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How to solve the crisis

Robert Peston | 16:22 UK time, Saturday, 4 October 2008

It's into the dangerous land of hubris that I'm going to stray today.

I have a plan (perhaps better than a Baldrick-style cunning one) that might just ease the credit-crunch pressure in the UK and help to fill the UK's yawning pensions hole, the humungous gap between what we as a nation save for retirement and what we should be saving.

This first bit is not my plan, but part of the Treasury's contingency preparation for the moment we reach Defcon 1 in the financial crisis (if we reach Defcon 1).

What's being considered by Chancellor and Prime Minister is that the public sector would inject new capital into our battered banks, to strengthen their balance sheets, and provide them with the muscle to start lending in a sensible way again.

And I'm told that their officials and advisers have sensibly learned a thing or two from the world's greatest investor, Warren Buffett, who recently bailed out Goldman Sachs with an injection of $5bn.

For this succour, Buffett received preferred stock paying a fat dividend of 10 per cent and warrants to buy a further $5bn of common stock at below the prevailing Goldman share price.

In other words he was being handsomely rewarded for providing Goldman with the resources to weather the storm and rebuild.

Which is arguably what we as taxpayers should receive as our just deserts, if the Prime Minister were to issue the call to arms, in a financial sense, and decided to inject billions of our cash into banks.

We too could take the stakes in our banks in the form of preferred stock with a warrants' kicker - so that we as taxpayers received both a steady and generous stream of income, and a very generous share of any future capital gains.

And I think, as I say, that if the worst came to the worst, that's what the PM and Chancellor would do.

Now, here's my modification of the Treasury proposal, my twist on a conventional Government rescue.

It's about making the most of a new institution that the Government has already established, the Personal Accounts Delivery Authority (PADA), which is setting up a new national pensions savings scheme for launch in 2012.

This will be a semi-compulsory, contributory pensions scheme for those not already in an occupational pension scheme - who number many millions, including a disproportionate number on low incomes.

My suggestion is that the Government could lend, say, £50bn to the PADA, and it could then use that cash to buy cheap stakes in banks, to help them recapitalise, and also - perhaps - to pick up other distressed assets.

Why am I excited by this idea?

Well, for those with deep pockets - like Warren Buffett - now and over the next couple of years is the best possible moment to be investing.

The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had.

But normally those bargains are only available to the super-wealthy. Those on low incomes almost never have the money to invest when asset prices are low.

However, if endowed with a jumbo loan from taxpayers, PADA could invest like Buffett on behalf of the low paid.

It would be important that as and when employees and employers start putting their money into the scheme, in 2012, they should buy in at the effective price at which the stakes were built in banks and any other assets were acquired.

What I mean by this is that contributors to the scheme at the off should receive any upside in the value of these investments that had already accrued - which would also be an incentive for them to invest, because savers would receive an automatic and instant uplift in the value of what they put in.

And if by bad luck there weren't any upside by then, well then those capital losses would revert to all taxpayers - but the risk of capital losses would, I think, be quite small.

Anyway, the big point here is that for the past few years, there's been a massive widening in the gap between the rich and poor, because it's only been the rich and the super-rich who've been able to take advantage of the fabulous investment opportunities that presented themselves in the decade or so before the Crunch.

But the boot is now on the other foot. Probably only governments, through the deployment of taxpayers' money, can solve a financial crisis that was created in large part by the foolish financial risks taken by bankers and financiers whose common sense was wiped out by greed.

If we as taxpayers are cleaning up the mess, there should perhaps be a dividend for those in low paid jobs and insecure employment, who are hurt most by the economic slowdown precipitated by this crisis.

If PADA bought into the market for them over the coming two or three years, their retirement prospects should be that much improved.

And if the PADA could become an institutionalised Buffett on their behalf - buying low and selling dear - well then a bit of natural justice might be restored to the financial system.

Comments

Page 1 of 2

  • Comment number 1.

    Excellent idea. Who will be the actual trustees?

  • Comment number 2.

    An intriguing idea.

    I am sure what many people object to re bank bailouts and extra flexible loans to bansks is that us taxpayers seems to be bailing them out but getting little, if any of any potential upside.

  • Comment number 3.

    Surely you mean DEFCON1 -

    DEFCON5 is the normal peacetime readiness.

    DEFCON1 is maximum readiness and the state that an attack is expected imminently.

  • Comment number 4.

    So a national wealth fund... now there’s an idea.

    Sadly British politicians are too keen to work out what tax kickback or spending bribe they can squeeze out of the finances to keep themselves in power . Long term prosperity, like fighting global warming, takes vision and a sense of priority that isn’t focused on ‘how do I keep my seat/get in the house of lords’

  • Comment number 5.

    "The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had."

    Now I understand why the BBC reports the financial with the gloomiest slang possible. Perhaps the Beeb's pension funds need topping up ??

    #1 The timeless question - Who guards the guardians ??

  • Comment number 6.

    Can I put my 'anorak' on Mr. Peston?

    Your info: and inside knowledge/contacts of late has been superb, especially over HBOS................ BUT, your timing is bizare.

    Look at this blog, timed 04:22 pm

    YOU CAN'T HAVE 04:22 pm, it's either 4:22 pm or 16:42.

    It happens on all of your blogs in the afternoon. Please see to it my good chap. Thanks.

  • Comment number 7.

    On a slightly different note, Alex Salmond wants HBOS to stay in Scotland. Perhaps he will ask *ALL* Scotsmen to dig deep into their sporrans to fetch every last penny to pay for that ??

  • Comment number 8.

    Robert; I think you mean DEFCON 1. But a good idea and very interesting article on Iceland too. So that is where all the Iceland cash came from over the last few years. Another group of people who were called "shrewd investors" by the commentariat when they really shouls have been called "berserk borrowers". Yours in pedantry..

  • Comment number 9.

    This is fine Robert provided you (and others) believe that if/when we get through this financial crisis alive, our debt-based money system will once again prevail. If it does then, sure, maybe it'll be bonanza time all over again for us proxy investors in the PADA scheme, itself investing in banks.

    The problem is that banks don't create wealth (they just shift it around) and I'm not convinced that the new world financial order is going to be all about banks making fortunes for their shareholders. Put simply, we can't go on like this.

    If we assume that the new world financial order will not be so heavily reliant on mind-boggling levels of debt, then maybe we'll go back to a more commodity-based system that prevailed pre-1970s?

    In any case, I think you may be falling into the old general's trap of fighting the last war here. I would need one hell of a lot more persuasive evidence that investing in money markets is the way to good, sound investment returns in the future before I voted for your idea.

    And finally, the idea that the economy can grow rapidly and relentlessly (with the odd downward blip), all along assuming that tomorrow will be significantly better than today (so let's borrow, borrow, borrow), is itself largely predicated on there being an infinite supply of cheap energy. Since we're now at the end of mankind's cheap energy party I'm even less convinced that I would want my tax invested in a debt-based economy.

    Maybe 10 years ago the Earl of Caithness was on to something here: http://tinyurl.com/4ql2oc

    All that said, you're a damned sight brighter than me Robert, so please flesh out your thinking and tell me I'm wrong.

  • Comment number 10.

    I think this assumes that the PADA and personal accounts ever happen. Many in the pensions industry are very critical of this proposed scheme as due to the means-testing on state benefit, low earners in work could easily be absolutely no better or even worse off being in this scheme than making no pension contribution in the first place and just relying on state benefits and credits.

    Also, another reason to be concerned with PA's and PADA is this huge 'pot' of money always looks likely to prove irrestible to politicians in the future and this engineering could be the start of the slippery slope years before it even exists and has any money!!

    If you want a baldrick idea, how about another U-turn on property as an allowed investment in personal pensions. By now allowing private pensions to buy BTL properties (it was originally going to be possible but was ditched by Gordon at the last minute) reversing this U-turn would be a big kick-start to the property market, flats in particular....

  • Comment number 11.

    Robert, yet another beautifully crafted article about, wait for it - BANKING!

    You're the BUSINESS editor right??

    Another masterstroke from the Banking Broadcasting Corporation aka BBC..

    GC

  • Comment number 12.

    The comments so far perhaps say something about this country - pointless minor whinging and no view of the big vision. Or is that just me whinging.

    Sounds like a good idea to me. At least people would see they were getting something for the bailout money and a national interest in the banks behavoir might put the brakes on them returning to their bad habits of recent years.

    As Robbie Coltrane said in the old Barclays advert "We're all bank managers now".

  • Comment number 13.

    An idea like this seems clever at a point in time when Governments are having to create huge pots of money and stand as the last resort for capital.

    Since all currency is created by the state, it is a mere design of accounting to place the newly created capital into the hands of PADA. The same effect of pension wealth redistribution could be achieved by many other ways. For example, some states have Sovereign Wealth funds. Britain does not have one, yet has been pumping oil out of the North Sea for several decades, and collecting a wonderful fuel escalator tax from it.

    To be truly clever, economists and accountants should really table all the various options and present them in ways that would be comprehensible even to 10 year olds. Coming up with only one idea and then running around shouting about only it is neither methodical, nor rational.

    A sovereign wealth fund is a commonly understood and successful international idea. PADA des not yet sound like a very encouraging vehicle, especially from a government that:

    1. still has not taken action on Equitable Life
    2. was responsible for removing the dividend tax credit
    3. has not satisfactorily supported or regulated simple-to-understand personal savings schemes (that collapse of the Christmas savings firm, was it in Wales, only two winters ago).

    Simple-to-understand personal savings schemes should be at least one of the primary elements of improving national pension allocation. Yet every simple saver at the moment has tax taken off their interest earnings, even though those with low incomes have no incentive to reclaim the tax refunds due to them.

    Something like PADA, or a Sovereign Wealth fund, would form part of the collective (not individual) element of improved national pension allocation.

    These nice ideas are supposed to be presented to us and discussed by our politicians as policies. Shame that they treat everyone to be as stupid as tabloid readers.

    Sticking one's head into the abstract world of Economics and Accounting risks ignorance of real wealth. Monetary wealth is only monetary, and unless there is a corresponding consideration of production and demand control of real wealth (eg., food and population demand), the design of an economic system risks becoming as useless as the Global Financial System whose collapse we have been so entertained with.

  • Comment number 14.


    On the face of it, sounds like an idea that might work, and it would work in the short term, but still, we are bailing out, not putting real money to increase Capital

    What is being left out is that the immediate result of this suggestion would push interest rates up and not down as the Central Banks want them to go, so a recession will not be avoided anyway, and in which case the idea would not work.

    My solution is that there are factors that we cannot and will never avoid. Increase in Capital will have to come from increase in deposits with higher interest rates and therefore much less lending due to these high interest rates.

    So far we are trying to deal with bad debts, and putting them into our pockets as tax payers, to bail out.

    In short we need to save more and borrow much less, not as a Government but as consumers.

    Problem is that the immediate result of this is a deep Global recession.

    I see no other way out of it.

    By the way Robert. Do we not sound like Old Labour Socialist? Do we not sound like admitting that the extreme of Capitalism is as bad for economies as Communism, when we suggest what the Government should do to intervene?

    These last 28 years, we have managed to loose all our manufacturing to the East and we thought that the Financial Market BUBBLE is going to feed us for ever without much effort. We were bringing up our children believing, that money really grow on trees. We thought that Hedge Funds were creating wealth, when we were comfortable enough to forget that these ideas were actually eroding our Capital.

    Global recession and very high interest rates will not and cannot be avoided!

  • Comment number 15.

    Ah yes.. take X billion taxpayer pounds, give it to a Mr. Buffet wannabe to look after, and just watch the profits roll in. How hard can it be, if only you start with enough money? And if it doesn't work, hard saving taxpayers take the losses, if it does, those who haven't saved enough take the gains.

    Robert, I think you need some sleep...

  • Comment number 16.

    This is a great idea and would work very well, except I can't help but have niggling doubts, and their based on Kondratiev Wave theory, more or less.

    If what is happening to us at the moment is no ordinary recession, and I would argue that it is not, then there are a few questions that need asking: how far is economic activity going to reduce? How much money will be withdrawn from the system? How much will assets deplete in value? What will be the consequences?

    If this is similar to the Great Depression, and I believe that when the banks themselves stop lending because they believe that the system is overloaded with debt and they themselves must, in the name of rational self-interest, start to defend themselves with a dash for cash, then people are going to be left with massive burdens of debt, possibly increasing, and that will hoover-up disposable income. Companies will go bust and there will be huge unemployment. So contributions to any pension scheme are going to be difficult and returns from shares will struggle. I don't think credit expansion can be re-ignited in even five years or ten, and this is what would have to happen.

    But, obviously a pension is a long term thing and in the distance, we will recover and there will be assets with good returns waiting for us. Perhaps.

    I don't think we're getting back to where we were, full stop. Capitalism is not win-win. It never has been, except over the past ten years which we can now see for what it was - deferred loss. Countries, areas always lose out. In the last Depression it was always a safe bet that when things picked-up, they would pick-up in the West. They were industrialised, advanced, had road and rail networks and systems of finance. Not so now. China and India can mass produce every piece of equipment and provide every service that the world requires. They have a low wage economy with no unions and little health and safety. Is the UK/European/American worker prepared to compete with this? With the loss of the consumptive powers of the Western worker there will be an even greater mass of cheap Asian labour. Can we compete with that?

    The key has obviously been credit expansion - at the moment there is credit retraction. The pension idea you suggest would work well if this is an ordinary recession. But if it is a 'reset' moment, then what will cause expansion again? Re-built bank balance sheets? What are they going to invest in to get a return? Even if they're willing is confidence suddenly going to return? We'd have another credit crunch in six months time if things went back to what they were. Given the retraction of credit and the global economic forces involved, the Government is going to have its hands full dealing with unemployment benefits, crime, and the bad debts that the banking system has. There is a reality to capitalism - winners and losers; cheap labour and cheaper labour. Credit expansion has just been hiding it from us. (Although if the pension scheme invests in China...)

    I'd be interested to hear arguments that I'm wrong. What could re-start credit expansion?

  • Comment number 17.

    LOL. Remember that last time Labour politician and civil-servants were 'picking winners'?

    Yes, that worked out very well when taxpayers were robbed to pay for British Leyland, Inmos, ICL, Alfred Herbert, ...

  • Comment number 18.

    That is a very good idea Robert - you should be well pleased with yourself. The sale of the 3G licenses was a missed opportunity.

    Bonuses. I was an inter dealer broker for ten years and have been in business for myself for twenty since. I am confident that the 'talent' for which mega bonuses were paid is no such thing.

    Its roots are in the cult of celebrity, status envy and 'tournament pricing' - all hopelessly dysfunctional, but understandable modes of behaviour.

    This has to be addressed properly.

  • Comment number 19.

    A quick review of the comments thus far Robert leads me to think that maybe pushing forward your idea could be rather like pushing blancmange uphill with a fork? Best wishes anyway; it does seem at least that you're able to give the problem more coherent thought than Gordon Brown. I have an awful suspicion that our esteemed government hasn't the faintest idea what to do next - other than apply Labour's old favourite of chucking money at the problem. Talk about out of their depth.

  • Comment number 20.

    And his knibs could give back that £50bn that he stole from private pensions and they could do the same.
    Winners all round.

  • Comment number 21.

    Good idea , in fact better than good. Can see practical problems with state aid rules plus I assume this would only be enough for the big 4 clearers. From the taxpayers viewpoint this would in effect mean that these banks could never be allowed to fail (but in effect that is the case now in my view) and we would have to put real shackles on the banks including closing their final salary pension schemes that have been part of the reward for excess with the more senior bankers.
    In fact with final salary schemes there should be a lifetime limit on the benefit anyway equal to those of us with our own scheme.

  • Comment number 22.

    A good idea in theory - and far better than most of the 'investment' Brown has squandered hundreds of billions on in the past ten years but I still wouldn't trust them not to waste the money propping up lame ducks in Scotland, Northern England etc

  • Comment number 23.

    Robnert you are a genius my boy

  • Comment number 24.

    Can a copy of this memo kindly be circulated to Messrs. Paulson, Bernanke, Bush, Brown, Darling, and King, and marked as urgent, thank you.

  • Comment number 25.

    Robert,

    Your blog is essential reading in this crisis and very much appreciated.

    I note that you continue the BBC line that the banks and their greed were to blame for the credit crunch. I was wondering what your view is on the very interesting article in this week's Spectator blaming the Clinton administration and its social engineering in the US as being the root cause. It's also mentioned in Iain Dale's blog today.

    http://www.spectator.co.uk/the-magazine/features/2189196/clinton-democrats-are-to-blame-for-the-credit-crunch.thtml

  • Comment number 26.

    As with all plans, cunning, relying on turnips, or otherwise there are often unforeseen roadblocks, but it is probably preferable to get something from the banks in return for an injection of capital.

    The one small flaw in your plan is that one pointed out by the first poster - who will be the trustees? A committee of the good and the great will be unable to decide anything as is quite usual. An individual, perhaps you, or the Archbishop of Canterbury possibly? Warren Buffet makes his decisions and is beholding to no-one. Your trustees will be subject to recall!

    What will your state ownership of the major banks do for the capitalist system? Haven't you just socialised capitalism? (I am not implying that socialism is a pejorative term on the side of the Atlantic.) Perhaps this current crash is the end of capitalism. It is most likely the end of the type of free market capitalism that was introduce by Thatcher and Regan in the 1980s.

    For capitalism to work business, including banks, must be free to grow and shrink through market mechanisms. Your system will almost entirely ensure that there will be no possibility of any other new banks entering the market. This is a recipe for the next crunch.

    The fears of the Republicans about the nature of the rescue mechanisms are real, I fear. The Poulson rescue voted through last Friday is just, at best, delaying the inevitable depression. The Poulson plan, and yours, seem to me to be almost entirely analogous to the catastrophically bad decisions of the 1990s and 2000s when interest rates were reduced to very very low levels.

    We need to rescue savers, depositors and performing loans but to write off non-performing loans and all of the absurd derivatives. We need ameliorating schemes, such as yours and Poulson, but we must not mistake amelioration for a solution.

    The solution is sound money, in soundly accounted for banks that trust each others accounts. How to get from here to there is complex.

    My view is that we need to:

    1. Protect savers, depositors and performing borrowers.

    2. Maintain a sensible value for money by having sensible interest rates (6.5 to 8 percent)

    3. Return to sound traditional lending criteria enforced by law e.g. my scheme of preventing banks loaning more than a statutory limit of a multiple of income through limiting the lenders security to that loan level.

    4. Have some short term schemes such as Poulson's and yours have a bridging part to pay BUT are not a solution in themselves.

  • Comment number 27.

    a return for the 'taxpayer' sounds good, but how will 'joe average' actually benefit, if they have borrowed to their limit to buy their own home, have a ppp they can no longer afford to pay into, and really look to go under completely if taxes or interest rates rise any more ?
    how ? oh how ?! can those who have struggled to pay their way their whole life and seen the banks/financiers reap their handsom rewards both corporately and personally now be expected to bail them out ? As another blogger mentioned, our loss of ability to compete in the global manufacturing markets has been in the more recent (10 yrs) a result of a general perception that real wealth would come from the financial markets and shuffling paper money around.
    We have gone from being a global leader in manufacturing with real money, to pretty much a 'service' industry country, and now to top that, an embarrasment in the financial markets.
    Question. What will we be if the external reverence shown to the Capital's financial sector dissapears in the same direction as our manufacturing ?

    Hey, as a taxpayer i would have been delighted to see some of my money go into a bid for Gatwick airport. What an idea ! Direct control of security, and something that is actually proven to make money.

  • Comment number 28.

    A good time to buy? I think that's called 'trying to catch a falling knife'. Sure the FTSE 100 looks cheap at 5000 points, but that's not much consolation if you buy it and it falls to 3000. It's cheap compared to the profits the companies are making, but theres nothing to say those profits wont fall to half in a bit of a recession, I assume.

    The same logic works for the housing market and all those toxic mortgages. Who knows whether the housing market will bottom out 20% down or 50% dow (or worse).

    Generally I am looking to buy more stock at the moment myself, but I'm not rushing in confident that we've hit a bottom yet.

  • Comment number 29.

    Robert what you and the government seem to have in common is the belief that the bloated corpses of the UK banks need to be revived at the expense of the public. I do not agree. Of course the UK needs banks like everybody else but it will need far less bankers than over the last decade or so. The government may have to intervene here and there to ensure that there still are sufficient banking capacities. But could both you and the government please go back and think again and first come up with a plan how to revive the real economy that will be worth some money which can then be handled by the slimmed-down banks. Yes pensions for the poor are utterly needed in this country, but they've got to be earned by someone first!

  • Comment number 30.

    Hubris sounds about right.

    Anecdotally, consumer credit demand is dead. Your average man or woman in the high street is barely treading water and is being scared into cutting spending in favour of increasing savings and repaying existing debt instead of taking on new. The taxpayer may recapitalise banks only to find they cannot make the interest payments because they cannot make enough profit from reduced take-up of loans.

    The economic contraction implied by the above will have a knock-on effect on commercial credit demand. Most businesses follow their customers' lead instead of aggressively expanding during downturns.

    The interest payments would have to be double-digit to compensate the taxpayer for the risk assumed. We are not dumb money and should not be sold out by the government as the greater fool of last resort. We know that the real price of banking investment risk is around the 10% mark if not higher regardless of what ratings agencies have been paid to say. Buffet's 10% coupon from GS and GE is a case in point, and GE is still rated AAA. It is unlikely that all banks will be able to afford it.

    PADA sounds like a sweetener which could backfire badly. The electorate has grown cynical after 11 years of New Labour and may consider this appeal to social equality as patronising. If this needs doing, it is worth doing without tugging of heart strings. If that is what it takes to sell it, then the scheme does not stand up on its own merits and that means it is not worth doing. Simple, really.

    What is missing here is any question of the financial industry's future earning potential. Not what we need the industry to do for us, but what economic fundamentals suggest it can deliver. Even a SWOT analysis would be better than nothing. What have we got under Opportunities? Hmm?

    How about instead we force disclosure of non-performing assets on and off balance sheet, mark to market instead of model, shut down dark pool trading and bring CDS and all other OTC instruments to public exchanges? How about that, Robert?

  • Comment number 31.

    I don't think it is hubris at all to offer ideas for a way out of this mess. I know more about metaphysical poetry than economics, but, since it is my savings that would form a tiny part of such a scheme, I'll offer my two penn'orth.
    The question is, do we think HMG would bother to negotiate as strongly as Warren Buffet for such preferential rates of return (10%) or purchase of stock options? I am sorry to say, I doubt it. I fear that Joe Public would get 'six-pack' quality guarantees and rewards.
    How would the government convince me otherwise?

  • Comment number 32.

    From my naive perspective, it seems like the irresponsible lending policies of the banks over the past few years have lead to two problems: the under-capitalisation of the banking system, and the over-endebtedness of the British public.

    Your proposal seems like an excellent way of resolving the former, while also tackling the pensions shortfall.

    I think some parallel action also needs to be taken with the latter problem, though reducing our debt levels (both at an individiual and at a national level) without causing recession, inflation or both is not going to be easy.

  • Comment number 33.

    The BoE will endeavour to ensure any intervention or purchase, if purchase occurs, is to the benefit of the taxpayer, and at the same time any intervention does not shield the banks from market forces and encourage them to take more risks.

    Essentially an BoE purchase has then to be a rock bottom prices to try and ensure a return. Any BoE loan has to be securitised at rock bottom evaluations on items put forward by the banks. There is a difference between short term intervention for 3 months or intervention planned to be for 3 to 5 years.

    At the moment we seem to be viewing a holding game. The banks may wish to not sell and stutter along if the price is too painful, continuing the liquidity problems. From their point of view just enough liquidity for them is just enough. Its a bit like an oil cartel supplying oil. In this case debt = profit, profit is not just based on volume. The banks still remain a predator given half a chance.

    The US bail-out bill will not impact on the situation for months and months. Until that effect comes through we will only be looking at the holding game continuing. In the meantime businesses will fall like ninepins in a credit freeze hence the EU small business aid proposal, which is almost certainly underfunded, will almost certainly be emeshed in red tape, and it is not clear how it can be implemented. It is not clear what can be done to help to help businesses. Switch off the tap to banks and they fall, the same applies to businesses, just less public, less general concern.

    If the UK economy suffers, tax revenues suffer, national debt has to rise (steps already in place), public sector services have to suffer. It is an ungodly mess. If all countries are in the mire global trade drops. Far from the objective of helping developing countries which this government talks about some are likely to suffer badly as a direct result of policy here and in the US. It is difficult for example to see growth in plane loads of roses from Kenya, their main export.

    Reports suggest there is a feeling of relief at present but it could evaporate, particularly is more bad news comes through which looks quite likely. The problem is there are unprecedented quantites of debt which have to be worked through the system in a national and global economy which can only slow.

    I cannot see the BoE rushing if it is at all avoidable. It is a major structural problem which will not have any easy solution. There will still be fear, followed by anger amongst the public, particularly as those who feel they will not be affected become affected. Emotion and money are a dangerous energetic mix. No political party has shown any sign of knowing how to deal with this, most are floundering on policy.

    We are looking at higher consumable prices as the supply chain efficency falls, and the collapse of the American Dream, at least in part, which has been marketed around the world, including the UK.

    Whether it is practical or not there is a case for trying to have agreement on similar strategies in damaged economies because that minimises the corrosive effect of banks seeking to exploit weaknesses in the differntials between countries which is their undoubted skill. That seems to be being looked at at present.

    In the face of a global financial system which behaves in a way which suggests it is above national control action alone is difficult (the early nineties run ofn the pound is an example). The problem is much bigger than bailing a local bank. it is a multidimensional problem and the solution has to be multidimensional. Mervin and his team are welcome to it. It is quite likely one of the most important tasks this century and will yield what is likely to be a new landscape. The new landscape doesnt have to be pleasant. Mervin and his team seem to be tough nuts. I hope they are.

  • Comment number 34.

    Robert, your plan makes a lot of sense to me,
    but I'm sure that here on the other side of the
    pond, we won't do anything nearly as clever.

    #16, GrouchoMarxist1, the West has to capitalize
    on its strengths in the global economy, which
    are production and protection of intellectual
    property. For example, the Chinese compiled
    this ranking of universities by the rough measure of
    citations of papers. Similar rankings consistently
    place the great preponderance of production of
    new technical ideas in the West. The monetization
    of new ideas is the only way that a new capital
    base can be created.

  • Comment number 35.

    Brilliant, Robert!

    Would you like to run the country?

  • Comment number 36.

    Any suggestion is well worth hearing, but I do see a potential problem.

    The money that would be used to fund PADA
    from taxpayers has to come from somewhere. If individuals take their savings out of the bank to put into PADA, then that just makes the banks even weaker.

    The only people who can create money out of thin air are the treasury, by printing it. But that just devalues the existing money in circulation by an equivalent amount.

    Ultimately there is just too much money, most of it imaginary in the form of debts, in circulation. Therefore the only long term solution is for this money to be unwound. Anything else just involves shuffling money about but doesn't solve the problem.

    Like it or not everything is going to crash, and there will be a lot of very poor people who will be after the blood of those who have managed to get rich out of the bubble. We have to go back to creating real wealth by making stuff and selling it.

  • Comment number 37.

    Can I just ask, as a financial idiot....

    With all this bailing out, will the "bail out" be passed on to the end user?

    Will banks and lending institutions be kind enough to us on the street when we feel the pinch or be made unemployed...?

    Anyone have an answer to that...?

  • Comment number 38.

    Excellent idea.

  • Comment number 39.

    Good that you recognise there is value to be had, but not just in banks but in property too.

    I like the idea. Also get Gordon to allow SIPP investments in residential property too while you are at it.

    BW

  • Comment number 40.

    "Probably only governments, through the deployment of taxpayers' money, can solve a financial crisis that was created in large part by the foolish financial risks taken by bankers and financiers whose common sense was wiped out by greed."

    Yes, the crisis was created in large part by bankers - but they operate within a regualtory framework set by politicians. Politicians cannot take the credit for it when the economy seems to be going well, and then deny responsibility when it tanks. Also the people who vote for those politicians have some share of the blame.

    I think we are reaping the harvest of the Thatcher-Reagan ethos of deregulation and greed. I never voted for it.

    New Labour have not moved away from it in any significant way. A key indicator is house prices - unlike virtually anything else, a rise in prcie has been seen as good. I disagree. Many have been priced out of the housing market - but presumably most politicians - and journalists? - have benefitted up till now, which is why newspapers consistently say that a fall in house prices is bad.

    A fall is indeed bad for some within the current economic context. We need to elect politicians who will change the economic context - which of course now has to be done in co-operation with other countries and in the face of the massive offshore industry, which in turn links in to money-laundering, organised crime and the hugely profitable drugs trade.

    Not an easy task, I agree, but some change at a fundamental level is necessary.

  • Comment number 41.

    i am very glad the government is thinking along these lines, and does not suffer from the mindless revulsion towards "nationalisation" and other forms of "socialism" that seems to characterise republicans in the us congress. recapitalising the banks is the only way to avoid a 30s style depression. without it, we will fall into a downward spiral of bank deleveraging, falling asset prices and collapsing demand, just as japan did in the 90s. hopefully an incoming us obama administration will realise this and replace the seriously flawed paulson plan.

    even with recapitalisation, lending is going to be a lot more conservative going forwards. there will inevitably be a serious recession (think 1992). it could be a global recession, especially if the financial crisis spreads to china, as i suspect it may. on the plus side, the fact that the usa and europe will also be in recession will help deal with supply-side constraints (commodity and food prices) at least in the medium term.

    i like the pada idea, but i don't think it is a long term solution. public ownership of banks creates enormous conflicts of interest. i am no fan of free market fundamentalism, but i do think banks are better off privately owned, but subject to much more rigorous regulation, especially regarding credit creation.

    i expect all of the european countries will go this route in the next few months (especially once the financial crisis spreads to the lbo / junk bond market). but i don't think it is in europe's collective interests to allow public ownership of the banks to go on for long, with the consequential temptation of a more dirigiste style of government.

    let's just hope that the theory that recapitalisation is a self-fulfilling prophesy turns out to be right, and the public sector does make a profit out of it.

  • Comment number 42.

    Giving loan at 10% will not work, as its too expensive. But buying stakes in bank and other institutions will work. The only problem is how government will use its power as major shareholder, as long as its not used for party political interest it would be fine.

    Another way of sorting this problem is cutting interest rate or keeping interest rate as it is and letting inflation go up, this will eliminate the asset bobble as salary will go up, but it should be handled correctly i.e. letting inflation and salary go up by 10% for three years, then house prices become affordable.

  • Comment number 43.

    It's an admirable idea Robert. One thing makes me slightly uneasy though. Do you remember the original National Lottery proposal? All proceeds to be divided equally between the four funds? Well look what has happened since. After school club projects, special research grants in the NHS and all sorts of other things that have nothing to do with the the original objectives are receiving lottery funds.

    So let's imagine that your PADA fund exceeds all expectations and becomes a booming enterprise and a public/private project gets into a little difficulty of even UK plc itself needs a quick injection of capital. You are way ahead of me.

    Appointing the right trustees, along with guarantees of independence and full accounting transparency would be an absolute prerequisite for any such project. I have reached the point where the one institution I really do not trust is government.

  • Comment number 44.

    excellent idea.

    I was wondering myself whether it might not be a good idea for the old building societies to re-mutualise rather than flogging them off to foreign banks.

  • Comment number 45.

    GrouchoMarxist1 (#16): "This is a great idea and would work very well, except I can't help but have niggling doubts, and their based on Kondratiev Wave theory, more or less."

    Hopefully less. Murray Rothbard usefully examined in detail and exploded the myth of 'The Kondratieff Cycle', including this classic line: 'One of the worst things about the "business cycle" is its name.'

    Professor Rothbard and those like him would say we are victims both of bad monetary policy and of egregious government interference in the economy - in this case particularly the Clinton administration's expansion of the Community Reinvestment Act (which Bush did made some half-hearted efforts to rein back, in the face of Democrat opposition, around 2002), - legislation which was willing to fine lenders who did not extend mortgages to those less able to pay.

    The US government tried to help the poor, in other words, and in less than fifteen years brought us all - the poor of the earth more than anyone - to the brink of sub-prime disaster.

    The other key factor, though, being cheap availability of credit, through low interest rates/expansion of the money supply, and that was down to the Fed and other central banks. (And to the fractional reserve system itself - but that's a deep systems change too far for the mental clarity of most here discussing the current predicament.)

    You don't need Kondratiev or other schemes, in other words.

    The Spectator article referenced by michaelmph (#25) rightly fingers the Clinton contribution but not that of the central banks.

    Ron Paul is the only politician I know of to point out ahead of time both areas of danger, their likely consequences and to propose legislative corrections.

    Not a single congressman backed Dr Paul's Free Housing Market Enhancement Act in 2002. But that doesn't stop him being 100% right - it just makes the others posing as heroes now as they commit a further $700bn of tax-payers' money rather harder to take. You can very easily read all Ron Paul's speeches and articles on the subject via Google - and see his various confrontations with leaders of the Fed in the banking committee on YouTube to boot.

    And that technological contribution can only be a major positive, in my view - given that that issue has been raised rather more negatively yesterday, a couple of Peston threads back. We should be counting blessings right now and that for me is one very clear one. The hard-hitting discussions on this blog being another.

  • Comment number 46.

    Hmm, not sure. It sounds like an opportunity *now*, but what about in ten years time? I suspect it would go down the same path as the present financial institutions. Under pressure from the govenment to perform, it would take greater and greater risks. Eventually the whole pack of cards will coming tumbling down, in the NEXT stock market crash. No thanks.

  • Comment number 47.

    Even if Robert's scheme was put in place, and worked like a dream, all that would be created is another vast pension fund which would subsequently be stolen by Gordon Brown or his successors.

    £50 billion pounds has such a resonance: It equals £5 billion pounds per year for 10 years. Ring any bells?

  • Comment number 48.

    [I]Test[/I]

  • Comment number 49.

    Robert, you are starting to sound like a bloody socialist!

  • Comment number 50.

    Clearly widespread support for the concept. Offers a golden opportunity for Conservatives to embrace radical ideas.
    1 Revoke Brown pension theft.
    2 Consider flat/level tax rate, some suggested 10% now 15% more realistic
    3.Is Islam's no interest a runner? Would require much greater disclosure but would cut off gambling without creating tangible wealth.
    Would have to be truly longer term than next parliament. Would mean lower revenues until life picked up again.

  • Comment number 51.

    Robert. I think your great idea misses the point. The rescue of Goldman Sachs may work but it is only one small bank in the overall scheme of things. Its alumni advise the British and US governments and if it pays a lot for its capital it will be able to cover the expense by continuing as before sucking money out of the system whilst contributing nothing to working man or his employment. If you scale that up to th national banks I think you will find that GB Plc is bankrupt and cannot bail it self out by creating, or borrowing even more money.
    The bottom line is we all have to get poorer, a lot o poorer and it would feel better if those that got us into this mess, politicians regulators, bankers took a big hit in their own pockets along with the workers.
    I also blame journalists none of whom gave front page publicity to the impending crash which had been widely for told by many academics and even Warren Buffet himself many years ago.
    Why for example was Fionnula Early, chief economist of Nation Wide in a recent interview not hammered by the BBC for her comments a year ago that the fundamentals in the economy were strong and house prices were only expected to level off. Is she stupid? A Liar? Or what. How was the 1st time buyer to make a sensible decision when economists in high places give such misleading information?
    Eddie Hatfield. Cambridge

  • Comment number 52.

    The banks have lent 2 trillion pounds on property that is only worth 1 trillion.
    No-one has pockets deep enough to cover losses like that.
    The only way out is to warm up the printing presses, and that's what they are doing.
    But it makes us all a bit poorer.

  • Comment number 53.

    Good ideas, Robert. Please send them to Gordon Brown and his advisors. If you manage to convince Peter Mandelson,
    the arch-defender of free capitalism, you would have succeeded in having an influential lobbyist on your side. Unfortunately, I expect that such revolutionary ideas, being truly concerned with the common good, will sound to radical
    for New Labour man Mandelson, who believes more in looking good, than in doing good.

  • Comment number 54.

    'to fill the UK's yawning pensions hole, the humungous gap between what we as a nation save for retirement and what we should be saving.'

    Is that possible? I mean to save enough to have a pension? We are being screwed rotten, tax on pensions (if your lucky enough to get one) and now, our future taxes will be astronomical (as if they are low now)!!!

    Face it, Britain is a rotten place to stay, I get mugged rotten by Brown and his cronies.

    I want to take my cash and get out, while I still have some!

  • Comment number 55.

    The PADA idea seems a fair proposal at face value anyway. The principle of intervention on behalf, and for the benefit, of the British people is sound.

    Remember your "dangerous land of hubris" comment however! As someone above has observed, there is no guarantee that the post crisis finance world will resemble it as we know it. The proposal is a gamble in itself, a case of "to boldly go...". And who's to say that Britain might not ultimately end up like "poor old Iceland" as Robert observes in his previous blog.

  • Comment number 56.

    That idea was on Democracy Now on Thursday.

    He's a lesson on hyper inflation and the break up of the Euro from the teacher, son.

    http://www.youtube.com/watch?v=cI55epbbtU0

  • Comment number 57.

    Sorry for the long post but this is painful and showing no signs of being understood - at least on these pages. I know this is boring but unless you understand the basic principles, the subject cannot be discussed with any meaningful chance of resolution. Please take the time to read my post. Thank you.

    Certainly, debating the financial system in isolation to the problem as a whole is meaningless.

    The purpose of a money system is to provide a means for exchange of materials and labour between one person and another. Since the labour and materials are indivisible then 'money' in small denominations allows labour and materials to be traded between two people in fractional amounts. In that sense it is much more flexible than a simple barter system.
    Unfortunately that relatively simple requirement has been hijacked by the current, fraudulent system calle Fractional Reserve Banking. In a debt-based, fiat, Fractional Reserve Banking system the majority of the 'money' in the system is fictional. It is an illusion of immense proportions. The 'money' is printed on a printing machine on a whim and bears no resemblance to any tangible asset or labour of any worth or value.

    To work[sic], the mathematical model behind the system requires a geometric growth in debt, population, energy consumption, raw material consumption, waste production and pollution (and a complementary geometric decrease in our co-inhabitants of this planet !). The word geometric means non-linear. i.e the previously mentioned list doesn't just grow linearly, it grows exponentially, 1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024 etc etc. The earth CANNOT sustain geometric growth of any of the above list INDEFINITELY. That is NOT an opinion. That is NOT a political statement. That is NOT the viewpoint of a religious crank. That is NOT pathetic wish of a tree-hugger. It is a physical, mathematical, practical, undeniable FACT.

    The model behind the current system is utterly flawed. Any talk of patching it up so that it can continue is unbelievably futile. The only reason it has managed to work at all until now is that a source of (almost) free energy has fuelled the previously described exponential expansion. That free source of energy (oil) is peaking out. Note: I did not say running out. I said PEAKING out. That means that since June 2006 the world's daily oil output has been in decline. i.e every day since June 2006 the worlds daily output has never been higher than in June 2006 and has been falling consistently since. It doesn't matter whether you believe in the Peak Oil theory or if you think anyone who believes in it is a nutter. The figures speak for themselves. The worlds daily oil output since June '06 has been decreasing. It is an absolute fact.

    In order to satisfy the base requirements of a debt-based, fiat, Fractional Reserve monetary system the consumption of energy must increase to fuel the increase in manufacture of goods and general industrial activity which in turn increases the consumption of those goods by ever increasing numbers of people taking out more and more loans to buy those goods which in turn results in more and more fiat money being printed. If the increase in energy consumption is strangled because of a decrease in the supply (which it has been) then the bedrock of that geometric system is undermined and the financial system collapses with it.

    Without the creation of new loans/debt/credit (call it whatever you will) the rate at which the money pot is being filled with new money is lower than the rate at which the loans are being repaid or written off, which destroys the quantity of money in the money pot (when its repaid or written off as a bad debt the original loan amount is destroyed but so is the leveraged amount - 40x in the case of Northern Rock). Therefore, if the rate of money destruction is greater than the rate of new money creation then the money pot shrinks. When the money pot shrinks it is called a DEPRESSION.

    The cretins in Number 10/11 may understand the explanation thus far ( but I have my doubts) and therefore they look around for 'solutions' to the problem. The 'solution' they seek, however, is to find ways of printing even more new money to keep the money pot topped up. That's the limit of the 'fix'. But new money can only be printed as a result of new debt. New debt begins as government debt which is then spent into the economy through the commercial banks or the corrupt PFI schemes or their cronies in the Defense Contractors camp. All of the proposals outlined by Robert above are ways to print more new money in an effort to prop up the exisiting, failing system. e.g.

    "public sector would inject new capital into our battered banks" That means printing new pound notes. Don't be fooled by the deliberately obfuscating vocabulary.

    "[to] provide them with the muscle to start lending in a sensible way again." So the 'public' lend the banks 10 newly printed pound notes for them to use Fractional Reserve Banking to lend £100 (£90 of which is fictional) back out to the 'public' (at a 10:1 lending ratio, most banks are much higher). Well that seems like a plan, not.

    "decided to inject billions of our cash into banks. " printing more new money again.

    "savers would receive an automatic and instant uplift in the value of what they put in." They may receive an increase in the numerical amount of pounds but not the 'value'. The purchasing power (value) of those pounds will be diluted in exactly the same proportion to number of new pounds printed. It is a pyramid selling (Ponzi) scheme.

    "but the risk of capital losses would, I think, be quite small." thats an incredulous statement to make given the example offerred by the current circumstances. In a Fractional Reserve System with, say, a 10:1 lending ratio the loss of £10 from the system results in the destruction of (10x10) £100. Destructive losses are magnified by the Fractional Reserve Banking system. Thats why it is so destructive.

    "This will be a semi-compulsory, contributory pensions scheme" You must be joking. The last place I want my retirement nest egg is in the hands of financial incompetents who want to make me better off by printing new, valueless pound notes. And then prevent access to it until you are forced to buy an annuity worth nothing in real terms. I'll invest mine in real, tangible assets accessible at all times thank you very much.

    "there should perhaps be a dividend for those in low paid jobs and insecure employment, who are hurt most by the economic slowdown precipitated by this crisis." It is pathetic and devious to use the low paid as a crutch to support this repugnant viewpoint. The low paid (and those on fixed incomes ie pensioners) are hurt far more by the destruction of the spending power of the little money they do have by your beloved inflation (wholesale printing of new money), a cornerstone of your proposal.


    "Personal Accounts Delivery Authority (PADA), which is setting up a new national pensions savings scheme for launch in 2012." Another quango to swell the ranks of the civil servants who represent 50% of the working population and 20% of the entire population.

    "only governments, through the deployment of taxpayers' money" Don't lose sight of the fact that the government has no money of its own, it is not a revenue generator. Every pound spent by the government must first be forcefully taken from someone else.

    If the problem could be solved and everyone made rich by the wholesale printing and distribution of new money then Zimbabwe would be the richest country in the world right now.

    Do not lose sight of the fact that the effect of printing every single new pound note devalues, debases and reduces the purchasing power of every pound note already in existence. Compounding that issue, deflation of the money supply does not return that reduction in purchasing power which the previous inflation stole from you. A period of inflation follwed by a contraction in the money supply is HIGHLY destructive and painful.

    Inflation of the money supply is the most devious and indiscdriminate tax on the populous which has ever been invented. It is silent and unsung and complicitly ignored and unreported by the media. The word inflation is used every day in an obfuscating manner to describe the rise in prices. It is not the rise in prices. Inflation is the printing of new pound notes which has the EFFECT of increasing prices because of the reduction in spending power of the pound notes already in existence RESULTING in the rise in prices.

    The government pension system is a scam. You are led to believe that pension contributions are somehow invested in some trust fund and ring fenced for future payout to the people who paid them in. In reality the government takes your pension payments and squanders them immediately upon receipt and your future pension payments, if you get one, are paid out of the taxes of the people who are still working throughout the period of your retirement. The system is completely insolvent because the forecasted future withdrawals are greater than the future predictions for contributions.

    If you got this far, congratulations and thank you for reading.

  • Comment number 58.

    Nice idea. You seem an honourable man who can see the rights and wrongs of the current financial chaos.
    However, there is a fundamental problem with your proposal: you are adding a moral dimension, wanting to help, in particular, the poorest in our society.
    The system we live in is not meant to help achieve an equitable outcome, to set financial fairness for society. The richest in our society will never allow your scheme to work - that is not what our market capitilisam delivers - and their respresentatives in the Tory and New Labour party will make sure things that only the wealthy will take advantage of the mess that the wealthy were allowed to create by their political stooges.
    But it is nice to know that there are alternatives ... even within the rotten system we have.

  • Comment number 59.

    Interesting idea, but not without drawbacks. For one, who decides into which instutions the funds are to be invested and the terms? Preferred stock as well as subordinated loans, were extended by the Japanese government only to the largest banks deemed "too big to fail."

    The bailout package approved in the US by contrast is open to any and all offers.

  • Comment number 60.

    Can someone tell me what the correct syntax is to get certain words or paragraphs in italics or bold please? or even better, to have a quotation in a box or something?

    Thanks.

  • Comment number 61.

    What a brilliant idea! Taking a leaf out of a shrewd investor like Buffet's book would mean that government could bail out banks, plus get long term benefit for it. This crisis is an opportunity, and we can all benefit instead of just being the muggins who pay for the mistakes of so-called experts.
    I sure hope someone in government is reading Peston's blog.

  • Comment number 62.

    Just had a note from dear Kenneth Widmerpool on the whole matter:

    "As you know Nick I have recently taken on a new assignment for Sir Magnus in these troubled times.

    All rather hush-hush of course, but needless to say I am considered just the man for a crisis. In essence - and this of course can go no further until time to take due plaudits - we are intending to declare a new Cod War on Iceland, alleging its unreasonable acquisition of certain British assets was achieved through deviant usage of 'weak money'.

    You won't understand the term Nick, but I've no time to open your eyes to the world of global finance. You really should have paid more attention to Muffins' lectures on the subject in the Lower Sixth. That was the time to gird your loins as a youth, not now.

    But excusing your deficiencies, as I say the plan is to invade Iceland, lay siege to Reykjavík then promise only to leave once the country's entire remaining funds have been handed over as a war reparation.

    You might argue - there have indeed been such feeble voices in Cabinet this morning - that it is pretty rough to kick a neighbour when he is down.

    But that is the whole point Nick, Iceland is finished as a country so what is the point or use of being sentimental about it? With the £200b or so we will carry back to the British economy we shall be able to re-capitalise every Bank in the land.

    I shall be in the first landing craft to hit the shore, as my role in securing the economic codes is, of course vital. You really should have joined the Territorial while you had the chance Nick. There is glory enough to go round for the subordinates and I could have done with a decent man who knows how to act on command.

    But no more until we return triumphant. I only tell you this because I know you had planned a painting holiday to Iceland soon, and it would be awkward if we had to stop and rescue strays such as yourself.

    Mother sends her regards as always.

    Yours,

    Kenneth."

    Sorted then really.

  • Comment number 63.

    #42 wrote: "Giving loan at 10% will not work, as its too expensive."

    Then that company has failed, hasn't it? And taxpayers are picking up the tab, aren't they?

    The alternative proposal I outlined (bottom of #30) will instantly reveal who is solvent and who is not. Investors can then take losses or realise gains according to their position in the hierarchy - common, preferred, senior bondholders, etc. The losses taken, performing assets can be sold to solvent institutions for servicing, and taxpayers can then step in with the ONE guarantee they should offer - to depositors, should solvent institutions lack the capital to meet their obligations to the FSCS. The capital markets will then unlock because the source of the freeze - lack of trust, uncertainty over who is in difficulties - will be removed.

    That's cheap, and it addresses the real problems, which are linked crises of confidence and overproduction. There are too few banks, they are too big, and no-one knows which can be trusted. Taking stakes in banks does not address those fundamental problems. Breakup and administration where appropriate does. Inevitably it means a much smaller financial services industry, but we are going to get that whether we like it or not. We can choose a better path though.

  • Comment number 64.

    A scheme to let the poorer people share in this country's financial wealth.... promoted by the government...fat chance!!

  • Comment number 65.

    You should have been offered treasury in the last reshuffle Mr. Peston!

  • Comment number 66.

    And another thing, it is sad to see a disingenuous trial balloon such as this receive acclaim, but it is the inevitable result of telling people they can have something for nothing, jam tomorrow, and packaging the promise with an empowering message.

    Do not be fooled, people, this will be a taxpayer debt, with the money loaned to banks of concealed financial status at a rate not commensurate with risk so they can arbitrage their way out of their difficulties. Over a sufficiently long interval, such as the duration of a pension investment, this carries a very high risk of loss. And the risk will be yours. If it were theirs, they would lose and there would be no point in such a scheme in the first place.

    You are basically being asked to fund a carry trade.

  • Comment number 67.

    And we could see the return of mass public-sector housing (council houses) as the government takes over all those failing mortgages.
    Council houses will be in every street, rich or poor.

  • Comment number 68.

    #15

    I think you are the one who needs the sleep (or perhaps wake-up!), if we don't pull out of the economic nose-dive we're in the hard working tax payer is going to take a hit anyway - along with everyone else, when your shares are worth less that a fresh sheet of A4 paper, or when your pension funds vaporise...

  • Comment number 69.

    #60 - NorrieC

    Our fellow blogger, Ed Inglehart has provided a useful guide. You will find it HERE.

    Good luck - thanks again Ed!

  • Comment number 70.

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

  • Comment number 71.

    #69 - threnodio



    Our fellow blogger, Ed Inglehart has provided a useful guide. You will find it HERE.



    Many thanks - you are a gent.
  • Comment number 72.

    #66 -WerringtonSilent


    You are basically being asked to fund a carry trade.


    Why is this such a difficult concept to get over to people? I can only presume that the psychology of the "Money for nothing" is so strong it overpowers peoples reasoning powers. I despair.
  • Comment number 73.

    Robert's idea is attractive. Most of us do see the imperative need for a very disciplined process of bank bail-out which protects the public interest and gives us the benefit that should come from holding the purse strings.

    What worries me about the present situation is the assumption that governments can safely continue to produce ever more money to bolster banks and depositors. Obviously they cannot - lenders will not be prepared or able to continue to lend even to governments at the present unsustainable levels.

    It all seems to point to an unavoidable and significant cutback in our standard of living over and above the current cost of living increases. Robert's idea, very necessarily, would lessen the impact on the most vulnerable.

    My own idea would be to also directly punish the almost criminal negligence of the inept boards of so-called banks. And for the future, disentangle banks from building societies [ it could be done]. We might then have real bankers running real banks, and good old stodgy mutual managers safely looking after our mortgages. Supermarket salesmen could then wend their way back to ASDA. Perhaps Alex Salmond's idea of a resurgent Bank of Scotland is not so daft !

  • Comment number 74.

    The comment about warming up the printing presses is about right..... the debts will get smaller when the value of each £,$,or Euro falls.

    But whenever inflation is pushed onto the system while in purely Financial terms things "work out" it's the outside-the-financial-system effects that cause trouble.

    Hitler is the classic example.... the inflation rate in 1938 isn't at hand but it was probably better than 1926...it's just that inflation wasn't the biggest worry by then.

    but even the less lurid examples aren't ever good...it's a classic cure that's worse than the disease....

    and don't get me started on people advocating "the right amount" of inflation... I've had enough of Goldilocks theories...

  • Comment number 75.

    No.57 (NorrieC)

    I'd be more willing to read through your comments if you didn't rant so much!

    That said, you raise important issues, in particular the unsustainability (in ecological terms) of a policy of limitless economic growth on a finite planet.

    'Economics' and 'Environment' still seem to occupy separate boxes in most people's heads. Insofar as they think about them at all. Though it's encouraging to see a number of contributors here mentioning Peak Oil and the end of the era of cheap energy.

  • Comment number 76.

    I can not help thinking that the current mess will sort itself out. The relative frequency over the years of this type of problem makes me wonder whether it is not a naturally occurring phenomenon conforming to chaos theory. Some action somewhere in the world of markets and human nature causes the system to run amok.

  • Comment number 77.

    A sound idea - why is it people with common sense, imagination and talent are never the politicians (with the notable exeption of Vince Cable)......

  • Comment number 78.

    Wow! I am stunned but such unmitigated Socialist nonsense.

    You did realise that the USSR collapsed because of its socialist policies, not in spite of?

    Waren Buffet, sadly, also got a significant proportion of the 700 billion dollar bailout so I think his advice is slightly suspect.

    Oddly, the one winner in all this is Goldman Sachs and by a completely random coincidence, the current US Treasury Secutary, who recommended this bailout, is an Ex-Goldamn Sachs CEO. Who'd'ave thought?

    No, we appear to haved learned nothing from the '30s Depression and want, desperately, to have our own, bigger and better than the last.

  • Comment number 79.

    "The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had."

    Be careful what you say. Even Buffet has the fear at the moment..

    The trouble is, we are on the edge of a precipice, a controlled demolition of western economies.. Throwing any public money at the banks, at risk, dances with the prospect of massive losses for the UK tax payer when we are already massively in debt. "The cupboard is bare"

    Also where would the money come from? Would we borrow from the banks to have a stake in the banks? Or would we borrow the money from China?

    No .. its too late.. The Keynesian and fiat money economic experiment has failed, it must be replaced with a new one.

    We need to allow the system to collapse and end the criminal syndicate controlling the Fed, ECB, IMF and other central banks and restore freedom in our western nations.

    Oh.. and please read post #57 he is right on the money! Well done, bravo.

    We should prepare by creating new currencies, localised money systems backed with sound money (gold or silver) with strict fractional reserve ratios and interest rates set by the free market. i.e. end inflation, end central banking systems and put the economy pretty much entirely in the hands of the free market, with strict oversight of reserve ratios.

    We need to start now.

    Setting up competitive and sound money systems and competing currencies in parallel with a failure of the existing banking system in its entirety will better allow a transition to a new economic model (Austrian School). If we do it after a total collapse, there will be no back up plan and we are into a new dark age of years of hyper inflation followed by anarchy.

  • Comment number 80.

    #57. totally 100% EXCELLENT post, very long yes but then the true reason for this meltdown of the capitalist order can't really be summed up in the way the media love ... "credit crunch" works for the masses, but its beauty is so very skin deep.

    I am actually in the position now, after some weeks of deep thinking, investigation, and planning, of taking decisive action as to what I see as the impending situation.

    And I would seriously counsel the rest of you to do the same. Keep talking about this stuff yes, keep thinking and considering the tactical moves being made - and proposed (e.g. by Robert), but please do not forget to TAKE ACTION to protect your own positions.

    I will give you a couple of examples :-

    * it takes 1-2 weeks to pull your investments off the stock market, particularly if embroiled in a unit trust / ISA

    * if you want to get into gold/silver, then you need to jump through some hoops to get a trading account

    Don't just believe you know how things are going to pan out here, only to find if they indeed do that all you have left in the world is the knowledge that you got it right.

  • Comment number 81.

    #57. totally 100% EXCELLENT post, very long yes but then the true reason for this meltdown of the capitalist order can't really be summed up in the way the media love ... "credit crunch" works for the masses, but its beauty is so very skin deep.

    I am actually in the position now, after some weeks of deep thinking, investigation, and planning, of taking decisive action as to what I see as the impending situation.

    And I would seriously counsel the rest of you to do the same. Keep talking about this stuff yes, keep thinking and considering the tactical moves being made - and proposed (e.g. by Robert), but please do not forget to TAKE ACTION to protect your own positions.

    I will give you a couple of examples :-

    * it takes 1-2 weeks to pull your investments off the stock market, particularly if embroiled in a unit trust / ISA

    * if you want to get into gold/silver, then you need to jump through some hoops to get a trading account

    Don't just believe you know how things are going to pan out here, only to find if they indeed do that all you have left in the world is the knowledge that you got it right.

  • Comment number 82.

    Since the 1930s, Britain has only 'emerged' from the Great Depression by a series of economic props: War (!), The Marshall Plan and Reconstruction, North Sea oil and gas, the arms trade, then the City. What next? No real solution appears on the hoizon. Instead, governments, local and national, seem committed to ever increasing costs for 'benefits' and health. Unless more people work, bankruptcy will increase exponentially. £billion patches will not stop the haemorrhage. Britain has to pay its way or suffer currency collapse, following Germany, Argentina, Norway...

  • Comment number 83.

    #75 StreetcornerJeremiah

    OK, point taken (although having re-read my post I'm not sure what proportion of it falls into the category of a 'rant'). But what we see here is a discussion at a level above the level at which the system is failing. Most arguments above including Robert's are centred around the (unconscious) acceptance of the existing fiscal model and what can be done to put a plaster on it.

    There are very few people challenging this at the foundation level. The financial system we attempt to operate is fundamentaly flawed. Mathematically it simply does not work. Robert refuses point blank to discuss or even acknowledge the matter and few posters rise to the challenge.

    That's what makes this so frustrating and maybe explains a degree of tetchyness.

    "'Economics' and 'Environment' still seem to occupy separate boxes in most people's heads." My point exactly. The fiscal model we are hell bent on following is mutually destructive.

    I realise my next statement will be construed as being contradictory but I have actually no long term worry that this will all be sorted. The fiscal model is based on the limitless exponential growth paradigm. It requires a coincident exponential growth in the consumption of energy (free energy in the form of oil). Peak Oil will be our saviour from the fiscal model of debt-based, fiat, Fractional Reserve Banking. The lack of a free fuel to sustain the growth will kill it stone dead as it is in the process of doing now. By admitting what the problem is and tackling it head on we could lessen the pain but that seems unlikely to happen in the current climate. However, the climate is very volatile and you never know....

    A bizarre viewpoint I know but humans are highly unlikely to voluntarily choose to fix this problem by themselves but nature will therefore do the deed for us.

  • Comment number 84.

    Lost in all the flak is the credit union. These worked well until the de-mutualisers got their way. Lending to members who had saved, worked seriously well for the better part of the 20th century. Abbey and Halifax when CUs had almost no bad debts. One can only hope enough groups are willing to come back into existence Will kill the first time buyer who has saved nothing. Has that generation got the bottle to succeed?

  • Comment number 85.

    There are the quintet of necessary state owned or controlled assets in a healthy society.

    1. Health Services - The NHS

    2. Utilities - privatised and now we are paying the price

    3)Education - whilst not perfect we've got a pretty good Education sytem here

    4) Banking - looks like the private sector have blown it again and by default our banks will becone OUR banks.

    5) The Military - take a look at Blackwater worldwide if you need convincing

    So all that is needed is re-nationalisation of the Utility companies and all will be good again in the UK

  • Comment number 86.

    Fabulous idea.

    They should do it. Prob a bit too imaginative for our current (mal)administration.

    :-(

  • Comment number 87.

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

  • Comment number 88.

    There's one problem: you're talking balance sheet. At the moment, that's the last bullet the banks want to bite on, because accurately assessing the balance sheet will force a goodly number into immediate bankruptcy. Like Mickey Mouse, as long as they don't look down and realise they're way over the edge of the precipice, all will be well...

  • Comment number 89.

    #83 NorrieC, as you recognised in #57, there is a limit to inflationary expansion, the episodes of deflation experienced at intervals. So credit market crashes can be viewed as a balancing mechanism of sorts. I could not say whether a full reserve monetary system in balance with resource availability would be viable, but an inflation-deflation supercycle is quite satisfactory so long as you exploit it on the way up, are in cash for the reset and do not worry too much about your grandchildren repeating your history. Whatever the disadvantages, it is likely that human avarice would always prohibit doing things differently for very long. You are right however that we cannot cheat nature. Thanks to our demands on the environment, this could be the penultimate iteration.

    This model is the only one taught, so it is not surprising to see it feature among unstated assumptions. I will make it a stated assumption. More troubling is the banal treated as juicy revelation and met with accusations that the information is too much. Too much for wide dissemination perhaps? It is all on Bloomberg.

    I think we can all appreciate everyone else's commentary though. Sometimes that is the real content here.

  • Comment number 90.

    Robert ,The Government could encourage many of the depositors who recently removed their assets from banks to buy into your pada scheme now rather than let their money sleep under their matresses

  • Comment number 91.

    We need to read all the political words very carefully now since they contain very clear messages. The EU leaders (inc Gordon) will not let a sound, solvent bank fail for lack of liquidity. Banks which are not sound and solvent may be allowed to fail.

    But banks aside. The short term liabilities of corporations is where the action, or rather no action, is happening now. The chance of rolling over maturing debts in the next 12 months is low. Are the EU governments going to rescue all the corporates as well? Why isn't the BBC reporting on the refinancing problems of corporates? This is the real story that the man on the street needs to know so that he can connect it to his own job and the banking problems.

  • Comment number 92.

    I agree, post 57 is brilliant (albeit extremely depressing for the future of the world and the UK in particular).

    It is true that Britain needs to rediscover something that allows it to provide goods or services to the outside world. It is unlikely to be financial services and I really do not know what it will be, as all of our useful legacy knowledge is already in the hands of people who do it better and cheaper than us.

    I think that one of the reasons that house prices rose so rapidly is because people with real wealth (i.e. people from countries outside of the UK, in economies that make things we desperately need (goods), or have things we desperately need (food, energy and materials)) could always out-buy anyone actually living in this country. The only way for a British person to actually compete was to have increased credit to match the outside buyers. Now this credit has run out but the outside buyers are still there and growing in number. British people need to learn how to work productively again and perhaps become less dependant on energy. When the power is finally cut, it will probably be the people, living simpler lives, who survive the longest!

  • Comment number 93.

    Interesting idea however, it’s not that original considering that the Australian government already runs a similar scheme with some of their budget surplus money. Sadly under Brown you’re not likely to have one of those for many years to come.

  • Comment number 94.

    And with every problem we have an opportunity...

    We are in accident and emergency at the moment and the dying patient is holding a gun to the surgeons head and saying cure me or die.

    Time to rethink I think. The suggestion that Robert makes has significant merit but cannot be the total solution, methinks the system has become much more rotten than that. When the man in the street fears to hold cash in a bank, when healthy businesses cannot refinance loans, then the current banking system is NO LONGER FIT FOR PURPOSE.

    All we have to fear is fear itself, a wise man once said. Perhaps we can learn from the 1930s and keep the damage of all this to a minimum. But lets be clear, attempting to prop up the current system will just prelong the inevitable. Radical thinking is necessary, but we MUST NOT destroy the banks in the process.

    The pupose of government here must be to hasten the darwinistic process, i.e. change the environment so that the natural selection of depression happens in months rather than years.

    Many people on this blog spout illuminating theories and conjecture, but what actually to do. So lets propose one solution - full of flaws and holes no doubt but lets say open to discussion. All I ask is an open mind.

    TO DO

    1. Government action to stimulate the renewal of a system of small local building societies, back to the model prior to demutualisation.

    Why... to seperate what should be solid long termism from what is speculation, and to ensure that the financial system CAN allow a part of the whole to fail without bringing down the entire pack of cards. Rescue of a small mutual IS easily possible, rescue of the banking system as a whole is, as we are finding, a little expensive!

    Method... one process would be to take the Northern Rock plus B and B housing stock, package them up with local housing associations and even possibly some council housing stock and sail them off as small mutuals. With the proviso that they must remain mutuals and not subject to subsequent debagging!

    Benefits... confidence! A more robust system, plus job sustinence, employing the day to day banking sector workers that would otherwise be made redundant, to run the small mutuals. I am proposing deliberate duplication here to add greater robustness to the system.

    2. Energising the first time buyer housing market. Taxation breaks encouraging a rethink of general UK house ownership using the shared ownership model. Encourage FTBuyers to purchase a share of house equity say 30 percent and rent the rest. At any time during their working life they could purchase the remainder of their house and gain full ownership. Into retirement the equity holding could then be effectively reversed, with equity release schemes funding retirement. The shared ownership model has been used extensively in the generation of the New Towns, such as Milton Keynes, and could easily be extended.

    Why... Confidence in buying full ownership in a house has been damaged by the crisis, part ownership offers a step by step approach allowing further debt to be taken on gradually. This will get first time buyers into the market, reducing the bottom of the enevitable housing crash. If the cost of housing falls almost to rental levels, which is what happens in shared ownership schemes, FTBs will start buying.

    Method... Taxation breaks to encourage FTBuyers down this route. Legislation to assist those homeowners in default to take a reduction in the ownership of the house from 100 per cent to say 50 i.e. reversion to shared ownership as an alternative to eviction and empty properties. The remaining share being taken over by the local Mutuals created in step 1.

    Benefits... This reduces the mortgage payments hopefully to a payable level, avoids dumping the property at the low end of the market and above all returns confidence to the householder that eviction would be very unlikely. Secondly it would be much easier to find a mortgage for a 30 per cent share than it would be for 100 per cent.

    3. The above 2 steps are likely to hit the banks hard as housing revenues tend to flow back to the mutuals, but no harder than the depression would hit them if these steps were not taken in the first place. The government must make it clear that the banks will continue to be supported until, and ENCOURAGED to, refocus their lending activites back towards the business economy and job creation/sustinence.

    Why... Redirection of banking activites to social purpose, i.e. the funding of sustinance and growth of the real business economy not credit bubbles.

    Method... Continued cash flow support to those banks realligning their activites, penalisation of those that do not. Legislation making executives accountable. Legislation to restrict LTV and self certification products. Accounting legislation as proposed in this thread to make risk more apparent.

    Benefits... Banks throughout the world will have to reallign their activites anyway. The first international financial system that completes reallignment will have a MAJOR COMPETITIVE ADVANTAGE over the rest of the world as it will find itself able to procure assets at firesale prices. Yes the banks and bankers will resist, but they must take the blinkers off as see the potential prize at the end of the process.

    4. It is of vital importance to the UK to have a financailly vibrant city and banking system. The funding solution Robert suggests is an excellent way of ensuring that the City recovers quickly by providing the cash to invest.

    Why... UK Ltd needs the City to generate foreign earnings.

    Method... As Robert outlines above.

    Benefits... Completing the necessary reallignment first will create an international competitive advantage and will reduce the effects of any recession.

    5. As well as the purchase of assets at a discount that Robert suggests. Why not also think big. Why not create projects that provide a benefit to future generations. During the 1930s Rosevelt stimulated growth with large Government projects, for example the Hoover dam hydroelectric scheme. This gave a significant boost to the USA then and still benefits it today. Projects that instantly jump to mind are offshore wind farms etc. Why not a significant mission statement to focus our energies, why not self sufficency in power in 10 years - not because its easy but because its hard!

    Why... Would get the ducks in a line, provide a focus for Roberts investment money alongside the procurement of cheap assets.

    Method... A certain percentage of the pension money siphoned off for this and other key strategic objectives.

    Benefits... Too obvious to mention.



    Lots of ideas here then for everyone to attack. But thats the point is it not, find one solution, find its flaws and improve it. One thing is certain, we are in a period of financial fear. Put very simply the fear ends when people decide not to be fearful anymore, stop contemplating their navels and start to look to the future. If your glass is half empty that could be ten years away, if your glass is half full, well every problem is a significant opportunity!

  • Comment number 95.

    #91, on your first point, we need to be able to verify this by reading companies' financial reports. Presently we cannot because they offer too little detail and their guidance is implausibly rosy. For example we can only infer from the presence of a SIV without writedowns that there may be problems in store. Or there may not. Without the guarantee offered by regular mark to market accounting, with scant details of what it contains, there is no way to know. A politician's reassurance is worth nothing to a lender or shareholder wishing to exercise due diligence.

    Your second point is very important. Commercial paper is not rolling. Solvent, profit-making, useful companies could go to the wall because banks do not trust each others' regulatory filings. Giving them taxpayer money will not restore trust and make them lend. It will just sit there along with all the other money sitting this out. I fear by the time this is widely understood, the damage will have been done. To answer your rhetorical question for everyone's benefit, EU governments are not going to be helping hotel chains make payroll. Utilities and transport, maybe. In arrears if their record is anything to go by.

    #94, we certainly need more competition in the banking sector, and no bank should be too large to fail and too large to rescue. Undoing past consolidation would be beneficial. But there is no need to introduce greater complexity in mortgage finance. The simplest solution is to make housing cheaper. That happens by itself when people are only allowed to borrow what they can afford to repay.

  • Comment number 96.

    To Mr Preston,

    Will you now research an article on why it could appear to happen but most certainly will not transfer wealth downwards?


    jamesthought

  • Comment number 97.

    Mr Peston

    That sound like a very good idea, if fact I find it very refreshing for someone to think about those at the bottom end of society.

    How and when could such a scheme mature in terms of pensionable age and return.

    Further more, would it be an end to company pension schemes and the start of a national pension scheme.

    Would it have any effect on the state pension, if indeed it did become a national pension scheme.

    Probably more questions than answers at the moment, however as I've said, its sounds decent to me.


    Another final point, how could you balance it for short term contributors in term of pensionable age.

  • Comment number 98.

    I've thought along these lines for a while, esp. since the BBC ? documentary on Soverign Wealth Funds a few weeks back.

    The UK needs a Soverign Wealth Fund, which could have been drawn upon in times of need like now.

    The 2nd biggest one from memory is the Norwegian one (only 'western ecomomy one'), part filled every year with oil revenue that the UK throws down the toilet.

    If Singapore without oil can have 2 in the top 10 no reason UK can't.

    Say 10% of oil tax revenue into it each year and 10% of Government waste savings. Following Robert's Government 'vulture' capitalist suggestions as above and kerching in 10 years we may have a UK Soverign Wealth Fund worth hundred's of billions.

  • Comment number 99.

    When we start to put right this mess in the next weeks months and years the future of banking governments and financial markets is like everything else locked in with the future of civilization. It is no longer possible to live in isolated self sufficient communities with stability because while we are still able to live in social communities we are dependant on all the other communities to share the resources the minerals, the natural and the cultivated ones to sustain the most reasonable life balance for us all.

    We cannot tolerate excess by any small minorities and we cannot accept deprivation of the unwitting. The national governments, bankers and a greed driven culture has culminated in many unsustainable and false markets which are now crumbling round our ears. When we rebuild our economic society and elect our governance we have to do it on the basis of sustainable management of all resources for all communities.

    Sustainable now is not a political green, softy, tree hugging word It has to focus in every thing we plan because if we are to survive and combat global warming, peak production and end economic boom and bust we can only achieve it by universal cooperation.

    There are no desert islands to hide away in isolation on and there is no room for conflict in markets. We have to develop the individual and society through strategies of cooperation not adversarial tactics.

    We have to work monitor and govern very tightly all those things which create seesaws because they become conflict not co-operation we have to have a global strategy now. Why? Because peak production is going to cause some real money market problems in the next 10/20 years which could make this crash look like a mole hill at the foot of Everest.

  • Comment number 100.

    NorrieC's post at Post # 57 is a good one. I think I say pretty much the same thing in slightly fewer words at Post # 9. We agree that the current debt-based money system, predicated on endless economic growth, itself predicated on infinite cheap energy is the problem in a nutshell. Like Norrie, it amazes me that our politicians have yet to twig this. All of their current actions are not fixing the problem, they're fuelling it. The mess we are in today will look like nothing compared to the even bigger future mess they're creating by printing money and pouring into our economies like a waterfall. Boy oh boy is this going to hurt when the collapse occurs.

    I'm not a survivalist nutter or anything like that, but at a personal and practical level I'm now rapidly taking steps to become self-reliant and to secure, water and feed my family. I know it sounds a bit dramatic, but I think this situation is now so out-of-control that the 'experts' and politicians haven't got the faintest idea what to do; they're panicking, which of itself scary.

    The financial mess will soon become a real-economy mess which will become society's mess. A messy society is a restless society and that scares me more than reading about the imminent collapse of yet another bank.

    Here's a good place to start: http://tinyurl.com/2o472v

 

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