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True cost of the rescue

Robert Peston | 14:27 UK time, Saturday, 20 September 2008

The US Government has just admitted that the financial system was on the verge of total meltdown. And it's right. On Thursday, even blue chip companies were having difficulty rolling over their short-term borrowings.

Armageddon was minutes away - averted by Hank Paulson's plan to insure money-market funds and cut the gangrene out of the banking system.

The US Treasury Secretary is working over the weekend to nationalise around £450bn of banks' balance sheets - equivalent to a third of the British economy.

So, if anything, he was guilty of understatement when he conceded that the "financial regulatory structure is sub-optimal, duplicative and outdated".

However, on Friday - in reaction to all of that - stock markets were partying as though its 1999 again.

Hmmmm.

That doesn't feel like quite the right reaction to me.

Investors are probably right to conclude that one great source of stress will be lifted from the banking system, as and when Paulson sucks their toxic subprime loans, unsellable asset-backed securities, and radioactive collateralised debt obligations into a vast, lead-lined box financed by US taxpayers.

In the country that brought us Ghostbusters, he is styling himself as the Debtbuster.

And it's not all front: the risk of a calamitous, domino-effect, collapse of banks all over the world - and especially throughout the US - has receded somewhat.

That said, the devil will be in the detail of the mechanics of the rescue. What we don't yet know, for example, is whether Paulson's First Toxic Bank - as I shall christen his vehicle for buying the stinky housing loans - will pay the written-down price for the debt, the market price (which after Lehmans collapse is lower than the written-down price) or a discount to the market price.

This matters.

There is an argument that Paulson should pay a discount to the market price, to protect US taxpayers and soundly spank the banks and their owners.

However if he did that, banks' capital resources would be further depleted, which would further undermine their ability to lend to the rest of us. And it wouldn't do a great deal to reinforce the foundations of the creaking banking system.

But if he bails banks out at the price of this stuff in their books or above, well that would be an acknowledgement that an entire generation of banking executives had behaved wholly irresponsibly in their lending practices for years.

Arguably, they should all be sacked and thrown on to the mercy of a jobs market made all the less kind by their own recklessness.

Let's assume for now that Paulson finds a mechanism to extract the poison from the banks, without enfeebling them in the process. Can we all then breathe a sigh of relief and assume our economic prospects will improve markedly?

Sadly, I don't think so.

Banks, money managers, controllers of trillions of dollars on behalf of the cash-rich states of Asia and the Middle East have all had a painful lesson in the meaning of risk over the past fortnight.

They will for an extended period - possibly years - be less willing to fund our banks without demanding a significant increment in what the banks pay them. That'll increase the cost of money for all of us, which will make most of us feel quite a lot poorer for some time.

Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years.

Our retail banks, commercial banks and investment banks will all be subject to much tighter regulation. Which will dampen their growth and their profitability.

Just the elimination of HBOS as an independent bank has removed from the scene a competitive thorn in the side of the other big banks which a few years ago shook them out of their torpor to the benefit of consumers and small businesses - for all that it's patently true that HBOS didn't properly appreciate the risks it was running in the way it financed itself.

The UK's unsustainable economic dependence on the City and financial services is coming home to roost.

The shrinkage of that sector may - just on its own - reduce economic growth by well over one percentage point over the coming year.

But, perhaps more significantly, the cutting down of finance into a smaller more regulated industry, and a semi-permanent rise in the perception of the risks of lending, will reduce the potential growth of the economy, probably for many years to come.

Even after the lean years are passed, and there may be a couple of them to come, subsequent recovery may be lacklustre. After the boom years, we may be entering the dismal grey years.

Comments

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  • Comment number 1.

    Although if the "dismal grey years" are characterised by sensible lending and borrowing, and well-regulated banks, they don't sound too bad to me.

    The loss of easy access to expensive consumer goods is offset by no longer having sleepless nights worrying about the debt piled up to pay for them.

  • Comment number 2.

    Spot on Robert. I fear that most people haven't got the faintest idea just how bad will be the economic and social ramifications of all this. We have been well and truly stuffed by the unregulated and untrammelled greed of the banking industry and the failure of our politicians either to grasp what was happening and/or to stop it. "Ordinary folk" like me will pay an horrendous price for this over the coming years. Throw in the impact of the end of the era of cheap energy (which will smash into us like a steam train over the next 5 years too) and the UK's chronic under-investment in its energy infrastructure and security (the lights will start going out in 5 - 7 years from now) and you have a very potent mix. Armageddon may have been minutes away earlier this week, but I'll lay money that we have not seen off Armageddon yet - not by a long chalk.

  • Comment number 3.

    Perhaps criminal action against the directors of HBOS would go a long way to curbing the banks' enthusiasm for taking risks with money that in fact does not belong to them but to their depositers. This is a very small step from embezzlement and should be considered as such. In any other walk of life this would be criminal , why not in banking? Also, rewarding the chairman of HBOS with shares is beyond belief, how can you reward someone for presiding over the destruction of a national icon ?

  • Comment number 4.

    This all sounds rather similar to me paying off my youngest son's credit card to help him get on his feet after university. He'd transferred the debt to a 0% card and had "maxed" it out so of course the interest was charged as every month it went over the limit even if he didn't spend anything. I did it because as I said to him at the time I couldn't bear the thought of anyone paying all that interest to the bank every month for nothing. Subsequently he got a job and began to save money (although he still spends a lot in my eyes).......He still has a massive student loan to pay off but that's another story. The government moved the goalposts half way through my childrens' education and there was no time to save towards their university education even if I'd been in a position to do so.

    If this doesn't work we really are all doomed but from the earth's point of view it's a very good thing. It's a big wake up call to slow down, stop polluting, stop wasting the earth's resources and share out resources a bit more fairly. If we don't then we are just another species to be made extinct. It's happened before many times.....if a species gets "too big for its boots" it'll be wiped out one way or another. The earth behaves like a living organism and will "shake off" anything it doesn't like so it can return to a steady state of homeostasis.

    We've all been a bit too greedy in the west and it's time to face the consequences!

  • Comment number 5.

    I'm more worried about the money spent. The US Government is in a serious deficit, with the debt ceiling being raised to over $11 Trillion. Neither of the major candidates has plans for a balanced budget. This attempt to stop the slide of the markets may make things a lot worse. Let's see if the US Government is "too big to fail"...

    Fortunately for the UK, the deficit is far less. The loss of financial jobs may reduce the UK economy somewhat, but the Crown and Parliament are still intact. Perhaps you can bail us out?

  • Comment number 6.

    The question is not whether the government can detoxify those bad "assets" but whether it has the wherewithal to do so.

    In the later half of the last decade and the early part of this decade, China detoxified trillions of bad debts that they "encouraged" their big banks to make to their SOEs (State Owned Enterprises) so that they could enter the WTO era with (nearly) clean balance sheets !! However, since they were sitting on an ever growing mountain of cash and reserves, they had the wherewithal to do so almost painlessly for its citizens.

    The same is *NOT* true for UK because, after 11 years of Gordon Brown's "financial prudence", UK now enjoys the highest level of National debt it's ever seen !! Where will the money come from to detoxify these poisonous "assets" ?? Printing more paper will just devalue the £. Taking more National debt will ensure that the other countries will have less faith and trust in the UK economy, with its attendant consequences.

  • Comment number 7.

    It is all very well, and easy, to blame Banks,Credit suppliers etc., but a modern, democratic world cannot exist without accessible credit.
    The alternative is a feudal system, no doubt dressed up in suitable aphorisms and nonsensical homilies.
    Punish the fraudsters, admonish the incompetent and get on with life

  • Comment number 8.

    I misheard a newsreader talking about HBOS the other day, I thought I heard him say, "Hedge Botch", perhaps he meant to say this after all!

  • Comment number 9.

    #3 - "how can you reward someone for presiding over the destruction of a national icon" - well, he is not rewarded for the destruction of a national icon. He is rewarded for paying lots of dividends to the shareholders of the bank at the expense of future steady income.

    Therein lies the difference between boring Lloyds and highly exciting HBOS !!

    I'm sure Mr. Ponzi of the scheme-fame will be very proud of his current disciples !!

  • Comment number 10.

    The sucker's rally on Friday will probably go down in history as the greatest ever example of the triumph of hope over experience.

    We are nowhere near out of this mess. Banning short selling won't make any difference either - I wonder who they will try to blame next - probably you Robert!

    In the last week free market capitalism died - and Wall St applauded. What will go next week? Democracy maybe?

    The public are not so daft that they will let the financiers get away with this. Those french folks in 1789 didn't either.

  • Comment number 11.

    Grey banking/dismal times ahead.
    What have we just been through this week if not a dismal time ?
    The current situation has still not fully played out and there will be more "fun" days/weeks ahead for you Mr Preston.
    So don't be down hearted yet.
    This era has only just begun who can tell what it will bring.
    The start of the longest journey begins with the first step, as that great "capitalist" Mao Zedong once said...
    But please do keep up these blogs of yours. It feels like the war all over again. We are sitting here in Blighty being stiff upper lipped all gathered around the computer lisertning to Aunty BBC bringing us news from the front. Banks are expolding left,right and centre. But our man RP with tin hat and bullet proof pinstripped suit will tell us like it is.
    gawd bless ya sir !

  • Comment number 12.

    USA for long has depended on privatasion of all her assets which means a workforce unknown to US was in control of banks,economy,Wall Street etc.
    It worked for a lot of years as the last generation ably ran the economy but now this generation of CEOs could not keep it up,hence one after another banks,insurance companies are filing for bankruptcy.The Government needs to control the assets and cannot leave them in irresponsible hands..
    This is where Britain scores over USA.

  • Comment number 13.

    Good analysis Robert.
    But it just may have worked. Banning of short sales was the cause for the unnecessary revival in the markets however.

    Shares rose, as they are assuming that the old days are here again. For the market to raise 10% is pathetic at best, and I am afraid I would like to see Mr Brown in court, and going to jail. I would also like to see, as a call from the conservative party

    1. A recognition that the actions from 2004 by banks and regulators to present date, has been criminal.
    2. Courts set up to prosecute these individuals and to sequestrate their personal assets gained over this period.
    3. The removal and stripping of all assets given as golden handshakes and parachutes

    This is because the people paying for these people's failures is the tax payer. Now of course, expect the banks to kick and scream, but right now, they are not in a position to do that.

    When this is done, we shall return to what we had before in the banking system. And this is why this will be effective, and why this is easily implemented. - There is nothing wrong with the financial system of this nation, or the USA. WE have the regulatory structure. IT WAS NOT implemented. THAT MEANS, there was a massive crime of huge negligence.

    To prevent this from happening again means prosecutions from the people of our Chancellor and bankers who have perpetrated this crime of tax payer theft. We believe this strongly works in our criminal system, so we obviously believe so in our financial system. Without these prosecutions, nothing will change, improve, move forward, or regain confidence.

    And I work in the CITY.

  • Comment number 14.

    I don't see that Mr. Peston's adds anything to the reporting of this
    whole affair. Yes, some bad lending decisions were made, yes some
    bought some pretty ropey assets and yes some reappraisal needs to take
    place and those who made errors sanctioned. What is worrying is that innovation is now apparently a dirty word
    along with profit.

    Words like 'gangrene''toxic''radioactive''stinky' and 'poison' are
    not helpful, just a bit pointless. They mean nothing in this context

    As for the stock market 'partying' again, Oh dear, more cliche.
    I expect that this may have been those who were short of stock hurriedly buying
    them back and others who could forsee this, going long the market.

    Mr Peston will get his pension from the licence payer. The rest of us
    have to rely on the profits made in the market to lift stocks to pay
    for our pensions. Yes, I am greedy if that means I want the best pension I can when I retire.

    It's perhaps time that some at the BBC recognise that profit is not a dirty
    word, it pays for many people's pensions, that is those of us who do not
    work for the rate payer, tax payer and of course Licence Payer.

  • Comment number 15.

    Robert Peston is right.
    The "First Toxic Bank" is now probably the biggest bank in the world.
    Perhaps we should re-name the British Bankers Association to "The Grand Order of Parasites".

  • Comment number 16.

    If “total financial meltdown” is the ultimate price of unbridled growth of the economy, we can do without it, especially when it poisons the planet.

    When will humanity grow up enough to measure and quantify quality and understand that more or bigger is not always better?

  • Comment number 17.

    Robert Is this US money new money to be printed or old money. And if the banks are not to be penalized fully for their errors in taking risks does this not mean that everyone else is penalized. Is it completely distorting the true market so that once again the speculators will be taking a pot shot again to find out where the real values lie?


  • Comment number 18.

    "...it's patently true that HBOS didn't properly appreciate the risks it was running in the way it financed itself." well done, Robert. Your mate Hornby has had to go and how "perhaps mistakes were make".

    Paulson et al have probably brought the liquidity phase of the credit crunch to an end, or more precisely "bottomed out" the source of the problem i.e. US housing debt defaults.

    Part 2 of the credit crunch i.e. solency can, at long last, get started. HBOS were not viable, given exposure to housing market PLUS exposure to building company and similar

  • Comment number 19.

    In the real world of paying off one's debts for loans on property or any other purchase o for gambling in a casino, anyone who behaved they way so-called "investment bankers" and the like have over the past decade would have ended up in jail a long time ago for fraud, embezzlement and theft. Unfortunately, the bigger the white-collar crime, the less likely it will be effectively and severely punished! Indeed, it looks like the majority of "sinners" will get away with it scot free and can carry on as before without personal loss or punishment as they are bailed out with taxpayers' monies.

  • Comment number 20.

    What should occur is that the debts are nationalised at the booked rate. However if this is above the market rate minus a discount for risk then the US (and I guess soon the UK) Govt should take a stake in the bank equivalent to the risk/difference it is taking on. This may mean that banks are effectively nationalised, but I fail to see why the tax payer should not enjoy the upside (i.e.) profits once the situation has returned to normal. If this approach was taken then the funds from dividends and the eventual sale of the stakes in the banks would probably cover most if not all of the initial upfront cost to the tax payer. Also the bank executives MUST lose their shirts over this, i.e. be forced to hand back any bonuses they have accrued over say the last 10 years. If they are no forced to do that then I see no reason for the people not to take to the streets and to demand the heads of the politicians and bankers.

  • Comment number 21.

    One of the things I have constantly wondered (and posted) about is what the cost to the taxpayer is of propping up our financial institutions.

    I have asked previously on Robert's blogs if anyone could quantify this, perhaps this one is now the correct place.

    From the figures quoted on the BBC's website, it appears that we have accrued an extra £126 billion debt since the baling out of Northern Rock. Assuming we have to service this debt at 5%, this means we have to find £6.3 billion extra from the tax revenue.

    There are apparently 29.54 million of us in work, so that means we each have to contribute an extra £213.27 per annum just to bale out Northern Rock.

    Would anyone like to comment on my simplistic calculation, which assumes that NR are the only liability and that the 29.54 million of us in work is not decreasing ? What would the figures be if they were extrapolated to cover all our other bale-outs ?

  • Comment number 22.

    Ahh, nothing like a bit of hyperbole to keep us entertained, eh? This isn't Armageddon, but just another sweet heart bailout of fat cats on WS. Lehman employees pocketed $5B in bonuses last year. And then add in Bear Sterns, Merrill, Goldman and all the rest and you have tens of billions of money that was fleeced by WS and shoveled into a relatively tiny group of cynical, corrupt insiders who grabbed while the still could. Some were so greedy they didn't have the sense to get out. Hank Greenberg was worth over $22B last year. He's now worth less than $1B - about $999.9999MM too much imo.

    But guess who's watching the hen house? Hank Paulson, a long time insider and head of the biggest scammer of em all - Goldman Sachs.

    The old saying is why do hoodlums rob banks and the reply is "that's where the money is" comes to mind. Right now, it's a culture of greed that is rewarded on breathtaking scale. And because of that scale, the con men are lauded and consider "captains of industry" rather that spending the rest of their life in a rat hole of a jail cell.

    Sure, without greedy consumers buying homes they couldn't afford, these scammers would never have got us in this position, but without the drug (cheap financing), the public would never have got addicted. They system worked fine until the geniuses at WS figured out how to put lipstick on a pig and get pure rubbish rated as "AAA" paper and then sold that bs paper around the world.

  • Comment number 23.

    "Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years."

    Hmm. Remember Nick Leeson? Orange County? Long Term Capital Management? Societe Générale?

    Maybe rather less creativity will be rather a good thing. It won't be so exciting for finance journalists to report, but it might save a lot of worry for the rest of us.

  • Comment number 24.

    Goodbye Lifestyle! Goodbye Selfishness? Hello Skint and Drudgery! Hello Altruism, Community and Happiness.

  • Comment number 25.

    I thought the BBC were meant to provide news, not endless, unremitting speculation. Everyone knows this can all go wrong, but why focus on the worst case scenario entirely? If you're going to speculate (as opposed to just reporting the facts like I think you should), then why not analyse how recent events could work, or does that not get you so much attention?

  • Comment number 26.

    Do we yet know whether Paulson is sucking up all toxic debt in incurred within the US regardless of who the lender was or only stuff to which the US banks are exposed? What happens to toxic debt raised from European, Asian and Middle East banks? These hard times would probably have come a lot sooner if it had not been for sovereign wealth fund injections. I imagine they will not take it kindly if the Treasury Department only looks after it's own.

  • Comment number 27.

    It is a brave map reader who overrides the GPS instructions in the presence of back-seat drivers in a hurry. To what extent is stock market buying and selling also software driven or prompted?
    If the rapid reaction of computer software contributes to or is responsible for destabilising the stock market, causing an overreaction or oscillatory response to a step input, is there a feasible solution such as the introduction of mandatory delays into the dealing system worldwide?

  • Comment number 28.

    I thnk you are making the mistake of thinking the supposed economic growth of recent years was real. An increase in GDP caused by us spending more on credit that we cannot pay back does not seem to me to be real. Neither do profits manufactured by financial engineering that are paid out as silly amount bonuses.We need growth to be wealth creation led and that means getting folk into real jobs that create real value. If banks are cautious, that will be no bad thing but it will put a greater emphasis on the role of capital to fuel investment- and PE houses have a big part to play in this- but they will have to earn their money by adding value not using ridiculous gearing levels and perhaps having to work on longer time frames.
    Challenging and interesting times that none of us know where they will lead but the system has coped with some amazing issues in recent years eg the meltdown in Asia- but perhaps they became very good at delay rather than soving problems- time will tell.

  • Comment number 29.

    We need a big firewall between us and the US . All the toxity must be kept over that side of the pond .

    We also need to ensure that all the investors who have lost on supposed good investments are compensated - if the rating agency said it was AAA+ then compensate to AAA+ .

  • Comment number 30.

    RE: 11

    "But please do keep up these blogs of yours. It feels like the war all over again. We are sitting here in Blighty being stiff upper lipped all gathered around the computer lisertning to Aunty BBC bringing us news from the front. Banks are expolding left,right and centre. But our man RP with tin hat and bullet proof pinstripped suit will tell us like it is.
    gawd bless ya sir !"

    I love the image. I hope it's still funny in a few months time!

  • Comment number 31.

    Your comments regarding whether the new US Fund should recieve bonds at a discount surely ignores the fact that the banks have been writing down debt within their balance sheets due to the sub prime crisis over the past year. For example in January Citigroup and Merrill together wrote off a total of 35bln. This was the start of the difficulty the banks were experiencing as the graps created in their balance sheets need to be plugged and as we know they have found it difficult to borrow fresh capital. So you would think that it is fair to assume that the debt held on balance sheets in the US will be already at a considerable discount to the levels at which they were being valued 12 months ago.
    Also within the mortgage structures that will be transferred you should assume that there are good mortgages as well as bad, although the expression sub prime is self expanatory.
    Also to dismiss the rise in the markets around the world on Friday is I think not giving enough credit to the suspension of short selling. We saw a massive short squeeze and although the suspension of short selling will reduce the liquidity in the market over the next 3 months this may be a small sacrifice to achieve a more stable enviourment for the market to build on. Markets never go up or down in a straight line but it is worth remembering that occasionally you will see good results from intervention and even within a recession some stocks will go up and some will go down this is why sector analysis is so important.
    And lastly, when Central Banks lend money it is already their practice to take what is called a haircut, this is in effect an extra cost for lending. They do this with cash, stock and bonds. So, as suggested in your article, this will not be a new practice.
    I think that perhaps the BBC should look for positive as well as negative results from the various moves by the governments of the world and I think this would go a long way to help recover confidence in the stock markets and high street banks from the man in the street

  • Comment number 32.

    Robert,

    You raise a couple of interesting questions:

    1. How will they identify the toxic debt so that it can be extracted - the market and the institutions concerned can't find it, so how will they do so?

    2. Will they extract Toxic debt originating in the US homes loans industry even if it is now owned by foreign institutions?

    My guesses at the answers:

    1. Anything that the banks say is a toxic debt will become a toxic debt - that is any debt or debt related instrument, so long as it increases the profitability and liquidity of the bank concerned. This basically is a licence to make totally uncontrolled profit in all US bans and institutions at the expense of the taxpayer. In short it stinks!

    2. Only US owned debt will be accepted even if the debt originated in the US. In other words the Poulson initiative will protect US banks and institutions at the cost of all overseas ones. This is highly likely the only from of legislation that Congress will pass. In other words those who pushed up shares in London on Friday had better read the small print! My guess is that they got it massively wrong.

  • Comment number 33.

    It would be nice if politicians stopped looking down their noses at boring old manufacturing.

    It's not likely though; there's really nothing sexy about turning raw materials into valuable goods, not compared to being entranced by clever-talkers in smart suits playing with billions of "Monopoly money".

    How foolish the Chinese are to concentrate on making goods and selling them to the rest of the World. Where will that get them I wonder, apart from owning most of the planet in 10 years?

  • Comment number 34.

    #26 If the US Treasury only looks after US bank owned debts then the entire US economy will be in for a massive meltdown !! All non-US trading partners will insist on cash-up-front from any US company. No more credit !! It will be fun to watch the US pay cash for their oil imports !! No more oil futures !!

    On top of all that, those countries that hold US debts will dump them in the open market and if the US cannot redeem them, then the US$ goes through the floor !!

  • Comment number 35.

    'Armageddon was minutes away'

    For once, we are talking!

    As a mathematical function, how can a system based on growth perpetuate itself indefinitely (based on limited resources).

    It can't, mind you as long as the super rich are happy.................The rest of us are doomed (eventually)

  • Comment number 36.

    I agree with RP.

    Something is not right here.

    If the problem could be solved by government (in the US or UK) just buying the toxic debt why hasn't someone done it before now?

    Could it be that the US government buying this huge amount of debt is going to have unpleasant side effects?

    What are the macro-economic consequences? Any impact on inflation, unemployment, currency values, interest rates, tax rates?

    P.S. Please guys stop barking on about criminal prosecutions. It rather shows up a lack of knowledge of how the criminal justice system functions. Criminal prosecutions would, if ever considered, take forever and achieve nothing useful.

  • Comment number 37.

    #21 good post,

    One may be even tempted to ask the question, why should the tax payer bail them out at all?

    If there is a risk to financial stability then perhaps the time to nationalise the banking system has arrived - after all, they have proved themselves to be incapable of managing the system properly.

    The fiat currency system stands where the once proud gold standard did, on the edge of a precipice.

  • Comment number 38.

    Robert:

    A very thoughtful analysis. However, you do seem to imply that higher interest rates will be a bad thing.

    Actually, structurally higher rates might be good news, if they prevent a repetition of the asset and debt bubble which got us into this mess in the first place.

    If we do indeed feel poorer, it will simply be the result of having to live within what we earn, rather than living within what we can borrow on top of what we earn. It will be a welcome dose of reality.

    Personally, the idea that would really scare me would be any prospect of a return to low long-term interest rates.

  • Comment number 39.

    #2:

    Spot-on analysis. The likeliest date for the lights to start going out is the second half of 2014, when the first two nuclear plants close down.

  • Comment number 40.

    From an American point of view I agree that the bank and brokerage managers should be publicly
    pilloried. In our system of government the president does have the responsibility to ensure that the public trust is not violated. Mr. Bush ignored that responsibility. However, for years Congress has added programs that were, in reality, an income re-distribution program. This has to stop, it i the middle class that has the small businesses and works the every day job, paying taxes. Giving away my hard-earned dollars to those who do not pay taxes or hold a job is counter-productive.

  • Comment number 41.

    None of this appears to get to the fundamental group behind and the basic reason why--- all this fraud and bad business went on and on for many years. Would someone get to the TRUTH behind this mother of a mess!
    And YES, the truth is out there.

  • Comment number 42.

    I think you are missing the point. Money market funds have nothing to do with the banking system. They are an alternative to leaving money in the bank which is use by many people because it yields more than do bank deposits. By guaranteeing these funds the government is not helping the banks, which might stand to gain if MMFunds were liquidated and money returned to the banking system. It is preventing the forced sale of assets held by the MMFunds, probably 95% of which are sound and 5% speculative. The risk to the Government therefore is probably about 2,5% of the sums mentioned and you can assume that fees will be levied, albeit of a contingent nature, which will reduce even that amount;

  • Comment number 43.

    There is nothing wrong with reduced growth rate - in fact it should be reduced continually and indefinately. There is far too much waste in so many areas of production. Result of high growth: high prices, pollution/chemical waste, enviromental damage, destruction of species/trees/rivers, wars, more greed and global warming (if we agree its manmade). So I see nothing wrong with a reduced growth rate.

  • Comment number 44.

    In the words of Sellars and Yeatman (I hope I have spelled their names correctly), who wrote "1066 and All That", does this mean that the USA will no longer be "Top Nation"?

    Who will have that distinction next?

  • Comment number 45.

    Robert: where have all the risk managers gone? Insurance is about spreading risk, yet AIG held over $300bn of credit default swaps. Only a blind man could fail to spot the dangers of such a concentration of risk. HBOS has over $100bn of short note notes due payable in the next 12 months. Were all good risk managers sidelined, or were they encouraged to take excessive risk, by bonuses linked to short term profit? We ain't out of the woods yet!

  • Comment number 46.

    >>Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years.

    It is exactly this "financial creativity, innovation" that has landed us in the plop - in my personal life I don't rely on financial creativity to make my bank balance defy reality, I live within my means (including some borrowing, but always within my means).

    Sure there are heaps of things I'd love to have that my financial state won't allow me to have at the moment - and now I'm potentially penalised because everyone else doesn't have the same willpower as me.

    The foolish man built his house upon the sand - it seems he was quite astute to build his house on something as tangible as sand - rather than a lie as our recent economic growth has been.

    For the record, I don't blame the banks entirely - they are working within a framework provided by governments - as such it is governments that need to take some of the flak. Rather than use my (taxpayers) money the government ministers who held office should be surcharged personally - like they did Dame Shirley "I don't have a bean, oh oops you mean *that* money" Porter

  • Comment number 47.

    Robert - the thing that puzzles me is - WHY must we have positive growwth year on year - intuitively it feels tight but is it really?

    Is there anywhere that explains this.

    The problem I have is that it seems to be growth at any cost - and what we have seen for the last few years is that - maybe this is not acceptable?

    Or maybe I'm just not clever enough to understand this stuff!

  • Comment number 48.

    There has been an awful lot of comment that bankers took excessive risk with other peoples money in order to generate massive bonuses for themselves. I don't feel this is wholly accurate.

    These high risk investments were nothing of the sort. They were incredibly low risk, in the sense that they were almost guaranteed to lose all value. They should have carried a AAA rating for going bust.

    If the man on the Clapham omnibus scratches his head thinking 5 times salary at 125% LTV, on top of a barrow load of credit card debt sound like a recipe for disaster, why did no such thing occur to our pre-eminent bankers making wads of cash?

    Maybe it did, and maybe they just didn't care. They knew that with a couple more annual lottery win bonuses, they would be sitting pretty when the music stopped.

    I'm not at all convinced this was a case of "innocent" greed and recklessness, and not the mother of all Ponzi schemes.

    Any other industry where such concerted and deliberate negligence was carried out on a massive scale, would result in criminal charges and prison sentences for the principals involved. Whereas we've seen all the sociopaths walk away with their bank balances held high.

    Now immensely wealthy bankers want the taxpayer to set thmn up in a brand new scheme, but this time it'll be different.

  • Comment number 49.

    I have been reading the Democratic Underground Forum this evening. It seems that the US government says that it is going to secure the mortgage market with gold reserves. Then other Forum participants pointed out that, as the Bush administration refused to have the gold reserves audited, no one knows how much there is. So the US government is securing mortgages with an unknown and uncounted amount of gold. (The CIA World Factbook 2008 says that the USA has gold reserves of nearly USD 66bn; the Federal Reserve web site says it's USD 225bn.) Some people posting on the Democratic Underground Forum think that the gold has already gone.

  • Comment number 50.

    there is a very important point that was made by hank paulson in his press briefing on the new package that very few people, including i fear robert, have picked up on. his point is that precisely because the government is buying (and in effect guaranteeing) these debts, many of them will cease to be "toxic" at all.

    to label some of this debt as "toxic" is perfectly correct. this is how it was actually called by the investment bankers themselves (but only amongst themselves) when they repackaged it and sold it onto gullible clients. however, "toxicity" is a relative concept that depends on the borrower's (in)ability to pay. and the ability to pay depends very much on the broader economy.

    what has happened in the current crisis is that the financial markets collectively realised mid-week that that the "toxicity" had become systemic and was unravelling the entire credit market and with it the us economy. what i mean is that the losses incurred through sub-prime lending (the truly "toxic" lending that should never have happened in the first place) was creating big enough problems that it was undermining the creditworthiness of borrowers who previously would not have been considered "toxic" at all.

    this feedback happened in many ways including (among others):
    (i) tighter lending terms by the banks (who needed to "deleverage" and repair the damange done by subprime to their balance sheets) meaning that other borrowers became unable to refinance existing debts
    (ii) falling house prices (from admittedly way overbloated levels) due to the liquidation of foreclosed properties and the stricter lending environment, which then pushed many perfectly sensible borrowers (who had not taken out 100%+ loans) into negative equity
    (iii) more reckless institutions like lehman being bankrupted, resulting in additional losses to other (more sensible) financial institutions that were exposed to lehman, putting their own solvency at risk
    (iv) the biggest feedback of all: a recession resulting from the tighter lending environment, widespread insolvencies and loss of household wealth (falling equity and housing markets), all leading to widespread loss of income and employment, resulting in widespread inability to repay debts (mortgages, credit cards, auto loans, corporate loans, you name it).

    what happened this week was that the market finally woke up to the fact that the crisis was big enough to trigger these feedback uncontrollable effects. whereas before the crisis felt like a storm in a teacup - i.e. losses limited to the truly "toxic" subprime mortgage sector - suddenly everyone realised that the entire financial system was about to unravel and take the economy out with it.

    so the important point that hank paulson made is this: the us government is in effect guaranteeing the debts of all of these troubled mortgage borrowers. this guarantee will restore confidence that these debts will be repaid (even if the government has to tax some other people in order to ensure that this happens). by restoring this confidence, the feedback effects (particularly the feedback into a recession) is significantly mitigated. by stopping this feedback, the value of the "toxic" debts being bought will significantly improve. debts that would otherwise have become toxic in the disaster scenario will no longer become toxic by virtue of the government's intervention.

    and the best bit of all - this clever confidence trick (if it works) means that the us taxpayer may not even end up losing that much money. maybe they will even make a profit.

  • Comment number 51.

    Banks who cant manage should of been bankrupted. Then retail depositors compensated via FDIC. Now banks got huge chunks of public money after abusing public for so long. As to liquidity that is not a problem. New banks can be formed to provide loans. Executives of the troubles banks and also the owners should be investigated. Grey times ahead if we dont shake off corrupt and greedy bankers grip on our world. Regards, Alex [Personal details removed by Moderator]

  • Comment number 52.

    "Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years."

    Wasn't this the very thing that caused all of the problems in the first place?

    Re the former Directors of Northern Rock and HBOS. Are they not being allowed to profit from their greed in being given a large departure bonus, and by being allowed to keep the bonus share options achieved through what was, by any definition, a scam operation? All rather like criminals being allowed to profit from their crimes.

    I doubt though that they will be viewed from that perspective, seeing as they are white collar criminals and also good friends of 'Labour'.


  • Comment number 53.

    Smart move by the US government – rather like the property speculators in the UK buying cheap property now in the certain knowledge that the property market will eventually recover and they will make a fortune. The “toxic debt” is mainly mortgages secured on US property. That property may well be worth a lot less than the debt secured on it at present but in a few years the US government will be the proud owners of a vast and very valuable property portfolio. Ditto buying up failing banks and insurance companies. The tax payers are very unlikely to loose out in the long run.
    Of course, if they were really smart they would stop all the repossessions and agree terms with the occupiers for joint ownership, the occupiers renting the half owned by the government. This would boost the housing market as it would remove the large numbers of “distressed” sales pulling down the property market at the moment.

  • Comment number 54.

    Where did my post go?

  • Comment number 55.

    I'm scared, because the consequences of this bailout attempt seem completely unpredictable. And I am angry about what you keep repeating: You always suggest that it's bad for the UK if there is less personal credit available. But Robert, just like the Americans, the British are completely over-indebted, which is the root of the whole problem. The last thing you should be asking for is more private debt. Let the b..... house prices fall until their worth equals the savings that people around here have on their accounts. Then they can be funded again and everything is fine. In the meantime we need an economy here. It's high time!

  • Comment number 56.

    #53, plastic_bag, you should come over here
    and help run things.

  • Comment number 57.

    If a business organization that is too big to fail has to be rescued by taxpayers should not the taxpayers have a say as to how big a business organization can grow?

    Economy prospers only when the 'non-ruling class' has money to spend and the current disparity in income between the managerial and labor class is the root cause for the economic distress.

  • Comment number 58.

    #39 FriendlyCard wrote:

    Spot-on analysis. The likeliest date for the lights to start going out is the second half of 2014, when the first two nuclear plants close down.


    Check out the site:
    http://www.bmreports.com/servlet/com.logica.neta.bwp_SystemWarningServlet

    Methinks the lack-of-power-related-armageddon is coming sooner rather than later. Nat Grid have issued an increasing number of NISMs (Notification of Inadequate System Margin), meaning the room for manoeuvre between demand, supply and spare capacity is exceedingly tight. Watch this space....if there is any power to do so!!

  • Comment number 59.

    53 plastic_bag. You're not an estate agent by any chance, are you?

  • Comment number 60.

    Didn't Brecht write (in the Threepenny Opera)..."Only dilettantes rob banks. The real pros found banks."

  • Comment number 61.

    RP says, "The US Government has just admitted that the financial system was on the verge of total meltdown" Can anyone provide a link to this admission?

    I'd also like to second the motion to stop all these calls for the bankers to be treated as criminals. A few of them were, and should be treated as such. Most of them made many decisions, many in a financial climate where everyone was praised for taking risks and booed for caution.

    Many of them were over-paid for the results they produce. The same is true of many pop stars, footballers and "celebrities". Like them, the bankers got what the market in bankers allowed them to get. They gambled with other people's money - but that was what they were paid to do. That they lost is unfortunate for all of us, but not criminal.

  • Comment number 62.

    Most sensible people do not care how much the rescue costs .providing someone else pays,hence the abstraction known as a future taxpayer.

    This farce is rapoidly turning into a traji comedy of MPerrors

  • Comment number 63.

    Any system that relies on infinite expansion for continuous profit is a chain letter or pyramid company. Last I heard was that they are illegal, no matter how they're disguised. Those at the top get the payoff and disappear into the woodwork and all other investors lose.

  • Comment number 64.

    The banking system seems to have degenerated into a form where those who have more money than they need effectively lend it to those who have less than they need in order to pay for day-to-day current expenditure. And the latter are expected to pay it back again in the future with interest.

    This is not a sustainable system. It inevitably leads to an ongoing transfer of wealth from the poor to the rich. It leads to the spiraling dependency on debt which we have witnessed in the last few years.

    But if those who have more money than they need stop lending to those who have less than they need (as is happening as a result of the credit crunch), then spending falls and we end up in recession.

    How do we avoid this? Well, there are alternative ways of transferring money from those who have more than they need to those who have less than they need. A more progressive taxation system would do the job just fine.

    Rather than bailing out the banks, just increase taxes (a lot) on the very rich and reduce taxes on low to middle incomes. That ought to keep spending going and avoid a recession.

  • Comment number 65.

    Growth and profitability that depend upon acceptance of unreasonable risks can be of no ultimate benefit to the economy, though they may benefit particular individuals, companies, or whole national economies in the short term. Acceptors of loans written by third parties cannot set indulgent criteria, else this debacle will be repeated. In the U.S. housing market, Fannie Mae's managers set ridiculously indulgent criteria, because myopic ideology became policy: they wished to see every affirmative-actioned civil service supervisor able to buy herself a McMansion, even if it meant lending at 120% of equity in loans doomed to default. Impelled by profit motive without personal risk, so-called lenders who had no intention of remaining on the paper exploited this situation to the fullest in accordance with human nature. It was bad practice through and through.

    In insurance it is trouble when the broker, paid by percentage of premium, "holds the pen" for the security, i.e., is able to bind the risk on his own. What results is called "cash flow underwriting." Caution for the system yields to personal gain. The same applies to lending when the Main Street lender makes his money writing the loan, but does not have to hold it. The loss of "creativity" that plays to this situation is not to be lamented.

  • Comment number 66.

    It's frustrating to see that all of the talk is about the failure of the banking system, not the long-standing failure of the property markets to value homes correctly. The repeated boom and bust must be a huge drain on the economy - housebuilders alternately rushing to employ everyone who knows what a brick looks like to build houses and laying them all off; homeowners and workers unable to move because of housing market illiquidity - but has happened again and again. It's also deeply unfair that your lifetime wealth can be so different depending on when you happen to enter the property market.

    There's only so much that limited credit can do to stop this. It can prick a bubble sooner, but a bubble is still a bubble even if only the creditworth participate - and it's still a drag on the economy. And remember, without mis-priced housing this crisis might never have happened.

    So, for me, the big question is: how can we fix our housing market? I don't even begin to know how to answer that. Government intervention could do more harm than good if it, say, prevents prices rising during a genuine shortage, or if politicians meddle for political reasons. Perhaps we need to get rid of the nauseating notion that rising=good. Or maybe valuers are all valuing property based on sales in the recent past plus a trend from the few months before that....meaning that future prices are determined partly by past changes and building in a 'momentum' that makes prices shoot past their fundamental value. But I can't imagine any kind of mandatory procedure that could be imposed that would produce an adequate valuation, even if it solves that one particular problem.

    [sigh]...maybe we're just stuck with it - better get that deposit ready for the next round.

  • Comment number 67.

    Private folly is saved again and the cost is social. Ordinary people - taxpayers - pick up the tab. Nothing changes.

  • Comment number 68.

    markus_uk, here in the states we've been able
    to invent an entire new category of jokes just
    by substituting the term "real estate agent" for
    "lawyer!"

  • Comment number 69.

    However, on Friday - in reaction to all of that - stock markets were partying as though its 1999 again.

    Hmmmm.

    That doesn't feel like quite the right reaction to me.

    **********
    I think it was Robert. I would be embarassed if I was having to pretend that it is all going to be doom and gloom for the naughty boys like you are paid to do.

    Mr Obama is just the man to get the party started again in '09. Yes the rules will be different but it will happen again because it always does. Boom bust is their favourite scam. Not only do the mugs get left holding the baby when the wise guys have disappeared, the remnants get sold off for buttons and the tax payer picks up the tab for the crazy stuf which caused the crash and made so much money for the high rollers.

  • Comment number 70.

    I will try to make this short and sweet, because alot of these comments are very long.

    I have 2 questions/points. I would like an answer to those by an expert/economist if at all possible.

    1- If the american govornment is now convinced -thank God- that those toxic debts have to actually be taken out of the picture before the market can be fixed, why does it not do the most obvious and honourable thing?

    By that i mean pay the money back to the banks through the people who took out the loans. One way of doing that will be to establish a ladder of decresing amounts of money paid to banks through the accounts of poeple who took out loans to pay for their homes. This is done with the lowest price homes given the most and the highest given the least. For example 10,000 dollars for homes under 100,000 dollars and 1000 for homes over 250,000 each month for 3-4 months. This is a very good way of paying those billions/trillions of dollars back into the banking system which will take time so that banks will learn to be patient and will be through the customers so banks will start learning to respect them -Hopefully-. This will also allow for finantial institutions which are beyond help at the moment to die in peace, which is not necessarily a bad thing if the repair process starts in earnest. It is all taxpayer money at the end of the day, so all that would do is give the money back to its owner with a little bit of redistribution, which can only be a good thing.

    2- If industrialised governments -In the current climate of financial meltdown, high inflation and high food/energy prices- are able to find such huge pots of money to repair this hole in the global economy, why don't they invest some of it in building large scale concentrated solar power plants.

    I have to admit here that I have a vested interest, I am an infinitly huge fan of this kind of renewable energy, and I am sure that this technology appropriatley employed can do untold good if we put the money in it. ( I understand that some people may need to do some research before they come round to my point of view).

    Thank you.

  • Comment number 71.

    There is no instant pudding, there is no instant pudding


    An Oil tanker cruising at full speed is an impressive sight however to the captain of a sailing yacht cruising across the Atlantic ocean it strikes fear.

    Sailing boats have right of way over motorised vessels. These rules are enshrined in international maritime law. However in reality a sailing yacht would always give way to an oil tanker. Why?

    Any sailor knows that the Oil tanker cannot stop on a sixpence. If the oil tanker put its engines into complete reverse it would take miles to stop. The sailing yacht may have the right of way and if it kept to its right of way whilst on a collission course with a tanker, relying on the oil tanker to change direction or stop, it would probably be obliterated and end up at the bottom of the ocean.

    The banks have stopped lending and the central governments have cooked up some schemes to rescue the financial markets. There is, I fear, a small problem. The state of the markets and the banking sector can be compared to the journey of an oil tanker. The anchor has been deployed, the engines are in reverse but in the words of Mr Deming, there is no instant pudding. The current problems for the banks will continue and no doubt get worse. The ordinary man will need to bear the brunt of the cost. A high cost for a long period of time.

    The damage done by the profligacy of the Bank's lending will not be solved quickly and whilst there may have been some pain relief on Friday the patient is still very, very sick.

    The instant gratification of the modern day has come to an end, the patient, the consumer, will need to get the message and that will not be easy.

    The answer to all this mess is that we need to start to make things, useful things. There is no instant pudding created by a rise in the value of property created by inappropriate bank lending.

    Houses are a place to live in, not an investment. In the UK we have once again forgotten this and until house prices return to a sensible multiple of earnings then the boil has not been lanced.

    The answer is a return to making useful things, useful things that help people, useful goods.

    The answer is manufacturing, and as engineers will tell you there is no instant pudding when it comes to manufacturing.

  • Comment number 72.

    #37 JavaMan1984:-

    Thanks for confirming there's not only me reading the posts on here !

    I've come to some very grave conclusions:-

    - the costs of the bale-outs are such that the consequences are just as bad for us all as the banks going bust

    - most people are happy to talk about economic problems without even understanding the basic arithmetic necessary to come to meaningful conclusions

    - the ones who can do the maths (including myself) are too scared to do the calculations

    Mind you, it appears our financial institutions themselves based their business model on rhetoric and hope rather than mathematics and reasoned prediction.

    The next week's going to be interesting....

  • Comment number 73.

    I appreciate Mr. Peston's analysis but I disagree like many other bloggers on the intentions and the ethics of the bankers.
    Considering the US, it hurts to see American taxpayers now bailing out the banks and the insurance companies.
    The Wars in Iraq, Afghanistan and Darfur generate a lot of capital, too, but I do not agree with them. As a citizen and a taxpayer, I would rather see my money spent on the creation of a National Health Care System than on bailing out first the Savings and Loans, then the Mortgage companies, then the Banks and then the Insurance Companies.
    The Bush (or Reagan Dynasty) legacy is morally and fisically bankrupt. The amount of devastation in the form of lives lost and damaged by hurricanes, famine, and the Wars in Iraq, Afghanistan and Darfur- all brought to us by Dubya and his cronies in the US, in Europe, in the Middle East and in Africa.
    When banks make money, it is called 'profit' and 'capitalism', but when they go bankrupt, 'Socialism' is called for. Maybe it is time to turn the tables.

  • Comment number 74.

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

  • Comment number 75.

    Hello Robert:
    Thanks for your blogs. I am an economics dimwit but enjoy reading your comments.
    One thing concerning the US plan.
    If the problem is one of liquidity in the market, could the US not create a government-run bank with the money it plans to use to buy bad debt? Hardly a desirable thing normally, but under current circumstances...
    Would that not be a better use of the taxpayers' money?

    Just wondered...

  • Comment number 76.

    Am I wildly incorrect in assuming that the USA is in danger of becoming the Argentina of the 21st century...an attractive country with great economic potential but poorly governed. It pursues a behaviour of printing much money and accumulating debt without solving any of its problems. This leads to periodic financial crises characterized by currency devaluation thus destroying the savings of its citizens and impoverishing all but the very wealthy. And then the cycle starts again.

  • Comment number 77.

    Hi

    This article helps to explain some of the more immediate reasons why the world’s extensively corrupted financial system will not experience a massive and violent implosion, it will however have to endure a long, slow and brutal examination of every institution, every deal, every bond and security. The system will now necessarily be forced to self-examine itself which will not end until it is absolutely sure it can validate its each and every part and as absolute hard, cold unadulterated pieces of financial bed-rock. Then upon that base a new world financial system will be built. This melt-down we are just beginning to go into is not some ordinary “System-Fix” this is “System-Change”. The current world financial system is not experiencing some regular occurring cyclical problems that are serious but fixable, the situation is far more consequential - this is a worldwide failure of confidence in the fundamental evaluation, representation and expectation of financial products and services. I doubt that few can visualize the eventual extent of the financial metamorphosis that the world is entering into. The great upheavals throughout the history of the planet and mankind - be they geological, climatic, and environmental or political, social or financial, have been terrible to witness and totally without any predictable outcome. It is not wise to buy real-estate in the middle of an extreme earthquake.

    peterkayne

  • Comment number 78.

    IMHO there is just one healthy way for the world to come out of this. Those who have borrowed must repay or go under. I'm terrified by all these financial Zombies lurking around, moaning and begging for their "life"-prolonging credit injection, whispering "What are you waiting for? Bail us our soulless bodies out".

  • Comment number 79.

    #78, markus_uk, the only thing which complicates
    things is that people and institutions which are
    underwater are not going quietly; instead they
    are handcuffed together and dragging each other
    under.

    Now, I plan to move to a gated community where
    I will not be bothered by these troublesome
    individuals and institutions; just make sure that
    you don't have any investments which handcuff
    yourself to them, and you are welcome to join me.

  • Comment number 80.

    Excellent comment, Robert. Right on the button.

    Big Government and Big Business sit down together conspiring to socialise the losses whilst the profits have been squirreled away in to overseas bank accounts.

    Time to set the government auditors loose! As a taxpayer I will want my money back.

  • Comment number 81.

    It seems very odd to me that GB should announce another £1billion initiative when our economy is already in a £142 billon black hole. People are already worried about the prospects of hike in taxes - 5p in £? Whosoever wins the next election!!!

    This kind of spin does not impress the voters any more. We had enough of that under the successive Govts since 80s.

    GB should concentrate on tackling the current problems created by the so called Credit Crunch although I do believe it is the situation essentially created by ill thought, ill conceived and illegal 2 wars we have been pursuing to help Uncle Sam.

    Initiatives so far taken to stabilise the market are the right one for the time being an they are not long-term solutions which ought to form a subject for another debate

  • Comment number 82.

    Saving Private Goldman:

    Goldman Sachs was on the list of investment banks heading for oblivion. Some entities will never be allowed to go under. And, the taxpayer will pay for the bail-out.

  • Comment number 83.

    CAN THE GOVERNMENT JUST KEEP PRINTING MONEY TO LEND TO THE BANKS?



  • Comment number 84.

    Who knows what the situation is? When AIG needed to be bailed out, it was because no one could work out the real figures they were dealing with. That says it all. Even the people who should be able to value what the amount owed is, the risk involved, and the result if there was a default situation have lost the plot. All the creative ideas with money have not worked. What is interesting is those involved in the business itself do not know how this all happened, so what chance do we have? Right now they are talking of using taxpayers money to shore it all up. They will meet over the weekend and see what they can come up with. Not very comforting.

  • Comment number 85.

    Will Mr Peston still be in a job with the BBC this time tomorrow

  • Comment number 86.

    The biggest and strongest way for banks to be regulated is by enabling direct action by those affected. You see we are all supposed to be protected by the Consumer
    Credit act! now let's see what that actually means- you have a case but its a civil case and you have to fund it. Will you get Legal aid, well only if your name happens to be Maxwell or if it's in the public interest. Well that's a non starter then because exposing a bank to ridcule and loss of profits certainly is not in the public interest- witness the class action about bank charges.
    I did suggest via my MP that Ombudsmen should be given a fund derived from the profit and loss account of major companies of just 1% to pay for legal action rather than the public purse. You can imagine the response. Regulation don't make me laugh- and from the man who raided the pension pots too!!

  • Comment number 87.

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

  • Comment number 88.

    Just watching Gordon Brown on Andrew Marr's show this morning, I get the impression that he has no idea how to solve our problems.

    Totally unconvincing in trying to dodge responsibility for the last 10 years, and just some mumbling about the 'FSA will look at it' when it comes to the bonus culture.

    I don't think GB realises quite how angry the ordinary voters will be when they get saddled with huge tax rises - those who still have a job/house that it.

    Marr just asked if taxes will rise. GB's response: No it's ok we will just borrow money....but he did not deny that taxes will rise too.

    Please let's get rid of this idiot and get someone in who can make things better and not worse.

  • Comment number 89.

    Pestons blog ends with the possibility of "Grey years ahead"?
    Maybe it should be green we are looking forward too?...high oil/ fuel / energy prices = care with consumption = less pollution and more investment in green energy (quickly please before it is time to ration power.)
    Inflation may lead to the "mend and make do" era again..the throwaway society may be doomed. I hope so.
    all is not lost ...the headlong, Lemming like charge for constant growth and greed for profits is not the only way.

    Finally...I am not sure the PM is the best person to advise on reckless borrowing?!!!!

  • Comment number 90.

    Please Mr Peston..
    try not to "talk down" to your audience on the "box"....

  • Comment number 91.

    The devil is always in the detail - US debt will be sooped up - so just watch the US banks with overseas subsiduaries dumping their debt off shore, their favour to the US treasury for the billions extra profits which will result from the bailout.
    Merril Lynch have dumped theirs in the UK - so no tax for us for a long time - but strangely they will still pay tax to the US.

    If the US bail out will not take back the toxic debt from everywhere it has contaminated then I would be looking to the UK/European banks to be taking a case to the WTO.

    Afterall this will amount to a huge govenrment subsidy to private business.
    US companies are the first to cry foul in the US when they are outcompeted by cheaper economies largely due to currency which the US policies made worthless. So let them reap what they sow or as usual the spineless politicians which the US have neatly divided will do nothing ensuring US interests are served to the detriment of everyone else

  • Comment number 92.

    @ 2. markanash *…the UK's chronic under-investment in its energy infrastructure…*

    I would reword this as the UKs chronic under-investment in *any kind* of infrastructure, as a result of a neoliberal orthodoxy that sees infrastructures as markets and has put all its bets on a *service* economy, i.e. financial services, so-called creative industries (i.e. advertising, etc.), tourism, etc.

    I have thought for a long time that the chronic under-investment in infrastructure in this country will come back to haunt the British economy. But the neo-liberals have, dogmatically, under invested in this area, whereas most, if not all, European countries have done exactly the opposite, as they don’t treat infrastructures as markets but as investment in their economies.

    In the UK, the financial services sector is well and truly shafted. The tourism industry is in a bad way, mainly as a result of the British refusal to join Schengen (see link below*) and the penny will drop that the creative industries only follow the economic cycle, i.e. they grow or decline with the economy as a whole. In turn, manufacturing (or rather the little thats left of it) is not benefiting from the weaker pound (link **) and the barriers of not being in the eurozone or Schengen will definitely *not* benefit British manufacturing.

    Which leaves ---- exactly what to drive the British economy in years to come?

    (*) Soaring visa costs turn Britain into an expensive add-on for visitors to Europe
    http://www.ft.com/cms/s/0/261786e4-e127-11d9-a3fb-00000e2511c8.html

    (**) Weak pound fails to lift exports
    http://www.ft.com/cms/s/0/2e44405c-7f15-11dd-a3da-000077b07658.html

  • Comment number 93.

    #83 irishminds - governments that just keep printing money creates the same value as that of Irish Mist.

    #79 - Don't forget to stock an ample supply of claymore mines for when the out-of-work merchant bankers try to storm your gated community !! On the other hand, most of them probably live in your gated community so you may be in deeper trouble than you think !!

    #76 - No!! The Argentinians still have the Tango. The US is just hopping around on hot coals !!

    #72 - What has maths got to do with anything ?? It's all based on BBB (Bullshit Baffles Brains) !!

    #71 - Welcome to Guangdong - Factory to the World. It's also the homeland of dim sum, wonton noodles, and a whole host of delicious Cantonese cooking !!

    #70 - Congratulations. You've made the discovery of the century - How to squeeze blood out of stone !! If the mortgagees cannot pay their mortgage installments, how do you expect them to pay those amounts that you suggest ??

    #65 King_Alexander - You've hit it bang on the head !! When commissions and bonuses are calculated on income instead of profit, we will always have cash-flow trading !! Perhaps Charles Dickens should be made compulsory reading for all these people. The Micawber Principle should be burnt into their brains(??) with words of fire - "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

    #64 If the people with more money than they need just simply buried that in a hole in their back garden, then the only people who can make any progress will be the ones with the *cash* to fund them. In bad times, the poor will starve to death in droves since they will have no means of borrowing to keep alive until times get better !! Nice random thought but it shot off at a tangent !!

    #60 Brecht lft out - "But the Grandmasters run Hedge Funds !!"

    #54 I presume that your post disappeared down that newly-discovered black hole and will reappear in a random parallel universe !!

  • Comment number 94.

    Labour was elected by raising the false hope that things can only get better[hint hint to the bankers] and stood back while a tooth fairy banking system was established ,to fulfil that purpose for a time ,one that recycled what should have been got rid of ,by reamortising the debt of those who could not pay it in the first place

    Leading to the financial equivalent of mad cow disease ,where the contaminated cAAArcAAAses will have to be burried at a cost probably greater than the corporation and other tax reciepts recieved over the decade

    This civil union between banks and government has proved to be childless unless Franenstein junior can be considered the cloned offspring

  • Comment number 95.

    The "gangrene in the financial system" are the boards of management of the financial institutions, in particular the investment banks . They badly need severe, strictly enforced external supervision, most probably by the central banks. For far too long the investment banking sector has been run by what would in the real world be called crooks, embezzlers or criminal mafia. They should be made personally liable for the way they have miss-run their institutions, including long -term prison sentences and massive finacial penalties....Instead the general public is being made to bail them out with real taxpayers' money with zero recourse, so that they can carry on as before......

  • Comment number 96.

    There seem to me to be several problems with this solution. First, the US risks becoming the Japan of the 2010s until this can be unwound. Second, there is nothing proposed to pay for it except more debt. At this point, the US needs to reverse the top end of the Bush tax cuts, however humiliating that might be for GWB. Third, there needs to be some real punishment for those who take this route: a federally appointed director for ten years; cancellation of executive stock options and bonuses for the executive management; and a law that forbids bonuses if a company makes a loss or goes into liquidation would be a good start.

  • Comment number 97.

    Brown is up to his usual tricks, Brown says the city needs cleaning and he's the man to do it but it rapidly degenerates to being somebody elses task.

    City bonuses are a problem and need cutting back. Oh but its not something Brown can do. Can't regulate pay in a private company, well its obvious so why even air it. Its a shareholder and management problem.

    There needs to be regulation, but it has to be on a global basis. But guess what it can't be done by Brown. Reliant on somebody else. As if the UK is ever going to tell the US to get its shop in order and they will listen. They were quite happy with the idea of UK going bankrupt at the end of WW2. Things don't change. The US will do what suits it, they always have.

    Why fly to the US. They have done their bit and started to ring fence their debt. The place to start is the EU, but no thats going to raise all sorts of National boundary and National sovereignty issues which will be sensitive, so no lets not deal with that. Lets fly to the US and cuddle up with Bush, Blairs first reflex in any event is alive and well. Why not fly to China they are as big as the US, because it would be laughable.

    Putting aside the impact of financial sector problems elswhere, which are always going to be pretty much impossible to control, the main problem in the UK is the fact that bankers have pumped up the housing market and lent ridiculous ratios. But nothing is mentioned about this because it is very easy to sort and Brown turn a blind eye to it whilst it is going on. In France the multiples and proportion of property value allowed to be borrowed are historically much lower than in the UK. Equity to price ratios there dampen overheating.

    Browns entire strategy seems to be to pretend the problems are always elsewhere and therefore he is a victim. It's hogwash. He must think we are all simple.

    The problem with this government is quite simple. They are slow to assess risk, very very slow to react in a dynamic situation, never proactive unless it is to supress civil liberties and stealth tax, and it is always somebody elses fault if there is a problem.

  • Comment number 98.

    The government wishes to turn the taxpayer in to an AAA's hole ,the bottom line being to keep their uneconomic cycle upright before the wheels come off it completely





  • Comment number 99.

    Well, I read some research a year ago which stated that the gap between the rich and the rest of us now exceeded that of the mid-1850's - the era of gigantic palatial follies in the English countryside - and was getting wider each day.

    That gap is about to widen exponentially as each day of this bailout passes.

    Here's why: below is an excerpt from the US bailout legalese document going before the senate this week:

    "Sec. 8. Review.
    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

    So, just so we get this straight, this allows Henry Paulson (ex Goldman Sachs) absolute control over the finances of the USA. HE can, without recourse, buy any stock, bond, equity, insurance or pension fund at a price determined by HIM. HE can sell it on at any price he wishes.

    Here's what will happen - as an official representative of the newly socialised economy of the USA, Goldman Sachs and their like will be in charge of buying US treasuries, securities and bonds held overseas for let's say, ten cents on the dollar. In turn, Goldman sachs will sell these bonds to the newly created US bailout fund for fifty cents on the dollar - netting Paulsons old buddies huge margins on official US gov't sanctioned deals.

    In 5 years time, the likes of Goldman Sachs or any other financial entity that Henry Paulson happens to have a relationship will rule the world.

    Think it won't happen here?

    You will see money from your house, your pensions and your bank accounts sucked into new, gigantic financial institutions favoured by, and passing brown envelopes to, government ministers.

    This is the biggest financial swindle to take place in history. By the time you wake up to what has happened, your grandchildren will already be working an 80 hour week for the new world order.

  • Comment number 100.

    99:

    Good points, and the Section 8 quote is particularly chilling. I suspect, however, that simply stating that something is above legal review would not stop the Supreme Court taking a look at it anyway.

    But your general point seems unanswerable. Of course, these US financial entities will only rule the world if the US itself retains its primacy in the global economy, which, of course, it may not.

    I see this situation as a bit of a race. Can the administration quantify the scale of the financial black hole, thereby providing reassurance to markets, in the short time available before either (a) equity markets succumb to renewed panic, or (b) the dollar cracks? It looks too close to call, but I suspect that the recent rebound is a classic bull-trap - just enough of a bounce to sucker-in the optimists before the next sickening downwards lurch.

    This once, I really hope I'm wrong.

 

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