How to solve the crisis
It's into the dangerous land of hubris that I'm going to stray today.
I have a plan (perhaps better than a Baldrick-style cunning one) that might just ease the credit-crunch pressure in the UK and help to fill the UK's yawning pensions hole, the humungous gap between what we as a nation save for retirement and what we should be saving.
This first bit is not my plan, but part of the Treasury's contingency preparation for the moment we reach Defcon 1 in the financial crisis (if we reach Defcon 1).
What's being considered by Chancellor and Prime Minister is that the public sector would inject new capital into our battered banks, to strengthen their balance sheets, and provide them with the muscle to start lending in a sensible way again.
And I'm told that their officials and advisers have sensibly learned a thing or two from the world's greatest investor, Warren Buffett, who recently bailed out Goldman Sachs with an injection of $5bn.
For this succour, Buffett received preferred stock paying a fat dividend of 10 per cent and warrants to buy a further $5bn of common stock at below the prevailing Goldman share price.
In other words he was being handsomely rewarded for providing Goldman with the resources to weather the storm and rebuild.
Which is arguably what we as taxpayers should receive as our just deserts, if the Prime Minister were to issue the call to arms, in a financial sense, and decided to inject billions of our cash into banks.
We too could take the stakes in our banks in the form of preferred stock with a warrants' kicker - so that we as taxpayers received both a steady and generous stream of income, and a very generous share of any future capital gains.
And I think, as I say, that if the worst came to the worst, that's what the PM and Chancellor would do.
Now, here's my modification of the Treasury proposal, my twist on a conventional Government rescue.
It's about making the most of a new institution that the Government has already established, the Personal Accounts Delivery Authority (PADA), which is setting up a new national pensions savings scheme for launch in 2012.
This will be a semi-compulsory, contributory pensions scheme for those not already in an occupational pension scheme - who number many millions, including a disproportionate number on low incomes.
My suggestion is that the Government could lend, say, £50bn to the PADA, and it could then use that cash to buy cheap stakes in banks, to help them recapitalise, and also - perhaps - to pick up other distressed assets.
Why am I excited by this idea?
Well, for those with deep pockets - like Warren Buffett - now and over the next couple of years is the best possible moment to be investing.
The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had.
But normally those bargains are only available to the super-wealthy. Those on low incomes almost never have the money to invest when asset prices are low.
However, if endowed with a jumbo loan from taxpayers, PADA could invest like Buffett on behalf of the low paid.
It would be important that as and when employees and employers start putting their money into the scheme, in 2012, they should buy in at the effective price at which the stakes were built in banks and any other assets were acquired.
What I mean by this is that contributors to the scheme at the off should receive any upside in the value of these investments that had already accrued - which would also be an incentive for them to invest, because savers would receive an automatic and instant uplift in the value of what they put in.
And if by bad luck there weren't any upside by then, well then those capital losses would revert to all taxpayers - but the risk of capital losses would, I think, be quite small.
Anyway, the big point here is that for the past few years, there's been a massive widening in the gap between the rich and poor, because it's only been the rich and the super-rich who've been able to take advantage of the fabulous investment opportunities that presented themselves in the decade or so before the Crunch.
But the boot is now on the other foot. Probably only governments, through the deployment of taxpayers' money, can solve a financial crisis that was created in large part by the foolish financial risks taken by bankers and financiers whose common sense was wiped out by greed.
If we as taxpayers are cleaning up the mess, there should perhaps be a dividend for those in low paid jobs and insecure employment, who are hurt most by the economic slowdown precipitated by this crisis.
If PADA bought into the market for them over the coming two or three years, their retirement prospects should be that much improved.
And if the PADA could become an institutionalised Buffett on their behalf - buying low and selling dear - well then a bit of natural justice might be restored to the financial system.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~17~RS~)
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Excellent idea. Who will be the actual trustees?
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An intriguing idea.
I am sure what many people object to re bank bailouts and extra flexible loans to bansks is that us taxpayers seems to be bailing them out but getting little, if any of any potential upside.
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Surely you mean DEFCON1 -
DEFCON5 is the normal peacetime readiness.
DEFCON1 is maximum readiness and the state that an attack is expected imminently.
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So a national wealth fund... now there?s an idea.
Sadly British politicians are too keen to work out what tax kickback or spending bribe they can squeeze out of the finances to keep themselves in power . Long term prosperity, like fighting global warming, takes vision and a sense of priority that isn?t focused on ?how do I keep my seat/get in the house of lords?
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"The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had."
Now I understand why the BBC reports the financial with the gloomiest slang possible. Perhaps the Beeb's pension funds need topping up ??
#1 The timeless question - Who guards the guardians ??
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Can I put my 'anorak' on Mr. Peston?
Your info: and inside knowledge/contacts of late has been superb, especially over HBOS................ BUT, your timing is bizare.
Look at this blog, timed 04:22 pm
YOU CAN'T HAVE 04:22 pm, it's either 4:22 pm or 16:42.
It happens on all of your blogs in the afternoon. Please see to it my good chap. Thanks.
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On a slightly different note, Alex Salmond wants HBOS to stay in Scotland. Perhaps he will ask *ALL* Scotsmen to dig deep into their sporrans to fetch every last penny to pay for that ??
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Robert; I think you mean DEFCON 1. But a good idea and very interesting article on Iceland too. So that is where all the Iceland cash came from over the last few years. Another group of people who were called "shrewd investors" by the commentariat when they really shouls have been called "berserk borrowers". Yours in pedantry..
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This is fine Robert provided you (and others) believe that if/when we get through this financial crisis alive, our debt-based money system will once again prevail. If it does then, sure, maybe it'll be bonanza time all over again for us proxy investors in the PADA scheme, itself investing in banks.
The problem is that banks don't create wealth (they just shift it around) and I'm not convinced that the new world financial order is going to be all about banks making fortunes for their shareholders. Put simply, we can't go on like this.
If we assume that the new world financial order will not be so heavily reliant on mind-boggling levels of debt, then maybe we'll go back to a more commodity-based system that prevailed pre-1970s?
In any case, I think you may be falling into the old general's trap of fighting the last war here. I would need one hell of a lot more persuasive evidence that investing in money markets is the way to good, sound investment returns in the future before I voted for your idea.
And finally, the idea that the economy can grow rapidly and relentlessly (with the odd downward blip), all along assuming that tomorrow will be significantly better than today (so let's borrow, borrow, borrow), is itself largely predicated on there being an infinite supply of cheap energy. Since we're now at the end of mankind's cheap energy party I'm even less convinced that I would want my tax invested in a debt-based economy.
Maybe 10 years ago the Earl of Caithness was on to something here: http://tinyurl.com/4ql2oc
All that said, you're a damned sight brighter than me Robert, so please flesh out your thinking and tell me I'm wrong.
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I think this assumes that the PADA and personal accounts ever happen. Many in the pensions industry are very critical of this proposed scheme as due to the means-testing on state benefit, low earners in work could easily be absolutely no better or even worse off being in this scheme than making no pension contribution in the first place and just relying on state benefits and credits.
Also, another reason to be concerned with PA's and PADA is this huge 'pot' of money always looks likely to prove irrestible to politicians in the future and this engineering could be the start of the slippery slope years before it even exists and has any money!!
If you want a baldrick idea, how about another U-turn on property as an allowed investment in personal pensions. By now allowing private pensions to buy BTL properties (it was originally going to be possible but was ditched by Gordon at the last minute) reversing this U-turn would be a big kick-start to the property market, flats in particular....
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Robert, yet another beautifully crafted article about, wait for it - BANKING!
You're the BUSINESS editor right??
Another masterstroke from the Banking Broadcasting Corporation aka BBC..
GC
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The comments so far perhaps say something about this country - pointless minor whinging and no view of the big vision. Or is that just me whinging.
Sounds like a good idea to me. At least people would see they were getting something for the bailout money and a national interest in the banks behavoir might put the brakes on them returning to their bad habits of recent years.
As Robbie Coltrane said in the old Barclays advert "We're all bank managers now".
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An idea like this seems clever at a point in time when Governments are having to create huge pots of money and stand as the last resort for capital.
Since all currency is created by the state, it is a mere design of accounting to place the newly created capital into the hands of PADA. The same effect of pension wealth redistribution could be achieved by many other ways. For example, some states have Sovereign Wealth funds. Britain does not have one, yet has been pumping oil out of the North Sea for several decades, and collecting a wonderful fuel escalator tax from it.
To be truly clever, economists and accountants should really table all the various options and present them in ways that would be comprehensible even to 10 year olds. Coming up with only one idea and then running around shouting about only it is neither methodical, nor rational.
A sovereign wealth fund is a commonly understood and successful international idea. PADA des not yet sound like a very encouraging vehicle, especially from a government that:
1. still has not taken action on Equitable Life
2. was responsible for removing the dividend tax credit
3. has not satisfactorily supported or regulated simple-to-understand personal savings schemes (that collapse of the Christmas savings firm, was it in Wales, only two winters ago).
Simple-to-understand personal savings schemes should be at least one of the primary elements of improving national pension allocation. Yet every simple saver at the moment has tax taken off their interest earnings, even though those with low incomes have no incentive to reclaim the tax refunds due to them.
Something like PADA, or a Sovereign Wealth fund, would form part of the collective (not individual) element of improved national pension allocation.
These nice ideas are supposed to be presented to us and discussed by our politicians as policies. Shame that they treat everyone to be as stupid as tabloid readers.
Sticking one's head into the abstract world of Economics and Accounting risks ignorance of real wealth. Monetary wealth is only monetary, and unless there is a corresponding consideration of production and demand control of real wealth (eg., food and population demand), the design of an economic system risks becoming as useless as the Global Financial System whose collapse we have been so entertained with.
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On the face of it, sounds like an idea that might work, and it would work in the short term, but still, we are bailing out, not putting real money to increase Capital
What is being left out is that the immediate result of this suggestion would push interest rates up and not down as the Central Banks want them to go, so a recession will not be avoided anyway, and in which case the idea would not work.
My solution is that there are factors that we cannot and will never avoid. Increase in Capital will have to come from increase in deposits with higher interest rates and therefore much less lending due to these high interest rates.
So far we are trying to deal with bad debts, and putting them into our pockets as tax payers, to bail out.
In short we need to save more and borrow much less, not as a Government but as consumers.
Problem is that the immediate result of this is a deep Global recession.
I see no other way out of it.
By the way Robert. Do we not sound like Old Labour Socialist? Do we not sound like admitting that the extreme of Capitalism is as bad for economies as Communism, when we suggest what the Government should do to intervene?
These last 28 years, we have managed to loose all our manufacturing to the East and we thought that the Financial Market BUBBLE is going to feed us for ever without much effort. We were bringing up our children believing, that money really grow on trees. We thought that Hedge Funds were creating wealth, when we were comfortable enough to forget that these ideas were actually eroding our Capital.
Global recession and very high interest rates will not and cannot be avoided!
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Ah yes.. take X billion taxpayer pounds, give it to a Mr. Buffet wannabe to look after, and just watch the profits roll in. How hard can it be, if only you start with enough money? And if it doesn't work, hard saving taxpayers take the losses, if it does, those who haven't saved enough take the gains.
Robert, I think you need some sleep...
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This is a great idea and would work very well, except I can't help but have niggling doubts, and their based on Kondratiev Wave theory, more or less.
If what is happening to us at the moment is no ordinary recession, and I would argue that it is not, then there are a few questions that need asking: how far is economic activity going to reduce? How much money will be withdrawn from the system? How much will assets deplete in value? What will be the consequences?
If this is similar to the Great Depression, and I believe that when the banks themselves stop lending because they believe that the system is overloaded with debt and they themselves must, in the name of rational self-interest, start to defend themselves with a dash for cash, then people are going to be left with massive burdens of debt, possibly increasing, and that will hoover-up disposable income. Companies will go bust and there will be huge unemployment. So contributions to any pension scheme are going to be difficult and returns from shares will struggle. I don't think credit expansion can be re-ignited in even five years or ten, and this is what would have to happen.
But, obviously a pension is a long term thing and in the distance, we will recover and there will be assets with good returns waiting for us. Perhaps.
I don't think we're getting back to where we were, full stop. Capitalism is not win-win. It never has been, except over the past ten years which we can now see for what it was - deferred loss. Countries, areas always lose out. In the last Depression it was always a safe bet that when things picked-up, they would pick-up in the West. They were industrialised, advanced, had road and rail networks and systems of finance. Not so now. China and India can mass produce every piece of equipment and provide every service that the world requires. They have a low wage economy with no unions and little health and safety. Is the UK/European/American worker prepared to compete with this? With the loss of the consumptive powers of the Western worker there will be an even greater mass of cheap Asian labour. Can we compete with that?
The key has obviously been credit expansion - at the moment there is credit retraction. The pension idea you suggest would work well if this is an ordinary recession. But if it is a 'reset' moment, then what will cause expansion again? Re-built bank balance sheets? What are they going to invest in to get a return? Even if they're willing is confidence suddenly going to return? We'd have another credit crunch in six months time if things went back to what they were. Given the retraction of credit and the global economic forces involved, the Government is going to have its hands full dealing with unemployment benefits, crime, and the bad debts that the banking system has. There is a reality to capitalism - winners and losers; cheap labour and cheaper labour. Credit expansion has just been hiding it from us. (Although if the pension scheme invests in China...)
I'd be interested to hear arguments that I'm wrong. What could re-start credit expansion?
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LOL. Remember that last time Labour politician and civil-servants were 'picking winners'?
Yes, that worked out very well when taxpayers were robbed to pay for British Leyland, Inmos, ICL, Alfred Herbert, ...
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That is a very good idea Robert - you should be well pleased with yourself. The sale of the 3G licenses was a missed opportunity.
Bonuses. I was an inter dealer broker for ten years and have been in business for myself for twenty since. I am confident that the 'talent' for which mega bonuses were paid is no such thing.
Its roots are in the cult of celebrity, status envy and 'tournament pricing' - all hopelessly dysfunctional, but understandable modes of behaviour.
This has to be addressed properly.
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A quick review of the comments thus far Robert leads me to think that maybe pushing forward your idea could be rather like pushing blancmange uphill with a fork? Best wishes anyway; it does seem at least that you're able to give the problem more coherent thought than Gordon Brown. I have an awful suspicion that our esteemed government hasn't the faintest idea what to do next - other than apply Labour's old favourite of chucking money at the problem. Talk about out of their depth.
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And his knibs could give back that £50bn that he stole from private pensions and they could do the same.
Winners all round.
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Good idea , in fact better than good. Can see practical problems with state aid rules plus I assume this would only be enough for the big 4 clearers. From the taxpayers viewpoint this would in effect mean that these banks could never be allowed to fail (but in effect that is the case now in my view) and we would have to put real shackles on the banks including closing their final salary pension schemes that have been part of the reward for excess with the more senior bankers.
In fact with final salary schemes there should be a lifetime limit on the benefit anyway equal to those of us with our own scheme.
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A good idea in theory - and far better than most of the 'investment' Brown has squandered hundreds of billions on in the past ten years but I still wouldn't trust them not to waste the money propping up lame ducks in Scotland, Northern England etc
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Robnert you are a genius my boy
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Can a copy of this memo kindly be circulated to Messrs. Paulson, Bernanke, Bush, Brown, Darling, and King, and marked as urgent, thank you.
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Robert,
Your blog is essential reading in this crisis and very much appreciated.
I note that you continue the BBC line that the banks and their greed were to blame for the credit crunch. I was wondering what your view is on the very interesting article in this week's Spectator blaming the Clinton administration and its social engineering in the US as being the root cause. It's also mentioned in Iain Dale's blog today.
http://www.spectator.co.uk/the-magazine/features/2189196/clinton-democrats-are-to-blame-for-the-credit-crunch.thtml
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As with all plans, cunning, relying on turnips, or otherwise there are often unforeseen roadblocks, but it is probably preferable to get something from the banks in return for an injection of capital.
The one small flaw in your plan is that one pointed out by the first poster - who will be the trustees? A committee of the good and the great will be unable to decide anything as is quite usual. An individual, perhaps you, or the Archbishop of Canterbury possibly? Warren Buffet makes his decisions and is beholding to no-one. Your trustees will be subject to recall!
What will your state ownership of the major banks do for the capitalist system? Haven't you just socialised capitalism? (I am not implying that socialism is a pejorative term on the side of the Atlantic.) Perhaps this current crash is the end of capitalism. It is most likely the end of the type of free market capitalism that was introduce by Thatcher and Regan in the 1980s.
For capitalism to work business, including banks, must be free to grow and shrink through market mechanisms. Your system will almost entirely ensure that there will be no possibility of any other new banks entering the market. This is a recipe for the next crunch.
The fears of the Republicans about the nature of the rescue mechanisms are real, I fear. The Poulson rescue voted through last Friday is just, at best, delaying the inevitable depression. The Poulson plan, and yours, seem to me to be almost entirely analogous to the catastrophically bad decisions of the 1990s and 2000s when interest rates were reduced to very very low levels.
We need to rescue savers, depositors and performing loans but to write off non-performing loans and all of the absurd derivatives. We need ameliorating schemes, such as yours and Poulson, but we must not mistake amelioration for a solution.
The solution is sound money, in soundly accounted for banks that trust each others accounts. How to get from here to there is complex.
My view is that we need to:
1. Protect savers, depositors and performing borrowers.
2. Maintain a sensible value for money by having sensible interest rates (6.5 to 8 percent)
3. Return to sound traditional lending criteria enforced by law e.g. my scheme of preventing banks loaning more than a statutory limit of a multiple of income through limiting the lenders security to that loan level.
4. Have some short term schemes such as Poulson's and yours have a bridging part to pay BUT are not a solution in themselves.
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a return for the 'taxpayer' sounds good, but how will 'joe average' actually benefit, if they have borrowed to their limit to buy their own home, have a ppp they can no longer afford to pay into, and really look to go under completely if taxes or interest rates rise any more ?
how ? oh how ?! can those who have struggled to pay their way their whole life and seen the banks/financiers reap their handsom rewards both corporately and personally now be expected to bail them out ? As another blogger mentioned, our loss of ability to compete in the global manufacturing markets has been in the more recent (10 yrs) a result of a general perception that real wealth would come from the financial markets and shuffling paper money around.
We have gone from being a global leader in manufacturing with real money, to pretty much a 'service' industry country, and now to top that, an embarrasment in the financial markets.
Question. What will we be if the external reverence shown to the Capital's financial sector dissapears in the same direction as our manufacturing ?
Hey, as a taxpayer i would have been delighted to see some of my money go into a bid for Gatwick airport. What an idea ! Direct control of security, and something that is actually proven to make money.
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A good time to buy? I think that's called 'trying to catch a falling knife'. Sure the FTSE 100 looks cheap at 5000 points, but that's not much consolation if you buy it and it falls to 3000. It's cheap compared to the profits the companies are making, but theres nothing to say those profits wont fall to half in a bit of a recession, I assume.
The same logic works for the housing market and all those toxic mortgages. Who knows whether the housing market will bottom out 20% down or 50% dow (or worse).
Generally I am looking to buy more stock at the moment myself, but I'm not rushing in confident that we've hit a bottom yet.
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Robert what you and the government seem to have in common is the belief that the bloated corpses of the UK banks need to be revived at the expense of the public. I do not agree. Of course the UK needs banks like everybody else but it will need far less bankers than over the last decade or so. The government may have to intervene here and there to ensure that there still are sufficient banking capacities. But could both you and the government please go back and think again and first come up with a plan how to revive the real economy that will be worth some money which can then be handled by the slimmed-down banks. Yes pensions for the poor are utterly needed in this country, but they've got to be earned by someone first!
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Hubris sounds about right.
Anecdotally, consumer credit demand is dead. Your average man or woman in the high street is barely treading water and is being scared into cutting spending in favour of increasing savings and repaying existing debt instead of taking on new. The taxpayer may recapitalise banks only to find they cannot make the interest payments because they cannot make enough profit from reduced take-up of loans.
The economic contraction implied by the above will have a knock-on effect on commercial credit demand. Most businesses follow their customers' lead instead of aggressively expanding during downturns.
The interest payments would have to be double-digit to compensate the taxpayer for the risk assumed. We are not dumb money and should not be sold out by the government as the greater fool of last resort. We know that the real price of banking investment risk is around the 10% mark if not higher regardless of what ratings agencies have been paid to say. Buffet's 10% coupon from GS and GE is a case in point, and GE is still rated AAA. It is unlikely that all banks will be able to afford it.
PADA sounds like a sweetener which could backfire badly. The electorate has grown cynical after 11 years of New Labour and may consider this appeal to social equality as patronising. If this needs doing, it is worth doing without tugging of heart strings. If that is what it takes to sell it, then the scheme does not stand up on its own merits and that means it is not worth doing. Simple, really.
What is missing here is any question of the financial industry's future earning potential. Not what we need the industry to do for us, but what economic fundamentals suggest it can deliver. Even a SWOT analysis would be better than nothing. What have we got under Opportunities? Hmm?
How about instead we force disclosure of non-performing assets on and off balance sheet, mark to market instead of model, shut down dark pool trading and bring CDS and all other OTC instruments to public exchanges? How about that, Robert?
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I don't think it is hubris at all to offer ideas for a way out of this mess. I know more about metaphysical poetry than economics, but, since it is my savings that would form a tiny part of such a scheme, I'll offer my two penn'orth.
The question is, do we think HMG would bother to negotiate as strongly as Warren Buffet for such preferential rates of return (10%) or purchase of stock options? I am sorry to say, I doubt it. I fear that Joe Public would get 'six-pack' quality guarantees and rewards.
How would the government convince me otherwise?
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From my naive perspective, it seems like the irresponsible lending policies of the banks over the past few years have lead to two problems: the under-capitalisation of the banking system, and the over-endebtedness of the British public.
Your proposal seems like an excellent way of resolving the former, while also tackling the pensions shortfall.
I think some parallel action also needs to be taken with the latter problem, though reducing our debt levels (both at an individiual and at a national level) without causing recession, inflation or both is not going to be easy.
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The BoE will endeavour to ensure any intervention or purchase, if purchase occurs, is to the benefit of the taxpayer, and at the same time any intervention does not shield the banks from market forces and encourage them to take more risks.
Essentially an BoE purchase has then to be a rock bottom prices to try and ensure a return. Any BoE loan has to be securitised at rock bottom evaluations on items put forward by the banks. There is a difference between short term intervention for 3 months or intervention planned to be for 3 to 5 years.
At the moment we seem to be viewing a holding game. The banks may wish to not sell and stutter along if the price is too painful, continuing the liquidity problems. From their point of view just enough liquidity for them is just enough. Its a bit like an oil cartel supplying oil. In this case debt = profit, profit is not just based on volume. The banks still remain a predator given half a chance.
The US bail-out bill will not impact on the situation for months and months. Until that effect comes through we will only be looking at the holding game continuing. In the meantime businesses will fall like ninepins in a credit freeze hence the EU small business aid proposal, which is almost certainly underfunded, will almost certainly be emeshed in red tape, and it is not clear how it can be implemented. It is not clear what can be done to help to help businesses. Switch off the tap to banks and they fall, the same applies to businesses, just less public, less general concern.
If the UK economy suffers, tax revenues suffer, national debt has to rise (steps already in place), public sector services have to suffer. It is an ungodly mess. If all countries are in the mire global trade drops. Far from the objective of helping developing countries which this government talks about some are likely to suffer badly as a direct result of policy here and in the US. It is difficult for example to see growth in plane loads of roses from Kenya, their main export.
Reports suggest there is a feeling of relief at present but it could evaporate, particularly is more bad news comes through which looks quite likely. The problem is there are unprecedented quantites of debt which have to be worked through the system in a national and global economy which can only slow.
I cannot see the BoE rushing if it is at all avoidable. It is a major structural problem which will not have any easy solution. There will still be fear, followed by anger amongst the public, particularly as those who feel they will not be affected become affected. Emotion and money are a dangerous energetic mix. No political party has shown any sign of knowing how to deal with this, most are floundering on policy.
We are looking at higher consumable prices as the supply chain efficency falls, and the collapse of the American Dream, at least in part, which has been marketed around the world, including the UK.
Whether it is practical or not there is a case for trying to have agreement on similar strategies in damaged economies because that minimises the corrosive effect of banks seeking to exploit weaknesses in the differntials between countries which is their undoubted skill. That seems to be being looked at at present.
In the face of a global financial system which behaves in a way which suggests it is above national control action alone is difficult (the early nineties run ofn the pound is an example). The problem is much bigger than bailing a local bank. it is a multidimensional problem and the solution has to be multidimensional. Mervin and his team are welcome to it. It is quite likely one of the most important tasks this century and will yield what is likely to be a new landscape. The new landscape doesnt have to be pleasant. Mervin and his team seem to be tough nuts. I hope they are.
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Robert, your plan makes a lot of sense to me,
but I'm sure that here on the other side of the
pond, we won't do anything nearly as clever.
#16, GrouchoMarxist1, the West has to capitalize
on its strengths in the global economy, which
are production and protection of intellectual
property. For example, the Chinese compiled
this ranking of universities by the rough measure of
citations of papers. Similar rankings consistently
place the great preponderance of production of
new technical ideas in the West. The monetization
of new ideas is the only way that a new capital
base can be created.
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Brilliant, Robert!
Would you like to run the country?
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Any suggestion is well worth hearing, but I do see a potential problem.
The money that would be used to fund PADA
from taxpayers has to come from somewhere. If individuals take their savings out of the bank to put into PADA, then that just makes the banks even weaker.
The only people who can create money out of thin air are the treasury, by printing it. But that just devalues the existing money in circulation by an equivalent amount.
Ultimately there is just too much money, most of it imaginary in the form of debts, in circulation. Therefore the only long term solution is for this money to be unwound. Anything else just involves shuffling money about but doesn't solve the problem.
Like it or not everything is going to crash, and there will be a lot of very poor people who will be after the blood of those who have managed to get rich out of the bubble. We have to go back to creating real wealth by making stuff and selling it.
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Can I just ask, as a financial idiot....
With all this bailing out, will the "bail out" be passed on to the end user?
Will banks and lending institutions be kind enough to us on the street when we feel the pinch or be made unemployed...?
Anyone have an answer to that...?
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Excellent idea.
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Good that you recognise there is value to be had, but not just in banks but in property too.
I like the idea. Also get Gordon to allow SIPP investments in residential property too while you are at it.
BW
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"Probably only governments, through the deployment of taxpayers' money, can solve a financial crisis that was created in large part by the foolish financial risks taken by bankers and financiers whose common sense was wiped out by greed."
Yes, the crisis was created in large part by bankers - but they operate within a regualtory framework set by politicians. Politicians cannot take the credit for it when the economy seems to be going well, and then deny responsibility when it tanks. Also the people who vote for those politicians have some share of the blame.
I think we are reaping the harvest of the Thatcher-Reagan ethos of deregulation and greed. I never voted for it.
New Labour have not moved away from it in any significant way. A key indicator is house prices - unlike virtually anything else, a rise in prcie has been seen as good. I disagree. Many have been priced out of the housing market - but presumably most politicians - and journalists? - have benefitted up till now, which is why newspapers consistently say that a fall in house prices is bad.
A fall is indeed bad for some within the current economic context. We need to elect politicians who will change the economic context - which of course now has to be done in co-operation with other countries and in the face of the massive offshore industry, which in turn links in to money-laundering, organised crime and the hugely profitable drugs trade.
Not an easy task, I agree, but some change at a fundamental level is necessary.
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i am very glad the government is thinking along these lines, and does not suffer from the mindless revulsion towards "nationalisation" and other forms of "socialism" that seems to characterise republicans in the us congress. recapitalising the banks is the only way to avoid a 30s style depression. without it, we will fall into a downward spiral of bank deleveraging, falling asset prices and collapsing demand, just as japan did in the 90s. hopefully an incoming us obama administration will realise this and replace the seriously flawed paulson plan.
even with recapitalisation, lending is going to be a lot more conservative going forwards. there will inevitably be a serious recession (think 1992). it could be a global recession, especially if the financial crisis spreads to china, as i suspect it may. on the plus side, the fact that the usa and europe will also be in recession will help deal with supply-side constraints (commodity and food prices) at least in the medium term.
i like the pada idea, but i don't think it is a long term solution. public ownership of banks creates enormous conflicts of interest. i am no fan of free market fundamentalism, but i do think banks are better off privately owned, but subject to much more rigorous regulation, especially regarding credit creation.
i expect all of the european countries will go this route in the next few months (especially once the financial crisis spreads to the lbo / junk bond market). but i don't think it is in europe's collective interests to allow public ownership of the banks to go on for long, with the consequential temptation of a more dirigiste style of government.
let's just hope that the theory that recapitalisation is a self-fulfilling prophesy turns out to be right, and the public sector does make a profit out of it.
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Giving loan at 10% will not work, as its too expensive. But buying stakes in bank and other institutions will work. The only problem is how government will use its power as major shareholder, as long as its not used for party political interest it would be fine.
Another way of sorting this problem is cutting interest rate or keeping interest rate as it is and letting inflation go up, this will eliminate the asset bobble as salary will go up, but it should be handled correctly i.e. letting inflation and salary go up by 10% for three years, then house prices become affordable.
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It's an admirable idea Robert. One thing makes me slightly uneasy though. Do you remember the original National Lottery proposal? All proceeds to be divided equally between the four funds? Well look what has happened since. After school club projects, special research grants in the NHS and all sorts of other things that have nothing to do with the the original objectives are receiving lottery funds.
So let's imagine that your PADA fund exceeds all expectations and becomes a booming enterprise and a public/private project gets into a little difficulty of even UK plc itself needs a quick injection of capital. You are way ahead of me.
Appointing the right trustees, along with guarantees of independence and full accounting transparency would be an absolute prerequisite for any such project. I have reached the point where the one institution I really do not trust is government.
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excellent idea.
I was wondering myself whether it might not be a good idea for the old building societies to re-mutualise rather than flogging them off to foreign banks.
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GrouchoMarxist1 (#16): "This is a great idea and would work very well, except I can't help but have niggling doubts, and their based on Kondratiev Wave theory, more or less."
Hopefully less. Murray Rothbard usefully examined in detail and exploded the myth of 'The Kondratieff Cycle', including this classic line: 'One of the worst things about the "business cycle" is its name.'
Professor Rothbard and those like him would say we are victims both of bad monetary policy and of egregious government interference in the economy - in this case particularly the Clinton administration's expansion of the Community Reinvestment Act (which Bush did made some half-hearted efforts to rein back, in the face of Democrat opposition, around 2002), - legislation which was willing to fine lenders who did not extend mortgages to those less able to pay.
The US government tried to help the poor, in other words, and in less than fifteen years brought us all - the poor of the earth more than anyone - to the brink of sub-prime disaster.
The other key factor, though, being cheap availability of credit, through low interest rates/expansion of the money supply, and that was down to the Fed and other central banks. (And to the fractional reserve system itself - but that's a deep systems change too far for the mental clarity of most here discussing the current predicament.)
You don't need Kondratiev or other schemes, in other words.
The Spectator article referenced by michaelmph (#25) rightly fingers the Clinton contribution but not that of the central banks.
Ron Paul is the only politician I know of to point out ahead of time both areas of danger, their likely consequences and to propose legislative corrections.
Not a single congressman backed Dr Paul's Free Housing Market Enhancement Act in 2002. But that doesn't stop him being 100% right - it just makes the others posing as heroes now as they commit a further $700bn of tax-payers' money rather harder to take. You can very easily read all Ron Paul's speeches and articles on the subject via Google - and see his various confrontations with leaders of the Fed in the banking committee on YouTube to boot.
And that technological contribution can only be a major positive, in my view - given that that issue has been raised rather more negatively yesterday, a couple of Peston threads back. We should be counting blessings right now and that for me is one very clear one. The hard-hitting discussions on this blog being another.
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Hmm, not sure. It sounds like an opportunity *now*, but what about in ten years time? I suspect it would go down the same path as the present financial institutions. Under pressure from the govenment to perform, it would take greater and greater risks. Eventually the whole pack of cards will coming tumbling down, in the NEXT stock market crash. No thanks.
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Even if Robert's scheme was put in place, and worked like a dream, all that would be created is another vast pension fund which would subsequently be stolen by Gordon Brown or his successors.
£50 billion pounds has such a resonance: It equals £5 billion pounds per year for 10 years. Ring any bells?
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[I]Test[/I]
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Robert, you are starting to sound like a bloody socialist!
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Clearly widespread support for the concept. Offers a golden opportunity for Conservatives to embrace radical ideas.
1 Revoke Brown pension theft.
2 Consider flat/level tax rate, some suggested 10% now 15% more realistic
3.Is Islam's no interest a runner? Would require much greater disclosure but would cut off gambling without creating tangible wealth.
Would have to be truly longer term than next parliament. Would mean lower revenues until life picked up again.
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Robert. I think your great idea misses the point. The rescue of Goldman Sachs may work but it is only one small bank in the overall scheme of things. Its alumni advise the British and US governments and if it pays a lot for its capital it will be able to cover the expense by continuing as before sucking money out of the system whilst contributing nothing to working man or his employment. If you scale that up to th national banks I think you will find that GB Plc is bankrupt and cannot bail it self out by creating, or borrowing even more money.
The bottom line is we all have to get poorer, a lot o poorer and it would feel better if those that got us into this mess, politicians regulators, bankers took a big hit in their own pockets along with the workers.
I also blame journalists none of whom gave front page publicity to the impending crash which had been widely for told by many academics and even Warren Buffet himself many years ago.
Why for example was Fionnula Early, chief economist of Nation Wide in a recent interview not hammered by the BBC for her comments a year ago that the fundamentals in the economy were strong and house prices were only expected to level off. Is she stupid? A Liar? Or what. How was the 1st time buyer to make a sensible decision when economists in high places give such misleading information?
Eddie Hatfield. Cambridge
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The banks have lent 2 trillion pounds on property that is only worth 1 trillion.
No-one has pockets deep enough to cover losses like that.
The only way out is to warm up the printing presses, and that's what they are doing.
But it makes us all a bit poorer.
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Good ideas, Robert. Please send them to Gordon Brown and his advisors. If you manage to convince Peter Mandelson,
the arch-defender of free capitalism, you would have succeeded in having an influential lobbyist on your side. Unfortunately, I expect that such revolutionary ideas, being truly concerned with the common good, will sound to radical
for New Labour man Mandelson, who believes more in looking good, than in doing good.
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'to fill the UK's yawning pensions hole, the humungous gap between what we as a nation save for retirement and what we should be saving.'
Is that possible? I mean to save enough to have a pension? We are being screwed rotten, tax on pensions (if your lucky enough to get one) and now, our future taxes will be astronomical (as if they are low now)!!!
Face it, Britain is a rotten place to stay, I get mugged rotten by Brown and his cronies.
I want to take my cash and get out, while I still have some!
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The PADA idea seems a fair proposal at face value anyway. The principle of intervention on behalf, and for the benefit, of the British people is sound.
Remember your "dangerous land of hubris" comment however! As someone above has observed, there is no guarantee that the post crisis finance world will resemble it as we know it. The proposal is a gamble in itself, a case of "to boldly go...". And who's to say that Britain might not ultimately end up like "poor old Iceland" as Robert observes in his previous blog.
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That idea was on Democracy Now on Thursday.
He's a lesson on hyper inflation and the break up of the Euro from the teacher, son.
http://www.youtube.com/watch?v=cI55epbbtU0
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Sorry for the long post but this is painful and showing no signs of being understood - at least on these pages. I know this is boring but unless you understand the basic principles, the subject cannot be discussed with any meaningful chance of resolution. Please take the time to read my post. Thank you.
Certainly, debating the financial system in isolation to the problem as a whole is meaningless.
The purpose of a money system is to provide a means for exchange of materials and labour between one person and another. Since the labour and materials are indivisible then 'money' in small denominations allows labour and materials to be traded between two people in fractional amounts. In that sense it is much more flexible than a simple barter system.
Unfortunately that relatively simple requirement has been hijacked by the current, fraudulent system calle Fractional Reserve Banking. In a debt-based, fiat, Fractional Reserve Banking system the majority of the 'money' in the system is fictional. It is an illusion of immense proportions. The 'money' is printed on a printing machine on a whim and bears no resemblance to any tangible asset or labour of any worth or value.
To work[sic], the mathematical model behind the system requires a geometric growth in debt, population, energy consumption, raw material consumption, waste production and pollution (and a complementary geometric decrease in our co-inhabitants of this planet !). The word geometric means non-linear. i.e the previously mentioned list doesn't just grow linearly, it grows exponentially, 1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024 etc etc. The earth CANNOT sustain geometric growth of any of the above list INDEFINITELY. That is NOT an opinion. That is NOT a political statement. That is NOT the viewpoint of a religious crank. That is NOT pathetic wish of a tree-hugger. It is a physical, mathematical, practical, undeniable FACT.
The model behind the current system is utterly flawed. Any talk of patching it up so that it can continue is unbelievably futile. The only reason it has managed to work at all until now is that a source of (almost) free energy has fuelled the previously described exponential expansion. That free source of energy (oil) is peaking out. Note: I did not say running out. I said PEAKING out. That means that since June 2006 the world's daily oil output has been in decline. i.e every day since June 2006 the worlds daily output has never been higher than in June 2006 and has been falling consistently since. It doesn't matter whether you believe in the Peak Oil theory or if you think anyone who believes in it is a nutter. The figures speak for themselves. The worlds daily oil output since June '06 has been decreasing. It is an absolute fact.
In order to satisfy the base requirements of a debt-based, fiat, Fractional Reserve monetary system the consumption of energy must increase to fuel the increase in manufacture of goods and general industrial activity which in turn increases the consumption of those goods by ever increasing numbers of people taking out more and more loans to buy those goods which in turn results in more and more fiat money being printed. If the increase in energy consumption is strangled because of a decrease in the supply (which it has been) then the bedrock of that geometric system is undermined and the financial system collapses with it.
Without the creation of new loans/debt/credit (call it whatever you will) the rate at which the money pot is being filled with new money is lower than the rate at which the loans are being repaid or written off, which destroys the quantity of money in the money pot (when its repaid or written off as a bad debt the original loan amount is destroyed but so is the leveraged amount - 40x in the case of Northern Rock). Therefore, if the rate of money destruction is greater than the rate of new money creation then the money pot shrinks. When the money pot shrinks it is called a DEPRESSION.
The cretins in Number 10/11 may understand the explanation thus far ( but I have my doubts) and therefore they look around for 'solutions' to the problem. The 'solution' they seek, however, is to find ways of printing even more new money to keep the money pot topped up. That's the limit of the 'fix'. But new money can only be printed as a result of new debt. New debt begins as government debt which is then spent into the economy through the commercial banks or the corrupt PFI schemes or their cronies in the Defense Contractors camp. All of the proposals outlined by Robert above are ways to print more new money in an effort to prop up the exisiting, failing system. e.g.
"public sector would inject new capital into our battered banks" That means printing new pound notes. Don't be fooled by the deliberately obfuscating vocabulary.
"[to] provide them with the muscle to start lending in a sensible way again." So the 'public' lend the banks 10 newly printed pound notes for them to use Fractional Reserve Banking to lend £100 (£90 of which is fictional) back out to the 'public' (at a 10:1 lending ratio, most banks are much higher). Well that seems like a plan, not.
"decided to inject billions of our cash into banks. " printing more new money again.
"savers would receive an automatic and instant uplift in the value of what they put in." They may receive an increase in the numerical amount of pounds but not the 'value'. The purchasing power (value) of those pounds will be diluted in exactly the same proportion to number of new pounds printed. It is a pyramid selling (Ponzi) scheme.
"but the risk of capital losses would, I think, be quite small." thats an incredulous statement to make given the example offerred by the current circumstances. In a Fractional Reserve System with, say, a 10:1 lending ratio the loss of £10 from the system results in the destruction of (10x10) £100. Destructive losses are magnified by the Fractional Reserve Banking system. Thats why it is so destructive.
"This will be a semi-compulsory, contributory pensions scheme" You must be joking. The last place I want my retirement nest egg is in the hands of financial incompetents who want to make me better off by printing new, valueless pound notes. And then prevent access to it until you are forced to buy an annuity worth nothing in real terms. I'll invest mine in real, tangible assets accessible at all times thank you very much.
"there should perhaps be a dividend for those in low paid jobs and insecure employment, who are hurt most by the economic slowdown precipitated by this crisis." It is pathetic and devious to use the low paid as a crutch to support this repugnant viewpoint. The low paid (and those on fixed incomes ie pensioners) are hurt far more by the destruction of the spending power of the little money they do have by your beloved inflation (wholesale printing of new money), a cornerstone of your proposal.
"Personal Accounts Delivery Authority (PADA), which is setting up a new national pensions savings scheme for launch in 2012." Another quango to swell the ranks of the civil servants who represent 50% of the working population and 20% of the entire population.
"only governments, through the deployment of taxpayers' money" Don't lose sight of the fact that the government has no money of its own, it is not a revenue generator. Every pound spent by the government must first be forcefully taken from someone else.
If the problem could be solved and everyone made rich by the wholesale printing and distribution of new money then Zimbabwe would be the richest country in the world right now.
Do not lose sight of the fact that the effect of printing every single new pound note devalues, debases and reduces the purchasing power of every pound note already in existence. Compounding that issue, deflation of the money supply does not return that reduction in purchasing power which the previous inflation stole from you. A period of inflation follwed by a contraction in the money supply is HIGHLY destructive and painful.
Inflation of the money supply is the most devious and indiscdriminate tax on the populous which has ever been invented. It is silent and unsung and complicitly ignored and unreported by the media. The word inflation is used every day in an obfuscating manner to describe the rise in prices. It is not the rise in prices. Inflation is the printing of new pound notes which has the EFFECT of increasing prices because of the reduction in spending power of the pound notes already in existence RESULTING in the rise in prices.
The government pension system is a scam. You are led to believe that pension contributions are somehow invested in some trust fund and ring fenced for future payout to the people who paid them in. In reality the government takes your pension payments and squanders them immediately upon receipt and your future pension payments, if you get one, are paid out of the taxes of the people who are still working throughout the period of your retirement. The system is completely insolvent because the forecasted future withdrawals are greater than the future predictions for contributions.
If you got this far, congratulations and thank you for reading.
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Nice idea. You seem an honourable man who can see the rights and wrongs of the current financial chaos.
However, there is a fundamental problem with your proposal: you are adding a moral dimension, wanting to help, in particular, the poorest in our society.
The system we live in is not meant to help achieve an equitable outcome, to set financial fairness for society. The richest in our society will never allow your scheme to work - that is not what our market capitilisam delivers - and their respresentatives in the Tory and New Labour party will make sure things that only the wealthy will take advantage of the mess that the wealthy were allowed to create by their political stooges.
But it is nice to know that there are alternatives ... even within the rotten system we have.
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Interesting idea, but not without drawbacks. For one, who decides into which instutions the funds are to be invested and the terms? Preferred stock as well as subordinated loans, were extended by the Japanese government only to the largest banks deemed "too big to fail."
The bailout package approved in the US by contrast is open to any and all offers.
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Can someone tell me what the correct syntax is to get certain words or paragraphs in italics or bold please? or even better, to have a quotation in a box or something?
Thanks.
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What a brilliant idea! Taking a leaf out of a shrewd investor like Buffet's book would mean that government could bail out banks, plus get long term benefit for it. This crisis is an opportunity, and we can all benefit instead of just being the muggins who pay for the mistakes of so-called experts.
I sure hope someone in government is reading Peston's blog.
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Just had a note from dear Kenneth Widmerpool on the whole matter:
"As you know Nick I have recently taken on a new assignment for Sir Magnus in these troubled times.
All rather hush-hush of course, but needless to say I am considered just the man for a crisis. In essence - and this of course can go no further until time to take due plaudits - we are intending to declare a new Cod War on Iceland, alleging its unreasonable acquisition of certain British assets was achieved through deviant usage of 'weak money'.
You won't understand the term Nick, but I've no time to open your eyes to the world of global finance. You really should have paid more attention to Muffins' lectures on the subject in the Lower Sixth. That was the time to gird your loins as a youth, not now.
But excusing your deficiencies, as I say the plan is to invade Iceland, lay siege to Reykjavík then promise only to leave once the country's entire remaining funds have been handed over as a war reparation.
You might argue - there have indeed been such feeble voices in Cabinet this morning - that it is pretty rough to kick a neighbour when he is down.
But that is the whole point Nick, Iceland is finished as a country so what is the point or use of being sentimental about it? With the £200b or so we will carry back to the British economy we shall be able to re-capitalise every Bank in the land.
I shall be in the first landing craft to hit the shore, as my role in securing the economic codes is, of course vital. You really should have joined the Territorial while you had the chance Nick. There is glory enough to go round for the subordinates and I could have done with a decent man who knows how to act on command.
But no more until we return triumphant. I only tell you this because I know you had planned a painting holiday to Iceland soon, and it would be awkward if we had to stop and rescue strays such as yourself.
Mother sends her regards as always.
Yours,
Kenneth."
Sorted then really.
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#42 wrote: "Giving loan at 10% will not work, as its too expensive."
Then that company has failed, hasn't it? And taxpayers are picking up the tab, aren't they?
The alternative proposal I outlined (bottom of #30) will instantly reveal who is solvent and who is not. Investors can then take losses or realise gains according to their position in the hierarchy - common, preferred, senior bondholders, etc. The losses taken, performing assets can be sold to solvent institutions for servicing, and taxpayers can then step in with the ONE guarantee they should offer - to depositors, should solvent institutions lack the capital to meet their obligations to the FSCS. The capital markets will then unlock because the source of the freeze - lack of trust, uncertainty over who is in difficulties - will be removed.
That's cheap, and it addresses the real problems, which are linked crises of confidence and overproduction. There are too few banks, they are too big, and no-one knows which can be trusted. Taking stakes in banks does not address those fundamental problems. Breakup and administration where appropriate does. Inevitably it means a much smaller financial services industry, but we are going to get that whether we like it or not. We can choose a better path though.
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A scheme to let the poorer people share in this country's financial wealth.... promoted by the government...fat chance!!
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You should have been offered treasury in the last reshuffle Mr. Peston!
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And another thing, it is sad to see a disingenuous trial balloon such as this receive acclaim, but it is the inevitable result of telling people they can have something for nothing, jam tomorrow, and packaging the promise with an empowering message.
Do not be fooled, people, this will be a taxpayer debt, with the money loaned to banks of concealed financial status at a rate not commensurate with risk so they can arbitrage their way out of their difficulties. Over a sufficiently long interval, such as the duration of a pension investment, this carries a very high risk of loss. And the risk will be yours. If it were theirs, they would lose and there would be no point in such a scheme in the first place.
You are basically being asked to fund a carry trade.
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And we could see the return of mass public-sector housing (council houses) as the government takes over all those failing mortgages.
Council houses will be in every street, rich or poor.
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#15
I think you are the one who needs the sleep (or perhaps wake-up!), if we don't pull out of the economic nose-dive we're in the hard working tax payer is going to take a hit anyway - along with everyone else, when your shares are worth less that a fresh sheet of A4 paper, or when your pension funds vaporise...
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#60 - NorrieC
Our fellow blogger, Ed Inglehart has provided a useful guide. You will find it HERE.
Good luck - thanks again Ed!
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This comment was removed because the moderators found it broke the House Rules.
#69 - threnodio
Many thanks - you are a gent.
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#66 -WerringtonSilent
Why is this such a difficult concept to get over to people? I can only presume that the psychology of the "Money for nothing" is so strong it overpowers peoples reasoning powers. I despair.
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Robert's idea is attractive. Most of us do see the imperative need for a very disciplined process of bank bail-out which protects the public interest and gives us the benefit that should come from holding the purse strings.
What worries me about the present situation is the assumption that governments can safely continue to produce ever more money to bolster banks and depositors. Obviously they cannot - lenders will not be prepared or able to continue to lend even to governments at the present unsustainable levels.
It all seems to point to an unavoidable and significant cutback in our standard of living over and above the current cost of living increases. Robert's idea, very necessarily, would lessen the impact on the most vulnerable.
My own idea would be to also directly punish the almost criminal negligence of the inept boards of so-called banks. And for the future, disentangle banks from building societies [ it could be done]. We might then have real bankers running real banks, and good old stodgy mutual managers safely looking after our mortgages. Supermarket salesmen could then wend their way back to ASDA. Perhaps Alex Salmond's idea of a resurgent Bank of Scotland is not so daft !
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The comment about warming up the printing presses is about right..... the debts will get smaller when the value of each £,$,or Euro falls.
But whenever inflation is pushed onto the system while in purely Financial terms things "work out" it's the outside-the-financial-system effects that cause trouble.
Hitler is the classic example.... the inflation rate in 1938 isn't at hand but it was probably better than 1926...it's just that inflation wasn't the biggest worry by then.
but even the less lurid examples aren't ever good...it's a classic cure that's worse than the disease....
and don't get me started on people advocating "the right amount" of inflation... I've had enough of Goldilocks theories...
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No.57 (NorrieC)
I'd be more willing to read through your comments if you didn't rant so much!
That said, you raise important issues, in particular the unsustainability (in ecological terms) of a policy of limitless economic growth on a finite planet.
'Economics' and 'Environment' still seem to occupy separate boxes in most people's heads. Insofar as they think about them at all. Though it's encouraging to see a number of contributors here mentioning Peak Oil and the end of the era of cheap energy.
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I can not help thinking that the current mess will sort itself out. The relative frequency over the years of this type of problem makes me wonder whether it is not a naturally occurring phenomenon conforming to chaos theory. Some action somewhere in the world of markets and human nature causes the system to run amok.
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A sound idea - why is it people with common sense, imagination and talent are never the politicians (with the notable exeption of Vince Cable)......
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Wow! I am stunned but such unmitigated Socialist nonsense.
You did realise that the USSR collapsed because of its socialist policies, not in spite of?
Waren Buffet, sadly, also got a significant proportion of the 700 billion dollar bailout so I think his advice is slightly suspect.
Oddly, the one winner in all this is Goldman Sachs and by a completely random coincidence, the current US Treasury Secutary, who recommended this bailout, is an Ex-Goldamn Sachs CEO. Who'd'ave thought?
No, we appear to haved learned nothing from the '30s Depression and want, desperately, to have our own, bigger and better than the last.
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"The best time to invest, always, is when everything looks gloomiest. That's when the bargains are to be had."
Be careful what you say. Even Buffet has the fear at the moment..
The trouble is, we are on the edge of a precipice, a controlled demolition of western economies.. Throwing any public money at the banks, at risk, dances with the prospect of massive losses for the UK tax payer when we are already massively in debt. "The cupboard is bare"
Also where would the money come from? Would we borrow from the banks to have a stake in the banks? Or would we borrow the money from China?
No .. its too late.. The Keynesian and fiat money economic experiment has failed, it must be replaced with a new one.
We need to allow the system to collapse and end the criminal syndicate controlling the Fed, ECB, IMF and other central banks and restore freedom in our western nations.
Oh.. and please read post #57 he is right on the money! Well done, bravo.
We should prepare by creating new currencies, localised money systems backed with sound money (gold or silver) with strict fractional reserve ratios and interest rates set by the free market. i.e. end inflation, end central banking systems and put the economy pretty much entirely in the hands of the free market, with strict oversight of reserve ratios.
We need to start now.
Setting up competitive and sound money systems and competing currencies in parallel with a failure of the existing banking system in its entirety will better allow a transition to a new economic model (Austrian School). If we do it after a total collapse, there will be no back up plan and we are into a new dark age of years of hyper inflation followed by anarchy.
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#57. totally 100% EXCELLENT post, very long yes but then the true reason for this meltdown of the capitalist order can't really be summed up in the way the media love ... "credit crunch" works for the masses, but its beauty is so very skin deep.
I am actually in the position now, after some weeks of deep thinking, investigation, and planning, of taking decisive action as to what I see as the impending situation.
And I would seriously counsel the rest of you to do the same. Keep talking about this stuff yes, keep thinking and considering the tactical moves being made - and proposed (e.g. by Robert), but please do not forget to TAKE ACTION to protect your own positions.
I will give you a couple of examples :-
* it takes 1-2 weeks to pull your investments off the stock market, particularly if embroiled in a unit trust / ISA
* if you want to get into gold/silver, then you need to jump through some hoops to get a trading account
Don't just believe you know how things are going to pan out here, only to find if they indeed do that all you have left in the world is the knowledge that you got it right.
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#57. totally 100% EXCELLENT post, very long yes but then the true reason for this meltdown of the capitalist order can't really be summed up in the way the media love ... "credit crunch" works for the masses, but its beauty is so very skin deep.
I am actually in the position now, after some weeks of deep thinking, investigation, and planning, of taking decisive action as to what I see as the impending situation.
And I would seriously counsel the rest of you to do the same. Keep talking about this stuff yes, keep thinking and considering the tactical moves being made - and proposed (e.g. by Robert), but please do not forget to TAKE ACTION to protect your own positions.
I will give you a couple of examples :-
* it takes 1-2 weeks to pull your investments off the stock market, particularly if embroiled in a unit trust / ISA
* if you want to get into gold/silver, then you need to jump through some hoops to get a trading account
Don't just believe you know how things are going to pan out here, only to find if they indeed do that all you have left in the world is the knowledge that you got it right.
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Since the 1930s, Britain has only 'emerged' from the Great Depression by a series of economic props: War (!), The Marshall Plan and Reconstruction, North Sea oil and gas, the arms trade, then the City. What next? No real solution appears on the hoizon. Instead, governments, local and national, seem committed to ever increasing costs for 'benefits' and health. Unless more people work, bankruptcy will increase exponentially. £billion patches will not stop the haemorrhage. Britain has to pay its way or suffer currency collapse, following Germany, Argentina, Norway...
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#75 StreetcornerJeremiah
OK, point taken (although having re-read my post I'm not sure what proportion of it falls into the category of a 'rant'). But what we see here is a discussion at a level above the level at which the system is failing. Most arguments above including Robert's are centred around the (unconscious) acceptance of the existing fiscal model and what can be done to put a plaster on it.
There are very few people challenging this at the foundation level. The financial system we attempt to operate is fundamentaly flawed. Mathematically it simply does not work. Robert refuses point blank to discuss or even acknowledge the matter and few posters rise to the challenge.
That's what makes this so frustrating and maybe explains a degree of tetchyness.
"'Economics' and 'Environment' still seem to occupy separate boxes in most people's heads." My point exactly. The fiscal model we are hell bent on following is mutually destructive.
I realise my next statement will be construed as being contradictory but I have actually no long term worry that this will all be sorted. The fiscal model is based on the limitless exponential growth paradigm. It requires a coincident exponential growth in the consumption of energy (free energy in the form of oil). Peak Oil will be our saviour from the fiscal model of debt-based, fiat, Fractional Reserve Banking. The lack of a free fuel to sustain the growth will kill it stone dead as it is in the process of doing now. By admitting what the problem is and tackling it head on we could lessen the pain but that seems unlikely to happen in the current climate. However, the climate is very volatile and you never know....
A bizarre viewpoint I know but humans are highly unlikely to voluntarily choose to fix this problem by themselves but nature will therefore do the deed for us.
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Lost in all the flak is the credit union. These worked well until the de-mutualisers got their way. Lending to members who had saved, worked seriously well for the better part of the 20th century. Abbey and Halifax when CUs had almost no bad debts. One can only hope enough groups are willing to come back into existence Will kill the first time buyer who has saved nothing. Has that generation got the bottle to succeed?
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There are the quintet of necessary state owned or controlled assets in a healthy society.
1. Health Services - The NHS
2. Utilities - privatised and now we are paying the price
3)Education - whilst not perfect we've got a pretty good Education sytem here
4) Banking - looks like the private sector have blown it again and by default our banks will becone OUR banks.
5) The Military - take a look at Blackwater worldwide if you need convincing
So all that is needed is re-nationalisation of the Utility companies and all will be good again in the UK
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Fabulous idea.
They should do it. Prob a bit too imaginative for our current (mal)administration.
:-(
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This comment was removed because the moderators found it broke the House Rules.
There's one problem: you're talking balance sheet. At the moment, that's the last bullet the banks want to bite on, because accurately assessing the balance sheet will force a goodly number into immediate bankruptcy. Like Mickey Mouse, as long as they don't look down and realise they're way over the edge of the precipice, all will be well...
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#83 NorrieC, as you recognised in #57, there is a limit to inflationary expansion, the episodes of deflation experienced at intervals. So credit market crashes can be viewed as a balancing mechanism of sorts. I could not say whether a full reserve monetary system in balance with resource availability would be viable, but an inflation-deflation supercycle is quite satisfactory so long as you exploit it on the way up, are in cash for the reset and do not worry too much about your grandchildren repeating your history. Whatever the disadvantages, it is likely that human avarice would always prohibit doing things differently for very long. You are right however that we cannot cheat nature. Thanks to our demands on the environment, this could be the penultimate iteration.
This model is the only one taught, so it is not surprising to see it feature among unstated assumptions. I will make it a stated assumption. More troubling is the banal treated as juicy revelation and met with accusations that the information is too much. Too much for wide dissemination perhaps? It is all on Bloomberg.
I think we can all appreciate everyone else's commentary though. Sometimes that is the real content here.
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Robert ,The Government could encourage many of the depositors who recently removed their assets from banks to buy into your pada scheme now rather than let their money sleep under their matresses
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We need to read all the political words very carefully now since they contain very clear messages. The EU leaders (inc Gordon) will not let a sound, solvent bank fail for lack of liquidity. Banks which are not sound and solvent may be allowed to fail.
But banks aside. The short term liabilities of corporations is where the action, or rather no action, is happening now. The chance of rolling over maturing debts in the next 12 months is low. Are the EU governments going to rescue all the corporates as well? Why isn't the BBC reporting on the refinancing problems of corporates? This is the real story that the man on the street needs to know so that he can connect it to his own job and the banking problems.
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I agree, post 57 is brilliant (albeit extremely depressing for the future of the world and the UK in particular).
It is true that Britain needs to rediscover something that allows it to provide goods or services to the outside world. It is unlikely to be financial services and I really do not know what it will be, as all of our useful legacy knowledge is already in the hands of people who do it better and cheaper than us.
I think that one of the reasons that house prices rose so rapidly is because people with real wealth (i.e. people from countries outside of the UK, in economies that make things we desperately need (goods), or have things we desperately need (food, energy and materials)) could always out-buy anyone actually living in this country. The only way for a British person to actually compete was to have increased credit to match the outside buyers. Now this credit has run out but the outside buyers are still there and growing in number. British people need to learn how to work productively again and perhaps become less dependant on energy. When the power is finally cut, it will probably be the people, living simpler lives, who survive the longest!
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Interesting idea however, it?s not that original considering that the Australian government already runs a similar scheme with some of their budget surplus money. Sadly under Brown you?re not likely to have one of those for many years to come.
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And with every problem we have an opportunity...
We are in accident and emergency at the moment and the dying patient is holding a gun to the surgeons head and saying cure me or die.
Time to rethink I think. The suggestion that Robert makes has significant merit but cannot be the total solution, methinks the system has become much more rotten than that. When the man in the street fears to hold cash in a bank, when healthy businesses cannot refinance loans, then the current banking system is NO LONGER FIT FOR PURPOSE.
All we have to fear is fear itself, a wise man once said. Perhaps we can learn from the 1930s and keep the damage of all this to a minimum. But lets be clear, attempting to prop up the current system will just prelong the inevitable. Radical thinking is necessary, but we MUST NOT destroy the banks in the process.
The pupose of government here must be to hasten the darwinistic process, i.e. change the environment so that the natural selection of depression happens in months rather than years.
Many people on this blog spout illuminating theories and conjecture, but what actually to do. So lets propose one solution - full of flaws and holes no doubt but lets say open to discussion. All I ask is an open mind.
TO DO
1. Government action to stimulate the renewal of a system of small local building societies, back to the model prior to demutualisation.
Why... to seperate what should be solid long termism from what is speculation, and to ensure that the financial system CAN allow a part of the whole to fail without bringing down the entire pack of cards. Rescue of a small mutual IS easily possible, rescue of the banking system as a whole is, as we are finding, a little expensive!
Method... one process would be to take the Northern Rock plus B and B housing stock, package them up with local housing associations and even possibly some council housing stock and sail them off as small mutuals. With the proviso that they must remain mutuals and not subject to subsequent debagging!
Benefits... confidence! A more robust system, plus job sustinence, employing the day to day banking sector workers that would otherwise be made redundant, to run the small mutuals. I am proposing deliberate duplication here to add greater robustness to the system.
2. Energising the first time buyer housing market. Taxation breaks encouraging a rethink of general UK house ownership using the shared ownership model. Encourage FTBuyers to purchase a share of house equity say 30 percent and rent the rest. At any time during their working life they could purchase the remainder of their house and gain full ownership. Into retirement the equity holding could then be effectively reversed, with equity release schemes funding retirement. The shared ownership model has been used extensively in the generation of the New Towns, such as Milton Keynes, and could easily be extended.
Why... Confidence in buying full ownership in a house has been damaged by the crisis, part ownership offers a step by step approach allowing further debt to be taken on gradually. This will get first time buyers into the market, reducing the bottom of the enevitable housing crash. If the cost of housing falls almost to rental levels, which is what happens in shared ownership schemes, FTBs will start buying.
Method... Taxation breaks to encourage FTBuyers down this route. Legislation to assist those homeowners in default to take a reduction in the ownership of the house from 100 per cent to say 50 i.e. reversion to shared ownership as an alternative to eviction and empty properties. The remaining share being taken over by the local Mutuals created in step 1.
Benefits... This reduces the mortgage payments hopefully to a payable level, avoids dumping the property at the low end of the market and above all returns confidence to the householder that eviction would be very unlikely. Secondly it would be much easier to find a mortgage for a 30 per cent share than it would be for 100 per cent.
3. The above 2 steps are likely to hit the banks hard as housing revenues tend to flow back to the mutuals, but no harder than the depression would hit them if these steps were not taken in the first place. The government must make it clear that the banks will continue to be supported until, and ENCOURAGED to, refocus their lending activites back towards the business economy and job creation/sustinence.
Why... Redirection of banking activites to social purpose, i.e. the funding of sustinance and growth of the real business economy not credit bubbles.
Method... Continued cash flow support to those banks realligning their activites, penalisation of those that do not. Legislation making executives accountable. Legislation to restrict LTV and self certification products. Accounting legislation as proposed in this thread to make risk more apparent.
Benefits... Banks throughout the world will have to reallign their activites anyway. The first international financial system that completes reallignment will have a MAJOR COMPETITIVE ADVANTAGE over the rest of the world as it will find itself able to procure assets at firesale prices. Yes the banks and bankers will resist, but they must take the blinkers off as see the potential prize at the end of the process.
4. It is of vital importance to the UK to have a financailly vibrant city and banking system. The funding solution Robert suggests is an excellent way of ensuring that the City recovers quickly by providing the cash to invest.
Why... UK Ltd needs the City to generate foreign earnings.
Method... As Robert outlines above.
Benefits... Completing the necessary reallignment first will create an international competitive advantage and will reduce the effects of any recession.
5. As well as the purchase of assets at a discount that Robert suggests. Why not also think big. Why not create projects that provide a benefit to future generations. During the 1930s Rosevelt stimulated growth with large Government projects, for example the Hoover dam hydroelectric scheme. This gave a significant boost to the USA then and still benefits it today. Projects that instantly jump to mind are offshore wind farms etc. Why not a significant mission statement to focus our energies, why not self sufficency in power in 10 years - not because its easy but because its hard!
Why... Would get the ducks in a line, provide a focus for Roberts investment money alongside the procurement of cheap assets.
Method... A certain percentage of the pension money siphoned off for this and other key strategic objectives.
Benefits... Too obvious to mention.
Lots of ideas here then for everyone to attack. But thats the point is it not, find one solution, find its flaws and improve it. One thing is certain, we are in a period of financial fear. Put very simply the fear ends when people decide not to be fearful anymore, stop contemplating their navels and start to look to the future. If your glass is half empty that could be ten years away, if your glass is half full, well every problem is a significant opportunity!
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#91, on your first point, we need to be able to verify this by reading companies' financial reports. Presently we cannot because they offer too little detail and their guidance is implausibly rosy. For example we can only infer from the presence of a SIV without writedowns that there may be problems in store. Or there may not. Without the guarantee offered by regular mark to market accounting, with scant details of what it contains, there is no way to know. A politician's reassurance is worth nothing to a lender or shareholder wishing to exercise due diligence.
Your second point is very important. Commercial paper is not rolling. Solvent, profit-making, useful companies could go to the wall because banks do not trust each others' regulatory filings. Giving them taxpayer money will not restore trust and make them lend. It will just sit there along with all the other money sitting this out. I fear by the time this is widely understood, the damage will have been done. To answer your rhetorical question for everyone's benefit, EU governments are not going to be helping hotel chains make payroll. Utilities and transport, maybe. In arrears if their record is anything to go by.
#94, we certainly need more competition in the banking sector, and no bank should be too large to fail and too large to rescue. Undoing past consolidation would be beneficial. But there is no need to introduce greater complexity in mortgage finance. The simplest solution is to make housing cheaper. That happens by itself when people are only allowed to borrow what they can afford to repay.
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To Mr Preston,
Will you now research an article on why it could appear to happen but most certainly will not transfer wealth downwards?
jamesthought
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Mr Peston
That sound like a very good idea, if fact I find it very refreshing for someone to think about those at the bottom end of society.
How and when could such a scheme mature in terms of pensionable age and return.
Further more, would it be an end to company pension schemes and the start of a national pension scheme.
Would it have any effect on the state pension, if indeed it did become a national pension scheme.
Probably more questions than answers at the moment, however as I've said, its sounds decent to me.
Another final point, how could you balance it for short term contributors in term of pensionable age.
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I've thought along these lines for a while, esp. since the BBC ? documentary on Soverign Wealth Funds a few weeks back.
The UK needs a Soverign Wealth Fund, which could have been drawn upon in times of need like now.
The 2nd biggest one from memory is the Norwegian one (only 'western ecomomy one'), part filled every year with oil revenue that the UK throws down the toilet.
If Singapore without oil can have 2 in the top 10 no reason UK can't.
Say 10% of oil tax revenue into it each year and 10% of Government waste savings. Following Robert's Government 'vulture' capitalist suggestions as above and kerching in 10 years we may have a UK Soverign Wealth Fund worth hundred's of billions.
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When we start to put right this mess in the next weeks months and years the future of banking governments and financial markets is like everything else locked in with the future of civilization. It is no longer possible to live in isolated self sufficient communities with stability because while we are still able to live in social communities we are dependant on all the other communities to share the resources the minerals, the natural and the cultivated ones to sustain the most reasonable life balance for us all.
We cannot tolerate excess by any small minorities and we cannot accept deprivation of the unwitting. The national governments, bankers and a greed driven culture has culminated in many unsustainable and false markets which are now crumbling round our ears. When we rebuild our economic society and elect our governance we have to do it on the basis of sustainable management of all resources for all communities.
Sustainable now is not a political green, softy, tree hugging word It has to focus in every thing we plan because if we are to survive and combat global warming, peak production and end economic boom and bust we can only achieve it by universal cooperation.
There are no desert islands to hide away in isolation on and there is no room for conflict in markets. We have to develop the individual and society through strategies of cooperation not adversarial tactics.
We have to work monitor and govern very tightly all those things which create seesaws because they become conflict not co-operation we have to have a global strategy now. Why? Because peak production is going to cause some real money market problems in the next 10/20 years which could make this crash look like a mole hill at the foot of Everest.
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NorrieC's post at Post # 57 is a good one. I think I say pretty much the same thing in slightly fewer words at Post # 9. We agree that the current debt-based money system, predicated on endless economic growth, itself predicated on infinite cheap energy is the problem in a nutshell. Like Norrie, it amazes me that our politicians have yet to twig this. All of their current actions are not fixing the problem, they're fuelling it. The mess we are in today will look like nothing compared to the even bigger future mess they're creating by printing money and pouring into our economies like a waterfall. Boy oh boy is this going to hurt when the collapse occurs.
I'm not a survivalist nutter or anything like that, but at a personal and practical level I'm now rapidly taking steps to become self-reliant and to secure, water and feed my family. I know it sounds a bit dramatic, but I think this situation is now so out-of-control that the 'experts' and politicians haven't got the faintest idea what to do; they're panicking, which of itself scary.
The financial mess will soon become a real-economy mess which will become society's mess. A messy society is a restless society and that scares me more than reading about the imminent collapse of yet another bank.
Here's a good place to start: http://tinyurl.com/2o472v
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I think the idea of allowing sipps to invest in residential property could help. It could also help solve the issue of expensive public sector pensions.
Imagine a typical public sector worker with a reasonably large pension pot (even though it does not actually exist). The government pays a transfer value to a sipp equal to the value of it as stated in the government accounts. The worker's sipp can take out a mortgage of up to the same value. The sipp receives rental income to cover the mortgage. The worker should be allowed to live in the propertyp provided he pays a true market rent.
I think that solves everything ;-)
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Let's face is the global economy is doomed, aye doomed.
For years this idiotic government and the one in the USA have gone on a binge of spending that has led to sky high unsustainable borrowing. A binge which is nothing less than 'live now pay later economics'.
In the UK they have encouraged the public to pay outrageous prices through artificially low interest rates (ignoring house price inflation). The banks are not the real cause of this credit crunch. They are just one of the fall-out victims. They too were encouraged by governments to provide "affordable housing" to people who could never pay off their mortgages.
Personal borrowing has become obscene as well.
So how do we get out of here?
Simple. Just don't start from here.
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#80 "if you want to get into gold/silver, then you need to jump through some hoops to get a trading account".
Depends whether you actually want to own physical gold, or trade it. The latter is risky if you don't know what you are doing. If you want to own and hold real gold - rather than a bit of paper linked to gold - but do not want to take delivery of coins yourself and arrange your own storage, then you can but gold which is held for you online at BullionVault http://www.bullionvault.com/.
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63. At 9:15pm on 04 Oct 2008, WerringtonSilent wrote:
The problem now we have is, we cannot let more institutions fail as
1) it would wipe out pension funds.
2) it would wipe out insurance funds.
3) tax revenue will drop with increasing business failure and redundancy.
4) crime will increase due to poverty.
5) house prices will fall.
6) government will not have money to pay depositor of failed banks.
7) even people on benefit will suffer as there will not be enough money to pay them at present rate.
Can go on, so we need this to be resolved. Only possible way is government bail outs, massive infrastructure projects, cheap loan and high inflation for very years.
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Good Idea Mr. Peston, one could also call this a redistribution of income. Perhaps the Utilities might want to pay some money into PADA too, as they are raking it in at the moment. In fact, these greed-throats should be taxed and the money paid into the PADA fund, which then could be used to bef up pensions.
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#38 - I was trying to look purely at he Icelandic situation, as was RPs article. Other posts seem to have made it clear that the problem with these banks is hardly an Icelandic one ata ll, but a European one - all he less reason for the Icelandic Government to bail them out.
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Although Robert Peston quite rightly seeks to look forward, can I make one point about the origins of the current worries?
Banks and other institutions, particularly PLCs, are subject to audit. I have read little criticism of the big four auditors; how is it that they were signing off accounts, and therefore approving asset values on the banks' books which were in fact very flimsy paper?
There is much talk about greedy speculators and short sellers; what about the auditors who are supposed to be the guardians of our financial system?
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"..massive infrastructure projects..."
Mr Keynes is back..
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#98, Singapore is a much smaller country than the UK. Also it has a very brutal approach to people who are out of work. If you are willing to see out of work people in the UK essentially be level above starving then the UK very quickly can have a surplus too.
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#104, yep because that worked a treat in the 70s....
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If PADA ends up particularly flush, it'll find its pocket picked by the Government. The problem with pensions is that you're tying your money up, which has an opportunity cost in itself, without knowing what all the governments until you retire will do to the rules.
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The situation is dire. We may actually have no choice but to return to policies like public works and stimulus . The Thatcher/Reagan era is drawing to a close.
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#108
"Mr Keynes is back"
...yes and Thatcherism/Reagonomics is dead! Many will cheer...
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Robert - I am all for coming up with creative ideas. However I think to use the PADA would be crazy. Many people believe the PADA is already a flawed initiative.
If this were to happen the people paying for this banking crisis would be some of the poorest people in the country. You would be dictating, for Govt reasons, the investment strategy for this fund.
Necessity may be the mother of invention - but please - not in this case!
The problem we have is ad hoc and half hearted measures. There are only two solutions. Either a complete temporary nationalisation of all UK banks, alongside a robust plan for their eventual recapitalisation by an orderly re - privatisation or let market forces take their course. Listening to the Chancellor on the AM show we maybe preparing to bite the bullet.
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Warren Buffett was able to receive such fantastic terms on his recent investments because his investment track record lent enormous credibility to those companies. This allowed them to raise several times Buffet's investment from other investors on completely different terms that were far less generous to those investors.
An investment by the UK government would not lend any credibility, rather it would be assumed they were paying over the odds to prop up the company for the wider good of the economy. Therefore the government would not be able to get a Buffett-like deal and would have to invest far more to achieve the effect that Buffett has.
Buffett is in a unique and highly enviable position to do such deals, but even he has limited resources. The government would be better buying new shares in Berkshire Hathaway (Buffett's company) and hoping he will choose to do some deals in the UK.
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#104, your points 3-7 are going to happen anyway, that is what always happens in a recession, we are in one now so there is no use worrying about it. Point 5 is a good thing, it is part of the problem. Your suggestions will make points 1-2 happen as cheap government credit creation inflates away people's savings.
We do need this resolved, but we will not resolve it by making the problem worse. Robert Peston's suggestion will make the problem worse as it assists hiding the wreckage and undermines what little trust remains. LIBOR will not budge in response.
Again, banks either do not trust each others' regulatory filings or do not like what they see. That is what the freeze in interbank lending is telling you. Giving them taxpayer money will not change that. Money today does not fix tomorrow's poor guidance.
Institutions are going to fail. Our actions will decide whether the ones that do are only those which have already failed but concealed it, or healthy ones too. The only way to save the healthy is full disclosure. More obfuscation will condemn the solvent. How long until a healthy bank fails because no-one trusted it in this climate? We cannot save everyone, we will lose everything if we try, so it is time for triage.
To recap, force disclosure of non-performing assets on and off balance sheet, mark to market instead of model, shut down dark pool trading and bring CDS and all other OTC instruments to public exchanges. If you trade illiquid instruments for which recent price data is not available, explicitly declare it. Then wind down the failures, pay out to depositors and commence reversing the consolidation of the past. Crisis of confidence solved.
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#112, yeah and how do you plan to pay for it?
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#113 Boilerplated
" "Mr Keynes is back"
...yes and Thatcherism/Reagonomics is dead! Many will cheer..."
Why divert the substance of this debate away to petty politics? The statement made by #108 2001Oysters was entirely accurate.
John Maynard Keynes proposes a philosphy whereby if you get yourself into a financial fix like we have just now then the solution is to spend your way back to prosperity. His tenet is for massive government borrowing (read printing of lots of shiny new pound notes) spent on infrastructure projects. The money is first received by the construction companies, then to their employees and finally out to the public at large. Many small business pop up to serve the construction process and the economy is generally 'stimulated'.
Sounds too good to be true? Well, it is. Someone must pay the piper and that piper is inflation. Adding massive amounts of new, fiat money to the circulatory system simply debases the currency. For every new pound printed the value (purchasing power) of all existing pound notes is propotionately reduced. If a country, and all its peoples are in debt this is great because it depreciates the value of the debt. However, if you have led a fiscally prudent life and collected any kind of monetary asset (including your pension) then the value of those are commensurately reduced.
To summarise, Keynseyan economics rewards the credit junkies by bailing them out of their debt and destroys the prudent saver by wiping out the purchasing power of his savings.
Politicising your answer simply diverts attention from the root cause of the problem. This diversionary tactic is used by politicians and their complicit media every day.
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the big difference between previous financial crises and today is the internet.
before, the fractional reserve bankers could repeatedly play their game, and rely on the fact that most people would never learn of their activities.
nowadays, we can instantly pass knowledge of their idea not only to each other, but to the giant database that is the internet, where it will stay, possibly forever, for the benefit of all generations to follow.
thus, it is only a matter of time before fractional reserve banking is hanging from the gallows.
our job, this time around, is to fully document, database and distribute knowledge of the fractional reserve system. we can flood the world with knowledge even more than they can flood the world with debt.
this lays mines at the base of their edifice (as it is essentially a fraud, and as such, works by exploiting ignorance).
TIP: search "reserve bank" on Emule/Limewire/torrent ...
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#45 rdrake98 "Professor Rothbard and those like him would say we are victims both of bad monetary policy and of egregious government interference in the economy - in this case particularly the Clinton administration's expansion of the Community Reinvestment Act"
Typical right-wing misdirection and scapegoating. The CRA does not cover the independent mortgage lenders who made most of the subprime loans, nor is there any evidence that mortgages encouraged under the CRA have a higher rate of default than other mortgages. The CRA did not force the banks to develop "financial instruments" so complex and opaque that no bank now knows whether other banks are solvent, nor even whether it is solvent itself. Note that the UK has had very much the same kind of housing bubble the USA has, without any CRA. At the end of three decades of deregulation, and concentration of wealth within countries, the right, as always, looks for ways to blame the poor. Rothbard was a mendacious fruitcake, his acolyte Ron Paul is an idiot who denies the reality of evolution and global warming as well as the intrinsic instability of unregulated markets. We've all seen in the last few weeks that the bankers, full of "let the market work" bravado when they were raking in the moolah, are the first to run blubbering to nanny state when the going gets rough. That tells you just how seriously the capitalist elite take this "free market" guff. Time to take the blinders off, rdrake98.
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I've been listening to Vince Cable for years.
He told us all years ago that we were playing with fire with the "collective property madness".
He was right.
He also said that the biggest losers would be the banks....
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Mr Peston,
There are quite a few off the point coments above. Do not worry too much about them.
It has taken the economics profession and the official world a long time to accept that the acute problem is, and has been for the past year, the need for more bank capital. Just as it has taken the banks a long time to accept tha they will have to pay the market price (the Warren Buffet price that you note) for that capital.
You have pointed to a politically acceptable route for injecting public capital before the financial equivalent of DEFCON 1 is reached. I hope that this, or something very like it, will be done soon here and in a good many other European countries.
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This seems very well worth trying, indeed it's an excellent plan.
But I think it misses two things. Oddly, measures addressed at fixing these two things could actually strengthen Robert's extremely good idea.
The first issue is negative equity, sure to become a bigger problem as (a) house prices decline, and (b) the spill-over from the financial into the 'real' economy hits employment levels. A wave of repos would achieve little for the lenders, as trying to sell huge numbers of properties into a moribund market looks futile. It would, indeed, crystalise losses.
Second, the government owns savings instititions (such as Northern Rock) which are capable of attracting hefty deposits at comparatively low rates of interest.
Now, grafting a housing element onto Robert's plan would make it a lot better. Buying bank equity and warrants with state (pension) funds might indeed be a profitable investment over the longer term.
But so too could buying houses in a depressed market, the state thereafter acting as a socially-responsible landlord and channeling any (eventual) profits into the pension pot.
Given the strength of Robert's connections and his high profile in this situation, it is very likely that his plan - or something very like it - will already be on the government's radar screen. They are very likely to try it.
And, on balance, that seems a positive development.
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I tried commenting on this last night, but BBC has blocked it for some reason. It's still sitting there as awaiting moderation. So I'll try again.
The PADA idea is something RP has no doubt been asked to float by the Treasury. The reason is that one option for them is to invest taxpayers' money into banks (via preferred shares and options in the way Warren Buffet did with GS). The risk for the government is that this sparks accusations of bailing out greedy bankers, just as the US bailout did. So, the government wants to test a few ways of making investment of taxpayers' money look more appealling to taxpayers themselves. What better way than projecting it as an investment on each person's behalf into the banks, whose share prices must now be cheap, right?
I have concerns with the approach. Firstly, the market is now showing signs of sorting the strong from the lame amongst the banks. Some bank share prices aren't falling, while others continue to decline alarmingly. Many banks have had rights issues recently, some of which (eg BB) have gone under subsequently meaning shareholders lost everything. The lame may well still fail, so do we really want to be investing indiscriminately in banks right now?
Secondly, the government's objectives are different to investors. The government (quite legitimately) measures success by how many votes it wins or keeps by its policies. That's the market all political parties are in: maximising share of the electorate. Therefore the banks they most want to save are those with the most depositors (voters) as customers. They may not be the best financial investments. For instance, Santander's position with its recent acquisitions may look a lot better than RBS's financially, yet RBS has more customers (voters) in the UK.
More generally, it's never a great idea to invest exclusively in one business sector. All investment advice, including from the government, is to spread risk across sectors and asset classes (shares, bonds etc). So putting £50 billion of pension money into banks alone doesn't look smart. There are a lot of other share prices that look ridiculously low right now, and the companies concerned are not in the same current mess as the banks.
I think a better way of approaching the problem is for the Treasury to make whatever capital injections are required by the banks. However, there should be a commitment to pass any profits from subsequent sales of those bank investments into everyone's PADA accounts, in cash, so that people can then reinvest it as they see fit (not everyone will want to load up with equities in their pension fund). That way everyone knows that if these investments are profitable, then they will benefit directly. It will be clear in future just how much that benefit was to everyone.
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#118
Sorry but I could ask the same of you (and others)...
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I live in the real world and I am telling you there is no more money left! The only reason for the boom times has been credit and its hidden the fact that the cost of living has sky rocketed, not only do we have no new credit but we also trying to pay our old credit back. People are scared out there. Even before the credit crunch there was a great distrust of penions, that is one of reasons for the buy to let boom, any measures to force people to buy penions will not happen. The only way out of this mess is to reinflate the economy, high inflation is the only way out, we have to devalue the debt! The alternative is to devalue assets and that is going to take us down.
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please see my comment 'hmmmm' on the Iceland blog-posted there by mistake!
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A bloody good read. Now if only the American powers that be had read it before their ridiculous bail-out. Maybe you should pass it on anyway.
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The temple of a financial product economy is destroyed the blocks are strewn across the market floor of greedy manipulation and speculation having established limited resources and false values to everything.
Do you want to rebuild the temple or see if we can design and build something sustainable for our future generations to be proud of?
Rather than a system that rockets up and down every 10 or so years and then collapses completely every 40 years with dire consequences to millions every time.
Maybe now is the time to bite the bullet and change things but it needs to be radical well planned and thought through to its conclusion change well designed not just to be change.
We seem to have lots of good ideas for tinkering with the old little for creating the new.
Remember if you always do what you?ve always done you will always get what you?ve always got and if you tinker with what you had you will always get what you had tinkered with.
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A MUCH better plan than Paulson's one!!!!
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#118, What do you think Brown has been doing for the last 7 years? Pure and simple deficit spending. What you fail to mention is that this public expenditure is like getting a drug hit, after a while it wears off and then you need more and more to get the same buzz and of course eventually you run out of money - as Brown is rapidly doing now.
All you do is destroy your currency - look at the FX rates - and make sure when it does eventually blow up that the "cold-turkey" is harder. I am sure there are not that many people remember the recession that the US and UK went through in the early 80s.
House prices need to hit their equilibrium rate, people need to stop both public and private deficit spending and that means a deep, deep recession. So much for an end to boom and bust....
Back on topic, the public sector pension deficit alone is many hundreds of billions of pounds and that's assuming they close the doors on it now. Exactly how much do you expect bank shares to go up by? Because it is a tiny, tiny drop in the pension deficit ocean.
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Reference the last two lines at 126
The point is that in a bank debt is counted as asset such is the way we account for things.
That is why every one including bankers get confused hence the financial mess we are in.
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#131 laughingblacksheep,
I'm confused. Was that an opposing argument to mine or were you agreeing? Or was the #118 a typo?
The context of my post at #118 was that Boilerplated was implicitly supporting Keynesianism by criticising the Thatcher/Regan years. I simply pointed out what Keynesianism meant in practice to support my argument in post #57.
I couldn't see anything in your post which contradicted that.
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IMO Mr. Peston your idea is a bad one. Warren Buffet didn't buy just any bank, he bought a bank with little if any of the very high risk loans that are in the process of defaulting. The problem for Goldman Sachs is not so called toxic loans but availability of credit, in other words a cash crunch problem. Investing in banks with a large portfolio of debts that won't be paid back is throwing good money after bad. The US bailout consists of the government buying these assets from the banks at reduced prices. We'll see just which assets and at what prices they are to be bought. This has created a lot of anger among the American voters who feel they are bailing out banks in bad times with government money that would never be used to bail them out should they suffer bad financial circumstances. In short, the government has set up an insurance company to spread the consequences of the bad investment to the entire economy and we regard this as socialism.
The good news in the US and Britain at least is that in the long run with increasing populations, these houses will for the most part be sold and used. The inventory glut will eventually disappear. There is no way to restore the financial health of banks that own these recklessly made loans without damaging the entire economy in the process. And that is what is being done. The method boils down to printing money which will have the effect of devaluing it and making it easier to acquire and pay back. Whoever owns the loans will of course be paid back with cheaper dollars (or pounds.) The alternative is deep recession or depression. The US government forget the lesson it learned about preventing a depression when it removed the safeguards to reckless credit imposed in the aftermath of the depression of the 1930s, but it doesn't seem to have forgotten how to get out of one when it recognizes one is in the process of developing.
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Interesting suggestion that depends on the assessment of risk involved - which, incidentally, is what is at the heart of the current economic debacle.
It is the financial institutions that failed to make a proper assessment of risk when they provided loans, and successive governments (since de-regulation of the financial industry) that failed to provide a proper regulatory framework, which are at the root cause of this problem.
I would like to know what those institutions are doing to review their loan books and re-assess the risks associated with those loans? Only when that has been done will this problem have truly unravelled.
Robert's blog neatly puts responsibility where it should be and the benefits back close to those who have lost them - but it does depend on how bad the situation really is.........does he know something we don't?
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Robert, the 'cure' will, and is, taking care of the problem all by itself.
We tend to imagine it's the machinations of some and the lack of steel in others which have 'caused' this situation. The real Truth is that our current position had no option but to come about just the way it has. Even if we think we could have or would have prevented it had we be able to and wanted to and been able to.
That's the real hubris of this piece, that we imagine we know what the causes are and even more arrogantly, what the potential solutions may be.
We don't. There aren't any.
What we have witnessed so far is just the beginning.
If I am wrong, tomorrow (Monday Oct. 6th 2008) will NOT be a bloodbath - both sides of the pond...and I'm rarely wrong.
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Reference 132
Yes I can see that but only if it is being repaid and backed by a property or insurance worth more or the same as the debt.
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A very basic question but I was taught when something goes down, something else MUST go up. But it seems with this financial crisis, everything is down. Is this not impossible?
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We did not have to get to where we are. We were stupid. Many of us saw what the banks were doing and knew it was silly but did not do a thing to stop it. We all knew that assets values cannot go up that fast and far. We all knew that the trade gap in the US and in many western countries was too high. At any time there were plenty of folk who could have said-stop! However we were all doing our Nero impressions,especially Gordon Brown as Chancellor, but to be fair to him - although why on earth should we- he was not alone by any means.
We have to be able to stop this kind of unravelling or else the next time it will be our environment and if we do the same there, no problems- no life on earth.
I cannot believe that all the worlds banks are bust- they are faced with the problems that any business has if all its creditors want to be paid at the same time- it cannot be done. So I actually have confidence that what governments are doing will work and the capital markets will come back BUT- they will be smaller and no easy path to riches- a return to boring banking and boring business is what we want now. Let our young talent become engineers and artists and business managers and public servants rather than spivs out to get a quick buck or the lawyers and accountants who have prospered with them. Sounds a better place to me.
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The fact that banks don't trust each other says it all!
I suppose that banks make a profit out of each other when they lend to top up each other?
Wouldn't it be a good idea if our Government pledge to the banks was re-directed... only to and through the bank of England... our bank.
In a crisis such as this the Bank of England should be permitted to respond like an ordinary bank and become the bank that 'lends' this 'top up' money to the other banks and building societies... at normal interest rates?
A bank that trusts the other banks might soon restore confidence.
It is our Exchequer that would then make the profit, for the British people... the other banks could borrow as before at reasonable rates... no 'high rate' lending could survive......and the Bankers would not be 'baled out' with direct cash, to get even richer... ... and, more importantly they would carry on trading as normal.
But then... what do I know?
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As you said you have strayed into the land of hubris. The important point that has only just started to be aired is that as a pension saver and a holder of Life Insurance policies I am already a stakeholder/shareholder in UK Banks, pension and life insurance funds being the largest investors. So why do I want to anything that reduces the value of the investments, if they do reduce, then I will have a smaller pension and this will depress spending not just this year but for 25 years to come. So as the Governments forgot to regulate the markets, they better replace the value of the investments that have been redeuced to ashes (c.£1,000bn)otherwise the whole system will not stabilise and economic activity will not recommence.
To finesse and hope to bring value in the future to the taxpayer seems short-sighted and to go for the smallest part of the equation, get the markets going again, get mortgages flowing again, get loans to small business and rolling credit to commercial organisations flowing again before the whole lot imploads. Taxpayers do not want to say that was good for the Treasury, they want to see the tax-paid sum continue to come through the door.
This is not the time to stand there and say it might cause inflation in the future, deflation is real again, and therefore lets see electricity, gas and food prices reduce and follow the commodity price trend again.
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I haven't had an opportunity to review all the comments but no one seems to be addressing an obvious solution.
If the concern is liquidity -- the government can act to increase it. You determine the appropriate level of credit or credit score or risk that the government will take. Tell the banks that you'll lend them money at an appropriate rate. The government takes first charge security on the loan created (PPSA in most of North America) and guarantees and PPSA security from the borrowers. This would get needed credit into the hands of the solvent; the insolvent are insolvent and we need to recognize that.
That includes banks. If their existing business and the new business is insufficient, their business can be bought for a buck for anyone who will appropriately recapitalize. Bye bye shareholders, bondholders and managers -- that life. If the existing owners and stakeholders won't risk money to recapitalize, why should anyone else.
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Robert,
Does your 'cunning plan' to help solve the crisis involve you going on telly and shouting 'don't panic, the first £X of your deposits are safe' - in the manner of Jonesie from Dad's army- as soon as a bank takes steps to solve their liquidity problems? Or are you now following a different agenda than you were a year ago?
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#133, I was backing up your claim and arguing against boilerplated - Keynes "solution" simply doesn't work. Sorry should have been clearer.
Point of course is that when faced with a similar bubble to that of 1999-2001, the Tories took decisive action to burst it - thus handing GB the best economy any incoming chancellor has ever received.
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Given the same people are in charge of the "solutions" as were in the creation of the problem - I expect the solutions will be onesided in favour of those that benefitted.
I think the appointment of a cabinet of unpopular people says everything we need to know. This cabinet is a setup for the next Labour government. Or in other words, expect tough or even stupid decisions to be made so the "blame" can be laid on the "bad" or "incompetant" ones.
This obviously clears the way for those who want to continue a path within the Labour party.
I'm think the best place for my savings is not in this country.
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131 - 118 - et al.
Much of our financial problems seem to have been caused by the Government not having the financial 'cushion' that should have been in place after the billions of pounds of 'extra', 'additional' and 'extreme windfall' taxes imposed during the last ten years!
Why is that?
I understand the Government manifesto promised to reduce the Public Sector (I believe a 15% reduction was mooted) but instead, because of its continuous... endless, diarrhetic stream of controlling legislation it has increased the public sector by over one million!
A low estimate is that each new public sector employee is costing the money generating taxpayers £30,000 or more pa, each... that is an additional £30 billion or more every year!! A squandered £300 billion over the last ten years... just to keep an eye on the adult population of Great Britain... ouch! £300 billion would have been a marvelous cushion.
Unfortunatley much of this legilation has directly resulted in the loss or curtailling of many small businesses... alas they were the money generating taxpayers necessary to fund our public sector, money using taxpayers!
Using rough tax guidlines it takes 5 or more 'equally paid' money generating taxpayers to fund one public sector money using taxpayer... plus covering all the public sector financial expenditure including their taxes and pensions.
One million extra public sector jobs requires 5 million private sector workers to pay them??? but unemployment is actually rising.
During the past ten years we have not only squandered our windfall taxes but we now learn that we sold much of our gold reserves when at rock bottom price and then borrowed huge sums from the IMF??
The sums cannot be right? Please?... where has it all gone?
The amount required by the banks to keep us on even keel is 'small change' compared to the unbelievably large amount of money 'squandered' worthlessly during the last ten years!
With a huge and growing deck cargo and less and less ballast in the keel HMS Poseiden did not need a tidal wave to turn it over... just a crunch.
We don't need endless legislation and therefore we dont need countless public sector workers to police the legislation.
We do need prudence... funnily enough something that the present Government actualy does not understand.
I think we will soon get over this recession once the Government stops needlessly spending our money.
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Good idea Robert but imagine the scenario. The PADA is up and running successfully in 2017. But lo and behold the City's masters come to whoever is prime minister and say, "it's unfair, you bought all that stock really cheap from us and now we are not making as much money as we should."
And the PM, charmed by the persuasive argument, sells off the best bits of the PADA to the City at a knock down price, just like everything else was sold off at a knock down price.
Ironically, I have just spent the afternoon reading Galbraith on 1929 and Marx on 1857. Both very good, but Marx spot on how greed and speculation is integral to capitalism.
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145 yes.
Bit like giving Billy Bunter the keys to the tuck shop!
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I like the wealth fund idea, we could start by taking ownership of the energy firms, airlines and rolls royce. If we dispensed with amy compensation, this would have the added attraction of being one in the eye for bankers with enormous pension pots.
The man to sell the idea to is George Osborne, as he is young enough not to think it a joke....
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This is not just a Bank crisis, businesses are folding every day, and more banks are in trouble, the fundamental problem is that those on Middle Incomes (£20,000-£50,000)who should be using their money to buy us out of this mess are the very ones who are hit the hardest by increased mortgages, decreased house valuation and targeted for tax increases. To solve this Mortgage tax relief should be brought back immediately and also fuel tax should be reduced by 40p/l. These two issues will jointly restore confidence in the country, stabilise house prices, and reduce inflation considerably. It may sound expensive, but how much will it cost for the massive unemployment which will occur if it doesn't happen, and also the cost of saving other banks in trouble.
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This is an excellent idea which the soon to be in-coming National Government should pay heed to.
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If the Treasury/government were to recompense the shareholders from Bradford and Bingley and Northern Rock at ?2 or ?3 pound a share, but payable in shares in Barclays, Royal Bank of Scotland or Lloyds/TSB/HBoS, it would put a solid floor below the share price of those banks,preventing any self perpetuating downward spiral on the share price of these remaining banks.(and prevent the certain litigation in the future, regarding the Bradford and Bingley and Northern Rock nationalisations)
With this level of support , those same banks should be compelled to undertake huge rights issues, underwritten by the Treasury.
If you were an investment fund manager , surely you would want to take up your rights in a government backed bank rather than in any other sector about to be walloped by the credit crunch.
Private investors would see that the government were treating loyal bank shareholders almost generously and hence there would be demand for the new shares.
If the rights issue is fully subscribed without recourse to the Treasury underwriting, then immediately repeat the process.
If on either issue the Treasury is left with some stock, then that would only enhance the rock solid nature of the newly fully capitalised British banks.
Would then all the British banks be given AAA ratings by the wholesale money markets.
Perhaps then, our Banks would be in a position, like Santander, to be picking up bargains, rather than waiting for the vultures to pick off the next British bank victim.
Otherwise, we have only the option of a further British Bank nationalisation or the further consolidation down to just three big Banks.
I am sure that Gordon Brown would prefer to be seen as the clever Prime Minister who turned things to our advantage, rather than the man who "pinched" our shareholdings in Bradford and Bingley and Northern Rock.
If any of the rights do end up with the treasury, then by all means put them into the PADA plan, but we should be soaking up all willing private investment possible first, to recapitalize our banks. That way, the PADA shares will have a value.
I know that I speak as someone who lost a bit on B and B and everyone will assume that I just want something back but I assume all the losers like me will be shunning investing in any British bank. This plan would certainly change my sentiment,so why wouldn't it change everybodys and once it starts an upward spiral everybody will want "in".
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#144
Thanks for bitting the bait...
Keynesian might have faults but it never caused three runs on either the banks or stock markets within 30 years of it's introduction, the last one has all but brought the world to the brink of a economic abyss!
The problem the world has now is that monetarism has failed - it's DEAD - something has to replace it, no one is going to want to jump head first into another untried ideology, remember that Monetarism was an untried system when Thatcher inflicted it on the UK in 1979, other than in the dictatorship that was then Chile...
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I've wondered since the tax payer had to start subsidizing the hitherto hubristic banks on such a massive scale, whether the govt should try and extract more in the way of a long term return from their bail outs, for the tax payers benefit. Banks must own a substantial part of the govt's PFI debt, or have influence over it. Couldn't part of the condition of access to funds be the sale of some PFI loans back to the govt. Obviously in keeping with the original spirit of PFI, they'd have to be eye wateringly lucrative terms for the govt this time. Quid pro quo and all that.
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#152
Warning: Shares can go down in value as well as up in value - The first principle of owning shares, can't or don't want to gamble, then don't buy shares. QED...
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137 that should be the fall back position
The problem is the true value of the security at the time of realization and was it deposited on true value, perceived value or potential value. Worse if it?s a product bundle bought from a third party well??..
Now who does not trust who especially when the market makers have to rely on the perceived hyped values in that market for security to borrow more?
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Like post 124 I assume that Robert has been encouraged to float the idea. I think the City knows that Robert has a direct line to Downing Street (certainly 'Pestowire' good links are an assumption on FT Alphaville). In these uncertain times with everyone making it up as they go along maybe the powers want to make sure that they don't make a howler before its announced.
Not just about PADA but about the structure of the capital injections.
Robert talks about GBP50 billion. The current market capitalisation of the big 4 banks is about GBP200 billion of which just over half is HSBC. So if the government puts in GBP50 billion its going to get some big shareholdings possible even providing the majority capital in some cases.
Hence preference shares. Ordinary shares carry votes - well the best value ones do. The problem for politicians having votes is that they don't know how to run banks but will get the blame for every excessive bank charge, every over big salary or bonus and every job that is outsourced by the banks to India (or as they are already gone to India, blame if they don't come back).
So no votes then. However the return if things go well for the banks are through ordinary shares with votes. These take the greatest risk so attract the greatest reward. Hence the warrants at a discount. Hopefully a heafty discount.
To help sell this to the public associate the scheme with Warren Buffet (America's second richest man - must be clever) and say the upside will go to pensions for the poor. Pensions for the poor also takes the shareholdings of the banks further from the politicians who, given the current reputation of bankers, probably want it that way.
The banks probably need the bail out to meet Basel capital adeqaucy rules, especially if one of the big insurers are downgraded from AAA (as the AAA ratings for capital adequacy are often as much to do with the insurance of the asset as the asset's own value - how anything can get AAA at the moment who knows, but thats probably a question that the financial system doesn't want asking at the moment.)
My own view is that the poorer members of society want a secure pension and not one linked to the stock market as they can't afford the gamble (don't gamble what you can't afford to lose) so I am not in favour of Robert's idea. The money shold go into the general pot.
If the government ever has any spare money it is best spent on all things to do with energy efficiency and rearranging transportation so we use less oil (peak oil will hit someday even if people are arguing about when). Insulating houses, reseach on LED lightbulbs, energy efficient housing, getting the mpg of vehicles increased, more efficient boilers, EU regulations on 'standby' are all useful things but only scratch the surface of what needs doing. So if they want to be Keynesian to help kick start things my vote would be spend the money in the energy areana. Alspo it helps the balance of payments as we are now a net importer of energy.
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#142 "If the concern is liquidity..."
Unfortunately the concern is solvency.
Mervyn King has done a sterling job of providing liquidity to financial institutions, extending the duration of credit facilities and for better or for worse, broadening the range of accepted collateral. It has not worked. If it were a simple matter of liquidity, the problem would have been fixed already. Instead the extra money freezes as soon as it arrives. We cannot say we have not tried. All that is proposed here is trying again with more zeros on the end.
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I have been pondering whether the present financial turbulence falls within the scope of the so-called Chaos Theory?
The sudden collapse of the financial system appears to be analogous to the onset of turbulent flow in water flowing down a smooth chanel. As the velocity of flow increases, eg by making the slope of the chanel steeper, laminar flow suddenly turns into unpredictable turbulence.
In this case the determining factor or driver is the increase in velocity of the flow of water. If the analogy holds good for the financial system, then the driver is the increasingly risky level of equity based loans taken on by the banks and similar financial institutions.
To return the water to a laminar flow simply requires a reduction in velocity below that where turbulence occurs (the boundary condition). The USA solution of using treasury money to buy the toxic debt from the financial institutions can be likened to reducing the driver below the boundary condition that caused the financial turbulence.
The analogy may also suggest a solution to the nature and extent of any regulatory regime needed to prevent re-occurrence.
Whilst banks are conducting their business prudently (laminar flow) only soft-touch regulation is needed. However if they start to take more risks they will begin to approach the boundary condition beyond which lies turbulence.
And this is where the regularity attention therefore needs to be focussed. There are already mechanisms for quantifying investment risk so it ought to be possible to calculate action limits for banks who are approaching the boundary condition.
The required action might then simply involve linking investment risk with a requirement for the bank to increase its capital adequacy ratio.
In a sense this is a self-adjusting mechanism and avoids the danger of stifling good practice banking by excessive regulation.
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to 158
I agree that the underlying problem is the insolvency of the financial sector. Whether the financial institutions are insolvent (in an Anglo Canadian legal sense), whether they have committed an act of insolvency under one or more of their contracts or are on the verge of doing the above, in a practical sense they are insolvent.
That is problem that cannot be addressed. Also one cannot appoint a receiver manager for an entire economic sector. The only useful thing that the central authorities can do is to attempt to ensure that money is available to those businesses that are, more or less, solvent. My suggestion was addressed to that problem.
On the basis of 25 years in law and business and at least in North America, a very significant proportion of the population is insolvent. That cannot be changed. Nobody really wants to admit the fact that huge numbers of people were not (and now certainly are not) meeting their obligations when due.
This is a unique situation in economic history. Never before have so many people at the bottom of the economic pile had credit advanced to them at the current rate -- I'm old enough to remember hire purchase restrictions and other such oddities.
It would take a far wiser person than me to even sketch the likley consequences of the current situation.
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I am more than a little concerned about Robert Pestons recent revalations. It seems to be from a very high government level leak - timed for the 6 o'clock news.
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Regarding PADA - Robert Peston is probably too young to remember the "Graduated Pensions Contributions Scam". IIRC we paid in additional contributions according to income - to be paid a better sliding scale state pension.
This ended about 1977 when the "scheme" was stopped and we were given a tiny slip of paper to keep (and it must not be lost as it will / can not be replaced).
I don't need this paper slip until 2015 - but I doubt if I can find it - how convenient for the scammers.
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Warren Buffet's $5 Billion was a very good idea for Warren Buffett. But i am sure that with its strings attached it is part of a very well thought through strategy of a total business plan for Warren Buffett. It safeguards his business interests (objective one) and puts him in a very good position for further financial growth (objective 2).
Our government's first objective is the safety and security of the people of this nation now and in the future. Therefore before getting too excited, please review objective and make sure strategy does not become more important. The mess the banking industry is in is because strategy (investing in v risky instruments without proper homework and collateral) has been more important than the number one objective for a Board - the safety and security and long term survival of The Bank. Growth should only be pursued when long term survival is assured.
Or was the objective to make a fast buck and get out while you could with a big fat bonus?
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Thet's cut to the chase. We had an enormous credit expansion (the kid got too fat). Nobody questioned this when they should have done so (the kid was never discouraged). The only way to save the kid from future health problems is to acknowledge that the kid has to go on a diet. It is inevitable that a period of credit deflation must occur. Simply pumping more money into the system is fool hardy and only prolongs the problem. As for the FSA and Government, it would be astonishing if they hadn't been mindbogglingly incompetent. They are after all slaves to popular opinion and therefore have no incentive to go against what the people, the markets and their own desire to remain in power dictates. It seems moronic, that an ordinary Jo like myself, through an interset in these matters was aware that this was going to happen more than 3 and a half years ago when those that claim to be competently running our economy, pensions etc were apparently unaware!! I put it to you that they were aware and when this is all over, will line their pockets with the bargains of the century whilst the man in the street and the dim witted pension funds (that always do exactly the opposite to what they should do whilst creaming off easy money in fees) will be left high and dry once again. Leave the market to the market. Yes, it'll be devastating and painful, but at least the fat kid may have a chance.
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#153, Keynesian economics bankrupted the UK. It caused nearly a decade of stagflation and the markets crashed in 1970s, and countries only stopped going bankrupt because we came off the Bretton Woods system and started printing money and even that was not enough in the UK.
If nearly a decade of no growth, collapsed markets and bankrupt countries doesn't represent failure to you then one is hard pressed to see how you can be blaming "monetarism" for failing.
PS if the BoE and Fed were running proper monetarist policies then you'd have had inflation targeted much, much earlier. The fact is that the UK at least has been running a Keynesian low interest rates, deficit spending economy since 2002 - worked out well for us hasn't it.... I only mention this in passing because facts mean nothing to you and you seem perfectly happy to parrot "it's Thatcher/Reagan's fault" despite copious evidence to the contrary.
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Robert
I like the idea and i have no doubt it is being discussed around the tables at the Treasury this evening. However I would like to propose a simple and easily implementable alternative which will restore faith in the financial sector.
Number 10 or number 11 will have to guarantee all retail and company deposits with any UK bank. In exchange the interest rate on deposits is set at zero (or close to) allowing the spread between deposits and loans to increase to between 4% and 5%.
On £950 billion of deposits this is £40 to £50 billion allowing the banks to recapitalise very quickly and or establish a 'toxic waste' repository.
Depositors would see their income decline but given the current turmoil I think the vast majority would exchange the income for a guarantee that they will lose nothing.
Interest rates can then continue to decline to say 4.5% in order to reduce the pressure on negative equity holders and the credit card carrying population
It seems astonishing that this option hasn't been given serious consideration.
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As Banks swelled their balance sheets with shiny new SIV's CDO's and other complex assets - shareholders only saw 'The Kings New Clothes'
Now that these banking masters of the universe have been exposed as bear naked fools will those fund mangers who 'tailored' these investment vehicles be held up as the fraudsters that they are?
Their craft involved flattery and sophistry.
Bewildering mathematics and mind-boggling small print presented to ego fuelled CEO's, accountants and regulators who were too embarrassed to question what they did not understand!
With some careful over rating here and a lot over valuing every where - they stashed huge bonuses. While stitching up not only those King-pins of banking but the rest of us tax payers as well.
As we now have to piece the banking system back together - we should make a few fixes. Here are a few suggestions -
The Banks Auditors should share liability - look out KPMG et-al
Rating agencies should be accountable.
Short Selling should be outlawed - if you don?t own it what right do you have to sell it ?
Derivatives - if you want to bet pay the tax at the book makes don?t gamble with national security!
After all this one wonders if they just worked these scams on mortgage assets, crazy oil prices were another favourite bet for bankers.
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My take on PADA is the same as others -good idea but too tempting for the Government of the day to rifle. What originally caused this banking crisis is that people used houses as part of their pensions, buy to let etc., so causing a 'shortage' of affordable housing which the majority of low earners could not afford. So they were persauded to take out loans way above their means and this started the ball rolling. It was a wrong turn by a goverment down a very long road.
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excellent idea
but you re talking about a govt that sold the countries gold reserves near the bottom of the market. they wont lead from the front, they'll wait for two or 3 other countries to find an answer, and follow them, at premium prices.
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make money when you buy not sell
well done the Government and hopefully they can put some clawback provisions in pay if these muppets who run these organisations mess up again
no more smokin 50s Fred
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I agree that their is a crisis at the moment, but what I can't help thinking it is due to all the publicity by the media referring to the 'Credit Crunch'.
The way I see it is as follows:-
1) If the press didn't report all the doom and gloom (and lets be honest at the moment I don't watch the news because I'm fed up with all of it!) - viewers who don't really understand the situation, wouldn't be thinking "oh no, I'm not spending any money this week!"
2) Therefore, if they weren't thinking this, businesses would have customers who would buy goods - resulting in no companies going into Administration / Insolvency / Bankrupt
3) This inturn results in the businesses, needing to buy goods from a supplier - once again stopping the supplier going out of business
4) If the supplier doesn't go out of business, the manufacturer doesn't either.
5) Banks then get money coming into them = resulting in NO CREDIT CRUNCH.
It's fair to say, that numerous people I have spoken with feel the same and blame the government and also the media. Its because we've had 'credit crunch' rammed down our throat so much, we now believe we are in a 'credit crunch'.
I say the above, as a person who was made redundant following my company going into administration due to the downturn in orders, caused by customers saying the above.
Following this event, I setup my own company and quite frankly it was the best thing I've done - people who are positive suceed in difficult times - so lets here something POSITIVE in the press to get us out of the doom and gloom!
Qubix
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When did "Reporters" become "Commentators" or "Pundits" ? Solution to crisis - gagging orders on city analysts, gagging order on Mr Peston .... ?
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This is all getting ridiculous. When a business becomes unable to make a profit they go bust! Why are we as a country bailing out bad business, whatever it is.
I do not support funding a bank/building society, we have got enough left to go around anyway (NO public funding spent). Why give money to the motor trade when there is enough already produced to accomadate the current climate. Let the bad ones go bust. (No expense to the taxpayers). What do the people of the country really need in a crisis. Shoes, Food, Homes,a post office, and work opportunities. It has been done before and should be done now as a basis to recovery.
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Before, banks would only allow people to take advantage of a loan modification in most extreme cases. Recent changes in mortgage industry have caused lenders to allow loan modifications for high interest rates, adjustable rate loans, delinquent payments, negative equity, foreclosures, and more. If you are one of many homeowners who are facing foreclosures and mortgage problems, loan modification can be a huge help. If you have delinquent payments and meet the requirements you can apply for the Federal Loan Modification program. Requirements are defined ? you must be able to prove hardship. You also have to have gotten the mortgage before Jan 1st, 2009. If your mortgage is through Fannie Mae or Freddie Mac, your window of opportunity closes in 2010, if not then you have until 2012 to file an application. If your mortgage or personal loans are in trouble, then you would do well to get assistance with loan modification.
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Robert
How is it that the value of the pound has dropped so drastically against the dollar? If the principal cause of the crisis was US sub-prime mortgages, then surely the value of the pound should fall in tandem with the dollar at worst? It seems that the pound has suffered to a greater extent against every other currency (except perhaps the Icelandic Kronor)!
Anatole
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