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Bank of England forces bank shrinkage

Robert Peston | 16:34 UK time, Thursday, 16 October 2008

Has the Bank of England lost its power, to re-work Scotty's famous line from Star Trek?

Last week it cut interest rates by 0.5%, in a coordinated attempt with other central banks to re-stimulate the global economy.

Since then, the LIBOR interest rate charged by banks for lending to each other over three months has barely moved.

And that matters, because banks set their prices for credit provided to households and businesses off that so-called interbank rate.

Bank of EnglandOr to put it another way, banks aren't passing on to us the full cut in the interest rate which the Bank of England thinks is necessary to prevent a deflationary recession.

This may be particularly frustrating for the Bank of England and the Treasury because they've been doing a sterling job, to coin a phrase, of providing loans and financial support to banks, to make up for the credit that's been withdrawn because of the seizing up of wholesale money markets.

As of yesterday, the authorities had committed - since the start of the credit crunch last August - to provide an incremental £600bn of taxpayer loans and support to our banks.

Which is just a little bit less than the net dependence of our banks on the defunct wholesale markets.

And our banks are likely to get even more financial help from the Bank of England, thanks to imminent reforms announced today of the way it provides them with loans and liquid assets.

Will this do the trick? Will banks start lending more to us and at reduced interest rates?

That's doubtful - and the Bank of England may well be seen as implicated in the way that banks are reducing how much they lend.

How so?

Well, the Bank of England stressed today that all its additional lending to banks is intended only to see them through this time of stress - and that this financial support should not be seen as a source of longer term funding to the banking system.

So if our poor battered banks don't expect a recovery in wholesale markets any time soon - and it would be foolishly Micawberish of them to count on such a recovery - then they have no option but to reduce what they lend to businesses and to individuals.

Which is why it will be very difficult to turn our super-tanker of an economy away from recession.

Comments

Page 1 of 2

  • Comment number 1.

    Yes - you not only need to have the money to lend, you also need the creditworthy borrowers to lend it to.

    The latter seem in rather short supply.

  • Comment number 2.

    Sterling job? - This is no time for bad jokes Mr Peston

  • Comment number 3.

    Gigantic piles of money will not get banks lending as they still don't trust each other. Trust is a bit like virginity - once lost it is lost forever! ([mis]quote from Pride and Prejudice!)

    Trust can only be rebuilt when confidence in banks being able to repay loans is re-established. This will not happen until full audited accounts are prepared.

    Look, when banks lend you money they want to see six to ten years audited accounts so why will this not apply to, and between, the banks themselves?

    I think it is reasonable for us to ask the Bank of England, the Treasury and the FSA to answer this question.

  • Comment number 4.

    In the interests of LLOY shareholder, why isn't the board offering 8% coupon preference shares to investors and remaining independent of HMG support package? The 12% HMG coupon is penalistic given that the cost of borrowing has peaked and the LIBOR should now progressively fall.

    Alistair Darling was quoted as saying that the banks are free to come up with a 'demonstrably better deal'. Isn't this more flexible and lower cost for LLOY and shareholders alike?

    This would allow investors to receive dividends and would support the share price. This would re-attract the departing institutional investors and also still not preclude any purchase of HBOS. Although I do still believe that LLOY would raise sufficient capital from the open market to increase the tier rating and also buy HBOS at a lower market price.

  • Comment number 5.

    We all need to face the fact we aren't as rich as we thought we were (especially Gordon).
    The 'growth' we have seen in the last 8 years is an illusion created by borrowing £650bn. We are now dependent on international money markets. The international markets are concerned at the the risks these loans won't be repaid. The ususal laws of supply and demand apply. He who pays the piper calls the tune. In today's market those prepared to lend set the rate.They won't lend any more without a significant premium for risk. Would you lend to someone who has already borrowed up to the eyeballs and might lose their job?
    The only way to break the dependency is to pay back these loans. Gordon needs to give tax incentives to people to save and disincentives to borrowing. Higher interest rates would help repay these loans quicker.
    Gordon doesn't have the political appetite to face the fact we aren't as rich as we thought. He wants to borrow more to continue the illusion longer. He doesn't care about the long term - he just cares about keeping the feel good factor going until the next election.
    Repaying these loans means either a lot of pain for a short period or a little pain for a longer period. Either way we have a lot of pain to look forward to. All Gordon's fault for allowing this borrowing binge over the last 8 years.

  • Comment number 6.

    If the squillions of taxpayers money thrown at the banks can't persuade them to lend, what was the point?
    Perhaps it would have been preferable to guarantee that no depositors would suffer and then let the banks succumb to their beloved market forces.

  • Comment number 7.

    It seems like a catch 22, needing to keep banks lending at the rates that contributed to getting us here in the first place.

    A day ago I thought what's the point, it's just delaying and deepening the inevitable contraction. But if a delay could help some families and individuals avoid some of the worst effects of recession then maybe it's a price worth paying.

    Seems like there will be some very grim choices ahead.

  • Comment number 8.

    Can you answer this question? (Sorry if I'm being a bit slow here..)

    What dictates the LIBOR rate, who controls this level?... Surely it cannot be the banks themselves?

    Interest rates are controlled by the BOE, so should the LIBOR rate be controlled this way as well... In the short term any way???

  • Comment number 9.

    And no more information about lending amounts between the BOE and the banks! That's not very transparent and can only add to the volatility of these stocks.

  • Comment number 10.

    and another thing, why is it a good idea that the banks can again offer the consumer cheap and easy credit. Isn't that what got us in this mess in the first place?

  • Comment number 11.

    Well, would you lend/borrow money now, when you know the interest rate is going to come down in the near future ??

    Too much talk of it(interest rates coming down).

  • Comment number 12.


    Brown spending more billions was never the answer. Reports say he has never been happier than during this last two weeks !

    He will be happy, he has been doing what he does and likes best, throwing taxpayers money around like conffeti.

    The man has broken Britain and still no one has the guts to oust him once and for all.

    We havnt seen half of it yet and redundencies will pile up before Christmas and we will have no further reserves.

  • Comment number 13.

    It sounds like good common sense to me.
    There's no point in lending money to dubious borrowers for the banks to take even further losses.
    I think they will need to know just how much bad debt they are going to have to write off before they start lending willy nilly again.
    No doubt the government will have to start using the recession word 'cos everybody else is and start planning for the cost of unemployment by cancelling some of their unnecessary spending on unnecessary schemes.

  • Comment number 14.

    Please please PLEASE stop saying "y'know" in your tv pieces. Your last few minutes on BBC News were excruciating. While you're at it, sit up straight and shave. All in all not an effective performance.

  • Comment number 15.

    I see this headline on BBC/business page.

    "Wall Street shares open higher but then fall back as investors analyse fresh data on the US economy."

    How can they be "analysing" anything? The investors are running like headless chicken.

    Perhaps there is just too much information ...

  • Comment number 16.

    Could we be seeing civilization fall apart??? I bet the Romans didn't see it coming or the Mynans or Incas etc etc.

    The safest place to invest whats left of your money is now in land.... they are not making any more of it you know...

  • Comment number 17.

    the banking industry has been given too much power and the result is what we see.
    banks that fall into problems dont deserve to be bailed out they should fail and be used to teach other banks to be more carefull with there assets.
    the old lady of thread needle street should know better than to become embroiled in politics, jumping into bed with gordon and his boys will only cause greater problems down the line, i advise get out and relearn what you should know.

  • Comment number 18.

    Houses eh?
    Nice to live in and paint up, but lethal if you over-price them.
    Let's hope all governments finally learn that lesson.

  • Comment number 19.

    Robert.

    "Which is why it will be very difficult to turn our super-tanker of an economy away from recession."

    The ship is already on the rocks. Surely you can see that. What evidence is there to the contrary?

  • Comment number 20.

    We are well and truly in recession now. Look around at businesses, high streets, car parks at stations.

    Refinancing the banks with public money and then let them carry on more or less as before is ridiculous and a complete waste of money.

    Nationalise the banks now until hostilities are over as they say.

    Sack the directors and managers who got usd into this mess and put new teams in to work to new policies.

    What will the banks do with all the houses they will have on their books and have to sell in a dying market?

  • Comment number 21.

    The banks that have received such magnificient support from taxpayers should be given 7 days to respond in a positive way. If not the message should be clear, all financial support will be withdrawn

  • Comment number 22.

    Is it me, or this now getting a bit boring?

    Unless the banks 'do something' soon, then those companies relying on working capital facilities to operate their businesses (not a good thing I know, but it's reality) may not be paying the wages soon. What if that company is a road haulier delivering food and other essentials hither and thither around the UK?

    And what if, when the truck drivers (pick any type of worker you like really) don't get paid, they withdraw their labour?

    Meantime, elsewhere and just out of the 'interest range' of mainstream news editors, some more countries are facing bankruptcy, especially in Eastern Europe.

    Things are going from bad to worse here and I'm surprised at how little attention this crisis is receiving, other than headline news stories. Maybe we're all bored with it? Until the lid blows off, which is not far off now.

  • Comment number 23.

    Have you only just realised the dear Old Lady doesn't have much control using its macro economic leavers??

    Besides which a half point cut under the circumstances was quite pitiful - it is less an issue of technicalities now than more of a clear psychological tsunami to counter the irrationality.

    bw

  • Comment number 24.

    I see that the Pru share price has fallen by another eighteen per cent today.

    I trust that Big Gordy has another few hundred billion set aside to bail out any casino players in the insurance industry, and give me a £50,000-plus guarantee that my little pension pot is safe.

    I have absolutely no idea what my "rights" are as a with-profits pension scheme holder if the insurance company gets into trouble.

    Probably none.

    Does anybody know anything any more?

  • Comment number 25.

    Isn't this what's called the liquidity trap? Time for some helicopter money? I'd be happy to receive some ..

  • Comment number 26.

    We tend to overlook the International nature of the City at this level - and that includes you, Robert.
    The problem isn't just that Lloyds are reluctant to lend sterling to NatWest, or vice-versa, it's that they're also reluctant to lend to Bank of America or Unicredito, for more obvious reasons. Why should funds backed by UK guarantees be spread out across the world - indeed, can they even be? This is complicated by the presence of true pan-nationals like HSBC and Standard Chartered, and so probably the only real resolution will be for the World Bank to instruct the IMF to act as a global Fed, Bankers of Last Resort in support of all world banks - and that could be interesting in itself, given the uncertain status of certain banks in Central Asia and points beyond. No one Nation can now lead the way, as there will be hundreds of different guarantees creating tens of thousands of loopholes for the unscrupulous: the IMF must collect the National Guarantees and spread the risk across all, creating a two-tier banking structure of those guaranteed and those not, ie AAA and Junk. One can hardly imagine the UK underwriting the Reserve Bank of Zimbabwe, for instance!

  • Comment number 27.

    'Poor battered banks'???? I hope that you were being ironic!

  • Comment number 28.

    All very strange. As I see it, governments have injected capital into the banks in order to provide liquidity, and to bail the banks out with respect to their incompetent management of credit.

    But the banks, rather than passing this on, are now hoarding so libor remains high.

    They wont lend to each other, and they are selfishly calling in debt which was less risky than the debt that put them into the situation in the first place.

    At the end of it, who deserves to survive this more?

    I'm not an economist, (which is probably clear from the next comment!) but I begin to wonder if Governments would not have been better off setting up a rival charitable organisation with the sole purpose of lending directly to small businesses, rather than trusting the banks to do it for them.

  • Comment number 29.

    Robert tells us that the banks set their prices for credit to households and businesses based on the interbank rate (LIBOR).

    LIBOR is based on UNSECURED loans but banks certainly do not usually lend to punters and businesses without it being SECURED on some asset.

    Is this 'treating the customer fairly'?

    It would appear not, but then again, is anybody outside of banking surprised about that.

  • Comment number 30.

    By the way Bobby P - since you are now a celebrity and will no doubt be on a fast track to riches, it may be worth doing a post-nuptial agreement with the other half just in case.
    bw

  • Comment number 31.



    These people running banks are basically thieves - not in a legal sense, perhaps, but any moral sense.

    They will profit from the bailout, requiring more and more cash-incentives to get them to play a role in cleaning up the mess they made.

    Sickening.

  • Comment number 32.

    The Banks have lied about their liquidity, they have been greedy and foolish.
    It should come as no surprise that their first response to the money made available to them will be self-preservation.
    Lending it out will have to wait.
    The only way to make them lend is to have proper representation at Board level sufficient to outvote the rest. Otherwise, like the NHS, they will suck it in and it will just disappear.

    The real question is, will fiat money survive ?

  • Comment number 33.

    this is the perfect time to open a bank.

    it will have no dodgy debt and so will attract huge investment. It will have the freedom to lend, depositors will feel safe and will have a huge earning [profit] potential as it takes up the business the current banks refuse. its a win win situation.

    maybe branson could do it?

  • Comment number 34.

    Is King out of his bank-spanking phase yet?

    If the new liquidity measures had been in place NR and BB would have survived - remember the naming and shaming of NR led to the first run on a British bank for 160 years and started the crisis of confidence in the banks.

    Historians will probably regard this as a significant contributory factor to all that has followed and will follow.

    What an error of judgement!

    Yet King, an arrogant academic out of touch with the real world who has shown many grave errors of judgement, including not only lowering interest rates in August 2005 (when house prices had stabilised/fallen slightly over the preceding 6 months) but also signalling that they would reduce further, which led to the recent and greatest housing boom, is still in place, apparently still obsessed with moral hazard, despite the fact he helped to create it, and that it disappeared over a year ago.

    He must have been dragged shouting and screaming into agreeing to some of the recent initiatives.

    The Government ought to sack him so that he can retire on his huge gold-plated Government guaranteed pension, whilst we watch our pensions and investments disappear.

    As a result of this fiasco, and particularly how bank shareholders, including our pension funds, have been robbed by the Government, assisted by an incompetent BoE, I cannot see either domestic or foreign monies flowing into shares, and therefore investment in the UK economy for a very long time. There are very clearly more attractive destinations when global share prices start to recover.

    What was regarded as a safe place to invest (a major attraction) is no longer - the UK public will pay the price for many years to come, even if the Tories get into power, investors will fear the return of Labour.

  • Comment number 35.

    Not sure that banks have stopped lending.

    My dad has just taken out a mortgage to buy another investment property. Madness you may say, however all the other properties are paid off and the loan is only 50% of the much forced/reduced purchase price, plus combined rental income will payback in 2 years with enough cash to clear the mortgage and fund the next 50% deposit.

    My point - Banks will and are lending to those with secure collateral and sensible borrowing ratios. On the BBC news last night their was a man with no job, a £200k mortgage and a BMW (on HP?). Now I wish this man no ill, but if people think that lending is going to be switched on again at the same levels/risk they are deluded.

    Its like jump starting a car with a flat battery, yes you might get it running again but the underlying problem is the battery is worn out and needs changing (next morning same problem). In the case of debt their is to much that needs to be paid back and asset values (houses) need to fall so that the available lending is enough to cover borrowing requirements at sensible levels for both businesses and individuals.

    It also does not help that Northern Government Rock is determined to deter people from re-mortgaging with them. Hence the good risk borrowers go elsewhere so taking part of the available funding from other institutions that would normally be available to lend to other borrowers.

    In addition would you lend to businesses that may fail, so increasing your losses on top of losses you already have?

  • Comment number 36.

    #5 gordonisamoron2,

    "The only way to break the dependency is to pay back these loans. "

    That may be true but consider the consquences, intended or otherwise. In a debt-based, fiat, Fractional Reserve Banking System the money in circulation exists as a result of loans (personal, corporate, governmental). So, money=debt=money.

    If, as you suggest, we raise interest rates that will have the effect of encouraging us to save as the opposite was true with low interest rates which meant that savings delivered a negative real rate of return.

    A proviso to this must be that people have some element of disposable income to save. That is not likely to be the case but lets ignore that for the moment. As the money is withdrawn from the circulatory money supply then the money supply diminishes.

    The first portion of the saving will actually go to pay off some of the debt. There's no point in having savings returning 6% interest whilst still paying 28 % APR on your credit card. As the credit card balance is paid off then the total national debt is commensurately reduced. Through the magic of Fractional Reserve Banking the repayment of 1 GBP of debt reduces the money supply by 1 x the average lending ratio. So if the lending ratio was, say, 20:1 then paying off 1GBP of debt reduces the money supply by 20GBP. So the effect of paying off our debts reduces the money supply.

    When the money supply reduces it causes first, a recession, second, a depression and third, a collapse.

    In reality it is much, much worse than I've described above. Investment Banks decided that the 'Reserve' part of the Fractional Reserve Banking system was too restrictive. So, they invented the Capital Adequacy rule. Now the fraction that you have to keep in reserve can be as low as you like as long as you adequately assess the risk. And we know how good they were at doing that......

  • Comment number 37.

    Hi Robert,

    You didn't really expect that the 50bps cut would be passed onto consumers and small businesses did you? You must be having a laugh.

    Bottom line, banks are interested in only one things right now. Self preservation. What this means is parking their toxic waste onto the BofE or Fed's balance sheet, in the form of a repo and then hoarding that money (possibly back with the BofE) in case they need it. All the while they continue to deleverage as fast as they can, so loans are not made and debts are reclaimed and repaid as rapidly as possible.
    All this screaming 'We must have a rate cut' by the banks was one rather large con job. The Bank of England must be feeling very foolish for having their pockets picked by the very institutions they were looking to help.

    The banks not lending is not the problem. It is a symptom of the problem, that being too much debt. The world has realised this belatedly and everyone with any sense is deleveraging as fast as possible. Nothing the central banks or government do is going to stop this credit tsunami. The world is going into a recession. The sooner our dear leaders pull their heads out if the sand and realise this fact the sooner they can draw up plan B. (Something they clearly don't have.)

    Unfortunately the heads of the G11 and many of their central banks have gargantuan egos, unable to fess up to mistakes made and thus make the necessary plans to deal with the oncoming economic implosion.

  • Comment number 38.

    Of course, only if you're a Keynsian its all very mysterious why the BoE cut had no effect.

    On the other hand an Austrian Economist might point out that trying to inflate an asset bubble thats burst will have no effect.

    For a less theoretical and more concrete example, look at Japan, where the real intrest rate has been held to zero or even below and has had no effect whatsoever.

    We currently lie at the start of the Japan experience and if we do what they did, we'll get the same result. Although in our case, because of the wild spending spree the government has indulged in, we may have high inflation or even hyper-inflation.

    Filling leaky buckets wont help, only a wholesale abandonment of the Basel II accord will even begin to slow this down.

  • Comment number 39.

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

  • Comment number 40.

    Banks cannot lend what they haven't got !! All this talk about banks not lending when the government has handed them a large dollop of cash is just so much hot air.

    The large dollops have *NOT* been handed over yet !! The shareholders of the various banks have not voted on whether to accept the terms that the BoE has imposed on the handing over of those dollops of cash !!

    Until the cash is in the bank (no pun intended), accepted and signed for, it is *NOT* a done deal !!

    Scaremongering and vitriolic comments based on misconceptions and misinformation is not helping anyone, least of all, the people who need it most !!

    Can we have more calm and reasoned comments instead of the kill-em-all-and-be-done-with-it type ?? We may not agree with the other comments but calm reasoning *may* help towards solving the problem !! The other type just fan the flames and lead to destructive thinking; just what we don't need at this point in time !!

  • Comment number 41.

    Banks will not lend money for a very simple reason. They have now been rumbled for their recklessness over the last decade and will not now dare repeat the same mistakes and risk going completely under.

    They know that we are already in a recession and that the housing market will crash - how can it not when average prices are 10 times average salaries?

    That being so, they are not going to lend money, even to those with sizable deposits, when they know that the value will tank, creating negative equity and the likelihood of repossession, the value of which will be considerably less than the amount lent out.

    Similarly, they will be cautious to lend to individuals and businesses who they deem to be high risk and thus lead to further bankruptcies and repossessions.

    With an economy highly dependent on consumerism we are in deep trouble. Whether we like it or not, consumers will be forced to cut back on their discretionary spending and that will hit the high street, leisure and entertainment industry.

    The Bank of England are thus wasting their time cutting interest rates, which will just make things a darn sight worse for the consumer by hyping up inflation.

    In spite of Brown's ridiculous proclamations that it is business as usual, we will be for an era of considerable austerity.

  • Comment number 42.

    #26 Strange as it may seem, HSBC (a Bermudan bank) and Standard Chartered (a South African bank) are probably the only ones that *DON'T* need the government's cash bail-out.

    One can tap into lines of credit in the Far East and the other is OK so long as the South Africans keep minting gold Krugerrands for the panic-stricken to buy !!

  • Comment number 43.

    Is there anything to stop the UK taxpayers' bailout billions being used by UK banks to pay their foreign-owned CDF instalments, as and when they fall due? In other words, could the bailout injections evaporate into the offshore ether, rather than lubricating the seized-up machinery of UK business banking and mortgage finance?

  • Comment number 44.

    I think it's simply a sign of the fact that those running the banks are really not very bright and are certainly completely unpatriotic.

  • Comment number 45.

    Time to cut out the middle man then and send loan cheques out to the public. Good Oh. Happy Crimbo

  • Comment number 46.

    13 virtualsilverlady

    Unfortunately it looks as though the approach will be to expand public spending and push up national debt. Dear Prudence at work again.

  • Comment number 47.

    # 4

    Well, all these banks still exist not because they are so creditworthy, but because the market got the message that behind them there is the UK government.

    If the LLoy followed your suggestion, then the only reasonable action from the Treasury would be (not because they would contemplate it, unfortunately) that in this case Lloy is excluded all auctions of treasury bills, any kind of central bank money distribution (why should the government support them in any form? They are strong enough, you said). Try to do it from your own capital and deposits. Then Lloy would disappear in no time.

    You know, once upon the time the Bundesbank played this game beautifully. And oddly the banks participated in it - after all it was Bundesbank's ball.

  • Comment number 48.

    # 12

    And how did Brown destroy the country? The man may not be the most talented PM, maybe boring, conceited whatever, but he had no real role in destroying the country (and it isn't you know).

    The British government has absolutely no means of developing a coherent economic policy partly for historical reasons (it never really had), partly because of the 18 years of Tory rule that destroyed the infrastructure of developing such a policy and the 11 years of new labour that did not make any serious attempt to find a way to do so.

    And as Peston's blog shows not even BoE has the influence any more on the financial sector (well, it has always been consensus driven, anyway).

  • Comment number 49.

    Robert,

    Now is the time to focus on what the banks are doing in practice to help hard pressed sme's.

    The reality I suspect is that they are doing the exact opposite of what the government has tasked them to do.

    At the moment they are busy raising interest rates and costs to their captive market...businesses cannot just change to different banks and are having the life squeezed out of them by banks whose sole interest is themselves.

    Its time to make sure this is stopped before it goes too far and every business must speak out now!

  • Comment number 50.

    # 22

    Excellent points.

    Having said that companies could reverse to bill of exchange and BoE could directly discount them to overcome the shortage of working capital credits.

    Some of the East-European countries are really interesting as you said as they are quite similar to Iceland in the main factors of their crisis, notably Hungary and Poland (maybe Slovakia).

  • Comment number 51.

    # 25

    Yes, in a way it is a liquidity trap as the government is alone on one side of the market and everybody else is on the other and hence interest rates stay high as any amount the government throws at the market, it can be absorbed (after all, the banks were extremely liquid in securities - OK, a large proportion of them were worthless, but it's a different matter and now they are very liquid in cash if they want to be).

  • Comment number 52.

    This comment has been referred for further consideration. Explain.

  • Comment number 53.

    I do note your analogy of our economy to a supertanker, you are in my opinion correct.
    In a past life I was a Chief Engineer of a supertanker.

    They were useless, there is a direct likeness to our economy.

    There was a problem coming to terms with these facts.

    regards

  • Comment number 54.

    I hope my bank isn't going to lend money on property in the near future. Why would any bank want to lend money to any of the companies operating in this country ? The building industry has been living in a bubble of ripping off the consumer for the past ten years along with estate agents lawyers developers and sundry other speculators. If property prices drop by 30% it will be followed by a drop in the price of the materials needed for building. Negative equity will of course affect those wishing to sell at a profit and those who bit off more than they can chew, but those who bought a house to live in and don't want to sell will be OK providing they still have a job. Property prices were inflated by greed and easily got credit and have to drop to a realistic level so that ordinary people in ordinary jobs can buy a house to live in.

  • Comment number 55.

    Some new news,

    > Sarkozy said the auto sector may need help given that the United States was making cheap loans to its carmakers

    http://uk.reuters.com/article/newsOne/idUKTRE4961YE20081016

    It's trade war time!

    Not to forget that it's generally agreed that protectionist policies exacerbated and prolonged the 30's depression.

    "When I was a boy I was told that anyone could become president; I'm beginning to believe it." -- Clarence Darrow

  • Comment number 56.

    Why not bypass the banks completely? Lend directly to the economy. Open a commercial lending arm of the BOE... Northern Rock, or B&B.

    Like it or not, right now, our money (97%) of it was created from debt. This means that when banks stop lending, the money vanishes. When the money vanishes, so do the stock markets, the sales and the jobs.

    If the banks won't lend. Someone has to. Failure means a depression.

  • Comment number 57.

    26 rahere

    ..One can hardly imagine the UK underwriting the Zimbabwe Reserve Bank...

    Sorry rahere, nothing would surprise me with this mob. I thought it bizarre that the UK declared financial war on Iceland, having said what a safe place it was for the punters life savings when questioned a few months ago. Then to immediately lend the same icelandic institutions in the UK 100M GBP, ringfenced or not. Erratic.

    Or to provide money to banks in distress and expect them not to use it for what they judge best rather than what the treasury imagined they might use it for. No nothing would surprise me.

    I have never seen how truely multinational banks could be supported by individual national reserves.

    I am waiting for some institutions/banks/businesses to fail because I believe that is what the banks behaviour says is coming, then we might have some uplift. Could be the various governments desire to let no banks fail is a mistake but I guess it depends which ones fail and where.

    Have the LB UK administarors got the money back which was piped across the Atlantic at the last minute.

  • Comment number 58.

    Gordon Brown came in with his grant of independence to the BoE from ministerial control. Possibly that arrangement has less relevance in the present climate. Could it be that if he does not rescind that arrangement he may also go out with it?

  • Comment number 59.

    43


    No.

    Yes.


    Scared yet?

  • Comment number 60.

    ALL THIS IS JUST TOO LATE!

    HAD UNCLE MERV DONE HIS JOB THIS LUNACY WOULD NOT BE NECESSARY.

    HAD THE FAT CATS AT THE FSA DONE THEIR JOBS THIS LUNACY WOULD NOT BE NECESSARY.

    I JUST DESPAIR ALL THESE IDIOTS GET PAID AT LEAST TEN TIMES THE AVERAGE SALARY,AND THEIR EXPENSE ACCOUNTS ARE MORE THAN MOST PEOPLE EARN.

    WHY OH WHY???

    TIME FOR AN ELECTION LETS HAVE A CLEAR OUT.

  • Comment number 61.

    #29 - JohnConstable

    It is blindingly obvious isn't it? The banks are not passing on the benefit of lower interest rates to their customers and they are not adjusting LIBOR. They are watching their own backsides and more especially the hip pockets.

    Presumably they are sticking to the letter of the agreement with HMG because they sure as hell are not honouring the spirit of it.

  • Comment number 62.

    During the first half of 2007, the Bank of England was happy to see LIBOR become disconnected from the policy rate, as it meant inflationary pressures could be squeezed by higher borrowing costs without a rise in the base rate. Recent evidence suggests it is going to take much more than 600bn for the Bank of England to regain control of the money markets, and hence inflation.

  • Comment number 63.

    Can we agree that a major financial adjustment is underway in this country? Can we further agree that this is happening because the British have over-indebted themselves over the last decade or so? If we can agree on this, why is it surprising that the next step isn't lending further zillions of non-existing Pounds to people who already have more debt than they can ever repay?

  • Comment number 64.

    What happens when the ALT.A market defaults. With £1 trillion tied up in secondary morgages , buy to let and remortgages' aren't we in for another banking crisis

  • Comment number 65.

    This comment has been referred for further consideration. Explain.

  • Comment number 66.

    #60

    Stuck shift key still?

    I'm sure that Merv King will be flattered to know that he could have cured a world wide banking crisis had he only known...

    At least we're not short of nutty fruit-cake and unlikely to be so for some time judging by some comments on this blog!

  • Comment number 67.

    #56

    Good question.

    How about giving more attention to un-sexy Credit Unions or other co-operative banks that are run for the benefit of the members rather than institutional shareholders?

    A characteristic of the Thatcher years was the de-mutualisation of building societies and what a disaster that has been.

    Personally, I think that we are heading for a revolution in which the control of money will be placed firmly back in the hands of the people until such time as we can once more place trust in a privately-run banking system.

    I for one do not want my hard-earned dosh simply given over to the banks so that they can hoard it in order to pay off the looming debts that they haven't even admitted to yet. Lending and borrowing is what banks are supposed to do, not just borrowing from tax payers.

  • Comment number 68.

    Looks like we're near the bottom now. Take a look at http://tradeforce.blogspot.com/ for greater insight. Probably the most insightful blog concerning this whole crisis.

  • Comment number 69.

    Until it becomes clear just who has been left with the Lehman toxic stock of CDS's and people know whether AIG, Swiss Re and a number of monoline insurers can balance the books to an extent that allows them to survive it is going to stay like this.

    We are in a classic prisoners dilemna as none of the banks know what the other banks hold in terms of toxic debts that can't be paid or hold insurance with AIG or the monolines that can't or won't be honoured.

    Its sad but true that the banks are acting totally rationally in hoarding cash as they don't know how much they will need to survive. No one knows how much of the paper they have of CDS's or other financial instruments is worthless as the people that need to pay them can't pay.

    One thing is certain there will be much more red ink on the Footsie and many more banks and insurers that go to the wall over the next few weeks.

  • Comment number 70.

    # 60 alexandercurzon

    Please don't shout at us

  • Comment number 71.

    Robert, what with all this money the Government is pumping into the economy, what's the impact on long-term inflation? Doesn't an increase in money supply empirically relate to a rise in inflation?

    Please keep up the excellent reporting. Not all of us are as dumb as Panorama seem to think. That was an abysmal programme this evening; a complete waste of sixty minutes. It could have been much better but they don't even trust the viewer to be able to watch Will Hutton for more than twenty seconds without the having to switch the camera to one that can pan out from behind a piece of scenery.

  • Comment number 72.

    The global markets are bigger than governments and it is ordinary taxpayers, national & local government employees and media personalities with insider information that must ultimately suffer a correction.

  • Comment number 73.

    "Has the Bank of England lost its power?"

    It never had it in the way implied above.

    Central banks do not set interest rates, the capital markets set interest rates. Central banks set a target which they defend by injecting or withdrawing liquidity. This target is usually near the market rate and it usually lags the market. When the MPC meets to vote on the official interest rate, it mostly meets to decide whether or not it goes with the market now or delays another month. Usually this does not matter as there is little divergence.

    Now there is an obvious difference and the truth is revealed. The market says higher via a steepening in the long end of the yield curve, the Bank of England says lower and must defend its target with fresh liquidity. Cutting 50 bips against the grain of the market was a purely political move, the coordinated cut was jawboning to prevent a market crash. It probably had more global resonance than actual effect here.

  • Comment number 74.

    Well government controls at least two banks so if they order them to cut rates others will fallow.


  • Comment number 75.

    71 ralphcorderoy

    I thought the Panarama programme was a bit superficial also.

    An aside - It really annoys me when some expert says 'we all have spent/borrowed too much', excuse me, speak for yourself. If all the government rep can say is interest rates are lower now than when the last bumpy landing occurred it is pathetic. Interesting that the media are starting to layout their vision of Brownland - the banks the cowboys but Brown a useless sheriff, the FSA an incompetent deputy. Think that we will have that typecasting for some time. No boom and bust, eh. True enough - Just megaboom and megabust.

  • Comment number 76.

    Its all a bit irrelevant now that Brussels has ruled on the five year dividend ban. I'd like to see how the Treasury officials are going to get out of that one. Special opt out?

  • Comment number 77.

    Surely the banks are just being sensible until the effects of CDS's become apparent and they know just how much they are actually in debt. I always assumed that what we had fed them to date was only a small down payment on what they would eventually require.

  • Comment number 78.

    I cant use the words to describe whats happening like others as I am dislexic and find it difficult. However, I cannot understand why, just as the lorry crashes into the deer we just stand there staring at the headlights?

    In order to produce phantom money the banks need to produce phantom balance books containing guarenteed deposits form the payments of the phantom loans they have given out.

    A loan produces more phantom money that enables further loans based on the deposits(repayments) of those phantom loans from the tangible money supply.

    The assets of which this phantom money was produced have tanked to the point that the people that gamble(invest) in assets realise that the phantom money is far in excess of the value of anything tangible including the reserves of the creditors.

    Everyone knows that the only way out is to produce more phantom money and tangible repayments to carry on the circus. However, there are not that many people left willing, able or forced to borrow. The number is declining everyday from companies to Mr Smith and therefore, the only result that can happen is

    1. We are forced to take out loans of phantom money

    2. We dont take out these loans and live on tangible assets (cash, commodities for now)

    Both actions result in the same answer, and raising or lowering interest rates will make no difference

    The Banking system will collapse and the difference between letting the Banks themselves collapse or letting the level of Governments collective debt collapse their respective economies have exactly the same result.

    Recession, Depression and a reorder of world economics to

    1 save the world by reducing carbon emmisions

    2 let people live in affordable housing

    3 local communities forming living almost entirely on local produce as world corporations dissapear from every day life

    Sorry about the spelling but the death of branding, mass marketing and globalism is worth making a few mistakes for.

    I love markets - but remember your purchase could go off quicker than it sell by date!

  • Comment number 79.

    Re-working . . . .?
    -What Scotty famous line from Star trek .?

    It wasn't:
    "The more they overlook the plumbing, the easier it is to sop up the drain.!" was it .?

    Scotty (James Doohan) in 'The Search for Spock.'

  • Comment number 80.

    WHY has the abbey building society, with whom I have a mortgage account, only reduced its SVR by 0.15% to borrowers when many institutions have reduced theirs to 0.5% --Abbey boasts that they have won Euro Banking awards --but they arent helping ordinary customers like me who are struggling every month to make ends meet .
    I have come off a fixed 2yr rate and have my house of 22 years up for sale to escape a big mortgage after a divorce and cancer.
    I have enough money to pay my bills JUST
    every month but am worried not just for myself but for many many people who are in the same boat or in even worse circumstances.

  • Comment number 81.

    Panorama was pathetic.

    "People spending on cars and holidays."

    "We are all to blame".

    This was very, very insulting.

    A lot of people have had no choice to rent and try and save for a house for years now. While the banks have hiked up house prices people have been suffering and delaying making families.

    My parents have never ever gone on holiday in their lives.

    Totally and utterly disgusted.


    How about the billions lent on BTL ? Tax breaks for landlords anyone ?
    How about the billions gone on dividends, asset sales and bonuses ? How much has not even been taxed ?
    How about the billions made on our pensions ? Taxed by Brown and commission - never mind the stock trades being made.
    How about the trillions lent out to ever hyped mortgages ? Where did 3x salary go ? Taxed by HMG.
    How about the billions/trillions lent out to hedge funds ? Speculation on oil ? wheat ? copper ?
    How about the billions sunk into student loans ?
    How about the billions sunk into the PFI ?
    How about speculation in share markets ? Mining shares ? Bank shares ? Soveriegn weath funds ?
    How about the 10's of trillions some of the banks have outstanding on the derivative markets with practically meaningless capital reserves ? JP Morgan anyone ?


    How can it be justified to have billions in city bonuses and million pound wages not to be taxed and then drop the 10% tax rate.

    It stinks.


    If the BBC doesn't stand up to the bar and take the chance of getting reform through investigative reporting then expect the same old same old in another 10-15 years time.

  • Comment number 82.

    Robert, the banks won't be passing on the base rate reductions because the rates of interest are too low, when factored against the risks they are taking , heading into a recession.

    As you, and others rightly say just about every day, we all got used to borrowing too much money, too cheaply.

    The price of money at the interest rate the banks can draw it in (LIBOR) won't drop until the gap with base rate has widened far enough to ensure interest income can sufficiently cover the cost of bad bebts.

    Until that plays tough why don't the Govt get a Business Loan G'tee scheme / such like, going - i.e. if the Govt underwrite the debt on a borrower-by-borrower basis the banks would fall over each other to offer the credit. The banks do the admin, the businesses (with a resonable bsiness case) get the money and the Govt. covers the risk - which is what they're doing now anyway, but without bagging the benefits.

  • Comment number 83.

    So the libor rate hasn't moved despite the bail out this means that the bailout was the wrong answer.

    Until libor returns to its historical average then the system is still broken.

    Personally I believe the answer is the solution currently being undertaken at Northern Rock, stop lending, hike up rates, demand repayment from customers and pay of the staff.

    We need to face facts the money markets are closed and will be for some time and the money borrowed from them must be repaid.

  • Comment number 84.

    81 There are no tax breaks for btl you pay tax on the profits of your business just like any other business does.

    In fact btl is taxed very unfavourably, tax rental losses can't be set of against other income. This results in a situation were you have to pay tax on money that you haven't actually made.

  • Comment number 85.

    74 You do know that Northern Rock are only cutting their standard variable rate by .14%instead of .5%

  • Comment number 86.

    #84

    No tax breaks ? What about VAT on repairs and improvements ?

    Don't just say "other businesses" are the same. "Other businesses" don't effect first time buyers like BTL has.

    BTL is a social and moral disgrace that has distorted house prices.

  • Comment number 87.

    #67 Strange but I seem to remember that the de-mutualisation occurred in the Blair years. In fact, I have several pieces of paper telling me what a lucky chap I was to receive some shares in various de-mutualised building societies !!

    It all came about because I was paranoid about putting all my hard earned dosh in one bank, oops sorry, I mean building society savings account !! I know I am paranoid but was I sufficiently paranoid ??

  • Comment number 88.

    are we now becoming a third world country? (sorry but I can't remember the fancy new of term)?

    Secrecy and highly questionable practices by politicians and banks, most people barely able to keep a roof over their heads, credit referencing in overdrive, the use of litigation to make a quick 'buck', rising unemployment, and the most affected by all this (ordinary hard working people) being left by the wayside.

    Doesn't much sound like the country of gentlemen to me! A person's word used to be their bond-where did that go? Up the Swanee with the sense of responsibility!

    The worst thing is we are powerless to do anything-anyone reading these blogs must be seeing comments being made now which are the same as those posted before.

    How can we wipe the arrogant smiles of their greedy, self important faces? The electorate is getting more and more angry-recurring themes are-

    The French revolution
    Sweden
    Balance sheets and total honesty required
    An impending recession (at my lower station in life it seems as though we have been in recession for some time!)

    T name but a few

    It seems that the most precious commodity around at the moment is trust.

    At what point will the world leaders listen?

    I did ask a while ago if anyone knew if the monies promised globally had actually been given-maybe not-governments hoping that rhetoric alone will save them parting with the money. Maybe then they can pretend they have so they don't have to show gross mismanagement of their treasuries!

    Common questions from the common people, but becoming increasingly strident.

    All that money, and all the people in desperate need of financial support, but GB is not on their doorsteps with a lot of cash, is he?

    Banks shouldn't be lending our moneyback to us-they should be compensating us by dropping mortgage rates so we keep our homes over our heads, and get our wages paid. Do any of those arrogant bankers and politicians live an increasingly frugal lifestyle? They have absolutely no idea of what the rest of us are going through!

    I'd like to open an account and the BofE, but due to being unable to work following emergency brain surgery, I'm stuffed by the credit agencies, with my husband working incredibly long hours just to pay our bills-we have no credit cards either!

    How can we, the people, take much more of this? Safeguarding jobs and homes by keeping the vultures and wolves (banks with their impersonal call centres) from our doors? I bet GB will be able to afford lots of new shinies at Christmas when a lot of us won't!

    I guess we'll just blow our stacks on here and let them all ride rough shod over us as usual-what else can we do? We are never going to get the action we want-let alone an apology from anyone else (all credit to the F S A guy-more courage and backbone than any of the others).

    Boilerplated-r u going to get taxed on your fruit cake? There seems to be an awful lot of it around? If I go to the bank I might get one I can ice for my Christmas cake!

    Btw I don't really want a Robespierre -he was not a nice man at all. Just want some retribution and compensation for the total rubbish

    Bash the bullies, spank the banks and pummel the politicians -at least then we'd feel like someone was doing something!

    How

  • Comment number 89.

    doesn't that saying go -oh what a tangled web we weave, when first we practice to deceive-?

    There must be a lot of cobwebs in London!

    This will probably not get passed by the moderators as it may me deemed off topic!

  • Comment number 90.

    Tigerjayj,

    The term you're looking for is 'banana republic', although as another poster mentions, this is not strictly true, as we don't even have bananas to fall back on.

    You ask what happened to 'my word is my bond' - that's a little dated, old chap. Of course, the city's motto in 2008 is 'my word is my AAA+++ sub-prime mortgage-backed derivative*'



    *conditions apply. The value of our word can go up as well as down.

  • Comment number 91.

    I have a question or two about this essay.

    Robert, if we the average mutts living our average lives, decide we are tired of living on borrowed money, decide we just don't wish to do business with these people anymore, what then?

    Won't that sort of leave the banks 'all dolled up with no place to go', as we say over here?

    If they won't lend to one another, and if we won't borrow from them, they still have their operating expenses, yes? What do they do then? If we begin socking money away in savings accounts, they have to pay interest, and aren't those demand accounts liabilities on their books? I'm not being silly, but asking to see if I understand rightly. Perhaps someone else here could help me out with these questions.

    ****

    I wonder if some part of the slowdown is that 'The Consumer' has sort of gone on strike, tired of paying for shoddy goods on borrowed money lent at usurious rates?

    We really could use a new car here, not just because it would be cool to drive new wheels.
    But for now, I'd much rather put money in my local mechanics hands to replace the rear oil seals on the Volvo (about $350 USD), and install new tires on the pickup truck (about $600) instead of assuming some 30K in debt over the life of a car loan to buy that new (or even newer) vehicle. I don't want to ever get in bed with these guys again, if I can avoid it.

    Am I the only one who feels like this?

  • Comment number 92.

    Here is what Roubini thinks.

    This makes me wish I had not opened up that Chinese
    fortune cookie that said, "May you live in interesting times."

  • Comment number 93.

    #91, OldSouth, don't you realize that you are being
    unpatriotic by not mortgaging your house to buy
    cheap toys painted with lead for your kids?

    The next thing that they will tell us is that "paying
    taxes to fix this mess is patriotic."

  • Comment number 94.

    THE BILDERBERG GROUP

    Laughing all the way to the bank and beyond.

    The 2006 plan, stage 1 has been implemented...

    Watch this space...riots in America next...US army on the streets against the constitution...but hey that's getting ripped up piece by piece everyday and the UK is not far behind...

    Interesting times indeed!

  • Comment number 95.

    This crisis could not have been so badly handled by accident; it must be by design.

    Brown's Falklands factor? £37bn handouts to Scottish banks to fix the Glenrothes result? Nationalisation? Bilderberg plan?

  • Comment number 96.

    #92 gunsandreligion

    Thanks for the link!

    At least Roubini seems to be a man with a plan.

    Let's hope that our leaders only have the cajones to carry out such radical steps.
    What's required cannot be undertaken by the faint hearted.

  • Comment number 97.

    4:

    I mentioned the use of convertible preference shares back when b and b was trying to fund raise.

    But this Gov't wishes to Nationalise our Banks, it does not wish to support Pension Funds or small Shareholders.

    Quite frankly their actions show they couldn't care less what happens to our investments.

    See Bradford and Bingley.

    Hamfisted handling, that has cost our economy jobs, our customers choice, and our pension funds alot of money!

    Remember it is easy to close a Bank, not so easy to start a new one.

  • Comment number 98.

    When will the Housebuilders start going bust?

    At this rate Mr Peston would be talking about them to ?


    Or does he have set priorities?

  • Comment number 99.

    @57 Glanafon
    Diolch a chi!
    Indeed, the risk is there, given the increasing irrelevance of the UN in thje current world - it's fast becoming a third-world club, and that's a potential disaster. The dispiriting thing is that the FSA states "we'll get tougher" and then immediately finds jobs for the boys, which we all know is the root of their failure in the first place. Poachers turned gamekeepers? Third star to the left and straight on till sunset...

  • Comment number 100.

    I'm in the process of negotiating new loan terms on a property with one of the major banks that have required capital injection from taxpayers for their survival.

    Far from the rescue package and recent interest rate cut helping, my personal experience in just the last two weeks has seen the interest rate soar by 0.45 per cent (virtually wiping out the rate cut benefit), the arrangement fee increase by 0.25 per cent, the length of the loan term reduced by more than half, not to mention the additional conditions attached to the terms of the loan.

    How on earth can this be justified as compliance with the government condition to channel funds to maintain mortgage and small business lending levels at competitive rates? It seems to me that the banks have got what they needed and have absolutely no intention of keeping any promises at all.

 

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