persuaded to loan again.

    The riskiest borrowers are their fellow banks and that is why the market has seized up - Banks can quite confidently lend to non-banks as their accounts have not been polluted by the unknown and un-knowable risk of synthetic monetary instruments.

    Interest rates need to be high enough to give a reasonable return to savers and at a reasonable cost to borrowers. Insane lowering of the rates will only create another bubble, worse than the present one.

  • Comment number 27.

    Robert. Have you stopped to consider that the interbank lending rate might be at the correct level given risk and inflation, and that the BoE rate is incorrect? Effectively the banks have taken interest rates out of the control of the government, for the time being at least. We are back to the core problem, people have borrowed too much at too low interest rates in the belief that nothing would ever change. For individuals, this is 'payback' time. For lenders, it's 'please payback what you have borrowed' time.

  • Comment number 28.

    if what RP says is correct and that the banks themselves have lots of money but refusing to lend to each other -
    why doesn't the BoE just refuse to take money from the banks for overnight deposits. that would force the banks to invest their money elsewhere otherwise they'd be making a lost sitting on their cash hoards.

  • Comment number 29.

    Some years ago, a well known foreign leader when asked what he found most frustrating about Britain replied, "Your inability to act until the thirteenth hour".

    Let's hope this is a criticism that will not be made of the Bank of England in the next few days!

  • Comment number 30.

    Listening to the clip (on Radio 4 Today) of President Bush putting the frighteners on the American people, I imagined how I would react if the British Prime Minister broadcast to the nation that, if Parliament didn't allow a multi-million pound bail-out, ah, rescue package, businesses would go bust and families would lose their homes.

    I'd be down the bank on the dot of 9.00am moving my money (or doing so via Internet banking) and where possible putting my accounts with the utilities in credit - ie "converting" my money into something other than money.

    Perhaps, after the 45-minute Saddam threat to the West that wasn't, the British are less ready to believe our politicians when they try to frighten us. However, no sense in taking unnecessary risks with one's money.

    #12 - the "Millennium Bug", the date-change bug, was real. I work in the industry: mega-corp spent millions on having every line of code examined, and a few big names still came a cropper but you won't hear about them because they threw even more money at it either in fixes or keeping people quiet. For instance, some customers of an international name who ran an "audit" after 1 January found that that returned everything to the status of 1982, viz to noughts.

  • Comment number 31.

    25: Sean Broseley

    Agree, a very perceptive observation; any idea what the spook factor is?

  • Comment number 32.

    The dynamics of the credit crunch have changed substantially in the past month, and it is not clear to me (nor, I believe, to anyone else) what all the financial and psychological choke points are. I would much prefer to see a convincing exposition of that before national governments, including that of the UK, throw more money at the situation. Some of what's been done so far seems to me like trying to seal the gash in the hull of the Titanic by shoveling bundles of currency into it.

  • Comment number 33.

    If the BoE were to limit overnight deposits and extend longer term deposits that would allow it to lend to banks longer.

    In effect it would become a central clearing house for interbank lending and make a profit for the taxpayer.

    Simple. No need for panic. Relax.

    PS
    We will never have full reserve banking. We will just have to make the best of what we've got. Get over it.

  • Comment number 34.

    Reuters have relayed a report from the South China Post that Chinese regulators have told domestic banks to stop interbank lending to US financial institutions - in ANY currency. Is that the spook factor?

    http://www.reuters.com/article/companyNewsAndPR/idUSPEK16693720080925

    It has since been denied by the Chinese but, hey, of course they denied it until, I guess, they have finished dumping their US dollar holdings. Wouldn't want the world market to be so full of dumped US dollars that the price went through the floor before China achieved much lower exposure.

  • Comment number 35.

    The Beeb is repeatedly talking about "bail-outs" when speaking on the US and UK banking crises. This is more than a little misleading.

    The Japanese had a similar crisis. They bought the low liquidity debt with taxpayers' money, the markets stabilised, and once confidence returned the government owned debt was resold - because it was bought in bad times the value had increased and they made a profit.

    It is only a bail out for the banks if the debt is bought at higher than market prices. Otherwise it is a commercial transaction like any other, apart from the motivation - economic stability rather than profit.

    What it shouldn't be is a parachute for the bankers themselves - those managers responsible for the sytematic undermining of lending practices (i.e. any banking executives who did not oppose sub-prime lending or trading in the resulting paper) should have their licenses revoked and not be allowed to take up similar positions until serving some time with the rest of us.

    There has to be accountability. In the absence of strong boards, this is an opportunity to enforce some on the financial world.

  • Comment number 36.

    Aren't we getting things a bit skewed here? After all, for the last ten years we have been listening to our dear Labour Government, and Gordon in particular, assuring us that they are in full control of the economy, that our unparallelled prosperity is all of their making, that Brownsian economics has banished "boom and bust" forever, that our economy is being managed with prudence as a result of which we can expect a degree of stability hitherto unheard of, that Britain is better placed to withstand any unforeseen downturn than any other European country, or in short "Your wealth is safe in our hands" so please keep voting us in.
    Now, of course, when all this has been shown to be the self-congratulatory drivel it is, it turns out the responsibility for things going wrong is down to the wicked bankers, speculators, ineffective regulators, etc., etc. and nothing to do with Gordon and his cronies. What hypocrisy! Furthermore, why are lenders always to blame, and never borrowers? The Nanny State may not have banished boom and bust, but it has certainly banished the phrase "caveat emptor".

  • Comment number 37.

    Sean Brosely 25
    Friendly Card 31

    'Spooked' is the word. Wonder what
    made Robert lose his cool and do his best to put the frighteners on the rest of us?







  • Comment number 38.

    So there is no shortage of capital, just that the mechanism for distribution is broken because the existing players are seen as high risk.

    So bring in new players, without the baggage, no reason for the other banks not to lend to them, once they start clearing up in the market then the other banks will start to act rationally once again.

    I would have thought that the VC guys and the Soverign funds should be looking for these vehicles right now, organisations with a Banking licence and no exposure - this is the time to get into a market, when it is is total disarray.

  • Comment number 39.

    The Paulson "bailout plan" will do nothing to solve to stop house prices from falling or the stock market from falling.

    In fact it will be the reverse, as tax payers are going to foot the bill it will take even longer for cash strapped consumers to rebound the economy.

    The only thing it will do is make vast profits for Paulson, Buffet and their ilk,, THIS HAS TO BE STOPPED.

    The only way for this crisis to be wound up is for investors to take the losses and those that made the deals to be prossecuted and asset stripped.

    Otherwise, I'm sorry to say, I predict war and revolution.

  • Comment number 40.

    It might be worth the FSA having a look at the use of Exchange Traded Funds.(ETF's).

    Apparently they can be used for the purpose of shortselling entire business sectors.

    Just an idea.

    If the Bank of England were to lend to the moneymarket on the three month basis, at the Interest Rate it prefers (ie the base rate) that would have a powerful calming effect on the market.

    The American idea to buy back the dodgy bonds, is going to make a great deal of difference when it begins.

    Just have to hold on for it to come thro.

  • Comment number 41.

    Government should sack the BOE governor or take the power back to set interest rate. I don't believe inflation is the problem now, the problem is jobs and houses.

    BOE could have acted earlier and stopped Northern Rock clasping; it would have been cheaper, I believe BOE is making the economy head this way.

    Other main problem we have is an incompetent government with lack of financial understanding. Might be better to bring in financial experts in to the cabinet by making them Lords.

  • Comment number 42.

    37:

    'Spooked', so perceptively identified by Sean Brosely, does seem the key issue here.

    It is part of Robert's job to put things in stark and readable terms, and he does this well; and last night we saw GWB try to spook Americans into backing the intervention plan; so spook and drama are in the air.

    But neither of these factors quite explains the particular degree of spook this morning.

    One contributor (34) has pointed at China. Maybe that's it?

    More generally, a crisis like the current one has been described as "falling off a cliff in slow motion". If so, there is a tipping point, and perhaps this is it?

    If any contributors have thoughts on the spook factor, this would be a particularly valuable contribution to the debate.

  • Comment number 43.

    #12 is absolutely right. I have said for months that this bank created mess should and must be sorted out by the banks themselves.

    Nothing has changed and this now a case of high stakes bluff calling by the banks with ignorant politicians rattled.

    Ask a 'banker' what they would tell a customer who got into debt?

    Well its about time they adopted their own medicine and stopped assuming their customer base and/or tax will merrily furnish their business plans for 20% per annum growth and take more hits on the chin.

    By all means let the treasury take on taxic loans but only at the right price and charge the banks the full rate for the service.

    Look at the Buffet deal with Goldman, and ask why should the taxpayer operate for nothing.

    This mess is as #12 a total sham and we must not let selfish incompetant bankers assume the can pass the buck and carry on regardless.

    The Regulator must for once wake up and realise that even though they have no experience in financial matters, and their track record has been abysmal to date this is one problem that requires no errors or conceding to the bankers bluff, or giving in to them with the promise of a cushy jonb when they take early retirement.

    As they say "Enough already!"

    This charade by teh banks must stop and for once politicians and regulators must cut the rhetoric and certainly teh red herring on short selling and get in people who will tell the banks to sell off what they must to get their acts together.

    If they shrink then so be it, history will clearly show they were never as large as they thought simply because their'assets' were just inflated garbage.

  • Comment number 44.

    I suspect what has spooked RP is that he has now answered his own question from yesterday. If banks don't lend to each other, then the issue is not "oh they are losing out on higher profits", the issue is where do banks get money from to pay you and me from cashpoints and to pay their other liabilities eg bonds, commercial paper etc.

  • Comment number 45.

    And sorry I should have added, banks have to pay you and me or their other liabilities because if they don't they will become instantly insolvent ... and that is why everyone is spooked.

  • Comment number 46.

    44:

    Liquidity collapse? You may be right.

    This would be ultimately scary, vut it would also be wholly consistent with RP's theme, which is a need for immediate government intervention.

  • Comment number 47.

    However, bank shares are holding up pretty well this morning.

  • Comment number 48.

    Every cloud has a silver lining.

    I've been looking at 'Social Lending' via the Web on sites such as Zopa (Zone of Possible Agreement).

    What I really like about it is that it reduces some of the 'friction' in this particular business activity i.e. lending money, by completely cutting out the middle-man ... the conventional bank.

    I, for one, won't be too upset if ultimately these conventional banks wither away.

  • Comment number 49.

    very good piece by soros in the ft today

    summary:

    - obama's proposed amendments to paulson's deal (help for troubled mortgage borrowers / bipartisan oversight of the rescue plan / equity role for the taxpayer in the banks being helped) are all justified

    - the buyback will be fraught by an information gap (banks know how cr ap their assets are, whereas the tsy does not), which means the tsy is likely to get stuffed with all the most toxic cr ap

    - he recommends the tsy spends the 700bn buying equity in the banks instead, as this will do much more to deleverage them, and will leave the cr ap assets with the people who know what they are really worth

    - legislation needed to strengthen homeowners in default to renegotiate their mortgages instead of being pushed straight into foreclosure (something banks might actually welcome as everyone recognises it is the rush by cash-strapped banks to foreclose that is one of the main factors deepening the housing/banking crisis)

  • Comment number 50.

    49:

    Yes, a very good piece. Let's hope Congressmen read the FT!

  • Comment number 51.

    33 morebalanceplease.

    "We will never have full reserve banking. We will just have to make the best of what we've got."

    I couldn't agree with you more, particularly if you never take your head out of the sand.

    "Get over it"

    Hmmm...Those who never made a mistake never tried.

  • Comment number 52.

    Care to justify the "tomorrow" or "next 72 hours" timing?

  • Comment number 53.

    If the Fed is going to bail out the US banks with taxpayers' money, the taxpayers should get something in return - which means a stake in the banks concerned. (And I say that as a Conservative!) Otherwise, the owners of the banking stocks are being given a gift at taxpayers' expense. So Mr Paulson's plan would look so much better if it simpy, included a provision that any bank that sold its toxic debt to the State should also have to give up an equity stake in its business.

  • Comment number 54.

    I seem to be missing something here.

    The Fed (and possibly BOE) are going to bail out the banks to enable them to lend MORE to US (and UK) consumers who are already overloaded with debt.

    When will this madness end?

  • Comment number 55.

    53:

    Spot on. I think that the basis for a compromise exists - more help for homeowners (as suggested by Obama), a need for equity in return for help, reverse-auction of the toxic debt.

    Paulson (and Bush) have been trying to scare Congress into a deal that bails out the bankers. Nice try, guys, but Congress is far more likely to spread the help between homeowners and banks (rather than bankers). Let's hope so, anyway.

  • Comment number 56.

    May I even dare to propose an alternative to the western capitalist banking system....namely the ISLAMIC one!

    The basic principle of Islamic banking is the prohibition of Riba- (Usury and interest)

    While a basic tenant of Islamic banking - the outlawing of Riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world. Though many of its guiding principles have. The majority of these principles are based on simple morality and common sense (which forms the bases of many religions, including Islam).

    Usury was prohibited in both the Old and New Testaments of the Bible, while many great of the 'great and the good', throughout history, have also attacked the barbarity of the practice. Much of the morality for this banking system is founded on the principle of the equitable distribution of wealth through man's fundamental right to work and is clearly present in modern Islamic society.

    Although western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century.

    Find out more about the equitable Islamic banking system and model......it's extremely interesting - given the current economic situation we find ourselves in.

  • Comment number 57.

    ....I forgot to add that the Islamic banking system has been developed to serve society as a whole......and not the other way round.

  • Comment number 58.

    Dear Robert,

    Either,
    Save the banking system now and saddle the public with 20 years of debt and stagflation,
    or,
    Let some of the High and Mighty crumble now and suffer some extremely painful shocks, but exit quickly with a lean and competitive growing economy.

    The first has high unemployment for 20 years, the later higher unemployment for 2 and then growth and return to prosperity.

    So why do you continue to state that the former is preferable (and you even state essential) to the latter ?
    Only if you are Gordon Brown with an election a year and a bit away, or a power wielding city banker or economist with his job on the line.

  • Comment number 59.

    Your still not listening are you buddy. Fear is the driver. The fear is being deliberately ramped up so that movement to a deal can occur. Everthing is going according to plan at the moment. You are supposed to feel fear, and if you dont feel enough you can have some more until you move in the right direction. And all you do is react. If you are not careful then the proper controls and mechanisms will not be put in place following this because relief will be marketed to avoid dealing with things. Your job is to provide oversight not just repeat guff you are fed. BoE action will be linked to US action, you dont honestly think the BoE is going to do anything on its own do, if you do you have major problems. Look what happened with the ERM fiasco at the start of the nineties. Germany was supposed to prop and decided it wasnt in their interest and left us to hang, on our own. When the US politicians believe they have hoodwinked everybody into thinking they are white knights then they will sign.

  • Comment number 60.

    Anyone who really thinks more debt is going to solve the debt problem probably deserves to be lied to.

    A world where debt outweighs actual physical money was bound to crash eventually, all apocolyptic speak of doom aside of course. Face it people, you/we were duped. They milked you/us, and they don't even have the decency to hug you/us afterwards.

    And whats inside the box? NOTHING!!! ABSOLUTELY NOTHING!!!

  • Comment number 61.

    I don't understand these comments about low interest rates being the cause of our current problems and blaming Broon as a result.

    If my memory serves me right, a couple of years ago the consensus was that we couldn't increase interest rates as this would put too many home-owners in negative equity. Now people are saying this is what we should have done.

    Surely the increase in repossessions would have put more pressure on our banks? Is it Broons fault that Banks gave too much money to people who were high risk? Was Broons job to deflate house prices?

  • Comment number 62.

    #59 ....I think I follow your line of thought.

    (Maybe David Icke has been right all along!)

    Its the 'The Problem Reaction Solution Paradigm' being played out......

    1) The government creates or exploits a problem blaming it on others.
    2) The people react by asking the government for help willing to give up their rights (or money/tax in this case)
    3) The government offers the solution that was planned long before the crisis.

  • Comment number 63.

    I'm not a great fan of regulation and public bail outs BUT.... my 95 year old dad lived through the 20's and 30's and he remembers how bad it was. His family were publicans and whethered the storm better than most but he says - people have no idea how bad it can get. Previously afflent people sudennly in abject poverty through no fault of their own. Pensions disappearing. Ordinary people being unable to heat their homes pay their bills and feed the family.

    We are not talking the poor and dissolute here. Hard working, honest, careful educated people with minmal debt and young families, suddenly unable to find enough money keep going.

    There is however much merit in the argument that bailing out the banks is rewarding shareholders and senior bank staff for failure and bringing the financial system to its needs, not to mentions causing recession job losses and economic misery. This issue must be addressed - common justice demands it.

    The answer is to professionalise banking. Create a "General Banking Council" and require bank staff (and staff in other sections of the Financial services industry) with anthing more than very basic responsibilities to register with the Council. If you are not registered then you can't work (as in nursing, medicine, law etc).

    Then endow the governing body with the right to fine, suspend or strike off the individuals for breaches of the bankers code of conduct. The code would include obligations to peoperly assess risk and to act in the public interest. Short time gambling aginst a catastrophic risk would result in a extreme sanctions.

    The rules would need to be retrospective to deal with past risk taking.

    They you need to do two more things. Firstly, no bank may pay a dividend to its shareholders for 5 years after availing itself of any bail out. If during that time the bank returns to profitability such that - in ordinary circumstances - a divident would be paid then the money goes to the exchequer. Secondly the government gets to appoint and or remove the CEO the FD and the majority of the board.

    Job done. The banks wouldn't like it but then whatever makes them think - under the present circumstances that their views matter a jot.

  • Comment number 64.

    @59
    Fear is a driver, yes. Anger may become another one if a face-saving compromise is not, apparently, to be found for the banks. Many well-informed people on this blog in the past days have explained how Paulson's plan may well not work with or without the face-saving for the bankers. I hope the report from Reuters (34) which someone wise noted earlier today is not true.

  • Comment number 65.

    61:

    Basically, two problems have led us into this mess - unduly lax lending procedures, and unduly low interest rates.

    The government cannot really be blamed for bankers irresponsibly lending 6+ x earnings and 120%+ LTV, though better regulation might have seen this problem coming.

    Interest rates have been too low, contributing to this problem. Rate policy is a matter for the BoE, but government set the criteria, which was to manage interest rates solely on the basis of current inflation. Brown should have given the BoE a broader remit - not just basing decisions on current price inflation, but managing the asset cycle as well.

    In fairness, it would have been difficult, politically, to raise rates simply in order to cool the housing market. But, from an economic management perspective, that is what should have happened.

  • Comment number 66.

    Debt is here. You can't create a situation where there is no debt, well you can, by burning the creditor, that is what was behind many of the witch trials, they were initiated by debtors who wanted rid of their creditors. If you are of that mind then unfortunately debt is international and eliminating countries is a bit more difficult.

    I'm not aware of any law that stops anybody converting to Islam and they would then have access to the Islamic banking philosophy - so on a personal basis there is a solution if that is your need, many high street banks offer that sort of service. It is a bit difficult to cherrypick the bits of different systems.

  • Comment number 67.

    there is no 'have to'. The 1930's credit squeeze was 'a moral one' based on british attitudes [according to some in the usa] that the working classes need to be 'kept honest' through tight money conditions.

    the bank of england is still talking the same way today about 'moral hazard' etc.

    there are plenty of people who all through this have been ahead of the curve [see the video archive of yorba tv]

  • Comment number 68.

    #62 dceilar

    "Was Browns job to deflate house prices?

    Yes - as the market was getting overheated (for the last decade) - that is what we pay him for - to run the economy.

    It goes to prove that the 'consensus', as you put, it tends to take the part of self-serving greed if it gets a chance. Always ask what a reporter or bank representative has to gain from any statement - if by urging more of us to take on unsustainable and un-repayable debt he/she gets a bigger bonus ... need I say more.

    Many people were pleading for higher interest rates over the last decade - it is just that they were ignored!

  • Comment number 69.

    Turns out that the much lauded BofE 'independence' did not really help at all in maintaining financial stability in the long run ...

    ... because the Government still controlled things by :

    a) specifying which cost-of-living index the bank must use (which excuded house prices)

    b) setting the target for inflation

    This lax monetary policy is the root cause of the problems today in the UK.

    An excellent letter in yesterdays Times pointed this out.

    I found that satisfying in that I'm always interested in the root causes of these things.

    Only once they have been identified can possible solutions be devised.

  • Comment number 70.

    68:

    Quite right. It may not have been Brown's job to drive house prices downwards, but he should never have allowed the housing market to overheat in the first place. This was irresponsible.

    Socially, it resulted in many first-time buyers being priced out of the market, and others becoming over-stretched; economically, it led to a debt culture, with economic "growth" actually being a function of consumer debt founded upon illusory (as it turned out) housing equity.

    It's economic mismanagement, pure and simple.

  • Comment number 71.


    I suggest agree with a free market approach with government/central bank involvement is the best way to free cash at market rates.

    #43 proposed similar, and it has the benefit of not being a banker bonus builder. However, to avoid too much use of taxpayer money, I would add that the originator of the toxic product should be ultimately liable at the last transfer price if the market didn't want the product.

    This would see the gradual buy back of bad products and unrevelling of the paper chase to reveal the underlying assets as a controlled deflation of the toxic bubbles of vapourware.

  • Comment number 72.

    #34 and #64

    An update on the Chinese regulators - they deny compelling Chinese to suspend lending to foreign banks:

    http://www.reuters.com/article/ousiv/idUSTRE48O2PZ20080925

  • Comment number 73.

    thinking about the $700bn bailout. if the root of the problem is hte sub prime housing mess then perhaps the answer is to use this money to buy up a percentage of the bad mortgages and make them interest free. the portion that the homeowner can afford continues to be paid, but the govt holds a percentage of the property.

    Thus it helps tax payers, the govt has an asset which hopefully will have value in the future, the banks no longer hold toxic debt, and it's a wholly US bailout.

    Only downside is it's not a $700bn giveaway to the investment banks.

  • Comment number 74.

    @72. Thanks. Let's hope it's true!

  • Comment number 75.

    As a financial novice what would be the matter with a rule that said if you buy shares you have to hold them for at least three months. If you don't have three months then put the money on deposit.
    After all much of the trading is supposed to benefit your and my pensions over which we have rather little say.
    Robert Good
    Sierra Leone

  • Comment number 76.

    I meet my Bank yesterday hoping for good news and they actually advised me of increased fees, reduced lending capacity and demands for interest payment.
    They know it is tight but why do they not release funds they have received from BofE to their customers.
    They still manage to run stupi TV adverts and sponsor International cricket matches !!

  • Comment number 77.

    The banks want $700 billion of taxpayers money to save their sorry backsides?

    I think Congress should grudgingly acquiesce, gather all the top bankers and fund managers et al, around a nice big table, give them silver plates, forks, fine wine and bibs, let them make hearty speeches and let them back slap each other for a job well done.

    And then, at gunpoint, they should be made to physically eat the $700 billion, in the smallest denomination notes and coins possible.

    And not leave the table until they are finished.



  • Comment number 78.

    Re Post 64

    Anger is a manifestation of fear, it follows. The problem is there is apparently only one deal on the table at the moment which is broadly the US taxpayer underwrites the US problems, it would seem it is inescapable, nobody else in the US has the money. Quite how the underwrite occurs has to be flexible, thats negociation. There are limited options within the underwrite, thats just a matter of mix. There is risk but also some possibility of uplift. Look at Japan in the noughties, 4 years later they were in much better shape. You can't ignore the strength and dynamism of what still remains the most important economy in the world, the US.

    It is good that any deal is queried and questioned. However those who do not want any risk in a deal will not have one, and have one the US must, and so must we. Anybody wanting no risk, or virtually no risk, will be ignored by the dealmakers. It is the buyer, congress, who has to make sure the deal satisfies them and still remains viable. Nobody else. There are some hard nuts in there, I am sure they will do their bit.

    I suggest there will be an enormous amount of anger shortly when the cost all around becomes clear, and probably for some time. It will depend on recovery.

    The problem is that mass anger not a good thing in excess, look at 1930's. There are plenty of people who will be only too keen to ride on a wave of anger, and direct it onto the wrong target. It is however about time there was a bit of anger, but whether it is translated into sustained demand for improvement is another thing.

    I see Bush has gone to the pulpit today to market hell and damnfire to the congregation, to stoke up the fear. Not enough fear for a deal yet then. It is a dangerous political game because ramping up the fear will ramp up the anger to follow. Anybody trying to stop or slow a deal only ups the amount of fear needed which just makes it all the more dangerous.

    You need to have a bit of faith (and actually have no choice in the matter) in very experienced people driven by a very critical situation who all need a sound outcome. It is not helpful to continually try and pull issues of how the problem developed into the current situation which some people are doing, it is devisive, that will be sorted later.

    In a situation where fear is being marketed it is important that the media retain some overview, objectivity and critical assessment in what the are repeating and are not just used by as a conduit.

  • Comment number 79.

    @ 73

    Sadly subprime is not the root of the problem, it's merely the first to give. Toxic debt has been the main building block of the entire financial system and in recent years risk has gone out the window. No thought of a recession was given so the collapse will be across all sectors.

    They want $700bn now, maybe a couple of trillion next time. Once they start they can't stop because they 'have to do something'.

    This $700bn has to come from foreign sources - the Chinese, Japanese, Middle East - places where there are a lot of savings. They have already financed the last decade of boom so why will they continue to do so as things go the other way? The single reason why they might is to protect their own dollar holdings - nothing more. They know the US will default, it's just a case of when and who pulls the plug.

    This is really hairy because it will happen very quickly just as it did for the Soviet Union. Without a doubt the US is going the same way, either this weekend or some time pretty soon.

  • Comment number 80.

    The hype around short selling is stupid. We now have religious figures calling them bank robberies. This is a sign that no one understand the market place at all....

  • Comment number 81.

    I broke the house rules. With certain figure heads calling short sellers bank robberies, is the world going made. To me it is people stating their view on items they have no understanding off.

  • Comment number 82.

    Blimey.

    Time to leave these blogs I think.

    There is so much hate and spleen vented at our rich bankers that anyone would have thought money is everything. It also blinds anyone to the slightest possibility that the situtation can be resolved.

    Too much hate, envy and defeatism for me.

  • Comment number 83.

    @78
    Yes, broadly, I agree. We are very much in the realms of group psychology and have been for some time. I take your point about hard nuts in congress (they will certainly need to be). The public, to be frank, will need to see a few bankers bodies (metaphorical) as the cost of all this becomes clear. I think this is partly why Paulson's initial plan went down so badly, it came across as a rather arrogant dose of 'help for the boys' - or else.

  • Comment number 84.

    There seems to be a misconception in these posts that the $700bn has to 'come from somewhere'. In a debt based, fiat monetary system they simply print it. It doesn't have to 'come' from anywhere. That's how a debt-based fiat system works.

    Where the taxpayer picks up the tab is the devaluation of all the currently existing dollars by the printing of 700bn new ones (inflation of the money supply). The overall percentage debasement (reduction in purchasing power) of the currency is how the 700bn will be extracted, not only from the taxpayer, but from anyone with dollar denominated holdings.

    The Paulson plan is simply asking permission from congress to crank up the printing press. Deliberate monetary inflation has been used many times in history because it reduces the value (spending power) of the creditors holding and therefore the debtors liability. In the meantime of course it absolutely crucifies those who have any savings or is on any kind of fixed income like pensioners.

    Furthermore, whereas the $700bn is a huge sum to Jo Bloggs on main street, it is a mere drop in the ocean in terms of the size of the problem. It doesn't even come close to being enough to put a dent in the problem. Its a catch 22. Either way its dead.

    If the public were truly educated about the way in which the monetary system worked they'd kill it in a trice. Maybe now they wont' have to . Its doing a fairly good job itself.

  • Comment number 85.

    82.
    Only bankers think money is everything, that's why they pay themselves so much of the stuff, that's why they're not prepared to consider paying back their fraudulently gained bonuses to help bail out the mess that they created.



    The rest of us just want to pay our bills.

  • Comment number 86.

    I'm converting to ISLAM!!!.....and pdq.

    ....and then I'm going to move all of my money into an Islamic Bank.

    Praise be to Allah!

  • Comment number 87.

    #65 FriendlyCard
    #68 John

    Thanks for the replies. So then, to surmise, interest rates being set low solely to keep inflation low was too narrow-minded as other things the rates affect spiralled out of control. These being mainly house prices and credit.

    Therefore greedy bankers, looking for more custom, bent their lending rules so people could buy these overvalued houses or credit who couldn't really afford to repay if things got tough.

    Would increasing interest rates a couple of years ago actually save us now (given that the US economy is going down the proverbial u-bend)?

  • Comment number 88.

    HOW THE STOCK MARKET WORKS:

    Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.

    The man bought thousands at $10 and as supply started to diminish, the villagers stopped their efforts. So the man announced that he would now up the price and buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.

    Soon the supply diminished even further so the offer increased to $25 each and the supply of monkeys became so scarce that it was an effort to even see a monkey, let alone catch it!

    The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

    In the man's absence, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them back to him for $50 each."

    So villagers rounded up all their savings, and bought all the monkeys from the assistant. They then sat back and waited for the man to return from the city.

    However, they never saw the man, nor his assistant, ever again... only monkeys everywhere!

    And so my friends, you now have a better understanding of how the stock market works.

  • Comment number 89.

    87:

    Basically, yes. You've put the story in a nutshell. Low interest rates (set by reference simply to inflation) are the precondition for an asset bubble. Lending without adequate security leads to a subsequent crisis.

    Higher interest rates could have helped prevent this; prudent lending (in terms of income multiples and LTVs) would also have helped prevent it.

    This is the hangover after a debt binge.

  • Comment number 90.

    Robert – Spot on, I agree the BoE should extend its liquidity provisions as soon as possible. I also agree a lot depends on what is going on in the US.

    The Paulson plan does seek to urgently suck these distressed assets out and to restore confidence in the system. The key issue is therefore price, and any government needs to both protect taxpayers’ cash and to not subsidise market failure and thereby encourage even greater risk taking in the future and an even bigger crisis further down the road.

    Therefore, as long as congress can get some safeguards that the US Treasury will seek to negotiate to buy these assets at a realistic price, I think it’s all aboard the good ship Paulson tonight and the quicker we get moving the better. The UK government will likely need to put in motion a similar smaller scale plan and quickly.

    I also think that although some further consolidation in the sector may help - some of the banks in the near future will also require further recapitalisation. Hopefully, when confidence returns private investors will sign up to this. But if necessary both the UK and the US governments may have to underwrite the required share issues to the extent that they are able to do so, and again any ensuing government stake should be commercially priced.

  • Comment number 91.

    Post 88,Johnnie-London,
    Fair play to you Sir!

    Simplicity is underrated these days.Just look at what sheeple`s belief in jargon-spouters has given birth to!
    Fraud/Scams are illegal.Or they damn well should be.

  • Comment number 92.

    THANK YOU! for the programme this evening - you guys were at least telling it how it is and i think the government should at least make an attempt to put it's finger in the dyke before the wave comes over from the US - all i have heard during this conference season is a very irritable series of sound bits like - difficult times - family's at petrol pumps - but no real explanations and certainly not any vague descriptions of a road map for the uk - so thank you Robert Andrew and panel for an excellent programme that didn't treat me like a lemon! - mind you if it came with gin and tonic!

    cheers
    tim davies
    PS - Why is the BBC giving Mugabe a platform for his completely irrelevant babble?

    PPS - As we are in the realms of fantasy allready is it possible a criminal mastermind is stroking a cat in a place far away while they watch an executed plan!

 

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