Nationalisation by stealth
The big vulnerability of British banks does not come from the danger that retail depositors, the likes of you and I, might shift our money around.
In the end, it's not practical for most of us to move our funds abroad - although we can and do move our money from banks we deem to be weak to those we see as strong, which obviously undermines the weak banks.
No, the big flaw in the British banking system is the way it became massively dependent on the money markets and wholesale funds.
Bank of England figures show that at the end of last year, there was a £625bn gap between the money lent by our banks and what they took in from conventional deposits.
That gap shows their dependence on wholesale markets - which have seized up and are very difficult for our banks to tap.
And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero.
Over the past few months, much of that gap has been filled by loans from the Bank of England.
In fact figures published just this afternoon showed that the Bank of England's direct loans to our banks jumped £49bn in just one week - and, including the special scheme that allows the banks to swap their mortgages for Government bonds, the authorities' financial help for the banks has grown more than £200bn in the past couple of years.
It's a sort of nationalisation of our banks by stealth.
However the banks told the Governor, Mervyn King, on Tuesday evening that they need even more cash from him, to avoid falling over.
Part of the problem is that as these wholesale loans become due for repayment, they're not being rolled over - which makes the banks ever more desperate for help from the Bank of England.
But King's not keen to forgive the banks for their past sins and bail them out even more than he has been doing. He views them rather as a parent sees a mischievous child, as needing to be taught a lesson.
And rather like upset sulky children, an extraordinary number of bankers have said plaintively to me over the past couple of days that "Mervyn really doesn't get it" - which is as much as to say that the mess they've made is far too big for them to clean up without his help.
The Chancellor rather agrees with the bankers. He is increasingly taking the view that although there may be a time for spanking the banks, this is probably not it - because the priority is to restore them to some semblance of health.
So there's a spot of tension between Chancellor and Governor, which is probably a bit more than then normal rivalry between Treasury and Bank of England - although officials close to them say that King seems to be less inflexible than he was.
As I pointed out this morning, at issue is the range of collateral the banks can provide in return for loans from the Bank of England.
King only wants the best quality assets as collateral - which is understandable, since he wants to protect his balance sheet and the interests of taxpayers.
But the banks are running out of the good stuff, and now want to swap commercial property loans, loans to companies and car loans for readies from the Bank of England.
This may sound tedious and technical.
But it really matters to all of us.
Because if the banks were to run out of collateral they can swap for Bank of England loans, well in the current inclement weather, that would be lethal.
Unconvinced?
Well, one of the reasons why the board of the Financial Services Authority deemed last weekend that Bradford & Bingley was no longer viable and fit to take deposits - which was the precursor to it being nationalised - was that it had almost run out of good quality assets that it could swap for loans from the Bank of England.
It wasn't the only reason why the City watchdog decided that B&B had reached the end of the line.
But B&B's inability to get much more out of the Bank was like the valve being closed on an intravenous drip.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~19~RS~)
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Merv is going to have to take a more 'holistic' view on this and exchange BofE wonga for banks junk.
Because the taxpayer will be hurt even more if the system freezes completely.
The time for spanking is not now.
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I trust that the banks as any organization going through a tough time will tighten its belt and impose zero pay rises and zero bonuses - else I'm afraid Mervyn should close that valve.
We have to see the City change its ways. Actions seek louder than words.
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Those numbers are interesting. So, wholesale funds contribute £650bn or so implying that should they roll over each month that rolled over/new funds of around £50bn are required every month which is a lot. Compared to this figure, amounts raised via rights issues (c£12bn for RBS) seem rather than small and it is clear that HM Treasury taking an equity stake would not help much either. It is clearly down to confidence, the state of the economy and of course public finances - in that HMG is a competitor for funds with the banks so lowering public borrowing would boost availability of funds to banks and sterling.
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£625bn is an awful lot of money: is it possible for the Bank of England to pay this out? Does it have that much money?
We are told if the Bank of England does not pay up we will all be in dire trouble. What is the impact on the taxpayer if they do pay up?
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So the Bank of England would not only own half the residential property in Britain it would have to take on unsaleable commercial property depreciating cars and god only knows what else they've lent money for.
All this at the beginning of the recession.
This is the stuff of nightmares
Poor Mervyn King. How does he retain his sanity at such a proposition and how do you having to write about it?
The madness is spreading.
You may as well put Great Britain up for sale.
What on earth will we hear next?
It's starting to sound like the 'goon show'
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Ever since I read this from the ceo of a company I used to work for I have tried to make sense of his "anything else" comment and now I am rapidly learning what he meant!
In an interview (The Daily Telegraph Personal view: Science is key to how we add value and create wealth 24 May 2006) chief executive of Rolls-Royce Sir John Rose said,
?There are only three ways of creating wealth. You dig it up, grow it, or convert it to add value, anything else is merely moving it about. In a high-wage economy you must focus on high converted-value activities. To achieve high converted value you need good education and differentiating skills."
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Robert has presented this as if the B of E is just being awkward. Mr King knows that Britain needs the big 4 banks functioning properly. He knows that the real economy needs a functioning finance system and without it the taxpayer suffers.
So why is he reluctant to agree with the other banks? Are we only getting half a story from Robert with the B of E side not being properly explained?
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Who lends the money to the British Banks? Does it come from Asia?
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Isn't a 'simple' truth, that the wholesale markets need to be kick-started, albeit with less leverage, more transparency and better controls. The alternative is be prepared for even more massive consolidation, contraction of economies an deconomic growth prospects.
If you like, wholesale markets are a necessary evil. There aren't enough depositors around for banks to rely on otherwise.
The generalisations around 'toxic' assets hasn't helped any real understanding of what the system is / can be.
BW
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This story just gets better and better......I can't put the book down. You just couldn't make any of this up!
There's a poster on Paul Mason's blog called 'bookhimdano' who's called this accurately. It's all about the bonds i.e. the bonds don't lie. They tell you who really is up to their necks in deep doo doo.
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If the £625bn shortfall is as at end 07, isn't it more likely to reflect dried-up money markets than a surge in new lending post Aug-07?
The Governor will presumably only want to provide enough funding to meet maturing and non-replaceable interbank depos.
If so, further deleveraging is inevitable.
The Bank may or may not 'get it' - it doesn't matter either way - cheap credit is gone, and expensive credit is scarce; the only point at issue is the speed of the adjustment process.
Of course, the government may want to use 'Bradford Rock' to be a new government funding corporation (a la 1960's) to keep the property bubble afloat - there is only about another 50% to go before we revert to the mean house price trend line, so it will soon be safe to lend again...?
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The following is interesting: "And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero."
- So the rot did indeed set in under Brown's watch!
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I get increasingly worried about the government guaranteeing bank deposits. In the end the only way they can do this is to print some more money. OK you get your money back, but if it is only worth say 50% of today's value by the time you get it what's the point ? Better than nothing at all I suppose.
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again, people are confusing symptoms with the cause of the crisis.
the inability roll over interbank loans is basically like a run on these banks by the other banks. but ask yourself this - why are they running? it is because of the fear of insolvency - i.e. that some or all of the borrower uk banks are experiencing more losses on their loan book than they have capital provided for, meaning they won't have enough money to repay their debts.
the solution imo is for the government to announce a standby capitalisation fund, and a review of all the banks' balance sheets to determine whether the government needs to recapitalise them. a fund of gbp 50 - 100 bn size should be more than sufficient (assuming a capital adequacy ratio of 8%, this would be the equivalent of guaranteeing gbp 600 - 1,200 bn worth of assets). this would restore confidence in the uk banking system and stop the outflow of funds. if it could be done in conjunction with the rest of the eu, all the better.
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No6 Quoted Sir John Rose of R-R:
"There are only three ways of creating wealth. You dig it up, grow it, or convert it to add value, anything else is merely moving it about."
We seem to have a declining manufacturing base, which after this current little fracas will be even smaller, as small (and large) companies pack up or are shut down.
Our own bank has been very quiet of late, but I'd be interested to hear of any general directives by the BOE vis a vis small and medium sized companies and their loan/overdraft positions.
Peter
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I am a Mervyn King fan. His reluctance to make bank managers happy is not about spanking someone for their past sins (terrible sins indeed) it is about change for the future. What most people here refuse to understand is that the main implication from all of this is that business as usual is off the menu. There simply will be no Britain based on bloated banks tomorrow and King just doesn't have any reason to try and save the banking system as it stands. It needs to slim down significantly and this does mean that some of it will simply have to disappear.
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What's happend to a new economics blog? If there is one, put a big link on the front of this blog, if not, what happened to that Flanders woman? It would seem a really good time to reinvigorate this blog...
I know not relevant but you can email the answer. Thanks
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US Banks propped, sold etc plus bail-out bill. If 700+billion dollars needed in US for bail-out bill and same culture imported over here then surely pro rata needed here, maybe not so much due to different circumstances but still more than will go down well with voters. Why do people think that a system with flux can be limited to the US, its already shown it can flow to Europe, and what is worse Browns economy has imported more US money than any other EU member for years from what I can see.
Could be Mervin King waiting to see just what he has to do when the US bill coming thru. Action may not be needed at all but if it is there is no point in any unless US bill implemented as no terra firma in US. No bad news is good news but unsurprising if it comes, surely. How many apple pies was it per family we might have to eat, 2000.
Good to ask for good security from banks surely, not just pick up any old wastepaper they should understand that as that is what they like, must enjoy working in a culture they understand. Send them away a couple of times to make them get really serious.
Gap between deposits and loans just another sign of imbalance, spending money domestically not generated domestically. Personally I hope Mervin King keeps the government out of it as much as possible, just gets them to rubber stamp whatever he and his team come up with.
Be interesting, that word again, to see how the UK public react if negative developments, if same anti intervention lobby as US errupts.
I am still uncomfortable about the situation when a bruiser like Paulson is agitated. Of course the Sun might shine tomorrow and everything be fine, in which case great.
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The banks' want Merv to accept CAR LOANS? He'd be bonkers to accept them. They will be worse than toxic mortgages. Many car loans have been taken out on gas guzzlers etc. Cars lose their value quickly.
Do even Homer could work that out!
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Errm, where is anyone supposed to find £625 billion? The BoE don't have that to give.
So essentially the British banks are on life support, soon to be terminated along with the UK economy.
Why would anyone keep their money in a British (or EU) bank? I'm off to Switzerland I think...
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From Mr Peston:
"But the banks ARE RUNNING OUT OF THE GOOD STUFF(my emphasis),and now want to swap commercial property loans,loans to companies and car loans for readies from the bank of England"
And what happens when they run out of even these "assets"?
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I'll just add, do the maths and you can see how much the UK economy is in trouble. We've gone from sucking in £650 billion in 7 years to now having to pay that back. We will go from 7 year boom to 20 year bust.
Super-hairy.
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Re 6 weath creation
The problem is that there have been very few, if any, in government for decades who have had anything to do with wealth creation as you have described so there is virtually no understanding of the concept.
Other countries have more of a grasp. The corollary of the concept is that if you don't take care and maintain your knowhow capability you end up with a low wage economy replacing high waged jobs with low waged jobs, now where could that happen.
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An excellent article by Nicholas D. Kristof about the banking crises can be found in yesterday's New York Times.
Please read:
Save the Fat Cats
http://www.nytimes.com/2008/10/02/opinion/02kristof.html
Enough said.
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Somebody somewhere must have lent this money to them and have made the profits. Why should the UK tax payer keep bailing the banks out?
Perhaps they should just shut up and take their medicine.
Its simple, either you expect the people you have lent to to pay you back or if you have lent too much to idiots who have over extended them then maybe, just maybe, you deserve to go bust.
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The BOE and Meryvn are the only people standing up for the future of the taxpayer and this country, while Brown would sell your children out to preserve the bankers.
So lets get this right - in addition to toxic mortgages being swapped, now the bankers are demanding that all the years of 'purple loans' adverts aimed at th.e unemployed, county court defaulters etc...starring Carol Voderman together with any other junk they have are swapped for gilts, or we all collapse from credit famine in a great depression!
What nonsense. If there is a line to be drawn in the sand its got to be this to protect the taxpayer and the national debt.
No taxpayer should close the gap between 'investors' and savers on the banks balance sheets funding thier mad 'assets' (loans) - i.e. collosal years of junk and 'asset' expansion.
The banks balance sheets will gradually contract back down to size when both sides of the balance sheet contract - i.e. Instead of Savers deposits + investors funds funding mad lending and a giant property/asset bubble, its now got to be savers deposits funding rational property values at 3 times earnings.
Meryvn is right to raise the bar now, to prevent taxpayers from eating certain junk. Something will be passed in the US in a week or so, and credit will get moving again.
The bankers here prob. see only a small window of 'systemic panic time' to demand to unload a whole lot of junk onto the taxpayer (via the BOE and Brown) before the crisis abates and the more gradual contraction in banks balance sheets starts.
Banks have billions in bondholders who can be eaten before the taxpayer has to step in. This bondholder bonfire is what occured in the swedish banking crisis before letting the taxpayer on the hook.
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Why on earth would Lloyds want to take over HBOS in these circumstances??? Sounds like ALL our banks will be doomed if takeover goes ahead unless massive Government bail-out.
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"But King's not keen to forgive the banks for their past sins and bail them out even more than he has been doing. He views them rather as a parent sees a mischievous child, as needing to be taught a lesson."
Do you really think that King's attitude is driven primarily by this? Is it not at least possible that he is waiting for some concrete evidence of understanding, acceptance and reform, before allowing the financial sector back near the cookie-jar from which they have been so recklessly gluttonous in recent years?
Could it in fact be that what King fears is that we will have a bail-out without meaningful reform, and that the public-sector's wealth will end up being p*ssed against the same wall as the private sector's.
How much improvement did we get from an unreformed NHS from throwing billions of pounds at it?
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Perhaps Mervyn should get 'supernanny' in to put them all on the 'naughty step' and not allow them to leave until they've thought about what they've done..
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#6 jimrait,
"There are only three ways of creating wealth. You dig it up, grow it, or convert it to add value," or Gorgon Brown's favourite....just print it !
Ooh, I forgot, that falls into the category of "anything else is merely moving it about." (And, gulp, you end up like Zimbabwe, full of zillionaires.) Its particularly odious because it robs the labouring classes of the purchasing power of their (inflated) pound and gives it to his cronies (PFI crooks, Commercial Banks, Defence Contractors) who receive the nice new shiny pounds first and get to spend it at the old (pre-inflated) rate. The the commercial banks 'lend' 40x (eg Northern Rock) that value to its 'customers' and charges them, say 5% interest. Except its not 5% interest on the borrowed amount, its 5 x 40 = 200% interest on the only 'real' bit of the money they ever had. Nice job if you can get it. (I, of course, would be thrown in jail for fraud if I tried it)
Inflation of the money supply is a deliberate and heinous tax perpetrated indiscriminently by stealth on the populous with the complicit silence of the media. That's you ..Robert. In case that was too subtle for you to realise.
The title of your latest "expose" and inciteful analysis had such potential -"The big flaw in the British banking system " . You nearly had me going there, you tease. (At least that is the title on the index page but a completely different one from the one above. I'm sure the Advetising Standards Agency would have something to say about that - Promising one thing and delivering another !!!). But as we've come to expect, your detailed analysis is no more than platitudes and propaganda for this failed wretch of a government.
How many 'scoops' has Alastair sent you this week? Are we to see the name Peston in the forthcoming New Years Honours list I wonder, for services above and beyond the call of duty in the obfuscation of the news?
Here's a tip - There's no need to spend hours and hours analysing the minutiae of how the banksters spend all day pushing valuless pixels around a screen. Once you understand the workings of a Fractional Reserve Banking system all becomes clear and the mystery evaporates. Go on...try it....once you understand you'll be able to get a second job to fill in all that free time you're going to have. In the near future you're going to need a second job just to pay your mortgage.
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Robert
I have a bone to pick with you.
Your comments are insightful and witty. However, this argument is imbalanced.
You are in effect saying that the Bank of England (or perhaps it is your personal opiniion) values the creditworthiness of commercial loans and secured lending to businesses making up UK plc as "not of high quality".
Most banks have bad debts or impairment provisions, but these are usually no more than 1% of their total loan book as a write off each year.
Having run finance companies for decades, I really think your comments are damaging and insulting to the hard working majority of all businesses. 98% of UK companies are SME's and most of them employ less than 50 people.
Banks have lent to these organisations because they make goods and offer services here and abroad that are in demand and want to buy. Without that, how can we grow our GDP, notwithstanding the financial services industry 20% contribution to GDP in recent years.
Don't throw the baby away with the bathwater by ill thought out comments. Banks do have more good quality assets - loans to well organised and largely profitable trading and manufacturing businesses. After all Robert, these companies employ millions of tax paying staff and ... lest you forget... the tax payers pay your wages!
Don't bite the hand that feeds quite so quickly.
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Let's just put this in perspective.
Good UK money is leaving the country, probably to Arabia or Asia, because UK banks have to pay back short term loans.
That money has been lent out for goods which now have a low asset value and the prospect of getting the money back is questionable.
Basically the UK has been destablised by overdosing on foriegn investment and then going cold turkey.
Getting the B of E to lend money just makes the matter worse. Good money will be exchanged for junk. At least if the banks failed then money would potentially not be leaving the country. No wonder the pounds value has been dropping.
I imgaine Mr King is pretty peed off with high street banks having a direct effect on inflation.
Does this have more to do with politics, war and religion ?
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With all this alarming - I might have added alarmist - analysis, there is one question which perhaps Robert, or other contributors, might answer. It is a question that non-technical people ask a great deal.
The financial economy is in dire straits. But the 'real' economy is still there. Houses, vehicles, roads, schools, hospitals, factories, they are all still there. Nothing has been vapourised yet. This is money-market trouble; it is not physical destruction; it is not Chernobyl; it is not Nagasaki.
So, how can we rebase the financial to the 'real' economy?
A naive question, of course. But I'd appreciate a neat, understandable answer that I can give the next time that someone asks me!
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Is this lack of confidence in the UK banking system on the part of savers a good reason for joining the euro to ensure our economic security?
Savers like voters vote with their feet, or is it their pockets?
Compared to a puny Bank of England struggling to preserve the value of an isolated and declining currency, the European Central Bank can act in concert and bring massive resources to bear enough to daunt and deter currency speculators and financial market predators.
Nato offers one for all, all for one military protection which has ensured the peace for over sixty years.
In times like these we need the same kind of economic security which savers do not feel is provided by the Bank of England or this government.
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Seems like the banks have been given enough rope to hang us all.
".... at the end of last year, there was a £625bn gap ..... as recently as the beginning of 2001 the funding gap was zero."
Heads must roll!
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As I have said previously, if the banks cannot get the funding they need, they should either be allowed to fail or go the way of Northern Rock (and now Bradford & Bingley). If this means that all UK banks are nationalised, then so be it. The US should be adopting a similar approach (nationalising banks as they fail), rather than a rather expensive $700bn bailout experiment.
It was interference in the natural economic cycle following the September 11 atacks that sowed the seeds for the current financial crisis. Further interference may offer some short term, palliative relief, but you can guarantee it will just result in even bigger problems down the road. As ever, short-termism appears to be the order of the day.
Plus ca change, plus la meme chose...
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"The big vulnerability of British banks does not come from the danger that retail depositors, the likes of you and I, might shift our money around."
That is a culpable lie.
The banks balance sheet is made up of some 'real' deposits and the remainder a combination of fantasy money created out of thin air (Fractional Reserve Banking) and casino bets. The ratio of 'real' deposits to fantasy money can vary from 12:1 to 40:1. If the public acted in concert and retracted their deposits from a single bank on a particular day the Fractional Reserve Scam is exposed for all to see. (For every one pound which is removed by a depositor it must unwind £40 of its fantasy money. Thats why the collapse is so sudden.) The bank closes its doors because it does not have sufficient reserves ie deposits to give the depositors their money back. Want some proof? Northern Rock. Leveraged 40:1 on the day it was yanked. I have a vague memory of some journalist making hay that day. Can't remember his name exactly....
For such blatant misreporting you deserve to be sacked. The term Public Service Broadcaster rings more hollow now than at any time in history.
"Because if the banks were to run out of collateral they can swap for Bank of England loans, well in the current inclement weather, that would be lethal."
So what do you suggest? That Merv should change his mind and accept cr@p in exchange for more, newly printed, fiat pounds which then devalue all of the existing pounds in your pocket thus have Joe Public pick up the tab via his debased savings? This is the policy of elitist '#?%$^*s and financially illiterate clowns.
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And, having asked one naive question, I would like to ask another, again about the 'real' versus the 'financial' economy. Again, a neat straightforward answer would be helpful, so I can tell people who ask me.
Businesses need credit to carry on their day-to-day activities. Government lends to banks in huge volume, but this support doesn't reach 'ordinary' businesses.
Simple question: if the middle-man (the banking system) isn't doing the job, why not cut out the middle-man and do this directly?
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Well Done to Mervyn King!
Stand firm. The CEO's of Investment banks need their knuckles firmly rapped and I applaud you for taking a stand.
How does this sound for an idea? - maybe you should float it with the bank of England Rob? If a company needs more cash then everyone in that company from ED up to takes a 75% pay cut (including bonus and options) which lasts for at least 3 years until after the money borrowed is paid back, with the entire board taking a nominal £1 per year until the companies are back in shape.
Why should the taxpayer be the only element to suffer because of director bad judgement?
Stringent personal terms like this would make directors more financially aware of the pain which they have been partly responsible for.
I think it is a good idea. Rob you going to float it with the BofE?
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@ 6
"is to print some more money. OK you get your money back, but if it is only worth say 50% of today's value "
The money has in effect been 'printed' by the banks which is why money has declined in 'value' by c. 10%+ pa since 1997 It's just that the State will underwrite it so it won't vanish into thin air along with assets against whose value it was created and which is now very questionable.
However it is inflationary which Mr King realises and also that a drop from 5% might trigger further weakness in Sterling, CPI up further and a real need for much higher rates to control Sterling and therefore prices.
Can Peston comment on the amount of money lent to banks by a) foreigners b) companies [which may need the cash] ?
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The Treasury should offer the banks a deal:
Treasury creates a bank specific self liquidating vehicle into which the bank places illiquid securities at a price of its choosing and the Treasury buys them with T-Bonds with matching maturities. However the securities must be priced low enough to cover with a margin the cost of the Treasuries.
The bank sells the Treasuries receiving cash.
The bank and Treasury also have a deal whereby any loss in the specific vehicle is compensated by issue of bank securities convertible into equity on agreed terms until which the Treasury ranks alongside HMRC as a creditor.
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"I'm off to Switzerland, I think..."
Where are you going to keep your money?
UBS?
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Let's just hope like mad that the US Congress read this, then they might act sensibly! Absolutely terrifying but extremely well written - thank you Mr Peston!
We bought some HBOS shares yesterday and are currently showing a 24% profit. I bet we will not be able to realise that in the morning!
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Hold on a minute. So now is not the time to spank the bankers. Well it's not the time to reward them either. Take Barclays, if they are so hard up then why is it that the first thing they did on taking over Lehmans was to promise to pay the bonuses to Lehmans bankers? Yes the very same bakers who contributed to lehmans going bust. What about Goron Bust paying for the deficit in mine and others pension funds?
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Robert,
I've no problem with the financial side of your postings. I do think you should work on your actual presentation. I know that it's not meant to be so important to blogs, but you shouldn't start a paragraph with the word "But". Feel free to use over 1 sentence in the same paragraph. If it's really bugging you then use bullet points.
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So, Robert, what does need to be done to fix this. Or, in your opinion, should nothing be done?
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@benagyerek: I don't think many are confusing the symptoms (lack of liquidity) with the problem (doubts about the asset quality). The point is that a decade or so of Gordon Brown's (inevitably futile) search for and end to boom and bust was always bound to end in a classic bust, unless the low stable interest rates had been counterbalanced by controls over the amount of credit available. The question now is whether the (de facto) nationalisation of the banking system too high a price to pay to delay, or fudge, the correction?
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Banks need to wean themselves off the aberration that is the wholesale credit market and cut back their lending to what their deposit base will support. A few did not make it, but the rest are in better shape and will be much healthier for it. Just think of it as the latest detox diet.
Mervyn King's stance is correct, that seems to be happening rather nicely. Gordon Brown's solution is to give them more juice and inflate a bigger bubble atop this one. That is all he knows.
Besides, is this not foisting a supply side solution onto a demand side problem? What if banks are bailed out, encouraged to lend, but no-one borrows? If the consumer is barely keeping up with taxes and repaying existing debt? What if the real crisis in banking is saturation?
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The bank of England should accept teeth as collateral on which to lend ,its a tried and tested method of recapitalising those that wasted their pocket money on the good ship "lolly" pop
I also have have two sets of false teeth that chatter and wriggle accross the tabletop to the recording of the laughing policemen ,which should net me the equivalent of three trillion s worth of CDO's[ book value]
Finaly I have some clay left over from the creation of Adam and the remaining three tons of authenticated bones from Francis of Assisi
If Mervyn King buys the worst of the toxic waste from the city, then they in turn can finance Gordons increasing public sector borrowing requirement .This menage a trois of unrequited narcisum will keep the show on the road for some time yet
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"Bank of England figures show that at the end of last year, there was a £625bn gap between the money lent by our banks and what they took in from conventional deposits"
I assume that economists measuring the money supply were including that £625 billion at the end of last year? Or were they ultra-stupid?
In which case, contraction of the wholesale funding since the credit crunch represents a clear case of contraction of the money supply.
Assuming that Mervyn King wants to manage the money supply to stabilize inflation, it is his duty to provide funds from the central bank to replace the missing wholesale funds.
If not, why did he allow the money supply to be inflated over the last few years, by allowing British Banks to use wholesale funding to make loans?
All of us who were horrified and mystified over the last few years at where the British property and credit boom was coming from: now we understand how it happened.
The question is: Why did the Great Economists, such as Mervyn King, allow it, and why do they still hold their jobs?
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Buy a good mattress.
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Dear Mr P and all
Thanks for all the positive?/informative comments over the last couple of very unpresedented weeks.
To the educated financial whix-kids out there could someone please tell me what to do?
I am a business owner in metal fabrication (some call me a metal-bangers boss) although very interested in every aspect of the world economy and how it effects myself and my employees)
With inflation rates inevitably going to increase significantly, what-ever the next few days brings about, how do I tell my work-force that a below inflation pay rise is prudent and for the good of the company and their jobs
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We need to take some pain. The reason we are here is because of easy credit. Give the banks what they want without change will not cure the patient.
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Wow! And I thought that our problems over here
were bad!
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The money markets and wholesale funds are pulling out of the UK bank market as fast as they can, and the BofE loan's are taking their place. So is the taxpayer bailing out the banks, or the money markets and wholesale funds?
What would have happened if the government had only guaranteed retail deposits when nationalising Bradford and Bingley the other day, as opposed to also guaranteeing wholesale deposits, derivatives , swaps and covered bonds? It would be nice to know who these creditors are that are being bailed out with taxpayers' money.
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I Just got a call from my credit card company (MBNA).
They are offering me
1) - 0% on all other credit card transfers to this account for 9 months !!
2) offer of transferring 95% of my remaining credit to my back account at 0% interrest for 9months again - for a one off 3% of balance transferred.
Do they know something we don't?
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#38 friendlycard
I notice you ask the other posters rather than Robert. That's a good idea. It avoids the embarassment of him admitting he doesn't know.
I recommend you start here for the fundamentals of the fraudulent system:
http://www.youtube.com/watch?v=ThXpjmfyiMQ
http://www.youtube.com/watch?v=sanOXoWl0kc
http://www.youtube.com/watch?v=kTv1fo6sKmo
http://www.youtube.com/watch?v=3qicabStQkc
http://www.youtube.com/watch?v=7kpSbkaD4tM
Please watch these short videos one at a time. Don't be put off by the graphics and the cranky format (people trying to spread the truth don't have the budget of the BBC to make a costume drama production) They are highly informative. You may have to watch them several times before the enormity of the fraud sinks in. After you get your head around fantasy money you then need to think through the ways it permeates through the economy or come back here and simply ask for the next thrilling installment.
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About 5 yrs ago I had lunch with a bank manager when the press were beginning to report on uk borrowing running at 1.3 trillion pounds. I asked "who is lending this money ?"he replied " the banks and building socs". i replied that could not be possible as their total assets were probably not worth ten percent of this amount . he replied " I`d never thout of that" The next few months we put our house up for sale and moved to a country where some sanity still prevailed-- FRANCE!
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About 5 yrs ago I had lunch with a bank manager when the press were beginning to report on uk borrowing running at 1.3 trillion pounds. I asked "who is lending this money ?"he replied " the banks and building socs". i replied that could not be possible as their total assets were probably not worth ten percent of this amount . he replied " I`d never thought of that" The next few months we put our house up for sale and moved to a country where some sanity still prevailed-- FRANCE!
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Robert,
Thank you for the excellent blog/reporting, once again.
I would not want you (or the BBC) to get carried away (.....ha, perish the thought), but making the complex simple has got to be the best definition of intelligence yet articulated.
So now we have it.... the FSA/BoE/Government (however you guys want to allocate your responsibilities..... ah, er, ok, so it was actually Gordon who was in fact the architect of this particular construction), as well as monitoring the overall level of consumer debt in the UK, should also have been monitoring the 'exposure' of UK banks to short term financing. (I had absolutely no idea that the country as a whole was exposed in this way - quite shocking)
As someone has already said somewhere in these blogs, we in fact need an increase in the MLR.
The rationale in monetary terms would be.... because the BoE now needs to reflect the increased risks in accepting less than blue chip security for lending its money. This would mean that those bankers who think that Merv still 'does not get it' will feel more pain still - well good - and may need to raise more capital - well good - and dilute existing shareholders further.
There will also then be a greater incentive for people to save, so we can get back to a better equilibrium on a national basis of savers and lenders.
OK...so if this all happens at once, it would mean the economy would be pushed further into a recession.
To prevent this happening, the government should produce a fiscal stimulus - reduce basic tax rates big time, and increase government borrowing (i.e. .....even more).
This would absorb the stress in the economy not via printing more money and creating inflation, (i.e. going back to the bad bad old days of UK plc, of just rewarding anyone who borrows an excessive amount) but create an economy which rewards savers.
I'm here hoping.... nay, praying.... that.... with Mervyn there, we damn well ain't going to inflate our way out of this one (which is what is coming to the US if they pass the bill).
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Sorry, I can't find the bit where Mervyn King, the FSA and gov.uk said to any of the bank before all this happened : No, no, you shouldn't fund credit from the money markets. You should restrict lending only to the amount you take in deposits from customers.
I've looked high and low for a quote of this sort from Merv and the gang, but still can't find it. Anyone help? No?
Well, in that case what are they doing moralising in hindsight?
Come on Merv, you know you've got the wonga stashed away in that vault of yours. Cough up and let's get this over with.
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I believe that house price inflation has averaged just over 3% per annum from 1945 through to the early 1990's.
Over the past ten years, it has averaged 18% per annum.
It has now dropped just 12% in a year, so you can see that there is still quite some way to go before it returns to trend.
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PS. A poster on this threaad mentioned that some 98% of businesses in this country are SME's.
I have noticed during this crisis that senior American politicians have stated that 'families and small businesses' are their concern.
But not a single peep from 'our' senior politicians about the plight of SME's.
In my opinion, SME's are shat on by HMG day-in and day-out.
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Comment 33 : Friendlycard
The real economy, as you call it, is not in a state of sustainable equilibrium, as many dreamers would like to think that it is. There are some major distortions and dislocations, many of which have been the result of the "real economy" reacting to the nonsenses that have been going on in the financial sector. A great amount of resource has been deployed in industries that produce goods and services for which the demand is only there courtesy of the bubble of unearned prosperity created by the financial shenanigans of recent years.
Ever since this retreat from reality began, there have been sound rational arguments cautioning against allowing it to continue - NOT because it will lead to comething awful happening in the financial sector specifically, but because the explosion of non-sustainable demand will lead to immense resource misallocation through the economy as a whole. THIS is what reasoned thinkers have been saying, but when ever has reason had any effect on the decisions of eejits enjoying a party?
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Credit 101 for Bankers
In December 1863, H. McCulloch, U.S. Comptroller of the Currency and later Secretary of the Treasury, wrote to all national banks. Here are some of the paragraphs.
?Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
?Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
?If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
?Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
?The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
?Pursue a straightforward, upright, legitimate banking business. ?Splendid financing? is not legitimate banking, and ?splendid financiers? in banking are generally either humbugs or rascals.?
Mr. McCulloch?s wisdom is as relevant today as it was in 1863. Every credit 101 today preaches those principles. However greed acts to ignore them.
The sub-prime mortgage debacle should serve as a reminder, yet again, that deposit taking is a sacred and heavy responsibility of commercial banks and that; commercial banks must remain separate from investment, insurance, and brokerage entities. These entities are no banks and their executives are no bankers. The culture of bankers, articulated by Mr. McCulloch, is stranger to the culture of non-bankers.
The emasculation of the Glass-Steagall Act contaminated commercial banking with the free wheeling and dealing of gamblers in the pursuit of quick and big profits and millions of dollars in ill-earned bonuses.
The next U.S. administration would do well to restore Glass-Steagall and bring back sanity to managing peoples? saving.
Elie Elhadj
Author: Experiments in Achieving Water and Food Self-Sufficiency in The Middle East
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Normally BOE and other NCBs would offer repos against AAA securities with only short/medium terms. Now it might make sense to expand all the criteria to include lower rated stocks for longer terms and also more Buy/Sellbacks...in effect this would be a sell off commerical banks assets for liquidity.
Given the static securities market - this might be a reasonable option. However, would this just be a case of finding a way to hide the problem?
All measures are stopgaps until the fundamentals of credit risk are resolved. Toxic assets need to be purged whatever the cost else the plumbing will be forever bunged up.
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#46 idormaine
"So, Robert, what does need to be done to fix this. Or, in your opinion, should nothing be done?"
You're wasting your time asking. Silent complicity is Roberts strong point.
"I know that it's not meant to be so important to blogs, but you shouldn't start a paragraph with the word "But". Feel free to use over 1 sentence in the same paragraph. If it's really bugging you then use bullet points."
Yes, yes, Robert, and whilst you're about it get those deckchairs rearranged like I told you. Yes, the ones below the sign that says "Titanic"
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Robert Peston wrote
"Bank of England figures show that at the end of last year, there was a £625bn gap between the money lent by our banks and what they took in from conventional deposits....And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero".
My big question is why this was allowed to happen? Who was responsible for not preventing this huge influx of wholesale credit coming from abroad which has de-stabalised our banking system and caused the housing and credit bubble?
Surely the man responsible is Gordon Brown. It happened under his watch and he was responsible for setting up the regulatory system, which was clearly not fit for purpose.
Gordon Brown said at the Labour party Conference that this was not the time for a novice to take over but experience shows us all too clearly that he is not, and never has been, up to the job. We can only expect more and ever costly mistakes from him and his miserable and incompetent Govt.
The myth that Labour managed the economy in a sound and prudent way has been well and truly obliterated.
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friendlycard
your two questions:
1) how does the financial crisis feed into the real economy?
the real economy comprises many different people who need to borrow. this comprises both (a) short term borrowing (credit cards, overdraft facilities, working capital facilities for companies) and (b) long term borrowing (mortgages, corporate loans, etc).
there is no doubt that there has been too much borrowing of all kinds in the last few years, and that the total amount of borrowing needs to be reduced going forwards. this will (and should) primarily affect long term borrowing, which basically finances the long term growth and structure of the economy.
unfortunately the current crisis is also hitting short term borrowing in a big way. if the crisis continues unchecked, pretty soon people in the real economy will find they cannot use their credit cards, their overdrafts will be cut back and companies will not be able to raise short term money to finance their day-to-day operations. this will happen irrespective of whether those individuals are sensible borrowers and those companies are profitable businesses.
the current crisis is basically a liquidity (cashflow) crisis. liquidity crises are very dangerous if they are allowed continue for too long. it is a bit like cutting off oxygen to the brain - after a while all the brain cells start dying. in other words, if people suddenly find themselves without access to ready cash, it forces them to sell assets (at a deep discount), lay off employees, postpone important purchases, etc etc. people are forced to make damaging decisions because they are desperate to raise much needed cash. it can push the whole economy into an unnecessary downward spiral.
2) why doesn't the government / boe lend directly to the people that need the money instead of the banks?
the government / boe are not in the business of making decisions about creditworthiness of borrowers, or rationing and pricing credit. doing that requires a lot of manpower. we can have an argument about whether central planning is preferable to financial markets (it is not), but i don't think that is the point of your question, and anyway the boe is simply not capable of this as things stand.
when the boe makes liquidity available to banks, it typically does this via a repo (in effect a collateralised loan) of gilts (government bonds). so if the borrower bank goes bust, the boe can sell the gilts (which usually have a higher value than the loan) to recover the value of the loan. the repo is also very short term, so the boe does not even need to think about the long term creditworthiness of the borrower bank. so the kind of finance that the boe provides (very short term loans collateralised by gilts or similar) is completely inappropriate for the end-borrowers that the banks deal with.
nb the problem with the boe taking lower grade assets as collateral is that it is much harder for the boe to assess their credit quality. it basically means that the boe is taking (marginally) more credit risk. when you multiply this over a very very large number, it becomes a genuine problem. all the same, i think the question for the boe is not whether these assets should be accepted or not, but how much the haircut (overcollateralisation) should be.
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I just don't see the point in the taxpayer supporting all the UK banks. Surely it would be better to just back a couple of the least reckless and let the rest go to the wall, while protecting depositors.
Although unemployment would rise, and some shareholders would lose their pile, we would at least end up with some kind of independent banking system.
More importantly it would give a strong signal to bankers that reckless behaviour will not be supported.
We really are in a big big mess and we are rapidly approaching the point where the pretence that the house of cards can stay upright cannot be sustained,
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from boom to bust, ive been scared to watch the news in case we have lost all our savings, and those who caused this melt down will yet again escape to do it all over again,and this government wring their hands and say we will secure your savings, rubbish, who do they think there kidding.
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Robert,
Am I right with my calculations that there are 350,000,000 people in the US, and $790 billion is $1,700,000 each person? So why not give each US citizen this amount,
Surley that would be better given to each person to spend in the US ecomony, no one would NOT be able to pay thier motgage, or their credit card fees, etc. Wouldn't this be a better way of pouring the $700billion into the US economy? What do you percieve as the disadvantages of this. As I see it the banks would still get the lions share as most people would deposit at least some of it?
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Comment 48 : WerringtonSilent
"Gordon Brown's solution is to give [banks] more juice and inflate a bigger bubble atop this one. That is all he knows."
I believe it's time we really started to look at what Gordon Brown has been trying to achieve over the last 11 years.
Is it any longer possible to believe that this red-eyed socialist firebrand of the 1970s and 1980s suddenly changed his spots when the iron curtain collapsed, and became a genuine admirer of the capitalist philosophy?
Or is a more likely answer that, out of pragmatism, he became a faux supporter - a fifth columnist giving every possible indication of being one of the converted, yet working away behind the scenes to attack the very foundations of the system he professed to support? Is this the reason for the abandonment of any meaningful regulation? Not that the system didn't need it to survive, but because without it survival was impossible.
Don't more of the crass stupidities of the last 11 years look more understandable if seen from the viewpoint of being by design rather than by mistake?
Is the real philosophy of New Labour, and of Gordon Brown in particular, no more than a duplicitous strategy to wreck the free market in the UK, to free the path for the introduction of the sort of State authoritarianism that has all the time been their idea of utopia?
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By way of light relief, and we could do with a little light relief, I have to say that words such as 'wonga' and 'spanking' were neither in my volcabulary or experience until I started reading Robert Pestons blog.
Which just goes to show how easily cross-contamination can occur.
However, I will draw the line at 'top myself', although it is tempting when perusing the latest pension statement from 'Grabby Abbey'.
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yareth31 @ 52
because the alternative is that your company will go bust and they will all be out of work. make them aware of the urgency of the situation, and make sure they understand that you are suffering personally for it as well. your story is going to become much more common over the coming months. they will understand.
sorry i can't offer anything better. it's going to be tough going for everyone.
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I run a small business and whenever I want to borrow money the bankers insist on personal guarantees from all the directors. supoprted by a charge on our homes. Now that the same bankers are coming to us the taxpayer (via Mervyn King) for £200bn surely we should be taking personal guarantees from the fat cats backed by charges on their home(s).
PS It would be interesting to know if they are confident enough in their business model and the security they are offering to stump up.....
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molieres @ 47
depends what kind of a correction you want. don't fall into the mental trap of the classical world of economic equilibrium. there are many possible dynamic outcomes to the current situation, some of them much less desirable than others.
recapitalising the banks allows for a more orderly (ergo rational) correction. imo a more orderly correction is a less expensive one.
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e1 @ 73
incompetence is always my favourite conspiracy theory.
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Just as a small glimmer of light in all this gloom.....
Very pleased to see that Markham Blue, made by Andy and Sandy Rose from Wokingham, has cleaned up at the recent British Cheese Awards.
A portfolio of this one plus maybe some old Worcester White, some Ribblesdale, and some Caerffili, packaged up and used as security for a large loan could maybe prove much more useful than one of those CDO thingummyjigs when eventually called in...
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Thanks Robert for clarifying this issue, which is nothing more than leverage, in fact, borrowing money to 'invest' ie lend in their case, which has brought the banks to their knees. This is intensely deflationary and the money being poured in risks going into a black hole. The system itself needs changing
For the whole idea of Mervyn King loaning the banks money from their balance sheet assets seems flawed to me, at least in this loss making deleveraging environment as they must pay it back using lower and lower types of 'asset'. That road makes no sence and it hasn't worked either
I do not see why instead the treasury can't inject money directly to roll over their existing loans and spread out the pain, allow them to deleverage with the aim of returning to the old system based on deposits. Am I missing something here?
The dodgy loans they made may well fail and some banks may well go under but it's obvious they are not going to earn their way out of this by new lending into a recession! Will not fly
The US plan makes good on the bad assets by directly buying them at the value the accountants wish for, well that seems an expensive way to do it as the full cost to taxpayers must be made up front in one hit. It's too big for that quite evidently from the numbers. It's insanity really
But why not help them make their interest payments with long term loans and force them to hunker down and return to the old ways of doing things?
It would be a painful remedy and reduce credit substantially but at least it would ring fence the national currency somewhat. It's the same with mortgages, why not extend the repayment terms instead of risking mass defaults and a big fat zero on the true worth of all those loans! It's not pretty but if my mortgage term were doubled it would free up money to spend in the real economy and keep me in my home, and long term the banks would make more from it
Propping up the current system risks a true meltdown as 2+2=4, always has and will, the bubble has popped well and truly
Oh, and it's high time that bankers took a substantial pay cut for this mess!! They will still be earning more than me!
Come on Mervyn think outside the box
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Why do you think Robert compares the level of deposits versus interbank lending at end-2007 with the position at end-2000? Here's my theory.
In March 2000 we saw the end of the dot com boom, and the start of a very severe sell off in equities. We were nine months into this by year end, and FTSE was down 10% in 3 weeks in March and April. It was flat for the rest of the year. Investors were highly spooked by this. Consider, for instance, that sales of Equity ISAs fell by 45% in Q1:2001 versus Q1:2000 (Q1 is the main sales season for ISA investments). What did people do with the cash that wasn't invested in shares? They kept it in cash.
In 2007, however, the market did not peak until October. There was a sell off in Q4, but only 5%. Consequently, people would not likely hold cash in preference to equities. That's why bank deposits are down: just a simple asset allocation decision as a result of equity market performance. Maybe RP could dig out the numbers from end-1999 (one year earlier and the height of the tech boom). That would be a better like-for-like comparison of cash holdings at similar stages of the equity market cycle.
In short, RP is again presenting a one-sided case. It is becoming increasingly clear that most of his stories are being fed to him by the banks, eg the one about BoE needing to lend longer than overnight, the one about how good the Lloyds/HBOS deal is for Lloyds shareholders, this one about how the banks are slaves to interbank lending.
As I've said before, the market is now sorting the survivors from the lame. The Treasury should sort out how to put down the lame most humanely. There may well be more of them. I don't have great confidence in Treasury claims that no more UK banks are in danger (actually, RP also carried this one in one of his blogs). They said this about NR, HBOS, and BB, none of which survived more than a few days. A bit like the dreaded vote of confidence in football.
Mervyn King is right not to put BoE's own balance sheet at risk as part of this. He's been clear that he sees taking credit risk on the banks as the Treasury's job, not BoE's. He said it in evidence to the Treasury Select Committee and he's now being consistent. He will provide short term liquidity, but rightly thinks the banks need to work out how to rebuild confidence in each other, and start increasing interbank credit lines, at least to those institutions that look as though they'll survive the current cull.
Oh, and another peice of good news that RP doesn't seem to have noticed (or considered worth reporting as he maintains his crisis focus). UBS announced its first profitable quarter in over a year today. UBS is widely reckoned to have had the highest exposure to MBS of any European bank. They have taken the hit by selling a big proportion of their MBS holdings and still turned a profit this quarter, suggesting much lower writedowns on this stuff than in pervious quarters, ie the market is finding a floor to prices for this stuff. They expect a small profit next quarter as well, and profits in 2009.
I've thought for a long time that the day a bank like UBS made this type of announcement would be the end of the downward spiral. It was derailed today by the falls on Wall Street in fear than the HoR won't pass the bailout. European markets were up strongly before that, and I wouldn't be surprised if they recover tomorrow.
Sorry, but I think the reporting of this crisis now needs to focus more clearly on who is still in danger, instead of claiming the entire financial system is about to crash. We've probably avoided that now, and the US bailout will provide insurance and time to rebuild a smaller number of well capitalised banks.
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akaPinpot
you are a factor of 1000 out.
The figure is $1700 per person in the US.
A billion is a thousand million (in US numbers) and not a million million as your math assumes.
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Varona
I suspect that one of our problems is that no-one in power has taken Money Supply seriously since the late 1980's -at the moment it seems to be shrinking fast on most measures. That is not a good thing!
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Robert,
This is a crisis only if we allow it to become one.
The biggest problem is the tension between the pragmatist who want to keep things going at all costs and the theorists who what to do the correct thing.
The Irish are firmly in the pragmatists camp whereas the UK authorities simple cannot see the express train of a disorderly savings market throughout the whole UK retail banking system that is coming towards them at an accelerating pace. The Chancellor did not act over Northern Rock for several days after the queues formed and he and his boss and their advisers are still turning a blind eye to reality.
Offer the guarantee to all savers and depositors of the UK's retail banks, like the Irish have done today and we will avert the train crash.
This must be done BEFORE this weekend. (Bet you it isn't - but will have to be done next week only after some damage has occurred!)
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57, 64, 69:
Thank you all for some very perceptive and helpful comments.
My questions may have seemed - indeed, intentionally were - naive.
Reason: I understand this stuff quite well - my job requires it - but I was looking for answers that I could give to very non-technical people, in language they could understand.
You all give great, really answers. You should be running this blog. Thanks.
57 Norrie C:
You noted that I asked posters, not Robert. Glad you spotted this. The posters here supply very good insights.
I'm coming to recognise that Robert, unfortunately, has a subtext (see below). I will watch those videos tomorrow. Thanks.
64 ExcellenceFirst:
Retreat from reality describes it exactly. From now on, my answer to people who ask this question (which they so often do) is, in a nutshell: the previous value of your house, the mortgage you secured against it, the borrowing you've added to that, and the lifestyle we've all been living, are unreal. We need to adjust, downsize, de-leverage. I think the non-technical people I'm trying to answer will understand that. Politicians may not; they are either idiots or self-servers. Thanks for your thoughts.
69 Benagyerek:
Great, clear answers to both of my questions. Liquidity is critical in the economy, just like cash flow management in running a business. Government/BoE not being able to manage micro matters is also a very insightful explanation. A long, helpful post, for which many thanks.
P.S. Robert's subtext, I'm sorry to say, is this:
"This is no time for a novice".
(Meaning "things are really bad - let's write some scary headlines - scare them into sticking with Gordon") (Personally, Friendlycard will NOT be voting for GB).
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#53: Ditto.
#26: You assume the House will pass the bailout. Do not be so cavalier--House members are hearing loud and clear that the voters are AGAINST this scheme, overwhelmingly.
The House Republicans are now literally the Thin Red Line that stand between the free citizenry and a surrender to socialism.
Yes, there will be pain. Lots and lots of it, in our house as well as yours.
And, the sun will rise tomorrow anyway.
Without the Constitution, there is no America left.
Without a societal system that rewards wisdom and punishes folly, there is no basis for an economy, and we are left with the law of the jungle.
It will get very ugly in the next few weeks.
In the meantime, on both sides of the pond, I urge us all to remember that we are free societies, built on the rule of law, not the rule of the Most Politically Well Connected.
It is time to return to first principles, and the values that build culture and prosperity instead of destroying it.
This is the opportunity to begin, right here, right now.
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84 John:
BRILLIANT post. I just hope they'll get your message before it's too late.
Incidentally, NR now seems to be doing rather well, cutting rates to turn away investors. Seems to prove your point about providing reassurance!
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Nationalising the banks? An interesting response to the wrong problem.
How about this as a radical idea?
-people don't need a bigger house
-people don't want new cars evey year
-people dont want the extra foreign holiday
-people dont pay extra for designer clothes
-people dont "need" to have the newest TV/ipod/mobbie
-people are not sucked in by slick advertising
-people are happy with what they've got
-Access is not our flexible friend
-people say no to extra credit.....
The banks are not solely to blame. PEOPLE BORROWED THE MONEY! Now ask yourself why the politicians are not focussed on that....
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Re. 70
Wykhamist - spot on !
(I wish 72 akaPinpot calcs were right though).
An aspect of all this that I haven't seen mentioned is the brainless notion that swirling cash and credit around the markets in ever-increasing circles can be considered 'economic growth'.
It is just exactly this City of London activity that Brown has been bragging about for a decade while truly productive enterprises have been sold to overseas buyers.
A country-wrecker !
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Time for a change:
1. Time for a change to those tedious small print conditions on loan agreements - "Youre mortgage provider may be nationalised if you fail to keep up repayments"
2. Time for a change to the remorselessly negative reporting on the finance industry. This has been a fanstastic engine for growth in the global economy - not all loans will default, many businesses could never have started without funding based on the wholesale markets. Entreprise depends on the finance market. It's not all about "Fat Cats"
3. Time for a change in the political landscape. Someone on the right needs to grow a pair and start defending capitalism. I'm tired of the self serving parochialism of just about every politician on the tv at the moment. Where are the elder statesmen?
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REVELATION "I will send a strong delusion to those who would believe a lie "
A politicion or bankerr is often someone who looks at which direction the lemmings are running ,and whilst running in the same direction says authoritateively "follow me things can only get better"...
Until they reach the sign that says "hold onto your declining assets this way" at which point the lemmings turn to eachother and say "Thats democracy for you "
The lemmings that survive the dashing ,will turn to eachother and say "well!now we know that things can only get better BEFORE they get worse"
We have a subprime bubble economy built on staggering levels of imported debt
Or to put it another way a credit bubble funded by our balance of payments deficit
shoveled into our expansive AAA's
Now that the titanic is going down due to excess liquidity , Prudent Gordon will have to lead us onto the stable iceberg ,we can sit it out with the polar bears
On the other hand it might only be the Mary Celeste
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#88: You are right, people who took on debt share the blame. But that list is especially true right now, we are seeing people being very reluctant to take on new debt. I think we are seeing a paradigm shift in the background, with so many people's finances extended to the max by debt that there is no new market big enough into which to lend to reinflate and fuel an economic recovery. The bad economic news is also encouraging people not overextended to cut back and pay down debt. We are going to see a recession whatever happens because people need or want to be rid of old debt from the previous cycle before they can afford the new. Your take-home pay caps the interest you can service, no-one can deny it. These are bad fundamentals for banks as they need to lend in order to make money. Credit demand might be different in business, but with consumer sentiment today, it would be like lending into a brick wall. So bailouts may not on their own make the banking industry profitable in coming years. The demand side problem is immutable, only time will cure it.
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#6, stuntedmonk, wrote "what happened to that Flanders woman?"
That gorgeous Flanders woman is currently on sprog-leave. I'm sure she has all our congratulations!
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#38 Friendlycard - cut out the middle man - Friedman called this "helicopter money", read all about it: http://en.wikipedia.org/wiki/Liquidity_trap
#52 yareth31 - how do i grant a below-inflation payrise - show your workers the books, ideally along with 2 charts, show them how the wage increase will affect profitability, if they can see red numbers, that can be convincing
#73 ExcellenceFirst - GB did it on purpose - I think that's giving him a bit too much credit. Never attribute to malice that which can be explained by incompetence. I'm more of the "he did nothing" school, aside from claiming credit in the good times, and hiding in the bad.
#81- JayPee28bpr - "Why do you think Robert compares the level of deposits versus interbank lending at end-2007 with the position at end-2000?" - I had assumed this was because prior to end-2000, the ratio of deposits to reserves was also imbalanced. Some might suggest this is a cyclical thing and that we can find an instance, approx once every 7 years, when the books are momentarily balanced.
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Robert, you are under-playing the significance of banks losing their retail deposits. The Telegraph highlights Credit Suisse reasearch today and states 40%, or UKP500 billion, falls outside the current guarantee cap. It's not just about moving it from bank to bank, the banks can lose the funds out of the banking system to National Savings, Gilts etc quite easily. I have moved some deposits already and will continue to move unless a full guarantee is given. I am retired and now is not the time to take a risk with my families savings.
Your article goes on to highlight the very reasons we need a full guarantee and therefore encourages people to make their deposits safe.
About time our leaders got off the pot.
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"And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero."
Robert, where have you been?
The 'gap' as you put it, between deposits taken and amount loaned out is a function of Fractional Reserve banking practice.
A practice, it is worth commenting, that recognises the 'obligation to redeem all deposits on demand'. That we now feel we are being given this as a bonus in those rare instances such guarantees are made is a sign of how lost the man-in-the-street has become in relation to his basic finances.
The Central Banks and Treauries and various financial service authorities betwen them should have enough legislative clout and market intelligence between them all to recognise when and where the formula needs to get 'tweaked' to reflect current and expected short term trading conditions.
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Ah, I see Greece are now also guaranteeing all deposits. And then there were two ... How long before a big country follows suit? This will put Robert's assertion about moving funds abroad to the test. It really ain't that hard, particularly not for those with very large amounts...
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Hi Robert,
I simply want to say thank you for your articles. I really enjoyed reading them.
You've de-mystified some aspect of the banking and finance system for me - at least in relation to the credit crunch and financial crisis.
Thank you.
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#73
"Is the real philosophy of New Labour, and of Gordon Brown in particular, no more than a duplicitous strategy to wreck the free market in the UK, to free the path for the introduction of the sort of State authoritarianism that has all the time been their idea of utopia?"
Yes, damned clever of him. Even cleverer that he managed to achieve the same effect in the USA and further afield too.
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I would rather trust Mervyn King than the Chancellor. Mr King has banking expertise, Mr Darling is an MP!
The banks have repeatedly broken the golden rule of banking - "Do not borrow short and lend long!"
They have also lent where they should not have lent. They have paid big bonuses to those who did not deserve them for making supposed profits made from bad, bad, bad lending which has now turned into bad debt.
Maybe it's not the right time to spank the banks, but Mervy King has every right to rub their noses in the brown stuff and tell them to shape up or ship out!
How many of today's top bankers are qualified - how many have passed the bankers' exams? Or are the top echelon in banking just glorified salesmen?
It's no use the bankers snivelling that Mervyn King does not understand them. He knows them all too well! And we, the taxpayers of UK, are paying the price for the banks' lousy practices and broken rules!
(By the way, I am an Associate of the Chartered Institute of Bankers (ACIB). I passed the bankers' exams! I spent nearly 30 years in banking before I was made redundant when the banks decided to get rid of experienced bankers and bring in salesmen)
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Could any of you guys with a financial brain comment on this ?
The UK looks caught between the USA and the Eurozone, and clearly is in difficulty.
Wouldn't Saturday 4th October be a great time to join the Euro ?
Why ...
1) The speculators and money men have their heads inserted up their rear-ends at the moment trying to find a way out....so no chance of them doing a G.Soros on Sterling
2) The purose of the Euro was to keep financial stability at a time like this as a block, rather than individual states.
3) Europe gets to spank GB's botty and get them to join on German/French terms
4) GB gets the safe harbour it needs...and joe public may actually think its a good idea when presented with an alternative.....similar to the question "Would you like to join the Euro or die ?"
Any input would be appreciated.
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I think Mervyn King is probably the only person in charge actually doing the country some good.
As I understand things, foreign investment into banks since 2001 has kept the pound strong and inflation low. But the down side is that investment has been loaned out in an almost reckless manner.
Now the foreign investment has to be paid back - these were short term loans. So our banks need to raise money. Hence the pressure on the Bank of England.
The resistance by B o E is ensuring our currency does not collapse while attempting to keep inflation low. It's also forcing banks to deleverage by using their own assets. It's also ensuring B o E is filtering out the bad debts.
Ultimately all the bad debts will be left in the banks - those that fail should be LEFT to fail and default on those foreign loans. Why ? Because to pay good money after bad is extremly stupid, inflationary and will cost the future UK dearly.
The down side of this will mean that a fire sale will occur on these bad debt assets - probably having an impact on housing values, cars etc. But this is far, far better than the years of misery in prospect if business is not allowed to take it's normal course.
The public cannot be made to guarantee investors loaning vast amounts of money irresponsibly. Those wholesale loans should have had more care with their money.
To think otherwise amounts to financial terrorism.
In relfection, if wholesale loans have been paid back by nationalising Northern Rock - then this will ultimately be a disaster for the UK.
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I would seriously question whether Mervyn King is the right man for the job given today's situation.
I'm sure he is perfectly competent, but if he really doesn't understand what is required of him right now, he needs to pensioned off very quickly indeed.
I believe he will be over cautious to the extent that he will extend the current difficult conditions longer than is necessary.
What we need is someone who is highly competent, who can command the respect of the Treasury and the banks and who has flair, courage and creativity...does such an animal exist?
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Beans @ 90
... "Someone on the right needs to grow a pair and start defending capitalism" ...
Fair enough, so I would imagine that you agree with me that no state aid should be forthcoming for these failing private sector enterprises? Otherwise, you'd be trying to have all ways wouldn't you?
I can quite easily work out the probable eventual losses from bad mortgage loans in the US ... comes to around 150 billion pounds. That's not that terrible, in the grand scheme of things, so why on earth can't the banks take the pain and deal with it without coming begging for government money?
The reason why a drama has been turned into a crisis is that the banks have decided they are now too frightened to lend to each other on reasonable terms. They have switched, in the blink of an eye, from greed and stupidity to cowardice and stupidity (please note the common characteristic there). Truly pathetic.
So they are the ones whe need to "grow a pair" don't you think? In this instance, capitalism and the free market mechanism clearly is not working. The clamour for state aid rather proves that, in my view. They should get no state aid and, if they don't shape up and do their job, they should be nationalised.
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#8 "Who lends the money to the British Banks? Does it come from Asia?" - Until recently, it was all "funny money" - promissory notes with no underlying(backing), artificially inflated prices of products that don't really exist and magic numbers in the fevered imaginations of various moneymen(and women, lets not be sexist here). Meanwhile the Asians and the Middle Easterners were hoarding and stockpiling their cash mountains !!
Now that the funny money is show for what it really is - smoke and mirrors - the banks are demanding that the Bank of England fund their continued extravagance in lending.
Unfortunately, Melvyn King is doing an Old Mother Hubbard - his cupboard is bare (and looted by Gormless Gordon in his years as then Chancellor and now PM). So, in their petulant anger, the bankers (and their political supporters) are swearing at that poor man as though it is his fault that the cupboard is bare !!
If I were him, and being a rather uncouth fellow, I'd tell them to go look for funds where the sun don't shine and implode. Either that or surrender ownership and control of the banks in return for Bank of England salvation !!
This is the very thing that the US Congressmen are demanding for that $700 billion bail-out package !! After all, Warren Buffet did that to Goldman Sachs and you can't get too far wrong following what he does !!
A third alternative is to surrender ownership to the Asians and Middle Easterners who will cheerfully cart them off by the camel-loads !!
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Robert,
Another good post! Keep going, I always enjoy the insight, however worrying they are. Business news has never been so fascinating. Right Reporter, Right Time, Right Place.
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#9 Contraction of economic growth is a fact of life not a special curse !! There is no law that says there must be continuous economic growth. All good things can and will come to an end !! If you can't produce the goodies, then economic growth will contract or even go into rescission !!
The only solution is for everyone to get their finger out and start producing more goodies. Oh, and cut out the unproductive scroungers living off the sweat of the workers/producers !!
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Has any UK Depositor actually lost money?
No.
Not one has.
Most people realise that this isn't going to happen.
If you have more than 35000 pounds to deposit, why not put the excess into other Banks.
If you have a considerable amount of money which you wish to hold on deposit, why not buy a National Savings Bond, they have various deals, and I believe the limit is two million pounds or something.
If you have more money than that - why would you hold it as cash?
Buy farmland, buy a small holding, bring in a tenant farmer to farm it for you.
Good returns from farming.
Or buy a series of Houses in a small town and let a letting agency rent them out for you.
Or, if you must buy Shares, spread your money round the Investment Trusts, they haven't been Pestonized yet.
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#12 - Of course not !! The Ministry of Truth said it was all the Tories' fault and the Ministry of Truth always tell the ...err...truth(????) !!
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I see your mum is posting on your blog Robert,
#98 kwali06
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101 point 1
I am quite sure there are Speculators who would very happily short Sterling into the ground if they thought it would make them a few hundred million Dollars, just like their treatment of the Banks.
The Hedge Funds and other shorters have no concept of the bigger picture.
They have no interest in tomorrow or what their trading environment will be like then.
They see an easy quick buck and forget all else.
They are happy to break the economy, put people out of work etc, etc, just for an extra yacht.
And the regulators, central banks, Gov'ts etc, have completely failed to deal with these people.
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107
Funny how some of Britains greatest achievements occured in the Victorian era.
But very sad that for working people, the Victorian era was an unending nightmare.
Especially, if you were old (not for long), sick, disabled, or indeed just not needed, by the Mill Owners.
All Victorian TV programmes generally seem to have rose tinted glasses.
They rarely bother showing the poor people huddling in the alleys, or the dead bodies usually found in the streets.
I remember the old cardboard city in London under Thatchers Government.
That was pretty close to the Victorian world.
PS: I just walked thro one lunch hour, luckily for me I have never been homeless.
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Mr. Banks:
A British bank is run with precision
A British home requires nothing less
Tradition, discipline and rules
Must be the tools
Without them disorder, chaos, moral disintegration
In short you have a ghastly mess
Mary Poppins:
I quite agree.
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Looks like we are all screwed then - or this Robert overdo-ing it?
Quite a number of his previous apocalyptic forecasts have not come about - but maybe this one will.
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At least Mr Peston's mother taught him how to be polite and civil with those who he disagrees with!
#??? You know who you are....
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When a Company looks for bank finance the bank usually downgrades the value of the Company debtors and stock by 50% or more "To be on the safe side" argue how you might, its take it or leave it. Now
they want the BanK of England to increase the value of their own dodgy loans to allow them to borrow against those dodgy figures
If anyone thinks the banks will return the "Favour" to their hard pressed commercial and retail customers they are in the same fantasy land as JK Rowlings.
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When this all dies down, maybe many years in the future, intelligent observers will note that the only person stopping Britian going over the edge was Mervyn King.
As far as post 52 goes I would concur with the few views expressed thus far. Many workers will already know what the real story is.
You don't say how many you employ but I would suggest if it is a small number get them all around and explain exactly what the situation is. You will be surprised how many probably already realise this anyway.
Explain that your main aim is to keep the business running not just now but for many years to come and keep them and their successors in employment.
Trust me the average worker in a metal bashing firm has a much firmer grip on reality than many men in suits in the City.
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Robert Peston has become the Brian Hanrahan of the financial crisis. The only thing is Peston counted it out but couldn't count it all back.
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Actually, perhaps I have been too hard on Hedge fund bosses.
After all they are clearly ill.
Suffering from OCGD.
Obsessive compulsive Greed disorder.
It's just a pity that the Doctors do not appear to have a cure.
And the rest of us have to suffer along side them.
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#33 - Easily !! We sell London Bridge to the Septics, they were naive enough to buy it once and they'll do it again. Then we sell Tower Bridge to the Asians, they are more discerning. The Hungarians will be interested in taking over the NHS, firing all the "managers" that can't manage a p*ssup in a brewery, and put it is a firm financial and service footing !!
Then we'll get Christies in to auction off all the clubs in the Premier league to the wealthy foreigners !! The art galleries will go next. After all, if someone is willing to pay lots of good hard cash for a pile of poo masquerading as art, they are most welcome to that !!
What other salable assets does UK have ?? Oh, dole scroungers can be sold to the Africans as mobile mine clearance devices. After all they are generally heavier than the average African and if they don't trigger any thing off, then it must be quite safe for the average Africans !!
That should free up some public money to pay off some part of UK's debts !!
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JackMaxDaniels in #102
"As I understand things, foreign investment into banks since 2001 has kept the pound strong and inflation low. But the down side is that investment has been loaned out in an almost reckless manner".
No. This is first and foremost a case of irresponsible borrowing. This irresponsible foreign influx of 625 billion pounds fuelled the housing and credit bubble and is responsible for the mess that we are in. Where was Gordon Brown, the Bank of England and the FSA when all this was happenning? The key guilty man is Gordon Brown who set up the regulatory process that was not fit for purpose - if it had been fit for purpose Northern Rock would have been stopped in its tracks.
And as for low inflation, this was nothing more than an illusion. Inflation was only "low" because the Bank of England and Gordon Brown excluded housing and house price inflation from the inflation index.
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111. At 09:09am on 03 Oct 2008, supercalmdown...
An emotive plea and like most passion fuelled output has little to do with reality.
It is still possible to short Sterling (or the Dollar or pretty much anything else that takes your fancy in the currency market). No change there.
As for catigating those whose profession/calling/vocation is to make money out of The Markets, have you supercalmdown NEVER profited from the services of such people? Have you never received interest on your money for doing absolutely nothing yourself in terms of producing a product or service? I suspect you have.
These are the very same people.
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I don't agree Robert, the biggest flaw in the UK banking system has been the FSA who is supposed to police the Financial Services industry. For years the FSA, and previously the PIA, has consumed itself and justified its existence with over-kill regulation of the minows in the financial pond whilst turning a cowardly blind eye to the sharks that are the banks and the stock exchange.
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I wonder how many Dr Beechings have been appointed to the Public Sector over the last few years.
Low pay rises, job cuts, service closures.
Now there would be something more worthy of Pestonization.
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#50 - Don't blame Mervyn King. It was Gormless Gordon who did it !! Him and his "there will never be a boom ad bust cycle again" !!
Mervyn King is doing his best to defend what's left of the UK economy against the predation of Gormless Gordon and his financial and political vandals. The barbarians are already inside the gates !!
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Dear Robert
The fste share index is still on its way down, and has been for the last two years, if you draw aline through the graph it indicates a continuose decline "WHY"/ whats going on.
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Spank 'em, Merv!
He'll have to take the dodgier assets as collateral, but that doesn't mean he has to offer the same terms...
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It is still a great shame that the Gov't failed the Pensioners, workers and shareholders of Britain (and elsewhere), with their handling of Bradford and Bingleys difficulties.
Of course, the Spanish are probably very pleased to get its assets (well depositors) for next to nothing.
A great shame indeed.
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Even when the House of Representatives passes the legislation as it surely will, questions will still remain as what happens next. Wall Street will probably rise dutifully as a rash of short-covering squeezes out the short-term bears. But it is merely a sticking plaster to cover a gaping wound that actually requires stitches.
It will take months for the banks to start lending to each other with confidence; longer still for them to lend to companies and individuals except those of the very highest creditworthiness. The central banks may cut rates, but at the risk of underwriting and locking-in inflation. Commercial banks will not pass on the benefits of that lower rate to borrowers, and will fight like rats in a sack to obtain retail deposits from the public. Eventually, the markets will come to realise that government borrowing is on a massive and unprecedented scale and steepen the yield accordingly, making mortgages more not less expensive.
There is always a price to pay.
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# 117
I tend to agree re: metal bashing firms ... except that in an advanced economy, they would not be metal-bashing but rather constructing state-of-the-art artifacts using nano-technology.
When the 'wash-up' occurs, I do hope that people will understand that the English economy was allowed to become unbalanced with an associated lack of diversity.
The emphasis on 'financial services' in particular should be seen in retrospect as quite unhealthy and destabilising.
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#122
They may well be the same people but does that excuse their irresponsible behaviour, as I understand it, Hannibal Lecter was a very nice man - except when feeling hungry!...
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A fair trade is no robbery.
Sad to say that cannot be said of Short traders.
And no, I have never benefited from Hedge Fund or short traders.
I have been a long term investor, regarding my investments as part of my Pension.
Hedge Fund shortselling has robbed my pension pot !
Along with costing jobs, damaging manufacturing and the rest of the economy.
Just so a handful of rich men, can be a bit richer.
As I said a fair exchange is no robbery, nothing fair about shortselling the exchange!
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#125
Stop bringing Gordon Brown into this, if you want to criticise politicians, why not blame those who allowed this - those two politicians who made the changes that deregulated the markets and started to strip away all the safe-guards that had been built into the markets for over a 150 years - Thatcher and Reagan.
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On the link between the financial crisis and the "real economy" (# 33 Friendlycard) I note the lack of any reference to time lag in previous posters' responses. For me, this is a very serious issue. As some other posters have observed, whilst we watch all the nonsense and hysteria in the banking and money markets, "normal life" goes on (apparently).
Of course, what's happening now is rather like those World War I events where one side would dig a tunnel under the other side and plant explosives under the enemy's lines.
The process takes time. The soon-to-be victims don't know it's happening and see no visible evidence of impending doom. And then, quite suddenly at dawn one day and without warning, BOOM! (or should I say BUST!) ... life (if you still have one at that point) is never the same again.
So, if the politicians and banks don't pump cash into the economy - however badly securitised - than we go bust. If they do pump cash in ... we go bust eventually.
The moral of the story: our "prosperity" is a monumental, debt-fuelled illusion and sooner or later we're going to have get used to living within our means. Getting there will hurt.
Finally, my view is to let the banks go bust: the sooner we take this medicine and move on, the better.
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Ahhhh!......I see the light now!...... this crises has been engineered specifically for UK entry into the Euro currency.
Yet again, another perfect example of the
Problem-reaction-solution paradigm.
1) The government creates or exploits a problem blaming it on others (the FSA are looking like the fall guys at the moment).
2) The people react by asking the government for help willing to give up their rights (or unwittingly their taxes in this case).
3) The government offers the solution that was planned long before the crisis (entry to the Euro).
My prediction is that this will all be signed and sealed over the weekend in Paris and delivered to the UK populice next week. And it will probably be packaged up as a condition of a huge Euro central bank bail-out of the banks that the UK will be party to.
Let's just wait and see....
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#80 - "But why not help them make their interest payments with long term loans and force them to hunker down and return to the old ways of doing things?"
It's because American are very hypocritical. They controlled the IMF and when countries like the Asian Tigers were going through the Asian Currency crisis, the IMF forced them to do just that. But now, it is they who are suffering from the same problem and they will do anything but swallow the same medicine that they forced others to swallow !! Is is any wonder that the Asian Tigers are squatting on their piles of cash and smirking at the Yanks? Only Singapore, who wisely sidestepped the Asian Currency crisis, is willing to help out the distressed banks (well, Citigroup for a start).
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#81 - Excellent reasoning !! And UBS did what it did by firing its profligate CEO and appointing a boring bean-counter/legal eagle in his place. He then rapidly flogged off those parts that gambled in the casinos/financial markets and got things back to what they did best !! Hence the profit announcement now !!
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Dear Robert
After the Prime ministers meeting in Paris he will declare that Britain is joining the EURO>!
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Can anybody give a rational explanation as to why Brown stoked up the economy via the housing market with US money over the last 5 years and at the same time went to war in Iraq and Afghanistan to help the US. Is it just he went gaga, surely something else. Was the economic boom meant to pay for the war(s) without raising income tax, or to deflect attention, or what.
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Merv is the king - because he's the only person involved in this mess who doesn't have a political angle.
Everyone - Paulson, Brown, Darling, Bush - else is happy to bail out the banks with taxpayer money because they know perfectly well, when the dust settles we will realise it WAS THEIR FAULT ALL ALONG.
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It's not rocket science, both US and UK governments looked the other way in boom times, when they should have been encouraging 'less use of the pedal'. The failure to do that is the impending Tony Adams (hitting a brick wall).
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#135
You could be right, seeing that it's being reported that Mandelson has been re-appointed to the Cabinet - and will (have to) get a peerage...
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What's wrong with nationalisation of the banks, When your child burns your house down from playing with matches - do you give him/ her some more to prove they have learnt their lesson (and remember - this isn't the first time either).
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#90 - "Where are the elder statesmen ?" -
She's still here but, unfortunately, she's too old and infirmed to care anymore !!
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BBC - dreadful website - cannot post messages properly anymore.
Sort out your IT
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Bring it on......lets get this party started
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Ideally the banks themselves should be able to solve the problem. While you say there is over reliance on wholesale debt, till now there have been enough wholesale lenders in the market as well. If the gap is GBP 625 Bio, obviously there are some institutions with this kind of surplus to lend out as well.
If its only a matter of confidence (or lack of), maybe BoE should act as an intemediary. Be a counter party for each and every overnight money market transaction on both sides. All the banks with excess liquidity should lend to BoE at close to zero rate (because of assured safety) and BoE should lend the money to banks which are short at hefty market rates by auction.
So it would not mean tax payer's money being used. Also, with such a mechanism, reliance on money markets would go down (sowly). Over time, as surplus banks see that the mechanism is working they would not be afraid of lending to other banks and start lending to get better yields.. and thats how the credit markets would be kick started.
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#101 - "Europe gets to spank GB's botty and get them to join on German/French terms"
Please !! Isn't there enough doom and gloom around without you bring up horrible images of sado-masochistic gratification ??
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#103 - "What we need is someone who is highly competent, who can command the respect of the Treasury and the banks and who has flair, courage and creativity...does such an animal exist?"
In short, what you are asking for is a political toady !! A Hank Poulson equivalent !!
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The downward figures for the service sector have just been released. Bad news. Looks like the Nantucket sleighride is really getting going. Are we seeing the Captain Ahab side of Browns policies coming through. When is the BoE going to get off the fence and drop interest rates or are they going to be used to support the pound again, because the pound has got to come under pressure as the decline sets in, weak economies have weak currencies. And for those who keep posting that the *ankers problems don't affect the 'real' economy just wait and see it gracefully fold, the only question is how much and how local.
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#135, 138, 142
See #101 from 8am.....That is exactly why I posted my questions, because it is the only thing that makes any sense to me right now.
But I would like to hear the thoughts of a financial person. Would this make any financial sense ? ie Not is it plausible, but is it possible.
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I think Mervyn King is absolutely right. Why should the Bank of England (effectively the taxpayer) take on the risk of holding dodgy assets from the banks without getting something in return. As others have suggested, the BoE should adopt a similar hard nosed approach to that of Warren Buffett in relation to Goldman Sachs. The banks must be made to pay for their gross negligence. Any solution which fails to penalise the banks is both unfair to the taxpayer and likely to encourage similar reckless behaviour in the future.
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36 YummyCarokirkwood;
Enjoy most of your posts, usually you're pretty much spot on but sad to see you advocating a choice of either nationalisation or collapse for these rogue banks. It can only be collapse and I think you know it. Don't go soft on them, any other 'solution' is just a way to scam the taxpayer. Like in the US at the moment, they're going to reward failure and pay for it with the taxpayers money. A sticking plaster over a gaping wound. Have you noticed its no longer a 'bailout' now a 'rescue'. The good old US playing the hero to all those unfortunate and dare I say misunderstood bankers. We can't get into 'bailout mode' here, we cant afford it but more than that we shouldn't do it: full stop. Think about it what's going to happen when a major manufacturer goes cap in hand to the government for a bailout? What will they say, sorry mate? They'll have a job saying that given the current abandonment of common sense. The bigger they are the harder they fall. What worries me is the idea that somehow, capitalism is so weak that there'll be no chance of new companies emerging from the mess. As for mark to market asset valuation: no one complained about this when these toxic assets were given fantasy valuations at the hight of the 'boom'. Can we trust banks to tell us what their assets are worth without some reference to the market? I doubt it. Anyway that's my moan for the day. before I go 45 WillPegg: get a life.
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#144
If you were referring to Thatcher, would that not be like putting an alcoholic in charge of a pub (and then wondering why the profits collapse), the last thing the country need now is more deregulation!
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Re 132. What is the problem with short sellers? and why keep harassing those guys and pretending they´re doing something evil.
Take a look at some recent history. A couple of short selling outfits; Kynikos and High-fields Capital were the first guys on the case with regard to Enron.
It was their work, and diligence that began to expose this company for the criminal conspiracy that it was.
If not for them the fiction that this was a real business would likely have persisted for a while longer. It would still have collapsed in the end because it was fradualent and manifestly unsustainable.
All that would have happened is that more people would have lost more money. How´s that good for you and your pension or anybody else?
They are not doing anything wrong now - they just got on to a problem with the banks. The banks created the problem, not the short sellers. The management and shareholders seemed happy to keep their heads in the sand.
Short sellers haven´t caused this problem - they´ve just highlighted it. Yeah, they´re making money - but they don´t claim to be a charity. They´re also saving people from losing a lot more money later on.
You should be thanking these guys - not vilifying them.
But they´re an easy target, not many of them, so not many votes, and the politicians are happy to jump all over them. All this does is lead to further market distortions, prolong the pain, and make it more likely that the average Joe in the street will lose even more money.
Maybe there would be no role for short sellers if the shareholders did their job properly - but that´s not about to happen any time soon.
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Isn't it a bit sensationalist to blandly state that there's a 625 bn pound funding gap ? Have a nice cup of tea and a biccy Mr Peston, you'll feel much better.
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101:
Good point. For a long time I was opposed to Euro membership, but have seen the error of my ways. Your arguments in favour of joining are compelling.
But would they let us join? And if so, on what terms? One of the issues that is getting lost in the financial market blitz is the question of competitive weakness or, to put it another way, pre-existing problems.
Greatly to the benefit of the government, it is now possible to blame everything on global markets, thereby conveniently ignoring some long-standing structural weaknesses in the UK economy.
Lax lending policies, excessive reliance on consumer debt, ageing infrastructure, a trade balance that depends on financial services, declining manufacturing industry, excessive government borrowing - these are just some of the things that might give our partners some reservations. Our economy looks more like that of the US than that of the Eurozone.
Second, the UK public remain very Eurosceptic, which is regrettable, but undoubtedly still true. This might make joining the Euro a politically-difficult exercise. The government could hardly turn to the public and say "we'd better join the Euro because things are so bad here", could it?
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Re 139. Your questions go the heart of the matter, and there are no soundbite answers.
Brown wanted to raise taxes to increase spending. He had a problem with raising direct taxes, because real incomes are not that high and have been in constant decline since around the mid 70´s. He wasn´t about to address that issue.
Rising house prices did very nicely, all that extra tax on stamp duty, IHT, Council Tax etc etc.
House prices can´t rise for ever, but he was hoping that the next fillip would be from Iraq. Everyone thought that this would be straightforward - a major expected consequence was expected to be direct control over access to oil and lower prices, prices below the long term real average of around $17bbl (1876-2002). This was to be supplemented with lots of work for western reconstruction businesses and management consultants, with the British and Americans acting a gatekeeper (keep out the French and Germans) and the costs to be paid for by the Iraqi´s themselves. Further economic stimulus was to be provided by production and sales of military hardware.
All of this should have ensured that the housing market had a soft landing - but that people were kept in debt, and hence kept quiet.
It hasn´t worked out this way.
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# To be fair to Gormless Gordon, it was Blair who got Britain into those wars. He thought he could do a Falklands !! And much innocent blood has been shed to prove him wrong !!
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The point no one seem to have made so far is the so called 'growth model' which forms the basis of 'capitalist' market economy. There comes a saturation point when there is noone to lend to any more and these investment bankers work towards targets, they are doing a job, so won't turn around and say, 'look, the market is saturated, we can't lend more money.' They will just keep trying to come up with new financial structures and keep lending to hit their targets. The people we are knocking are just normal people doing their job, working 12 hours a day, and most have come from the best universities in the world. Banks are vehicles if they are in trouble so are we. Pointing the finger at them and blaming each other wont help thats for sure.
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I suspect some of the banks are trying to pull a fast one and are trying to profit from the current turmoil. Seriously, car loans as collateral? What next?
Rather than sulky children with parents, they are more like heroin addicts with their eyes on their Gran's post office savings account.
The banks who need help should be obliged to open up their books to full scrutiny. Only then should the decision be made as to who is worthy of being bailed out.
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#157
I agree with all of what you say except the last paragraph
...... the UK public remain very Eurosceptic, which is regrettable, but undoubtedly still true. This might make joining the Euro a politically-difficult exercise. The government could hardly turn to the public and say "we'd better join the Euro because things are so bad here", could it?.....
That would all depend upon how bad things were. Right now, then I agree that they could not. However the circumstances in which they could appear to be a lot more likely than they were this time last year.
My personal feeling is that the GBP outside of the Eurozone in an economic storm could be suicidal for the country.
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Re: #153 doctor-gloom
Enjoy most of your posts, usually you're pretty much spot on but sad to see you advocating a choice of either nationalisation or collapse for these rogue banks. It can only be collapse and I think you know it.
Sorry, I was either unclear in my post or you have misunderstood what I wrote ("The US should be adopting a similar approach (nationalising banks as they fail), rather than a rather expensive $700bn bailout experiment.")
I am vehemently AGAINST bailing out any financial institution that is not viable. However, I am sufficiently pragmatic to realise that if all banks were simply allowed to collapse, the domino effect would likely bring the entire world economy to an abrupt stop, and I don't think that would benefit anybody. Instead, as each bank collapses/is about to collapse, it should be nationalised (as has been happening), and if that means all banks are eventually nationalised then so be it. At some point, the banking industry will be able to "reboot" - start again afresh from a cleanish position.
Unfortunately, the politics of fear are very much in play now in the US (just like with the Iraq war), and the electorate, who originally were vehemently opposed to the $700bn bailout, are being scared into supporting it. They are being told that they will be the ones to suffer, whereas in reality it is the richest members of society who face losing their vast wealth. This is why I previously wrote that refusing to bail out the banks could be the most effective method of wealth distribution the world has ever seen...
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#160
Some might see that as poetic 'pay-back', after all all the jobs that were destroyed in the British manufacturing sectors so that the 'Brave new world' - according to some untried philosophy called monetarism - could be build.. I have would have no problem in allowing all the banks and trading rooms go bust for it not the fact that in doing so would cause even more harm to 'Main-Street' (another Americanism that is bound to become a OSD entry candidate). The one thing that is sure, whilst the 'Financial service' sector is here to stay, as it always has been in some form, this country really must get back to the basics of creating real money from real industry - because any 'service industry' is only as strong as those who are being serviced, and as such is always going to be the sector first hit (as has happened at least three times since 1980).
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itreallyis42
Apolgies....hadn't read your post #101 before I posted mine. We therefore came to the same conclusion independantly.
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163 YummyCaolKirkwood;
Fair enough, it's probable that the global economy will slow drastically, but grind to a full stop, I don't think so. As for a slow 'as and when required' nationalisation of the banks, again, it's not the solution. This type of argument simply plays into the hands of the 'rescue to survive' brigade. It can be used to push for a bail-out of any sector that any country considers 'too big to fail'. If we really think nationalisation is the answer when times are bad and that many of our banks are 'too big to fail' for systemic reasons then they ought to be a part of the state when times are good, full stop. Who was it that called it 'creative destruction' ? New companies emerge when failed companies die. Shumpeter, were he alive, may well be rubbing his hands in glee at the thought of all those entrepreneurial opportunities.
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Back then to the relative safety of socialism!
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We said post #160. All I see on blogs like this are armchair experts wanting to throw our taxpayers money at a failed financial system in order to restore the fat pay packets, bonuses and investments of those who voluntarily bought into it. Well tough. I would let the banking system fall over. And if those in power are stupid enough to lend hundreds of billions to banking wide-boys, then the financial sector becomes nationalised and said wide boys should become civil servants and get civil servant salaries. Lower grade civil servant salaries becasue the whole lot of them are incompetent. And Mr 160, how right you are this country is now paying the price for lauding and relying upon people in striped shirts selling no more than money and promises to each other. They produce nothing, and are of no value. Fire all City workers and get them cleaning up graffitti. Work? They don't know aht a proper job is.
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Re: #166 doctor-gloom wrote
As for a slow 'as and when required' nationalisation of the banks, again, it's not the solution. This type of argument simply plays into the hands of the 'rescue to survive' brigade. It can be used to push for a bail-out of any sector that any country considers 'too big to fail'.
I disagree: all modern economies are predicated on a stable financial system. As such, the banking sector IS a special case, hence the need to nationalise banks as they fail. Once stability has eventually returned and the economy re-established itself, the Governments can sell them off again. I believe this is what Sweden did back in the '90s?
If we really think nationalisation is the answer when times are bad and that many of our banks are 'too big to fail' for systemic reasons then they ought to be a part of the state when times are good, full stop.
Again, I disagree. The financial sector is a special case and, given its bedrock-status in the modern word, requires strict regulation and supervision. Clearly the recent UK and US Governments decided they knew better than their predecessors ("those who fail to learn the lessons of history...") with the result that they failed in their prime directive of providing security to the citizens of their countries. With proper regulation and supervision, we would not have got into this situation - without the need for the financial industry operating as a completely nationalised entity. David Cameron's proposal for an Office of Financial Responsibility (or whatever it's called) is not a bad first step in trying to prevent this being repeated in the future. And did you see the guy on This Week last night? He was talking a lot of sense (mostly).
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162:
I agree entirely, very good point.
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171: YummyCarolKirkwood
I understand where you're coming from. Yes, nationalise and then re-privatise by all means, but, and it's a big but, are you confident that we'll bring in tough regulations to prevent this type of financial gambling occurring again? I'm not. Not because I'm a born pessimist but because I'm a realist. 'Light touch regulation' has been, and still largely is, the underlying theme of much of what is written about market efficiency. It's intimately liked, as I'm sure you're aware, with the anti statist assumptions underpinning the rise of neo liberalism in both the US and the UK. This is something that can't easily be prized away from the dominant notion of what a 'free market' ought to be. I don't believe, when this is over, there'll be enough political will, either side of the pond, to do what will be required to restructure the way banks do their business, especially given the fact that there will be many of those implicated in the 'crisis' still within earshot of our economic policy-makers. But there you have it. We'll have to agree to disagree.
Sorry, didn't see the guy you mention, must have been something though.
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BankRSlicker (#135): "Ahhhh!......I see the light now!...... this crises has been engineered specifically for UK entry into the Euro currency ... My prediction is that this will all be signed and sealed over the weekend in Paris and delivered to the UK populace next week. And it will probably be packaged up as a condition of a huge Euro central bank bail-out of the banks that the UK will be party to."
So Gordon Brown and New Labour have patiently engineered the whole of the worldwide credit crisis to enable them to go back on their solemn commitment that the UK will have a referendum before joining the Euro? And they are going to commit publicly to this foul deed in the next two days, however obvious and disastrous the electoral consequences will be for them?
Well, I beg to differ. I think that in some quarters this blog increases paranoia to strange proportions. And such paranoia always blinds to genuine dangers and the real, practical steps needed to avoid them.
Here's what the BBC was reporting elsewhere this morning about Gordon Brown's attitude to tomorrow's meeting in Paris, including the mooted Europe-wide 'bailout fund':
'A European financial summit to discuss the current global crisis is set to take place in Paris on Saturday ... British Prime Minister Gordon Brown is also sceptical of the need for any Europe-wide plan. According to the BBC's Europe correspondent, Mark Mardell: "Downing Street prefers the case-by-case, nation-by-nation solutions that have been happening so far." However, a French civil servant is reported to have proposed a 300bn euro bail-out fund, and the Netherlands has proposed the creation of a European reserve fund to come to the aid of ailing banks before they fail. Despite the differing views, Gordon Brown's spokesman said he did not expect discussion of an EU-wide bank fund at the meeting. "The purpose of the meeting will be to discuss how each of the four major economies in Europe are responding to the global financial crisis," he said.'
That sounds very much to me like Gordon the old five-economic-tests Euro-sceptic talking. You may dislike him for it - as Friendlycard now presumably does - or you may applaud him, as I would. But some things don't change as fast as our fevered imaginations would have it, even during global worry about credit markets. Thank goodness.
Which brings us nicely to benagyerek's cute aphorism in #78: "incompetence is always my favourite conspiracy theory."
What's interesting is that I deeply agree and disagree at the same time.
The context was another Brown conspiracy theory, this time from ExcellenceFirst (#74). This time Gordon and his acolytes had brought the UK almost to ruin in order "to free the path for the introduction of the sort of State authoritarianism that has all the time been their idea of utopia."
In that particular context, I agreed with ben. Whatever his faults, this is not what our prime minister has been up to for the last eleven or indeed forty-odd years.
But the pedant in me is troubled by a number of things.
First, incompetence isn't a conspiracy theory. That's a category error if ever I saw one. Even an explanation for complex events depending entirely on human incompetence isn't ever going to be called a conspiracy theory. (Simplistic, yes, but a conspiracy theory, no.)
Even getting beyond such boring literalism, I sense an unhelpful false alternative lurking.
An important example would be JohnConstable's passionate PS about our 'senior politicians' in #63: "A poster on this thread mentioned that some 98% of businesses in this country are SME's. I have noticed during this crisis that senior American politicians have stated that 'families and small businesses' are their concern. But not a single peep from 'our' senior politicians about the plight of SME's. In my opinion, SME's are shat on by HMG day-in and day-out."
Hmm, I've noticed that too, especially the two times I've listened to the much-mocked Sarah Palin. You may not be into moose-hunting or a whole lot else this glamorous Alaskan mother advocates but one can't help noticing her passion for small business and enterprise. Who does that remind me of? A woman, one with a great deal more political savvy, in the end, but who never lost that concern for the SME. And, blow me down if she wasn't English and, by anyone's standards, a 'top politician'.
No, the name escapes me.
JohnConstable is surely right and it's a grave indictment of New Labour. But it ain't conspiracy and it ain't merely incompetence. It's partly cultural, to do both with the politics of envy and of hypocritical, easier pickings - from the busy lobbyists and senior executives of much bigger companies, often those semi-monopolistic ones not properly made to suffer the rigours of true competition during the very incomplete 'Thatcher revolution' (including banks), with whom New Labour has always been far too cosy. No concern for the SME is expressed because there is no concern - perhaps no understanding - about the effect of the credit crunch and the likely ensuing government interference and red-tape on them. Yet 98% is I assume the right figure for the number of companies we will be damaging. Shame on all concerned.
Finally, ben's 'always' just has to be wrong. Was every elaborate deception practiced by Hitler, for example before the invasion of Czechoslovakia, mere 'incompetence'? No, though the success of the deception depended on the incompetence of others, like Neville Chamberlain. And their lack of courage. Such is always true of real conspiracies, which need to be recognized and named as such.
But, in the context, the right answer. It isn't Adolf Brown or Heinrich Cameron we have to deal with, as yet. Put away the tin foil hats.
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All this money, tax payer money, being pumped into the system will do nothing, look at what happened yesterday after the 700 billion nonsense, the market took a huge dive.
We the tax payers are being robbed blind and our leaders are letting it happen.
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Re: #171 doctor-gloom
I understand where you're coming from. Yes, nationalise and then re-privatise by all means, but, and it's a big but, are you confident that we'll bring in tough regulations to prevent this type of financial gambling occurring again?
To quote Mark Twain, "history doesn't repeat itself, but it does rhyme." What we are seeing is a very strong rhyme of the fallout following the 1929 Crash in the US. In fact, we were beginning to see an even stronger rhyme following the bursting of the dotcom bubble at the beginning of this millennium, but the actions of the world Central Banks (very much led by the Fed in response to the September 11 attacks) sought to prevent that, and now we have, IMHO, an even WORSE scenario - the result of interference in the economic cycle to prevent the natural and much needed contraction following the preceding bubble-boom. Ho hum. As such, yes, I don't think this will happen again in our lifetimes - regardless of regulation, the conditions just won't support it. People, countries and economies are going to be severely scarred by the coming "correction" for a long, LONG time - so much so, in fact, that it may even sow the seeds for the next World War.
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At 12:58pm on 07 Oct 2008, YummyCarolKirkwood wrote
People, countries and economies are going to be severely scarred by the coming "correction" for a long, LONG time - so much so, in fact, that it may even sow the seeds for the next World War.
I wish i was as eloquent as that cos that exactly what i think and stated but written in a sh8t way!
[b]/In order to prevent revolution in a time of strive and crisis you have to get the peoples armies to replace the guillotine with guns and tanks - that way you get conformity together with the solid foundation in which to re-build economies on the back of arms[b/]
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