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When taxpayers buy business debt

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Robert Peston | 09:55 UK time, Tuesday, 27 January 2009

Can the Bank of England's autonomy over monetary policy, its independence from political interference, be sustained as the Bank Rate approaches zero?

At a time of painful recession, this question may sound of interest only to the clashing egos of central bankers and Treasury ministers.

But the answer probably does have implications for all of us, because it would have a bearing on the all-important credibility of the institutions that shape economic policy, especially that of the Bank of England.

This issue has arisen because the Bank of England is about to start using measures other than movements in its policy interest rate to influence the interest rates actually paid by businesses and households and to increase the stock of money in the economy.

These measures have been given the label "quantitative easing". But this seems a very unhelpful badge, since economists seem divided - in a theological kind of way - over precisely what it means.

Better then to describe what the Bank of England is about to start doing.

Within a few short weeks, it will start exchanging high quality Treasury bills for various forms of corporate debt, both bonds and commercial paper (the main difference between bonds and commercial paper is that bonds have a longer maturity and commercial paper is short-term debt).

We'll know a bit more about this tomorrow, when the chancellor and the governor of the Bank of England send letters to each other setting out the scope and operation of this scheme.

But this is what we know so far. The Bank of England will have about £50bn of Treasury bills to disburse and this fund will be underwritten by taxpayers. So any losses incurred by the Bank of England from its investments in companies' debts will ultimately be borne by all of us.

Now the reason why the Treasury and Bank of England have decided to set up what they call an "Asset Purchase Facility" is because they believe big companies are finding it too difficult and too expensive to borrow in the form of bonds and commercial paper.

The logic is that if the Bank of England were to buy these bonds and commercial paper, the market would become deeper and more liquid - which in turn could persuade other investors to buy these forms of corporate debt.

There's a hope on the part of the authorities that the price of bonds and commercial paper would rise (over time), which in turn would lead to a fall in the interest rates actually paid by companies. In other words, big companies would find it easier and cheaper to borrow.

Now the governor of the Bank of England insists that what's going on here does not represent formal monetary policy. But that's surely a nice distinction, because the Bank of England would be influencing both the supply and price of credit - which seems to me to have the distinctive quack of monetary policy.

However, Mervyn King feels able to describe this as something other than monetary policy because this debt is not being bought for cash but for interest-bearing Treasury bills, or government debt.

That said, those bills are highly liquid. The recipients of them would treat them as the equivalent of low-risk money.

Oh dear. I am in danger of slipping into the kind of obsessive theological economic debate that gives me the willies. So let's move on.

SHAUN CURRY/AFP/Getty Images / Oli Scarff/Getty ImagesPerhaps the important point is that Mervyn King and the chancellor have both made clear that it won't be long before the Bank of England starts to use money, rather then Treasury bills, to buy corporate debt and other financial assets. At that point, even the governor would call that monetary policy.

It would be the moment when - for the purists - quantitative easing would begin (you knew I'd break my word not to use this ghastly expression). To reiterate, the Bank of England would start to buy financial assets - low-risk government bonds and higher risk corporate debt - from banks and for money.

There would be two reasons for doing this.

First, the stock of money in the banking system would increase. The hope would be that the banks would lend this out - though if they were still feeling very averse to risk, they might lend it only to the Exchequer, by purchasing more government bonds. In fact, if they were feeling really frightened about the world, they could just sit on the cash.

That is why it would make sense for the Bank of England to buy riskier business debt, corporate bonds, from banks: doing so would liberate precious capital for banks, under capital adequacy rules, and would give them an incentive to provide new loans to companies and to households.

You'll notice, of course, that what we're talking about here is taxpayers paying cash for corporate debt. In a way, we'd all be lending to companies.

And because we'd be lending to companies - which brings with it the risk of loss for the Exchequer and thus for us - the chancellor feels he can't stand idly by and give the Bank of England free rein to invest as much as it likes and in whatever way it likes.

So Alistair Darling will, I am told, set limits on how much the Bank of England could disburse when buying financial assets from banks. And he may also set guidelines on how much the Bank can spend on individual categories of debt that carry different kinds of risk (thus there'd be a maximum allocation set by the Treasury for purchasing corporate debt, another allocation for government bonds, and so on).

He feels unable to dodge doing this, because taxpayers' money would be on the line.

However, it would mean that he would be impinging on the operation of monetary policy, as and when it takes the form of purchases of financial assets (oh yes, the infamous quantitative easing again).

Many would see this as undermining the independence of the Bank of England - almost an abandonment of the economic reform upon which Gordon Brown built his early reputation for success as chancellor more than ten years ago.

Would that matter?

Hmmm.

If this new form of monetary policy were to fail, blame would be shared with the Treasury - so perhaps the credibility of the Bank of England would be less damaged.

But it may represent a slippery slope back towards a muddying of how macroeconomic decisions are made. And some would say that the UK's mediocre economic performance through most of the post-war years stemmed from a failure to properly delineate the responsibilities of the Treasury and the Bank of England.

Or, to put it another way: when politicians were intimately involved in setting monetary policy, Britain was something of an economic loser.

Comments

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  • Comment number 1.

    US home sales see surprise rise !

    http://news.bbc.co.uk/1/hi/business/7852011.stm

    No headline here.

    Massive layoffs !

    That's better!

    (70,000 worldwide in Jan 2009 would be expected not massive)

  • Comment number 2.

    To distance Treasury from this new monetary policy, why not run it through UK Financial Investments, or whatever it's called? Ally D can then claim he delegated the decisions to "experts" and his involvement was simply to set strategic objectives. Bit of a fig leaf, I know, but it maintains the independence line for the future when (if?) a sense of normality returns.

    Incidentally, LIBOR has been falling steadily (ie the spread versus Bank Rate), which indicates banks are returning closer to normal trading doesn't it? Is there a chance that the need for quantitative easing might actually disappear?

  • Comment number 3.

    And what would stop the Banks increasing their lending abroad rather than at home, Robert?

  • Comment number 4.

    Mr. Peston,

    You reproted yet more doom yesterday and made not one metion that some bank shares went up over 60 %......

    I bet you would have been beating the doors down to tell us all if they went down by even half that value.

    STOP TALKING US INTO MORE PROBLEMS

    Lerts just hope you were short selling Barclays yesterday......

  • Comment number 5.

    I think 0% interest rates will mean multiple bank runs. Who wants to leave their savings in banks only to be charged interest for the pleasure of doing so. No one, and as such this will only expedite the collapse of the system.

    Time to run to the hills ...

  • Comment number 6.

    It sounds cheaper if we just nationalised the banks and told them to start lending.

  • Comment number 7.

    OK, lets call this what it is - this is printing money, not backed by assets or bonds in order to increase the flow of money around the ecomony. At some point it will have to be paid back especially if the economy swings back the other way into a inflationary period as too much money is chasing too few goods.
    Business have debt that they cannot put a value on and this is telling taxpayers that they have to pick up the risk on that debt on the potential benefits that might accrue as the economy recovers. This frees business from the accountability for past decisions, enables the co-opting of the Bank of England to pay for this and ultimately the politicians are making the decisions. OK, if thats the way we want to do it - but at what point do we have accoutability if it goes wrong? Bank of England independence was a good idea - this will reverse that and its a shame that market problems have made it a casualty almost at the first signs of problems.

  • Comment number 8.

    dumping cash into the economy to increase the money supply. LOL. buy gold.

  • Comment number 9.

    Mr. Peston,

    You reproted yet more doom yesterday and made not one mention that some bank shares went up over 60 %......

    I bet you would have been beating the doors down to tell us all if they went down by even half that value.

    STOP TALKING US INTO MORE PROBLEMS

    Lets just hope you were short selling Barclays yesterday......

  • Comment number 10.

    Public money should only be used to ensure that societies elected representatives have real and meaningful control of the economic forces it is required to sustain. The idea that the irresponsible, reckless louts and financial dunces in the City and other financial centres that have caused the chaos getting there hands on any more public funds would clearly be the final betrayal of the people by a political party that was established to eradicate the fraudsters.

  • Comment number 11.

    The main question appears to be:-

    Who is actually qualified to judge the quality of the debt that the Bank of England is going to be purchasing ?

    Brown has flushed taxpayers money down the toilet with every single one of his major decsions (gold, bank shares etc).

    The 'advisers' who managed the 'hi tech' funds have made massive (and sometimes total) losses.

    Untill very recently Northern Rocks mortgage book was considered 'very high quality' now the loans are considered reckless.

    If the government is giving away tax payers money then the very least it can do it give it directly back to the taxpaying public.

    So Robert -- who is qualified to judge?

  • Comment number 12.

    I thought the Bof E sole target was that on inflation. So how does square with that or has the Old Lady been given a wider brief?

  • Comment number 13.

    The sensible cause of action would be for the British government to issue gilts in the normal way, and the money it raises from these gilt auctions could then be used to buy corporate bonds. The government borrows real money and then lends this real money to the private sector.

    The bond market can then decide how much money it wants to lend to the government to lend on to the private sector.

    However, the idea of the BoE printing money backed by no real assets, and then using these funds to buy corporate debt is very worrying. It could cause a fragile sterling to fall even further.

    Also, with the world economy contracting sharply, the future earnings of British business are very hard to predict. In this climate, a business should not borrow more money than it can pay back in 1 to 2 years, as there is too much uncertainty surrounding the value of future profits.

    Borrowing too much got us into this mess. Borrowing more will not get us out of it.

    Businesses, households and government should concentrate on paying off their debts.....



  • Comment number 14.

    Bert - big deal

    whilst some of the "big" companies are having profit warnings they are still making profits and are therefore good for the money

    crack on and get things moving asap

  • Comment number 15.

    RP
    Why attach obsessive to theological? As the leader of the "watch it" pack, and as the one poster here who is actually consulted by his local Cardinal for help in steering a way for the world's oldest organisation through this minefield (for all that I'm fundamentally a Prot!), when Darling proves even less competent than Healey (classically termed the most expensive adult education course hitherto) at avoiding the Japanese reef, then I've a right to complain.
    There's more than one form of dogma here, and the one that's doing all the damage is the one which refuses to recognise the banks are incompetent, must be squared away once and for all, and a positive proactive leadership taken, not one which waits for Banks to lead the way.
    Firstly, why destroy investors' morale with low interest rates, in support of another dogmatic policy, controlled inflation, which has obviously failed? Inflation's not the worst thing possible, even in these times, an unsteerable economy's worse, and not all industry's suffering, even though much is. Increase interest rates to 4 or 5 per cent, but no further, and push house prices down to the realistic average of about 100k, which will do quite a lot, together with the falling price of fuel, to sort it. That will clear the backlog of likely housing defaulters, giving bank portfolios something to get a grip on, and require them to get a grip. Introduce price control on fuel, yes, I recall the 1970s only too well, only on fuel, that's what the Regulator should be doing but isn't. See what effect that has after two months, and extend if necessary.

  • Comment number 16.

    Please someone give me an answer to this question!!

    Why dont we just remove all bad assets from the world? just writing them all off? like they just didnt exsist and then carry on as if there was no recession?

    Almost as if we just turned a blind eye.

    OR

    You could just give every country 500 billion and say they can only use it to fund jobs in the renewable energy field.

  • Comment number 17.

    I don't think the BOE have much credibility left now as an independent body.

    Let's face it the only reason GB gave them their independence was so that he would have someone else to blame if inflation got out of control, while still being able to claim credit if things worked out OK.

    Only having interest rates as a tool to play with makes them a one-club golfer. Soon they will be torn between wanting to lower interest rate to help the economy while wanting to raise them to allow the government to borrow more and to protect sterling from collapse.

    My overiding impression of all these government departments and think-tanks is that they were fine while the bubble was inflating. As soon as they are required to actually earn their over-inflated wages they haven't got a clue.

    What use is an economic model and projections of growth etc if they cannot predict a credit-crunch?

  • Comment number 18.

    Unfortunatly the BOE nor our incompetent Government have yet admitted why we are in this mess. More interfering and more of the rampant money supply that got us to this point wont work. The country needs some stabilty but as usual, this inept outfit simply try and provide cures instead of preventing problems in the first place. The recent drops in interest rates have not worked because they have created more problems for those needing a return on thier savings than any help it provided to borrowers.
    Why would anyone, or any company, wish to borrow on Gordies false 2% rates knowing full well that he will increase them again on a whim, too late of course for those that follow the flock and fall for Gordies snake oil sales tricks. The quicker a friend tells Gordie he has political BO and should resign, the better.
    Then the trouble will be finding someone competent enough to run the devastated country and our opposition in short pants dont appear to have much of a clue either. Perhaps big Ken will get his way and shovel us into the unelected and corrupt EU ! The future seems just has bleak as the present !

  • Comment number 19.

    So, we're all going to become shareholders in effect, whether we wish to or not? And, as we all know shares may rise or fall in value!
    However, if the firms that need the cash can't get it, they go bust or lay people off, and so we pick up that bill instead-with no chance of any return at all. Seems like the first option is better to me.
    If it all goes belly up, at least the B.o.E. can hide behind Alastair or Gordon as they'll get the blame come what may.
    Strange, isn't it, that when all was going well, it was all due to the Tories "Golden Legacy" and nowt to do with GB- now its gone splat, suddenly its all his fault an dalways was! You can't take the con out of conservative!

  • Comment number 20.

    In other words New Labour are about to throw us all ever deeper into the old smelly stuff. The problem is now deeper than simply the lack of credit, it is now more the lack of purchasing. We do not want to buy. It's as simple as that. We, the 'consumer' are frightened. Easier money won't alter that. Throwing more good money at bad financial institutions simply exacerbates the downturn. Oh and by the way Robert you're right in what you imply about these awful financial 'concepts', printing 'money' in whatever form is just that: printing 'money'. We'll all be the worse off for it.

  • Comment number 21.

    Surely the biggest matter of political intervention is that the Bank Of England is only able to dispurse taxpayers money by a very circuitous route (With no guarantee of success) rather than lend directly to the companies that need loans and are being stonewalled by theor banks)

  • Comment number 22.

    I think what is very interesting here is the way in which th BOE has moved away from its Inflation mandate towards being now almost exclusively focusing on stimulating economic growth - if we see mass inlfation when we come out of this trough then it will be near impossible for BoE to retain any credibility........that said...........

  • Comment number 23.

    Britain's economy ceased to perform lamentably due to a small number of factors: 1. North Sea Oil - a factor that is seldom taken into account, as though smart policies and hard work explained it all; 2. Policies that allowed Britain's industry to go down the drain while the "much more profitable" financial sector took off; 3. Labour flexibility that suited the new services companies' needs; 4. The Rest of the World's eagerness to lend the British consumers, houseowners and government what they asked for. Three out of four such factors have vanished or are about to vanish. On the contrary, labour flexibility will increase, and wages will fall, but that won't bring happiness to most people.

  • Comment number 24.

    Spot the speech:

    "The challenge—as the UK Chancellor of the Exchequer Gordon Brown said last September—is to make the IMF as credible and independent from political influence in its surveillance of economies as an independent central bank should be in the operation of domestic monetary policy."

    Why does this not apply to our own BOE?

    "Clear transparent procedures for monetary and fiscal decisions include presenting a full factual picture of the national accounts, usable central bank reserves" - recent proposals have included the BOE not reporting how much money it's printed.

    "Because we must never return to the unsustainable burdens of debt of the 80s and 90s" - which we have exceeded now, including PFI."

    "National governments should not pick and mix which standards they
    choose to meet and which standards they choose to ignore. so
    proper implementation of the codes should be a condition of any
    imf and world bank support. in the global economy national
    governments have rights but they also have responsibilities they
    must meet." - So how many IMF warnings did Gordon Brown ignore?

  • Comment number 25.

    The independance of the BofE and the MPC has been a sham demonstrated by the political imperative some months ago to reduce rates outside of their normal calendar, so to alude to it still existing is a mistake.
    As for the credentials of the MPC or the BofE, and the Treasury come to that, has been so dramatically damaged as for neither establishment to have any credibility.
    To have seen the bark on the trees in such minute detail and to be debating the volume of moss they see or want, to actually miss that the forest around them was burning, is the proof.
    Monetary Easing (monetary inflation by another name) will have one impact only.
    Devalue the pound and address the imbalance between its' value and the value of assets derived by it. Namely, stop house prices falling by making the money to buy it worth less requiring more money to buy it, and therebye instilling some semblence of stability to their value. In reality house values (real terms) still decline, but, the weakening pound eases money to meet it.
    Of course a devaluing pound will have another detremental affect, and increasing and hazardous spiral in inflation from all those imports.

  • Comment number 26.

    Buying bad or questionable assets from Barclays and letting the taxpayer pay for them

    is:

    taking taxpayer's money and funnelling it to Arab investors when we cannot afford to do so.

    We and our children are in enough debt already (up to our eyelashes).
    Isn't adding more debt by giving handouts to Middle-East investors a criminal step ?

  • Comment number 27.

    Dry Rice will be turned into wet porridge till their isnot a grain of truth left .

    Porridge that will be sold to future pensionerrds [todays workers] to be augmented by their soylent green when they arrive at their" pot" at the end of the rainbow

    Future generations may be left with only a hand full of beans and providing they throw them out the window and they grow into a beanstalk and their name is Jack and they are not frightened of rich angry giants or heights ......

    By taking on liarbillitease this gogovernmint has effectively agreed to print money if all else fails ,which the city and fractional reserve banking can no longer do, because of the declining value of assets held by banks making them insolvenmt .

  • Comment number 28.

    These measures have been given the label "quantitative easing". But this seems a very unhelpful badge, since economists seem divided - in a theological kind of way - over precisely what it means.

    Come now Robert, well all know what it really means. Defaulting on sovereign debt, the Euro is just round the corner once hyper inflation and the rioting starts!

  • Comment number 29.

    Who cares what bank shares did yesterday? Well if you do then you are taking a very short term view of what's happening. The same can be said for the rise in US house sales.

    If you look at stock market movements in every recession we have had since WW2, you will find that it is not a mirror image of what is happening in the real economy.

    Yesterdays news started with major job losses both here, in the US, in Germany and in Holland. All of the BICS revised their economic forecasts down. This was the real news.

    Should we pump money into the economy by the exchange of treasury bills for commercial paper? ON face value I think this is a poor proposal. If the additional funds are to help our long term existence, this money should be targeted at specific firms and industries.

  • Comment number 30.

    Is this tax payer money replacing foreign "investment" that has already flown back to its originating country, or is there a risk that we will be freeing money so that it can leave our country?

    I'm not convinced the pound can withstand the impact of us being the first to use quantative easing.

    It strikes me that some companies, mainly our massive nationals or our multinationals, having been running themselves in as unsustainable a way as the banks have been, carrying massive amounts of debt and believing that they will always be able to do so. They've been doing it all in the name of tax efficiency so us tax payers having to bail them out now is a double smack round the chops.

  • Comment number 31.

    Robert

    I find the article extremely speculative

    I would think that it is your duty to explain the possible progress of these measures, yet you hold out only "Hope"

    I would say that your treasury insider has set you some information on an informal basis, but unfortunately he/she wasn't fully able to appreciate the full implications of the discussion that he has been privy too (that would seem to point the finger at a politician)

    What are the implications for the economy of these measures based on the treasury's own economic model?

    What other parameters and addenda are being added that will hedge this government position?

    Will transferring this "toxic" debt to the UK treasury actually just cause the run on the country instead of the run on the banks?

    After all they are now so cheap a foreigner could step in and buy them up for what could be considered peanuts. In those terms, however, the value of the banks is in the people they employ. They have been shown to be delinquent so maybe their value is properly equated in the eyes of the market.

    This step must therefore be followed by a full independent enquiry and individuals named and taken to account for their decisions. We must have openness and honesty to create a market.

  • Comment number 32.

    The governement doesn't appear to know what it should be doing other than they should do something. It comes as no shock that they want to gain control of the Bank of England again as it has more credibility than the FSA and Treasury.

    We know it will end in tears but God, when will they let the voters have a say?

    At the last possible minute no doubt....

  • Comment number 33.

    'Within a few short weeks'

    don't they realise that this train is running at full tilt and they only have 'a few short days' in which to act.

    'send letters to each other'

    what is wrong with email or instant messaging, what decade are these dinosaurs living in (1809)

    also posted on
    http://www.democraticbritain.tp2p.com/

  • Comment number 34.

    I have never been totally convinced by the virtue of BoE independence.

    When Nigel Lawson messed up the economy in 1988 it was clear who was responsible. We now seem to be always behind the curve and maybe Mervyn King has been slow to respond to the necessary decisions.

  • Comment number 35.

    12. At 10:38am on 27 Jan 2009, timharkersmith wrote:

    'I thought the Bof E sole target was that on inflation. So how does square with that or has the Old Lady been given a wider brief?'

    Yes, it appears that the 'Old Lady' has been given wider briefs, so wide in fact they are in severe danger of falling down :0

    Also posted on
    http://www.democraticbritain.tp2p.com/

  • Comment number 36.

    The whole "credit crunch" is much simpler than any of this.

    1. In a free market, interest rates reflect risk.
    2. Currently risks are substantial.
    3. Therefore market interest rates are high.
    4. But the politically-motivated rates are low.
    5. Therefore the only willing lender is the government.
    6. The private sector, including of course rich foreigners, would be happy to lend. But only at a market interest rate.
    7. Since the government is suppressing interest rates, they've killed the market.

    When Northern Rock went down, government had two options. To keep interest rates low and rapidly become the ONLY lender, or to allow interest rates to rise to where the free market would lend. In the past we've chosen the capitalist solution. This time we have a command economy, on very unfavourable terms of being already broke and in panic.

  • Comment number 37.

    Hi Robert

    Sometimes these blogs confuse the hell out of me, to be perfectly honest. However, I was wondering if you could answer this question for me (does Mr Peston do requests?):

    In the pre-budget report, the figures tallied using July 2009 as the date we come out of recession. Are we on course?

    If so, what does that mean?

    If not, does that mean taxes will need to be higher in order to get back on course by 2015 and if so, by how much?

    I think that this is all that people care about. The whys and wherefores are not important - I just want to know if I can feed my kids and keep a roof over their heads. Plus, I wouldn't mind knowing how heavily my wage will be taxed and what that can buy me after inflation has taken its course.

    Anybody else bothered about the independence of the BoE? I just want someone to tell me what will happen to my pocket and those like me.

    Thanks

  • Comment number 38.

    Japan's quantitative easing strategy did not succeed in stopping price deflation, why should this?

  • Comment number 39.

    #11

    "If the government is giving away tax payers money then the very least it can do it give it directly back to the taxpaying public."

    Yes but only when those selected members of the public are closer than the landfill site.

  • Comment number 40.

    all this guff from the Republic Of Westminster, doesn't matter a monkeys anymore.


    GC

  • Comment number 41.

    I always wanted to post on this subject but someone interrupted me when I could have posted top ten! Damn!

    Money is two things: debt and an exchange commodity. Why not make it one thing? An exchange commodity. The treasury can issue money (if not then it can be granted the power) and with regulation, that will be debtless money that facilitates economic activity. It won't cause inflation because inflation is not caused by the increase in money chasing too few goods: it is caused by the debt increment that prices have to include or the weakness of the pound on the foreign exchange. This weakness being exacerbated by the deficit being created to have some debt free money in the economy - except its government debt.

    The government are trying to do the same but are creating a deficit that means at some point we will be in a worse position - if we keep to the same mindset.

  • Comment number 42.

    Is this announcement just a fishing excercise ?
    I mean it is well known that these postings are trawled for feedback with a view to modifying policy.
    If the postings are majority in or out of favour, will this idea be pushed ahead or quietly dropped
    Just who is creating the governments policy.

    Having said that, the agenda has always been, borrow lots of foreign cash, nationalise a few banks, print money to stoke inflation, pay back foreign debt with worthless sterling. The only drawback comes when we try to borrow again in the future and find the ratings agency puts us in with the junk bonds

  • Comment number 43.

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

  • Comment number 44.

    Sorry this is a bit off of the topic but this Govt never ceases to amaze me!!

    I see that Mandy is making an annoucement at 3pm this afternoon designed to help get credit back to help out the car industry. It says 3 out of 4 people who buy new cars buy them on finance deals such as 0% interest - and as we all know those deals have well and truely dried up. The Govt wants to get credit and finance deals flowing again so we can all flock out and buy new cars - BRILLANT!!

    Are we all living on the same planet as GB and his cabinet or what???

    We are - as a country and individuals - up to our eyeballs in debt and from years of cheap credit. This Govt is burdening the UK with more and more debt at a level never seen before and they expect us to all rush out and do the same. I'm sorry but I don't know a single person at present for whom buying a new car is high on their list of priorities. I don't know anyone who is desperate to take out a new loan. I do know lots of people who would love to bring their debts down!!

    With redundencies coming at a rate of 2500 a day and 2/3rds of people (as stated in a recent poll) listing job security as the biggest concern for 2009 this UNELECTED PM and his side kicks are really proving to be out of touch with getting the country back on track. They show us more and more as each week passes.

  • Comment number 45.

    @29
    Was going to write something here but frankly you summed up my views perfectly!

  • Comment number 46.

    Robert,

    A very interesting and long entry which can be summarised as "more fuel on the fire".

  • Comment number 47.

    When this QE stategy fails and everyone of them holds up their hands and say "we have tried everything we can"

    Dollar tanks (already has pledges nearly equivalent to the US national debt of US$10 trillion)

    Pound tanks (who cares, its just a local issue)

    Panic, what panic?

    Oh and anyone in debt gets off scott free (funny enough, every government is in massive debt) with the onslaught of hyperinflation


    The Amero is introduced and it will then be a trully global money system.



  • Comment number 48.

    "In fact if they (the banks) were feeling really frightened about the world they could just sit on the cash"
    Isn't this what is happening already, despite successive government interventions. Sure, they're frightened. They're frightened because they dug a hole and now nobody knows how deep it is. Let's have the books open before we start committing taxpayers money and devaluing peoples' savings.
    As others have posted - why not lend or invest directly in companies? Why involve middle men whom you suspect of having bad gambling debts?
    At its worst, it means that taxes witheld from the last pay packets at Corus and Woolies are being used to preserve jobs and status in the halls of smoke and mirrors known as The City of London.

  • Comment number 49.

    Why can't the Bank of England lend directly to businesses therefore bypassing the banks. Then when the banks see their business being lost they will then start lending again.

  • Comment number 50.

    The Bank of England must make sure that the government bonds that they swop/issue to the banks/companies for the toxic debt have very low interest rates(at least 3 -4% below the yields offered on the so called toxic bonds etc..) for three pertinent reasons:

    1. The obvious-these are non toxic assets and so very less risky
    2. To give the tax payer a good deal on the money issued
    3. The Banks are currently very seriously taking advantage of ordinary commercial customers by doubling margins and arrangement fees using the credit crunch argument as an excuse to do this.

    We can now stop this tawdry ransom. No excuses from the government. (No cosy back scratching at Davos by tony Blair and gordon brown behind close doors with bank MD's and Chairmen for future directorships)

    We now have a control on the banking boards and their finance and so we (UK government/FSA/BE)set the banking margin ceilings for the next 3 years for small to medium business and domestic customers who are after all the backbone to the banking industry and the innocents in this banking and economic crisis. If the banks abuse this margin (their loan books will be subject to sudden sample inspection - like a finacial ofsted) charter they will incurr financial penalties and the directors will be liable for personal fines/ loss of share options.
    By the way the wholse of the RBS board should be made accountable as part of a public enquiry to asertain what went on at RBS including any government involvement as it clearly smells worse than an open top pig slurry tank.

  • Comment number 51.

    Jeeeez.........

    Just put the interest rates up!

    Then we would have happier savers, happier pensioners, happier foreigners putting funds in from abroad, happier banks and no inflation on food imports.

    Chucking money at the banks from government sources is only going to get them hoarding it like the last two attempts ended up.

    Meantime the government (if they want to do something useful) can start investing, tax-reducing and grant-funding into the manufacturing sector for the long term.
    Then they can reduce the public sector employment monster and move them into the productive jobs which might exist in a couple of years.

    Once we are in a position to start seriously exporting our new clean-technology products, they can manipulate the exchange rate (by which time the Euro will be no more) to suit foreign trade.

  • Comment number 52.

    Rahere for chancellor.


    or at least non-exec. director of one of the big banks and maybe you can start spreading the message from the inside.

  • Comment number 53.

    The interesting question here is how the government would decide WHICH corporate debt to buy. Sounds like "picking winners" to me. Same old Socialist clap-trap.

    If the government weren't borrowing well over £100 billion this year, the lenders could lend that money to companies and individuals. The government, as so often, is the PROBLEM here not the solution.

  • Comment number 54.

    once again treating the symptoms not the cause....quantitative easing only works in theory, in practice like in Japan, people just pay down debt so it is of little benefit to the economy, in the longer term the consequence is high inflation...

    The only way out is to create the "bad bank" then confidence in the banks will return....you can guarantee it is going to happen, it is only the politicians who are postponing the inevitable in the vain attempt to cling to power.....

    I have absolutely no incentive to leave deposits in the bank at 0% (especially when they then lend out MY money at an average of 12.5%) ........so in order for the banks to start lending they have to offer me a decent return on capital.....or me and the rest of the savers will empty the banks of their funds causing more runs and the inevitable spectre of "nationalisation"....

  • Comment number 55.

    Robert,

    The truly most important question to be asked and full disclosure demanded is-

    'Who and how, giving complete and verifiable details, are all these debt instruments going to be priced by the Treasury/BOE (including the insurance for toxic debts)?'

    Can we request the information through a £10 Freedom of Information' request?

    It is vital that the taxpayer is not a loser as the Uk can not adopt protectionism given our addiction to foreign money and goods and we are near the end of interest rate reduction's and the money is not there for repeated and continous fiscal stimuli.

    Furthermore our current exporting base and capacity can not lead us to a balanced budget in the next 5-10 years.

    The Government/BOE's methods and implementation are vital to be as vigorous as their spin these 'let us try this or that' strategies are the taking the UK to a tipping point.

    Remember the UK is currently a service lead economy with structural trade, personal and fiscal debts.

    In 1930 the US and the UK were industrial/manufacturing lead economies that had trade and fiscal surpluses and thus had more strategies, money and goodwill available than today's UK.

    'Experts and Politicians' keep on trotting out Keynes who may have been right in his analyses of those economies' in 1930'S, but his strategies surely can not be appropriate for us today as a solution to the UK and the US' service lead economies of today.

    Next Keynes felt 'Finacial services and the rentier class' were parasites and should be kept to the very minimum in a well run economy and here we are expending vast UK resouces trying to bolster them with the majority of the remaining financial goodwill the UK has.

    It appears to me that we have much too much short term self interest by GB and too little relevant and proven record in financial risk analysis by those tasked with implementing costings of intentially complex and opaque debt instruments that we are told have defeated the combined brains of all the major countries to-date.

    GB says he will give us accurate debt costings from a standing start in a few days and he is going to bet upwards of £300 Billion of our money that he is right.

    I do wonder if he would be so quick and cavalier if he had to put up all his and his family's assets as the first losses the taxpayer could recover?

    The result of these unproven and enormously expensive 'stimuli measures' are likely to be too expensive for the taxpayer.

    Even the Government can not get round the fact that everyone can only spend a pound once.

    The Government seems to believe it can now print money in the various guises of quantitive easing and undisguised creative accounting indefinitely.

    One would laugh until one realised they are putting the future of our children at risk with wild and unproven strategies for the UK's economy.

    Much less haste and much more forensic and real and truly robust stress testing for evry outcome is needed by the relevant powers.

    Too much is now at stake.

  • Comment number 56.

    The last sentence says it all: when politicians were intimately involved in setting monetary policy, Britain was something of an economic loser.

    We need to keep politicians out of the economic market places.

    Politicians will allocate money to marginal constituencies rather than the overall national interest.

    This is not what I pay my taxes for. I pay taxes to fund essential public services (health, education, law and order) not to bail out Brown's mismanagement of the economy.

  • Comment number 57.

    Injecting more air bubbles through quantitative easing into an extremely over blown economy can at the very best only delay the time it will take to discover sustainable prices.

    The sooner we achieve sustainable prices the less humiliating for our generation and the better for our children and grandchildren.

    Those of us who did not see the 'con' for what it was should now take responsibility and correct matters as quickly as possible and endure the pain.

  • Comment number 58.

    See Article re Mandy and 'Loans' to carmakers.

    Hmmmmm...........

    Rather like when I read about Us Govt $17.4 billion of 'loans' to car industry.

    These loans are to fund losses. Many of us on these blogs think that the world will never return to where it has been - therefore following 6 months of big losses, there are likely to be 6 months of, AT BEST, smaller losses and then some sort of break even position if everything has turned round a bit.

    The reality is that even in the 'Boom' these companies in the UK and US were not, on the whole, making money so in the 'Bust' things are going to be horrendous.

    Reading Mandy article sounds like there'll be a few sound bites in there about Training and Green Environment stuff but its not going to fool most people.

    These loans will never be repaid - they may as well give me a £billion loan - actualy they would be better doing that because they would get all that money back plus some interest/income that I generated.

    They would be much much better finding some techie scientist petrol heads and giving them the money (as a grant, not repayable) and telling them to build a green, environmentally friendly car fit for commercial production. Let the loss makers go to the wall - it will be hard for the 800,000 and the rest of us but we're just not dealing with the underlying issues AT ALL.

    YOUR COUNTRY NEEDS

    STRATEGY FOR THE FUTURE
    CLEAR POLICY ANNOUNCEMENTS TO MAKE THE UK GREAT AGAIN (5-10 YEAR PLAN)
    CLARITY AND OPENNESS ON CURRENT POSITION
    OPEN PUBLIC DEBATE FOR GOOD OF COUNTRY NOT FOR GOOD OF POLITICIANS

    We are drowning in rhetoric and heaps of money we do not have and can't ever repay, individually and as a country - please someone GET A GRIP!!!!

    Without pain there will be no gain but the pain needs to be sharp and hard to enable us to get over it. We need a brain transplant and at the moment we are taking 3 paracetamols a day (that we're borrowing from someone else!!) and hoping it is going to go away.

  • Comment number 59.

    I'm getting sick of people banging on about an 'unelected PM'.

    It's nothing new - there have been four other instances since 1945 of new PMs without general elections - Harold MacMillan (replacing Anthony Eden), Sir Alec Douglas-Hume (replacing MacMillan), James Calaghan (replacing Harold Wilson) and John Major (replacing Margaret Thatcher).

  • Comment number 60.

    Yet more money is going to be thrown at the banks to try to get them lending again.
    I'm perhaps being a bit simplistic here but this, in my opinion, is what is wrong with this.

    The UK bank plc (call it RBS or HBOS or Northern Rock or Bradford & Bingley as you will because they all made similar mistakes) grew far too qucikly over the last ten years chasing an ever increasing level of profits and dividends and thus bonuses for directors and senior managers.

    In 2001 or 2002 the supply limit of funds to lend and help growth from domestic sources was reached. At this point the balance between UK borrowings and savings tipped in favour of borrowings.

    To continue their growth the banks were left with two options.

    1) Start to borrow from overseas to fund growth or

    2) Invent or find news means of lending the same money over and over again.

    Rather stupidly they thought they could do both.

    The problem with 1) is that when troubles hit people bring their money home where they feel it is safer. The UK public and councils did it to Iceland so we aren't entirely blameless in this. Much of the money in part 1) is very liquid and can be demanded back at short notice.

    If too many people want their money back at once then you are in trouble, a la Northern Rock. The problem our banks faced was that they had lent the money long or in illiquid assets such as property which was not only not selling but also falling in value. Much of their profits had been made on the back or rising property prices. As Lord Myners has since pointed out at one point last autumn we were a few hours from financial armageddon across the whole UK banking system.

    If point 1) wasn't bad enough the banks greatly increased leverage and so a relatively small downturn could have catastrophic effects. Enough people have written re 33:1 leverages and banks being left out on a limb that you get the point and I really don't need to go over it again.

    To be very blunt there is a huge hole at the base of our banks and Crash and Alistair Darling's only actions seem to be desperately trying to pour money money in from the top rather than fixing the holes in the bottom.

    Quantitaive easing will have much the same effect, i.e. none after all it failed totally in Japan.

    The next question is when are we going to start seeing bridges to nowhere and other vanity projects to keep labour bank benchers in line and allow Crash to see out his term.

    If you can stomach it I would suggest you read books on the Japanese economic slump form the late 80's till the turn of the millenium beacuse unless Crash is ousted very quickly that is exactly where we are going.

    We will have a lost decade or maybe even more.

  • Comment number 61.

    Post 53. I will have a bet that many of the winners picked to have their debt bought will be based in either

    a) Ministers constituencies or

    b) based in maginal seats.

    Cynical. Moi?

  • Comment number 62.

    Another helpful explanation from RP of the difference between a spade and a manually operated hole creation device.

    Cut whichever way it is still tantamount to printing 50bn quid and dumping it into the banking system on a wing and a prayer.

    So we swap 50bn of T Bills for 50bn of various corporate instruments and T bills (other countries issues presumably - Icelands'? Irelands'? Hungarys'? or newly issued US ones from their quantitative easing?). After all if the banks can buy UK T bills with UK T bills then the exercise is just an expensive way to try to keep the value of the issues up by using new investments to pay out the old - a Ponzi scheme. Oh and generating another commision in the process.

    The prayer is that not all the 'assets' bought will be defaulted on so that at least some of 50bn can be cancelled out upon redemption.

    Describing it as not quantitative easing just because you in principle swap a T Bill for the bond/paper is legalistic semantics.

    If it waddles and quacks then it's probably duck - quantitative easing is printing money, which brings us to the oft repeated Einstein quote. The effects are predictable unless Comical has worked missed a new wheeze which will allow the banks to nick , sorry, earn commisions equal to all of money before it makes it into the wider economy (an outcome based on passed performance I would not rule out).

  • Comment number 63.

    So the BoE, on behalf of taxpayers wants to take risk, presumably because it feels that intervention cannot take place without risk. A reasonable conclusion, the so called bail out with 12 percent interest coupons appears to have failed due to HMG not wanting any risk and a take it or leave it message to the banks. Such coupons now seemingly due to be swopped for something less punative.

    And HMG does not want to take risk, or at least that is the public delivery. Something new, or do they not think they have been taking risks for the last 10 years. Not taking risk involves making access to funds difficult. The upshot will be that only large businesses that do not need access to money to survive in a reduced form, but claim they need to develope will have application for this money.

    This is just more multiple personality disorder with diametrically opposite objectives, ie risk and no risk. Can we have joined up thinking please. I for one am getting tired of what appear to be schizoprenic financial policy.

  • Comment number 64.


    Quantitative easing is just another form of stealth taxation. It devalues the money which is out there by creating more, thus costing everyone who holds UK pounds wealth and gives new money to the government.

    Quantitative easing taxes people who hold cash rather than people who earn unlike income tax and corporation tax. Thus it will tax non-working people such as pensioners and foreign investors as well as the 'usual' taxpayer. Inventing new stealth taxes is what Gordon Brown does best.

    I can see situations where quantitative easing may be necessary, just as I can see situations where a doctor should prescribe morphine. But it scares me when quantitative easing is demanded by a government with a debt habit.


  • Comment number 65.

    Is this not exactly the policy followed by the Weimar Republic in the twenties and currently by Robert Mugabe in Zimbabwe?

    Smacks of desperation by the current administration to hold on to power at all costs - Throw other people's money at it and cross your fingers.

    Or as maggie T once said - socialism is affordable until you run out of other people's money .

  • Comment number 66.

    PS To number 58 re openness - it was interesting yesterday that Barclays told us it had £8 billion of losses written off and its share price soared - I realise there was other info in there too that was generally good but there were clear statements about Barclays position.

    If Barclays can do this then all other banks must be able to do this too - no matter how good or bad lets hear the same figures from the other banks.

    Get the information out in the public domain - the reaction may be a lot better than you think!

    PPS Or it might not be depending on how bad it really is!!!!!!!!!!!!!!;-)>

  • Comment number 67.

    # 9 LeoMissRuislipRanger (and others who echo the same view) - "STOP TALKING US INTO MORE PROBLEMS" -

    Please, please, please GET REAL!
    RP is NOT responsible for starting this mess or making it worse.
    Ok his style of journalism can be somewhat sensationalist sometimes but do you honestly think if he ran a 'positive' spin on every bit of business news that came out, then all the problems with our economy would be solved?

    Some, including I, would even go as far as saying he's being optimistic about the general outlook. I fail to see how some posters on here seem to think that if we all sit back and do nothing, this whole downturn/recession/depression/crisis will just sort itself out; like the guy yesterday who said 'stop being so pessimistic, things will get better soon'. Will they? Why? Just because all previous boom and busts have been followed by another boom and bust? What if that isn't the case this time?

    Call me a doom and gloom merchant, if you like - but what's needed to fix this LONG TERM isn't government or BoE intervention, tinkering with interest rates or trying to put in place measures that make small changes to the fractional reserve banking system....it's real change that's needed; radical changes to the way we all live our lives. We need to take stock and realise that we can't go on depleting this planet's finite resources, that profit isn't the be all and end all of business etc

    Call me a loon - see if I care.
    Just remember this:
    Once upon a time everyone thought the world was flat. Some guy came along and he said "Excuse me peeps but I think you'll find it's actually a sphere".
    Don't be daft they all said.
    Guess which one was right?

    More recently, a group of nerds thought there was a place for the personal computer. Most of the bigwigs at all the top electronics firms said "No, there'll only ever be a niche market for computers".
    And hey, what am I typing this message on?

    And then there were the guys who developed the ARPAnet (the forerunner to the world wide web) to share their ideas/work/knowledge without the need for being in the same building.
    Some of those guys at the MIT thought "Hey, businesses could use this as a selling tool. Joe Public could use it for knowledge, entertainment etc"
    No, it won't take off the ground most said.
    Hmmmm.....

    To all the anti-doom & gloomers out there, it's time to think outside the box. Start reading up on things like Peak Oil, GAIA theory etc
    There are just too many of us, using too many resources.
    None of what the government is doing right now will help us long term!

    #40 Guy Croft - all this guff from the Republic Of Westminster, doesn't matter a monkeys anymore - I couldn't agree more!

    I'm with the Mullerites (the new Luddites?) on this one. Time to set sail off the Somalian coast, me thinks, and formulate a plan for a new social movement

  • Comment number 68.

    # 59. Umpire50 wrote:
    "I'm getting sick of people banging on about an 'unelected PM'2

    yeah, be fair, but no-one with half-a-brain ever liked Brown

    GC

  • Comment number 69.

    #55

    Agree with this.

    I too am concerned about how these corporate bonds are going to be valued when bought by HMG. Bank valuation in their books? That value minus 10% , 15%, 17 1/2% for cash, or even 25% - 40% ALL STOCKS MUST GO?

    We (the taxpayeras) are a big, big, bulk buyer here, and must surely get an astonishing good deal, or I will be very, very disappointed!!

    Who is the haggler working on our behalf to get the best deal for us? Where is the HMG valuer/financial analyst/broker setup?

    Now that HMG are truly deeply involved in this financial jungle, do they have the experts to get things right in that world?

  • Comment number 70.

    Astronomers talk about background noise out there beyond what we can see. That's the feeling I get about the underlying current of these many comments.
    We are adjusting to the new reality of a global economic shift and our attempts to pretend it wasn't really happenning has been at least a contributing factor to the type of recession we are in.
    This shift means we will emerge from the mayhem, gazing upon a very different economic order, which the IMF recognises has already taken place.

  • Comment number 71.

    "And some would say that the UK's mediocre economic performance through most of the post-war years stemmed from a failure to properly delineate the responsibilities of the Treasury and the Bank of England."

    Actually I'd settle for a bit of "mediocre performance" right now. That's a lot better than what I fear is going to happen....

    I have no problem with printing money in these circumstances. The banks are lending less, so money is not circulating as fast, so we need more of it just to keep the economy going - that's not inflationary (unless the banks start lending excessively again which seems unlikely).

    Not sure about buying any old commercial debt though. Good companies, yes. But those that loaded up with debt during the bubble (private equity buyouts etc) should perhaps just be put in some kind of administration and re-structured.

  • Comment number 72.

    Hi,

    With all our tax payers money being spent, I don't see any benefits to the tax-payer.

    Why pay billions to the banks to pay there debts and high wages, why not pay off the account holders debts(even mortgages) so they have got money to spend. Would of had a better effect than giving to the poorly managed banks, now we still have debts and the banks have had a freebie, no benefits at all.

    Same goes to Car Manufacturers, if the cars were not so expensive to buy, repair, maintain and run more would be sold, bailing them out gives them the impression that they can do what they want when they should be improving the way the operate.

    If you ask anyone who should of recieved the help, the people or businesses, guess how many will say businesses...

    These debt are all there faults, poor management and desperation to make a profit at any cost.

  • Comment number 73.

    # 44 jd6969preston

    You've hit the nail on the head. The absolutely, crunching fundamental point about this crisis is that we citizens (not all of us, of course) are monstrously over-borrowed. Too many of us have borrowed too much, with little prospect of repaying debts anytime soon; some folk will be bankrupted. That's it.

    Throw in 10 years of chicanery by the bankers, ably assisted by the incompetent regulators and championed by the tax-grabbing politicos and you have a disaster waiting to happen. Hey presto; disaster it is then.

    The flawed borrowing/lending system is now collapsing around our ears. Unless and until the situation is wholly unravelled and we are able to get back to a stable, sustainable system of borrowing/lending then this crisis will continue to get worse before it gets better.

    Attempts by our political elite (ha!) to re-establish the borrowing/lending status quo ante are akin to the actions of knackered old generals trying to fight the last war. Remember what happened on The Somme?

    It's going to hurt like hell weaning ourselves off all of the pointless, debt-fuelled consumerism that we've "enjoyed" over the past decade and more, with thousands if not millions of people living well, well beyond their means. And this is what both baffles and scares the politicians, because they don't have any answers to the problem (none), but they can (just about) imagine the consequences of those millions of people having to adjust to living within their means. The word 'struggle' comes to mind.

    Take a look at what struggling citizens are already getting up to in Iceland, China, Greece, Eastern Europe etc, to understand why there is an air of mild panic about Supreme Leader Brown's actions and pronouncements these days.

    New car anyone?

  • Comment number 74.

    #58

    GRIMUPNORTH77, there is one caveat to your neat synopsis -- the Govt don't ultimately care about you and I, but only in keeping their mega-rich chums afloat.

    Hence they give them all the money under the sun, whilst labouring us with even more of the debt (in the form of taxation).

    Fundamentally, the Big Business are colluding with some Govt ministers/agencies to rob the people.

    As, Brown himself said yesterday, they are trying to create their new world order using our money.

    The conspiracy theorists were right.

    How long now will it be till people start to fight back -- e.g. is there to be a 2nd American Revolution / Civil War?

  • Comment number 75.

    # 59 Umpire50 wrote:
    I'm getting sick of people banging on about an 'unelected PM'.


    But in this case Blair promised to stay as PM for a full term if labour were elected.

    So as blair is no longer PM, then the term for which labour was elected must be over...

    The only good thing blair ever did was keep gordon out of the top job - then it transpired that blair couldn't even do that reliably.

  • Comment number 76.

    New Improved Plan D sorted (with added sugar)

    Don't you worry yourselves about minor details, 50 billion is an extra large amount to cover all of the various bank losses (including toxic sub-prime debts, credit defaults and derivatives etc) and will surely trickle down to the rest of the economy (businesses and individuals who pay taxes).

    It will stop unemployment, home repossessions, bankruptcies and insolvency's from growing exponentially.

    The credit markets will flow like a river and high street spending will go mad crazy again. Houses prices will go boooom.

    It is better than Plan's A (lending) and Plan B (nationalisation) and Plan C (insurance) and if I'm lying I'm flying (no bull).

  • Comment number 77.

    #52
    Rahere has an interesting problem - he shares the same name as a leading US financial commentator, which has led to interesting situations in the past. Fortunately, Rahere's guardian angel has steered him past the problem, although he is told his cognomen will to this day never understand how he presented the presentation he intended to make to the main board of a UK bank although he was stuck on the wrong side of the ditch: it's partially that the average bank board member knows his own close circle, but nobody else, and bankers are quite happy if they hear what they want to hear, which is quite predictable, as RP knows.
    We have an interesting game in the office, take the pictures of influential politicians and ask people to name them, people like Carl Bild, Javier Solana and so on and so forth. They can't.

    That being said, as far as this RP report's concerned, Rahere's going to break with tradition, having thought about it a bit. This one might actually work, and won't be any worse for the UK economy than not doing it. What's actually happening is that Plan B seems not to be working either, and now HMG's finally owning up to having broken the banking system, at least they're providing a viable alternative as long as it's accessible in practice. Examine what happens if a company goes bust: it's debtors get stung, and its creditors see their cashflow crucified. That hurts them, and risks dominoing them into the same boat. The loss hits inflation anyway as they try to recover it, and their own credit capacity passes on the hit through their reduced bank holdings. On the other hand, if HMG takes the hit, then nobody else gets hurt, and maybe this will work. The biggest problem is that it's not going to reach the small people who are most exposed to the pasting and who form most of the economy. CP starts at a million, and your friendly neighbourhood hardware wholesaler supplying these bigger body doesn't have access to the safety net, making it easier for bigger business to abuse the minnows.
    Perhaps a more interesting alternative would be to start reverse-factoring their payables, at least we'd then know it was only indirectly assisting their losses.
    Let's hope it works and is in time.

    #59
    I think your own list explains your mistake - look at each of them and weep.

  • Comment number 78.

    So the government is going to print money and create inflation, to devalue to money owed by debtors. I suppose this will help companies with existing debt (at the expense of savers), but it will do nothing for companies that want to borrow new money to expand.

    Although inflation will erode the principal for existing debtors, it will cause interest rates to rise and decrease the present value of future income. So heavily indebted existing companies will be helped at the expense of entrepeneurial companies that want to expand to take advantage of forthcoming opportunities. So yet again, the government's actions will create some favourable headlines, but by blocking the creative destruction which should be a useful feature of a downturn, they will imperil future prosperity and delay the eventual upturn.

  • Comment number 79.

    We is in danger, I'm off to ALDI's to stock up on porrdge, baked beans, canned food and a billion crates of mixed red & white wine. See you all in hell :-)

  • Comment number 80.

    By the way - gordon backed out of that other election because he 'wanted more time to set out his vision'.

    Hasn't he done that yet? If he has, then we can have a general election to let him know what we think of it.

    But if he hasn't, then after over a decade in the cabinet, I think we have to assume that he hasn't got and never will have any 'vision' to set out. That he is just a chancer who presents himself as a 'leader' when infact he just rushes to the front of what ever random events happen by.

  • Comment number 81.

    For those who may not appreciate or understand percentages:

    Share price = 100

    Loss of 50% in week 1
    Price at end of week 1 = 50

    Gain of 50% during week 2
    price at end of week 2 = 75

    After 3 more weeks of seemingly matching losses and gains, the share price would be around .....6.

    Which is why right now seeing RBS at top of the Beeb's list of top 10 gainers is just no news at all.

  • Comment number 82.

    I’ve just worked out what a tax payer is!

    An inanimate object used by the rich to pay for their mistakes, an endless stream of slaves that capitalism will extort (via DEMOCRACY) in order to keep the rich in a lifestyle by which they have come accustomed!!!

  • Comment number 83.

    I would beseech you all in the 'bowels of Christ' to allow the inevitable to happen NOW... have the Authorities expand the Money Supply by printing notes.

    Lesson fron History : Germany, end of 1923....bank note presses operating numbered 1,783 at 133 printworks. There were worries when the print workers went on strike.

    Let the UK prepare properly:

    1. Nationalize De La Rue, manufacturer of presses.

    2. Have press workers sign a 'NO STRIKE ACTION' contract.

    3.Instruct HMG to buy shares in Price Gun Companies.

    Inflation is Janus-like. Let's concentrate on her virtues for a change. I am being serious.

    I see that GouchoMarks1 is blogging on this site.

    Didn't his namesake say : These are my principles, and if you don't like them I have some others.

  • Comment number 84.

    on 27th January Robert Peston wrote.

    "These measures have been given the label "quantitative easing". But this seems a very unhelpful badge, since economists seem divided - in a theological kind of way - over precisely what it means."

    However it should have read:

    "These measures have been given the label "quantitative easing" (by the scaremongering press who have been waiting 15 years for this to happen).
    But this seems a very unhelpful badge - (if not convenient), since economists (financial blaggers) seem divided (don't know) - in a theological kind of way (Theological? don't make me laugh) - over precisely (nothing is precise in Economics) what it means (it? - what do you mean it, everything, the meaning of life?)."

    Robert, I am normally an advocate of your blog, but this heading into financial fantasy land - along with all the ficticious money we've all been spending.
    Instead of trying to make the stupid look clever, why don't you get back to fundamentals.

    Economics is not logical mathematics - and will never be. Why we are still applying logical maths to it I will never know.

    We're in this mess because people can't get their heads around the risks. Every single risk model used by every single bank is based on PAST SCENARIOS.
    As most human-beings (non-Economists) know - past events are very rarely a reflection on future events. Their modelling is false.

    This whole joke stems from the Capitalists attempt to cover up where profit comes from. By attempting to 'price risk' these Shylocks can justify charging interest for doing nothing other than owning the means of production.

    That means there is no control about what is charged and by who - and now we're really seeing the inability of the market to correct itself logically. There may be low central bank rates today - but there aren't many loans available at competitive rates.

    This is because the fools (the lenders) have gone from underestimating risk to over-estimating risk - mainly because they didn't understand it in the first place - and still don't.

    ...and now the Government has convinced itself that it can understand risk better than the banks. Sadly this is NOT the case and will more likely than not end in disaster.

    THE BANKS ARE IN COLLUSION WITH THE GOVERNMENT TO ENSLAVE THIS POPULATION.

    If you don't believe me, then ask yourself this question - what would the biggest banks in the country need with all the rolling stock for the railways? and more importantly, why would the competition commission be investigating them for unfair pricing?

    Answer - because this is the goal, every time there is an over inflation the public looses more and more of it's capital to the banks or corporations.

    Your Government is implicit in it's colusion with the Banks to work against the population.

    They (the banks) already own the railways, the motorways and the highways through PPi - now they're coming for your home and your savings and pensions (through inflation).

    ...and of course they own the Government too.

    Don't take my word for it - check it out at the link below. It's scary stuff when you read the blatancy of it all.

    At least we saw Hitler coming - this time we're being annexed and nobody has even noticed.

    'http://en.wikipedia.org/wiki/Rail_transport_in_Great_Britain#Leasing_companies_.28ROSCO.29'

    How can you trust a Government who is supposed to regulate the banks - and by it's own admission - didn't?

    We can only believe incompetence so far - beyond that it must be deliberate and calculated.

    I am very scared about the future - what will happen in 2010 when the Police won't work for the money the Government is offering because inflation makes sterling effecively worthless?

    We see it happening in Zimbabwe - there's no reason why it cannot happen here too.

  • Comment number 85.

    #4 and for good measure a repeat at #9 leomissruislipranger

    So just the 80% down on the year now....... yep great news

    Let's go back to talking it up again and ignore reality........ our kids can sort that out later

    I'm getting a little fed up with the over use of the word CONFIDENCE, which ever way you look at it things have to change and the first is going to be our delusion that we are a wealthy nation!

  • Comment number 86.

    I don't really care for the abuse that I'll receive for writing what I'm about to so I'll go ahead and do so anyway. I'm happy to live with criticism from the arrogant few who have the misguided perception that they know everything.

    For a while I supported the views of people on this blog but I recently made the decision to stop reading the comments made on here; it was simply becoming too depressing to read the opinions and unqualified analysis of wannabe economists.

    It is evident the arrogance that is now enveloping those here who seem to think they know more than the man on the street. If people were to take a look back at their comments in a few years' time, they'd probably laugh at themselves. The prophecies of doom are actually hilarious at times.

    I know that a lack of confidence is far from being the only reason for this mess but I just can't see how it helps to get bogged down in doom and gloom over it. What will be, will be.

    I really don't want to sound like a preacher but I can't understand why people don't just get on and enjoy their lives. I think it is a shame that people would allow the problems in the world economy to get in the way of simply doing what makes one happy. Putting off plans? Making unnecessary cutbacks? What is the point?

    Fair enough, if you're being seriously affected by the recession then you've reason to be alarmed, especially if you're financially unstable. But what percentage of people writing on this blog are being financially impacted by this? I doubt there are many.

    Surely it is important for those unaffected by the crisis to do their bit for those who are suffering? We are insulting those in real trouble by tapping away at our keyboards and predicting meltdown. Can't we find some optimism in all of this?

    I apologise for taking this stance but I'm just fed up this amateur speculation of doom. I read this blog today in hope that people's attitudes would have changed since I boycotted it.

    Sadly, I was wrong.

  • Comment number 87.

    On the other hand, Robert, when the BoE and the FSA and the banking system are left to their own devices by a government obsequious to the free enterprise system -

    result pandemic misery!

  • Comment number 88.

    "What's in a name?" Mervyn King seems to believe that a monetary policy will not be a monetary policy if it's called something else.
    Not so, "A rose by any other name may smell as sweet" but the change of name of a monetary
    policy carries with it strong whiffs of financial
    chicanery.

  • Comment number 89.

    Robert, an informative article. Regarding the BoE independence; who appoints some of the MPC's members? It's Brown, isn't it? Was it not Brown's stooges that voted for a rate cut, against Merv, in August 2005 just as house prices were starting to drift downwards?

  • Comment number 90.

    81. At 1:16pm on 27 Jan 2009, ThorntonHeathen wrote:

    #major revision, due to mixing days and weeks...doesn't time fly when you are having fun!

    "For those who may not appreciate or understand percentages:

    Share price = 100

    Loss of 50% in week 1
    Price at end of week 1 = 50

    Gain of 50% during week 2
    price at end of week 2 = 75

    After 21 more weeks of seemingly matching losses and gains, the share price would be around .....6.

    Which is why right now seeing RBS at top of the Beeb's list of top 10 gainers is just no news at all"


  • Comment number 91.

    # 86 randomaccessandy

    I can understand your point, but adopting an ostrich-like approach to this situation probably won't help. Too few people are grasping the enormity of the mess that we're in, or the futility of our politicians' attempts to crank us all back to our previous, ludicrous levels of indebtedness (which seems to be Gordon Brown's world-saving strategy).

    Right now, the collective behaviour of our citizens is rather like the proverbial drinker who can't/won't accept that he's an alcoholic. Only when he wakes up in the gutter one morning, covered in the contents of his stomach, does he twig that he could have a problem.

    Similarly, under Supreme Leader Brown's glorious leadership, we're now careering towards the most seriously bad economic and social circumstances that anyone can remember, possibly unprecedented, and set to last longer than most people care to imagine. It scares me to death: for me and my kids.

    Like the drunk/alcoholic, my view is that the majority of British people still don't quite see the depth of this crisis. Could you be one of them?

    Solution to the problem? Only a massive transfer of resources from Gordon Brown's beloved 'Client State' to the wealth-creating, profit-making, tax-paying private sector will rescue this country. Anything else is either delaying the inevitable or a smoke screen to save politicians' necks. We're getting both at the moment, so the problem is just getting worse by the day.

    Sadly, as you'll see from this article, we've one hell of a long way to go yet: http://tinyurl.com/dblytd




  • Comment number 92.

    Having just read the imf report from 15dec2008
    (I should probably have read it before)
    It seems the government is following it to the letter
    Confidence is what it calls for so that is what HMG called for.
    Give money to the poorest sections as they are more likely to spend it (fiscal stimulus), they did this by bringing forward child benefit increases.
    Stabilise financial systems by removing the fear factor of toxic debt, they are in effect buying this debt.
    Bring forward projected infrastructure spending etc.

    HMG seem to be pretty much on message with what the imf were saying.

    I like the last bit of the report though

    'All around the planet, the people of the world have reacted to the crisis with feelings going from surprise to anger and from anger to fear. It is our responsibility to help building a world based more on humanity and cooperation than on opacity and greed.'

    what that means is anybodies guess but it sounds nice.

  • Comment number 93.

    re 86

    To some degree consumer confidence will be a key factor in the recovery when it comes. To that extent a sense of not being too pessimistic is useful.

    However many people, whilst still, employed are wondering if they will lose their jobs in the next 12 months (and beyond). These people (and I am one of them) are going to be prudent with their spending plans as right now it is a very bad time to be looking for work.

    Many people have investments and are wondering what the best course of action is. The more one understands what might happen and the causes the better placed you will be to decide on the best investment strategy.

    Unfortunately right now if you can see green shoots in the economy then
    a) you will probably have grown them yourself and
    b) probably also smoked them as well...

    Whoever has stable and secure employment can afford to say well I'll just get on with things pretty much as normal… but even their pensions are likely to effected .

  • Comment number 94.

    I think this is great news.The Bank of England's remit is not just to control interest rates, it is to minimise inflation and to keep the economy growing at 2%pa.
    Clearly corrective action is required and that is what is being done.
    And despite the whines from the passive-aggressive demolition Tory doomster brigade, there are signs that we are getting back on track.
    Well done B0E and well done to Labour for giving them tools to do this with.
    However bad it may seem , it would have been a heck of a lot worse if the Tories were in power right now and for that we should all give a big sigh of relief.
    Full steam ahead!

  • Comment number 95.

    "86 randomaccessandy

    I could not have worded it better myself..i read this blog daily and must confess i get so depressed at the 'hopeless void' we are all supposed to be facing....... that after reading it i need a strong coffee and a ibuprofen.....

  • Comment number 96.

    No59 Umpire50
    I would not be to concerned about those that refer to the PM as being unelected. They are, in the main, rather dim and political backward to say the least. They are probably unaware that approximately 50% of the members ot the British parliament are unelected.

  • Comment number 97.

    All very technical stuff designed to baffle the ordinary man in the street of course.

    What it really means is there is not enough money in the system to pay the country's obligations and unless every other country did the same will eventually lead to a collapse of sterling and high inflation.

    The value of our money will be diluted and unless wages rise in line with inflation we will all be much worse off.

    As inflation rises so will interest rates so anyone with a mortgage or loan who is benefiting at present will find this shortlived before their next rates hike.

    The cost of council tax and public utilities will all have to rise unless the government starts to cut back on public spending .

    The weakness of the pound will make everything that is imported which is just about everything we consume much more expensive.

    Anyone who thinks that printing money is the saviour of the economy should think again. How many more increases in their cost of living can they stand without an increase in their wages.

    We are now at the point of no return and if some are suffering hardship now this is nothing to what lies ahead.




  • Comment number 98.

    Rather that attempting to recapitalise the entire banking system, perhaps the BoE should look to recapitalise a select few, to the extent that they have no excuse to not start lending again? Look to the ones who were less open to excesses in the previous debacle and enable the good, responsible lenders to lend again!

    As for the irresponsible ones, let em hang!

  • Comment number 99.

    86,

    Bang On there mate, thought the same some time ago.

    History will take care of Peston's blog :-)

  • Comment number 100.

    Print money. Deflation is the opposite of inflation. Replace credit with paper money.

    Then restrict bank's ability to lend fractionally. 100% reserve banking.

    No more booms, no more busts. Just people trading with one another.

 

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