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The deleveraging vortex

Robert Peston | 08:27 UK time, Thursday, 9 October 2008

Shipping rates for transporting raw materials to the great manufacturing economies of the world, as measured by the Baltic Exchange Dry Index, have halved over the past month - and have fallen 75% since mid-May.

This index is normally seen as a leading indicator of global economic activity.

Shipping containers being loaded on to lorryIn recent years it's been buoyed by China's voracious appetite for the world's natural resources, especially iron ore.

There may be one or two exceptional factors depressing shipping rates, such as a decision by China (which may turn out to be temporary) to consume from its vast stockpile of iron ore rather than bring in more.

But the fall in rates is redolent of a global economy on the turn, in a pretty sharp negative direction.

It's the backdrop to yesterday's forecast by the IMF that the world's economy will grow at 3% in 2009 - which is on the cusp of what it regards as a global recession.

And it's the context for the co-ordinated cuts in interest rates by central banks, from China, to Europe to North America - which extended overnight to rate cuts by South Korea, Taiwan and Hong Kong.

The emergency action by the authorities to reverse the direction of the global economic supertanker away from a seriously impoverishing economic downturn also includes the lending of taxpayer's money to banks on a mindboggling scale.

This is absolutely essential, if banks aren't going to dramatically reduce what they lend to households and businesses and to ensure that at least some of the reduction in official rates is passed on to customers.

But the world's banks are becoming seriously dependent on incremental funding from central banks, and special additional liquidity provided by finance ministries, to make up for the seizing up of money markets - which in turn stems from the fear that grips managers of vast pools of cash (typically our pensions and long-term savings) and makes them wary of lending money to any bank where there's even the faintest smell of trouble ahead.

Icesave websiteThe money managers are switching their investments into government bonds and official national debt in its various forms, on the assumption that we as taxpayers are always good for our debts - although the recent behaviour of the Icelandic government in apparently failing to honour its deposit insurance guarantee to Icesave customers makes that a slightly more courageous assumption than it was.

What's happening, therefore, is that money managers are lending to governments like ours, and those governments are then recycling that money to the banks.

The perfect illustration of this is the £250bn guarantee announced yesterday by HM Treasury for short and medium-turn debt issued by our banks - that should allow them (phew!) to refinance their debts as they fall due in the next two or three years.

There's quite a big question - for later - about how on earth we wean the so-called commercial banks off their addiction to borrowing from the state.

And if the addiction can't be broken, there'll surely be big implications for how banks are permitted to behave (should a taxpayer-supported institution be paying any of its employees 800 times average earnings, which a few that are now utterly dependent on taxpayer support have been doing?).

But for now the pressing issue is how we can pull the global economy out of the deleveraging vortex, how we can crush the devastating phenomenon of banks collectively atoning for their past sin of lending too much by lending too little.

No single government, not even that of the US - as Hank Paulson, the US Treasury Secretary, conceded last night - can contain the destructive power of deleveraging, of the de-facto lending strike, on its own.

It may require global collective action by governments on a scale we've never seen before.

You only have to look at the implosion of Iceland's ludicrously oversized financial economy to recognise that even the British government's £400bn package of support for UK banks is a drop in vast and stormy global ocean.

Today the Icelandic Financial Supervisory Authority is taking control of the country's largest bank, Kaupthing.

It's not as big as Lehman, but it's connected to lots of other international financial institutions and businesses, and it has $73bn of assets.

Some of its overseas assets were dumped on the market yesterday. If there's a fire sale of the rest, the pain would spread way beyond this small and storm-battered nation.

Comments

Page 1 of 4

  • Comment number 1.

    What I still don't understand in all this, is that the UK government will "borrow" in order to lend to the banks.

    Where do they "borrow" from? Other banks? Doesn't the (non-existant?) money just go round in a circle becoming ever more expensive?

  • Comment number 2.

    More reason to invest in the small businesses, particularly manufacturers, in the UK.

  • Comment number 3.

    Robert:

    A great piece of analysis, one of your very best.

    Recession is now a given - it cannot be avoided. The deleveraging process is an inevitable, unavoidable consequence of an irresponsible debt-fuelled spending boom, in which asset prices have reached unsustainable levels.

    This has opened up a "value gap" between loans and the value of the assets against which these debts are"secured". Managing this gap - it's more of a chasm - is now the overwhelmingly important issue.

    It is to be hoped that deleveraging can be managed gradually - this is what central banks are now trying to do. If they fail, the consequences would be ghastly.

    If they succeed, on which I'm optimistic, recession is still unavoidable. But, if systemic collapse is avoided so that recession is all that results from this crisis, we'll have got off comparatively lightly. We've survived recessions before, and can survive this one.

    On a lighter note, I've been amused by gags such as "Origami Bank has folded, things look fishy at Sushi Bank", and so on. Here's another one that I found very amusing this morning: "The Icelandic Financial Supervisory Authority".

  • Comment number 4.

    nigelpeacock

    The government is just acting as the intermediary, as it can raise credit fairly easily, as its assumed its "safe".

    Icelands recent actions might change that operception of "safe government" though!

    What I dont understand is why they bother!

  • Comment number 5.

    An informative, if somewhat uncomfortable read.

    FWIW, and I am by no means a supporter of this Administration, I think they have coupled together an extraordinary plan. Whether it is 'cunning' enough to work or just another one of Baldrick's wild ideas remains to be seen.

    However, even if it does, how long before the 'drip, drip, drip' of leaks about tax hikes followed by the inevitable statement from the Chancellor?

  • Comment number 6.

    The fall in shipping rates is hardly news. To have a pretty good grasp of most economic situations, all you need to understand is supply and demand. Nothing else.

    It has been quite clear for some time that the West was going into recession. Even so, central banks (most notably the ECB, but also the BoE) were preoccupied with inflation. But the equation is quite simple: a recession in the West equals less demand, equals commodity prices (ie. oil, industrial commoditiy prices) coming down. Yes, said the experts, but the economies of China, India, Brazil, Russia will march on, unaffected (as if they can't work out that without their customers in the West they too are looking at a slow down).

    So, a recession equals 1. less finished goods shipped and 2. less raw materials need and 3. lower shipping rates as there is less demand.

    Insightful reporting would be more appreciated Robert....

    The most telling thing I read yesterday, but couldn't find it on the BBC website (forgive me if I overlooked it) was this, quoted from the guardian:

    "While most of the participating banks encouraged the government to produce its plan, Michael Geoghegan, chief executive of the UK's biggest bank, HSBC, warned that it set a dangerous precedent. "I don't think it is right that the British taxpayer should need to bail out banks ... It sets a bad precedent, but the government had no alternative," he said."

  • Comment number 7.

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

  • Comment number 8.

    So for the last few years, our pension funds have been lending vast sums of money to banks, who then lent it back to us to buy overvalued houses. In effect we've been borrowing from our own pension funds.

    Now instead the pension funds are lending to the Government, who is lending the money to the banks, who are lending it back to us again. In other words pretty much the same, but this time the Goverment (ie the taxpayer - us again!) will take the hit on any losses.

    Am I completely mis-understanding this? Or is it just completely insane?

  • Comment number 9.

    Doesn't all this "additional liquidity" injected by central banks refer to "printing more money"
    This was at one time something that goverments used to refer to as the Money Supply and if it grew too sharply it was a sure indication that inflation would follow.
    Enoch Powell warned of the dangers - We shall see in the next year or two if his words prove correct

  • Comment number 10.

    BBC Website : On this Day 9th July 1991: "Bank collapse costs taxpayers millions
    The closure of the Bank of Credit and Commerce International has lost about 20 local councils up to £30m in investments."


    October 2009 "Local authority leaders are seeking an urgent meeting with the chancellor after it emerged at least 20 councils have cash in troubled Icelandic banks."


    Unbelieveable (not !!)

    We the tax payer spend fortunes and still the local councils gamble our money down the drain and politicians say "they will learn"

    Why did these councils go offshore with the monies when they should have been held somewhere very secure closer to home. ?

    Heads should roll and the council executives who authorised this should be sacked for gross negligence - They cannot say it has not happened before !!

  • Comment number 11.

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

  • Comment number 12.

    Robert,

    The natural progress of any vortex is that it will, given time, run out of sufficient energy to maintain its own growth. It then disintegrates, essentially collapsing in on itself.

    The mechanics of the global liquidity crisis are just the same. After years of pumping up the vortex - it is now fragmenting and collapsing. Just look at today's Local Authority news - 500m stg lost overnight. There will be many, many more casualties popping out of the woodwork in coming weeks.

    The gov.uk has just tried to keep the vortex in action by pumping in vast amounts of liquidity and guarantees. They are saying "more of the same" will cure the problem.

    The storm that drives this vortex will take its own course. Driving interest rates down will only discourage saving which is the lifeblood of the vortex. Work it out for yourself...

  • Comment number 13.

    Full throttle downhill and braking uphill...

    What I wonder is how many of these bailouts can any government (including the UK) handle? And how are they financed? Could this lead to superinflation in the medium term?

  • Comment number 14.

    Due to the misguided central banks raising intrest rates, the dominoes are falling. Very hard to stop once started. It looks as if we will go into a period of very low interest rates and probable deflation. This will last a long time. Not just 1 year probably 3-4,but as always we will come out of it and learn nothing.

  • Comment number 15.

    Great - so now our councils have gone and done an Orange State.

    Do any of them want to admit to speculating in mortgage-backed securities?

    I think that there is a line between depositing and speculating and that this has been traversed with all these cross-border capital flows into Iceland.

    If I were Iceland's government, I would loath to put my 200,000 taxpayers on the hook to underwrite the speculative activities of a collection of foreigners.

    And personally I cannot see why the UK government is so keen to step in to fill the gap. This will only put further strain on our own economy and our own banks.

    I am sure that there will be a few tragic stories of life savings disappearing, but a greater number by far will have gone from the stock market collapse, and noone is suggesting those should be reimbursed.

  • Comment number 16.

    Dear Robert
    Ii's a lot of Naughts, 400 billion, nowt to say on the out come though, nowt to show for it. nowt can be guaranteed, 25 councils up the swanney creek, High street owned by Russia through Iceland, nowt doing on the Russian stock markets, very clever.In terms of Points, i'll give it naught, it's not going to resolve the problem, BECAUSE the problem has NOT been sorted OUT,
    The Traders and Bankers have NOT been bought to Boot, it is their fault it is their Blame, and when this is all over, even twenty years down the road they should be ----Hung Drawn and Quartered,---and there names hung over Traitors Gate, its not the Institutions that bear the blunt of all this, its the General public the tax payer, they have crucified, and when the Establishmentarians suddenly go into the shadows, by having Holidays at the expense of the Tax payer, (BARCLAYS) -----YOU KNOW THEY COULD NOT CARELESS.
    Know of any good council houses for rent at £12,000 a month, ots no wonder Councils have problems.

  • Comment number 17.

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

  • Comment number 18.

    10:

    Absolutely right. Local Authorities cannot plead lack of prior experience. There should be strict rules on the custodianship of their (meaning our) funds - preferably they should hold the lot in gilts. They should certainly have had a suitably diverse spread of investments.

    It would be most interesting to know if there are any overlaps between the 20 affected by BCCI and the 20 now affected by Iceland?

  • Comment number 19.

    Why are they trying to perpetually avoid the pain? We NEED de-leveraging. We NEED deflation. We need to start paying off our debts and stop borrowing.

    The debt addicted Western governments are still at the stage of an alcoholic who hasn't admitted he has a problem. They think if only we can get the banks lending and consumers borrowing again everything will be fine. Every solution they come up with involves more debt. No.

    We've borrowed too much. The government have borrowed too much. Individuals have borrowed too much. Companies have borrowed too much. We have to start paying our bills, we can't keep borrowing our way out of facing reality like a gambler chasing his losses.

    NO MORE DEBT!

  • Comment number 20.

    I can see large scale civil unrest on the not too distant horizon.

    People will lose their jobs as the banks will still not lend to small businesses, no matter what Brown or Darling say.

    So people will lose their homes, repossesed by the banks that have taken £16,000 from each tax payer.

    Its patently unfair and may always have been this way, but now its transparent.

    Meanwhile the Fat Cats will get fatter, payed for by Joe Public being made homeless.

    This is going to make the Poll tax protests seem like a mere skirmish.

  • Comment number 21.

    As an alternative cause to this financial mess could it be that developing countries like China 'invested' their excess capital in markets that were already saturated rather than investing in their own infrastructure?

  • Comment number 22.

    The fact that there are so many posts begging for answers to fundamental questions (like where will the money come from?) makes me wonder.

    RP has obviously caused a storm of attention (to himself) and has both fans and detractors.

    For his fans, I suggest you read a contributor on the guardian blogs called golemXIV. Then you will finally understand what calm, insightful and balanced writing is all about.

    For RP's detractors, I suggest you look out for golemXIV too. Read a few of his posts, and you will understand what is going on. No more need to read the sensational journalism of the BBC, with its "Armageddon", rates "slashed", prices "plunge".

    http://www.guardian.co.uk/users/golemxiv

    (Have they not heard of Ben Graham's "Mr. Market" concept and the volatility of markets failing to reflect the more stable underlying values of assets?)

    I wonder why RP doesn't tell us what is really going on, where this is really leading us?

    From what I can understand, we will be increasing our national debt to save these incompetents (you only have to walk into a high street bank and try and open an account to see what a shambles they are). During an era when this country is in decline, when exactly do they think this debt will be paid off? It's a bit like us taking out extra loans and mortgages as we go into retirement. But it doesn't matter to them, they are only politicians. Serve your term and then go join a bank, like TB at JP Morgan. Better not make the pay restrictions too limiting Gordon, they are your future employers!

  • Comment number 23.

    Excellent blog, but the assumption seems to be that recession can and should be avoided. I think it is a natural corrective mechanism and that the anomaly is a too-long period of unrestricted growth. My own rule-of-thumb is to look in the travel supplements. When champagne/ spa weekends in a bedouin tent near Marrakesh are offered for a mere £5000 per person, it's time to count your spoons and get out of the markets fast!

  • Comment number 24.

    It seems impossible for me to post any messages here, without going through moderation.........

  • Comment number 25.

    hell mend anyone fired their money into Icelandic banks - our own could have done with this liquidity and it is a disgrace they are being bailed out.

    I think though we are all daffy ducked

  • Comment number 26.

    Spot on Robert. Central bank guarantees might unlock the safes for interbank trading again, but what about the horrors in there which closed them first ?

    The lack of credit which some consider the cause of the recession is merely a symptom. It is a decade of insane lending which is to blame and has to be "unwound". Unwound meaning millions of people in the rich world having huge amounts of personal debt for most of their lives.

    This recession is misnamed as the "Credit Crunch". It will eventually be known as the "Deleveraging Disaster".

  • Comment number 27.

    "There's quite a big question - for later - about how on earth we wean the so-called commercial banks off their addiction to borrowing from the state."

    How about we raise the interest rates at which they borrow? This will be unpopular, but we also need to wean the wider society off living in excessive debt.

    Furthermore, if we abolished the Bank of England base lending rate and let the market decide the interest rate, then an excess of borrowers and a shortage of depositors would naturally put the brakes on borrowing and keep debt in check.

    I think it is not that the banks cannot refinance their businesses, but doing so with commercial money will cost them more. This is the natural way of the market. However, the banks do not want their profits and bonuses hit so they create disaster stories like SARS and the Millennium Bug combined and pressure the government into making hurried decisions. The media are more than happy to go along with this because it is exciting like a Bruce Willis movie. (But a bit like the movie Armageddon, the solution is implausible.)

    However, if the banks are talking about refinancing that need to take place in the next two years then there is no real hurry. They at least have a month to decide and debate what action to take, but I don't think the banks want them thinking about it too much.

  • Comment number 28.

    "Should ... be paying etc"

    I'd avoid Jonathan Ross in the BBC tea bar for a little while.

  • Comment number 29.

    15:

    I agree about HMG not bailing out in this situation.

    But I've less sympathy for Iceland's taxpayers, and none at all for their overborrowed businesses.

    Iceland's (elected) government and its supervisory agencies have presided over grossly irresponsible borrowing (in relation to the size of their economy); much of this was borrowed from foreign depositors; and it was matched by equally irresponsible lending (much of it to Icelandic businesses, who used these funds to buy assets in the UK and elsewhere).

    The ordinary Icelandic taxpayer, through his/her government, has some culpability in this mess; but Iceland's over-leveraged businesses, through reckless borrowing to buy assets overseas, are far more to blame.

    If Iceland doesn't even honour its minimum depositor guarantee (about GBP 16,000 per person) to British depositors, we should consider getting our money back by taking possession of Icelandic-owned assets in the UK.

    The reason for this is simple - these assets are often the security against the loan of Icelandic banks' depositor money - to the extent that these deposits are our money, we should take possession of the security. That's what loan security is for. It's time we called it.

  • Comment number 30.

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

  • Comment number 31.

    Robert, for the record and in the name of journalistic objectivity, could you please post an article (or series) on ""What would be the results if no central government funding had been injected into the money markets over the last couple of months?"

    I can't seem to get beyond the doom-laden predictions of "catastrophic" and "unthinkable". What exactly would happen and how would this affect people?

    Please could you spell out as coherently as you are describing the current actions by central banks the actual events that could unfold if the opposite course of action to the one being taken was pursued?

    I think we need to know some facts.

  • Comment number 32.

    One cocept that I have struggled with for a couple of years is why continuous growth is 'good'. Continuous demand feeds the belief that markets always go up and money is always there to be made. However maybe stagnation is better at a time when resources are become scarce - continued growth is not an environmentally sustainable wolution. Or am I missing something?

  • Comment number 33.

    Robert, as has been proven by market response to these variouis bailouts, liquidity is NOT the problem.

    Trust and Confidence are missing. Without these, it doesn't matter how much is available.

    The UK (and US) government have underwritten further cheap money to orgainsations that have shown themselves incapable of managing the previous, and long-standing, flow of overly cheap money.

    We are then advised to be of cheerful spirit in that these institutions may, just may, be willing to lend us some of our own money back - for a fee.

    The few savers (proportinally) left with anything to call their own are further penalized, as if the recent slew of Icesave debacles hadn't sufficiently traumatized them enough already, by lower savings rates.

    Giving money to the banks is like giving more Whisky to the drunk. Give taxpayers' money directly to real enterprises which generate real wealth, product and service. Cut out the middlemen and their fees and interest rates and incompetence.

  • Comment number 34.

    Bulk shipping rates have also fallen because of the fall in bunker prices.

    You're delving into areas of business that you know little about - having started with finance are you now looking to bring international bulk shipping to its knees? :p

  • Comment number 35.

    It is remarkable how all these problems have developed since the use of the 'wholesale money markets' spread outside the city.
    Hence we got these strange 2 and 3 year mortgage 'fixes' rather than 25 years SVR, and we see that councils found it easier to raise money on these markets rather than issue their traditional bonds. These were before Mr Peston's time probably, but widely used by small investors as part of their cash portfolio. Local Authorities raised all their working capital via them. The councils now in trouble with the Iceland banks clearly were not competent to handle risk analysis correctly. It is time for the return of the local authority bond and removal of their ability to engage in more exotic financial instruments, particularly outside the UK.

  • Comment number 36.

    Now is the time to revive the idea of a public supervisory board for the part nationalised banks. The board would have representatives from the treasury, bank staff trade unions and non-institutional shareholders (by ballot) as well as bank non-executives and executives.



    Not dealing with operational matters but concerned with policies with social and economic implications. In addition it would nominate a member to chair the remuneration or compensation committee to ensure responsible and equitable rules are set on both executive pay and bonuses.



    This would initially be a temporary arrangement but one that could and should develop into a permanent feature.

  • Comment number 37.

    18 wrote "It would be most interesting to know if there are any overlaps between the 20 affected by BCCI and the 20 now affected by Iceland?"


    Also when Northern Rock was rescued/nationalised why did the NuLabour Government jump in so quickly - was it because there was huge amounts (hundreds of £millions !!) of monies from local authorities on deposit ? - did some of these authorities jump out of the NRock frying pan straight in to the Icelandic Fire ??

  • Comment number 38.

    This is a fine article,

    I note that many informed posters on here provide their views on the current situation (with the previous implementation of the banking system in mind). What I mean to say is that things will not go back to they way they worked in the past (consequently we cannot apply the rules as they stand now, to second guess the future), change is upon us. To me this means that the present financial problems once fixed, a new different version of world banking industry will evolve.

    The old system has died, may it rest in peace.

  • Comment number 39.

    The devil is always in the detail. A tiny sum, perhaps £750 million!!!!, from the commercial finance arm of one of the Icelandic Banks safeguards around 20,000 UK jobs. These companies are supported by an Asset Based Revolving Credit. Understandably the UK Treasury has frozen all assets of this bank. I hope they have the time to review the operation of this activity (which was always profitable and backed by audited assets). Time is of the essence and the next 48 hours will see these jobs go either way.

  • Comment number 40.

    So, the Government creates a facility to fund up to £400 billion support to banks. How much of this is to be borrowed by the Govt and who do they get it from?, what rates apply? or do they just sell a tranche of gold?

  • Comment number 41.

    In all the discussion about the present crisis, no mention is made of the fact that oil prices have almost halved since their peak, but prices at the pump have fallen only about 10%. Even allowing for the fall in the pound against the dollar, there is surely a rip off here both for oil and for gas and electricity.this is leaving inflation far higher than it needs to be and means that interest rates are still higher than thay need to be. This in turn means more people than need to are struggling with their mortgage repayments, as well as with higher than necessary fuel bills. This inturn means less expendture on other goods.
    Perhaps someone could explain why a windfall tax on oil and gas and electicity companies is not justified

  • Comment number 42.

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

  • Comment number 43.

    I haven't followed your situation over there, but
    here in the US Paulson basically started with a
    "give us $770B or we'll shoot this dog" routine.

    I don't understand why we don't just start sovereign
    wealth funds, instead of lending money to these
    banks. Isn't that what the Chinese would do?

    That way, if a CEO misbehaves, we can take
    his corporate jet and ski vacations in Aspen away
    from him, and make him sign for a hall pass when
    he wants to go see his friends in Davos.

  • Comment number 44.

    Slighty of the point but ever so relevant. I think we are in trying times with an econmic crisis which is having a knock on effect with everyone. Everyday I read more and more and more negative news from robert Preston. I think Mr Preston you need to be more responsible in how you report news and when. As most people will know timing is everything. In the econmic state we are in currently. Please I ask you choose your words carefully and dont just fly at the mouth in an atempt to score points or make yourself feel as though it's your duty to report "Any News". Whilst I understand your have a job to do please spare a thought to the everyday man and women. who are effected by comments you make. I think yourself and any other media associated individual need to be more repsonsilble in the information that you release and when. On the more relavent point at hand we should stop blaming everyone else. As responsbility should be spread amongst the banks and the people. As cheap credit was available we took it upon ourselves to access it. So when the system around this credit collapses we should complain. As a result we should be partly expected to help through taxs to get this system started. As if it dosent we will eventually be the biggest losers so stop the complaining and lets rally behind getting the issue at hand sorted by any means possible. So hopefully we can secure a more stable future for the economy.

  • Comment number 45.

    Do you think that Tony Blair entering the banking world on $5000000 a year has anything to do with all this, he should be well qualified and has the advantage of having Cherie to advise him

  • Comment number 46.

    Thank you for these insights again, Robert.

    Overall I feel it was an excellent package put forward by the government - to be applauded - and I suspect we will see other governments, in particular the US, having to follow suit.

    The move to assure all Icesave depositors that they will not lose money, and the threat to sue the Icelandic government, particularly, sends out a very strong signal indeed that the UK Govt won't take no s**t, and even though it does not say it, is protecting bank savings.

    As 3. has stated it all now depends on how softly things can settle back.

    Three scenarios could occur. Inflation could be allowed to let rip, we could go back to the bad old days, and all those who have borrowed stupidly could get out of jail and in a few years time be getting ready to go out and borrow stupidly again.

    Alternatively an enormous number of people/companies/intermerdiaries could go bust and get out of jail that way.

    Hopefully the third scenario of a managed wind down can be arranged, which will mean that those (people, companies and intermediaries again) that have excessively borrowed will just have to spend the next few years working damn hard to pay money back to the lenders, and not going very far forward themselves.

    After decades of the economy being run for the benefit of those who have been able to borrow the most, it should now be the lenders who relatively speaking benefit. This will mean real interest rates (or rather the real return on cash compared to the real return on assets, that are now already busy deflating) will in fact stay very high for some time.

    And once the dust has settled, we need new banking regulation/monetary control systems to prevent this all happening again.

    Maybe Mervyn can arrange a global initiative by central banks to include asset prices in inflation targeting?



  • Comment number 47.

    So there'll be a recession? I am 57 and I've lived through the 1987 crash and the Seventies 3 day week. In what way is this going to be worse than either of those? In the 70s we had no power for hours every evening and the £ was worth not much more than a $.

  • Comment number 48.

    34

    thanks, that made me laugh!

  • Comment number 49.

    32 sdwatson:

    Great question, which seldom gets asked.

    I think it's a combination of the healthy (human desire for material betterment) and the unhealthy (an excessive culture of materialism, acquisitiveness and greed). The former is a good thing; the latter, in excess, is dangerous both socially and economically.

    Resources are, as you say, a key factor. The population of the world is increasing but the resource base is not. If oil demand had continued to grow at recent rates (2-3 percent annually), my reckoning is that we would have hit resource constraint by 2015 or thereabouts, causing oil prices to soar. At stable levels of consumption, the oil industry can meet requirements for far longer than that.

    In oil as in other resource categories, availability will limit economic expansion. The pursuit of debt-fuelled growth has now inflicted severe damage on the economy.

    So we do indeed need to re-think the assumption of continual growth. Maybe this crisis will compel us to do so.

  • Comment number 50.

    Oh no Robert! - you shouldn't have mentioned the IMF assessment! Now plenty of people will blame the World Wide recession on you and this blog!

    Keep up the good work, the BBC needs you! Where have you got your savings?

  • Comment number 51.

    Not directly related to your current blog, but I cannot believe that local authorities have seemingly not learned the lessons of BCCI all those years ago. There is always a link between risk and reward and to think about locking in taxpayers' money to banks that are some way from mainstream is a scandal. It is one thing to exploit short term market rates with smaller banks (overnight and short term LIBOR based products) but quite another to look at 2 and 3 year deposits as many seem to have done. Now all the L/A treasurers are trying to do is to get the national tax receipts to subsidise Town Hall tax receipts once again. I hope this issue will be raised in profile over the next few days.

  • Comment number 52.

    Governments beware-the peasants are revolting-look after the victims first, not the bullies.

    Some of the phrases going around governments at the moment sound like Marie Antoinette's 'let them eat cake'! Although it is disputed that she actually said this, the sense is the same-the rich lived the high life at the expense of the poor-haven't our gocernments learnt anything from history?

    Our parliament was conceived to look after the interests of it's people-not itself or the fat cats!

    Oliver Cromwell must be turning in his grave-I wonder what our former Lord Protector would say right now?

    Others have mentioned Enoch Powell-he was slated years ago, but perhaps he should now be called a visionary ahead of his time-we need more of his integrity!

  • Comment number 53.

    The question of no conditions being put on the banks seems to be glossed over. Why loan the money and then just hope that they will start to use it to loan to each other and get the system back on track. Make them. Why are we still pussy footing around? Your point about the bonus payments is crucial and the fact that no one wants to seriously address it, or reveal the actual figures or names of individuals involved is the greatest indicator that they have no intention of changing the way they operate and however this resolves over the next few years, those individuals at the top of the pile will never suffer. It is a disgrace that everyone, BBC reporters included buys into it and keeps quiet as in reality they all just want everything to go back to normal as quickly as possible. Why don't you tell us which banks, which individuals, how much........interview them, ask the difficult questions? Ask for justification. I see a lot of blustering men on the television, self-important and pompous trying to explain why it's essential to raid the piggy banks of the working people of this country to prop themselves and their institutions up. Just as the poorest American electorate aren't given enough machines to vote with, the poorest in our society have no voice or channel to complain, and yet they will suffer the most over this.

  • Comment number 54.

    re: #40

    He can't sell a tranche of gold because he's already sold it..when the market was at rock bottom.

    Brown is out of his depth..he had an easy ride for 10 years yet still managed to rack up a massive defecit, all just to buy more votes.

  • Comment number 55.

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

  • Comment number 56.

    A quick Google reveals that Iceland enjoys the third lowest corporate tax level in the OECD nations. As recently as 2007 right-wing, 'free enterprise' US think tanks were trumpeting the Icelandic model of flat taxes, low corporate taxes and deregualtion and flagging up Iceland as an economic powerhouse enjoying phenominal economic growth and a model for other nations tpo follow - the American Enterprise Institute approvingly quoted the Icelandic Prime Minister - "success is because of low taxes, not despite them" and urged the US to follow Iceland's example. The Cato Institute uncritically reported the growth of the Icelandic economy and its commitment to a low taxes and almost complete abolition of banking regulation . Even today the Invest in Iceland website trumpets a range of low-tax incentives. (In a report compiled with contributions from KPMG.)

    Clearly this model has now imploded - the ideology that undepins it utterly discredited - but I am very concerned about the degree to which we as British taxpayers will now be picking up the tab for Iceland's irresponsible government. I and many others have warned for YEARS that the Iceland economy was being run more like a huge pyramid selling scam - the problems itr was storing up predated the onset to the credit crunch. Surely if people were willing to ignore those warnings and put their money into Iceland then they must be reimbursed by Iceland - not the UK. It's not even as if we have been enjoying the tax benefits of these banks during the good years: I suspect precious little corporate tax has been paid into the UK exchequer by Icelandic banks taking UK savers money - though I'd be interested to know if anyone can tell me.

    The 'Fire Sale' of Icelandic-owned assets will also have serious knock on effects on commercial property prices. Icelandic investors have been buying up huge tranches of the High Street at top dollar - assuming they were more important as property investments rather than businesses in their own right, and treating them - as someone said of Sainsbury's - "as property companies that sell a bit of food."

    Now its payback time and the rolling over of debt and the servicing of debts, against a backdrop of declining sales - the selling of a bit of food, clothing and replica football shirts - and declining asset values is supremely painful. If we are not careful it is going to hurt us even more - unless we cut ourselves loose and let Iceland go down.

    Any views?

  • Comment number 57.



    In a nutshell.. #33



    "We are then advised to be of cheerful spirit in that these institutions may, just may, be willing to lend us some of our own money back - for a fee..."





    lost for words.

  • Comment number 58.

    Just one small point that you mentioned - the next two-three years!!
    GB made mention yesterday of the obligations that some (i suspect most) banks have taken on when using lending/finance packages that tie them in for repayments for the next 2-3 years.

    How on earth are they going to fund these now with the spiralling vortex of 'asset' prices and the 98% blockage of credit??

    The 'de-leveraging', seizing up of world trade + spending and rock bottom asset prices means broke banks!!

    It will take 10 years to sort this mess!

  • Comment number 59.

    41:

    About fuel prices and windfall taxes.

    As you say, the weakness of Sterling has diminished the beneficial effects of lower dollar oil prices. Most of what you pay for fuel is tax, so a big fall in wholesale product prices only translates into a small fall in pump prices. Some price falls are still working their way through the refining and distribution system, so further price reductions will follow.

    The accounting system inflates the profits of the international oil companies - they are producing oil at current (high) prices but depreciating the cost of reserves found and developed in the past, at much lower cost. As today's much higher reinvestment costs feed through, profits will fall back. Imposing a WPT (windfall profit tax) would be difficult anyway, as these are global companies. Only a small part of their profits is generated in the UK - the vast bulk of income is generated (and taxed) elsewhere.

    The utilities' after-tax earnings aren't as big as people often think (typically a return of less than 5 percent on assets), so a WPT wouldn't raise much money. And we need these companies to invest in our infrastructure.

    An example here is EDF, which is committing billions to our nuclear rebuild requirements. I'm pretty sure they wouldn't have committed to this unless they received assurances about WPT.

  • Comment number 60.

    Dear Nick
    Okay, "wHAT BANKS ARE GOING TO FAIL", ?
    when a government says so, they know who they are.If they do not the Regulators are not doing their Jobs.

  • Comment number 61.

    I am also very worried that Brown is attempting to prevent necessary deleveraging through conditions attached to the intervention in banks. Negative equity voters are unhappy voters.

    Not once have I heard Brown admit that the housing market got out of control, and needs to return to normal levels. In fact, he has recently been saying quite the opposite, playing down the recent falls in prices by comparing them to the (insane) property inflation over the last decade.

    Personally I really don't blame banks for this, when even the leaders of the country still can't grasp that things went too far on their watch.

  • Comment number 62.

    46:

    Great post, which sums up the situation spot-on.

    Your point about including asset price inflation in future interest rate policy decisions is absolutely critical. We must never repeat the mistakes that we're paying for now.

  • Comment number 63.

    Three simple cures to the present day problems.
    1. freeze the derivatives market immediately - this would stop the speculative nature of the market re trading in any stock quoted through London, get back to fundementals and expose those who are profiteering at the tax payers expense, and still are, principally the banks and hedge funds (how are their half year profits?)
    2. Legislate that the banks have to lend to other UK banks a significant portion of their funds and bear any loses that they may incur as a result of their own rash past lending - shareholders can take the pain as they took the profit.
    3. Fire the senior directors, executives and managers who got us into this. A trader does not change his spots or his morality because the the PM says so. If they lacked the morality to behave responsibily in the past, they certainly cannot be trusted to get us out of this. If Nick leeson can spend time behind bars for his crimes so can these bankers and traders.

  • Comment number 64.

    Good article, at long last connecting the recession and the financial crisis.

    I still think, however, that inflation is more likely than deflation, simply because a significant portion of the central bank money will stuck in the system (exactly because of the recession, thus because of defaults on inter-company loans). It will be even more complicated because of the parallel asset devaluation.

  • Comment number 65.

    #16.... so many cliches and so little use of the English language.

    Example, "The Traders and Bankers have NOT been bought to Boot, it is their fault it is their Blame"

    The phrase is, I believe, 'brought to book' or 'brought to account'.

  • Comment number 66.

    Does anyone in the Govenment care about the taxpayers?

    I recently read that if a single years welfare budget (around £140 bn) was split evenly among the poorest 25% of households, they would be on abover average income!!

    End poverty (almost however you define it) in a stroke.

    A lot of innefficient 'makework' civil servants out of a job, but maybe they could start generating wealth instead of consuming it.

    Having got away with such stupid waste, the government now think they can get away with stealing our money for private banks to rent back to us...

    Gordon may laugh - but he is set up for life - some of us are working hard for every penny - struggling to generate wealth against all the government can throw in our path.

    Mugabe doesn't suffer any financial problems because he is insulated from real life. Out politicians (particularly the government) are no better.

  • Comment number 67.

    It's pretty simple, sooner or later an economy financed purely by debt has to come to a halt. Sooner or later people hit the wall and can't borrow any more, so have to focus on repaying what they have already borrowed. Then they stop spending, and the only question is whether we experience a long slow decline or a juddering halt.

    Unfortunately so much of what we regard as normal bears more resemblance to a Ponzi scheme than those in charge care to admit. Put your money in now, that money pays for people now, and there'll be plenty when you need it, honest guv'nor.

  • Comment number 68.

    Another lull before another storm. At least there is now some temporary stability in the banking system
    Depending on whether we really know how bad things are in the banking system which at present will remain a mystery funding should trickle down to businesses without which we are dead and buried.
    There is still a lot of cash swishing around in the system so things aren't totally hopeless.
    The biggest challenge immediately for Gordon Brown is to massively prune public services.
    Unemployment will be a huge cost to the taxpayer in months to come.
    Public services do not create wealth they drain it away and this is an opportunity not to be missed for the Government to put its own house in order.
    Not popular but essential.

  • Comment number 69.

    Governments acting in a positive, coodinated way as we witnessed yesterday, was probably the most significant event of the day. If this can be followed by equally creative and timely interventions in the future, I believe that confidence can be restored relatively quickly.

    If the Brown/ Darling initiative can be followed by others, perhaps this will herald a era where we see governments taking a grip of the financial markets...that would definately be a 'good thing'!

    I think the long-term effects of 'events' will very posiyive - now there's optimism for you - enough to make the Baltic Exchange Fry Index leap in anticipation!

  • Comment number 70.

    I agree with #20 Dr_Goats that politically the road ahead is going to get particularly worrying.

    It seems likely that repossessions will accelerate, unemployment will increase, and businesses will close. At the same time, the banks will still refuse to lend, award themselves high salaries and bonuses all with taxpayers money. Even if banks do lend money to the public it will be essentially be taxpayers money and they'll charge the public interest on money that is technically theirs already.

    I get the impression that the entire legitimacy of the State will be at stake here if banks carry on as normal with all the funding from the taxpayer. The only solution I see is for the troubled banks to be nationalised and temporarily bring back the Keynesian Mixed economy until the mess is sorted then sell them off.

  • Comment number 71.

    poster 53

    You are so right-I said yesterday that the rules must have changed to go strings attached cos they all said no 24 hours before.

    So any balance sheets around?

  • Comment number 72.

    Robert, you shouldn't report on things you don't really understand. The freight market is probably the most volatile market in the world. It has seen massive highs and lows before and these have not led to economic boom and bust. In that sense it is not a leading indicator.

    The reason dry bulk shipping rates have dropped so dramatically is because there is a huge number of vessels being built. Yes, cargo demand has dropped but it is starting to pick up again as India, China and even Europe start booking coal purchases for the winter. If you looked closely enough you would see that FFA's (Freight Forward Agreements) are trading in contango meaning that traders expect a healthy pickup in future months. Typically the freight market has always traded in strong backwardation due to the excess of vessels coming online.

  • Comment number 73.

    56:

    Spot on. In my earlier post (29), I put the case for nationalising Icelandic-owned UK-based assets where those assets are security for debts from Icelandic banks which, for their part, are unable to honour commitments to British depositors.

    They borrowed money from UK savers, lent it out to their own companies to buy UK assets, and may now think they can keep those assets whilst we accept the loss of depositors money. Sorry guys, no deal. I think we should call the security on this one.

    Where we can spot linkage - UK deposits (via) Icelandic banks (into) Icelandic companies (into) UK assets - we should take possession, right now.

  • Comment number 74.

    I think the amount of money 'owned' and 'owed' by banks needs to be put into perspective.
    Using a nominal amount of cash as 'x'.


    Bank1 only has x amount of cash, but there assets - (at previous values) were worth 10x. As a result of this they lent 25x to other banks in the hope of making more xs in the long term, hoping that the value of the original 10x didn't fail/fall while they lent the 25x.

    However, the price/value of the original 10x assets went up to 20x in a short time, so (prior to having their first 'lent' 25x returned) they lent 50x on the premise that they had doubled there money.

    This has continued with bigger multiples being used.

    However, the other institutions have lent 100x after borrowing 25x from bank1 (to make even more money at a faster pace!)

    Eventually the credit bubble (all backed up by ridiculous house prices) was huge and the banks had run out of decent reliable people to lend to. But the lesser (dodgy) banks/lenders wanted some of the action so they borrowed 1000x from the banks higher up the chain (in the form of ever more complicated lending tools that hid the true source of the original 'asset' value - x) and lent to people with no chance of paying - NINJA mortgages in the US.

    Eventually defaults started at the top of the inverted pyramid and the cascading thundering crash started!

    But the bank still has it's original amount of x in cash right? Wrong - there asset values are now worth -10x so there net worth is -9x with 1000x of liabilities!!! Oh yes, then they offset this massive loss by quoting there inflated share prices as assets and continue lending at the same rates for another 5-6years!!

    Multiply this world wide and you may have some idea of how deep this hole is!

    This simple illustration is based on banks + mortgages only - without consideration of credit card lending by individuals that have borrowed against there asset/house!

    Do you really think there is enough money to save this mess?????

  • Comment number 75.

    Robert

    There are conflicting statements in your blogg this morning and I'm getting this conflicting info from everywhere else as well.
    You say:
    1. Some of the banks most in trouble have had people paying themselves and other members of their staff, 800 times more than the national average in salary and other benefits.
    2. But, also we hear/read that the same, or different banks, or American banks, have been lending to people who have no means or capability, to pay their instalments.
    Which is it? Or what proportion of each of the above applies?

    Please could you clarify this? I feel that this is very important. We need to avoid a witch-hunt. Is it naughty bankers or naughty taxpayers, or naughty non-taxpayers?

  • Comment number 76.

    Frequent improvement of the existing financial system leads to an absurd already seen in the history of humanity. The Ptolemy model of the Solar system got so complicated through all successive improvements that it became too hard to use efficiently. It was replaced by a simple Copernicus model. We called it a paradigm change.
    What we need now is to lend the collected taxpayers money to the institutions that need them bypassing the existing banks that will make evaporate that capital. It’s not the banks that are the ultimate users of that capital. It is industries and all services that are of use to us.
    We need a “new” bank that is an old one: the most traditional one that exercises its basic function. One that transfers the collected money from taxpayers to those who will create an added value for us. Banks are not doing that anymore. If we accept a free market idea we should accept the creation of a very simply body of a bank that model existed already in Babylon. Banks of today monopolised the activity of lending and borrowing in order to create a fictional value even for themselves.

  • Comment number 77.

    Nice blog, good explanation of where the spondoolies are coming from. Anyway, let's look on the bright side, whoops forgot: there isn't one.

  • Comment number 78.

    Did the British government bring down the last Icelandic bank, Kaupthing?

    Kaupthing, the last standing Icelandic bank did not have major liquidity problems, did not have bad loans, and it honoured it's commitments to both Icelandic and British customers.

    However, after the IceSave "incident" this week, the British government seized Kaupthing Edge, Kaupthing's online savings bank, a part of Kaupthing's daughter bank in Britain, Singer and Friedlander, and then closed down Singer and Friedlander. (Business on Kaupthing Edge was going as normal, the website was open and fuctioning and people were in large numbers withdrawing their money or transferring them to other banks.) Major lenders of Kaupthing considered the closing down of Singer and Friedlander to be a breach of contract, even though Kaupthing was honouring all its commitments to those lenders.

    And this brought Kaupthing bank to ask the Icelandic Financial Supervisory Authority to take control of the bank today.

    Am I understanding this correctly? Did the actions of the British government against this bank, on the sole grounds, it seems, that it was Icelandic, bring down a "healthy" bank, in a financial environment where governments are trying to save banks that really do have serious problems?

  • Comment number 79.

    Further to 10 and 51: I agree that the question of local authorities with money in Icelandic banks deserves Robert's attention.

    As well as BCCI, UK local authorities lost money on deposits with a number of small banks that collapsed in the early 1990s - such as Chancery Bank.

    There was an outcry at the time, and local rate payers were horrified that local services had to be cut because of lax financial controls in some local authorities.

    I understood at the time that local authorities would in future set up proper lists of 'approved' counterparties for regular review and approval by councillors - a simple and basic form of financial control that was sadly lacking.

    While we should of course ask why some local authorities did not learn from the experiences of the 1990s, I suggest that it is also important to ask whether the authorities with deposits in Icelandic banks had proper approval by elected councillors to deposit with these banks?

    It is one thing to lose money because a properly considered decision proved to be wrong - but quite another to lose money because of a lack of elementary financial controls.

    If the authorities cannot show a proper process of consideration and approval of limits for these banks, then officer heads should roll.



  • Comment number 80.

    it seems the lessons of the past have fallen on deaf ears.
    the whole system is in peril and in basic terms it needs an enima, rather than the supositories being implimented.
    over the last few years too much power has been given to local authorities who by there own nature are corrupt and inept, thus there local areas will suffer greatly becouse of there negligence.
    but ultimatly if falls to central government to take the blame due to its stupidity in giving them these powers.
    the people of this country needs to wake up and smell the coffee now becouse if the people fail to reign in this government soon it will be too late.
    this government is not beyond selling this country out from under us in our own interest as they would see it.

  • Comment number 81.

    The media in general are talking down the economy. Robert Preston uses very emotive and strong language in his reports. The central banks are putting huge amounts of effort into corecting what many banks did wrong.
    If you Robert, start being positive about what the central banks are doing, then the people who listen to you and read the newspapers will start to think it is not all doom and gloom.
    I thouht, is it only since trading on stock markets by computer in several different trading rooms that we have seen these regular large swings in the stock market. When it was mostly done on the floor of the stock exchange people talked face to face together and came to more sensitble dealing.

  • Comment number 82.

    Surely it's very easy reporting to find some doom and gloom stories every day and stoke up the fear which will lead us all into a recession.

    Of course it's important to keep people informed of world events but the BBC is going too far with the negative worst-case scenarios which cause people to panic and then banks have deposits withdrawn, companies go out of business because people are too scared to spend and the BBC can say 'told you - we predicted this'.

  • Comment number 83.

    Why are more banks not allowed to fold and government pick up the reins from insolvency (as barclays and others did with Lehmans) rather than rescue all the senior people at the banks who got us into this mess?
    And when will we get the real story of why we are in this mess? Is it really only the US toxic and similar mortgage related stuff which has has got banks into this mess, or is the Iceland situation more relevant (not to mention RBS losing just how much on ABN?
    We need to know more about what our taxpayers money is really for in terms of replacing capital - which anyway is really a euphemism for meeting the banks disastrous losses.

    It is also about time we had a real investigation of what banking is for and how that is best delivered, as it is by no means obvious that, for example, repossessing people's houses, shoudl be a part of that. Nor lots of other things.

  • Comment number 84.

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

  • Comment number 85.

    Now that the bubble has burst, there are some people who must be very happy that can now buy their first house because the prices are dropping.

    With interest rates falling, it's a great time for businesses to invest and a falling pound means incrased exports.

    Also, for people who pay monthly into a pension, they'll be buying real bargain shares at the monent and in the long run their pensions will be higher than if the markets had stayed flat.

    And with housing not being so profitable for developers, our villages can breathe a sigh of relief as the plans for in-fill building and mass housing estates are torn up.

  • Comment number 86.

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

  • Comment number 87.

    Dear Bob,

    Why don’t you write something about the real causes of the present crisis? That is - the belief that everyone is entitled to own things which they cannot afford to buy – that they have the right to own property. This problem cannot be associated solely with the peasant in his hovel (the home owner) or the shoe addict; it applies to the pseudo-businessman as well.

    The banks cannot be blamed for the present situation. If they withheld funds – they would be accused of discriminating against the poor… or worse (this particularly applies to the American situation).

    In the discussions of recent months I’ve never heard this question even put let alone tackled.

  • Comment number 88.

    Also, for people who pay monthly into a pension, they'll be buying real bargain shares at the monent and in the long run their pensions will be higher than if the markets had stayed flat.

    And with housing not being so profitable for developers, our villages can breathe a sigh of relief as the plans for in-fill building and mass housing estates are torn up.

  • Comment number 89.

    Mr 'no boom and bust' Brown could have prevented the housing bubble in the first place through regulation of the lenders. Stricter lending criteria would have prevented over-stretching to afford inflated prices which would then have kept them in check. This, I believe, is why the Germans don't have this problem.

  • Comment number 90.

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

  • Comment number 91.

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

  • Comment number 92.

    I find it difficult to comprehend that any thought whatsoever is being given to refunding money lost by local councils in Icelandic investments.

    On balance I´d rather see my money expropriated to help out Iceland than I´d see it used to continue feathering the nests of overpaid second rate Administrators in Councils delivering second rate services, and forcing people to pay for "services" that they neither want nor need.

    Before people start bleating about some of the useful services they provide - well these can still be provided by downsizing the pension "entitlements" of Council Executives. After all, we´re all in this together - If my pension can be destroyed for the greater good of the country then why can´t theirs?

    I don´t care how much advice they´ve received about the probity of investing in Iceland - take ´em outside and sack them all for gross stupidity.

  • Comment number 93.

    I'm furious that my council tax has been gambled away. When we pay our taxes we do so on the understanding that the money will be wisely managed. This is a case for abolishing the council tax, as councils have proved they are incapable of being responsible with the money. (Seriously, what kind of freak thought that devolving responsbility for billions of taxpayers' cash to hundreds of small quangoes was a good plan?)

    I note yesterday's attempt at a bailout included a requirement for banks to increase their tier 1 ratio. I'm interpreting this as a concession to the full-reservers, and a tacit acknowledgement by government that fractional reserve banking is dangerous and unsustainable.

    My suggestion now is to investigate local exchange and trading systems (LETS). These allow us to barter between ourselves, in the process, cutting out the banks completely. LETS can even invent their own asset-backed currencies (as opposed to the debt-backed currency issued by the reserve banks).

    "Local Exchange Trading Systems (LETS) also known as LETSystems are local, non-profit exchange networks in which goods and services can be traded without the need for printed currency." -- http://en.wikipedia.org/wiki/LETS

  • Comment number 94.

    I see my earlier comment was moderated. Why? I said Mr. Peston has no idea what he's talking about when it comes to the freight market. Yes, rates have fallen but this is because of a huge supply of vessels coming online. The freight market is actually trading in contango meaning that freight traders expect a significant pickup in economic activity and rates in the near future.

    Does the BBC only publish reactionary, headline grabbing stories and bad news? Perhaps Robert should stick to the mass uninformed where his headlines sound plausible. Is this going to be moderated too?

  • Comment number 95.

    Oh come on - this is just a LULL - America will still dictate what happens here... Their foreclosures are still gathering pace... and it is affecting Main Street more and more... Read this.... http://www.cnn.com/2008/US/10/08/chicago.evictions/index.html

    The Dow is heading for less than 5000... FTSE 1000 -

    Why did Paulson say there would be more bank failures...? because he knows how bad it really is going to get....

    This time next week GB will not be so happy or smug...

  • Comment number 96.

    I agree with Greg Kingston above - it's time Robert "Hello magazine" Peston stuck to what he knows and give us some (other) facts. How about focussing on Northern Rock having paid back over 50% of their government loan. How about some comment on govt involvement might now avoid the well documented greed/mismanagement by the banks, or city dealers/hedge funds - remember the junk bond scandal of the 80's.

    A couple of weeks ago we were being warned of the liklehood of stagflation - not going to happen. Inflation has been quickly nipped in the bud the B of E's plan has worked. Now time for the govt intervention to start the Bank's greasing the wheels of the economy.

    The latest story about freight rates really is scrapping the "Armagedon" barrel. Oil is now below $90.00 per barrel. Inflation is set to tumble, thereby providing the basis for responsible economic activity.

    Less of your own opinion please, Robert. More facts from which we can all form our own opinions.

  • Comment number 97.

  • Comment number 98.

    This blog now runs the global economy - enjoy it while you can:

    At least ten years of 'Originate & Distribute' scamming lies at the root of the problem. Until these positions are unwound the true scale of the problem can only be guessed.

    When 'Hank's Cesspit' opens for business we should have a better idea of the real state of affairs and its not going to be a pretty sight. Given previous experience the mess is likely to be much greater than is currently estimated.

    One thing I'm not clear about - maybe someone out there can enlighten us - what is the position of banks' off balance sheet entities as regards the 'bail-out'? What happens to all the merde stashed 'under the carpet' in SIVs etc?

  • Comment number 99.

    #45 I think you have a new sketch for Harry and Paul there.

  • Comment number 100.

    Money is indeed going round in a circle. It always has. This time the driver is the Treasury. It borrows from the likes of the pension funds etc at X% and lends on to commercial banks at X+Y%. The important thing is that it underwrites the risk - or rather the tax payer does. Interestingly will the pension funds rebalance their portfolios away from equities towards gilts given the rate of interest the Treasury will have to pay to borrow the sort of money it needs to raise.

    It is only when a bank defaults (that is it cannot repay its depositors), that the Government has to spend real tax payers money. Icesave I think is the only example todate?

 

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