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Spend, spend, spend?

Robert Peston | 08:24 UK time, Thursday, 16 October 2008

It's like an avalanche.

A snowball of tumbling share prices began in Europe yesterday afternoon, picked up momentum on Wall Street - where the important S&P 500 index suffered its biggest loss in 21 years - and has been battering Asia overnight.

And that in spite of the £2 trillion pounds of taxpayers' precious money committed by governments to bank rescue plans all over the world.

What's more - and probably more worrying for the authorities - is that interest rates charged by banks for lending to each other for three months remain at disturbingly high levels (see my note from earlier this morning for detail on this).

It means that last week's dramatic and co-ordinated cut in interest rates by central banks is having an only limited impact on the cost of credit for businesses and individuals.

What we're witnessing is the limits of what these banking bail-outs can achieve in the face of what increasingly looks like the onset of a global economic recession.

Governments have been able to prevent individual banks from falling over. There's another example of that this morning with the announcement that Switzerland's national bank is lending a staggering £30bn to a special new company set up to extract poisonous assets from the huge bank, UBS.

But they've been powerless to prevent the banks contracting the amount of credit they're providing, which has reduced the ability of companies and individuals to invest and spend, and risks turning an economic slowdown into something rather worse.

That's why the British government is being forced to think about something new: a substantial and sustained increase in public spending to offset the contraction of spending by the private sector (there may be little point in cutting taxes, since nervous consumers and businesses would probably hoard any extra cash that went into their pockets).

A rise in public spending would increase the burden of public-sector debt, which is already - on one measure - above the government's self-imposed limit.

And paying off the increased debt would limit the growth of the economy as and when the economy turns.

There's also a risk of downward pressure on sterling and upward pressure on the cost of borrowing for the government, if the UK's balance sheet were perceived to be weak by international standards.

But ministers increasingly believe that may be a price worth paying, if an old-fashioned Keynesian stimulus to the economy meant that the UK suffered a shallow recession rather than a deep and dark one.

Comments

Page 1 of 4

  • Comment number 1.

    "They don't know what they're doing"

    Darling to Gordon Bust......."Have you another cunning plan Baldrick?"

  • Comment number 2.

    Wasn't it James Callaghan who said

    "We used to think that you could spend your way out of a recessio nand increase employment by cutting taxes and boosting government spending..."?

    How did that quote end?

  • Comment number 3.

    Back to business as usual for Brown then
    Borrow and Spend!

    IT DOESNT WORK.

    This government need to go now.
    The best solution would have been to let the bad institutions go to the wall and take the toxicity with them, leaving the strong and sensible ones to lend to others that they also knew were strong and sensible.

    The LIBOR remains high because the toxicity is still in the system and until the house of cards starts to fall no one knows exactly where it is.

    I hope the world realises just how premature they were now lauding the buffoon who is PM in this country for saving the world.
    He hasnt, he was never likely to. As always with his pronouncements the devil is in the detail. He and Darling "hope this and hope that" when they needed the ability to order the banks to do what they needed to do.

    If Brown now borrows and spends on top of the borrowing and spending that he has already done the UK will be heading for the dark ages for 20 years

  • Comment number 4.

    Dear Robert

    Banks are into self destruct, they are hoarding money.even tax payers money paid to them to operate.

  • Comment number 5.

    Might I suggest an appropriate public spending project should be to sort out the utility services under our streets? Get things structured so all services are ducted, with a single pavement service hatch for each building. The idea started with Hitler's motorways project, but given the lamentable state of the water supply and sewerage, there's an obvious target where the investment will benefit generations hopefiully to come.

  • Comment number 6.

    Gordon Brown is not Winston Churchill and is not going to save the world from financial crisis.

    The markets have now given a clear indication.

    We must stop this foolishness now.

    To do so we need a new government with fresh ideas.

  • Comment number 7.

    Robert

    The global bail outs are, as you say huge, but no where enough to eradicate the real culprit. The best government could do, was to stabilise the banking sector in preparation for a recession. I'm afraid the two are now happening together.

    I am also concerned about the big rush to reduce interest rates and the reasons. I have looked at which prices are going up and those coming down. There is definitely a downward trend, which if I project accross the board results in a rate of change -18%. On today's figures that means deflation in about 12 months time. If rates are cut too much too soon that will happen.

  • Comment number 8.

    Spending too much now is a waste. If intervention starts too soon and isn't a global effort then the UK will be throwing cash away to no effect. There's a myth that a Roosevelt ended the Depression - he didn't. The Second World War and the massive spending combined with the massive consumption of commodities (ships/tanks being built then being sunk/blown-up) lifted the US out of Depression.

    When money is being sucked into a vortex why throw more in? Trying to sustain the economy at 2007 levels or 2006 or 2005 or... is a waste of time and money. It would be wiser, I think, to let the economy deflate and then intervene with a chance of success. Aside from the waste, if the government plans didn't work, the loss of confidence would be immense AND the upturn will be even further away.

  • Comment number 9.

    Instead of increased government spending, an alternative is set the VAT rate to zero until the end of 2009. This would affect all areas of consumer confidence in the economy. All governments have a poor track record when they attempt to target areas of need.

  • Comment number 10.

    the problem is that some things haven't happened yet:
    - failure of hedge funds
    - more insurance co failures
    - massive credit card losses
    - failure of auto companies
    - massive corporate debt defaults

    rates will need to be cut (almost) to zero everywhere. govt deficits will need to hit 10%.

    asia will go into recession too (not just a slowdown). china will have its own banking meltdown.

    only when these things have happened will we have seen the bottom..

  • Comment number 11.

    Perhaps I'm being silly (after all I'm no expert on economics) but I just wonder if instead of cutting interest rates they should be be increased.
    This crisis is not caused by a lack of people wanting to borrow but by a lack of lenders.
    Reduced rates would increase the number of borrowers but reuduce the reward to lenders and make them less likely to take the risk of lending. An increased rate would reduce the number of borrowers but would perhaps make it worth lenders while to start lending to those borrowers still looking for a loan. It might slow the economy down but it would only need to be a short term step to prime the pump and get the system flowing again.
    I'm sure there must be flaw in this idea so please challenge it.

    You're all doing very well !!

  • Comment number 12.

    Say it ain't so. You're telling me that having doubled national debt and spent our way into this recession the plan is to spend our way out of recession?

    Robert Mugabe will be pleased to know his fiscal policies are now mainstream.

    Can I design the billion billion pound note?

  • Comment number 13.

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

  • Comment number 14.

    As I predicted the bail-out hasn't worked. The banks are still not lending to each other despite the govt conditions.

    1. The 4 UK big banks must surely have enough to lend given the guarantees, so they should not need to borrow from other banks.

    2. Why isn't the govt FORCING banks who've signed up to rescue to lend to small businesses in a controlled fashion.

    3. Is it that the banks are hording money to repay their exposure to the NEXT tranch of CDS?

    4. Bearing in mind the enormous cost of the bank bail-out and little to no benefit to the taxpayer (its little good having a banking system that won't lend). why on earth isn't the Govt lending direct to businesses via Northern Rock or B andB?

    5. Broon and Darling the music hall comedy duo should do the decent thing and resign. Very costly bank bail-out, to boost PM's stature 'in a crisis' - Hallmarks of P. Meddlesome here briefing to friends in BBC.

    6. Why Robert isn't your headline BROWN PLAN FAILS or is that not what your source (very close to Brown & Nu-Lab) told you to say)?

  • Comment number 15.

    Well, it was always highly unlikely that the bank bail out would be sufficient to stop the house of cards from falling further.

    The banks and investment houses are still hoarding money, or could it be said that for a change they are being more prudent with their money like in the old days, where they were not so leveraged. That is also causing pain down the line for hedge funds who are finding that they are under capitalised and need to quickly make good the deficits on their accounts with their brokerages. Where are they to get the money? Simple, sell assets! Hence the flood of stocks onto the market to realise cash for the hedge funds is pushing all the stock markets much, much lower. Also, remember that there are some $500 billion of CDS that have been cashed in a result of Lehman, the cash to pay those needs to come from somewhere as well.

    All that is leading the stock markets down, and the truth is, that is going to lead to more CDS to be paid up, and more selling until the whole house of cards comes tumbling down.

    I think the US said recently it has no plans to close the markets because of the turmoil, I wonder how long it will be before markets are closed on both sides of the atlantic as the bottom drops out of them and they go into total freefall?

  • Comment number 16.

    More and more I feel that I am living in a Banana replublic with a self-imposed dictator who is determined to do anything to cling onto power.
    Spending your way of a recession doh, has this not been tried countless of times already and does not work.
    Move over Gordon as you are reason why we are in this mess.

  • Comment number 17.

    Robert,

    can you remark on the rumour I heard that the UK Govt is shortly going to announce that banks cut interest rates on outstanding amounts to date credit cards to 4% over base - across the board?

    GC

  • Comment number 18.

    It would make sense to use the partial nationalisation of the UK banking system to support a municipal building programme on a scale not seen since after the second world war. The shortage of housing will not get any better during the recession and if we don't start building now there is little hope that housing will ever be affordable for those on average incomes in the UK. Such an investment in housing and associated infrastructure would be of long-term benefit to us all, whilst creating employment in the short to medium term. To be able to do this the Treasury will have to relax it's stranglehold on surplus public sector land, whereby it demands that it is sold for development at the highest price possible, instead of being used to the benefit of ordinary taxpayers who can't find a home they can afford.

  • Comment number 19.

    the way to unblock it is for the govt to start taking on the rolling commercial loans the banks won't. once the banks start to think they will be losing business then that might focus their minds more.

    it means the state stepping in to provide 3 month money but if we leave it to the banks and their psychological collapse they will drag the rest of the economy down with them.

    there are billions that have to be refinanced soon including those running pfi contracts [schools, hospitals, roads, etc]. The banks should not be allowed to wreck the rest of the economy.

  • Comment number 20.

    To halt the share price tumbling is not such a so difficult thing to do. The key or the bottom of the problem is to restore confidence especially in the banking industry. In the past few weeks or specially past few days, the government successfully turned the total macro economic collapse and failure and laid the blame squarely and solely at the door of the banking institution. I felt the British public and opinion is so easy to be fooled and misled. Suddenly all the economic ailments accumulated for the past 15 years become solely the responsibility of the banking industry, it sems to me suddenly everyone even the opposition forget that it's the government macro economic and monetary policy is the cause of the current problem. Suddenly the most unpopular government become a super hero leading the charge to save not only the UK economy but the whole world from faltering, the truth is just plainly opposite, the government policy of driving bank share price down and try to nationalise as many financial institutions as possible is key to unlock the confidence. For the banks like RBS, HBOS, LLoyds and even Barclays, my advice is never ever expecting this governemnt will come to your rescue, the true purpose of this so-called government bailout plan is to run down bank share prices as cheap as possible and then nationalise as much as possible, within several months after robbing share holders their income and retirement fund, the governement will sell the shares at highest bid to make huge profit, use these profits to buy another general election victory from the UK public by spending huge amount of confiscated shareholders money to invest in some useless public spending projects to artificially reduce unemployment rates. So my suggestion to the public is not buying the propaganda, clearly say 'yes' to curtail excessive risk taking behaviour of the bankers, regulate the industry and limit boardroom bonus and executive pay, but say 'no' to privatisation of banking industry, robbing of shareholders and their income and retirement pension.

  • Comment number 21.

    We can hardly blame G Brown et al for what is a global crisis. If even the Swiss are now in the poo, we can hardly blame specifically UK policies. The idea that different policies in the UK would have insulated us from such a worldwide crash sounds like wishful thinking.
    What we are now seeing is that markets are run by humans who are all too often quite irrational in all aspects of their lives. Putting one's faith in markets always carried this risk.
    As we are now in uncharted waters I suspect the rule book ( and Lucky Jim's nostrum about spending and recessions) goes out the window.
    Having supported the banks, as a taxpayer I now expect them to do what is best for the greater good ( ie the economy). If they will not do that, there was little point in saving them in their present form and we now need to consider their full nationalisation.
    A bank that will not lend and participate in normal commerce ( ie making stuff and providing services ) is not a bank and has no purpose. This is a crisis and the economic wellbeing of citizens should not be decided by boards of directors whose first loyalty is to shareholders.

  • Comment number 22.

    Money being spent = money which does not exist (except as debt) being injected into debt which does exist = no effect whatsoever.

    Who expected anything different?

  • Comment number 23.

    Does this mean that Gordon Brown is not superman after all??? Well who'd have thought?

    So.... Can we have our half trillion pounds back then please?

    Better still, can the Government distribute that money amongst mortgage payers and credit card holders so that we can pay off OUR debts and get the real economy going again???

    It is too late for Gordon to pretend that he is on the side of the people. When the economy was about to go titsup, we will remember who he went to rescue, and it wasn't the people, who would have been very grateful at the election for some real fiscal help. No he went5 running to bail out the corrup, greedy and ungrateful bankers.

    Let the banks fail and we can replace them with institutions that actually work for us. Instead of institutions that enslave us in a prison of debt.

  • Comment number 24.

    Oh to be a DANIEL!,

    Once,Twice,Three times a Welcher?

  • Comment number 25.

    #16, no sadly not, you're not in a banana republic because if you were you could still trade bananas..

    As Monty Python said, 'no dear, this is the dream, you're in reality..'

    GC

  • Comment number 26.

    Last night's News Night Revealled that Barclays has exposed 2.4 trillion insurance liability, the world over the total liabilities are a mind boggling 58 trillion. So anyone can predict when this huge cannon ball will explore and what the consequences are...

  • Comment number 27.

    Goldmine Sachs

    Daily Mail: Wednesday December 13th 2006

    By Lucy Ballinger

    Bank staff to get £320,000 Christmas bonuses - City payouts total £8.6bn in biggest pay bonanza ever seen in London.

    STAFF at investment bank Goldman Sachs are expected to receive Christmas bonuses averaging £320,000 each. The news came as it emerged that City workers will be paid bonuses totalling almost £9billion this year.

    Soaring stock markets and company takeovers have helped fuel expectations of record payments, with the biggest players likely to receive tens of millions. Goldman Sachs, the world's largest investment bank, said its employees would be awarded a total of £8.4billion in bonuses this year -40 per cent up on 2005. It comes after annual profits for the bank, nicknamed Golden Sacks, soared 70 per cent to a record £4.9billion.

    The bank has set-aside a record amount for its employees across the world, averaging £320,000 per mem-ber of staff. It will be paid in bonuses and other benefits to the 26,467 employees, including around 5,000 based in London. However, the rest of the workforce is not so lucky. While the average salary for a man working full-time in the City is nearly £90,000, everybody else is on £25,000. The average salary, excluding bonuses, is just 3.3 per cent higher than last year - below inflation, despite above-inflation rises in household bills. The average gas bill has jumped 91 per cent since 2003 to £630.

    New York-based Goldman Sachs has kick-started the seasonal pay-ments because it is the first to announce how much has been set aside for bonuses this year. Some employees will receive bonuses which will dwarf their nor-mal pay when they are paid out in the first two weeks of January. The biggest players, such as senior executives, star traders and deal-makers, can expect to receive £10million or more each, while many more junior staff will be on £1million or more. Goldman Sachs finance director David Viniar said: 'This was a remarkable year for Goldman Sachs by any standard.' Last year, 3,000 senior City workers took home at least £1million each in record bonuses.

    Experts predict 4,200 high-fliers across the City will benefit from bonuses of more than £1million as part of the biggest pay bonanza ever seen in London. Bonuses in other firms are forecast to be between ten and 30 percent higher than last year. Total bonuses in London will be around £8.6billion, according to the Centre for Eco-nomics and Business Research. Morgan Stanley, Lehman Brothers and Bear Stearns all report their own results in the next few days, and most other investment banks follow in January.

    More than half of bonus money from the City is believed to be spent on new homes or second homes. City workers' spending power has helped property prices in London rise to an average of £260,000. With more than 300,000 people working in the City, an increase in bonuses will fuel fears that prices in the South East will continue to surge next year. While some will put their money into investments or property, others will go on a spending spree, buy-ing luxury cars, yachts, race horses, jewellery and designer clothes. City bonus payouts have been heavily criticised in the past. At the Labour Party conference, Harriet Harman described them as 'excessive and ridiculous'.

    The Constitutional Affairs Minister said the increasing gap between rich and poor creates a 'sick society'. Brendan Barber, general secretary of the Trades Union Con-gress, said: 'No one. should begrudge generous rewards for hard work and risk-taking. But the obscene size of these City bonuses has lost touch with reality.'


    WHat a difference 24 months or so makes.......!!!

  • Comment number 28.

    Why does it matter if people don't borrow? Encourage folk to save awhile.

    So the economy doesn't grow - grow - grow for a year or two.

    Ok, no harm done there. A pause doesn't hurt.

  • Comment number 29.

    The bail out plan for the banks may not have succeeded in getting LIBOR rates down, but it has prevented big banks from defaulting on existing lending - which would have led to collapse.

    The money certainly hasn't been wasted, it has prevented something even nastier happening.

    However, the *consumer* spending bubble has certainly burst, which is going to have a circular knock-on effect in property prices, jobs and deflation.

    What we should be planning for is that the recovery won't be led from Europe or the US, it will be led from the East, and we are now going to see the balance of economic power move away from the old world. How do we plan for that?

  • Comment number 30.

    How can anyone yet say whether or not the "bail-out" has or hasn't worked yet?? Have people forgotten that it takes weeks if not months for economic and political changes to be reflected in the economy??

    We all talk about the bail out not working but are we even certain that it has actually been carried out yet? Have the banks actually been given the money?? I have a feeling from reading blogs (including this one) and news articles that it is still yet to be transferred to the banks.

    I doubt anything will really change until they physically get their money. So come on Gordon and Alastair - if you are going to give them the wads of cash, do it sooner rather than later and let's set the wheels in motion for a bit of stability at least if not recovery.

  • Comment number 31.

    RP Wrote:
    "...(there may be little point in cutting taxes, since nervous consumers and businesses would probably hoard any extra cash that went into their pockets)...."

    The same could be said and was said of the billions given to the banks. So, why the difference between the banks and small businesses/consumers?

    The difference is that the banks run the politicians and the country. First they ran us into deep debt. Now they're going to run us deep into the ground.

  • Comment number 32.

    What a pity that "borrowing", " taxation" and "economic incompetence" were not
    events at the Beijing Olympics.
    The labour party would have three gold
    medals to parade through London.

  • Comment number 33.

    Bailing the banks out and leaving them more or less as they were was /is nothing more than stupid.

    The crisis has caused a downturn and recession/depression is coming fast.

    Now we will see millions of people and business going under and forced sales to rouques who will be buying houses and offices at auction for less than they were built for causing mass poverty and a new super cash rich class.

    The companies and mortgage holders should have been bailed out, not the banks. They should have been allowed to fail so that the financial sector could be re organised and re started.

    All Brown has done is save bloated and badly run banks so that they can destroy millions of people trying to buy homes and trying to run businesses.

    As usual HM Gov et all listen and side with the finance sector and not the real economy.

  • Comment number 34.

    the banks have to hoard money as the G7 dictates - they need to get their ratios sorted before they can do anything ie they had sweet fa in the coffers all along

    it's all a bit self defeating really

  • Comment number 35.

    Robert,

    Why this assumption that, even if the banks were open to lending money, consumer's and small businesses worldwide would bow down in gratitude and borrow yet more to purchase non-essentials?

    True that this has been the pattern for the last decade or so. But not true that we are all so mindless as to continue spending when it is plain for most to see that the time has come for a period of austerity (the "A" word).

    The occurence of feast and famine thru natural or man-made events is embedded in our folklore. I suspect a period of financial famine will, in the long run, do much more good than harm.

    The colloective will of the people is far greater than the financial markets, or governments. Whatever will be, will I suspect now be, despite the boys from Downing street.

  • Comment number 36.

    #33, all true I figure.

    This is a time when MPs should be out and about canvassing opinions and taking campaigns to Westminster. That is what MPs are for. I'm not one but I did campaign to be one in the last election and I warned Brown would be a disaster for Britain.

    But I haven't heard a 'dickey bird' from the two MPs that are supposed to represent me. Whatever you're are doing it's less important guys..

    I think that is the biggest travesty of this crisis - in the UK anyhow, the complete failure of democracy to fight its corner.

    GC

  • Comment number 37.

    Robert,
    It seems not G Brown is leading the way, but the Swiss government, dividing banks into 'safe' and 'toxic' ones, a move that helped in the Japanese banking crisis.

  • Comment number 38.

    Robert, please do us a favour and state the bleeding obvious - "what increasingly looks like the onset of a global economic recession"... onset?? Forget onset, we're already in it!

  • Comment number 39.

    Perhaps we should all adopt the Ambridge trading scheme, and leave the banks out of it altogether.

  • Comment number 40.

    I really think that people seem to be getting behind the fledgeling banks at the moment, even in this period where the market is tumbling day by day.

    The drive to see these big banks above the cost at which the government will buy at, is impressing me. People really want the financial system to still have some control outside of the governments control.

    More confidence like this is needed to keep our system going.

  • Comment number 41.


    Robert, you say:

    '[Governments have] been powerless to prevent the banks contracting the amount of credit they're providing, which has reduced the ability of companies and individuals to invest and spend, and risks turning an economic slowdown into something rather worse.'

    Well, I apologise for repeating wholesale what I posted in one of your blogs a few days ago but it explains precisely why the current crisis is a function of the way the entire money system works. It is a few lines from the final page of 'The Ecology of Money' by Richard Douthwaite:

    '[In 1994] two economists, FX Browne and JPC Fell, who then worked for the Central Bank of Ireland but later moved to the European Central Bank...suggested that central banks were losing their power to control the money supply. Professor Kevin Dowd of Nottingham University Business School agrees. He points out that banks are already providing a smaller proportion of all loans as a result of 'securitization' - the sale of a bank's loans to non-bank investors who are not subject to reserve requirements. This, and the development of electronic cash, means that more and more money can be placed in circulation on a smaller and smaller reserve base. Dowd writes, "As base money becomes less significant, it will gradually lose its effectiveness as a channel through which the central bank can influence broader money supply."

    In other words, our current money system is coming to the end of its useful life. Its radical reform has become necessary as well as desirable. Only a widespread debate on the issues, by a well-informed public, will ensure that when changes are made they are on the right lines.'

    This was written in 1999. And the time for that debate is now - especially if we taxpayers now own (much of) the banks!

  • Comment number 42.

    The situation illustrates the giant flaw in the Brown plan. The major problem we face is one of confidence. Mr Brown could have achieved the same result at no cost by announcing the existence of a safety net to underpin bank activities. Instead he chooses the worse option by undermining the confidence of bankers and shareholders alike who now fear that any mistake or other unforeseen event will result in full nationalisation. They are thus paralised !

    I dont think this is incompetence, I suspect Mr Brown knows this approach is a mistake, but is pandering to the financial illiterate in a desparate attempt to stay on office.

  • Comment number 43.

    As the UK Government now is the majority - or controlling shareholder in many UK banks, can it not define their banks 3-month lending rate.

    Would this not provide some stimulus to the inter-bank lending and bring down the LIBOR rate?

  • Comment number 44.

    Could it be possible the banks arent lending because they lied about their need for cash and have used it not to secure their balance sheets, but to cover operational costs?

    Was any due diligence done on these companies?

    Does the government really know where their money went?

  • Comment number 45.

    It's time for Gordon and Alistair to show the lead again..

    We need bold, decisive action...we need to be ahead of the curve...pro-active rather than re-active, and not be too influenced by over emotional stock markets.

    Substantial cuts in interest rates and a significant increase in public spending - on capital projects that can be actioned quickly - is what's needed.

    Put your 'creative' hats on lads, and lets get this show moving!

  • Comment number 46.

    Banks must be made to write off ALL BAD DEBTS. Simple really.

    Brown demanded none of this financial bloodletting before giving banks cash. Look at how Sweden successfully handled their bank crisis in the early '90s.

    Politicians continue to focus on the symptoms. Look at how they were transfixed by the threat of high inflation only a few months back, when even little old me could see growth slowing (and an end to rising inflation due to easing demand).

    Now they are stuffing banks full of cash even though the banks aren't coming clean. And cutting central bank rates to help generate liquidity when, as far as I can see, there is no fixed link between them and LIBOR.

    Politicians are on a gravy train. You or I couldn't do a worse job.

    And look at Peston hailing Brown as a world savior only a couple of days back. With all your "knowledge" of the situation, I am surprised at you Peston. If I didn't know that an Englishman was incorruptible, I would have said that someone had paid you off...

  • Comment number 47.

    OK Mr.Darling, you say that LLOY can seek a better deal elsewhere.

    Something better than 800-900 pts above the project BoE baserate for 2009. How about LLOY offer 8% preference shares to all the institutional investors who have been busily bailing on LLOY and reinstate the dividend rights for ordinary shareholder?

    Even the great Sage of Omaha couldn't muster 12% out of GE as a preference shareholder.

  • Comment number 48.

    Global recession or global histeria. I think my guinea pigs would be ideal stock brokers. stupid, scared by anything including their own shadow and over rewarded for doing very little.

    is it just me or is anyone else sick of seeing them glued to antique telephone handsets and shouting at each other. Go wireless and walk to the person you want to speak to - simple

  • Comment number 49.

    Shucks No. 18 you beat me to it.

    No better use of the Keynsian response to the gathering recession/depression.

    Even with reduced house prices there are hundreds of thousands who will simply never be able to buy a house and who it would be grossly irresponsible to tempt them into future mortgages which is where we and the US began with this crisis.

    Private sector builders are almost floored and would have the capacity to build to council specifications in substantial volumes thus both stimulating the economy and meeting a real social need.

    The Government have consistently underestimated the magnitude of the financial crisis and now they are not recognising the depth of the wind down of the real economy (a revealing phrase).

    They need to take control of the macroeconomic levers like credit, interest rates, vat rates, income tax, public works etc and manage the economy out of recession or (realistically) ameliorate its effects and duration.

  • Comment number 50.

    to #28: My mid sized company is owed about £1.5m in overdue invoices from Big manufacturing companies. they are having trouble paying because people are not buying their end product, and their banks are refusing to lend them short term loans to get over this hump.

    If they go bust and don't pay me the £1.5m in the next month, I cannot pay my staff. And guess what- my bank will only lend me more money at 12% interest. My company will go bust as well and I will have to lay off about 120 people.

  • Comment number 51.

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

  • Comment number 52.

    With all this tax payers' money at risk I can't understand why the heads of banks have not been dragged into the public arena and asked why LIBOR is still so high. Are they judging the amount of toxic loans on their competitors' books by the amount of toxic loans they have on their own books? Why were we not told how many of these toxic assets we were buying before Brown put up our money?

  • Comment number 53.

    I don't think that banks are afraid of lending as such, judging from my own experience lately.

    I'm a private individual with a spotless credit record and a lot of equity in my house. Three lenders I have dealings with have approached me in the past fortnight with offers of unsecured loans/balance transfers at quite tolerable rates - between 5.6 pct and 6.9pct.

    This would suggest to me that banks are eager to start lending again - but only to the very best risks. Which in its turn would suggest that they don't regard their fellow banks as being as good a risk as yours truly.

    Which is a strange and disturbing thought.

    And no, I'm not borrowing just now. Perhaps that's what made me a good risk in the first place.

    Catch-22, anyone???

  • Comment number 54.

    "(there may be little point in cutting taxes, since nervous consumers and businesses would probably hoard any extra cash that went into their pockets)."

    There is always a point in cutting taxes - to stop taking so much money off people in the first place.

    Think about it Bob. Where would people hoard their cash? Think long. Think hard. They'd either keep it under their mattress (and see it inflated away) or stick it in a financial institution, be it a bank that hasn't got into difficulty (as not all of them have), a building society that also hasn't got into difficulty (as most of them haven't) or National Savings and Investments/Northern Rock. Hey Pesto! The good banks get plenty of capital and the bad banks wither away.

    That is aside from those who would use the extra cash the Government hasn't taken from them to get themselves out of debt sooner.

  • Comment number 55.

    Nu Labour has finanally dropped the Nu and stopped pretending to be anything other than tax and spend Labour.

    Just like the 70's we will have a government spending our money to manufacture pointless jobs and wasting billions more on loss making public funded ventures. We will have parasitic union bosses demanding inflation busting pay rises while millions more have no job. We will witness the vile spectical of a nation on its knees at war with itself, while public sector workers suck up an ever growing share of the resources to pay for their copper bottomed pension guarantees.

    We will watch the next chapter of this disaster unfold - the unwinding of our currency. I can see a time if things reach their natural conclusion that we will beg to be let into the Euro.

    Soon all those people under 40 will understand why labour were in the wilderness for 20 years. They brought us to the brink of economic oblivion last time they were in power, why should things be any different now. You cannot advance the prospects of a nation by removing effective regulation and encouraging destructive asset bubbles.

    We need leaders to lead us, posessing long term vision not weak immoral populist politicians, that hate making tough but necessary decisions because they may cost votes now.

    Go now Brown the nation despises you. We need another Thatcher to clear up this mess.

  • Comment number 56.

    So, the banks carry on being greedy, protecting their own interests and personal nest eggs and waving two fingers at their customers and national governments, while putting up enough of a veneer of cooperation to keep the authorities off their backs to some degree.

    They've been doing that for years and governments throwing bucketfuls of cash at them won't change the habits of a professional life time. You don't change the cultures of organisations or professions overnight.

    We need a whole new type of banker and a whole new type of bank, 'cos the current beasties are out of control and, basically need to be killed off / allowed to die off.

    Brown and Darling - and the other national governments - just did not tie the bail-out to radical enough changes.

    So what next? Perhaps legislation to out and out nationalise them? Then we can 'make' them lend money to each other and to ordinary people. Maybe that is what the banks are bracing themselves for and, therefore, why they're not lending to others. If they hoard their assets, then perhaps they can get out at the last minute with personal / corporate wads of dosh.

    There are some govenments in the world who will take sweeteners to leave the dear banking people alone and not hassle them about anything. My guess is that our 'globalised' bankers are planning to get themselves and their assets into such 'safe' places, in a hurry - if the heat in the kitchen gets too hot

    The behaviour model we should expect from them is paralel to what the Nazi's did with their assets once they realised they were not going to win WWII. This country and its people are effectively at war with the banks and the financial industries - and are currently losing.

    Sorry folks, but it strikes me that it's them or us - it can't be both. There just isn't enough real economy to go around and to support the financial world's ways anymore. The 'live life on credit' balloon - the very building block of our 'modern' financial industries - is deflating fast.

    Ordinary people need more community, cooperative and locally based financial solutions. Entities more akin to credit unions or the orginal building societies, rather than current unaccountable, poorly regulated, globalised monsters that play on the world markets with ordinary peoples' money.

  • Comment number 57.

    Yes spend but only on worthwhile projects that can be an investment for the future

  • Comment number 58.

    If it comes to big public spending projects, we could do with a couple of modern high speed rail links. Oh and could we try and return the 21st centuary and dump the diesel engines?

  • Comment number 59.

    Well, thought for today should be, just how long can Barclays sustain the $2.4 Trillion on Credit Default Swaps it has on its books. At some time or another, some of these will need to be paid out, lets assume a modest 25%, would be some $600 Billion! Even with the current cash injection, does it have the cash assets to actually pay that out without going insolvent?

    This is why I can't understand why their shares are seemingly going up, when the blackhole of future payments is HUGE, or is it simply a short term effect of traders taking profits from the recent Govt/Private cash injection?

  • Comment number 60.

    You mention an "old-fashioned Keynsian stimulus" and there is an obvious candidate - the EU renewables (energy) programme. As we
    analysed here yesterday
    , the EU targets can only be met with investment that is uneconomic, by commercial standards, at current levels of cost and present lending constraints.

    If, as Barroso and Brown insisted yesterday, these projects will go ahead even in an economic downturn, it will only be possible with state intervention.

    As it happens, I believe the renewables programme is infeasible: but then we will need an urgent programme of new coal-fired power stations if we are to keep the lights on.

  • Comment number 61.

    This comment has been referred for further consideration. Explain.

  • Comment number 62.

    Here is an idea for Mr Brown.. Why not stop bailing out the banks instead pay off everbodys mortgage (probably cheaper option) which in return stops bad debt and allows everyone to start spending again !

  • Comment number 63.

    Oh good heavens, more discredited 1930's-style Keynsian thinking.

    As a number of people have said, now that the banks have got their funds and are solvent to lend again, increase interest rates, not decrease them for heaven's sake. Will someone please start listening to the so-called 'Austrian-School' economists before it's too late!

  • Comment number 64.

    More money for executives and administrators in hospitals (with index linked pensions)?

  • Comment number 65.

    I found this presentation on 'Greed, Fear and the Brain' useful information to help understand what is going on.... http://snipurl.com/4esjl [[Unsuitable/Broken URL removed by Moderator]]
    Maybe it will help us act in a way to unlock the credit so credit goes to where credit is due!

  • Comment number 66.

    #46, not just Bad Debts, all debts. We're really gonna have to start our economy from scratch.

    #50 crikey, you're not alone. And we both know you can't borrow your way out of debt unless you have funds that are pretty well cast-iron on their way. And then some...

    There is a way to stop the socio-economic trainwreck heading your way and I have repeatedly tried to campaign on this to my MPs, via my firm's website and also via a No10 petition, freeze on loan, mortgage and credit card interest, moratorium on foreclosures, repossessions, bankrupcy orders, court orders and seizures and all the ghastly repertoire of the Dickensian British insolvency system.

    I watched so many friends go bust in the 90's. I Knew of numerous suicides, marital breakdown, nervous breakdowns. The Govt just smugly said (were they not always smug under Major?) ''new firms are replacing the old (ergo -failed) ones and things will be fine''. You can't replace old established firms with new ones, the expertise, technology, skill, systems, archives are irretrieveably lost once a well-constituted firm goes down. In every case I knew, which was many, the fundamental cause of the collapse was the reasons you have stated. In EVERY case.

    The PM could do this at the stroke of a pen and frankly, it he wants the people behind him, he better do it mighty quick.

    There are so few ways to speak out, and the time to do it is going fast before the financial system goes to work 'in the same old way' on all of us. I implore readers to get on the No10 website and sign up to my petition. Withe deadly silence from local MPs it's as close to the top you're ever going to get.

    Robert Peston could open a blog on this, it would be spectacularly successful, but he won't..

    GC

  • Comment number 67.

    #16, #25 Google Iceland+Bananas. Ironic or what?

  • Comment number 68.

    Robert is right. Cutting taxes will just allow people to reduce their debts.
    Sadly, cutting interest rates to the general public will reduced the income for the many who so far have been responsible and saved, while encouraging those without money to borrow more and make matters worse for them and their creditors. Therefore, I suggest general rates should be slightly above the inflation rate.
    One answer is for businesses that need more cash is to be encouraged them to increase their equity through a sympathetic and government-encouraged market, possibly even a special government-backed fund.

  • Comment number 69.

    It seems crazy that having thrown money around like water for years, and thrown a lot more at the bank crisis, the government is even considering spending our way out of recession/depression.
    I dread the tax levels for the next generation, to pay for all this it means heaven knows what on basic income tax.
    However, if it is going to be spend, spend, spend, then let's do it on our dreadful infastructure, railways and roads, so when we come out of recession/depression we haven't got business hamstrung with poor transport links.

  • Comment number 70.

    I have the answer to the finanical problems.

    It's clear that the problem is a senior management issue, they have failed to control their staff.

    The solution is simple - put Fabio Capello in charge of the FSA and the BoE.

    He seems to have got the best out of people without having to incentivise them with huge win bonuses and although he's on a good wage, he certainly hasn't been awarding himself huge bonuses.

    I'm slipping into insanity as I hear more and more rubbish from the financial industry - they must even believe it themselves.

    How about 'We need bonuses or all the talent will go elsewhere'

    - Well if this recession is where 'talent' gets us then I think I'll take my chances with monkeys writing shakespere.

    WELL DONE DARLING - I saw you on newsnight last night and it was refreshing not to hear the crack of yet another politcian bending in the wind.

    (paraphrasing - so apologies for accuracy)

    "The banks saw the deal on Tuesday and they accepted it - there won't be a renegotiation on the terms".

    We have an interesting situation here - did the banks agree to the deal, but like all good banks, now think they can re-negotiate after the fact....

    .....or did they simply not understand the deal?
    The heads of our banks, not understanding a relatively simple financial package?

    No wonder they were completely stumped by CDO's - they must be bottom of the class dullards.

    .....but that's the 'talent' we have been so good in drawing to the city.

    The man on the street must be realising that actually he (or she) is the most intelligent on this planet - politcians and bankers ranking just above single celled ameoba.

    Finally the CDS situation - well isn;t that what happens when people with no insurance experience start providing insurance?

    Any big insurer takes the premiums from all it's customers and keeps a fund in case we have a major disaster (like the Hull / Gloucester flooding recently) - it is unlikely, but that's how insurers make sure they have cover for the worst case scenario.
    The probability of disaster is factored into the premiums.

    Bankers however took the CDS premiums and bought champagne and cars. So when Lehmans went POP - no one had any cash left to pay out with.

    ....and there's no need to regulate that?

    I think that question answers itself.

  • Comment number 71.

    As the original problem was caused by a ridiculous lend, lend, lend philosophy over the last 20 years or so, I'm not surprised that the Banks are reluctant to start that again.

    In fact, I'm rather pleased that they're not lending, its a sign they're being responsible again.

    I've said it before and I'll say it again. Interest rates should have stayed at 5% or gone up a bit, to change the financial culture and get some of the bad habits out of our system and the way that we all think.

    We've got to find new ways of pulling ourselves out of the recession. The old school economics of cut interest rates and fuel a consumer-led recovery isn't the right strategy.

    We probably need to start manufacturing things again. That's what has drawn the third-world countries out of their recessions.

    But this problem needs as much radical thinking as we saw a couple of weeks ago prior to the Bank bailout...

    What would I do ?
    Well, I'm sat around unemployed at the moment. The Government needs to find a way of getting me off this blog site and starting up a small business. That means doing something about all the things that discourage me from starting a business.

    For example, there is an enormous overhead when starting-up. Rents, Rates, Insurance, Transport, Stock, fitting-out, marketing, staff. If we're in a recession, its too great a risk. All it makes sense to do, is run some sort of cottage industry from home, particulary if you are single - or if you can afford it, ride out the hard-times until an occupational pension becomes payable. Reduce the risks of starting-up and I'll certainly give it a go.

    Business rates need to be re thought and accomodation rental costs particularly need to be subsidised. That's the other down-side of the property boom. Rental costs have gone through the stratosphere as landlords have to recoup their investment...

    And what about setting up a scheme where the Government can help single people get together to work together at putting some sort of business together, working out what sort of business is needed and where to locate it, backing the venture, providing the advice and support that is necessary and taking some of the risk out of starting up with a complete stranger ? Its easier to set up a small business if you are married, with a reliable partner, quite difficult if (like the majority of the population) you are single ....

    Public spending probably isn't the answer. We saw a huge increase in public spending post 1997 when Labour were first elected. Where's it all gone ? Consultants, expensive outsourcing, administrators, bureaucracy and more and more regulation that discourages the Householder from moving home (HIPS) or improving what they've got (Electrical Regulations)...

    Its not just the banking system at fault. Everything is out of balance in the economy, because the Government has been pursuing its pet projects (Fox-hunting, Global warming, Taxing cars off the road, over regulating Homeowners, bombing Iraq etc, etc) rather than doing some joined-up thinking about the whole system. That's really why they're unelectable next time around. But I suppose they've got a year or so to start putting the whole system right. I hope they have learned their lesson, and get on with it now...

  • Comment number 72.

    RObert -- i would like you to spend more time as a journalist investigating the Credit Default Swap (CDS) timebomb that were currently sitting under.

    Especially since the UK has a much higher exposure to it than the US.

  • Comment number 73.

    Sounds like a plan! As I proposed in a previous blog -

    Would it be possible for the government to embark on a huge social housing development?

    This would generate jobs and stimulate the economy while also keeping housing prices relatively stable by reducing the demand for stock. This in turn would go some way to ensuring we dont have another housing bubble in a few years.

    Oh, and of course it would provide houses for socially disadvantaged people too!

    If building them is too expensive, then encourage the huge Registered Social Landlords (RSLs) like "Home" or "Places For People" to build faster through tax incentives or loans at preferential rates. They’ve already bought huge tranches of former Local Authority stock when they were all selling it off, so the latter might make more sense, actually – You don’t want the councils competing with the RSLs over price. That’s just counterproductive.

    Margaret Thatchers dream of everyone owning their own home is doing for this country. We need to be a nation of renters for a while!

    Less estate agents, more RSLs (or at least more exposure to the existing ones).

    Its just an idea…

  • Comment number 74.

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

  • Comment number 75.

    I didn't think that the government investments have actually been made yet, and surely creation of preference shares would require shareholder agreement, so for the moment whilst there are guarantees ther banks haven't yet got this cash. Those banks now remaining actually didn't lend irresponsibly (it was the sub lenders that did and businesses they took over) so its hardly surprising that lending has fallen. Just wonder how the supported banks are supposed to increase lending when what the feel is prudent isn't enough to pay to enable someone to buy a house. Proces have a long way to fall.

    And the increased liquidity requirements means this extra cash actually just porives this, and not extra funds to lend.

    Like the banks not appreciating dividend restrictions none of this is being thought through.

  • Comment number 76.

    @ #18 and #49 -

    Good grief, I can scarcely believe there are people out there who still believe the housing shortage myth. Don't you get it, even after all this??

    It was just CHEAP MONEY that chased property prices up. It was a BUBBLE. Take away the cheap lending (via the credit crunch - you may have heard of it) and property prices tumble, leaving oceans of unsold property.

    IT'S OVER!!! Please let's not reflate another asset bubble based on the property bull lies.

  • Comment number 77.

    Robert,

    Are Credit Default Swaps the root cause of this inability by banks to lend to one another?

    I don't understand them but am concerned to learn that these unregulated privately traded derivative contracts currently have total values close to world GDP.

    Your thoughts would be appreciated.

  • Comment number 78.

    This is all very well. However, oil prices are nearly half of their high in July. If oil was $140 or thereabouts in July and pump prices were £1.20 litre (near me anyway!) then surely if oil is $75 per barrel this morning, our pump prices ought to be nearer to £0.65 per litre. Nobdoy seems to have picked this up in the national press. If this is the case then one thing the Government perhaps should be making noise about is the reflection in the barrel prices for the consumers - people would not be so worried about huge energy prices if they felt everyone was trying to help. I appreciate it is huge profit taking by the oil companies but for me anyway, a hugely reducing domestic fuel bill is a ray of light in otherwise dark times.

  • Comment number 79.

    #62
    "Here is an idea for Mr Brown.. Why not stop bailing out the banks instead pay off everbodys mortgage (probably cheaper option) which in return stops bad debt and allows everyone to start spending again !"

    That's like saying why not feed the cows on milk and cheese? Why not feed the pigs on bacon?

  • Comment number 80.

    "... public-sector debt, which is already - on one measure - above the government's self-imposed limit."

    The problem is that accounting for debt has been fiddled. Government cannot on the one hand say that others are irresponsible when it avoids reporting debt (and other data) on a straightforward basis. Let's cease double standards and ban "creative accounting". Borrowing to assist the financial sector is debt, no matter how it is dressed up.

  • Comment number 81.

    As a small one man band retailer on the High St, just borrowed in excess of £100k to buy own shop, these are indeed very worrying times.
    A major cut in interest rates, maybe by a full 1%, will help the economy. I know it would certainly help me and many other SME's.

  • Comment number 82.

    Ahhhh Keynes is alive and well at the Beeb then.!

    Given the massively expansionist public spending initiatives undertaken by this Government (both on and off balance sheet), don't you really think that they have done enough damage?

  • Comment number 83.

    #70, well put!

    I think my cats have a sounder understanding of the current financial climate than most economists and politicians. I asked the two of them to think about it overnight and let me know this morning...

    I awoke to two, large, brown smelly deposits in the litter tray! I guess that is a short and sweet answer!

  • Comment number 84.

    Someone on the Today programme this morning said that the markets have moved on from worrying about the financial crisis to worrying about the crisis in the real economy. The next stage, he said, was that the concern would turn to the credit worthiness of certain governments. Brown's GB at the top of the list?

    As other people have commented we are back to the mess created by Wilson/Callaghan governments of the 1970s. Remember Healey going with the begging bowl to the IMF because Labour had effectively bankrupted the country?

    And, of course, when Margaret Thatcher had to sort things out there were massive job losses for which she was blamed. This time, let's put the blame where it belongs - with the Chancellor who promised an end to boom and bust.

  • Comment number 85.

    Now its just the investors gone mad, at this level fundamentals in markets are sound.

    Still to avoid recession we need to cut interest rates to 3% immoderately; if its done we need not spend billions rescuing the markets. EU, UK and Asian central banks need to cut rates.

    If central banks does not act government should force them to act now.

  • Comment number 86.

    I hate to say it, But I do think Gordon is the man for the moment, like he keeps saying it's a global problem… Which will not go away overnight.. Give him time to sort the mess…

    You are always going to have times of prosperity, which will also cause times of hardship… it's natural…

    I would like to see another 0.5% drop in interest rates… this will give an helping hand, and encourage spending by all (that’s if they have it to spend), and please don’t leave it too long..
    If it's done to close to Christmas the sales will be flat and issues will continue. Remember a lot of this is consumer confidence, this needs to return to start the "merry go round" that makes the economy.

    Gordon took the incentive to make an huge commitment in stopping the banks going under (And a good job, as the consequences would have been un-thinkable if this happened)…. He now needs to make the decision to ask the BOE to really consider another cut in rates….

    Look at the US, they have a current rate of 1.5%, and the same inflation the UK has.. It is possible….

  • Comment number 87.

    Well,nothing much seems to be working does it? Finally the people round the world have come to a conclusion that the last 15 years of boom have been on shaky foundations with shady financiers,dodgy government regulations and safeguards and they have lost trust in banks,business honesty and governments alike.

    Yep now we are pressing every button to see what works. Lets have a go at increasing public spending,why not?...see if that makes a difference.

    Maybe now a time for a 'New Deal' for people where their bank savings will always be 100% safe. Where we can be assured the banks do not get up to outrageous speculative behavior with the publics money. Where thier business is transparent rather than Machiavellian.

  • Comment number 88.

    Why do you expect the sustained folly of 5 years of global and domestic bubble to be resolves so easily.

    This is a dark ages war in a high tech world, the worst of combinations.

    Cash has become a strategic resource and weapon.

    Profit is not just volume.

    Banks are predators and operate individually, any collective action is coincidental.

    The same applies to countries

    Banks are expecting other banks to fold. Those banks surviving gain market share. The object becomes survival of the individual bank

    It has been shown that taxpayer money is available as a last resort.

    The banks still have domestic deposits to operate on.

    Toxic bonds have a variable value. If the minimum value has been reached they can only gain value with time.

    A recession is here and the likelyhood of vulnerable people and businesses will lead to defaults pressuring the banks to be increasingly cautious about lending, irrespective of political desires.

    Individuals and businesses that are seen as being solid are being approached to take borrowings, they are cautious and see no need to move increase debt yet. They are part of the upturn but are only moderate risk takers.

    Economic models and comment by economists means nothing because economic models and opinion are built on empirical data and no data exists for this situation. In particular economists - please note - do not risk their own money.

    It is the behaviour of risk taking predators like Warren Buffet which is the most important, they give signal of opportunity. The question at present is are they the ravens on the ongoing battlefield or a sign of the bottom being reached. Not enough predators are about at present for uplift.

    The government is stupid as defined by the history of behaviour to date. It is certainly slow to respond in comparison to the dynamic of the situation. Governments are reactive not proactive by nature.

    The government also has an inflated opinion of the effect of its actions coupled with a false faith in its incoming communication (moderated and poor quality) and control mechanisms (coarse, ill founded). That together with political imperitive to declare quick fixes, which the sort most likely to unravel, leads to a lack of credibility with people who actually take risk.

    The jolly club of international politicans who are grasping at straws and patting Brown on the back is devisive. They live in virtual reality, blindly want to believe a salvation is at hand, and just appear to encourage Brown he has solved things, when it remains to be seen if he has. The opinion of politicans is almost certainly irrelevant in the marketplace.

    Isaac Newton - The reason I have seen so far is because I have stood on the shoulders of giants. Dont think he would get a great view standing on politicans shoulders.

    It was a particularly stupid ploy for the government to request party A to lend money to party B at 2007 levels when Party A will bear the cost if party B defaults, if party B is stupid enough to borrow before sure growth is indicated, and Party B also has the risk of bankruptcy. The government gets the benefit of the lending but party A and party B both get bankruptcy to deal with if it goes wrong. Third parties should not intervene in two party deals. That should be shouted at the government at every opportunity.

    This would appear to be the trough and bumping along is a possibility until further collapse indicates it is the time for uplift. It is a question of what deteriorates next.

    With respect to the housing market, which is key to economic recovery, the most effective thing Brown can do is provide a mechanism to allow the trading of negative equity, but he will not do this. It appears beyond his comprehension. As I have pointed out before - If you have 5 GBP negative equity and no cash you cannot get rid of your property. If you cannot pay the mortgage due to changing circumstances the bank is only interested in foreclosure and dumping the property at auction and claiming the, by then, substantial loss against the insurance policy the dispossessed housholder paid for. It is the fact this insurance policy exists which stops negoication about 5 GBP. The insurance company then pursues the housholder to bankruptcy. Until that senario is contained one way or the other, by property price rises as the default, then economic recovery will be slow.

  • Comment number 89.

    The asset bubble was burst on July 5th, 2007 when interest rates rose to 5.75%. Within days the FTSE peaked at 6754.10. Once a balloon has been burst, there is nothing that can be done to put the pieces back together. The writing has been on the wall since then and the market has a force and momentum of its own which neither politicians or economic advisers can do anything about. Anyone wishing to question this can look at the experience of the Japanese stock market which fell from 39,000 to 7,200 over 10 years. It took 10 years because of intervention from the government, but the final outcome was inevitable. Many people are employed to give daily commentaries which are completely irrelevant. It would have been just as realistic to say that the FTSE fell yesterday on the back of news that Madonna is to divorce.
    Generally speaking, markets do not fall in straight lines and uncertainty keeps volatility high.
    What is needed now is a dose of realism and responsibility. I am happy that Mr Brown has at least realised the importance of confidence in the banks, even if the banks don't trust each other yet. It won't save the stockmarket which is why the role of banks is even more important than before as lenders to companies which didn't even get a look in when all they wanted to do was lend to the virtual economy

  • Comment number 90.

    Obviously the banks are hanging on to the cash as they know that they will need it in the near future when the next round of CDS liabilities comes due. Perhaps this explains alot as to why the treasury is insisting on the unprecedented Tier 1 levels at this time. If Barclays is exposed to a 2.4 trillion liability and felt able to go it alone, what does this say about RBS, HBOS et al who felt the need to delve into the public coffers?

    GBs plan may not be helping the man in the street but will probably ensure that the British banks stay aloat through the next 1-2 years while others fail so that there is at least some financial system to start the recovery with.

    In the meantime the stock market is crashing down to a level more in line with the actual amount of money, rather than debt, in the system. A way to go yet then.

  • Comment number 91.

    How is public spending better than tax cuts?

    Tax cuts put money in the taxpayers pockets (the people who the money actually belongs to!) - public spending puts it in the pockets of the paracitic 'public servants' whos unlimited greed means they will forever demand more, or into the coffers of international businesses (whos head office may well have relocated from London to somewhere more business friendly.

    The left wing bias of the BBC and its staff is so engrained that they can't even see it.

    This mornings 'today' progr on r4 went on and on about the options being 'more borrowing' or 'more taxes'. Completely missing the option of 'SPEND LESS'.

    And government borrowing has to be paid back - so just helps cashflow while we wait for 'more taxes tomorrow'.

    BROWN - TIGHTEN YOUR DAMN BELT! AND WHILE YOU ARE AT IT TIGHTEN THOSE OF YOUR MINISTERS!

  • Comment number 92.

    #2 tjccjt

    The Callaghan quote (as nobody else seems to have bothered and as a few people may not know its end, although on this blog a very few!)

    "Labour Prime Minister James Callaghan, who told Labour Party Conference in 1976, “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step." (Source various site via Google)

    Jim C. told home truths at the time and he was soundly told off by the country!

    Margaret Thatcher came along with the line that you can have your cake and eat it, and we fell for it - but unfortunately look where that has go us! Will the electorate be ready to accept a dose of reality or will they fall fro the blandishments of the snake oil salesmen (or as in the recent past woman!)?

    So on balance we are to expect a slump followed by higher inflation - caused either by increasing regulation on the banks or by allowing wages to rocket - either way we are stuffed for a decade or so!

    There are established investment strategies during such periods and some companies will do well, but discretionary spending and the business that rely on it will fall and fail. The froth will boil off and that is to be expected and a good thing, but it will hurt. The hurt will not be evenly spread and the vulnerable will need protecting - if we still think of ourselves as civilised.

  • Comment number 93.

    #78

    Most of the price of petrol is tax. GB needs to find the money for the bail out from somewhere :-)

  • Comment number 94.

    If unemployment is increasing at such an exponential rate, won't the Payment Protection Insurance (PPI) that banks "forced" on unsuspecting borrowers really come back to bite them (or the underwriting company) now?

    Will we see defaults on these policies?

  • Comment number 95.

    Lets not forget where all this trouble started . The greed and cowboy antics of the USA financial institutions. The world economies should stand up for themselves and realise that the USA has been living a dream at the expense of the rest of the world . Now that thier pathetic economy is in meltdown it is the rest of us who picks up the tab. It has given itself a lethal injection and still expects to live. If it was not for all the printed Euro dollers the condemned would have passed away long ago. It is time for the Euro to make it's debute as the leader of the pack.

    PS Robert Peston for chancellor OK ;-)

  • Comment number 96.

    Robert

    Forget the credit crunch - that is a symptom not the problem.

    The problem is quite simply debt: personal debt and national debt. It is not even just bad debt, although that is what drew people's attention to the fact that it was there and was a problem.

    So what has happened. People and the Government have Spent, Spent, Spent, because they were able to get easy credit and things were cheap. Now people have realised the rising debt is unsustainable and has to end. This could have happened at any time over the past few years, but because it has run for longer, the pile of debt is bigger.

    Who's to blame. The people and the Government for borrowing too much, the lenders for lending too much, the BoE/FSA for not calling time on it and the Chancellor/Treasury for not setting up the system so they had a duty to call time on it.

    As for the credit crunch, the Banks quite rightly judge that if they lend to anyone, including other banks, there is quite a high chance that they will not get it back - it doesn't take many defaults to cancel even a 2 percent interest margin.

    What about the stock market? There aren't many companies who do well without customers and the customers have realised they don't have any spare cash, in many cases because they already have a pile of debt to service. So few are going to invest before some sort of a bottom is reached and we are nowhere near that yet.

    How do we avoid the recession? We can't, we just have to work through it until the debt is substantially reduced - some of it will be repaid, some written off and the rest reduced by inflation to manageable proportions. The recession will be longer/deeper in proportion to the amount of debt that has been built up. If you do postpone it, then you only build up more debt, so more pain for the future.

    So what do we do to solve it? Inflation has to rise further to reduce the debt in a relatively painless way (historically Labour Govenments are very accomplished at this, so it shouldn't prove a problem). Also they have made a very good start through creating lots of new money to pump into the banks. Interest rates have to rise so we don't get hyperinflation - the market forces are doing that anyway although the Goverment is mistakenly trying to drive them down! We are particularly fortunate in still having our own currency, which allows us to adjust relative to other countries. Rising import costs will prompt people to curb their spending on imported goods and also contribute to inflation as the pound is devalued.

    Who will be hurt? Most people but in different proportions - small businesses that close, people who lose their jobs or homes, people on fixed incomes, people with savings will lose them through inflation or having to spend them to live. Those on benefits will find it hard but will get by. Those who manage to keep their jobs will break even. A few very astute people in niche positions will do well (that probably includes Government ministers and MPs, people in quangos, etc). Also, the police and security services because the Government will want to maintain its grip on power in the face of a rising tide of public dissent - let's hope that all Labour's shiny new anti-terror laws are not deployed against the understandably upset average man in the street.

  • Comment number 97.

    The only way to pay for this mess is by printing more money. While the outlook for sterling looks terrible, we need to make sure that some of our new excellent British companies in growth industries receive the finance they need at this difficult time to get exporting again.

  • Comment number 98.

    The problem with the banks, secretive at the best of times, is that we don't know what we don't know. My guess is that there is a phenomenal amount of 'badness' (or toxicity, to use the buzz word) locked up in the banking system. Much of it is so arcane and, dare I say, crooked that few of us can barely begin to understand what's really going on.

    We're now all passengers in a slow-motion train crash. Unfortunately, the train crash is only just at the stage where the carriages start to judder a little and people are looking around, confused, wondering what's happening.

    This will be a mess, despite the best efforts of sensible commentators to assuage our anxieties with soothing words about 'mild recession', 'things picking up in 2009', 'this won't be as bad as the 70s' etc etc.

    The problem is, the situation today is unprecedented in its size and complexity. Remember: the bigger it is, the harder it falls.

    For what it's worth to those of you who blog here and elsewhere: I would focus on self-reliance from here on. Relying on politicians to get us out of this mess would be a major mistake; they're all as bad as one another.

  • Comment number 99.

    Robert mentioned on the news learlier week that UK Government, Corporate and Individual debt totals 300% of UK GDP. Government dept is approx 40% of this.

    UK GDP is approx £1,500 Bn therefore total debt is £4,500 Bn.


    What is the split of this debt and how does it rank in % GDP terms with other countries.

  • Comment number 100.

    Government spending on public services...

    will we get fixed water mains? nope.
    will we get fibre-optic broadband to everyone? nope.
    will we get a fast rail network? probably not.
    will we get renewable energy farms? not really.

    will we get ethnic diversity co-ordinators and housing development facilitators? oh yes.

    A Lot of people have said for a while that the recession is inevitable, that we should bite the bullet and get it over with. Instead, we have Bubbles Brown *still* trying to prop up the housing market. The only good thing is that the next economy may be built on technology and engineering instead of selling mortgages and insurance to each other.

 

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