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Monday morning feeling

Robert Peston | 07:20 UK time, Monday, 6 October 2008

Welcome to another anxious Monday morning.

Branch of Hypo Real EstateMoney markets are deeply stressed again, with the Asian rates for lending between banks for three months remaining at their highest level since last December.

Asian stock markets are falling, with Japan down 5%.

And it's the troubles of Europe's banks, and the messy response of the authorities, that's to blame.

First, let's accentuate the positive.

Fortis's Belgian and Luxembourg operations have been bought - and effectively rescued - by the mighty BNP Paribas of France for just under £12bn in shares and cash.

The troubled German property lender, Hypo Real Estate, has been rescued for the second time in a week, with a package of loans provided by the government in partnership with a consortium of banks and insurers.

And the UK seems to have moved a step closer to announcing the details of a contingency plan being worked on in the Treasury (which I described in my note on Saturday) to inject billions of precious new capital into British banks.

So far, so reassuring.


We still don't know how and what the Icelandic government will do to restore confidence in its banking system.

There's talk of a great national effort, or the use of its citizens' £8bn of pension savings to provide financial support to banks that may need it.

But as of now, it's unclear what Iceland will attempt to do to stem the flight out of its currency and shore up banks that have borrowed £80bn in foreign currencies (and see my other Saturday note, "Markets call time on Iceland").

Finally, there's the residual uncertainty about the extent of Germany's guarantee to holders of private accounts.

It certainly looks as though it's providing 100% insurance to £450bn of deposits. Which seems fairly ambitious, and will put pressure on the UK government to do something similar.

But here's the thing: retail deposits in the UK are much greater than that, some £950bn, according to an analysis by the City watchdog, the Financial Services Authority.

In other words, we in the UK appear to hold more of our savings in authorised banks than seems to be the case in Germany.

So for the UK to offer 100% protection would put a proportionately great strain on the public sector's balance sheet.


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  • Comment number 1.

    Today's assignment, should you wish to accept it, is to find ONE (1) MAJOR MEDIA OUTLET running a story on FRACTIONAL RESERVE BANKING.

    First in with a URL (http://...%29 wins the prize*

    The term "fractional reserve banking" must be mentioned in TEXT of the story - pages using the term in their reader comments section only will not be accepted!

    * Actually there is no prize. There's no need, because there's no stories to find.

  • Comment number 2.

    We still need to do more to stabalise the markets. The US for instance guaranteed temporarily money market funds if they "broke the buck" We may still see a lot of fall out from investors who will lose money in what was traditionally relatively low risk investements. Money Market funds hold a lot of paper from Banks which are rescued, being rescued or have already failed.

    Let us hope that the new NEC can get ahead of the event cycle.

  • Comment number 3.

    Dear Robert,
    There will be bad news for two more British banks this week, and Nationalisation of Banks is going to cause serious Economic fall out. The Banks are the cuase of all yet we bail them out, and the government is scared stiff of APublic revolt over savings losses, more so than the economy,
    When will those who created this crisis be bought to boot, and why is it the Stock exchange shares index, over the last two years is on a continuous downward spiral."?
    "What and who is generating thses losses."?
    It has got to stop because this is the way wars brreak out,

  • Comment number 4.

    Thanks for the clear basic analysis of issues hitting the proverbial this morning.

    Guaranteeing private savers will potentially stop a run on the banks by private individuals but what of the corporate savings and those moved around by many a vice chancellor of universities and the like?

    The amounts of money held in savings accounts on behalf of educational establishments alone will have a huge impact on the potential for improved liquidity in the banks as it is moved to what is perceived to be a safer haven to weather the storm and this would have to be outside the UK.

  • Comment number 5.

    The effects of everything going in on the Banking industry are now clearly going to be felt for years.

    I'm not quite so dogmatic as some on this site about things never being the same again, and because everything depends on confidence and that confidence has blown..that things can NEVER be restored.

    However with the large rise in the jobless in the USA and the same expected here and across the world, it may be that while confidence gets restored in the Banking industry it won't do a lot now to avert something that is looking, as each day passes, as if it could slide over from a "technical recsioon" into a depression.

    On a side issue I do like the use of "Technical" as a softening adjective.... I wonder if it would work as well in other fields...Doctor: 'The patient is technically dead..." or Garage: "The car is a technical waste of money"

  • Comment number 6.

    Iceland has an inflation rate of 14%. The government is looking at wage restraint. Iceland's credit rating has been downgraded. Its currency, the Krona, is plummeting, it has lost a fifth of its value against the dollar.

    Can Iceland bail out its banks? I dont think so, even if it beggers its population.

    In the UK, the knock-on will be felt, but in a rain storm, a little more rain will go un noticed.

    PS. Robert. What have you done to upset a Crabbe columnist over the weekend ? ;-)

  • Comment number 7.

    Wait a minute .. Britons have more cash savings than Germans? Yet we are constantly lambasted by tales of consumer debt. That's odd.

  • Comment number 8.

    Like any insurance, a guarantee only strains the balance sheet to the extent that it is likely to be called upon. If a blanket guarantee prevents liquidity draining from banks, and (as is repeatedly claimed) banks are generally solvent, there are huge benefits and few costs. A collapse of the banking system is many times more costly than the guarantee itself.

    There are times when balancing the budget and avoiding moral hazard is important, but this is not one of them. Feet dragging and obfuscating language is simply not helpful when leadership is needed.

  • Comment number 9.

    I don't think we ought to be too surprised by Germany's unilateral action (regardless of the impact it could have across Europe) in the case of savings guarantees.

    I think the UK Government could well be facing their "Normal Lamont" moment.

    In the face of enourmous currency speculation ahead of Black Wednesday, Lamont faced was faced by an intransigent Germany that wanted high interest rates to conquer inflation (owing in part to the botching of currencies in the East/West reunification) and in Britain we wanted low interest rates to beat inflation. The Uk wanted Germany to lower interest rates to beat the speculators.

    Robert - maybe an idea to get Norman's view on what to expect from Germany? Especially on the future of monetary union - given the ERM experience.

  • Comment number 10.

    Robert to conclude that the British have greater savings in "authorised accounts" than the Germans from the fact that the German government "only" guarantees an extra 450GBP is a Monday morning mistake. Bear in mind that in Germany there already was one of the most generous systems of saving protection worldwide, which (besides the "normal" state guarantees) includes an internal insurance fund within the industry.

  • Comment number 11.

    Robert you quote:

    "retail deposits in the UK are much greater than that, some £950bn, according to an analysis by the City watchdog, the Financial Services Authority."

    Is the use of the word "analysis", not a bit of a stretch for this organisation?

    Their performance in recent years has been woeful in relation to regulating the activities in the financial services sector. In this context is the quoted sum at all reliable?

  • Comment number 12.

    What we need is a war to sort this all out!

  • Comment number 13.

    i like comment number 4. Guaranteeing private savings is interesting and should at least match the Irish and Germans, but what of the larger institutional sums? Without confidence that source of funding is not going to fly out of the door, I doubt you really start to get anywhere close to the core problems.
    Isn't it interesing how initially the banks get all 'protectionist' and dont coordinate anything with each other as they are scared for their own survival- then the nation states start to do the same. Everyone retreating into themselves because of fear and mistrust.

  • Comment number 14.

    Al Jazeera August 16 2007:
    Max Keiser looks at the global asset bubble and the record levels of debt caused by the carry trade.

    Specifically the Yen carry trade and Iceland’s dependence on it:

    No surprise to me, but hey, as much as I tried to tell people about Max’s predictions; no one took any notice.

    Can any here get Max on the Beeb?

  • Comment number 15.

    Why do the government need to guarantee more than the first £35,000/£50.000 of people's savings? Why not leave the status quo? Anyone with any sense/responsibliity has made sure they have only this amount in one institution. Now the less responsible people who didn't bother to sort out their affairs are going to be supported by the unresponsible. The usual story for this government - the responsible paying for the irresponsible.

  • Comment number 16.


    As you probably gathered, the "Normal Lamont" moment was meant to read "Norman Lamont".

    Given the context of my comment, this Freudian slip (by using the word "Normal") could be as equally correct in relation to Germany's behaviour.

  • Comment number 17.

    How do I become a bank?

    Up to now, people have been unwilling to lend me millions of pounds, but now that all deposits are guaranteed by the government, this shouldn't be a problem anymore.

  • Comment number 18.

    Checkout this story 'About solving the banking crisis'......

  • Comment number 19.


    Best I could do here:

    Extract here: (Mods - Please let the truth be free)

    By Action Network U9476027, Glasgow City

    "Yes? So where? Where does the money you have in your pocket and in your bank account come from?

    Who created it?

    It comes from the Government! ... Nope. It doesn't.
    It comes from the Treasury! ... Nope. And that's part of the government.
    It comes from the Mint! ... Nope. It doesn't, though they do print some.
    It comes from the Bank of England! ... Generally Nope. Though they do have the ability.

    Of all of the money we have, almost all of it is created by your local bank. Yes, created.

  • Comment number 20.


    here is another attempt to win the prize!

    (Mods - Please let the truth be free)

    [Unsuitable/Broken URL removed by Moderator]

    Smoke, mirrors ... and how a handful of missed mortgage payments started the global financial crisis
    GLOBAL FINANCIAL CRISIS, PART 4: How we got here -Iain Macwhirter traces the history of financial mismanagement, fraud and complex mathematics that combined to culminate in a run on – and the collapse of – some of the world’s biggest banks

  • Comment number 21.

    Robert - forgive me if i am wrong but dont you think all Savers deposits in Banks ought to be guaranteed as of definition from now on. The problem is how to do such a move.
    My pragmatic view is that out of the shambles of NR and BB the government should take a permanent 49% share, underpinning all savings. When the market returns maybe they could be re-mutualised and owned by their own members/shareholders/mortgagors and the lending criteria return to a normal risk. By this time the markets will have driven property prices down by 40%.
    Alternatively the government could make a 'safe haven mortgage bank' a bit like Fanny Mae which if i am correct was set up to free up finance for house buying after the great depression. Something major needs to be done to get some confidence back quickly otherwise downturn in Housing and Construction will lead us in to a slump.

  • Comment number 22.

    Robert - How about YOU explain what "Fractional Reserve Banking" is?

    I would think that a great many of your readers would love to know your description of it.

    May even deflect some of that unfair critisism that seems to be directed towards you of late.

    Thanks in advance,


  • Comment number 23.


    ''Today's assignment, should you wish to accept it, is to find ONE (1) MAJOR MEDIA OUTLET running a story on FRACTIONAL RESERVE BANKING.''

    'Fractional reserve Banking is bankrupt in the western world....' quoted on Bloomberg 0847 this morning.

    So there you go, when the blind, bonkers public begin to realise the game is up and that assassinating leaders for trying to change 'their' system cant be done any more, the people who hold real power and that caused this mess will be like caged tigers.

  • Comment number 24.

    re: In other words, we in the UK appear to hold more of our savings in authorised banks than seems to be the case in Germany.

    I can explain this one: most Germans with sufficient funds have deposited their money in Liechtenstein bank to hide it from our equivalent to the Inland Revenue.....does anyone know the state of those banks?

  • Comment number 25.

    Dear Robert
    Finance, and leadership, "Are we on the right track, "?
    IF there is a unaminouse agreement over the problem, "Why are governments all doing different things regards the Economy,"/
    "This is economic warfare all are playing the card of Brinkmanship with ordinary people taking the hit"?
    " Why are we not told of the Corporate issues that are far more damaging than savings accounts, "?
    "This just goes to show Europe as a collective is not working"?
    "Europe is divided over the solution?"
    The root cause of this crisis is the Banks, yet they have closed their doors to all but a selective few, and therefore when all this is over the Banking sector should be laid open to public scrutiny as the money they hold is the Customers, and it is they who keep a Bank operating, not governemnts and bail outs.

  • Comment number 26.

    Oh dear oh dear oh dear. I was just idly thinking that we seem to lack ANY form of leadership, in the guise of a senior Government minister (Gordy Boy, Ally-Pally or even, God forbid, Mandy) standing up and giving a succinct summary of the problems, a straightforward analysis of the proposed solution, and setting out what they will DO, plus how ordinary simple folk like me will be affected. But please, an end to saying they are listening and will do whatever it takes. (Trebbles all round, and pass the Beano please)

    Could it be that they have no understanding, so cannot set a plan, and therefore are clueless about the impact. Surely not.

    Oh, and another thing, do you think any of them read these blogs? Hello there in Downing Street ... is there anybody in there, just nod if you can hear me, is there anyone at home? (As David Gilmour and Roger Waters put it in 1979)

  • Comment number 27.

    A short while ago,i wrote on yomi11 blog that the financial markets have been in this situation before but have a way of digging themselves out of it,a few days after that the US passed the bailout bill and it was passed into law,way before that Barclay,s bank and Bank of America had played their part with Merrill Lynch and AIG,ultimately everything will sort itself out,if we can just tone down the hysteria a lttle because all the money does is change hands, it doesn,t really leave the city.We should stop hanging our heads and get on with it.

  • Comment number 28.

    All this money is owed to Asia.

    Why don't we just let those banks fail and take the debt with them. Apologies to Asia but they took a risk lendinf to those banks.

    The alternative is taxpayers are stuck with this for decades and there will be no economic growth. Living standards are going to slump anyway but this will just make UK Plc a slave for at least a generation.

  • Comment number 29.

    Ho hum.

    Anxiety and large amounts of slippage in the perception of values that is stock market trading around the globe.

    However, chaos is normal. Varyingly extreme forms of chaos are normal. We try to regulate against possible 'wayward' behaviours but all we do is make the slip of grains down the sand pile more dramatic when it is eventually released. All we can do right now is observe, think and stick on another sticky plaster or band aid.

    At some point, hopefully soon, the perception of the then current state will be that there is not just hope but a distinct possibility of making money again and then, and only then, will money readily be available between the banks.

    They never have trusted each other but their interdependence and interchangeable products and skills make them have to put up with each other like people in a bad marriage.

    Just giving them more liquidity by pumping money in by the central banks is not sufficient because, as with the people in a bad marriage, some form of counselling and agreement needs to be made between them to create a new way of working productively and successfully.

    The old banking business model has failed by selling and buying high risk products as if they were low risk, and the banking business model needs a revamp for all concerned to be able to more forward. NM

  • Comment number 30.

    So at waht point will the cost of bail out be too big? There must be a point, which I suspect Iceland has reached where it actually would make sense to let it all collapse and start again. Probably result in a lot of pain short term but bail out will be paid for for many generations.

  • Comment number 31.

    Dear Robert,
    thank you for your comments, which are deprived of jargon and easy tor ead for non-bankers.
    My wild guess about the end-result of this historic set of events is that Europe will guarantee deposits up to certain ceilings, perhaps 100%. As some countries, especially France, cannot afford it, as soon as one bank collapses -and it will, whether ordinary citizens withdraw their cash or not, other banks will follow suit, and the ECB may submit and "print" vast amounts of money which should result in a massive devaluation of the Euro, perhaps to less than 1 euro a dollar.
    European industries will be delighted, the banking industry will be reshuffled, and that will be the end of the drama.

  • Comment number 32.

    Hi Rob,

    With the greatest respect, I am starting to doubt your sanity.

    Why are you advocating a government backed Ponzi scheme? What you are avocating (taking an equity stake in ailing companies) is a very bad idea. These banks are a very bad investment. With the exception of a few, they have exceedingly bad balance sheets and if fund managers are selling them, let's face it, short sellers can't sell them anymore, (and they are meant to know what they are doing) why are you advocating using govenrmment money to prop them up? This is nothing more than polishing a cow pat.

    What is wrong with maintaining the current depositor insurance and allowing them (banks who have made dodgey investments) to go bust? All this 'systemic' mumbo jumbo. I simply don't buy it.

    Allow the organisations to go down, we will have 1-2 years of very tough times, but the system will clean itself out and rebuild.

    Make no mistake, a lot of people will loose money but, hopefully they will learn from this massive mistake and put checks and balances in place to make sure that this kind of rampant capitalism can be allowed to happen again.

  • Comment number 33.


    I know you are steadfastly refusing to begin the discussion on Fractional Reserve Banking but events are going to catch up on you and you're going to miss the boat.

    If you begin the conversation now you may get your own statue in Trafalgar Square. If you refuse to have the conversation you'll end up reporting it behind the curve as usual.

    You know its the root cause behind this whole debacle.

  • Comment number 34.

    lsi92 - nice one ;-)

    Robert - are the sharp falls in UK banks today due to fear of public sector capitalisation which might dilute stakes of the private sector or would UK banks welcome more capital? It still seems to me an issue of liquidity rather than solvency so clearly the solution is for BoE to become the lender in the interbank market and possibly for Northern Rock to start lending in the SME and consumer sector.

  • Comment number 35.

    Fractional reserve banking, the big dirty secret that nobody will talk about!

    Seriously Robert, I know you're sort of hinting at it, but these 'guarantees' are completely worthless aren't they? Where's the money coming from if a big bank goes under? Where exactly would £200 billion come from if, say, Barclay's went under and the whole system is teetering on the abyss?

    Let's face facts, there is NO money to back up these fanciful guarantees is there?

  • Comment number 36.

    So its Monday morning again and the markets are down 4.5 percent of so, but I wonder if someone can give me a rational explanation of why all the world's markets move quite so synchronously?

    E.g. the CAC 40 and the FT 100 are both down about the same percentage, but these indices are made up of different stocks in different proportions - so why do the aggregates move together? I particularly notice this with NASDAC and the SandP 500 - different sectors same country yet they move together.

    I know in times like these it is mostly marking stocks lower, but this seems to happen in normal times too.

    My guess is that it mostly gambling related options covering moving the real market. (But there are often quite large volumes of real shares moving at these prices.)

  • Comment number 37.

    "There's talk of a great national effort, or the use of its citizens' £8bn of pension savings to provide financial support to banks that may need it."

    OMG - talk about your dropping your country's future into a black hole!

  • Comment number 38.

    Can we please have a break from banging on about fractional reserve banking without offering any realistic alternatives? It is a system that needs to be managed properly, not thrown on the rubbish tip. Banks do not create money, they simply provide the mechanism for it. Anyone who lends or deposits money in return for an exchangeable IOU create the stuff. It doesn't mean they create value for themselves as the extra money is matched by debt. They just increase the amount of money in circulation. At the other end of the process loans get paid back, this reduces the amount of money in circulation. As long as the system is stable and regulated properly it works (now, who's job was that...)

  • Comment number 39.

    Dear Robert,

    I would be prepare to make a small wager that most European banks will be in public ownership within a month. At which point the acute phase of the banking crisis will, most likely, be at an end.

    I think the speed with which the situation is developing will, in time, come to be regarded as a good thing.

    If this is the end game, then the sooner Governments seize the initiative the better.

  • Comment number 40.

    So its Monday morning Robert. Whcu way are you swinging today, is the Uk going to gaurantee all savings as you stated yesterday or are they not as you also reported yesterday

  • Comment number 41.

    How could it make sense for taxpayers, rich and poor alike, to compensate a super-rich individual with £1bn in a bank that fails, but not to compensate a small private firm, a pension fund or a charity with £50,000?

    Yet that appears to be what is being suggested.

    Maybe the limit should be £100,000 rather than £35,000 or £50,000, but an unlimited guarantee restricted to private individuals seems both illogical and frighteningly costly.

  • Comment number 42.

    How to solve this issue in two moves:

    1. Rescind FASB 157. This regulation includes the accounting rule that requires banks to monitor on a daily basis the impact of collateralised debt on their balance sheet. This constant "pulse taking" is fuelling a collapse and contributing to "knee jerk" moves by panicking governments.

    2. Regulate the CDS market. Ensure that any underwriter is subject to strict fiscal criteria to ensure that they are in a position to "guarantee" loans.

    It's a big problem, bu the solution is really quite simple.

    Tom Donnelly

  • Comment number 43.

    Isi92 try the Sunday Herald, which has a clear and simple article by Ian MacWhirter.

    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 44.

    A quick additional comment on the savings guarantee given by Ms Merkel: all the news in Germany are talking about a complete guarantee. No limits of any size are being mentioned. Not sure where Robert's figures come from, but they are not reported anywhere in Germany!

  • Comment number 45.

    As a serviceman employed overseas for the last 10 years the current situation is very worrying. We have saved over 200000 to allow us to by a house but it is in just one account. We would like to spread the risk but the EU Savings directorate means that most British Banks will not allow us to open accounts from outside the UK. We are vulnerable we know it and the rules to protect the banking system from money laundering are currently working against us.

  • Comment number 46.

    Gordon Brown's newly created National Economic Council who will meet soon for tea and toasties, then get down to the real job of counting how much they will earn for drinking tea etc.
    another quango is all we need in times of crisis or just someone else for the PM to blame.
    mondays used to be a great day the start of the working week and full of get up and go people would resume there duties.
    now its just another doom and gloom day under a government whos policy seems to be doom and gloom.

  • Comment number 47.

    #9 Terry - well remembered - it's almost like we were here before!

    I thank the stars that this time around we're not in the ERM and our (BoE) hands are not tied in this way.
    Imagine if we were in this pickle under the EU rate setting - there would certainly be no rate cut this week and it would undoubtebly lead to a recession.

    I heard David Cameron on Sunday spouting about 'how this lax lending must never happen again - and regulation must be put in place to prevent it happening'.

    .....a bit like Major was spouting about 15 years ago. Obviously the Government is as stupid as a 5 year old child and perhaps the people need to take it in hand and treat it so - because they don't seem to be learning on their own.

    So the Tories let it happen in the 80's and Labour have done it in the 00's - so who wants a go next?

    Bunch of useless good-for-nothing time and money wasting muppets.


  • Comment number 48.

    HBOS is trading at c175p while Lloyds is c275p so HBOS is still at a massive discount relative to implied fair value of around 250p - it represents a good buy op.

  • Comment number 49.

    Just for good measure Fractional Reserve Banking is a very American term which is possibly why a lot of younger Brits may not know its definition or use.
    If anyone cares to read FRB by Murray N Rothard, it will enlighten all you wanabee bankers.
    Some people consider it to be just an elaborate scam - 'a swindle' in American terms but in reality the Fed now controls the money supply in USA. It is a very interesting subject and for any Economic historian it is definately worth reading.
    The exact definition is 'A Banking system in which only a fraction of the total deposits managed by any bank must be kept in reserve. The amount of total deposits equals the amount of reserves X the deposit multiplier. In the USA this system is maintained by the Federal Reserve Board.

    Am not sure whether the BOE does the same here... perhaps Bloomberg may be carrying something on this today but Rob Please do a piece on this sometime this week as it puts our global banking/investment Bank crisis in to perspective.

  • Comment number 50.

    I have a theory about the bailout crisis: it's routine--a routine credit contraction caused by overexpansion. I would welcome a comment.

    Here's how to prove this yourself: Google "The Curve in the Road by John Mauldin". Look at the two graphs for LIBOR over the last year and for commercial paper outstanding since 1990. Two things stand out:
    LIBOR also spiked in Dec 07 and from Mar-May 08--to 2% from 0.5%. This past 30 days it spiked from 1% to 3.5%. To me, it doesn't seem unprecedented. I've heard that in the early 1970s a similar spike
    occurred (can anybody confirm this?). Second, and most damaging: the reduction in commercial paper is not historically abnormal now. From 2000 to 2003, commercial paper dropped 19% (look at the graph: 1600 to
    1300). From 2006 to 2008 (today's crisis) commercial paper outstanding dropped 25% (2200 to 1650). Severe yes, but, again, not totally unprecedented.

    Can we therefore say that this credit crisis is a 'routine' (albeit severe) response to the credit expansion we've had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit
    contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we
    taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.

    One final note: you can argue that "but for" the government intervention, the contraction in commercial paper would have been much more severe, which therefore justifies the intervention. But this is
    complete speculation. In fact, you can argue that $700 B is not enough to prevent further contraction, and therefore this argument is circular.

    PS--A professional economist has independently made a similar argument to the above: Google "What Crisis" by professor John Seater.

  • Comment number 51.

    If the German government has givenb a full guarantee the B of E may have to follow.....

    Hardly the sort of leadership that the country needs if the most constructive thing is to follow the german iniative

    Where is our supposed leadership I thought the pruneheads were supposed to be running some of the best Banks in the world and all they can come up with is We may "follow the Germans"..

    No wonder the FTSE is going south again this morning. Could a major bank go this week?

  • Comment number 52.


    I found this story in the Sunday Herald

  • Comment number 53.


    Ah, but Fractional reserve banking doesn't have any mechanism within to to accommodate 'interest'.

    OK, the loan is paid back - but it's paid back 'with interest'. Now where does that money to pay the interest come from? Gottcha!

    Only by infinite expansion will this system keep working.

  • Comment number 54.

    Now in amongst all the hullabub anyone notice that the price of oil has dropped below $90 a barrel - a drop of nearly one third?

    Now the gas companies never tire of telling us that 'the price of gas is tied to the price of oil'. So, I'm really looking forward to a reduction in gas bills this winter!

  • Comment number 55.

    When does any one think that the government will/should bring back exchange controls so that they can be sure where all the bail-out money is going?

  • Comment number 56.

    The cause of all this is not the banks...
    the cause is the policy of controling inflation for 20 years by every means.
    excess capital normally destroyed by inflation has sought a residing place, the pressure has built up to extreme levels
    so bubbles have grown , the IT bubble destroyed a lot of capital but governments sought to replace it without inflation so house price growth became the receptical
    finally the oil price bubble broke the economy and the capital values are falling due to real interest rates. the banks are the casualty. we need 25% inflation instantly worldwide or 25% asset destruction more accuratly and low interest rates to create inflation to sort it all out from there liberals are right for once

  • Comment number 57.

    19. At 08:38am on 06 Oct 2008, FWIW_FWIW wrote:

    Sorry, no prize for this one. I actually wrote that a couple of years back...

    "By Action Network U9476027, Glasgow City

    "Yes? So where? Where does the money you have in your pocket and in your bank account come from?"

    This was before I decided that getting high blood pressure about it all was a waste of effort and instead to simply switch to cash at the peak and watch everyone wail and beat their chests as the giant sucking sound emptied their pension schemes, house values and investments.

    Hey, you can't tell people. Nobody wants to hear that they don't know what money is... Or that they should sell now and rent for a year or two. They look at you like you're an idiot.

    All you can do is say "Don't you all look silly" afterwards.

    Here's the best advice I can give:

    - READ MISES! -

  • Comment number 58.

    So last year all us bank customers had to sit through all the banks posting record profits whilst we had to pay their inflated and dare I say, quasi cartel, inspired charges. Their directors got fat and ever more greedy and governments did nothing.

    Now, unlike any other commercial organisation, the governments are now having to shore them up - with our money again.

    So our governments, get us a fair deal! We'll allow you to bail them out but we don't want to have to foot the bill now and later. They get the money on the following provisos - they pay back all you loaned them plus providing us, the taxpayer and customer, with some interest on those loans. You drop your charges and you make less out of us beacuse without us, you'd be dead!

    Just imagine if all the customers of one bank (any bank) moved all their funds out of that bank- al al Northern Rock. How would the banks survive? We can as one organised group have our say but we don't organise.

    Banks - we are your Customers and your lifeline - treat us properly.

  • Comment number 59.

    With the economic crisis seeming to affect much of the world, it is not obvious to me as to how this is affecting China. They did seem to be gloating at the woes of the US but surely if the rest of the world doesn't have the money to spend then China will be affected.

    I would welcome some comments on this

  • Comment number 60.

    This is like a cliff receding and threatening several houses-every occupant looking at their neighbours and saying-'oooh, that's bad we have to do something'-then each neighbour running to their own garden shed and using their own tools and nicking wood fron next door to protect their own house!

    Look at the global response to global warming!!!

    Foreign nationals don't vote in our elections-of course each country will look after its own!

    Now here's the thing....if joe-public overspends on mortgage and credit cards noone gives him a hand out. Currently, sub prime debts are increasing as property prices fall, so what amount of lending is toxic?!

    Banks were greedy, focussed on making money and ignored the folk in the street-government turned a blind eye cos of funding by big fat cats. We need to have savings and pensions safeguarded, fatcats to make recompense, and banks to be made accountable. Like the USA, 'main street' people are justified in wanting some sort of payback for having their money being used without their agreement.

    Spank the banks, pummel the politicians, and sort this out! Global, European, or national-does it matter?! If the government protects savers, pensions and helps those in mortgage difficulty, then let the banks sort themselves out-humility can be a good thing!

  • Comment number 61.

    Am I right in assuming that all guarantees of accounts are provided by the FSA under the FSCS?

    If so then I would suggest that such guarantees are not worth the paper they arre written on - the FSCS does not have the assets to cope with a bank failure. if a bank failure were to arise then the FSCS would ask the BOE for a loan to pay those who had lost money and then seek to recover the money ... FROM THE BANKS!
    There is already potentially a 14bn liability - which would absorb the total liability for deposit takers under the FSCS scheme and the rest of the scheme only has a 1.8 billion coverage - by asking insurers/ brokers etc to contribute.

    Thus the promises of guaranteeing all funds are basically just propaganda to maintain confidence in the retail sector and prevent a 'run on the bank' - - - well more of a run than is happening at the moment.

  • Comment number 62.

    Further to Fractional Reserve Banking ... in principle, it's fine. Indeed, I can't see how banks could service a complex, modern economy if they didn't follow this model. Course, by the same token, when confidence goes (like now, for example) FRB adds fuel to the fire.

    But banking is essentially a confidence game, isn't it? ... if you dispensed with FRB and went back to a near zero risk "demand assets equal demand liabilities" model then, fine, you wouldn't get the sort of problems we have now but neither would you ever get much economic growth. I mean, why not go back to bartering ,and dispense with money altogether, if we're going to go that road?

  • Comment number 63.

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

  • Comment number 64.

    This may seem such an obvious question - but when the Bank of England "injects" billions into the banking system - where does it come from? It's not already in a bank account obviously, but it's not in a box under Gordon's bed either! Is he printing it?? Either way it's Mickey Mouse answers that the ordinary taxpayer cannot comprehend and therefore feels irrelevant however you try to explain it. So long as Darling says he won't have to increase taxes, them most people think it's all smoke and mirrors anyway and is happy to let HMG get on with its financial sophistry.

    And why all this focus in the news from the view of the "ordinary man"? The real story here is surely that these markets move because of the big players - not you or me and those big players used to be people like George Soros, but now I suspect it is the Sovereign Wealth Funds who can wield such enormous financial power - they can advance their country's interests (and dimiish 'ours') by the deployment or withdrawal of their funds from the open, Western system into their more controlled, even closed sovereign ones.
    But I guess with that all power ranged against us who would dare to point a public finger at any such big player who is arguably just looking after its own best interests and has firepower in reserve to do even more damage? Maybe we shouldn't be so hard on our big-beast and highly paid bankers who have played them at their own game for so long and who we will almost certainly need again, on our side, when the game resumes.

  • Comment number 65.

    "38. At 09:28am on 06 Oct 2008, crispblog wrote:

    Can we please have a break from banging on about fractional reserve banking without offering any realistic alternatives?"

    Full Reserve Banking.

    "Banks do not create money"

    Yes they do. They do exactly that. Money is a means of exchange. Bank credit is just as much money as notes and coins are.

    "At the other end of the process loans get paid back"

    Do they now? How exactly do the loans get paid back. Where does the money come from to pay back the loans?

    Want to know the answer? The money to pay back the loans comes from newer, bigger loans. Yuhuh, yes it does... Which means the debt is never in fact paid off, but just keeps growing.

    "As long as the system is stable and regulated properly it works (now, who's job was that...) "

    The system is NOT stable. It CANNOT be stable because debt is an exponential function. That is, it increases exponentially. Fractional Reserve Banking is fundamentally unstable at it's very core, and this is where the bubbles and bangs as well as the "business cycle" we are all so used to come from.

    The ONLY way to make banking stable is to ban the practice of fractional reserve lending. Otherwise it WILL continue happening.

  • Comment number 66.

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

  • Comment number 67.

    In view of the current lack of unity in the EU, maybe we should be referring to "factional reserve banking", rather than "fractional"...

  • Comment number 68.

    True Lib @ 57

    ... "This was before I decided that getting high blood pressure about it all was a waste of effort and instead to simply switch to cash at the peak and watch everyone wail and beat their chests as the giant sucking sound emptied their pension schemes, house values and investments" ...

    Aren't you a clever boy?

  • Comment number 69.

    Can I have my prize for typing "fractional reserve banking" into and clicking on this article by Iain Macwhirter in the Sunday (Glasgow) Herald?

    Seriously, I do think fractional reserve banking is a very important issue, and should be understood more widely. I'm not (yet) advocating that we get rid of it, but at the very minimum, when you have any system that is based on improbable things not happening (i.e. a large fraction of depositors trying to take money out of their accounts at the same time) you need good regulation. Perhaps the system would work more sustainably if only 5 rather than 10 times the assets could be leant out? Or perhaps we need a radical new approach to the banking system?

  • Comment number 70.

    This will not work, only way out is to cut interest rates to 2% and pump money; also immigration has to be temporary hauled as more and more jobs are lost. This will stabiles the markets.

    Looks like our government and BOE has started to move n the right way but they are too slow. Don't worry about the tax payers as these are the once that are losing jobs or closing business.

  • Comment number 71.

    If it is OK for us depositors to take the risk of bank failure individually, as we are urged by politicians to do, why cannot the taxpayer (which seems also to be us) take this risk collectively? Why is the government so reluctant?

    Conversely if the risk is not good for us (the taxpayer) are we (the depositors) not being told that we should switch our savings to Irish banks?

  • Comment number 72.

    Regarding FRB, there's a Wikipedia article on it that may help some.

    It seems clear from the comments on blogs like this one that there's an audience out there for a programme or two from the Beeb that takes a *non-dumbed-down* look at the world of finance and macro-economics.

    By that, I mean one where the cameraman isn't told to bring the scene in and out of focus, and the presenter isn't made to walk and talk at the same time. I'm quite happy to look at someone who stands still and talks if what they're saying is interesting.

    How about it? Tim Harford did some BBC 2 work a while ago. Or perhaps Peston if only he had a spare minute in the day. :-)

  • Comment number 73.

    This current fall in the Euro, is it overdone or just a long awaited correction that has been overdue? Either way I think in the longterm it may bring some relief to Europe if it sticks. Short term wise corporates can take advantage quickly enough and this volatility is unsettling.

    Everybody is worried about banks, faur enough but the basic volatilities are making even the most stable businesses nervous.

  • Comment number 74.


    You mention that the FSA believes c. £950b exists in UK bank accounts thereby discouraging the government from guaranteeing such a large amount.
    They need not worry so much. Given that Ireland, Germany (Greece and Denmark too, I believe) are taking the people focussed approach of guaranteeing all deposits, the£950b will be diminishing as quickly as Zarkava won the Arc on Sunday.
    A few weeks should have that whittled down to a more manageable figure and also help to underpin banking in those other countries.

  • Comment number 75.


    I think you will see a fall in gas bills, with the following two provisos.

    First, the fall will occur in early 2009, providing that the price of oil is still low at the end of December - term supply contracts tend to adjust on a six-monthly basis.

    Second, the fall will not be as large as the fall in oil prices. The price of oil is only one factor in the price of gas - declining domestic production is another significant factor.

  • Comment number 76.

    Good news!

    I have opened my wallet this morning and find that the £10 note there still reads "I promise to pay the bearer on demand the sum of ten pounds". So obviously all is well.

    More seriously - we all know that, in a sense, money is meaningless.

    So let's stop banging on about fractional reserve banking - which is just one myth built on another.

    More interestingly, is it the case that a relatively long period of stability is itself a cause of instability, as Minsky suggests, because of over-confidence which develops?

    If so the boom and bust is simply a never ending cycle. If the booms last longer the busts will be bigger.

  • Comment number 77.

    Robert - the GBP 450bn refers to the amount that is already guaranteed by the German deposit under the German equivalent of the FSCS. To guarantee "all savings" would probably require an amount closer to GBP 1.3bn.

  • Comment number 78.

    In terms of size, the US bail-out may be huge but based on the figures given in the following bbc article it is the UK's bail-out that is proportionately greater:

    The US's bail-out works out at approx 7% of its GDP in contrast to the UK's 13% of its GDP. I can't say that i've heard or read this in any articles or reports yet the figures seems quite alarming.

  • Comment number 79.

    Fatcat @ 53

    Well, one expects expansion over the long term because people work and make stuff and invent things and generally create.

    Money is nothing in itself, it's just a barter mechanism and a way of measuring activity and wealth.

  • Comment number 80.

    The Western financial system has always been dependant on maintaining a high level of confidence, much of it false and undeserved.
    Nationwide Building Society for example is held up as a model of the right way to fund long term mortgages yet it boasts that the majority of its funding comes from customer deposits that could all be withdrawn within 5 years at the most, and the vast majority I suspect is Instant Access. If confidence (in the idea that enough savers will continue to recycle their short-term funds through the Society to keep the ball rolling, it will fall over.
    Yet it is fashionable to rubbish Mortgage Backed Securitisation which is a very sensible approach to matching the long term mortgage asset with a long term funding profile which, so far as it could, seeks to match it and create a tradeable security so if the funder want's to cease funding a tranche of mortgages, he trades the paper - he doesn't bring the lending institution down. It's not perfect, it never will be and perhaps it would helpful if the Public were enabled to understand that you cannot talk in terms of absolute security or zero risk in anything - there is always a risk, and it would be beeter if the Public appreciated that.

  • Comment number 81.

    No. 52

    Well done - the Ian Macwhirter article is the clearest explanation of this mess I have seen so far. I urge everyone to read it.

    Maybe your prize will be some worthless bank share certificates to frame and hang on the wall in the toilet...

  • Comment number 82.

    The death of globalisation has started.

  • Comment number 83.

    It seems if you criticise Peston you get blocked by the moderators, BBC cencorship in operation i see, anyone else think like me that he seems to stoke the fires of uncertainty?.

  • Comment number 84.

    Robert, this mess has been compounded by politicians and regulators failing to apprecite that bankers are not masters of the universe.
    It is insane to assume they know how to get themselves out of this mess simply because it would be like asking turkeys to vote for Christmas.
    I suggest the following:-
    1) Banks here come clean about their liabilities and toxic loans, a situations i suggest they have as yet refused to do.
    2) Having established the extent of their liabilities, they are then netteed out against their assets.
    3) The difference is then agreed to be written off over 10 years at full cost to the banks.
    4) Dividends are scrapped for 3 years and only paid when in year 4 when a trend has been established.
    5) If banks do not return to lending to customers and continue to keep the draw bridges up. The government instructs the Band of England to cancel the extra
    liquidity to the errant banks and takes over direct management.
    6) All future short tern loans comes not just at a rate of i terest but with a shareholding resting at the treasury for the taxpayer.
    7) Shareholders have to be reminded of caveat emptor( buyer beware) and it is they who take the strain.
    8) All banks executives on remuneration schemes in receipt of taxpayers money will have those schemes canceled and will just work on a basic salary. There can be non logic for one more day in rewarding failure!
    9) We stop blaming America
    10) We stop consulting experts on how to get us out of this as it was they who allowed it to happen.
    11) I am happy to offer my services to get this sorted. This problem doesn't need graphs and consultations, it has been bulding for years. It needs firm leadership and resolution not to be bullied by parties who only care about their own self interest.

  • Comment number 85.

    Re #1 fractional reserve banking

    You win - I can't find one but it's universal in modern banking.

    google the crash course by chris martenson

    There's an explanation there. Warning it's depressing.

  • Comment number 86.


    Many thanks for pointing out the excellent Guardian article.

    Recommended to all.

    So it was the dire/ criminal lack of regulation of our globalised banks that allowed them to conjure up pyramids of money sold as debt to non wealth creating entities that caused the crunch. Hmm ... simple really.

    So Fractional Reserve Banking is all about smoke and mirrors afterall!

    Tulips anyone?

  • Comment number 87.

    Can anyone tell me where the money that is traded on the wholesale markets comes from ? And what it is doing instead ?

  • Comment number 88.

    New World Order

    I got it!

    It's not the method (tried and tested for years) it's the reckless way it's been used recently - the number of times money is lent and re-lent and who it's lent to.

    I for one am now sick to the back teeth of this mess!
    Did no one at any of the financial institutions run a ‘what if’ – the housing market turned – the economy turned - etc. Is it really true that no one knows how much and where the liabilities are? I am struggling to believe that!
    Despite dealing with International Money Markets why does there appear to be shock that something in another country can affect a bank in the UK.

    And now, after relying on the herd instinct of the public for 10 years to borrow for ever more ludicrously priced houses, to uses Credit Card limits set with no real vetting in place or to take out loans that at best are going to be a struggle to repay. They are now asking us to trust them and not do anything silly – like take our money elsewhere! If you are going to use mass hysteria to drive up an economy, don’t complain when mass hysteria drives it down....

  • Comment number 89.

    More Banks to be scuppered ?

    If all deposits, bonds and cash convertables over 50 thousand were withdrawn from any single Bank, then you can bet that the particular Bank would be out of business tomorrow.

    Brown has to guarantee all deposits otherwise the money will slosh around and eventually break down the defences of one or more Banks.

    We know that, Brown knows that, the Banks know that, so any inaction on a low guarantee limit is simply waiting for the inevitable to happen.

    The total deposits of the 50 thousanders plus will probably exceed the Bank deposit calls by a factor of 2 or 3.

    Guarantee is needed if stability is to be reined in.

  • Comment number 90.


    Paul Grignon made this animation on "Money as Debt". It gives a very good illustration on terms such as fractional banking, gold-backed dollar, etc.

    Google for "Money as Debt", or make use of this link:

    With regards to "interest" or "usury", this was basically shunned by all religions and it was even a crime to ask for interest then.

    So, what happened then?

    We all have our thoughts and opinions on the above topics, but to lay the blame squarely at bankers and the current financial system, is to show utter ignorance and arrogance.

  • Comment number 91.

    All this talk about fractional reserve banking is really a distraction. You could still have a run on a bank without it. This is because banks take retail deposits that can be withdrawn short term, but lend long term.

    The authorities are supposed to control the fractional reserve banking system by controlling interest rates. Actually they stood idly by with low interest rates for years while the money supply grew massively, fuelling the asset price boom.

    The issue isn't the FRB system, it's the negligence of the authorities who didn't control it properly. Taxpayer-funded bailouts won't work, because they won't correct the root cause of the problem. The only way to stabilise the banking system is higher interest rates. And the authorites (and Robert too) are talking about lower rates!!

  • Comment number 92.

    Robert, there is something I would like to understand about the German government bailing out the banks, and EMU.

    For the UK, it seems simple. The UK government would probably be unable to cover the cost of bailing out everyone in pre-'08 money (the tax budget is far smaller than the numbers being thrown around)

    But in the worst case, that is OK, it prints money via the BoE, and gives it to the banks. Devalues the pound a bit, but currency devaluation to prop up the economy has happened several times in the past couple of centuries.

    But the German government surely can't print euros: only the ECB can do this, and Germany has given away its right to control its own currency. So who would actually be empowered to take the necessary action to devalue the euro? And even if authorised, how do they go about distributing the proceeds between all the countries that need it (Italy, Spain.....)?

  • Comment number 93.

    The medium term solution will almost certainly involve the rehabilitation of junk bond schemes. There is no way out of this crisis short of a round of mergers and acquisitions supported by speculative bonds - the difference between now and the eighties being that junk bonds would have to be issued (and underwritten in some fashion) by governments. The assets of affected institutions (their debt effectively) would be significantly disocunted and folded into a bond - which somethign similar to but more transparent than the US proposal. The principle is well understood, the difficulty lies with the level of mark down applied to the debt. This is where the regulators and bankers fall out. A very severe mark down of asset values will undoubtedly drop property values which has the upside of stimulating sales among first tiem buyers and investors with cash, but it also has significant downsides. In Iceland, property will dramatically collapse whatever strategy is proposed however, given the debt problems.

  • Comment number 94.

    true-liberal #57 said the best advice is to read Mises, the Austrian born economist.

    Mises is not the answer!

    Mises advocated that during a boom period, Mises counseled the immediate end of all bank credit and monetary expansion; and, during a recession, he advised strict laissez-faire, allowing the readjustment forces of the recession to work themselves out as rapidly as possible.

    This advice is nonsense because we did not reduce bank credit and monetary expansion in the boom period. Of course ,if we had done so, we wouldn't be in the mess we are in now but Mises himself was a man who advocated strict laissez faire policies which would prevented the very thing he supported: namely the end of all monetary and credit expansion in boom times. His entire philosphy was against the direct interventionist action required to achieve this!

    Because we failed to reduce monetary and credit expansion both in the last few years and also in the USA in the 1920s, a policy of strict laissez faire after massive credit expansion would cause a massive and very deep recession, as it did in the 1930s.

    Mises said the worst form of intervention in a recession would be to prop up prices or wage rates, causing unemployment, to increase the money supply, or to boost government spending in order to stimulate consumption. For Mises, the recession was a problem of under-saving, and over-consumption, and it was therefore important to encourage savings and thrift rather than the opposite, to cut government spending rather than increase it. Well, that is the argument for a deep and permanent depression.

    In a recession, the problem is a lack of confidence and fear. we can see this with the current banking crisis. Expenditure both of investment and consumption is cut back in such circumstances which leads to lower production, lower consumption and greater unemployment and much hardship. Governments do need to intervene to mitiagate the effects of a recession and to provide the means for recovery.

  • Comment number 95.

    I've said it before, and I'll say it again, all this worrying reporting of the 'safety' or otherwise of OUR savings begs the question - WHERE are financial experts {such as Robert Peston} stashing their savings? We want to know

  • Comment number 96.

    Moderators - my entry #66.

    Please just take out the offending 'wet' and leave the 'dream' stand. The context will carry it.

  • Comment number 97.

    There's one thing that puzzles me about the Government's reluctance to give a 100% guarantee to personal savings. We are constantly being told that much of the present difficulty is due to lack of confidence in the banking system - and the risk of a rush to withdraw deposits - rather than banks actually being in the red. In that case, the risk of having to actually pay out against a 100% guarantee would be extremely small - whatever the total "theoretical" risk.

  • Comment number 98.

    The banking crisis - It gets worse in Japan

    I've just read that uncertainty has now hit the Japanese banking sector:

    In the last 7 days Origami Bank has folded.
    Sumo Bank has gone belly up. Bonsai Bank announced plans to cut some of its branches.

    Yesterday, it was announced that Karaoke Bank is up for sale and will likely go for a song, while today shares in Kamikaze Bank were suspended after they nose-dived. Samurai Bank is soldiering on following sharp cutbacks. Ninja Bank is reported to have taken a hit, but they remain in the black.

    Furthermore, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank where it is feared that staff may get a raw deal! BUT there is some good news amid the gloom, a spokesman for Ichifani Bank Corp confirmed- ''we are up to scratch''

  • Comment number 99.

    "fractional reserve banking"? Are you kidding?

    That's not the problem. Without it there would never be any economic growth.

    No - it's FAS 157. Great idea. Unfortunately it is "shock therapy" that cured the patient but killed him the process.

    This crisis was anticipated by many, including almost half of the FASB seven member board.

    This crisis didn't "just happen", it was caused by the FASB in November 2007 and it was deliberate:

    Unless it's suspended and brought back later in a controlled fashion (and a regulated CDO/CDS market), the bail-out money will disappear into an even bigger black hole (Debt Market Traders' pockets)

    Tom Donnelly

  • Comment number 100.

    Ohhhh - "profanity blocked" - WHAT ON EARTH did Iwrite..... I used percentage sign, I used the letter 'Kay' appended to the number 50 in a couple of places.... what else - oh, I used round brackets - oh yes and I tend to use ellipses ..... and there were no web links.... I didn't use the ampersand & this is just a test to see if this gets through the filter - if it does appear - I apologise for the waste of space in theblog and I'll try to resubmit my original.....


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