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The risks of forcing banks off welfare

Robert Peston | 08:19 UK time, Wednesday, 30 June 2010

There are always moments of anxiety when benefit claimants are weaned off their welfare support.

One such is today, as eurozone banks face up to the refusal of the European Central Bank to roll over €442bn of exceptional one-year loans provided to them by the central bank.

Euro logo outside ECBEurozone banks are hooked on credit provided by - in effect - the public sector. And are fearful of having to fend for themselves.

To be clear, the ECB is not exactly throwing them on to the streets with its decision to demand repayment tomorrow of that €442bn: it is today offering banks as much three-month money as they want.

Which may seem bizarre, in that inevitably the ECB will tomorrow be repaid in part with funds it is providing today.

But central bankers take the view that the rehabilitation of banks requires that they become less dependent on longer term loans provided by the authorities.

See it as the equivalent of moving the long-term unemployed off disability payments and on to a jobseeker's allowance: it's a message to the banks that they have to start to prepare for life back in the real world, where all but their short-term unexpected liquidity needs must come from depositors, wholesale creditors and investors.

For Spanish banks - and also for Greek and Portuguese ones - that real world looks scary right now.

Spain's banks are finding it tough to tap commercial sources of wholesale finance, because of growing fears about potential losses stemming from the weakness of its property sector.

And more-or-less the whole eurozone banking sector - including big German and French banks - is under the dark shadow cast by their huge holdings of eurozone government bonds, because of deep-seated fears that Greece and perhaps other overstretched eurozone states will eventually default on their sizeable debts.

But it would be quite wrong to see the welfare dependency of banks as a purely eurozone phenomenon.

You'll recall that at the peak of the financial crisis in late 2008, public-sector support for the worlds' banks - in the form of loans, guarantees, insurance and investment - was equivalent to a quarter of everything the world produces, or more than $12trillion.
In the UK, support reached a maximum of around £1.3trillion, almost 100% of GDP.

These weren't just a few handouts. This was the biggest co-ordinated financial rescue operation the world had ever seen.

But to avoid a permanent fusing of the balance sheets of banks and the balance sheets of sovereign states, all that emergency financial support has to be unwound.

In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme.

And over the same timescale, British banks will have to find £120bn to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme (there is an option to roll over a third of these government guarantees to 2014).

Now as bad luck would have it, this schedule for repaying the Bank of England and the Treasury coincides with a spike in repayments on other substantial debts of British banks, in the form of bonds and residential mortgage-backed securities.

What this means, according to the Bank of England, is that banks need to refinance or replace up to £800bn of term funding and liquid assets over the coming 30 months.

The Bank of England estimates that simply to replace this finance, British banks need to sell about £25bn of new bonds and asset-backed securities every month.

Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7. And banks are currently issuing (selling) less than half the debt that's needed.

Now if you think there's safety in numbers, you might be reassured that French, German and Italian banks also face substantial increases in debts falling due for repayment.

And wherever you look in the rich West, from the US to the eurozone, banks are currently borrowing substantially less on debt markets than they require simply to replace their maturing debts.

It has all the hallmarks of a second credit crunch.

Not a short sharp financial crisis in this case (although that can't be ruled out as a possibility), but a squeeze on the funding available to banks that - barring a miracle - will also squeeze the volume of credit they're able to make available to households and businesses, or to all of us.

As I said, coming off welfare is always painful. And as and when the banks feel pain, we're going to feel it too.

Update, 12:40: Eurozone banks have borrowed 131.9bn euros of three-month money from the ECB, which is about a third less than analysts were predicting.

It certainly implies that strains in the wholesale funding market are less acute than some feared, and that fewer banks than it was thought are being deprived of finance from commercial sources.

That said, 131.9bn euros is a non-trivial sum of money.

And with the market rate for bank-to-bank money on average 25 basis points - or 0.25% - cheaper than ECB money, it would be foolish to argue that eurozone banks are in tip-top condition: no bank would choose to borrow from the ECB, given the financial and reputational cost of doing so, unless it had to do so.

Eurozone banks are still on welfare support.

Comments

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  • Comment number 1.

    The game is to force government to interfere with the market.
    They are then in a lose - lose situation which can only be covered up by more interference. Taxpayer pays!

    British Leyland again

  • Comment number 2.

    With a bit of luck debt will become a lot more expensive, and businesses and people will learn not to become so dependant on it.

  • Comment number 3.

    The bail out of the banks was simply delaying the inevitable, as many bloggers have been saying, and here we are again a few years later. I heard a rumour today that the Germans are preparing the printing press for rolling out the Deuchmark again. Sounds like the German's are preparing for whats to come. Not sure it will work though, comments? We dont have that option. The American's are simply printing Dollars as fast as they can. You seem to be increasing hinting in your blogs Robert that the monetary system is on the edge of collaps as many of us believe, its just you cant be seen to agree to that. If you are of that view, well done. I suggest you check out Chris Martensons web site and U tube vids, they are very interesting.

  • Comment number 4.

    Good that you re-state the hideous amounts handed out to the spivs by governments. It puts the nonsense about unbalanced books being due to having too many teachers and nurses into perspective.

    I see that the treasury's secret projection of the number of job losses due to Bertie Wooster's cuts has leaked out - 1.3 million! Most in the so called 'private sector'

    So basically the ConDem package is most of labour's political correctness AND a return to the recession. Clegg did us all a big favour when he pushed this on us.

  • Comment number 5.

    'It has all the hallmarks of a second credit crunch.'

    I wonder how many 'experts' will claim no one saw it coming this time?

    Many bloggeres have said many times:-

    'The light at the end of the tunnel is definately a train!

    This is not because they are better at predicting the future, but better at learning from history.

  • Comment number 6.


    Myself and others have said for a while that much of what is being done is the equivalent of burning the furniture to keep the house warm.

    Now, unsurprisingly, the sofa has finished burning and it's cold again. It's just that this time we don't have anywhere to sit down in the cold.

  • Comment number 7.

    "And as and when the banks feel pain, we're going to feel it too."

    Which is why the focus should be on not only how much the banks are lending, but on the long-term solution of the ways in which they pass on the pain. That means setting differentials between the rates they pay to savers and the rates they demand from lenders.

    What they did after the credit crunch was to set the lending rate for their products at a much higher level than the savings rate - effectively passing the problem on to their customers (the same taxpayers who already nailed them out once and will be taking the pain of sorting out the economy for years to come anyway).

    This is a double-whammy that adds insult to injury, because the people who should be paying for this are the people who took the risk: the shareholders.

    In looking at bank reform we must set not only a base rate but also a differential rate that limits the lending rates. Lending rates should reflect the risk of the customer not repaying and nothing about the bank's innate problems. They must accept that sometimes their problems have to be solved by a long-term (winning) business strategy - at the moment my granny could run a bank if it's as easy as setting the lending rate as high as you like to pass the problem on to the customer (while colluding with al your cronies in other banks to do the same).

  • Comment number 8.

    The difference between the next credit crunch and the last one is that many of the banks are now owned by us so whether we likme it or not we will foot the bill - a bill that cant be repaid.

    The weaker "SOVERIGN OWNERS" of the debt will collapse first and the markets have begun to factor this in.

    It is not only Germany preparing the Deutchmark presses - the only concievable way out of this mess is inflating the debt away

  • Comment number 9.

    Eurozone economies, the US and Japan are all in some disorder. What our coaltion calls 'that mess you made' whilst pointing to our previous government.
    But if all these other countires are in a mess too, doesn't that suggest that 'the mess' is truly international and not national? Or if the problem is mostly a British one, perhaps the previous government had an omnipotence we weren't previously aware of?
    Of course, whilst there's a requirement for Banks in most countries to borrow more from their domestic and foreign money markets, there's a near balancing demand for somewhere to deposit the vast surplus of (mostly) Asian savings. With China and to a lesser extent middle eastern savers searching hard and with the most to deposit somewhere.
    So one outcome might be for China and others to put their savings into Euro and Sterling Government Bonds, and for those Governments to use those savings to re-capitalise their own Banks in exchange for shares.
    It's like buying stuff on hire purchase: we buy Chinese stuff with HP loans from China, and they charge us interest via loans to our governments and banks. We end up with cheap goods and they end up with our promissory notes/HP contracts. Simples!

  • Comment number 10.

    Q1 - Are the banks been treated better than they treat their customers.

    Q2 -As the answer to Q1 is - Almost certainly yes. Then - Why is there supposed to be any sympathy.

    Q3 - If the primary purpose of the banks is to enable the economy to function by providing liquidity and they are not up to the job why are they not taken over as they appear to be unable to function in this role, and it is this essential role which meant inteverntion was needed.

    Q4 - If the answer to Q3 is they are too big, why is nothing done to cut them down to size PDQ.

    Q5 - As it would appear the banks are at this point holding recovery back why is nothing done about this. The banks are apparently creating their own spiral again. Which is in essence where this started, the Credit Crunch spiral where they declined to lend to one another.

    Q6 - If the banks are in fact holding the economy in lockdown and double digit interest rates when is something going to be done about it. Otherwwise there is no reason that this cannot go on indefinately. In the meantime the customer who has very little option as to which of the current cartel they use, get milked.

    Q7 'As I said, coming off welfare is always painful. And as and when the banks feel pain, we're going to feel it too.' Could you please explain the basis of this comment. Is it based on speaking to somebody who has been on benefit and come off it, or your personal experience of coming off benefit, because most people on benefit are actually pleased to come off benefit if they can in my experience. Hmm. 'When the banks feel pain'. Self inflicted perhaps. Why should a monopoly or cartel be on benefit anyway. Surely there is more sensible uses of money. An ABSO seems more appropriate somehow. It is perhaps the possibility that the banks felt they were above pain that lead to their madness. It is the possibility that they are reported effectively as feeling they have a right to 'benefit' that can possibly lead to another derrangement.

    Q8 How do you normally deal with people with derrangements.

    Q9 Do you ever feel that talking to banks so often perhaps distorts your perception of things and that you are being told by the banks their perception of their problems. After all I doubt they talk about their customers problems to you. Business is more than banking.

    Q10 Are there more questions than answers

  • Comment number 11.

    6. At 09:09am on 30 Jun 2010, ThoughtCrime wrote:


    Myself and others have said for a while that much of what is being done is the equivalent of burning the furniture to keep the house warm.
    =========================================================================
    I think you will find that the furniture is long gone, and now we're running out of floorboards. The lunatics in charge no doubt have a cunning plan, involving window frames, doors and ultimately roof timbers. Their plan is based on the fact that right now it's warm and isn't raining, so everything will be be fine- won't it?

  • Comment number 12.

    "Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7"

    I wouldn't call that troubling news. I'm hardly an expert on this sort of stuff, but it strikes me that's the equivalent of worrying about an alcoholic on the basis that he's not drinking anywhere near enough.

    Surely, if we've learned anything from the idiotic credit boom and subsequent, ongoing bust, we've got to look it this in more reasoned terms than simply "we'll be fine if we can be 66% more idiotic than we were last time"?.

    Then again, heaven forbid we should have to face the reality of never again being able to borrow wheelbarrowloads money on whim to spend on whatever tat takes our fancy, treating houses like cash points, and ever-increasing government spending on the back of seemingly minimal tax rises...

  • Comment number 13.

    This can't be a second credit crunch as the regulators are in control.

    If there is a second credit crunch there will have to public beheadings of bankers, central and otherwise in all the town squares of Europe.

    I think this is just another crisis induced by the naive belief that the main crisis is over. It isn't and it won't be unless someone gets a grip. For as long as there is just a short-term fudge being presented as a long-term solution we will continue to wobble from crisis to crisis.

    We have to accept that all the solutions presented over the last two years from fiscal stimuli to the pathetic and inadequate changes to bank regulation have been wholly inadequate. The perception has been that this was just a recession, like all the others we have had over the past few decades.

    No: the problem is greater than that. This is a moral and intellectual challenge for our culture and we have to address it at that level. What we need to see from those who would govern us that they bring this under control.

    This will mean really reforming banking by splitting retail from the casinos, identifying the debt, letting the casinos go bust, shafting the rich and restoring some degree of economic stability for the majority.

  • Comment number 14.

    > As I said, coming off welfare is always painful. And as and when the
    > banks feel pain, we're going to feel it too.

    Banks are corporations, and can't feel pain. But _bankers_ are capable
    of feeling pain, and we will inflict as much as humanly possible on the perps
    themselves.

  • Comment number 15.

    I was advised, once, that if one needed a reliable indicator of the state of the world's prosperity, then follow the Baltic Dry index. It was this index that foretold the recent bad period, preceding the financial bubble bursting and I note that it is forecasting another period of downturn. It has fallen everyday since the 26th May and has lost 42% of its value over that period. Comments please.

  • Comment number 16.

    The way the global economy recovered from previous depressions was FIRST to undergo a period of debt-deflation (and in the case of secured debt repossessions) only AFTER that process did economic activity re-start.

    All, and every present, policy initiative need to be judged against these historic economic facts. And further if debt-deflation is to be resisted those deliberately resisting it need to explain how what they are proposing will enable economic activity to re-start.

    The requirements to re-start economic activity in the past have been to expunge over priced assets from the economy so that the assets required as part of the means of production can again become affordable. It is a huge and insurmountable economic error to think that keeping prices up of over priced assets will assist recovery - it won't if the past and common sense is to be taken as the benchmark.

    The disjoint between asset prices and the price of capital has to be redressed for economic activity to become re-energised as is shown by economic history. It is economically wrong headed to assert, and run policy, that all that is required is that loans are cheap(free) and economic activity will re-start - history shows us that unless the assets required for economic activity are appropriately priced all loans do is to inflate asset prices which in turn further depresses economic activity.

    Banks have to be forced off of welfare for economic activity to re-start as this will cause, has to be accompanied by, a substantial downwards revision in asset prices, as it is probable that most of the assets on the books of banks will be found to be worth far less than their book value. The music has stopped and all of the chairs have been taken away!

  • Comment number 17.

    4. At 09:07am on 30 Jun 2010, jon112uk wrote:
    Good that you re-state the hideous amounts handed out to the spivs by governments. It puts the nonsense about unbalanced books being due to having too many teachers and nurses into perspective.

    I see that the treasury's secret projection of the number of job losses due to Bertie Wooster's cuts has leaked out - 1.3 million! Most in the so called 'private sector'

    So basically the ConDem package is most of labour's political correctness AND a return to the recession. Clegg did us all a big favour when he pushed this on us.
    --------------

    Absolutely right. The possibility of really high unemployment is increasing daily - together with, of course, labour over-supply and a wages downtail. Meanwhile, back at the bank......

  • Comment number 18.

    Nicely put Robert. Certainly seems like we are reaching full circle.

    What happens next:

    1) Nationalise the banks for a period of restructure and reform, continuing dividends to shareholders (whose stock is not tradeable), returning any profit back to clear the deficit.

    or

    2) Create unimaginable sums of money, and some more, to plaster over the cracks again.

    or

    3) Allow the depression to work its way through.

    Option one is unlikely, option two is the most likely, and option three is also unlikely for fear of the West becoming a tatically weak.

    This is never ending, there simply will never be enough fundamental economic growth to re-balance the insolvent situation.



  • Comment number 19.

    Debt has increased at every level, as The Economist pointed out this month. Consumers, companies, banks, and whole countries, are up to their eyeballs in debt. Though the effect varies from country to country, a survey by the McKinsey Global Institute (quoted by The Economist, and their findings published in it as a Table) found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008. There were, they say, even more startling rises in Iceland and Ireland (not shown in the Table), where debt-to-GDP ratios reached 1,200% and 700% respectively. The burdens proved too much for those two countries, plunging them into financial crisis. Greece is also not in the Table, but debt there is now 800% of GDP. Although there is no thoretical limit to the debt a country can bear, 700% seems to be the upper limit (Ireland), because at 800% Grrece is in such trouble that default is likely.

    Of the major countries in the Table

    http://www.economist.com/node/16397110?story_id=16397110

    Japan's total debt is the highest at about 450% of GDP. Britain's is the second highest at about 375% of GDP, and rising. And here lies the rub: though these figures have been adjusted to remove foreign-owned financial debt, they do not include the £1.3tr in guarantees to the banks, the cost of PFIs, and the public sector pensions shortfall. Almost every country in the westerrn world is in DEEP financial trouble. It is only a matter of time - and it won't be long in coming - and the whole system will collapse like a house of cards.

    God help us all.

  • Comment number 20.

    "Eurozone banks are hooked on credit provided by - in effect - the public sector. And are fearful of having to fend for themselves."
    Fine. It's about time that they were given a very large dose of reality. The banks have become far too powerful within the western economic system. Many have behaved irresponsibly and negligently which has cost our society dearly in terms of jobss, homes, etc.
    Our toothless governments in Europe and the US simply pander to their calling, when really what is needed is a cull of all those executives, managers and gamblers working in their midst who believe they are so clever and essential that they can continue to pay outrageous bonuses and cream profits from easy central bank money, whilst the rest of the world looks on impotent to demand any remedy.
    Savings and loan banking should never be mixed with the kind of casino mentality of the major investment houses. These gambling operations should be placed alongside Las Vegas Sands and treated accordingly. Society has allowed itself to be conned into believing that the world of exotic financial instruments are essential to the workings of the modern capitalist system. Tosh! The world survived before modern derivatives were hatched alongside their other ethereal brethren. Those involved in this world are simply playing with other people's money where computer programmes are driving a majority of the activity. Citibank's 'Dragon' is an example of this practice.
    However, not all the blame can be placed at the feet of the spivs and wide boys in the City and Wall Street. Wealthy individuals and many large financial institutions from the insurance and pension funds, along with mutual funds have allowed themselves to be seduced by this world; in so doing they put at risk the hard earned savings and investments of average individuals who trust that their funds will be responsibly managed: poor fools.
    The past 150 years of history have shown how bankers are not to be trusted and that the current eurozone fiasco is just another sad chapter in the ongoing smoke and mirrors game played out by the world's rich and elite, whilst the rest of society picks up the pieces.
    The real medicine which should have been administered in the US, UK and Europe back in 2008-2009 is to let the incompetent idiots go bust. Provide protection to the individual savers and let the executives, managers, spivs and gamblers join the doll queue with the rest of society. Schumpeter's process of 'creative destruction' would ensure that more competent and hopefully sensibly managed corporations would step in to take over the banking services. Of coure, the banks know this, which is why they their greatest fear is that anyone should challenge their lies about being indispensible. Banking itself is a core part of our economic system. However, we don't need irresponsible, greedy and incompetent banks as we have now.

  • Comment number 21.

    But how will the problem be solved? Interesting article, but it is a bit of a cliffhanger. My banking/economic knowledge is being stretched.
    Please follow up the article.

  • Comment number 22.

    It does seem we are entering a Marxist nightmare/paradise with a wholesale collapse of capitalism or at least given the tone of your article.

    The banks continued lobbying for limited or no additional or delayed regulation, their increased pressure on the states that saved them and the self interested bonus munching bankers is about all the intelligent public can stomach.

    While not a revolutionary myself I cannot help feeling I would not act to defend a line-up of bankers and other elites propping up this ludicrous system where the democratic will of the western worlds people is represented by a bunch of spineless slaves to the market.

    Does the market serve us or do we serve it? That is a rhetorical question. Not sure how this gets resolved the numbers are so vast that a catch 22 now exists. If the banks fail capitalism collapses and likely some public order problems would exist, if states bail out the banks again we place more pressure on the market and require more sovereign debt issues that may not be subscribed too and making George Osborne austerity measures seem like positive extravagance, eventually creating public order problems.

  • Comment number 23.

    "12. At 09:35am on 30 Jun 2010, CarpCarp wrote:

    "Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7"

    I wouldn't call that troubling news. I'm hardly an expert on this sort of stuff, but it strikes me that's the equivalent of worrying about an alcoholic on the basis that he's not drinking anywhere near enough."

    At least take the trouble of reading the article, CarpCarp. Robert's point was that banks need to borrow more or they'll go bust. The fact that the amount they need to borrow is even more than they could get their hands on during the greatest boom in history suggests this problem may be insoluble. Alcoholics don't drop dead when they stop drinking, so your analogy is totally bogus.

    Banks would cease to exist if they didn't borrow money. They make money by borrowing cheaply and lending expensively. Their problems were caused by borrowing from flighty sources against dodgy loan assets, both their own and those they bought as AAA CDOs. So, not like an alcoholic, then. Though maybe more like a heroin addict...

  • Comment number 24.

    Robert, you said:

    "And wherever you look in the rich West, from the US to the eurozone, banks are currently borrowing substantially less on debt markets than they require simply to replace their maturing debts. "

    ----------------------------------------------------------------------

    SHOULD READ

    And everywhere you look in the capilatist world Soverign States and their corporations are only succeeding in borrowing 50% of what they need to prevent them from defaulting in time.

    NOW YOUR PARAGRAPH HAS OOMMPH!

  • Comment number 25.

    Mr Pesto

    Many of the risks engineered by the banks using our stakeholder money is ravelled up not only in property and business and sovereign loan books but also in basic share price derivative contracts ...

    Could it be that the risks of hedge funds and derivatives linked to global share values is now the driver /catalyst of what may well be coming next/happening now ... global market retrenchment affecting share prices as the big global economies concentrate on driving their domestic economies ... in the face of several major economies tackling their own debt crises.

    The banks have been very secretive about the level of risk here with the weak accountancy standards relating to hedge funds and derivatives and may be ... this is what is now spooking all and sundry as the share prices spook the hedge fund managers and the hedge fund managers in turn spook the markets.

    I just thought I'd mention this since you hadn't ... and what about the weakness of our money itself precipitating and exacerbating these effects through the universality of the global currencies with instantaneous electronic reactions around the world.

    Perhaps the safest places to have money right now is somewhere like Venezuela, Russia, China or Burma where their banking systems are ... shall we say... a bit different to our UK systems as being open to every kind of global reaction and interference?

    The question is where is the intelligence to shine the light out of this now global mess without a competent global central bank ... and inter-related global policy plan.

  • Comment number 26.

    @ 15. At 09:43am on 30 Jun 2010, schrookes wrote:

    > follow the Baltic Dry index. It was this index that foretold
    > the recent bad period

    The global housing bubble peaked in the U.S. in 2006, yet the
    Baltic Dry index shot up after this period, right until the
    onset of the crisis. A reaction or a prediction?


    > It has fallen everyday since the 26th May and has lost 42% of
    > its value over that period.

    It's now the same as it was a year ago. It often drops for a month,
    in recent history. It's quite volatile, as it also often rises for a
    month! If you are certain, then short it and make a few million!

  • Comment number 27.

    stanilic @13

    I think this is just another crisis induced by the naive belief that the main crisis is over.
    --------------------------------------------------

    Actually I think it's still the same crisis, not an aftershock. Reminds me of an anecdote reported by the French 18th century author I have taken my pseudonym from, about a doctor who was pretending that a sick man was going better. The sick man died. When questioned about this the doctor replied "Ah, but you didn't follow the progress of the illness. He died cured."

    Today this physician would head some financial institution.

  • Comment number 28.

    We were always promised that the taxpayer would get the money back when the government shares in banks were sold off back into the private sector. It looks a bit of a bad risk to me and nobody asked us (the taxpayers) if we were prepared to take on that risk.

    40% of small businesses on the business park I was on folded in the wake of the credit crunch. The bailout of banks caused huge resentment 'There is no one to bail me out' was a commonly used phrase at the time yet banks who should be bankrupt themselves continue to chase debts accrued by these struggling, folded or bankrupt businesses. It seems somewhat unjust. Ok we must all pay our debts but if the major banks were broken up and new ones established by government as Will Hutton and others argued for, it would have been fairer in the sense that the failed banks were done away with and seen to pay the price for failure.

  • Comment number 29.

    Schrookes @15

    I'm following it too (long family history in ship-broking and related activities, even if I'm in a different trade). I was taking some comfort from seeing the Harpex (http://www.harperpetersen.com/harpex/harpexVP.do%29 heading up, but the Harpex, being more about manufactured products, is a lagging indicator. The Harpex is likely to take the plunge too before long. I'm more confident about the price to move raw materials and freight around as an indicator of the underlying economy than about markets that look like having permanent hormonal issues.

    Doesn't look good.

  • Comment number 30.

    Hmmm.... how about brokering a deal.

    Both banks and governments are in debt, often to each other. Perhaps it's time for a bit of dickering, that banks will shoulder the burden of public borrowing in return for not having to repay loans which they have received from the government to such a rigorous schedule. A good look at interest rates on loans (in both directions) could also see them being reduced as a reciprocal agreement, so the amount that eventually needs to be repaid doesn't spiral out of control.

    Or is this too radical a thought?

  • Comment number 31.

    With such low interest rates who is going to deposit money in the banks. Governments artificially keeping interest rates low reduces the flow of money into the banks from savers (if they still exist- check with W.W.F. extinction list) Governments then force people to invest in the banks at low interest rates by using tax payers money!

    Propping up the failed euro economies is like trying to fill the swimming pool by taking water out of the deep end and tipping it into the shallow end. Unfortunately some one has taken the plug out of the pool.

    It all just delays the inevitable, as each bail out comes a small rally in the markets and then back to the original uncertainty of which card falls first.

    Try putting a bet on countries leaving the Euro at your local book-makers...they wont take any more money on it!

  • Comment number 32.

    Yes the Baltic dry is a good indicator. Also I am glad our government is cutting spending. If we'd have been smart in the first place, we could have been much stronger going into this extremely foreseeable, but well ignored mess.

    Hopefully in a years time when every other country on the planet is broke due to the extreme interpretations of Keynesian policies we'll be having the last laugh.

  • Comment number 33.

    "What this means, according to the Bank of England, is that banks need to refinance or replace up to £800bn of term funding and liquid assets over the coming 30 months"

    Can anyone tell me whether this (hypothetical?) £800m appears on the banks' balance sheet, or the government's balance sheet or both?

    If both, then surely that makes it £1600bn of imaginary value. Isnt this kind of "imaginary-value-multiplication-through-lending" very similar to the methods used by banks in 2008 to create awesome-looking but unstable balance sheets built on tiny amounts of material collateral, that they could nevertheless use to collect huge bonuses?

    Is this what Robert Peston means by a "second credit crunch"?

  • Comment number 34.

    #23. At 10:10am on 30 Jun 2010, Tim wrote:

    ".........Alcoholics don't drop dead when they stop drinking, so your analogy is totally bogus."

    Nothing to do with economics but actually they do. Alcohol withdrawal can be fatal, in its most severe form it's the only withdrawal from any addiction that can KILL the sufferer unless medical support is provided. One in five alcoholics suffering the most extreme form of withdrawal die without treatment, it reduces to one in twenty when treated.

    Withdrawal goes through stages and only a small percentage advance to seizures or Delerium Tremens which are the potential killers, most just have tremors, headache, anxiety and a few cold sweats that can come and go for many years. Before you ask, nope not personal experience but I've watched two friends slowly kill themselves and like banks they take inccocent victims with them.

    Bogus analogy - sounds pretty close to me.

  • Comment number 35.

    27: M. Chamfort

    Well put.

    I think my sentence was not very clearly stated. It was rushed. The point would have been better put if I had said that this current, new crisis is part and parcel of an entire sequence of crises which all total into the one global calamity.

    Banking crises are like buses and policemen: you don't see one for ages then several come along together.

  • Comment number 36.

    Robert,

    You really are a pessimist. The essence of your article is that in Europe they are having to repay their loan but can borrow again on 3 month terms, pressumably even that will be re-newable. This to me is the same as I do with my wayward son. He tells me week after week he is getting on top of his debts so I call in my loan to him. He tells me he can't repay all off it and I ask how much he wants re-financed. In this way I can judge if things are improving for him or he bulls****ng. Usually I get a pay down of his debt faster than he would do if left to his own devices.

    The UK situation is slightly different. They have 30 months before a squeeze comes so why on earth would they be re-financing now?

    I think what we can look forward to is another 8 years or so of 'no real change' particularly in the over priced residential property market. A status quo for about that period should work through the current issues, barring any further 'events'.

  • Comment number 37.

    We woz 'ad gud and propper!

    Everyone ... ... by the myth that credit and debt will help you live a better life and is good for you.

    It isn't really all that good for you except in the short term.

    But now, because everyone signed up to it in such vast numbers, to such obscene amounts and at every level, personal, corporate, national and beyond, we've saddled ourselves with a virtually uncurable disease.

    Some individuals, some companies / businesses and some nations will find their way back to health. But some won't.

    Having a better life was always going to come at a cost - we, as a global society, have delayed that cost, not eradicated it.

    And, just as the pension schemes set up in the 60s and 70s failed to factor in such economic decline as we now have and therefore need to be radically re-written, so too the current financial, political and national governance systems just aren't fit for dealing with this ongoing disaster, mainly because they were never designed to be.

    So, what should we expect to happen? Well systems as they break down usually go into a period of chaos from which eventually a new way emerges. Maybe we will go into a period of civil disturbance, a breakdown of law and order, revolution or rioting before this all fades into historical insignificance.

  • Comment number 38.

    I think bankers need some simple training in what money is about.

    See, guys, money is about trust. For it to work, we all have to trust each other. We have to trust that promises made will be kept, so we use money to go back to the originator of the promise, and say "look, I've got this certificate here that says you are responsible for this, but will you be here tomorrow?"

    If you are not going to be around (because you want to spend more time with your own money, and because you've raided the bank and now it's empty) then I'm afraid the trust dries up.

    If we can't trust you, then you are absolutely, utterly useless to us. And that's where things stand today. You're a useless bunch of scroungers, and it's time to get new blood in - people who know what trust means.

  • Comment number 39.

    Well just get more entend and pretend until the system completely runs out of credibility by which time of course it will be too late.

  • Comment number 40.

    All this user's posts have been removed.Why?

  • Comment number 41.

    Doom & Gloom is alive and kicking.
    If we're all in the same mess there'll still be winners and losers.
    Time to start growing your own veg and for food retailers to sell British and give decent prices to the producers.
    With 1.3mln additional unemployed we can start to improve the country's infrastructure - in 5 years we could be the powerhouse of Europe, and we still have our far flung friends in the US, Canada, Aussie & NZ to mention a just a few.

  • Comment number 42.

    #34. NorthSeaHalibut: #23. Tim: "...Alcoholics..."
    I was pleased the government didn't raise fag and booze duty. I give back approximately a third of my £65 weekly spends on the poor man's tax. Normally I keep quiet about it as it gives people the opportunity to assert their superiority which I don't find helpful. Yours comment is based on kindness that will, at least for some people, encourage their understanding and compassion. Well said.

  • Comment number 43.

    35. At 11:26am on 30 Jun 2010, stanilic wrote:
    Banking crises are like buses and policemen: you don't see one for ages then several come along together.

    The only time you see more than a brace of uniformed policeman is when they get together to bash demonstators.

    I had to laugh when Sir Hugh Orde, the president of the association of chief police officers announced that the coming cuts would mean fewer police on the street. I think he must be referring to all those non uniformed ones that are keeping us safe from all those terrorists.

  • Comment number 44.

    @ 19. At 10:03am on 30 Jun 2010, newProtectorCromwell wrote:

    Greek total external debt is less than 200%, not 800%. Among the lowest in OECD. Mainly because of (comparatively) low levels of household debt, and corporate debt secondarily.

  • Comment number 45.

    "...the ECB is not exactly throwing them on to the streets with its decision to demand repayment tomorrow of that €442bn: it is today offering banks as much three-month money as they want.

    Which may seem bizarre, in that inevitably the ECB will tomorrow be repaid in part with funds it is providing today."

    Robert, please help me, you've just made my brain go numb...

  • Comment number 46.

    The reality is that the masses of losses of banks still exist, with some banks, especially in Greece and Spain being further massively undermined by huge further losses due to HUGE fall in property prices/values.

    This banking catastrophy is FAR from over, it is FAR from reaching its WORST point.

    It has been able to shuffle and hide behind taxpayer intervention and central banks which was in its very FIRST instance UNSUSTAINABLE.

    The REALITY is that some VERY MAJOR European banks can easily go under and I personally think they will go under and ARE going under and their is NO WAY to ultimately prevent them going under and when they do go under, the overal effect/consequences will be massively damaging

    Central banks just cannot afford to prop up such massive failure, central banks dont want a mass failure because of the effects on other banks which are closely tied together, but thweres actually nothing they can do to prevent huge failures, except to slow them down, but this just extends MORE & FURTHER problems onto taxpayers.

    The money so far used to prop up the banking/financial sector, is basically a long rope in which to gently lower the banking sector to its bottom most point as gently as possibly while deceiving populations to the enevitable reality of depression.

    Public expenditure cuts are being made because the consequential economic debts and loans/losses from banking catastrophy in 2008 have to be paid. There is NO FINITE extension to the abilitys of European central banks or taxpayers or growth in economy to pay much more than has already been paid. They are basically at the uppermost of limitations.

    To provide any more money would just result in further MASSIVE taxpayer intervention and MORE taxes and MORE CUTS, which NO European government can basically afford.

    In all this, lets NOT forget a further MASS FRAUD.

    This is the payment of bonuses by banks which in my opinion was/is just a basic fraud to deceitfully enhance the publics financial image of banks. If banks can pay out so much money in 2009/2010 (in UK £60billion bonuses), then there cannot be any real financial dangers lurking in the background. Hence in my opinion the bonuses are/were a deceitful pretentious fraud, because as you mention, they already are NOT meeting the REQUIRED levels of new bonds and asset-backed securities every month to meet their liabilitys which the time for repayment is bearing down upon us.

    IT IS THEREFORE NO SURPRISE that there is SO MUCH turmoil in financial markets, ESPECIALLY in Europe, THEY KNOW THE FACTS, they probably expect central banks/governments/taxpayers to once again step forward when a disasterous situation re-appears. This move by the EU central bank has put paid to that temporarily.

    Some of the MASSIVE amounts of money the banks owe and are due to pay are just about upon us. The reality is, is that if a ordinary citizen mortgage payer was in the same position, then for MOST, further rollover loans and extended payment times just would NOT be available, because these very same banks will and DO demand payment terms that they themselves CANNOT ABIDE BY.


    This EU central bank policy is basically cutting off the life support machine for banks.

    The factual reality is that some just WILL NOT MAKE it, they WILL NOT SURVIVE, and when they go, the already recessionary hit world will drop into STEEP ECONOMIC DEPRESSIOIN because of the domino effect of one medium/large or big failing bank upon another and on economys.

    Just in UK the SCALE of cuts to public services are just being realised by the population.

    ALL IT WILL TAKE IS JUST QUITE A MINOR FURTHER KNOCK and UK WILL DROP INTO ECONOMIC DEPRESSION, and I think unemployment will be in excess of 5 million and possibly upto 7 million.

    The consequences of such an outcome is BEYOND comprehension.

    AS I have said on many previous comments, I saw this recession coming and took personal action and provided myself and family with safety nets to withstand the worst outcome/reality.

    I personally still think that we are basically no-where near the bottom, which is fast approaching, and it is ALSO NO coincidence that government is removing many social dutys it is legally bound by because in all entirety, there is NO way on this earth that it can maintain them as/when our economic social position deteriorates further and further.

    The pieces of the economic/financial jigsaw are coming together, there is MUCH been done and still being done for the FULL and complete picture to be realised/finalised, when it does eventually take FULL form, it will be a nightmarish scenario, worthy of the title "Dawn of Reality"



  • Comment number 47.

    38. At 11:51am on 30 Jun 2010, Jacques Cartier.

    Well put Jacques, it's all about trust and confidence.

    I do wish people would think a little more about letting banks go broke though. Do they realise the potential impact of this?

    Banks have little money themselves. They rely on this trust and confidence they have generated in order to borrow at one rate and lend at another, the difference being part of their profit. Now if we let a bank fail they will fight tooth and nail not to go broke. This will mean forclosing on mortgages, loans to business, loans to government etc. They will bankrupt many but still fail to recover more than 50% of the loans. They will default on their borrowing from their creditior and will apply pressure for another government bailout. During the course of this conversation they will remind the government that their creditors include places like Russia and the middle east. Failure to pay these creditiors will produce such wonderful things as oil not being supplied and no gas or elctric in winter. We are an imported energy dependent country.

    So with the combination of bankrupcies, no work and no energy the UK would not be a very happy place. Would this lead to civil unrest, probably. It is then that you discover that it is not 'he who controls the money supply of a nation controls the nation', it actually he who controls the armed forces.

  • Comment number 48.

    Translation to an appropriate metaphor.
    Teacher : "Now Steve had you run round fast and paid more attention you would have not been kicked out of the Musical Chairs game - And this is a lesson for all of you kids.
    If you run round fast enough and pay enough attention then you won't lose"
    Why is this an appropriate metaphor : Well someone somewhere needs to go into debt to fund savings and profits. It's fair enough to say to an individual : "work hard and save and you should be alright"
    but from the perspective of the whole game - the whole economy - his savings and companies profits match exactly other people's debt.
    Well the actual equation is the Sisyphus equation :
    Companies Profits = Companies Fixed Assets + Consumer Debt + Government Debt + Foreigners Debt
    So using the current financial system it's no surprise we've been having the financial crises for centuries - it's the same as saying that
    kids have been losing at musical chairs for centuries - it's an inevitable feature of the rules of the game - the financial game, but it's not an inevitable feature of reality. We need new game rules like NEFS.

  • Comment number 49.

    Personally I would compare the govt support of the banks to the equivalent of giving someone an injection of an extremely potent and addictive drug.

    One injection makes the banks extremely high and also hopelessly addicted.

    The only way for the Banks to come off this particular drug is over time by slowly diluting the injection. So in the UK some of the existing support will need to be rolled over (say 75%) for a couple of years and at the next roll over you reduce the amount again by 25-40%. It is not a problem it just takes 5-7 years to get the banks completely off the drug.

  • Comment number 50.

    Jacques Cartier no. 38,

    A gem of a post. I think this insightful and highly original piece of advice should immediately be sent to the bank CEOs; I'm sure they hadn't thought of that before.

    Maybe the answer is to have all the bankers publicly stoned and let the crazies and conspiracy theorists take over the banks (i.e. bloggers). Obviously plenty of experts with enormous amounts of free time on their hands to mount campaigns and quick fire responses via Peston's Picks.

    After all, the problem with the financial system is clearly so obvious. It's just the low IQ bankers like me that don't see it, right?

    I think there are two inverse corellations that are prevalent in the financial crisis:

    (i) the negative corellation between strength of opinion and knowledge;

    (ii) the negative relationship between "technical" PHd type knowledge and intelligence; these chaps weren't bankers and should have been doing low IQ work at Cern or something, not building "sophisticated quantative" models that ruined our banks.

    Cheers,

    Barry Lyndon.

  • Comment number 51.

    The banks will be ok because there is a global concensus that they have to be looked after so these apparent 'debts' that they are due to repay can just be re negotiated on favourable terms over and over again, to the point where they will essentially just be written off. Having said that, if foreclosures in the US continue to run at 90,000 a month (and there are 2 million more of them in the pipeline)any banks in this country that have significant exposure to the US housing market are going to be in big,big trouble...
    The single biggest problem with the global economy is very very obvious and yet totally ignored by economists and politicians. This is the fact that only the very wealthy have ANY real disposable income, that is 'income' not derived from loans,credit cards,house price equity or other debt. It is pointless adding stimulus to the economy unless you significantly increase the average wages of your citizens, as they are currently massivey overstretched from the excesses of the previous fifteen years. Trying to artificially boost the economy by piling even more debt on to people who can barely cope now, and whose wages have gone down in real terms over the last few years is futile at best and more likely to lead to a financial meltdown in the future. People look back at the 70's and shudder at the 15 percent plus inflation rate..hey, I was working then and it was brilliant, 20 percent pay rises every year! You could say the country couldn't afford those kind of wage levels now, but isn't it better to have people relatively debt free and spending real money in the economy than pretending the inflation rate is 3 percent and encouraging them to borrow way beyond their means?

  • Comment number 52.

    #36. Uphios wrote:

    "I (Uphios) think what we can look forward to is another 8 years or so of 'no real change' particularly in the over priced residential property market. A status quo for about that period should work through the current issues, barring any further 'events'."

    Your solution will be a disaster.

    What evidence or macro-economic model do you offer for doing nothing for 8 years will 'solve' anything?

    If the bank support is removed and market fundamentals are allowed to work through I suggest in eight years time we actually will have solved the economic 'catch 22' situation. Resisting the market fundamentals as you suggest will store up a disaster (as it did in the 1870s and 1930s) OK so neither you, I or Robert P. may not be around, but the social disaster of your 'solution' will plague the next generations just as it did in the past.

    The only realistic 'solution' is to allow credit to contract, asset prices to fall, loans to fail (secured property to be repossessed and sold into the market at lower prices), banks to fail and countries to fail that is what the market 'demands'. Optimistically, I hope that this is allowed to happen quickly - as the sooner it is over the sooner we can genuinely recover. This is what austerity is about. Austerity is not just a public state it is a private condition and imperative too, once started it will ripple through the economy - that is inevitable. It has started and it will ripple through.

    (I'd call in your son's debt and cease refinancing him - now! If that requires that you repossess his property then do so and sell it off for whatever you can get - as in a few years time it is almost inevitable that you an he will lose even more. Personal de-leveraging is an absolute necessity - do it early and you tend to lose less than waiting.)

  • Comment number 53.

    "19. At 10:03am on 30 Jun 2010, newProtectorCromwell wrote:
    Debt has increased at every level, as The Economist pointed out this month. Consumers, companies, banks, and whole countries, are up to their eyeballs in debt. Though the effect varies from country to country, a survey by the McKinsey Global Institute (quoted by The Economist, and their findings published in it as a Table) found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008. There were, they say, even more startling rises in Iceland and Ireland (not shown in the Table), where debt-to-GDP ratios reached 1,200% and 700% respectively. The burdens proved too much for those two countries, plunging them into financial crisis. Greece is also not in the Table, but debt there is now 800% of GDP. Although there is no thoretical limit to the debt a country can bear, 700% seems to be the upper limit (Ireland), because at 800% Grrece is in such trouble that default is likely.

    Of the major countries in the Table

    http://www.economist.com/node/16397110?story_id=16397110

    Japan's total debt is the highest at about 450% of GDP. Britain's is the second highest at about 375% of GDP, and rising. And here lies the rub: though these figures have been adjusted to remove foreign-owned financial debt, they do not include the £1.3tr in guarantees to the banks, the cost of PFIs, and the public sector pensions shortfall. Almost every country in the westerrn world is in DEEP financial trouble. It is only a matter of time - and it won't be long in coming - and the whole system will collapse like a house of cards.

    God help us all."
    Its becoming harder all the time to believe there is a simple fix for our problems. The level of economic growth required to overcome the level of debt would be of a level never achieved before, ever. Its hard not to take the step of concluding that the end of capitalism is near, irrespective of whether or not you believe in Marx or Marxism. And if it is, why arn't we spending our time designing something better.

  • Comment number 54.

    Hard to believe that just four (4) days ago European financials were gaining.
    Why?
    G20 agreed to provide more time to banks to adopt stringent rules. i.e. G20 adopted a more flexible timeline for banks to build up higher levels of capital and liquidity (breathing space).
    The EU does not kid itself.
    Government finances in MOST (That’s MOST.) developed economies are in serious trouble. Banks being banks, and banks being people, most European banks would rather get replacement funding from the ECB. But with many banks chasing funds, the cost of borrowing is rising.
    Removing the ECB liquidity =
    push up the cost of money =
    the fall-out hits consumers.
    The thing to watch:
    ECB loans.
    Why?
    Because if ECB loans can be obtained that would suggest that European banks are able to get funding and the rise in lending costs would simply be the result of supply & demand.
    But, if the ECB cannot meet demand for funding, will some other country pick up the need? Well, that’s not likely. So, if too many banks go hat in hand to the ECB, that’s a nerve-racking sign.
    Yes, there's something wrong with the European banking system. There are a lot of bad debts out there (highly likely tird to derivative instruments like CDOs, a gift from the United States). It takes a really great auditor to find and isolate these tangled derivatives. This is why the EU is conducting stress tests, trying to find out where these derivative knots are, isolate them, and eventually write it off. Until bank account balance sheets are “true”, in the sense of audit, the ECB will remain nervous.
    Today, the ECB will announce how much money banks have asked for.
    The important thing to watch for is:
    Because market rates are lower than the 1% charged by the ECB, only those banks with severely limited access to liquidity will bid; banks can currently borrow three-month money from each other in the market at about 0.76%.
    Will the bonds of Greece, Portugal, Spain be shunned in the market?
    Who makes the loans is another area to watch.

  • Comment number 55.

    Maybe you're just not allowed to say it Robert, but of course "they" are trying to engineer Credit Crunch II, or rather talk up the possibility of it. It will be the only way of continuing to provide taxpayer support,(which the markets alone cannot provide, something at which you strongly hint,)whilst at the same time still being able to claim such government debt...is not debt, well not of the on-balance sheet variety. Neither has the Bank of England shut the door on QE, (good job?)

    Glad you clarified it was END 2012, (not the beginning) that UK banks have until they have to come back with begging bowls. The Government is cranking up the talk of growth sooner rather than later, not just out of reasons of electoral popularity. If it's still not happening by April 2012 the loans will have to be extended. It's going to be a "nailbiter!"

  • Comment number 56.

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

  • Comment number 57.

    47. At 12:43pm on 30 Jun 2010, Uphios wrote:
    38. At 11:51am on 30 Jun 2010, Jacques Cartier.

    Well put Jacques, it's all about trust and confidence.

    I do wish people would think a little more about letting banks go broke though. Do they realise the potential impact of this?

    ----------------------------------------------------

    WAKE UP

    Basically, the banks ARE BROKE, which is WHY they STILL NEED EU & UK central banks provide FURTHER CREDIT/LOANS to pay OFF their DUE DEBTS.

    Do you not understand this.

    The banks do NOT HAVE THE MONEY TO PAY THEIR DUE DEBTS, hence, ask yourself, WHY and HOW did UK banks manage to PAY OUT £60billion in bonuses year 2009/2010.


    UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme.

    And over the same timescale, British banks will have to find £120bn to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme .

    Thats £286 BILLION in total. Apparantly the banks have NOT been raising enough money to facilitate this re-payment.


    There is an option to roll over a third of these government guarantees to 2014, the guarantees relate to the £120billion figure, hence the banks can further put off/extend repayment time of around £40billion.

    It still means they have to find a total of £200 billion to pay their dues, of which they are PRESENTLY OFF target from reaching/attaining.

    Hence that £60billion bonus pot or even just HALF of it, could WELL have been used to PREVENT growing market anxiety and continued fall of share prices by being available to PAY OFF what the banks are DUE TO PAY, instead it has been wasted.

  • Comment number 58.

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

  • Comment number 59.

    52. At 12:54pm on 30 Jun 2010, John_from_Hendon.

    Hold up! I never said 'solution', I said what I think will happen. Not being in government, banking or any other that can affect the outcome I am not in a position to offer a solution.

    Removing bank support I posted on later, I don't think much of that unpredictable route. Easing bank support is what I suggest and this it what appears to be happening.

    credit to contraction is already happening and I advocate more of the same, we appear to agree.

    'asset prices to fall, loans to fail (secured property to be repossessed and sold into the market at lower prices), banks to fail and countries to fail that is what the market 'demands'.' This is where we clearly disagree. I think the banks and the government's interests are aligned in making sure that does not happen. Across a period of time the debts they are carrying will reduce as loans get paid off and credit contracts. Causing a serious downward valuation on assets will push the banks into insolvency. What I think they are trying to do is maintain the status quo so that debt gradually reduces whilst banks and the country stays solvent. Note again this is not my solution, it is what I think is happening.

    How does this affect the following generation? Well the good news is the £200k house your looking at today will still be £200k in 8 years time. I suspect there will be major unemployment in the meantime. This doesn't sit well with me because I believe wages need to rise and they do not usually rise when we have high unemployment. I have no idea how to cure that one. As a country I suspect that the austerity measures will have made us better off. Perhaps we can then start to re-invest inwardly and create useful jobs, I don't know.

    My Son. Well his property is on the market, I think overpriced by about 10k but he and the estate agent think otherwise. If he sells my loan comes back, if he doesn't then perhaps I will move in there myself!

  • Comment number 60.

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

  • Comment number 61.

    The US Senate, always generous with taxpayer monies and those free market Republicans, just passed a banking regulation that has the taxpayer and not the banks paying for the costs. In most instances those receiving services pay some fee for the government to provide such a service, either with a special tax or fee, but for banking there is no such requirement. The bill originally had the tax in it but thanks to the efforts of the banking lobbyist and the spineless Senate they decided that since the taxpayers are underwriting the "private" banks already they might as well pay for this as well. If it all wasn't so blatantly corrupt there might e some hope for the future. I am sure the UK will follow up with a similar approach. No matter how bad things get we must always look out for the wealthy.

  • Comment number 62.

    @19: Thank you for posting a link to this article...
    http://www.economist.com/node/16397110?story_id=16397110

    I think it the most honest, articulate article I have read on the state of the world economy.
    The most infuriating things is no-one wants to take charge, and make a real difference. It's just "I'm ok Jack" and "Sell your bad loans onto someone else".
    I don't trust any politicians any more, what a sad state of affairs. They all think short-term as they are scared to lose votes. Someone has to take the bull by the horns and get us out of this mess, but I just can't see it happening. Who has the cojones to make a real difference?
    The music will eventually stop in this particular game of musical chairs, it simply has to.

    I think we have to stop seeking happiness through material gain, it's a good start to rid us of this debt trap/depression mess, but who is going to educate us in that if the capitalist world need growth and profits to sustain itself?

    We're all working as slaves, an unhappy nation: binge drinking at weekends, watching soaps, reading magazines about celebrities, nonsense tv, facebook and twitter. The media colours us, xfactor makes us believe fame and fortune is utopia, ie xfactor etc.
    Where is the creativeness, the hobbies, the goodwill to others, the community, the sharing, the smiling?
    What happened to hard work, learning a craft, playing a musical instrument and making music for FUN?

    Wealth *should* be the ability to be generous....surely?


  • Comment number 63.

    57. At 1:44pm on 30 Jun 2010, MrWonderfulReality.

    Just 3 things, 1). the banks are not broke they have an amount owed to them via mortgages, business loans and government loans greater than they owe. They have a liquidity problem in being able to refinance the borrowings they have made in order to make these loans. Clearly the way out of that one is to call in all of their loans and damn the consequences.
    2.) From the BBC pages Ocober 2009 'The Centre for Economics and Business Research (CEBR) said payouts would hit £6bn, up from £4bn in 2008, because of rising profits and less competition.'

    I think your 60b is out by an order of magnitude.

    3) why on earth would any bank re-finance their loans 30 months before it's due?

  • Comment number 64.

    Just to lighten the mood,
    Was it the EU banking news that has lifted the UK markets or was it the news on "Eggs can still be sold by the dozen says EU"

  • Comment number 65.

    "In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme."

    ...or what? - they are alowed to fail - I don't think so....what would be different this time to Autumn 2008? Is the Governments fear of 'total banking collapse' any less than back then?

    As the public sector sheds jobs, the private sector......sheds jobs?

    I'm sure this isn't how 'recovery' works..
    http://news.bbc.co.uk/1/hi/uk/10457352.stm
    http://news.bbc.co.uk/1/hi/business/10462761.stm

    Fools, fools and damned fools.

  • Comment number 66.

    Welcome back WOTW. Looking forward to your post clearing mods. Where you been?

  • Comment number 67.

    So the world is once again heading in the right direction. Most of the banks can borrow most of what they need. Sovereign budgets are heading for surpluses. Now we need to bed in growth in the private sector. It's time to take a hatchett to the rules and regs which add to business costs and even price out our domestic and export manufacturing and services.

    We all know planning and the tax laws have hyped up land prices to the point where homes and commercial property are double the price they should be. so here are 2 back of the envelope calculations.
    Assuming property is double it's real value and mortgages are at 6%, this excess price accounts at:
    - 21% of factory gate prices.
    - a reduction of 66% in discretionary consumer spending.

    So chose. A decline in the equity in your home or yourself, your children and neighbours facing the real threat of unemployment and declining business' activity.

  • Comment number 68.

    We need another 1990 type asset crash and we are going to get it

    Interest up and cost down - Government Vs Pensioners is always a good benchmark. Linking pensions to earnings rather than RPI says it all!!

  • Comment number 69.

    Not to worry bankers! You have a government in power that will happily throw the rest of the economy, the public sector, capital commitments and promises to the electorate to the wall to save you! How about 85% cuts in government spending, George? Not enough to allow us to forgive the bankers their debts? How about 110% - i.e. each household does the work of hospitals, schools and the police for free and pays for the privilege. That way the banks need not repay a penny...and you'll still get that job on the board of a bank when you retire from politics!

    OK, enough cynicism. Robert's comment that "all that emergency financial support has to be unwound" is the nub of the problem here. The fact is, it cannot be now be unwound. The whole point of a lender of last resort is that it is just that - a one-sided bargain that the BoE (and government) won't let the banks down, ever. Recover the bankers' debts to the nation when they can't quite pay them and then fail to forestall their bankruptcy and you make a mockery of the BoE. Goverment economic and fiscal policy would be meaningless. Now that the government (and BoE) is owed so much by the banks, they dare not take it back less the banks fail.

    So we need some radical solutions - but not the ones government and HMT will undoubtedly be considering, which are likely to be

    - some form of debt forgiveness
    - partial write-offs
    - balance sheet tweaks
    - accounting rule changes
    - rescheduling of repayments over a longer period
    - ...or (and I can imagine this one coming out of HMT) 'counting enhanced lending to the private and household sectors as if it were a contribution to the government balances and hence a repayment' to hide the effects.

    So here is a recipe to repair things:

    - consolidate the assets of the largely state-owned elements of banks into one 'bank' (let's call it Osbourne's Bank for the sake of argument) and get it lending against its existing asset base to generate the balance sheet that will allow it, in 2015 (or some future date) to be sold off. The remnants of the existing banks will have freedom to pursue an agreed, lower risk, strategy for growth with targets for balance sheet value, lending and debt payments from 2015. This is not nationalisation; it is proper bank separation, for a period, with a guaranteed end point. Not easy to sell but it will work, George.

    - close the Bank of England for a period and establish instead a Banking Industry Board which will definitely not be a lender of last resort or peddle bills (a new Treasury Bond Office will do that) but will hold a collective liquidity reserve against new assets, the rate to be set by the BIB and HMT jointly. This 'Risk-based Assets Reserve Ratio' need not have a deposit banking brother of a 'reserve assets ratio'. The Act setting up the BIB and introducing the RARR could even have a sunset clause or review point to enhance confidence. Go for it, George.

    - consider selling some UK banks now or forcing them to repay early. Confidence is a two-way street, and moral hazard is problematic. Show that you mean to sort this out whatever it takes within banking itself. Set out plans for that, with a clear date for a once-for-all announcement. The value recovered by the UK governmnt could nominally be set against the £800bn+ owed by the sector.

    Forgive the banks a penny of what they owe, or cover their debts for them again, while plunging millions into unemployment, and there will be riots on the streets that make Athens look like a polite social gathering.

  • Comment number 70.

    52. At 12:54pm on 30 Jun 2010, John_from_Hendon wrote:

    'The only realistic 'solution' is to allow credit to contract, asset prices to fall, loans to fail (secured property to be repossessed and sold into the market at lower prices), banks to fail and countries to fail that is what the market 'demands'.

    This debt deflation spiral was tried in the 1930's. It will lead to Soup Kitchens.

    Scratch that.... it will lead to WW3!

  • Comment number 71.

    Eurozone banks are hooked on credit provided by - in effect - the public sector. And are fearful of having to fend for themselves.



    wowwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwwww


    The banks immortals have been snackingk off woelfaaair for 30 years with help from their big broth er centroll banks cooksters back stopping their thrice Aponzi time share scheme from which they derive their index linked pension carrot divine writes.



    The banking ponzi bunking woelfairwell system is an Aartattack on the carrot voucher rights of themasses pulling the carrot scrappage cart up the hill to meerkat.

  • Comment number 72.

    I won't try to solve the country's problems as I am busy trying to think through my own situation. I have GBP 250,000 mostly in cash on short term deposit, no property or other assets, no pension fund, and no debts. Should I buy physical assets to protect my money from inflation,which many on this blog fear? Or should I stay in cash because, as many on this blog have said, the value of assets will collapse as owners who have over extended themselves liquidate what they have? Or am I just going to lose out whatever I do? Suggestions welcome from all except licensed financial advisors.

  • Comment number 73.

    Wolfie's back. Yay.

  • Comment number 74.

    Paul from Hong Kong,

    From Hong Kong! Do what the Chinese do...buy gold or jewels something you can convert to cash when needed and tends to hold value. The bankers and their governmental prostitutes are only interested in saving each other, banks first of course, and the future is uncetain as other failed states will begin to announce their debt and the bankers will extort interest rates that will cause a depression...they really don't care they make money either way as we have all learned the hard way..again. Paul look around, nobody understands the threachery of governments and bankers better than the Chinese.

  • Comment number 75.

    Buddy, can you spare a trillion dimes....?

  • Comment number 76.

    #72 (PaulfromHongKong)

    In the big picture, all paper currencies are now faked and dangerous. Believe it or not (and most people cannot comprehend such an old-fashioned idea) the only true default currency is gold (physical gold) -and even then the banking sector has been trying to manipulate that for years. Mind you, they have only succeeded in controlling promissary pieces of paper that claim to be gold.
    Buy productive land somewhere (you might get a Greek island soon) and as much gold as you can store. At worst it will ride out the financial tsunami and retain its value -but much more likely- it will quadruple in value within 3 years.
    Or maybe start a company and employ people; that might give you the best return of all.

    Regards,

  • Comment number 77.

    @ 50. At 12:52pm on 30 Jun 2010, Barry wrote:

    > Jacques Cartier no. 38, A gem of a post.

    That's nice of you to say so.

    > Maybe the answer is to have all the bankers publicly stoned

    They appear to have been stoned out of thier minds all the way
    through the crisis.

    > the low IQ bankers like me that don't see it, right?

    It's a dirty job, but somebody has to do it.

    It's a very low-tech industry, and we can start new banks whenever we like.
    I lend money to my brother; all you need is the brains to use a spreadsheet
    properly.

    > (there is a) negative corellation between strength of opinion and knowledge;

    That explains how the Sir Greedies got hired, then.

  • Comment number 78.

    72. At 4:37pm on 30 Jun 2010, Paul from Hong Kong wrote:
    I won't try to solve the country's problems as I am busy trying to think through my own situation. I have GBP 250,000 mostly in cash on short term deposit, no property or other assets, no pension fund, and no debts. Should I buy physical assets to protect my money from inflation,which many on this blog fear? Or should I stay in cash because, as many on this blog have said, the value of assets will collapse as owners who have over extended themselves liquidate what they have? Or am I just going to lose out whatever I do? Suggestions welcome from all except licensed financial advisors.



    When people start thinking about only saving themselves then its time to think about canibalism and weather you can acquire a taste for it , plus acquiring friends with AAAok47's who might like to share your rem'ninmby circle of friends [soon to be occupying your cool room because they didn't want to go off in their back yards] before giving you the cold shoulder and a menu with your name on it .

  • Comment number 79.

    66. At 3:29pm on 30 Jun 2010, Uphios wrote:

    "Welcome back WOTW. Looking forward to your post clearing mods. Where you been?"
    Even the rebellious need a break away from it sometimes.

    I see not much has changed - the world is still living in financial fantasy and the stack of cards are still swaying. Met someone from Detroit while on my break - not a pretty picture by all accounts - strangely not really being commented on over here - the media don't want to scare the 'little people' I guess. The news is becoming more and more trivial as they desperately try to distract our attention from the continuing collapse.

    I missed the budget - so I'm still catching up on the destructive hole it's probably going to cause - you know things are bad when a Tory led Government is talking about reducing the police force in numbers and in pay. I see the oil spill is still going and now getting worse most things have continued their downward trend in the markets.

    When I left Britain we were in a mere recession - following the England result against Germany it's now become a full blown depression!

  • Comment number 80.

    "And banks are currently issuing (selling) less than half the debt that's needed."

    I can see Robert that you have finally started to talk straight. So
    MONEY _IS_ DEBT after all...

  • Comment number 81.

    #73. At 4:52pm on 30 Jun 2010, PacketRat wrote:
    Wolfie's back. Yay.
    -----------------------------------

    Seconded

  • Comment number 82.

    #70. newblogger wrote:

    "WW III!" - many people thought that was an inevitable consequence a couple of years back when this all started.

    The economics will happen - thus it is critical that all countries stay engage and mutually supportive of other countries, particularly in Europe the cradle of World Wars! The EU is even more vital now!

  • Comment number 83.

    #59. Uphios wrote:

    (précis:)"Asset prices will remain unchanged for 8 years - if we are lucky!"

    Only way that could happen is if we have 100% inflation to bring them down to rational long term multiples of income. The net effect will be a 50% reduction in house prices. Houses are still far too expensive. Farm workers need to live near their work and they can't - that cannot go on. Workers cannot live near where they work and they can't. House price have to fall to re-energise the economy - sorry if it hurts your personal master-plan. (Sell now, rent till the crash and then buy again! if you can get the timing right!!!!)

    There is another terrible consequence of workers having to travel too far and that is the personal and productive time it wastes, the emissions that are generated and the waste of resources and despoiling of the country for roads. We need to return to a situation where workers had to live within 30 minutes travel of their job for all of the above reasons.

  • Comment number 84.

    83. At 6:56pm on 30 Jun 2010, John_from_Hendon wrote:

    I'm minded to repeat my comment about increasing the amount of land available for development from the current 10% to 12%, which would achieve a consequent reduction in land-based asset values.

  • Comment number 85.

    Keep getting sucked back in by great debate and thinking.

    Just want to endorse last two paras of #62. Great post. Hear, hear!

  • Comment number 86.

    "65. At 3:22pm on 30 Jun 2010, writingsonthewall wrote:
    "In the UK, for example, UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme."

    ...or what? - they are alowed to fail - I don't think so....what would be different this time to Autumn 2008? Is the Governments fear of 'total banking collapse' any less than back then?

    As the public sector sheds jobs, the private sector......sheds jobs?

    I'm sure this isn't how 'recovery' works..
    http://news.bbc.co.uk/1/hi/uk/10457352.stm
    http://news.bbc.co.uk/1/hi/business/10462761.stm

    Fools, fools and damned fools. "

    Great to see you back. What do you think about the rumour that the German's are warming up the Deuchmark presses? Also check out Chris Martenson's web site and U tube "crach course", if you havn't already. Its very interesting.

  • Comment number 87.

    I would also like to congratulate WOTW's return, get this person into power.

    How long will this bunch of morons last Robert / WOTW? What are the odds on length of Service? December?

    ps...I'm 40 tomorrow, I'm told thats when life begins :-0 (so no nasty scary stories about armageddon)

  • Comment number 88.

    And the Chuckle of the Day Award goes to ...

    ... #72

    for the last sentence!


    PS: Happy Birthday JavaMan. 40,000! Now that's an achievement! :-) [Beats the Neanderthals on the other Blog.] Here's to the next 40 - best wishes!

  • Comment number 89.

    88 I'm sure he was just trying to avoid some NuLabour rule about the constraints on supplying "online ad hoc financial services"

  • Comment number 90.

    RP: "...but a squeeze on the funding available to banks that - barring a miracle - will also squeeze the volume of credit they're able to make available to households and businesses, or to all of us".

    which is (again and again and again) exactly what needs to happen. There needs to be an end to easy credit. British homeowners need to repay their towering mortgage debt, not to have even more of it. Consequently house prices finally need to go into free fall.

  • Comment number 91.

    If it was an out of work person the banks would be screaming scrounger or parasite when any body gets state benefits. Now the boots on the other foot and its the banks that are getting state benefits should we not be calling them parasites on a magnitude a thousand times greater than private individuals!

  • Comment number 92.

    88,

    Thank you very much, well I've risen to the tune of a longer day and a weekend of overtime, I'm really enjoying life at 40 :-|

  • Comment number 93.

    The Banks are, in effect, the motor of Government Austerity.
    Unless Banking corporate welfare ceases then huge swathes of jobs in the Public and Private Sectors will be ended by Government Spending Cuts. The only purpose in thes cuts being to provide cashflows and bonuses for Bankers. This will create a Negative spiral of Public Cuts resulting in a declining quality of life for everybody except the banks.

    The truth being that the Banks are in Hock to the Taxpayer by much more than the "spending hole in public finances". The truth is that we, the Taxpayers, are being sold a lie about who has financial problems. It is not, in fact, industry. Non Banking Industries would be pootering away if Banking provided credit. They might not be perfect but the growth evidence is that they would be solvent. Similarly Government is not insolvent. The main economic location of debt management problems is Banking.

    There is a convenient excuse: historically high levels of personal debt. Except: general taxpayers have a way of earning money, outside of banking, in order to pay that back. Personal debt is not the whole story. Banks have sold those debts and made "pure products" out of repayment schedules and so on. Having taken risky investment decisions based on "ownership" of customers, Banks have created the situation that they now expect to be saved from. Not only that, but they expect to go back to their previous behaviour.

    The volume and cost of Bankers Welfare is something that would never be tolerated if the recipients were individuals. If banks were out of work they would currently be "long term unemployed" - having been in receipt for two years or more of benefits. That would - if they were signing on - cause them to be forced to attend training course to get them back on track. Attend or lose benefits. It would also make all benefits conditional on "actively seeking work". Conditions such as these are seen to be appropriate for individual persons - why not the corporate person: they are welfare recipients and therefore a drain on the taxpayer.

    Or, perhaps there is one rule for ordinary welfare claimants and another for the special friends of government.

    The stark fact is that, unless Governments take control of their own currencies, Banks will simply recreate the crisis again in a few years time. The taxpayer will be instructed to suffer cuts when it is patently obvious that cuts do nothing except feed the welfare dependence of the banks.

    The idea that Germany is getting out the old Deuschesmark Plates for printing is a rumour the banks would like to be true: if they could bring down a "big" economy then Banking really is too big to fail. That should not happen, Germany should simply issue a Central Bank Act - no printing presses involved - making the central bank the only source of credit. The Banks have played with Sovereign currencies for too long - as though they owned them. It is time for Europe and the Countries of Europe to actually assert their right to manage their own currency (or currencies) and not leave it to Banks out for the main chance.

    If Germany were to take a lead on the control of the issue of credit then there would be no need for cuts: credit could be provided where needed instead of for the purpose of providing future profit or future bonus payments. Going back to the multiple currencies of Europe is a Bankers pipe dream - allowing profits to be made on currency exchanges. The era of austerity that Banking incompetence has forced onto the world is likely to see the reduction rather than proliferation of currencies. It's a natural defence: an economy that is too big to fail.

  • Comment number 94.

    Looks like things are on the way down again with Japan and the Dow leading the way.

    No/low growth and deflation looming.
    Victims of our own efficiency.

    Timmmberrrrrr!

  • Comment number 95.

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

  • Comment number 96.

    Just popped back in, wearing sackcloth and dropping ash everywhere (from Steffie's blog) to see if Paul from HK at #72 received any helpful advice.

    Obviously not. So, as a non-financial advisor but a bit of a creative thinker (don't ask which bit), and despite occasionally getting it wrong, how about this?

    Paul, if you are still relatively young and have a chance of earning a good salary in the foreseeable future, how about not earning anything whatsoever on a little bit of your stash?

    What about setting up some seed money/capital for very small (sole prop) businesses run mostly by women but, perhaps, also men? You could use just £5K of your money and make it available somewhere where that sort of finance is not normally available to people, either because the banks cannot make quick money from them, or they have no security to offer, or there are no banks where they live.

    West and south-west China, Cambodia, Bangladesh and India come to mind as possible locations and are possibly en route on one of your visits back to the UK. You could end up getting your capital back, although you could lose it (or give it away); you might even receive a small amount of interest. And then be able to keep offering money for new investment.

    You will not make a lot of money, but you will stand a chance of changing some people's lives, hopefully much for the better.

  • Comment number 97.

    The idea that banks are some sort of sacred cows that need to be saved is rubbish.

    The state should let these banks go bust and let house prices return to affordable levels. Ever since Thatcher, governments of all complexions have been competing to pump up house prices so as to capture the middle-class vote - this is the outcome of that process.

    In a true market economy, there would be regional banks all over the UK and London would not have all the money funnelled to it as at present. A bank doing straightforward business is a very easy business to set up. The reason all banks need to be based in London is so as to be close to the regulators and politicians who decide which lives and which dies.

    The Midland Bank used to be the largest in the world and it was not based in London.

  • Comment number 98.

    Or, equally, post#01 'onebadmouse' for banks and markets to interfere with governments?

  • Comment number 99.

    Savings rates in UK have totally collapsed due to long-term, low interest lending rates and casino style market funds.

    This has undermined the whole population who do save, outside of pensions, which have also collapsed for many? The only advantage of not saving in a pension is that you get all your capital back.

    There is little, or no chance of getting your pension contributions back, as they are under tax laws, if your employer goes bust - the creditors (banks get first bite) clean up, and where on earth have your years of pension contributions gone?? Can any expert explain that in plain english and the legality of pension schemes as they now stand? - one doubts that, but worth asking?

  • Comment number 100.

    "The taxpayers of europe will be paying for the mistakes' of all the greedy bankers, for many years, with cuts to all public services and many homeless familys and jobless young people. The new government of the U.K.are just getting started, 66000 public job cuts is only the start .

 

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