Central banks to the rescue
The Bank of England and other central banks have announced massive financial help for the banking system - which has been seizing up because of fears of further bank collapses.
They are taking co-ordinated action to lend vital funds to banks for a week, to tide them over till some kind of stability returns to the banking system.
The Bank of England's share of this will be $30bn in one-week money, to be auctioned today, and $10bn of overnight money.
Perhaps more importantly in a UK context, the Bank of England will also on Monday auction a substantial £40bn of three-month loans (which is what I've said in recent blogs was necessary).
And banks will be able to swap their hard-to-refinance mortgage assets for these three-month loans.
This should bring three-month interbank interest rates down a bit, and reduce the pressure on banks to increase what they charge us for finance.
Also, it should reduce the risk that weaker banks will topple over, because of the difficulties they're experiencing in raising funds from the banking system and wholesale markets.
The central banks are responding to a couple of shocking events last night - neither of them completely unexpected, but both of them chilling.
The Republicans in the House of Representatives decided to blow up the Paulson plan.
And although there'll be desperate attempts to put it back together today, my examination last night of whether the $700bn Septic Bank will do an effective job of detoxing the banks and quarantining the poison, well that may turn out to be academic.
We may have to start wondering again what the financial world will be like without the Septic Bank.
There was a glimpse of that overnight, when we saw the biggest banking collapse in US history.
Washington Mutual, the giant mortgage lender, was seized by regulators. That will lead to massive losses for holders of WaMu's shares and bonds - even though JP Morgan has already acquired many of its assets for $1.9bn.
It's by far the largest failure ever in the US With $307bn in asssets, it's 10 times the size of IndyMac, which went down in July.
Think of it as some kind of horrible Olympic record, since the biggest bank failure till today was that of Continental Illinois in 1984.
Bottom line of all this is that the Age of Anxiety is far from over (but then I never thought it would be, even if Paulson's Septic Bank were built).
UPDATE, 04:00PM: A quartet of central banks have given the White House and Congress a few days to sort themselves out, with their co-ordinated action to lend tens of billions of dollars to banks for a week.
Will that be long enough for a workable rescue package to be agreed by the squabbling legislators?
Well, President Bush's remarks a few minutes ago weren't exactly reassuring, viz: "the proposal is big and the reason it's big is because it's a big problem".
Okay. I don't know about you, but I am not sure that provided great grounds for optimism.
The most powerful politician on the planet also said: "there are disagreements over aspects of the plan, but there is no disagreement that something substantial must be done."
Hmmm.
Is it time to put all our money into gold coins, baked beans and shot guns - or those essentials for a severe recession as famously recommended by Jim Slater, the investor who helped to engender mayhem in the British banking system in the early 1970s?
Surely not, though I might buy a couple of extra tins this weekend.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~43~RS~)
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It will be interesting to see how much banks are prepared to pay (in interest rates) for 3 month money [£40 billion is a lot!]. It will also purchase information for the British taypayer about which banks are most affected, most in need of cash.
How do we stop someone taking this money out of Britain in suitcases?
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Robert
How similar is this problem to that of Japan in the early 90's. I seem to remember that their banks lent massive amounts of money on the value of land which effectively bankrupted them and stalled the Japanese stock-market for years.
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I never believed the plan would work in the first place - they are just throwing more good money after bad.
It's all a bit like that film Deep Impact. Eventually people will come to realise that all those clever people in charge cannot actually stop the meteorite crashing into the earth.
I am fully expecting to see a run on all banks next week and the shops rapidly running out of food. All those disasters from around the world you have watched on TV - now it's your turn to feel like what one is like.
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If you set aside the air of panic, and really think about what's being proposed ... that the US government (taxpayer) buys all these bad assets from the banks ... well, it's ridiculous isn't it?
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This sounds all very serious, but I wonder who it is that should be sitting round the table. Using the school playground as an analogy: What it seems is that the children (bankers) won't play ball nicely with each other because the ball keeps going over the fence. In order to stop the squabbling the teachers (government FSA etc) throw more balls for them to play with. What any teacher would do would be to get the children together tell them how to behave and once they start behaving themselves, then and only then are they given a nice ball to play with.
A bit of short term strict regulation is needed, which can be relaxed as and when the bankers start to act sensibly. The bankers should be round the table making suggestions how they could play together again, whilst accepting that their old game cannot go on. A totally free market will take too long to sort the problem out.
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It is clear that none of this will go away until banks are prepared to pay the "retail/business" saver enough interest to make it worth their while to save.
At the moment the price for lending money is not enough to keep up with inflation
This means that borrowing rates will have to rise
There is safety in large numbers of savers and danger when you rely on a few wholesale providers of money.
Rather than have the taxpayer forced to lend to these basically incompetant banks why not make them compete for the taxpayers cash by borrowing direct from Joe Public, and pay a proper price for borrowing it.
If the state is worried that increases in borrowing costs will damage the economy let them make interest earned tax free for a while.
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after building up such a plan, to lose it will cause a massive stock market fall-off.
all bad news, even if it 'saves' US taxpayers the $700 billion. the loss of a recession will be much more if no deal is done.
Pumping cash into the system does not seem to be working or really matter.
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The logic of propping up the weaker banks with this 'new' intervention may work.
Would it be sensible to suggest that this strategy might be to gradually allow the weaker banks to fail over an extended period, so there is no simultaneous meltdown ?
This would seem to be the safest way to let the weak banks go bust -and they will have to- otherwise we will be perpetuating the 'idiots' at the expense of the 'wise'. Eg the difference between Lloyds and HBOS.
We've got to let 'the market' or 'natural selection' get rid of those who didn't make the 'best' strategies. Otherwise we will be doomed to make the same mistakes again, only next time they may be bigger. And that would be really quite BIG.
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Dear Robert
One thing is ceratin, there is now no leeway for banks, i'm affraid that i want it to work, for the sake of all those who will loose out .The cure has not been found, nor has the reason why it started in the first instant.-----Those who created the problem are the ones who are being baled out at tax payers expense, and as it is NOT their money they will think they have an open cheque book
Sorry, i cannot see it working and will stick to my prediction of a massive stockmarket fall.---- BECAUSE OF GLOBALISATION, individual nations are no longer incharge of their fianances. as has been proven.
Under Globalisation the financial markets are open to Terrorist fianaciers, who have and will manipulate the stock markets, against the West, and if this is the case then there will be more market down turns.
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Why is all the talk centred on USA?
The UK government has over extended itself with lots of borrowing from the future to build lots of hospitals and schools.
The UK government also allowed massive borrowing to buy houses and then to borrow again against the increase in value of housing. Also credit card borrowing was allowed to get out of hand.
This all happened because the formula given to the Bank of England by Gordon Brown to calculate inflation, did not take into account housing costs i.e. mortgage costs and council tax.
The UK should also get its house in order, as well as the USA.
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What is even more terrifying than the American muddle is the total inaction on the part of Brown and Darling. I share the concerns expressed by Robert Peston that Gordon Brown has sounded much less than well informed on the detail of what is happening in recent interviews. He now seems to think that sound bites will solve the problem and the Americans will sort it all out.
Meanwhile even the Bank of England seems to be slow and reactive in its money market activities
Given that we are heading into the weekend with little prospect of 'septic bank' getting off the ground, we ought to be hearing something positive from Brown and Darling about how the UK intends to halp its own banking system. Failure to do this will demonstrate that there no understanding in governement circles of just how worrying this is for everyone in the UK.
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Its a pity that when leadership is required, neither the US or the UK has what is needed.
Yes its a mess, but working out who to blame is not what is required right now.
What the populace lacks is knowledge of what it is like in a financial collapse.
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It is not the system at fault, but the incompetent greedy people who have been operating it. Markets need morals, and regulators who are not asleep on the job. But if the politicos adopt such laissez-faire attitudes as the Bush and Brown governments the regulators are bound to be timorous. Then, as we have seen , the greedy and unscrupolous take advantage.
For example, it is common knowledge that insider based short selling has been going on, on massive scale , for years,but neither in the US nor UK has there been anything but tokenism in investigating it. Similairly, with irresponsible mortgage lending, but for political reasons our leaders became commercially deaf.
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haven't we been here before, central banks flooding the market with money? (Where does all this money come from?) It has not worked before and there is little reason to think it will have a positive effect this time, surely they will just take it and keep it to themselves as before.
Today is building up to be "black friday" Washington Mutual going overnight, means we are nowhere near the end, there are still financial companies out there in big trouble. The iconic picture of Paulson on his knees is worth thousands of words......
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The object of policy should be to work towards an orderly deconstruction of the stupidity of the last decade (or more) chucking money at the problem like a fool will only retain and entrench the management and senior staff that caused the problem and these must all go.
Money should only be lent to institutions whose senior management undertakes to take no salary and bonuses for the next five years, or leave now without compensation or pension.
No matter what is done we are all in for it. Shares in a soup kitchen anybody..., anybody... - no takers eh. see what I mean, we are in for it!
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We are in the now familiar scenario in which we are doomed if we do and doomed if we don't.
The Sceptic Bank should be called Hobson's Bank as we really have no choice about it. I am not convinced about it at all, but at worst it can be part of the tool kit for repairing what has gone on.
I do feel that the way our political leaders are waffling around the subject, still trying to score points of each other, is just not helping to calm nerves.
If ever there was a time that leadership was needed then this is it. However, all we get is the same old posturing.
I fear this is going to turn very nasty because the poseurs who have elevated themselves into positions of influence are way, way out of their depth.
Indeed, it is this weak leadership in our governments and financial institutions which got us here in the first place. One is starting to understand how it was the Weimar Germans sought a strong leader in the Thirties.
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For the non-financial listener, I don't feel that your report was quite clear enough. You say that some banks and others are hording their 'cash'. Clearly not bank notes! So where is it horded? I am a retired banker myself and I feel that the general public needs to understand the mechanism better. I assume that banks are depositing surplus funds with the Central Bank rather than lending it to counterparties on the money market, The central bank is therefore awash with funds which it, in turn, lends to banks short of liquidity. For the tax-payer, the issue therefore is that the B of E is taking on the risk of counterparty failure instead of this risk falling, as it should normally, on money market participants; or have I got this wrong?
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I suppose this is not the best time to query the recoverability (or non-recoverability) of credit card debt by banks - with a recession coming surely this will open up a whole new can of worms ???
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Does pumping all this money into the markets have the same effect as printing money? Will inflation now increase its upward pace? Or will it be balanced and held in check with mass unemployment?
Will importing and exporting become more difficult and less profitable? e.g. Car sales already decimated will now become fond memories.
Will commodity bubbles create froth within the market as money will have no solid permanent home? Lots of bubbles bursting ? like listening to freshly poured champagne.
With no short selling for 3 months, will share prices increase in an un-natural way, thus leading to a predictable collapse when short selling returns to correct the market?
With UK leading the EU personal debt league at well over a £trillion, will the UK see a merry happy Christmas this year or will the high street look like the recent panicked trading floors; traders running in panic with wild eyes with no one to sell to?
My wife by the way has always called me an optimist!
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#4 - sagamix
Absolutely! Why on earth would the taxpayer want to buy toxic debt from the companies that have generated it? Just so they can feel free to do it again? Do they get bailed out then too?
These banks are in a mess of their own making, but not all look terminal. I think we should just stand back and let the strong devour the weak.
Redundancies are unfortunate, but then these banks have expanded over the past decade based on perceived "economic growth" and "assets" which were all smoke and mirrors anyway, so maybe this inevitable contaction will just get them back to the realistic, sustainable size they should have been anyway?
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if paulson's plan does not go through today, i will close my savings bank and buy gilts.
seriously.
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Dear Robert
I enjoy reading your views - regardless of whether I agree with them or not!
However, I have one request; please refrain from the overly repeated use of your own terminology for the U.S. rescue plan (Septic Bank).
You have already lost the race to receive the acclaim of a new entry in the OED - as you know, the wider financial press are already widely referring to it as TARP (Troubled Assets Relief Program). Googling "Septic Bank US debt" returns 76 results, the same search using "TARP" provides 22,900.
Please do not make a complex subject more complicated by using your own terminology. If you don't refrain, it will appear that your own ego is more important than providing clarity for your readership.
Thank you.
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If the majority of the 'profit' produced by the global financial system was actually being fed into the wider economy ie supporting the development of businesses, paying savers' decent interest and improving pension funds then a global meltdown would obviously have apocalyptic consequences.
What has become clear over the last few weeks is that this 'profit' is actually just feeding back into the financial system itself - generating huge profits for banks and bankers out of thin air - with only about a third of it actually finding it's way out of this closed ecosystem into the 'wider' economy.
Therefore would 'meltdown' be such a nightmare scenario?
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If the banks are having to pay so much more money to borrow from one another, why aren't they offering us higher rates on the money we deposit with them? If LIBOR has gone up so fast, surely it is now significantly cheaper to attract retail investment by offering better rates to savers?
Maybe those of us who saved through the good times (instead of spending it all on overpriced property and luxuries) should all withdraw our savings until such a time as we are properly rewarded for our prudence!
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Surely all this turmoil will continue until the system is stable enough for all the cash floating about to find homes for more than a day or two. I suspect what this means is that interest rates need to go up by half a point or even more. Of corse this will further deflate asset prices but they have some way to go before they reach what they are worth. But that also means that a correction is needed throughout the asset value chain- ie development land must come down and old run down property will be next to wothless etc.
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There are different objectives and we have to be clear what we are trying to do.
The first objective is to get the system working and avoid making things worse - it's key we do that first or we all suffer. This is time critical.
The next objective is stop it happening again, this is putting in place appropriate rules and processes - this will take some time, however they have been working on it for over a year.
The third objective is to penalise those people who got us into this mess and are still making it worse by their bad behaviour. This is not time critical, but it needs to be made VERY clear that this is going to be done and monies taken unfairly will be returned.
So the key thing is HOW DO we get things working -
make cash available,
threaten the bankers who are not playing ball,
make it harder to re-possess houses,
encourage people to reduce debt,
keep interest rates 'high' for another month or so
look at alternative ways to make cash available to the non-banking market.
Any other ideas?
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I don't see why the Fed cannot adopt a similar plan as the Special Liquidity Scheme used by the BOE. Allow the banks to swap their toxic mortgage securities for treasury bills at a penal rate for an extended period of 3 years. The ultimate liability remains with the banks, but liquidity should return to the markets. If/when the mortgage securities return to their book values when the housing market turns around the banks can swap them back at the same rate. The problem is liquidity because banks don't trust each other's ability to fully underwrite their debt. It should only require the FED to effectively underwrite the banks to bring back confidence to the markets. If it is more than this and the banks want the FED to purchase debt at a higher value than what is worth now or in the future then this then becomes a solvency issue with the banks and the bailout is to stop wholesale bankrupcies of the banks.
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I think people are over stating the problems.
The 700 billion dollar rescue plan will only buyout investors - Tax payers money should NOT protect investors. This plan is flawed.
Tax payers money should protect depositors. Guaranteeing their money is safe is all that is required. Simply put, there will be NO financial crisis that affects the public if this approach is adopted. Further more, no one will be able to gain from tax payers money if this approach is adopted. There will be bigger investor losses - but given the circumstances of greed and lack of duty of care by banks/investors they will get what they deserve.
If private banks then cease to loan funds, the easy option is to nationalise a bank, like northern rock, and provide state loans with good regulation. It would then be a do or die position for all banks. Again problem solved.
I'm surprised in these times there is a liquidity problems as such. Surely good bankers would be confident of their procedures even in times such as now and would be leading the way in gaining new business ? However, there seems to be a lack of knowledge of their business, shown clearly by the current state of affairs.
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Re the_fatcat (#23). The more I look at this the more I get the impression they are desperate to get back to where they were a couple of weeks ago - in complete fantasy land.
All the 'wealth' generated since deregulation seems to be to the detriment of the real economy and required massive house price inflation to keep it up. Thats gone and wont be back for a long time. Its not faith in the market thats required anymore its faith in the economy as a whole thats gone.
Is there an open computer model anywhere that we can play with on our computers at home to see whats really going on?
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Central banks in Europe, BOE and the governments aren't doing enough. Until these organizations acts nothing much is going to happen.
Also the other main problem we face is the green policy; its costing us too much with out much benefits. Government need to do value for money analysis and scrape most of the green taxes. Without these policies petrol price would not have gone up by so much.
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Yesterday Peston predicted that an expansion of central banks' lending at three months' maturity was necessary. Today it happens. Shouldn't we be asking if it's time Peston became chancellor?
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I might have missed something here but, if the problem is principally that of confidence, surely the solution is to legislate that every bank which runs out of liquidity automatically becomes the property of the state?
As a state-owned bank cannot possibly go bankrupt unless the entire state collapses, its problems with liquidity would immediately stop as the rest of the market would no longer have to worry about lending to it.
The banks would be incentivised to run a tighter ship as their shareholders would lose their investment in the event of a liquidity crisis. Furthermore, I don't see why the state would be out of pocket because confidence would return to its newly nationalised banks as soon as it took control of them. If these banks could make a profit before the crunch, then surely they can make a profit afterwards with the benefit of the state guarantee.
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Printing money. Germany 1920´s. Oh lordy.
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Seriously, how can Paulson's plan possibly work?
We have the Washington mutual going bust with assets, if that is the right word, of $307 billion. Thus we have one bank going bust with assets nearly half of the $700 billion so called rescue package!
Wouldn't it be far better to provide the banks with $700 billion in return for equity AND the dodgy loans? The banks would be free of the $700 billion debt, they would be liquid again and the taxpayer would own a large part of the banking system and may be able to make a decent profit at the end of the day on the deal from the equity and the dodgy loans that may have some small value.
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In a fiat currency system there is only one institution that effectively creates new money, the central bank of that particular currency. Although it is a complicated mechanism by which new money is created through fractional reserve lending etc., ultimately the control of the volume of money resides with the central bank. Growth and inflation are created from the expansion of the money supply. The root cause of the massive increase in debt and asset values(mostly property) is quite simply due to an excess in the supply of money in the system. It is not really the fault of greedy bankers, they will operate under the regulatory systems in place to make the most profit with the amount of money they are allowed to work with. The simple root cause of all the problems we are now seeing is the over-expansion of the money supply due to the flawed policies of the central banks and the governments responsible for defining the parameters they work within. It is politically expedient both here and in the US to shift the blame to the bankers.
The tri-partite system of the Treasury, the FSA and the BOE does not work, from either a regulatory or monetary policy perspective. Targeting a simplistic inflation measure alone is an ineffective means of achieving all monetary policy objectives, it is clear that money supply should also be considered and that monetary policy should be used in conjunction with fiscal policy and financial regulation to achieve the overall goals of economic growth and stability.
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Dear Robert
I have heard that anyone who is involved with PFI, Contracts is in a very serious position, "Why"?
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There are probably two kinds of bankers at the moment :
i) Ones who are desparately trying to bail themselves out of the sticky stuff.
ii) Ones who are desparately trying to figure out how they can profit from this situation.
If I was ii) I wouldn't be lending anyone any money. One because I might not get it back , and two because if a few of them go to the wall I can pick up some assets on the cheap. Bank of England auction ? Grab as much cash as possible. Stops i) from getting it.
Of course ii) might turn into i) - and there's the risk. But until a siginficant proportion feels that they cannot profit from this situation this will continue.
Of course, the actions of ii) will cause misery for the vast majority of the population and poentially damage the system. But why do they care so long as they are making a profit ?
Too simplistic ? Or simply wrong ?
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#1 - interesting thought. An exercise in GCSE maths !! £40 billion in £50 notes (the highest available denomination) makes 800,000,000 notes. That will fill a suitcase the size of a shipping container. Unless you are a Third World dictator or an American banker with your own aeroplane, there are not many ways to take that "suitcase" out of this country !!
Q.E.D. !!
It is fascinating to see so many people bleating on about "tax-payers' money" being used to save these banks !!
The reality is that the tax-payers themselves are broke and the only money available is that borrowed from other, wealthier countries !!
The problem will then be one of how the various governments propose to pay back these loans and, more importantly, will those other countries trust these governments to keep to their terms of agreement and not allow red-neck politicians interfere with their given word on political/prejudice grounds ??
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Deja Vu
Comment from SIB (the securities and investment board) consultative paper Nov 1996.
Short selling does require controls
because:
i investors may be induced to make disadvantageous investment decisions as a result of being unaware that a sale is uncovered and will have to be closed out by a purchase; and
ii the stock gearing effect of short selling, albeit temporary, may:
a accentuate downward pressures and de-stablilise the market;
b increase the scope for market abuse;
c facilitate speculative selling ahead of a secondary offer to the disadvantage of the
issuer/vendor by investors who know that a new supply of stock is about to become
available with which they may be able to close their short positions
Well we've learnt that lesson then........
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I hate to say it but it looks as if the only rational response is to buy gold!
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37:
I'd guess that PFI contracts are debt-financed - a bit difficult right now.....
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This is all starting to go over my head, but I can't see that this is going to work, or even if it should....
Now, I'm probably what you would call a 'right wing capitalist' but this is crazy. Obviously there has been a fundamental misconception of risk management throughout the banking sector.
Although I work in finance, I'm an accountant, not a banker, but I was taught the basics of 'risk vs reward' and the need for managed portfolio's. Was there any of this? Or did the fact that debt could be bundled up and sold on mean that no one had to worry about it, and they were willing for this toxic debt to be bundled up, repacked and sold on time and time again...
If thats the case. theres something fundamentally wrong with the system. It's that which needs sorting out before any money can or should be used for bail-outs.
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Found this link on what Sweden did in the early 90's when it was facing a similar crisis - do you think the US should take a similar approach?
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em
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How ever you dress it up, there is only one way to fix the problem. Recognize that worthless stuff is worthless, then move on.
You can do it on one big bang, or you can drag it out for a few years or. You can let those directly affected take the full hit and rely on the charity of the rest to survive, or you can attempt to do some social engineering to spread the pain around.
The real question is this: can the rest of the world learn to live without America faster than America can learn to live without the rest of the world? I suspect the answer to that is yes.
The intelligent thing to do is take the end of the American dream as a given, and start adapting now. Making Mandarin part of the core curriculum in all schools, worldwide, would be a good start.
The future is not America. Stop whining, and learn to enjoy living with that fact.
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If capitalism is to survive this crunch then the Fed bail out must be based on capitalist principles and not political posturing.
The Banks caused this problem, so if they want the taxpayer to bail them out then it must be done as it would be done by capitalists - assets are bought based on their market value and equity stakes at purchased at values that reflect riskiness of the asset - we should treat the banks in exactly the same way they treat their customers and the market.
It's about time they were taught a lesson for their profligacy.
And we shouldn't be conned into believing the financial system will collapse if we don't play ball on their terms. Whether the tax payers bails them out or not we the ordinary tax payer is in for a rough ride
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can we just be done with this mess and move on. it's dragged on for a year now with probably many more to go. we need some form of collapse in the system before a new order can rise up to replace this current system.
why don't we all help things along by withdrawing all our money out of the banks in the next week. also, we all delay our next month mortgage payments by 1 month.
that should give a nice signal to the banks that we contol them and not vice versa.
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Hi Robert,
Your recent blog posts have been very impressive and most insightful.
Certainly a step up from Radio One where Chris Moyles told his listeners to "embrace their stupidity" with regards to economics.
Keep up the good work!
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The $700bn plan, even if it is passed through congress, is probably too little to late.Paulson and Bernanke clearly feel they can do a JP Porgan and "stop the rot" but I think the situation has deteriorated far too much. The UK and the US had decided that a service economy, lead by financial innovation was the way to go and we are witnessing what happens when the finance sector fails to operate. This crisis is primarily a credit crisis, not an equity crisis as in the past. Nationalisation of the banks won't work as Northern Rock has shown, after selling off the best mortgages, they offered customers renewing their mortgages an increase of around 60% - good effort! We should all be prepared for a good bout of depression era living, unless the great and the good can engineer a nice winable war, look out Iran, Venezuela and North Korea!
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American and British capitalism and banking in particular are different from the European model.
We now have a scenario where all banks working the American derivitive version are up to their eyeballs in junk.
The wealth of a nation is not contingent on its banking sector and the USA woudl suffer some indigestion but not to the degree the touted via their lame duck president.
It is utter insanity to expect anyone to lend money without knowing if the gap filled is the the full extent of the problem or not. Its well.....prudnt, judicious, logical and certainly not rocket science!
Yet not one commentator or politician appears to have saoid to date that $700 billion is the full story.
No bank would lend to any company or individual without soem suppporting evidence and given this scenario is now being played in the public arena, the taxpayer should be told the full picture as well.
It seems strange when there is an agreed understanding that teh balance of economic power is shifting to the east yet everyone should expect to go to the west for their banking needs.
Industry has felt the pain of the shift yet banking assumed it was invinvible. That party is now over and if it means western banks shrinking eastern banks will take up the slack Business is buisiness after all.
This almost seems to be about demented ego's than logic. Banks misy either have fire sales and get their books in balance or go to the wall they do not need Federal money.
Lets also ask if banks are not prepared to trust each other why the hell should we trust them as a group.
Bush may be trying to dump the next possibly Democratic President, althouugh I sincerely hope that wont be the case as Obama has no knowllege or experience in anything and has flip flopped on too much to be trusted, with a noose that will give him one term only.
Main street America is right to get their representatives to question every last detail, whether the cost individually is $2000 per head or $2. Its how their incredible system of government was meant to work unlike the hopelessly inadequate totalitarian regime we are seeing foisted upon us her in the UK.
I say all power to the US Congress and Senate they have shown true democracy and real re[presentation of how main street really thinks. What a shame or representatives appear unable to say boo to a goose.
The banks can sort this out without government aid.
Members of Congress and the Senate Please let common sense prevail and ensure you do not wioe the slate clean for the banks.
Any compromise to the point where bank earnings are handicapped paying for the damage over say 10 years is way better than expecting the taxpayer to pay over 50.
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A Fed SLS type scheme would be as expensive (and that would be just one reason why it would be disasterous) as the Poulson Plan.
Reuters have put out that the Fed was lending $188billion overnight every night last week.
The faultering of the Plan and Washington Mutual's demise all came after the Dow closed last night. One would expect the Dow to take a fairly negative view of those two events which may give Republican senators cause to reconsider the Plan...unfortunately... time will tell.
As for our own Glorious Leader's performance. He has given the Poulson Plan his full support. Tad prematurely it seems.
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Cynical view.
The "market" should be forced to act as a market and follow the suggestion of another poster (sorry, too lazy to find the number) and let the "strong devour the weak".
The $700bn rescue bid should not go through, the weak banks should fail and then the strong ones (if there are any left) should take over.
Yes it will be hell for quite a while and people will lose their jobs etc. (probably including me) but stuff happens.
If the people that caused the situation are bailed out and endure no negative effects it will happen all over again far more quickly than people think.
And to be honest, is this not the absolute result of "The American Dream" in reality?
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Excuse me but does anyone know what measurement definition of the growth in the money supply is approriate for current circumstances?
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I strongly suggest reading an excellent report on French finance on the BBC business website.
France is weathering the storm comparatively well, because finance is more conservative than the UK and US model. You cannot use credit cards to buy TVs, etc, on tick, as the money comes out of your bank account straight away. Consumer and housing indebtedness is far lower as a result of prudent credit policies. It's a far more workable model than the US-UK version.
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Robert,
You (and many financial analysts) are very clever and astute people, who can see (and sensibly disect) what is going on behind the complex machinations of the finanancial systems in the Western world. Why don't the governments of the USA and Britain ask for YOUR advice, instead of letting "incompetent" ministers foul things up (because of their vested interests) even more!
They (the financiers and governments of this world) make the monumental mistakes, and we (the taxpayers) are (as always) made (without even so much as consulting us) to pay for the mistakes!!
Incredible!!!!!!
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Central banks to the wrecksqueue, now that the stock car race is over ,we are waking up to the fact that we are governed by the delusional insane who thought things could only get better and who sat by waiting for evolution to do their job .
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# 55
I have a French colleague who explained the system to me.
It is very conservative and in my opinion, England will have to get to a similiar place in time.
Kind of back-to-the-future for old-timers.
But I doubt if that will happen until there is a change of Government and the associated political landscape has shifted somewhat i.e. England is free to pursue its own economic policy, which will be simplified once Scotland (and Wales) continue to migrate away onto their own political paths.
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It is still the same game. There is only one deal. Parties that block or stall the closure on the deal just inflict damage and notch the fear up. If terror is needed for closure on the deal then terror will result. It is the process that is in control. This is politicans posturing, in part to make life difficult for the banks and the current administration. The politicans are claiming principles which they don't have. It is about extracting vengance before agreeing. When the bloodshed reaches the point it is not just in the banking enclave and the terror gets uneasily close to the politians they will crack and very quickly. It is a sad thing to see such a lack of reality. There are still far too many members of the public beefing that they don't want a deal which feeds through to the politicans who want to be in the position of saviours. The media do not help by reporting this as a bailout, almost something for nothing, it is not, it is a transfer of assests. Anybody opposing the deal simply inflicts very local damage on a minority, hope you are considering that if you do. As the assets being sold are linked to the future valuation of property then by driving the value of the toxic paperwork down thru standing off nothing is gained because the projected value drops in parrallel. The ultimate value is based on property a variable not repayments from mortgage holders. The whole principle of the deal is to spread the load throughout the population which is a safer thing to do. Things are still moving towards a deal and to me the process is working.
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Oh Mr preston, please, enough of the smug comments, "as I said here" and "as I said there".
Is the BBC so understaffed? Surely the currect economic crisis warrants more than one reporter...
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Confidence in free markets has been blown away now. If only Keith Joseph was here to see it. But rejoice - this could be the start of a brave new world. From now on, we will be on top of the system, otherwise it'll victimise us again, as it has so often in the past. Let's just nationalise the banks, take their assets as collateral and run the system ourselves. It's not like steel or mining, which require high levels of skill and practise. We don't need spivs; anybody can count money and put it away in the safe.
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If British banks are suffering from the same problems that afflicted Northern Rock, why isn't the Government rashly passing emergency legislation to steal them all from their owners, aka nationalisation? Again, the Government's inconsistent actions will simply add further weight to the litigation being pursued by former Northern Rock shareholders. Yet more money the taxpayer will have to cough up.
(And, having created this country's economic problems, Labour politicians argue that Gordon Brown is the right person to sort them all out? Hmmm... like the logic there.)
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58:
Agree, it would be desirable to move to the French type system, but it would indeed be a huge culture shock.
However, there's a huge culture shock happening right now anyway, so a (rather nostalgic?) hankering after more conservative finance is one possible outcome.
Agree that Scotland and Wales will probably go their own way; it would make sense for them.
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We're beginning to see the dominos fall in the US. WaMu failed and was instantly sold off - this is the kind of promp action that is needed - weeding out the foolish and sickly members of the financial community, like an old gazelle taken by a pride of lions.
What the market cannot suffer in the long term, and continue to operate as a 'free market', is the interventionist approach being touted by the US Government. Buying out $700billion of bad debt at full price will distort the market (you don't see lions licking gazelles better, do you?) and reward the financially weak and faulted institutions which should, in the law of ecomonics here, go to the wall and be dismembered and parcelled out.
And a concern now over here is the way the sell-off of HBOS was conducted. That the government was willing to green-flag the creation of a 'microsoft' in the banking sector has to be described as poor economic judgement, coloured by political opportunism. Gordon wanted to be seen to be 'doing something' about a crisis not of his making. This will be paid for by the mortgage buying public in the long term, and will not benefit the HBOS mortgage customers in the short term. Gordon didn't encourage HBOS (or other banks like the Rock, for example) to offer loans which wouldn't be serviceable WHEN the market correction (which had been muttered about since about 2003) arrived. These poor decisions and advice came from the mortgage lenders, who should have known (I actually think they did) better, but were blinded by the possibility of profit.
SO, when the crash arrived, why bail them out? The markets have needed correction for some time, the bubble was created by the frenzy of poorly designed loans on properties grossly overvalued. Proping up a failing system will ultimately only postpone the inevitable, not stop it.
The best think to do in the long term is to allow the crash to occur, it will be short term extreme pain, for a healthier system in the longer run. This is how Capitalism works.
If you want Socialism and a planned economy, you pay up front, Capitalism just gets the cash later and leaves you in debt...
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One further point: controversial as it may sound, refusing to bail out the banks (both US and UK) could be the most successful form of wealth distribution the world has ever seen, and would undoubtedly reduce the massive wealth gap that has developed further over the last decade (despite the propaganda toted by New Labour).
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In a perfect world, the first thing the government would do would be to go after the personal assets of the greedy bank executives who have got us into this mess in the first place. It's a travesty that these money grabbing pigs are making millions in salaries and bonuses for completely messing everything up. Take their big houses, chuck them out in the street, and make them depend on the public services that will suffer reduced funding because of their actions. See how they like it.
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#62 - YummyCarolKirkwood
The shares of Northern Rock were worthless when it was nationalised after being suspended, so other banks aren't quite there yet!
The NR shareholders have no case to take to the government (unless they want their shares returned with a valuation of-3bn GBP). The bank was incapable of continuing without governemt intervention. The shares were worth nothing. The shareholders should have bailed out (at the latest) when the price fell from 12 GBP to 6 GBP. As for the hedge funds who bought late - Well, who has sympathy for them?
I agree that nationalisation is the answer, but not further nationalisation. Since NR already has the infrastructure and distribution network required it should be ran as a national savings and loan (as competitively as brussels will allow) and let the rest take their chances.
If they made good decisions in the past decade, they will survive. if they didnt, they wont and dont deserve to.
Politically, establishing a financial powerhouse in the NE of England will be popular in the Labour heartlands (and the further we can move responsibility from London, the better). Hopefully none of the worst city fat cats will want to relocate and it will leave them stranded in London, while generating jobs for those "decaying, post industrial cities" that were so lamented recently.
You might ask, why should NR survive, just because it was first? Well, we are where we are - Lets try and make a negative a positive.
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Like-it-or-not, we live in a capitalist system (or mixed economy) and as such it is set up, quite blatantly, to allow those who can do so (including bankers!), to make as much money, in as short a time as possible (or over any time period that they wish), without regard to anything or anyone else. Therefore, if we have lived all of our lives up to now putting up with (or benefiting in any way from) this system, then we have no right to criticise.
To protect poorer people (i.e. those with less than a few million) we have regulators and governments.
If you accept the above statements then, only if you have been a long time activist against inclusion of a capitalist element within our mixed economy (or in downright opposition to Western democracy) can arguments against the setting up of septic banks be taken seriously (especially right-wing senators!)
Governments and their regulators are solely to blame.
In the far future we will look back and wonder how the financial systems of the world managed without septic banks before 2008.
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Please
How much is a billion
100 million, 1000 million, a million million
And how much is a trillion
And can you think of a way of explaining it that we understand - beyond - it is a lot.
Thank you
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Robert - ideologically I?m very much in sympathy with the free market conservatives in congress. I would rather have seen government intervention to restore confidence in the system limited to underwriting these assets.
But I?m with Paulson on this, in that - in order to now restore confidence in the system the US government does need to actually remove these assets from the system. However, if we do this now and do not delay then hopefully when confidence returns the government involvement in the share issues that are likely to be required in the near future in order to further recapitalise the banks can indeed be confined to underwriting.
But with regard to the distressed assets and where we are now, I believe we either get aboard the good ship Paulson without delay or we run the risk of being drowned.
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All this money being pumped into the system does not mean any progress to us the end user.
Banks are taking in cash and shoring up their balance sheets and stock piling.
There is no credit being released or it has prohibitive fees attached.
The subtle difference is that it is not just the Banks that need supporting but the businesses that are being crippled by the credit squeeze.
There should be conditions that some of this funding needs to get to the market place and the end user !!
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If the bail-out happens, it will only increase the moral hazard. The international banking system has shown that it is extremely blinkered when it comes to making the same mistakes over and over again. The collapse and rescue of LTCM, (smartest people in the room), which was overseen by Greenspan had little impact on the ambitions of traders and hedge fund managers. In fact Merriwether was up and running a very similar but smaller fund shortly after being shown the door and was, incredibly, trumpeting his track record! the Russian default was similarly followed by the Argentinian debt default, noticably banks had increased their risk management operations hugely between these two events, unfortunately the smart people in risk only seem able to interpret what their bloomberg or risk management systems tell them rather than recognizing when the yield to maturity of a soverign bond is over 140% there is a good chance of default - I suppose phd's in mathmatics or physics doesn't teach you how to recognize real events. And what of increased regulation like Sarbannes Oxley, introduced to prevent another Enron? Well a SIV run by a bank is just the same as Enron's ludicrously named off balance sheet vehicles.
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69:
On the American numerical system - which we all use nowadays - a billion is 1,000 million, a trillion is 1,000 billion, so:
Million = $1,000,000
Billion = $1,000,000,000
Trillion = $1,000,000,000,000
In the old days, I think the British definition of a billion may have been a million million, but if so that was long ago and no longer used.
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"Weapons of mass destruction [read CDOs] are within forty minutes of being launched at the undefended US and UK homelands[read banks] and therefore extraordinary miltary [read financial] action is urgently required." Sound familiar?
The 'First Septic Bank of America' is about to be launched in all its (sic) gory. Does anyone really think this plan will work? 700bn? - more like at least 1200bn - and probably 2000bn for starters. The shadow banking sector and its SIVs will gobble this up in weeks, and come back looking for more.
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Couldn't help notice that Bradford and Bingley's shares were down 20% today, despite the fact that there is no short selling allowed.
Could this perhaps suggest that it isn't simply short selling that has been causing all the problems in the banking sector? I know it's the job of a reporter to try and find causal links and apportion blame, but sometimes these panics don't have any nice easy explanation. It's more likely that a large number of things have lead to the loss of confidence, with concerns (rightly or wrongly) about short selling simply a part of the feedback loop of panic and price falls.
As for the bank bailouts, and the benefits thereof, at some point people are going to have to get over the "it's too expensive and I don't want to pay" feelings. What's the alternative - looting and rioting as people realise that the collapse of the financial system mean no working ATMs, and a return to barter economies of the 11th century?
I know this bailout isn't pretty, but at some point a line needs to be drawn.
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1 - This is a market environment. If a market can't sustain itself, it will find a level where it can. Otherwise it isn't a market (which should be SELF-perpetuating). In the normal order of events this would involve the more prudent banks buying the more reckless ones (or at least picking at their remains) when they smell weakness.
The short term downside to this will be redundancies and a lack of competitive products for the consumer.
2 - If the financial markets are shored up by the government (all concerns about Hank Paulson lining his buddys pockets, the lack of consequences for the execs, etc, aside) then it is just artificially delaying the inevitable. These institutions are over extended, bloated and living on fictitious "profits" and borrowed time.
1A - Realistically, the best of the redundant staff will find employment elsewhere and direct competition in retail banking doesnt seem to work anyway (one up manship leads to 6x Salary Multiples and 125pc Loan To Valuation), so these "downsides" are negligible. We will all still have banks to conduct our business with (I don't hold with the "apocalypse theory"), but at least we will know they are the stronger ones who survived the "perfect storm" relatively intact, due to (relatively) diligent management.
2A - If option 2, then people will continue to deposit savings in companies who needed saving due to bad management. If Adam Applegarth was still CEO of Northern Rock, we wouldn't touch it with a barge pole (inspite of 100pc guarantees). Why should anywhere else be any different. These banks will still need to downsize as theyre staffed up for boom business, not bust levels. Redundancies will still happen. Competition will still suffer, as all banks price themselves out of the market while they lick their wounds.
Essentially, the same outcome, but 1 will offer a more secure future to base the rebuilding on. Option 2 will leave the cowboys at the helm. There, same outcome, but Ive saved $700m -
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So who is the Patsy in all this ?
It won't be the gambling Bankers and the incompetent Bankers
It won't be the incompetent and suppine Politicians
It won't be the sleepy Regulators
It will be the Taxpayer, the Depositor and those who don't want rabid inflation
ie Banks win - Customers lose - Stupidity reigns
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The system of creating new money is at fault, with massive lending against a limited supply of assets and savings deposits. Banks should only be able to lend what is saved with them and no more, and extra money should come into the economy through government spending. This would ensure house prices were reasonable and affordable for all. If you believe in such a fair and just money system, take your money out of the bank and put it into a credit union. Banks are in effect doing legal forgery by creating huge amounts of new money through debt, so causing inflation and devaluing existing money.
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or even $700bn!
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Re 59: You write
"The media do not help by reporting this as a bailout, almost something for nothing, it is not, it is a transfer of assests" (sic)
If you gamble all of your money away and I then transfer my assets to you surely you have (a) received something for nothing, namely my assets, and; (b) by any normal definition been the beneficiary of a bailout.
The proposal is clearly a proposal for a bailout and it is clearly proposed that the poor bail out the rich.
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Yet again the BBC has set its reporters up to actually have an affect on the market.
When will this news organisation realise that it should be reporting the news not filling its vast website with editorial comments. It is a good idea if the standard of reporting was raised and that not every reporter felt that they could set themselves up as experts.
Watching and reading the BBC news now has become a long line of interviews with its own reporters it this because the experts have kept well away knowing that they will be abused and harrassed by the interviewer.
Stop interviewing yourselves and try to find proper opinion on the matters in hand the standard of news reporting is a great deal lower thanks to your so called internal experts.
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@60 Well said. Some idiot script reading anchor on the World at One today on Radio 4 obviously knew nothing about business. First of all at 1.10 BST he went over to Wall St to talk to some "expert", while saying Wall St had just opened. It hadn't and wouldn't for another 100 minutes. Then he described Warren Buffet as a banker. He may be the richest man in the world but he is certainly not a banker. Hathaway is an investment company. If people at the "most prestigious broadcaster in the world" (as they rather self-style themselves these days) can't get it right then there is no hope for the rest.
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Re 72 ... moral hazard
The problem is the situation requires a deal. Morals has nothing to do with. That is why the situation is self harming when morals and vengence are introduced. The deal has to be in the US to solve the US problem. It has to be US money not foreign money. Only the US taxpayer has the funds in the US. Chinese or Arab money wouldnt go down well.
The situation developed because it suited business and the governments involved to created debt. Business made money out of debt and the government had voters who where compliant because they felt wealthy. The principle is to take novices with no experience and expose them to the benefits of the market but not to tell them the market can bite, queue the poor fellow who had all his life savings in shares of one bank, or the 125% mortgage holder of 2006.
Debt is just money taken from the future, you end up poorer in the future because the debt cannot expand forever. If you are intent on expanding debt then when you run out of the finite number of sound borrowers you move to unsound borrowers. When sound percentages of mortgage to price are reached then you move to unsound ones. Because the only way is expanding debt you just hope the whole thing dampens down very slowly. That leaves a situation in which a straw can break the camels back. Sound familiar?
It has very little to do with the consumer. That is like saying that cod are responsible for their scarcity, not fishing. The problem is the government whose duty it was to regulate the market was adverse to regulation because it recieved bouyancy by being hands off. In the UK it would have been easy to introduce the housing inflation into the BoE inflation model but it was not done. The mortgage to salary and equity ratios could have been controlled at the point of sale, the high street. Doing nothing was a deliberate act by the government(s). In the UK it could have been introducted on a 5 year taper years ago. The problem is not the banking system it is leaving it uncontrolled. By seeking a banking scapegoat you satisfy the government who is noticable in its mantra that the problems are always somewhere else, not with them. That is why the US congress are bleating and posturing so hard that the bankers are to blame.
There is still plenty of money about it just has few outlets for the moment. There are opportunities and some are being grabbed. You only buy if you think you can profit otherwise you hang onto the money.
2000 Mcdonalds humble pies just take some eating. And yes if control mechanismas are not put in place, which has to involve the government then the danger is we just go around the loop again.
I have always found the US very Roman, if so the Romans used to demand decimation, a one in ten arbitary killing of legionaires whose group was seen as lacking. The lots were drawn by the legionaires and they then had to kill their comrades it was to induce the right amount of terror.
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'We Republicans don't do it that way'.
The United States and the World's financial system is in meltdown and all we hear from the oppositing Republicans in rejecting the Presidents proposal is a statement of just stupid political dogma.
Wall Street has to provide answers and will be judged, but I expected more from Americas leading Republicans in this, a 'nation united in crisis', a forum without recent precedent.
If a referendum was conducted throughout America on this bail-out, President Bush would win handsdown and his fellow Republicans in the Congress would lose by a mile.
That is how plain stupid this issue is.
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Hi Robert,
Last night on News24 I watched you spend an hour discussing who was to blame for the current speculation crisis: *as the stock and currency prices were streamed continuously across the screen below you!*
Physician, heal thyself!
The BBC continues to encourage speculation even while discussing its dire consequences!
The BBC dogma/mantra, that only ?growth? is good, and that only house prices, economics, politics and disaster, (and of course 'sport') qualify as 'News', dumps a sizeable portion of the blame in your very own shoes.
You also consistently snipe at one of the most stable and peaceful countries in the world, whose people are some of the most long-lived and healthy on the planet, as a ?failure?. You even take this as the model of all failures, to be avoided at all costs!
I wonder what Adam Smith has to say:
?The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects. But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.?
Interesting how modern ?economists? have turned this on its head, don?t you think? You should be holding out Japan as the target for us all to hope to achieve, but instead you constantly urge that we must join with those who are racing ?fastest to ruin?! Indeed, that we get there first!
If you really want to help: remove the gambling statistics from your broadcasts and leave them at the bookies where they belong; and, instead, stream the CO2 and population growth counters, so we can all see very clearly the disaster you are helping to drive us all toward.
Very sincerely: listen to David Attenborough and get back on planet Earth.
S
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I find it interesting that the Republicans do not want this $700bn Bail out...them who are so usually keen to help corporate America...and then I questioned myself on who was profiting from all this?And realised it was the big boys:JP Morgan Chase(have bought up BearStearns and WaMu for nothing, as if all of the $307bn in assets are worthless buying them for $2bn is a deal)...When all the little players collapse, the big and powerful will feast on an orgy of easy pickings...This is going to look like the garage sale of all the oil and gas assets of the USSR during the late 80's early 90's.
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Has anyone seen the ridiculously badly infromed article by Ben Shore about why European banks won't need bailing out?
What was the first bank to go bust? IKB, a german bank, supposedly nothing to do with mortgages.
Which bank has written off the largest amount so far? Step forward UBS from Switzerland.
What about the following European investment banks? UBS, CSFB, Dresdner Kleinwort, Deutsche Morgan Grenfell
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Actually #84 you completely and utterly wrong.
The latest poll figures 'I've seen (CNN) puts positive support for this Plan at less than 33%. And in an election year, to have 66% of electors letting you know they ain't happy sure concentrates the mind.
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Just when is the FSA going to fill it's boots with details of the ''spivs'' and ''speculators'' currently betting on the mooted plan of the US.
There has been no real, or actual, action, and until specific details from the plan emerge, people are just gambling something or other is done.
Surely this is an adequate definition of speculation ??
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Dear Robert
There is a huge twist to this, and Bush,
"Is he wrangling this bail out to save his famlily fortune and that of his co directors on Wall Street", I remember a bit of History, and Roosevelt, "Trading with the Enemy" how much is teh Bush Family worth, and how much have they lost so far?"
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# 66
> Take their big houses, chuck them out in the street,
> and make them depend on the public services that
> will suffer reduced funding because of their actions.
> See how they like it.
At last ... a voice of reason. This will install a sense
of moral hazard. Anyone remember that scene
in Dr Zhivago where they chuck the toffs out on
the street? We've got it all to look forward to!
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Congress has said that they're willing to work with the White House and Henry Paulson on their request for money.
The only problem they're having
is coming up with 700 billion in unmarked bills.
http://www.wilytrax.com
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#88
I believe that was before the President repeated what he wanted, late yesterday.
Anyhow, more important just watched the President on Bloomberg, everything going to go thru, hang up appears to be speed of legislation, still disappointed with the Reps.
You reckon this has damaged McCain ?
GBA
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Leaving the banking issue aside for just a moment. The UK has the highest debt in Europe at over £1 trillion. How much of that is secured/unsecured loans and credit cards?
My reason for the question is, consumers have spent a shed load of money. Where did it go? I am no high flying banker but in my simple mind it works like this:
Consumer buys TV with cash from bank loan
Cash transfers to retailers hands
Retailer BANKS cash
Retailer SPENDS cash on stock
Wholesaler BANKS cash
Consumer pays interest on money borrowed every month until settled.
Ad nauseum....
In theory, credit and debit cards are essentially the same process minus processing fees etc. as far as I understand.
This £1 trillion is floating around somewhere. I appreciate it is 90% 'funny money' leveraged and created by fractional reserve banking. It is definitely not down the back of my couch (I have looked).
So who has it? It will ultimately end up back in the banks pockets surely?
Answers on a postcard please.
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Will this be the final nail in the coffin for the reputation of the accountancy profession?
Lehman Brothers anounced record profits last year - http://www.nytimes.com/2007/06/13/business/13wall.html
AIG audited results go $14BN profit 2006, $6BN profit 2007, bankrupt 2008
Bear Stearns, Lehmans, AIG, WaMu, etc, etc, all publicly quoted companies with fully audited accounts declared by independant accounting professionals as 'going concerns', the off balance sheet finance game ends in tears.
When Robert Peston finds time to write his book on this mess he should find room for a few chapters on systematic regulatory failure as well as greedy inept bankers.
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(from the 'Bush says bail-out will be passed' BBC report)
'Financial markets are gummed up because banks do not know exactly how much bad debt they hold '
So why should I trust them if they hold stuff they cannot reconcile?
It seems like a primary case for NOT giving them any money.
What is this
Banking for Dummys - by Dummys ?
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Re: #67 apollo_mcqueen
The NR shareholders have no case to take to the government (unless they want their shares returned with a valuation of-3bn GBP). The bank was incapable of continuing without governemt intervention. The shares were worth nothing. The shareholders should have bailed out (at the latest) when the price fell from 12 GBP to 6 GBP. As for the hedge funds who bought late - Well, who has sympathy for them?
Hmmm... and how exactly is the NR situation ("incapable of continuing without governemt intervention" in your words) any different from the current situation faced by our banks which currently require massive injections of liquidity for them to continue operating, according to Mr Peston:
The Bank of England's share of this will be $30bn in one-week money, to be actioned today, and $10bn of overnight money.
Perhaps more importantly in a UK context, the Bank of England will also on Monday auction a substantial £40bn of three-month loans (which is what I've said in recent blogs was necessary).
It's fairly plain English - can you still not see the inconsistency???
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I love the way our French friends are now adding insult to injury... Having bought up our nuclear industry they're all over BBC TV news telling us how much more cautious their banks are when it comes to lending, how they limit mortgages to 30% of salary etc..
Given they still own some major industrial and very high tech companies it seems to me that we might be better off instead of merging our banks flogging them to the French.. They seem to know what they're doing!!
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#84,
What planet are you on?
Are you saying the American ta payers (you know, the ones that had their properties repossessed by the banks) and desperate to bail the banks out?
You're having a giraffe surely:-0
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94:
It doesn't quite work that way, unfortunately.
Someone buys a house for $200,000, using borrowed money. Value of the house falls to $150,000, but he still owes $200,000. So the lost $50,000 hasn't gone to anyone; it has gone up in smoke. It's the difference between an actual debt and a notional value. If the value of assets falls below the sum of the debt "secured" against them, a gap has been created.
It's a bit different when applied to credit card debt, but similar. Someone borrows $200 and spends it on a TV. He owes $200, but the TV is now second-hand so worth less.
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Sorry post 99 should have said
#84,
What planet are you on?
Are you saying the American tax payers (you know, the ones that had their properties repossessed by the banks) are desperate to bail the banks out?
You're having a giraffe surely:-0
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#98, it was somewhat shocking to see our friends across the channel looking a lot more secure than we are. I had no idea the financial systems in France were so different than over here, and I even spent 3 months living in Paris a decade ago!
You have to sit back and compare systems and say that perhaps the French are right and we plain got it wrong, VERY wrong.
If we take a step back and look at the mess on cold rational terms, the only conclusion you can come to is that it does not need UK and US taxpayers bailing out the banks, it needs for both countries to wind and downsize the banks and finance houses who played in fantasy land for so long with other peoples money, to plainly change the system that has been operating to one that balances risk and reward. If Paulson et al are so cock sure that the bailout will work, then let us see them first put their pensions and assets into it before a penny of taxpayer money is, on that course, lets also put the pension funds of all the directors and high flyers who made huge bonuses into the pot too. Surely we would get at least a 1/4 of the money if not more simply from them.
I am at a loss to understand why none of the news services, especially the BBC is not doing a programme dedicated to how the fractional reserve banking system and Fiat currencies work. Could it be that if the great mass of the poor and hard working people actually knew the truth about the money system that there would be blood in the streets as bankers and financiers up and down the financial districts of the world are strung up in disgust?
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98:
The point is exactly that, i.e. the French DO know what they're doing. They have maintained domestic industries (including utilities) in French hands. They have imposed rules (such as mortgage and credit limits) aimed at ensuring sound finance. It has paid off. I wish we had done the same.
Basically, we've backed the wrong horse - American-style unfettered capitalism instead of the 'social capitalism' (which I prefer to call 'responsible capitalism') preferred by the French and others. When I say 'we', I mean most of us; bankers, yes, but also politicians, borrowers, voters. Putting money on the wrong horse has cost us, as it always does.
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Is any of you aware that the credit default swap rate for US treasury bonds today rose higher than those of McDonalds?
That means that the average investor believes it is more likely that the US government will go bust than that McDonalds will go bust.
This has NEVER happened before. It reinforces the old saying: " a man's gotta eat"
It means the U.S, and everybody else, could look to MacDonald?s for insurance, and not AIG. That could be a, new, growth market for MacDonald?s. I wonder how their shares are doing?
Does this smell like Septic bankruptcy to you?
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#99 I have to agree with you regarding #84
I think a recent poll put US taxpayers approximately 70% AGAINST the taxpayer bailout of Wall Street. Perhaps there should be a referendum so that the legislators in congress in the USA can see just how out of touch they are with the voting taxpayer. Perhaps in 40 odd days time the pigeons will come home to roost for more than a few of the ardent bailout supports.
the poll results are at: http://www.maristpoll.marist.edu/usapolls/EC080924.htm
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#93 I honestly beleiveBush'is statement is an attempt to keep Wall St from posting a closing figure in excess of 500 in the red. I think they are miles from a deal as of yet.
As for Mcain he's hurt either way as he represents the party presently in office. Voters wont like him for giving $X billion to Wall St. If the Plan falls, still likely or fails, almost certainly then he will carry the blame.
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#97 YummyCarolKirkwood
My point wasn't that all banks who are in receipt of this BoE money should have their shares valued as worthless? Just NR. Only their shares were suspended before they reached absolute zero (so far, here). The other banks are not in the unfortunante position of losing a billion pounds over a weekend through a bank run, of course.
Some banks, but not all, are in something close to this position (in terms of value), with >80pc share devaluation, but even those accessing the BoE facility still have (unsuspended) shares and are managing to get by. NR failed.
The money needs to come from somewhere, and if it can't be from another bank, then it needs to be from the BoE as "lender of last resort" for the time being. These loans are much more favourable than the 3bn GBP the treasury has effectively written off in Northern Rock.
Also, the shares in NR were worthless as the brand is dead. Without the 100pc guarantees, why would you choose the one bank notable for its abject failure, which crashed a year ahead of any other. The others are just a pack, it's the leader of incapability.
The money which is, I'm sure. flowing into NR during this current crisis, isnt sticky money. Its safe haven money. Given an equal playing field, its the last place you would put it.
This may well change in the future, with new management in place, etc (and I personally hope it does), but the shareholders held their options too long and have been burnt accordingly.
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I think it's worth noting that the FBI is looking into these issues, other law enforcement agencies will be doing the same, and there will no doubt be prosecutions IF LAWS HAVE BEEN BROKEN. But not otherwise; that's the way a lawful society operates.
If, for example, mortgage brokers in the US (or here, for that matter) knowingly sold a mortgage based on falsified income numbers then presumably they have broken the law (and so has the customer, incidentally). If management has sanctioned such practices, it may have broken the law too. If an institution has told regulators, or shareholders, or customers, that their finances are sound when this was not the case, they have broken the law.
We should trust law enforcement agencies to do this in the first instance, using the laws that exist. There is no point in passing new laws as yet, because they would not be retroactive. We should, however, introduce new regulations to ensure no repetition of these events. No doubt the SEC and the FSA will do exactly this.
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# 102
The reason why there isn't a TV programme about Fractional Banking: most people aren't interested, wouldn't understand it, and, or, would turn over within 30 seconds, leaving only those viewers that do understand it who will sit there with a critical eye marking the accuracy of the programme out of 10, and then get on to Mr Peston's blog to moan about the bits that weren't quite right, or were too close to the knuckle.
Seriously, some of the banks don't understand Fractional Banking, which is part of the problem.
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Why all the 'shock' and 'awe'? Average Joe down the pub has been saying ?it will all end in tears? for ages ? and he IS a novice!
The proposed bail-out plan appears logically flawed ? isn?t it generally imprudent to hand the task of disaster-recovery to those who presided over the disaster? All Mr Rogue Trader needed was ?one big win? ? should we have stumped up the wager? Do we really believe these bankers have learned their lesson and won?t find some way of repeating the debacle? Handing gamblers, however well suited and booted, a shipping container full of cash doesn?t sound too sound to me! Especially when it is not their money they?re risking!
If you want to stick with capitalism, then the ?proper? capitalist solution has been stated numerous times ? it is survival of the richest! When the music stops (and it is silent right now) those sitting on nothing more than a mountain of bad IOUs are out of the game. Pleading on knees never cut it at the parties I attended.
A horrid thought I know, but perhaps in the future we might actually need to be able to afford the things we want to buy!
Does this mean communism won?
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Interesting to read some of the comments:
we are not in meltdown yet.
Many businesses are as yet unaffected.
Banks aren't being bailed out, any money they recieve has to be repaid with interest, before the shareholders get any profit.
The toxic debt may not be as toxic as made out, so any purchases of said debt may actually return a profit to the purchaser, especially if they are marked down in price below face value.
The Fed res may create as much money as it wishes.
Such won't be inflationary as it will be paid back with interest by the banks.
Tax payers thusly are not subsidising this part.
Of course a massive recession caused by inaction would cost the taxpayers enormously, including very likely their jobs.
It is worth remembering the majority of Bank shareholders are pension funds.
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It is interesting that Mr Buffett has moved his money back into the market, although in a carefully targeted way.
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#105 ? Seriously, a referendum?
With the exception of a few, I would say that virtually no one in the U.S would understand the ramifications that their vote might have on the ?yes? or ?no? to the bailout. A referendum on the matter is therefore out of the question.
Lets face it, only about 0.1% of the entire world population, probably less, have even the slightest inkling of what is really going on and could make a sensible, reasoned judgment worth pinning the economic future of a $14 trillion economy.
Some of them are crawling around on their knees, when they should be eating MacDonald?s.
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Congress is debating about how to reward bankerrs for the contents of their colostomy pouches ,clearly they are in competition to prove once and for all which is the bigger AAA's hole
Its notable that the bankers have their fans well positioned in congress to redistribute their semi liquid assets to themasses
Only in America
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Bankers helping bankers and protecting their vested interest. Look at the pedigree of the US administration particularly the Treasury Department - mostly brought up in banks on Wall Street. Enough said.
Any assistance to a bank should be contingent on changes at senior levels and an equity stake to the government - it is the only way there is a possibility of getting the money back i.e. a package of toxic debt and equity.
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#30 MadTom1999
"Is there an open computer model anywhere that we can play with on our computers at home to see whats really going on? "
The closest model is called "Mornington Crescent"
But of course that model only works when things are working.
As for a model that works in the prersent day conditions, I'm sorry I haven't a clue.
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Base rates will probably have to follow the Japanese course, heading downwards to zero percent.
This along with pay freezes in the Public sector seems to be the way things are headed.
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All those here calling for state intervention by the US are supporting the propping up of a fundimentally (arguably fatally) flawed system.
The ability to move debt off the balance sheet, to securitise debt as an asset and raise money by it, having a debt greater than your assets etc. is the basis of the crash.
For those who have studied it, the Great Depression was also founded on unsustainable debt in the US. And historians will tell you that things move in cycles.
It was money lent to individual investors (now homebuyers) by banks to buy shares(homes) on the basis that the value of the shares(home) would continue to rise. The system collapsed when the value of the shares (homes) collapsed and insufficient money was available to service the debts. Banks went to the wall, but 10-12 years later, the world economy was able to climb out of the pit it had unwittingly created.
This time around we should have seen the parallels and taken the copeous warnings that the situation was unsustainable. The financial experts were best placed to see this coming, but the wretched blinkers of short term profit and making your returns look good for a single year meant grossly irresponsible behaviour. You could argue it was verging on professional negligence. Could this be the behaviour being investigated by the FBI?
Regardless of this, the system needs to be allowed to fail. If it is propped up, those senior execs responsible will be given the opportunity to sell their shares, cash in their over-generous pensions and run away with the loot. Crashing the banks around them means that they won't get the opportunity to get out unscathed and will have to suffer the same pain as their customers.
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RE #111
The US plan is to take the debt at the FULL mature value of the debt, i.e. what the debt was expected to generate at full price.
for example. A house priced at £100, mortgage for that pays back around £120 over the term; the collapse in the housing market means the value is now £70.
Each mortgage would lose the US treasury £50, supposing it could even generate the new market value on foreclosure.
This is a dreadful idea and would saddle the US taxpayers with a massive debt. They aren't responsible for anything other than believing in the 'American Dream' and are about to be royally stiffed by a President who is leaving office and knows that Obama is going to be choosing the furniture in the Oval Office, so why not leave him crippled...
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Hmm, I do wonder how many armchair anarchists would actually survive a breakdown of civilization?
Fortunately that is not on the cards !
Mad Max fans are going to be really disappointed...........
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#90 -Trading with the enemy is nothing new to Bush !! His granddaddy traded with the Nazis right up until (and possible after) America declared war on Nazi Germany !!
#84 And what, pray tell, will the US taxpayer use to bail out their banks ?? Already the US is up pass its collective eyeballs in debt to other nations. Where will the taxpayers find any money to pay for the bailout ?? Print more paper ?? Sell their children into slavery ??
However, if there is no movement afoot to calm the fears of the others and renew their trust in the US economy, they will foreclose on US Inc. !! Already, Daimler is trying desperately trying to dump its Chrysler part. And where once Ford owned 25% of Honda, we may yet see Honda owning 100% of Ford in the near future !!
All foreigners trading with America will harken to the advice of the pieman - Show me first your penny !! And the American reply may very likely be - Indeed sir, I have not any !!
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Has anyone watched the Sky News interview with Gordon Brown on Sky Anytime? The journos are awful and the whole set-up is ridiculous (its meant to be an interview "panel", but just comes across as a bunch of incompetents only half finishing their points - Also one of them has a mullet). Anyway, GB manages to say Fannie Mac and Fannie May twice and blame the global economy for the current problems but take all the credit for the last decades prosperity. Absolutely ridiculous!
Cameron gets the equivalent treatment tonight, although I'm sure he'll manage to sell some of his brand of snake oil to the masses!
By the way, does George Osborne have to mention in every interview that hes "not an economist" - In that case shut up and find one to be Shadow Chencellor in your stead. I dont want someone else who doesnt understand finance managing the economy!
Hopefully we'll all still have jobs come Monday, but for now it's the weekend!
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Of course a truly horrendous financial meltdown, might well mean the end of Benefit culture in the UK.
Afterall, if the Gov runs out of money there would be nothing in the kitty to pay Income Support, or Invalidity Benefit etc etc.
(Armchair Anarchists take note ! Your benefits may be at risk in a financial crisis!)
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I restate, as an independent Sovereign power, the USA may through the Federal Reserve create as many Dollars as it wishes.
Creating money by Fiat, is against economic tradition, but has been done many many times in the past by nearly every Country.
The Federal reserve plan would not increase inflation as the money is not directly entering the Consumer goods market.
Tighter Bank lending to the Consumer takes away this risk.
Thusly the risk to the Tax payer is minimal.
Cheer up.
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119:
Yes, taking debt at full value seems daft.
One reason why they might be doing it, I think, is to avoid write-downs. If a bank takes a crystalised hit (as opposed to a non-performing debt), it has to be written out of equity. Given debt/capital multiples, each $1 of equity write-down means calling in loans of many times that figure, or restricting lending by the same amount. That's where Paulson is coming from here, I think.
The answer is surely to take debt at less than full value, then make up the capital loss by also taking equity through cash injection (presumably at par value). This is what some top experts have suggested - an equity injection to offset discount debt absorption.
So, why isn't Paulson going for this pretty obvious solution? I think it's political - taking equity would mean at least partial nationalisation, with taxpayers ending up owning banks. In the UK, I don't think we'd have too much of an ideological problem with that; in the US, many people do.
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Robert, bad debt must be allowed to default for any new lending and economic growth to take place, as the capacity to service debt in any economy is finite. Attempting to pay back bad debt is an exercise in throwing good money after bad, as it ties up economic resources which could be directed towards investment in productive economic activity.
If the banking system is given an advance and the taxpayer services the debt, the taxpayer will not be able to take on additional debt. The banks will have no-one to lend to. Game over.
If the banking system is given an advance and the government prints to inflate away the debt, the taxpayer still effectively services it through loss of purchasing power. In this case too, the banks will have no-one to lend to. Game over.
The banks know it. The argument that a bailout is necessary to restart the credit origination cycle is a falsehood told as blackmail. Their lobbying for a bailout is an attempt to recover stranded capital and leave the public and government holding the bag. They have no intention to lend again straight after this - only recover their capital and ride out the storm, which would be a decade-long depression.
Once again, this so-called $700bn bailout is a rotating credit facility of indefinite duration and cumulative size, not a fixed price at all. It is being put in place to recover capital the banks stranded themselves in nearly worthless and illiquid credit instruments, and it would be achieved by stripping the taxpayer of his and her liquid assets.
Supporting a measure such as this amounts to volunteering to pay off someone else's mortgage in addition to your own. Are you asking us to be so selfless, Robert? If such sacrifice is demanded of us, can it not be framed in such terms?
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Back to the seventies - there's always a silver lining - big hair!
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118
I think you are right. Grossly irresponsible behaviour by bankers, regulators and politicians have caused this crash. There has certainly been an abundance of negligence and a fair amount of straight fraud. There is no way back now I think and the Anglo-saxon capitalist model has been shown to have been a disasterous one. We might delay doomsday but what would be the point?
It is going to very painful for a long while but I think this is the correction the US public now realise they need. After 8 years of the sickening erosion of democracy/rule of law in the Bush White House the people are going to relish sending a bullet straight to the heads of the criminal Washington-Wall St mafia. Both parties surely now know backing the bailout is political suicide.
Once the dust settles I would hope some serious reflection and the operation of law - some high-profile criminal trials and negligence cases - will set the scene for a new responsible and long-termist phase of regulated capitalism. Of course the ecomonies of the East will have done some serious catching-up by then and we will be participating in a much more multi-polar world which should be to all of our benefits.
Well, that's the optimistic view!
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Its amusing that so many people are cavalier about this situation, the truth is that many of the lost jobs in the city were at the apex of the food chain and the repurcussions of so many people being laid off will be severe - go and walk down Cheapside and see how many mobile phone stores, expensive coffee shops and overpriced sandwich bars there are. These establishments exist because the average secretary or clerk in a city institution earns 3 to 4 times as much as in regular jobs. Expand the thinking and see how many of the creative types in the westend depend on business from the banking sector to maintain their similar life styles. Of course this means little to the average worker in Wales or the Midlands but consider the tax revenues generated by London. Very few of us can imagine what it is like to exist in a world where the banking sector ceases to operate normally. I am only 38 but was working in Indonesia in 1997 when their system collapsed completely during the asian crisis - I wonder how people in this country will react to similar circumstances. When I was a child I remember the Winter of Discontent, the power blackouts, the constant strikes but it seems as real to me now as a world with only 3 television channels.
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#124 - Absolutely right. Zimbabwe created Kwachas by the trainloads !! Their last big note was in the trillions of Kwacha and was probably capable of buying a loaf of bread !!
If the US$ devalues to that extent, the US economy is dead and buried !! And Canada and Mexico will beef up the number of their immigration officers against a tsunami of US illegal immigrants, something the South Africans did with fences, wire, dogs and guns !!
#128 - re. Anglo-Saxon Capitalism - It was Admiral Perry's gunboats that forced Japan to trade with them !! It was the Brits (primarily the Scots) who engineered a series of three Opium Wars with China to grab land (Hong Kong and Shanghai) and force them to trade teas and silks for their opium ( Colombian cocaine barons, please take note). Now the Japanese have out-traded the US and owns large chunks of it !! Name me one US state that does not sell something manufactured in China (IPod and IPhone fanbois, please take note). With no one willing to accept their creditworthiness, they may have to sell the family silver to the Chinese and other East Asians.
Reminds me of an ancient Chinese saying/curse - May you live in interesting times !! And these are certainly interesting times !!
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I really enjoy Robert's posts, but I also spend a lot of time watching Bloomberg TV, which consists almost entirely of interviews with 'experts', who are themselves bankers.
Paulson is a banker. Bernanke is an academic who has been happy to watch the whole economic system go to hell in a hand-cart. We all know the politicians don't have a clue about anything.
My point is, why don't they get some people involved who are nothing to do with economics or the banking system. I am thinking of the likes of Richard Feynman, or some eminent physicist who can look at the whole problem with a fresh pair of eyes.
It seems to me that there must be someone clever enough out there to see to the root of the problem.
I suspect in its simplest form the whole problem condenses down to this: The clever people want to get rich off the not-so-clever people. They did this by getting the Central banks to issue lots of imaginary money, then lending this currency to people to buy assets which were really not worth anything, getting rich off the commissions. When the poor people could not borrow any more of the imaginary money the whole house of cards collapsed, except that the bankers kept all their gains and the poor people lost everything they thought they had.
In other words, capitalism, far from making everyone a winner, was really just a way for the clever people to get rich off the poor people.
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JPMorgan has got an incredible deal.
But the law of unintended consequences rears its head...
All unsecured investment grade and senior debt has perhaps all been converted to junk by this deal.
Debt that is used by all of our pension funds the world over as low risk assets. Especially in funds for those close to retirement.
As the default risk has been ramped up to ridiculous levels, they are now unsuitable investments.
This problem is not limited to the spivs, speculators, asset strippers et al. The reprecuscssions will make the recession even deeper and harder to clime out of.
Companies will not be able to borrow, more will go under, companies other than banks will start to fall.
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I do agree that action needs to be taken to help the situation, but throwing such vast sums in with no conditions to simply 'buy' the bad debt from various institutions seems like madness to me.
I think the help should be in the form of repayable loans to each qualifying institution, then when as GWB says the economy recovers, they begin to pay it back. You cannot take all the profit in good times then expect to be bailed out by government in the bad.
What about householders who are faced with lots of debt? will the government also buy that off them for good?
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Why not bail out the home owners by settling some of their mortgage debt and then you bail out the banks in the process?
If the idea of the banking bailout is to save the banks from all of these bad mortgage debts (so they can lend to each other etc), then rather than buying the mortgages from the banks and still leaving the borrowers in arrears to face eviction, why not simply settle all of the mortgage arrears on behalf of the borrowers and also pay off (say) one third of the remaing debt or each mortgage holder?
The banks gets paid all arrears upto date plus a third of the morgage is repaid (reducing the exposure to falling property prices) and home owners owe a lot less, sothey get a breathing space and a chance to keep their homes.
Pay of the consumers debt and the banks have no 'toxic' debt to worry about, plus people keep their homes and have more money in their pocket to put back into the economy.
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It is my understanding that when we in the UK (and the USA) buy TV's ( or oil or anything else that can't be sourced in the UK) much of the money goes to China or the Mid and Far East, leading to a massive current account deficit. Also I understand that the French and Germans have much smaller current account deficits ( or perhaps even a small surplus) as well as perhaps less easy access to the cheap credit which we have in the UK.
Is a competitive devaluation called for? What would it take to get the £ to parity with the Euro? Would an interest rate cut to 3% do it while keeping credit very tight by some other means? Once the £ reaches parity, joining the Euro would be easy if we meet Gordon's tests ( what were they?) and the EU requirements.
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#99 and #88
The US media have been sacking Wall Street big time this week, rightly so, but it has distorted the big picture.
If public opinion was properly tested, (not by lining up a few dudes to walk around City Hall with bill boards or house repo-victims in a few downtown neighborhoods), you would realise that there has been a false impression created.
When the real facts are properly presented to the American people, opinion will support the President and the Treasury, have no doubts.
Why ?
There are about 1.2Million Americans affected by the mortgage depression right now, and without a deal, about 3.5 Americans could be affected in the same way.
We are told that about 100Million ordinary Americans will be hit with defaulting pensions, lost investments, lost family savings, reduced property equity and it is certain millions of jobs
will be lost if there is no deal. About as bad as the recession in 1993.
That's why a deal will go thru, but there is also an election in six weeks time.
Contrary to european opinion the Congress is considering the effect of doing nothing in this crisis on the rest of the World.
I am on this planet a bit nearer to the problem than yourself, I can see your JavaMan 'nom de plume' is for real, it was a just bone head wasn't it ?
America has faults, just like everybody else.
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Having sold my house I spread my savings across several big banks. The take-over of HBOS by Lloyds TSB now means my savings in one institution exceeds the FSA compensation sheme maximum of £35,000. Expressing my wish to cancel a Fixed Rate Bond with Lloyds because I was now over the compensation scheme limit, I was told I would not only lose interest but would I to pay approximately £230 in penalty charges. Surely this is very unfair.
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How can the architects of the policy of
demutualisation (i.e. the Tory Party)
which as Robert Peston so rightly says now
lies in ruins, dare to offer themselves once
again to the electorate? Will the Gadarene
swine once more respond to the lure of pig
swill? There are manyanswers which should
be demanded in Birmingham this week.
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"131. At 7:35pm on 26 Sep 2008, wykhamist wrote:
It seems to me that there must be someone clever enough out there to see to the root of the problem."
Ludwig Von Mises, The theory of money and credit, published 1912:
e.g.
http://www.mises.org/money.asp
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This thinning of the herd will affect the "Unheard" most
http://www.wilytrax.com
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