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What Mervyn didn't say

Robert Peston | 09:17 UK time, Wednesday, 22 October 2008

The slightly odd thing about Mervyn King's speech last night is that it didn't address the issue of what the central bank, the Bank of England, could do better next time.

Mervyn KingKing's analysis of what went wrong is spot on, as always.

In a nutshell our banks and other financial institutions lent too much against the security of over-valued assets, largely residential housing and commercial property.

And to obtain the funds they lent to households and business, those same banks were too dependent on credit from wholesale and overseas sources (net wholesale funding of our banks went from zero in 2001 to £625bn by the end of 2007).

So when the penny dropped that the value of houses and property was falling fast, two terrible things happened at the same time: the overseas and institutional providers of all that incremental funding wanted their money back from our banks, because the formal or informal collateral underpinning that funding was shrinking; and the capital foundations of the banks were eroded by actual and prospective losses on loans that had been made into those frighteningly pumped-up housing and real estate markets.

Banks have been living with this devastating combination of a liquidity crisis and a solvency crisis since the summer of 2007. At times, the symptoms of the disease have been relatively mild. Since the beginning of September, after the collapse of Lehman, the entire banking system was almost in its death throes.

And it's not just been a British disease. This near-deadly combination of banks that lent too much to finance the purchase of inflated assets while being dependent on capricious, unreliable wholesale funding has afflicted the US, other Western economies and - as the extreme case, the sickness in its purest form - Iceland.

Which is why governments and central banks all across the world have adopted similar remedies for their banks: injections of new capital; guarantees from taxpayers to providers of wholesale funds to persuade them to keep their money in the banks; and massive taxpayer-backed loans from central banks.

Few, I think, would dispute that these are the right remedies, although there is a question about striking the right balance between capital injections and the provision of liquidity or cash.

But although the patient, the banking system, is no longer close to death, it's not out of bed and handing out squillions to anyone able to utter those fateful words, "can I have a loan please?"

Nor, with any luck, will there be a return to the lending mania of the few years before the Crunch, or at least not for a long long time.

But there can be no growth in the economy while banks contract the credit they provide to companies and households.

And the reluctance of banks to lend will continue until they're confident they can see the bottom of the fall in asset prices - and we're not there yet.

Also, all that extra money that we as taxpayers have lent to the banks and invested in them (some £600bn and rising) will have to be repaid: that too acts as a serious constraint on how much our banks can lend to businesses and individuals.

Which brings me back to where I started, which is what the Bank of England and other central banks could do better next time.

What was important for me about Mervyn King's speech was that he conceded that our woes stem from a borrowing binge that both fed and fed off the over-valuation of our housing and property markets.

But shouldn't the Bank of England and other central banks have curbed that binge before it became near-lethal?

When in the spring I put this point to King's deputy, Charlie Bean, and also to Jean-Claude Trichet, the president of the European Central Bank, they both said - in essence - that they don't have the tools, that raising interest rates to put a brake on house-price rises or on the growth of credit would have had unfortunate consequences for the wider economy.

And, in the case of the UK, to have hiked interest rates to stem the bull-market in houses and property would have led to the Bank of England undershooting its inflation target in a way that would have been deemed a failure under the mandate it's been given by the Treasury.

Which perhaps means that central banks need new tools and new targets.

The Tories have talked about giving the Bank of England the power to vary the capital ratios of banks depending on credit conditions, which is a fancy way of saying that the Bank of England would be able to force banks to lend less in a period of economic euphoria.

Many will say that's by no means bonkers - although there are immense practical difficulties in devising a credible framework for the Bank of England to exercise such new powers.

Perhaps the important point is that the ultimate strength of any economic recovery will depend in part on all of us regaining confidence not only in the robustness of our banks but also that our central banks have regained the ability to deliver a stable economic environment of low inflation and steady growth - and the important word here is "stable".

It would be impertinent to suggest the theme for Mervyn King's next speech. But he would, I think, attract a large audience for his thoughts on how and whether the Bank of England can prevent the next credit binge and asset bubble.

UPDATE, 11:21AM: Crikey. At a time when some have questioned whether central banks have lost their power, Mervyn King still moves markets.

Sterling has plunged overnight and this morning - especially against the dollar, where it fell from $1.67 to $1.62 at one stage.

That's going to hurt a few traders and speculators, and may nudge inflation up a bit.

Which, in the typical mad fashion of financial markets, reduces the likelihood of the very prospect that has bashed sterling in the first place - namely the expectation, based on King's speech and this morning's minutes of the Monetary Policy Committee, that the Bank of England will cut interest rates again in the coming weeks.

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Comments

Page 1 of 3

  • Comment number 1.

    "Which perhaps means that central banks need new tools and new targets."

    Very true - including asset values in the target would be a good start. The Bank would have been justified in undershooting the basic inflation target, if it was trying to control the asset/credit bubble of recent years.

  • Comment number 2.

    AAAh Mr Peston, you havent been told to mind you own business and get back to reporting on business matters by any chance.??? I don't expect Nick Robinson will be too chuffed at you treading on his patch.

    Oh and by the way, if you do report on something, have the good grace not to put in the little throwaway comment ("as I say in my blog". Its intensely irritating.

  • Comment number 3.

    Strong leadership and prudence - two sadly lacking qualities over the past few months.

    Monetary policy and banking regulation should be overhauled. Problem is the Western economic model is used globally. Therefore, as new precedents are being set by this credit crisis, no one really knows how to deal with the problems.

    One thing is for sure. We do need to cut interest rates and stimulate the economy. Public works are a good idea. However its the how to pay for it question that is the problem. UK plc has already hit its gilts overdraft limit, and has then asked the markets to increase this to raise more money to pay for such works. All debt eventually has to be repaid. How is this going to happen with rising unemployment, rising benefit payments, lower GDP and poor credit market liquidity.

    These are not easy questions to grapple with. We, the public, have to sit and wait.

  • Comment number 4.

    The bank's remit implicitly agrees that so long as growth is within acceptable targets, it matters not whether houses or other valuable (and vital) assets are being used as sources of wealth as well as stores of wealth. Which to my mind comletely misses the point.

    To my mind, the very fact that something as vital as housing, at least amongst poorer people, could be a source of wealth and profit one minute, and then a millstone around their neck the next, is fundamentally wrong. And it stems from insufficient council housing giving insufficient competition for private landlords, thereby making the 'buy to let' decision a few years ago a bit of a no-brainer for those who could get the finance.

  • Comment number 5.

    My word, unless I'm mistaken I think I can actually spot some economics in this blog entry!

    Trying to shake off the shameful gossiping of yesterday are we, Robert?

  • Comment number 6.

    Robert

    In order for the banks to survive they have to keep lending

    They cannot keep lending because everyone is broke

    Therefore, the Banks will be broke, the taxpayers money will be gone and the only solution is

    quote: The Tories have talked about giving the Bank of England the power to vary the capital ratios of banks depending on credit conditions, which is a fancy way of saying that the Bank of England would be able to force banks to lend less in a period of economic euphoria.

    Unfortunately, the problem will have the same result in economic doom

    Banks will have to have a ratio of 1/1 period.

  • Comment number 7.

    It is good to see that the Governor has woken up at last from his deep sleep over our economy. Now that he is awake he should pause over his corn flakes just long enough to ring colleagues and say that we are going to cut interest rates by 2%. Not a quarter or a half as usual, but something bold and brave, and entirely in tune with what we need right now. And while he is at it, he can tell his friends in Government that Lord Mandeson should stop threatening LLoyds TSB shareholders that if they do not agree to the merger with HBOS he is going to take his (sorry our) money away. Most of us think that the merger is as stupid as Lord Mandelson and George Osborne going on a yacht with a Russian oligarch - they should know from the Profumo case that Russians and parties are political suicide.

  • Comment number 8.

    "And, in the case of the UK, to have hiked interest rates to stem the bull-market in houses and property would have led to the Bank of England undershooting its inflation target in a way that would have been deemed a failure under the mandate it's been given by the Treasury.

    Which perhaps means that central banks need new tools and new targets."

    I'm not sure you followed this far enough. The significance of the involvement of the Treasury in creating this regulatory regime has been overlooked. It was Brown who designed it, Brown who set the targets, Brown who chose CPI as the inflationary measure and Brown who is responsible for this fiasco.
    If the target had not been CPI, but RPI, then the Bank could have started raising interest rates in 1999 (when they had been at 4% for some time) when RPI began to climb. This would have eased the approaching problem and left us with only the single whammy rather than the double we have been hit with.
    However, Brown chose this measure to generate a growth bubble to ensure he and Blair won three elections. So well done Prudence.

  • Comment number 9.

    Nice to see you doing your proper job instead of spreading political tittle tattle provided by spin merchants. Seeing you go from programme to programme yesterday wriggling to justify your actions appeared to be most embarrassing.

  • Comment number 10.

    It's interesting that many people are now saying that we are in a recession but that it will be a short recession or V shaped. Yep, I really believe that!

  • Comment number 11.

    > his thoughts on how and whether the Bank of
    > England can prevent the next credit binge and
    > asset bubble.

    His thoughts will be of moral hazard. In particular, he will notice that borrowers are experiencing the full force of moral hazard, as they are being turfed out of their homes. But the bank people simply keep their bonuses. If we don't severely punish the bank people quickly this time, future bank people will take note, and they will take large risks again, and again...

    It's time to retroactively go after the assets of the bank people. Then we can all sit back and enjoy the schadenfreude, knowing that we've done the necessary things to stop another iteration of greed.

  • Comment number 12.

    So, no mention of the GBP in free-fall then?

  • Comment number 13.

    Why are all the banks in the same position, did none of them see this coming?

  • Comment number 14.

    It's not just what Mervyn King didn't say, Robert. Gordon Brown has been silent on - and has not been held to account for - his decision a decade ago to divest the bank of its regulatory powers and pass them to the half-baked FSA. I know that the banking system is more complex than it was ten or twenty years ago but that makes it all the more important that the regulation is focused in one place. One way or another we need a return to the "Governor's eyebrow" - the informal system whereby bankers invited to take tea at Threadneedle Street were made subtly aware of the Governor's displeasure when he raised one eyebrow.

  • Comment number 15.

    So now we are to understand that it is not either a Prime Minister nor a Chancellor nor the Bank of England alone who can claim to prevent the Boom and Bust that is part of our economic cycle.

    Common sense has always indicated it thus and now perhaps some unity of thought may really be given as to what strategy must always be followed whatever political party holds power.

    Let that be the legacy of this current financial hiatus.

  • Comment number 16.

    "net wholesale funding of our banks went from zero in 2001 to £625bn by the end of 2007" - quite stunning, i had no idea that it was like that, thanks for this useful bit of info. if a company funded its business activities purely from loans & credit and not from cashflow or assets, it would rightly be expected to go to the wall sharpish. never was that old dictum more true: if you owe the bank a thousand pounds, it's your problem, but if you owe the bank a million pounds, it's the bank's problem. nice one!

  • Comment number 17.

    Dear Robert

    Some of us would prefer him and the MPC to concentrate on how they can use their influence to help reduce the risk of a deep recession and surprise the market with a deep interest rate cut.

    Navel gazing is for later.

    Peter Kenyon
    http://petergkenyon.typepad.com/

  • Comment number 18.

    We have all been 'piping up' about the false economy of deliberately creating a housing shortage to inflate house prices for ages. You can not flood the country with overseas workers and not build more affordable homes, it's ridiculous.

    Now 'Merry Mervyn' has more or less said the same thing. I would like to know what happened to all the tax payers money that John Prescott spent try to rectify the affordable housing problem. Surely it could not have all gone to consultants ? Some houses must have been built.

  • Comment number 19.

    Maybe we're lucky we have such a talented man at the head of business.

    Obviously once he gets around to doing anything about it rather than spreading lies and innuendo

    Or maybe they should have given mandelson a fake job to build up a smear campaign so that somebody who's actually concerned about saving british workers, rather than playing political games (with the aid of the impartial bbc), can do something about this coming recession because mandelson and brown didnt look in the slightest bit concerned last night more interested in laughing at failing businesses.

    Welcome to the 70's

  • Comment number 20.

    Get over it! This isn't news!

  • Comment number 21.

    What the BoE needs is surely a whole new system for bank regulation AND a new set of instruments for macroeconomic policy management...or at least for SOMEONE to have them! We have lived for more than a decade with the bizarre belief that macroeconomic poilicy is interest rate setting, and fiscal policy may play a role somewhere but noone any longer seems quite sure how, and none of it is coordinated.

    Your father, Robert, once wrote a blistering short called 'Whatever Happened to Macroeonomics?' - in which he outlined the demise of macro *thinking* in the tradition of Keynes and Kalecki. We have now seen a generation pass at the Treasury for whom the levers of macroeconomic policy management are strangers. We need to start thinking again about how a genuinely integrated macroeconomic policy can be crafted for these difficult times.

  • Comment number 22.

    As I posted yesterday.....

    IT'S ALL ABOUT THE FRAUD THAT IS THE FRACTIONAL RESERVE BANKING SYSTEM....STOOPID!

    It's the Rothschild's best kept secret. Get rid of FRB......and all the world's wounds would be healed overnight.

    It wasn't denigrated in the oldest books for nothing you know (i.e. the Bible, Old Testament, Koran etc. etc.)

    Isn't it amazing how the systemic banking crisis is now subsiding. The exponential growth of debt requires the deliberate triggering of boom and bust cycles just so that the bank ownwers remain the masters of the universe.

    Expel USURY......you know it makes sense!

  • Comment number 23.

    I'd be curious to know who decided to leave house prices out of the RPI / CPI inflation calculations.

    Yes, you can have low inflation for ten years, if you leave out the very things that are inflating in price!

    Where has the treasury and BoE stood on this? I'm sure even as recently as this year, this policy was probably defended.

  • Comment number 24.

    This is a Homer Simpson moment!

    Of course it's all about varying capital ratios!

    Doh! Doh! and Doh! again!

    The Bank of England MUST have the right tools in place to be able to adjust bank lending. Doh!

  • Comment number 25.

    Within the current framework, it would have been possible for the FSA to mandate the criteria that the banks/building socs must use to assess home loan (mortgages).

    For example, the FSA could rule that loans must not be offered beyond say, 4 times earnings.

    If such rules had already been in place, then we would not now be trying to painfully deflate this particular bubble.

    Which, incidentally currently shows average property prices at just over five times avg. earnings, down from just under six times a few months ago.

  • Comment number 26.

    Erm,

    Forgive me if I'm wrong but didn't the BoE have such tools to constrain bank lending BEFORE Brown took them away?

    Incidentally, that inflation of asset prices?

    Did that have something to do with rampant M4 money supply growth of 10-15% actually inflating house prices & other assets.

    And a government unwilling to stimulate more supply of homes?

    Perhaps you should stick to gossip because lumping the blame on the banks isn't the whole story and you know it.

  • Comment number 27.

    Many will say that's by no means bonkers

    Yawn - back to your old games eh? Damning the tories proposal with faint praise - you are completley transparent...

    If many say it isn't bonkers, that implies that some people do think it is bonkers -- maybe you could tell us who these people are? Do they have witnesses who are prepared to go to court? Or were you told at a party, so can't let on?

  • Comment number 28.

    Growth. 1767-2008. R.I.P.

  • Comment number 29.

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

  • Comment number 30.

    Nice to see you have finally debunked the idea that Maggie was to blame. Wholesale borrowing was the cause - Zero in 2001, rising rapidly thereafter. Definitely on Mr Brown's watch. We've had the bankers on whose watch it happened resign...

  • Comment number 31.

    "there are immense practical difficulties in devising a credible framework for the Bank of England to exercise such new powers."

    No actually. The difficulties are political. It would be very ease to create and manage the banks, their lending and their capaital or prudential ratios.

    The current difficulty is that a loan is seen as cheaper finance than equity and at a time when the realistic value of the 'equity' is still too inflated (ie questionable collateral) and the risks too high.

    Banks local business managers might set up matching businesses in need of money with investors, perhaps 12% conv. Preferred, and take a fee. But the businesses will demand a loan because they seek leverage, dismiss risk and see cheap money as an entitlement- much like Benefits. Indeed loans seemingly have been.

    If businesses was replaced by property/houses the exact same would apply.

    The Governor has consistently voted on the MPC for higher rates during his tenure. The Treasury representatives lower. Sterling is now dropping off a cliff CPI, RPI, Rossi, etc are all well above targets and the country in a slow meltdown; difficult for the Governor to be other than diplomatic about the MPC and its remit.

  • Comment number 32.

    The UK economy was not large enough to sustain the high cost of property, so we had to borrow from foreigners. We shall now see how small it is when we try to borrow off foreigners to dig ourselves out of the slump we are in. For too long we have been told we can get by in this world selling fast food and cheap imported tot.
    That is not enough to sustain a mordern ecomomy for long. Only this morning India has launched a rocket to the moon, while here we worry about what was said on some Russian's yatch.

    But in trying to start borrowing his way out of trouble Brown seems to have started a run on the pound, so he will be happy, now that we have another financial crisis to worry about.

  • Comment number 33.

    I am going to be impertinent too and suggest that the subject of your next blog is why Brown hasn't made a speech explaining what he could do better next time!

  • Comment number 34.

    The fall in the pound is about to make headlines as the rest of the world cottons on to the reality that the printing presses will soon be going full steam to "make" money for the financial and economic bail-out. This should make conditions easier for the few exporters we still have, although some will struggle to deal with volatility in the forex markets. This is the time for the UK government to woo high tech industries back to the UK. What on earth is the benefit of building aircraft carriers to be used in situations which would result in the UK spending even more money it does not have?

  • Comment number 35.

    Mr King and most mainstream commentators still avoid mentioning the elephant in the room...the big banks as yet still unknown and unquantified liabilities. Apart from their direct exposure to "sub-prime" of much greater concern are their indirect exposures. These relate to their offloading (sale) of the financial instruments that guarantee certain types of debt. The timing of these sales in certain cases could be seen as suspicious, especially those carried out in the months leading up to "the Big Bust".
    Buyers of these financial instruments now find they have incurred huge liabilities, don't like it and of course are resorting to litigation.
    Actions placed in US courts are likely to take some time to pick up momentum, but when they do, we can expect to see some mind boggling numbers claimed as compensation and financial penalties, and our big banks are likely to be on the receiving end of some of these.
    And never mind the criminal actions....

  • Comment number 36.

    How to get volatility out of the housing market? Housing should be respected and the government should promote stability. So many jobs are linked to housing that surely it would be better to remove the boom and bust nature of the market and to avoid the mess of repossetions etc.

    Perhaps a capital gains tax on potential mad gains in housing equity is a way to push wealth to poorer areas and to dampen the speculation? I believe that sustainable economic wealth must be found elsewhere and that a house purchase and sale must be taxed when gains are made to ensure that wealth is kept in communities.

    Shares are taxed when a gain is made. If not, I imagine even more speculation and a loss to the taxman. Now is the time to think about ways to change the perception to housing and to consider it as a place to live and not a place to gamble.

  • Comment number 37.

    Blimey a business story, I was expecting to see some more government-leaked insight from Mr Peston regarding Osborne.

    Best I trot off to Nick Robinson's blog where this stuff usually is

  • Comment number 38.

    Hopefully, house prices will drop to more reasonable levels on the back of all of this. Thankfully I didn't listen to my ill-advised (by the media/government) peers and stayed away from the property bubble. I've a little sympathy for the buy-to-let landlords or those who are in negative equity now, even though you were the first people bragging about how much "money" you had made on your house every year, you were shockingly brainwashed into it by Brown & Blair's infinite boom charade. However, if you want to play the markets then you should be prepared to lose as well as win. Unfortunately there's no bail-out for you.

  • Comment number 39.

    Robert

    You should already know the answer to this question.

    The Bank of England cant do anything different because Gordon Brown has set them the wrong inflation number to target that doesnt take into account house prices and the control of financial institutions was taken from the Bank of England and given to the FSA, again this was done by Gordon Brown.

    Has Campbell told you to breif against Mervyn King now? It certainly seems it.

    Robert what happen to reporting facts?

  • Comment number 40.

    I think the government and the bank of England went into this with their eyes open. The reason? They both knew that the British economy has been effectively bankrupt since the late 1990s. We have lost our wealth producing capability to globalisation, which was pursued in the interests of a self-styled elite who felt themselves to be flying above the weather. The only remedy for this was a bubble boom to keep Tony and Gordon in power for long enough to enjoy the benefits of that power. Commentators have been talking about the "cappucino economy" since the late 90s and the dotcom boom. It is possible that they never dreamed they would still be in power when the bubble finally burst.

  • Comment number 41.

    We do Mervyn King an injustice.
    Two year,s ago he warned the banks about their levels of high risk lending.


    They were too busy banking their bonuses to hear what he said

  • Comment number 42.

    Hail the new king - Mervyn King

  • Comment number 43.

    Mr. Peston

    I am not sure how the Bank of England could have been expected to have prevented "borrowing binge that both fed and fed off the over-valuation of our housing and property markets".

    Their remit is - solely to control inflation (as defined by the RPI) via varying base interest rates. House price inflation has been excluded from this measure, therefore the Bank has no method of control.

    It was, and is, the role of the government to control said binge, which they spectacularly failed to do. It was deeply irresponsible, albeit expedient, to exclude house price inflation from the RPI.

  • Comment number 44.

    Is not the fact that the BOE's decisions are based almost entirely on inflation targets set by the government of the day thus limiting their scope for action? I do find it amusing that the Governor has to write to the Chancellor when the target is not met when in many cases the government could have acted to prevent some of the causes for the rise!

  • Comment number 45.

    Mr King made a solid report last night even though it did lead to a run on the pound. That is the price of truth these days!

    I don't usually agree with dressing down into black ties but the occassion was certainly better managed than a party in a Corfu taverna. I expect the wine and the gossip flowed less freely as well.

    I am alarmed, Robert, by your question as to what the Bank will do next time? NEXT TIME! Dear God, I certainly hope there will not be a next time, certainly not in my lifetime!

    I agree whole heartedly that the regulators should have been a lot keener to regulate the boom when it was in full swing. However, is it the job of a civil servant to call time at the banker's party? You can just imagine what would have happened if either the Bank or the FSA had intervened in say, 2004, when it became apparent that the entire boom was running out of control.

    No, to call an end to a boom when it is in full swing is a leadership duty and we all know who was in charge of The Treasury, the FSA and The Bank at that time. We all know who had put the regulatory legislation together in 1997 and we all know who was busy rambling on about the longest period of economic growth for two hundred years.

    This was a political decision and it was not made. We know whose task this was and they not only refused to do it, they even denied it was happening.

    Please do not blame the Bank. The only tool they had was interest rates as the FSA had run off with the sherry bottle with which the Governor once used to entertain over-imaginative bankers.

    The blame for all this rests with the person who inhabited the office of No 11 Downing Street from 1997 to 2007. The same person who is now trying to leverage the entire country out of the mess in which he put it. For the sake of the children we must lever him and his party out of office.

  • Comment number 46.

    It seems a lot of Tories comment on this blog.

    That figures.

    Well, I would like to congratulate Mr Peston on his man-in-the-middle role in ensuring that the probity of a man who hopes to become the next chancellor of the exchequor is examined in detail.

    If the Tories think that they can sit an throw mud at the government without being in danger of being splattered themselves then they have become far too complacent.

    Thank you once again Robert for your excellent reporting.

  • Comment number 47.

    Am I stating the obvious or should banks start qualifying risk, such that if you wish to lend a bank money you could easily check what levels of risk they are carrying.
    Also house prices in the UK had gone to levels whereby it must be impossible to repay the mortgage. Go back to the days of some agreed level of a multiple of salary would be your mortgage limit; otherwise you are feeding house price inflation.

    And as one of your bloggers has said, go back to social housing, make it a viable competition to buying.

  • Comment number 48.

    Perhaps CPI with Consumer Prices including median house prices would be the tool they need rather than the lie of inflation fighting that we have now. Perhaps then our financial managers can be required to manage fiscal expansion rather than allowing it to tide itself unrestrained.
    CPI from the 80's in the U.K, U.S, Europe and Australia has caused the expansion in house prices with unmatched increases in average wages. The golden rule of housing markets is being returned to in the most painful way possible. The average person on an average wage should be able to afford the average house. CPI allowed this rule to teeter out of balance.

  • Comment number 49.

    If we are meant to be at the beginning of the end of the credit crunch, and if we accept that the Government has bought a handle on the lending market, what is the Government’s vision for the:

    Loan to value ratio?

    and

    Mortgage lending as a multiple of income?

    Surly an answer to this question will allow everyone to see if we are going to learn from the mistakes of the past or just to return to a debt based economy?

  • Comment number 50.

    Robert..your post disappoints. You have become part of the establishement I think. You sould be angry.as we the people are.

    We pay guys like Brown , King etc serious sums of money to maange our business.
    I remeber my 75 yr old Mum telling me years ago that 'house prices are going crazy and its not a good thing..and it can't last'.
    IT WAS BLINDINGLY OBVIOUS TO A 3 YR OLD THIS WOULD HAPPEN!! and these guys just stood there and let it !!!!!!!!!!!!!!!

    Its pathetic. As for Brown and co. claiming credit for managing this mess..its make me speechless.

    P.S. remeber-you are journo first..take these guys to task and don't show any mercy. They deserve the utmost scorn.

  • Comment number 51.

    Surely the lesson is that as long as the politicians are allowed to define what target the bank meets and by what criteria it is judged, then the bank will be powerless to stop any bubble if it suits the politicians to have it so.

    Everyone knew that inflation as seen by the man on the street was above the bank target, but by making the bank use a fanciful, low number GB was able to keep pumping up the bubble which has now so spectacularly exploded.

    If the bank is given an inflation target which includes factors for such things as house prices then the bank could have acted.

    This disaster is the clearest signal possible that the BoE needs to be given targets which are realistic, relevant and not changeable on the whim of the ruling party. For Mervyn to make such a suggestion now would probably be NPC as it would be a tacit recognition that GBs follies got us in the mess in the first place.

  • Comment number 52.

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

  • Comment number 53.

    Isn't it a question of the Bank of England having the power to order the banks to deposit funds with them if they see things going awry. A little like Mummy or Daddy regulating the kiddie-winks pocket money? Can't be beyond the wit of man, surely?

  • Comment number 54.

    welcomeback Robert! Don't let someone else write your blogs next time you have a day off!

    Ole Merv seems to think we are GOING into a recession-we, when did he wake up? Someone tellhim to look at the real world where non-financier people live-we've been in a recession for several months! Just noons had the courage to utter the R word! 2 negative quarters of national growth is the slowest indicator ever-it gives all the politicians and banks 6 months to pretend it isn't happening!

    About time all this people re-joined the real world where most of us live-real people, real lives, real problems-not graphs, paper and computer numbers!

    Anyone seen those balance sheets and declarations of off book debts? Nope thought not? This issue will not go away!

  • Comment number 55.

    You say 'we're not there yet' in relation to the bottom of the fall in asset prices. No doubt you are right but I would say it is truer to say there is currently little or no real market for many assets.

    Some commercial property, for example, is being valued at below basic rebuild costs and at a combination of historically high yields and highly conservative rental projections well under the rents actually being paid. Double hedging, in a sense. Triple if you take into account interest rates that are well above the base rate. Banks have switched from being driven by extremes of greed to being driven by extremes of fear. Both excesses distort the market and both need to be recognized as such.

    Since you distort markets just a surely by lending too little as you do by lending too much banks are arguably behaving no more sensibly now than they were in creating the problem.

    This leads to an important question... Is the banks' reaction necessary in order to bring us back to balance or is it simply in danger of creating more imbalance and causing deeper problems which could be avoided?




  • Comment number 56.

    I'm amazed. "New tools"? Surely not.

    The FSA have the power to regulate the bank employees and IFAs who negotiate loans. Remember last year, where loans at 105% of value and 5 times income were obtainable? The FSA can stop that by setting a maximum of, say, 80% loan to value, 3 times income and monthly repayments must be affordable on a documented budget. The FSA regulations would then stop stupid lending, and also curb price increses in the housing market to match what people could realistically afford to pay.

    This isn't rocket science - why haven't the FSA acted already?

  • Comment number 57.

    "Few, I think, would dispute that these are the right remedies..."

    Few in Mr. Preston's circle of banker friends and Labour cronies, but not amongst the ordinary taxpayer!

    The real reason for the 600billion bail-out of the banks was to help the British economy, not to just save the bankers and ensure their bonuses for years to come.

    Since the banks are not lending to businesses, even after the bail-out then the remedy does not seem quite so right after all when you consider the burden placed on the taxpayer and the benefits that the taxpayer actually gets.

    Surely a better solution would be to abolish the artificial manipulation of interest rates and let the market determine its own interest rates!? This would automatically increase rates when debt was excessive and capital was short. Thus putting a brake on borrowing sooner, and preventing politicians from using a debt bubble to mask their failure to develop a real economy.

  • Comment number 58.

    I can't say I am impressed with Mervyn King's speech. We know we are heading for difficult times so his comments are only a statement of the obvious.

    Robert is right. The issue is the overall governance of our economy. Mr G Brown was praise for handing control of inflation to the BofE but it is a simplistic lever. Other responsibilities were handed to the FSA.
    Somewhere there is a big hole which allowed an asset bubble to emerge.

    Rather than a knee jerk reaction to current events, ie. no more big bonuses,we need a properly considered approach that reviews how the contol of the economy should be exercised. This a wake up call.

    Unfortunately we have a government full of closet Socialists who will jump at the opportunity to socialise the country. Heaven help us in the future!

  • Comment number 59.

    It is still my opinion that Mervyn King is asleep at the tiller! And yet he does not resign - in my opinion only when all of the heads of the tripartate control system are gone can we start to recover.

    The names (for reference):-
    Mervyn King - BoE
    Adair Turner - FSA
    Nick Macpherson - Treasury (Permanent Secretary)

    They should have prevented the banking crash yet they just reacted to it, and they did so even slower than the general public - they are always playing catch-up. This is not what we pay them for!

    The queues outside Northern Rock were preventable, yet they did nothing for days, if not weeks. Further, having seen Northern Rock fail they were still not prepared for further problems.

  • Comment number 60.

    Is it true that Mervyn King doesn't know how to send an email..... that in itself isn't a worry BUT what it might reveal in terms of his understanding (or lack of it) of business culture in 2008 just might be...of concern

  • Comment number 61.

    I wonder if this will lead to a re-assessment of off-book positions and uses of derivatives for purposes other than the direct reduction of risk?

  • Comment number 62.

    The BoE mandate needs to change to the American system of overall watch on the economy - rather than this singular rather pendantic view of keeping inflation in check. It is now obvious to all and sundry that Mr King twiddled the knobs of banking -slapped high interest rates on the citizenship of Britain - only to find that whatever lever he pulled - the opposite reaction followed.
    Mr King and his MPC mates need to sit down and think about the situation - forget the inflation target - concentrate on lowering interst rates - they need to come off at least 1 basis point. Better still would be a radical reduction down to 2% - I'm sure that would lift moral and confidence. But Merv and the banking tie wearers who set the agenda just haven't got a clue...

  • Comment number 63.

    38 - i don't want your sympathy thanks and I'm sure many others don't either. My investments are doing OK. I've invested tax-paid money earned in a full-time job into BTL and provide a good service to tennants (having rennovated myself). I'm in it for the long term and happy in the knowledge i've got of my backside and done something.

  • Comment number 64.

    The Torie's idea is a non starter - for Labour at least. It would favour the already wealthy.
    Why should people be restricted from buying their home? The whole outrageous housing situation should have been tackled. People need / want housing, don't want to waste money on rent. Oh, by the way, even at the high levels house prices reached, it was still typically cheaper to buy in the long term than rent.
    Is the problem partly due to having 'clumsy' tools to work with intricate issues? Is this where the real scandal lies? Have the financial experts shouted loud enough for reform or have politicians ignored them?

  • Comment number 65.

    Good insight on the stalled and diving aeroplane that is the world's economy.

    http://www.monbiot.com/archives/2008/10/14/this-is-what-denial-does/

  • Comment number 66.

    @39
    Stalinistas
    Moderation indeed

  • Comment number 67.

    You should already know the answer to this question.

    The Bank of England cant do anything different because Gordon Brown has set them the wrong inflation number to target that doesnt take into account house prices and the control of financial institutions was taken from the Bank of England and given to the FSA, again this was done by Gordon Brown.

  • Comment number 68.

    Has Campbell told you to breif against Mervyn King now? It certainly seems it.

    Robert what happen to reporting facts?

  • Comment number 69.

    what can you expect from the bank of englands leadership a pro labour group that have been let off the leash by this government and expects it to back the government on financial issued.
    the bbc is only being used as a mouthpiece of this government becouse they allow them selves to report the news based of peoples alliances rather than honest neutral reporting.
    sadly all this story tells us is the government waited untill the last second before doing anything then when they did it was more luck than judgement.
    if the government had acted sooner and nationalised all the banks this problem would not have occured and the government may have looked even better and more inteligent, but they didnt and they dont.
    its the same with water, energy and other industries that are at this moment under the thumb of overseas conglomerates who are raking in the profit at our expence.

  • Comment number 70.

    RP> there can be no growth in the economy while banks contract the credit they provide

    And here was I thinking that growth in the economy came from people building things with raw materials and their creativity, or at the very least, from new babies being born and from civilisation advancing.

    But no, growth = debt!

    Very strange.

    RP> to have hiked interest rates to stem the bull-market [...] would have led to the Bank of England undershooting its inflation target

    This also does not make sense. The BoE was so keen to avoid low inflation, that it let a credit bubble explode instead?

    Utter tripe.

    If I wasn't convinced of the total, irrefutable independence of the BoE from the government, I'd think a much more likely explanation is that the BoE did nothing to arrest the credit bubble because it did not want to squeeze the electorate, as we are going into an election.

  • Comment number 71.

    In your blog no mention of depositors and their required safety.
    It seems the BBC and politicians ignore people / institutions that are the fundamental building block of successful banking system. Why is that ?
    I would argue that the UK gov was dilatory in providing the reassurance necessary to prevent runs on banks. Hence the problems.
    In the USA their gov let a bank collapse thus destroying confidence.
    Perhaps depositors should take out liens on banks assets when they loan them money!!!

  • Comment number 72.

    Don't agree with the prognosis that part of the cause for this mess is due to 'over valued assets' not in the UK in any case. The value of any asset is largely subjective and in essence determined by the demand for the product and the ability of the prospective purchasers ability to pay. Before the 'crunch' people were generally comfortable paying their mortgages, they had made a decision on what value they put on owning their own property and whether they could afford it under differing economic conditions and decided along with the banks risk assessment that it was viable. The seizing up of the availability of credit came about not becasue of a large increase in the number defaults on loans, to date this is still not the case, but it will obviously get worse during a recession. For the UK banking system the seizing up of the wholesale fund markets came about becasue those previous investors in our mortgage securities deemed the UK similar to the US with their large number of sub prime loans sold fraudulently on terms that were never going to be met. We had and have a much more stable mortgage system in this country, not without faults in the provision of loans to people with a high risk of defaults in a downturn, but these are a much smaller percentage of the overall market and under normal wholesale funding conditions any losses could have been absorbed by the banks with limited effects to profit margins.
    I could go on and on but in essence the point I am making is that the credit crisis arose not becasue of people in the UK defaulting on mortgage loans that they couldn't afford, and I would therefore contest that property prices were not over inflated.

  • Comment number 73.

    The model used by ALL banks is based on lending mutiples of core finance + interest

    The ONLY way the banking sector can go is

    1. Carry on and INCREASE lending in order to grow

    2. Stop lending and wait for the fake money to repaid in interest, reducing the balance sheet to ratio in common with their reserves

    Therefore the only result of such

    1. Interest rates are lowered to such an extent people and businesses are given free fake money to EXPAND THE FAKE BUBBLE EITHER FURTHER

    2. Banks through evolution return to I will lend you whats in my safe at this interest rate over this many months.

  • Comment number 74.

    Interesting to see some of the comments about property values. Truth is, they have been and always will be driven by the most basic tenet of economics: supply and demand. We are a small country and with the demand for an extra God knows how many millions of homes forecast by 2020, does anyone seriously believe that prices will not recommence their inexorable rise? We need to shift away from our expectations of owning a house to the inevitable solution of owning/renting an apartment.

  • Comment number 75.

    Lets all face it -tax has to go up by around 3p in the pound and why not add another 2p at the same time to dig out the mess the health service is in ?

  • Comment number 76.

    Stalinic @ 45

    are you sure you are not me in disguise.

    Could I also add this.

    Even if he had a problem with slowing down the inflation bubble in 2004, which would have had dire consequences then, never mind now, the very very very least he could have done was.

    Appreciate that the bubble was having a wonderful effect on his tax receipts. You cannot exaggerate the effect on his tax receipts. It was collossal.

    If he had any sense at all about him he would have put aside some of these tax receipts for a rainy day. He should have known they wouldn't last. If he didn't then he had no right being chancellor

    But no!!! he didn't put any aside and worse he spent it all and then borrowed even more to spend more on the basis that tax receipts were going to continue increasing.

    This bears repeating time and time again.
    I want to scream but not enough people would know what I'm talking about.

    Tax receipts are now inevitably starting to fall. Less people working, less profits being made especially banks, less houses being sold, I could go on.

    It is impossible to exaggerate by how much they are falling and going to fall. Now what!! I am genuinely scared and I know who is responsible.

    I AM NOT A TORY APOLOGIST

  • Comment number 77.

    #7

    Further to the point about the Governor waking up. He really does come across as a purely reactive chap. There is no bold leadership, no incisive mind looking for the best way forward. Like the MPC he seems to only understand that "yes, the ship has hit an iceberg. And yes, it is sinking. But its not the fault of me and my colleagues"
    No sign of how best to swerve out of this trouble. Its hard to see how indeed we can recover with this quality of leadership. What we face is a battle. A battle to recover the essential benfits of the Capitalist System. This is not a time for a general who is miles behind the line and can only see what has happened. Not how to make things happen.

  • Comment number 78.

    Maybe I'm out of step but I do not see where a deep cut in interest rates will do anything other than restoke the bubble of house price inflation. As a country we have shown ourselves to be greedy and spendthrift. We have lived beyond our means, not saved but relied on too much borrowing from abroad. Surely reducing interest rates will curtail that inflow of funds just when we need them as those funds go to states and regions where they can get a higher return. Isn't that what happens in a globalised financial market? Profit doesn't recognise political boundaries?

  • Comment number 79.

    Here we gooooooooo.............

    Oct. 22 (Bloomberg) -- Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.

    The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

    ``We'll see the same problems we've seen in subprime,'' said Alistair Milne, a professor in banking and finance at Cass Business School in London and a former U.K. Treasury economist. ``Banks will take substantial markdowns.''


  • Comment number 80.

    A significant number of posters on Roberts's articles (and elsewhere) offer their advice on how to get out of this mess and 'back to normal'. This particularly applies to those who want to see the debt-based, fiat, Fractional Reserve Banking system prevail. It cannot, of course, because it is mathematically flawed.

    In most cases an attempt is made to describe the above model and its effects in words. However, words have their limitations particularly so if you do not naturally possess the skills and gift of eloquence (I fall into that category). Therefore I would like to draw your attention to a graphical representation of the expansionary and exponential nature of the Fractional Reserve Banking system.

    Please take 3m 19s out from your busy day to watch this short video. Please use the pause button at 3m19s to freeze the screen on the graph.
    http://uk.youtube.com/watch?v=HMwg0Ug9FIc

    This is of significance to those here and elsewhere promoting 'solutions' to get us out of recession and back to good old 'growth'. It sounds even nicer if the 'growth' is preceded by cuddly words such as 'sustainable', 'reasonable', The graph shows only population. However, it does not take a vivid imagination (and indeed the respective statistics support this)to come to the conclusion that all those people need to eat, wear clothes, have a place to live, consume raw materials, consume energy and produce waste.

    Of course, in the debt-based Fractional Reserve system they must also (on average) be financially indebted in order to maintain their existence. So the graph also reflects debt and because our money system is debt-based, then by definition, money.

    You can replace the Y axis of this graph with just about anything but the shape of the graph remains. It is exponential. (Only by making the Y axis a Log of the x-axis could you hide the exponential nature)

    So, the next time you put pen to paper or fingers to keyboard to promote a formula to keep the current system going please recall this graph. Please also keep in mind 'growth' is expressed as a percentage increase which, by definition is compounded on top of last years growth which in turn is on top of the year before's and so on and so on. Compounded growth is exponential. That is a mathematical fact.

    Ask yourself two questions:
    1. Is this graph mathematically sustainable to the right (increasing value of time)?
    2. Even if you answer wrongly to question 1. ask yourself - Do I want to maintain this graph until human beings and their houses cover every square inch of the worlds landmass, use up every (non-renewable) energy source on the planet and process every natural resource from source to landfill?

    Be careful of what you wish for lest you get your wish.

  • Comment number 81.

    @68

    At least i know now that is criticism of Bob Pesser that is frowned upon

    The purpose of a blog is to comment.
    If said comment calls the bloggers integrity to task, that is a comment.

    It breaks no house rules

    I smell campbell

  • Comment number 82.

    this blog is nonsense

    easy to blame property but it is only about 1/10th of the problem - do the math the sums of money pimped into the system would sort the poor property assets in a flash

    property is valued at what someone is willing to pay for it in an open market and due to the liquidity failings of the banks because of their hidden assets they have turned of the tap and increased their lending criteria

  • Comment number 83.

    Yes the banks may have been on a lending/borrowing binge based upon the overvaluation of assets

    But - are the households and businesses who bowwored the money not responsible for spending said funds

    Why are we not seeing the blame for the current crisis being shared with the households and businesses who have been spending too much

  • Comment number 84.

    Stateshootr @ 50

    Can't agree more

    Why can't our grannies run the economy at least they have common sense.

    I was saying how bad it was for builders to my mum the other day and how they have had their wages more than double over the last 10 years but wages have now gone back to were they used to be.

    Without much thought she said. I'm sure they will have saved quite a bit over the last 10 years.

    Do you have to have your common sense gene removed before you run the country.

  • Comment number 85.

    dear Moderators

    Post 39 breaks none of the house rules

    So why is it not posted.
    Is it likely to make Bob cry into his meusli?

    If criticisim of poor bobby isnt allowed every post on here should be removed

  • Comment number 86.

    Did anyone else see Merv smirking last night when discussing the recession? Its good to know that he is ok isn’t it.

  • Comment number 87.

    I know it was said at the time, but I've forgotten!

    Why were house prices not included in the index used for measuring inflation? Was it to hide the facts from Europe so GB didn't get into trouble?

  • Comment number 88.

    The Bank and the Government have seriously weakened our banks by (a) insisting that they overcapitalise at the cost of existing shareholders and (b) a punitive 12% coupon on the capital. This will make it very hard for UK banks that take part to raise monies in the market. I expect these banks to sell off subsidiaries etc as soon as the market allows to get the Govt off their backs reducing their footprint and the standing of London as a financial centre. No other Govt supposedly following our esteemed leader has sought to damage their financial sector in this way. To do that when finance is such an important part of our economy is ecomomic vandalism and stupidity.

  • Comment number 89.

    Does Mervyn King remind anyone else of Ronny Corbett's character Timothy Lumsden from the TV series "SORRY!"

  • Comment number 90.

    Fascinating article. So glad to see you've gone back to reporting on real news, and doing it well, after yesterday's little aberration.

  • Comment number 91.

    'King's analysis of what went wrong was spot on, as usual.'
    Well, give that man a cigar! My cat was sick this morning and the sick could have told me where the banks went wrong!

  • Comment number 92.

    Robert

    Great stuff. Yes, the BoE should have the power to vary capital requirement ratios and also to call a halt on excess lending by banks. Surely no bank in particular and certainly not together can increase lending my 10+% year in year out.

    Still, the main short-term problem is a lack of credit. HMG needs to realise it has the tools itself - it can use N Rock and B&B to increase lending rather than try and persuade HBOS and RBS.

    R

  • Comment number 93.

    Again, this is a distortion of what has happened.

    Since New Labour came in in 1997, the Treasury has been doing targeted hits against other forms of investment:

    1) straight away taking away tax benefits of paying dividends, making sure that it only makes sense to invest in "growth" stocks and just in time to catch the dot.com bubble.

    2) Then give breaks to people who invest in property and people building property.

    3) Post dot.com crash, keeping interest rates artificially low. When real inflation starts to go up and there is a danger the BoE will do it's job, Brown changes the inflation target. BoE still targets real inflation for a while and then gets slapped down again and so gets the message and ignores housing in its inflation targets.

    4) Just in case there is any danger people might save, Brown goes on a debt-fuelled bender pushing real yields down. He also changes the law to make pension funds measure their solvency against 50 year bonds which means when he issues a load of 50 year bonds, pension funds have to buy them and so lock a significant portion of YOUR pension( assuming you don't have your pension coming out of the gold-plated public sector final salary pot, the one with a 700bn GBP deficit ) in an investment that is GUARANTEED to pay zero in real terms for the next 50 years.

    5) Tax people's savings and investments to the hilt. Make it unprofitable for companies to make profits. Keep crazy taxes so that people don't trade shares but trade far more illiquid - and non-centrally cleared - OTC products like CFDs or Total Return Swaps.

    6) People have to search for yield, so invest in property - which Brown has given all sorts of tax breaks for - and at the same time pull their money out of deposits FORCING the banks to turn to alternate sources of funding.

    7) Spend like crazy, borrow like crazy, lie about your debts, like about your income and prospects. Engage in all sorts of accounting fakery - the exact same kind that Worldcom's CEO is currently doing bird for - and then have the brass balls to criticise other people for doing what Brown has being doing since spending restraints came off.

    8) Boast about fake growth, growth that is fuelled solely by debt and public sector spending binge.

    And eventually the debt fuelled bender ends. We have Darling wanting to give some hair of the dog to prevent the party-goers sobering up and getting the inevitable hangover.

    ALL of the above issues were pointed out. Off the top of my head I can think of 6 IMF warnings about the imbalance in the UK economy, no end of articles and the Lib Dems warning over and over but Brown always knew best. The fact remains if Brown had sat and thought out how to the most targeted ways to bring about the current state of affairs in this country he probably couldn't have done better.

    End to boom and bust?

    http://uk.finance.yahoo.com/q/bc?s=%5EFTSE&t=my

    I count at least two busts.

  • Comment number 94.

    #48, SoapboxJoe:

    House prices should indeed have been factored into the inflation index. Rather than things deliberately chosen because they dramatically drop in price such as digital memory cards - people struggle to pay their rent/mortgage, but who struggles to pay for memory cards!?

    This would have shown a more realistic inflation figure, which should have in turn triggered interest rate increases that would have put the brakes on borrowing sooner.

    However, the risk is that now house prices are dramatically falling, they will be added to the inflation index to again massage the figures and make inflation look low.

    I agree with you with the caveat that house prices are only added to the CPI once they have returned to more realistic levels,
    e.g. average house price = 4x average income.

    Also, those in charge of the economy seem to have missed or ignored the positive feedback loop caused by lending secured on property. E.g. property prices rise so they lend more money in property backed loans. However, much of this money is spent on property, which in turn causes property prices to rise further and result in more loans. Positive feedback loops generally cause systems to spin out of control until something busts!

  • Comment number 95.

    #58, there is a limit to what the BoE can do when:

    a) The government is spending with zero restraint thus CAUSING inflation.

    b) It has an inflation figure that explicitly excludes housing costs.

  • Comment number 96.

    Hmmm, no mention of the George Osborne fluff from yesterday. And Nick Robinson is back pedaling so hard he's already over the horizon. How amusing.

  • Comment number 97.

    Here's an idea;

    Why doesn't the UK manufacture stuff that foreigners need ?

    Then we could buy other stuff with the money they give us instead of selling our land for their loans.

    I think I'll call my idea, "Trade".

    All these discussions seem to ignore manufacturing.


  • Comment number 98.

    Given our balance of payments black hole surely we have to keep interest rates high to support the Pound. If we drop interest rates foreign investors will flee from Sterling. Which once again brings us back to the question that was ducked a few years ago - joining the Euro €.

    If we need lower interest rates we have to join the Euro. This will also help encourage exporting industries.

    The government should have the courage to act regardless of what the tabloid press "think". Indeed the press have printed so much Euro nonsense that a referendum is not winnable (the repeat a lie trick). The average person goes to Benidorm and survives - indeed even has few Euros stored with his/her passport.

  • Comment number 99.

    Bank Slicker is no more! My name has been moderated only after 14 months! It must have hit a nerve with someone.

    But behold!.....a miracle!

    And so, as it was pre-ordained, the LIBOR began to subside and the world was saved to live another day!

    http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=145&a=10796

  • Comment number 100.

    "Therefore, the Banks will be broke, the taxpayers money will be gone and the only solution is

    quote: The Tories have talked about giving the Bank of England the power to vary the capital ratios of banks depending on credit conditions, which is a fancy way of saying that the Bank of England would be able to force banks to lend less in a period of economic euphoria.

    Unfortunately, the problem will have the same result in economic doom

    Banks will have to have a ratio of 1/1 period."

    The capital adequacy ratio is the ratio of assets (loans) to equity at book value. This is what the conservatives are suggesting be modified in a counter-cyclical way. (The trouble of course, is to decide when the cycle has turned.) On the other hand, the ability to cover withdrawal requests is the ratio (cash on hand) / liabilities (deposits), which is what you are suggesting should be unity. Yet more evidence that the full-reserve folk know nothing about banking.

 

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