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How much will taxpayers finance economy?

Robert Peston | 11:13 UK time, Friday, 5 December 2008

You know the world has changed when Jim O'Neill, the chief global economist of Goldman Sachs - the investment bank that defined the culture of bonus-driven, globalised financial capitalism - grumps on the Today Programme that our government probably needs to create a state bank that will provide the vital credit that our commercial banks cannot provide.

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He's been banging on about this for months - because, as you know, it's been obvious for rather longer that the source of our economic woes is the savage contraction of lending by banks all over the world.

And the credit squeeze is particularly acute here.

So Goldman Sachs votes for socialist, state-directed lending. The symbolic power of this thought is mind-numbing, for those of us who immersed ourselves in the liberalised, winner-takes-all financial markets of the past 25 years.

Next week I'm going to write about the long-term implications of the failure of financial markets and the rise of the taxpayer as the new source of credit for the banking system and the real economy.

What kind of capitalism will emerge from the rubble?

But right now I want to look at the contradictions in government policy towards the banks - and the difficult choice it faces about how to revive lending.

The important point, which I've made many times before, is that the £600bn (and rising) of loans, guarantees and capital provided by taxpayers to rescue the banks does not encourage them to lend more, and may actually contribute to the contraction of lending.

For example, the terms of the £250bn credit guarantee scheme - which allows banks to borrow for up to three years from markets with taxpayers standing behind that debt as guarantor - are extremely expensive. So banks have no incentive to take advantage of the scheme to raise funds for lending to all of us.

Bank of EnglandThe £200bn they're raising from the Bank of England by swapping mortgage-backed securities for Treasury bills has to be paid back in three years - which does not feel to banks like an eternity at a time when there's a global shortage of capital and credit.

And the preference shares that three of our biggest banks have been forced to sell to taxpayers are very expensive for these banks. So they want to redeem them as soon as possible - thus giving them another powerful incentive to shrink their balance sheets, reduce lending and prove to regulators that they no longer need the preference capital.

Then there's the impact of the Basel II global rules on how much capital banks need to hold relative to certain kinds of loans. Those rules make it hideously expensive for banks to provide mortgages to first-time buyers, by stipulating that banks have to hold massively more capital for a mortgage when the deposit on a house is 15% of value compared with when its 25%.

Also, as house prices fall, Basel II obliges the banks to raise yet more capital to cover the declining value of collateral held against their £1,200bn of mortgages.

Finally, as the FSA confirmed yesterday, the banks are being forced to hold hundreds of billions of pounds of additional government bonds.


Well, government bonds are liquid, so when banks have relatively more of them the risk is reduced that they'll fall over (a la Northern Rock) after wholesale markets shut down in the way they did in August 2007.

Which is all very well, except that the more gilts and other high quality government bonds that our banks are obliged to buy, the less capacity they have to lend to households and businesses.

So what are the policy options for government?

Well, the Treasury could, for example, revise the terms of the Credit Guarantee Scheme and perhaps expand it, so that banks start to use it on a substantial scale to raise money for lending to all of us.

And it could also provide taxpayer guarantees for other, more long-term borrowing from money-managers and other financial institutions - something along the lines of the sovereign-guaranteed, mortgage-backed securities proposed by Sir James Crosby in his recent report for the Treasury.

I get the feeling, however, that Crosby's narrow suggestion for how to revive the mortgage market has rather slipped down the Treasury's list of priorities.

What is higher up the government's agenda is an increase in explicit taxpayer support for any kind of lending to the real economy, or lending to small businesses, big businesses and households.

It could take a number of forms.

There could be taxpayer guarantees for real-economy loans packaged up into bonds, similar to what Crosby suggested for mortgage-backed bonds.

However, there is evidence from markets that even if these bonds were converted in this way into the equivalent of UK government bonds, so that they were an explicit claim on taxpayers and the state, they still wouldn't be bought by money managers.

You can see this in the failure of Northern Rock, a wholly nationalised bank, to increase its funding on attractive terms from wholesale markets.

Money managers apparently don't want to buy into the UK housing market, even when the risk is covered by HMG. And they may have the same qualms about buying any kind of asset-backed security, even when it's gilt-edge or underwritten by taxpayers.

So there are two alternatives. One would be O'Neill's state-owned, state-funded bank.

The other would be a longer-term, broader more ambitious version of what's already happening here and in the US. Which is that banks could package up loans to businesses and households and then exchange them for cash from the Bank of England.

In effect, we as taxpayers would be funding the bulk of the real economy.

It sounds extreme. There are big and serious issues about whether such an initiative would be perceived by international investors as seriously weakening the strength of the public-sector balance sheet, such that there would be a damaging run on the pound.

And it would probably only persuade our banks to lend more if there was a commitment from the Treasury and the Bank of England that this funding from taxpayers would be available for many years (certainly much more than three years) - which would represent a radical re-making of how capitalism operates.

However, such a substantial increase in the provision of credit by taxpayers has to be a serious option, because the sunny economic uplands won't be visible again until a solution is found to the vicious, inexorable contraction of lending.


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  • Comment number 1.

    '........because the sunny economic uplands won't be visible again until a solution is found to the vicious, inexorable contraction of lending.''

    I suppose your in the camp of the vicious, inexorable expansion of lending Robert.

  • Comment number 2.

    Banks lend to the taxpayer his tax money at a rate of interest. Good trick if they can get away with it.


    State funded bank, funded by the tax payer, to make loans available. Good trick if they can get away with it.


    Borrow money at interest, lend to banks and business and pay back borrowed money with taxpayer money. Good trick if they can get away with it.


    Put gun to taxpayers head and demand money with menace. A good trick and they are getting away with it!

  • Comment number 3.

    'The other would be a longer-term, broader more ambitious version of what's already happening here and in the US. Which is that banks could package up loans to businesses and households and then exchange them for cash from the Bank of England.'

    Am I missing something here, or is this the subprime fiasco again. The government being the fall guy for dodgy loans supplied by the banks !

  • Comment number 4.

    Is this a trick question?
    For the record, I did not agree to fund banks, I want my money back

  • Comment number 5.

    It all sounds very depressing Robert.

  • Comment number 6.

    It would be nice if they asked us..

    I kept my money in a UK bank at 5% interest, instead of icelandic at ~7%.
    I've been rewarded by having my taxes pay for a 100% guarantee of the risk takers, even past the useless FSCS scheme.

    I didn't buy a house at peak, instead saving a deposit for when i can afford a house even when they interest rates rise.
    I've been rewarded by seeing the interest on my savings fall, the price for new mortgages rise, and now am subsidising via taxes everything from other peoples mortgage interest to a BTLs portfolio.

    Why is that 'helping hard working families' doesn't apply if the family in question rents, has savings, and didn't apply for a mortgage they can't afford?

  • Comment number 7.


    where are you going to have your "Mark",

    forehead or right hand?

  • Comment number 8.

    As the 'spender' of tax payers money any government will have to be seen to be deeply conservative in its lending.

    So it will appear expensive to banks and/or will not lend where there is a significant risk of not being repaid.

    Hence liquidity will not (and in my humble oppinion should not) return to 2007 levels.

    What we need is to find a way to cut out the gangreen that does not kill the patient OR require too many expensive drugs to keep the infection from spreading.

    The more I think about it the more I am sure that the way to do this is to let GOVbank lend directly to credit worthy individuals and business at a sensible rate and seperate it from the political need to prevent wholesale colapse and redundancies, which is always going to have an element of throwing good money after bad.

  • Comment number 9.

    Robert - The tone of your blog almost suggests that the policy objective should be a return to 2006/7 as soon as possible.

    I can't be the only one who thinks that a time of unsustainable behaviour based on false beliefs is not the best target.

    We only have one planet, and it cannot sustain resources being used that fast in that way.

    As a human race, it doesn't make sense to be replacing 32" TVs with 48" ones whilst millions of people starve or freeze to death.

    The global policy objective should be for a more long-term sustainable system.

  • Comment number 10.

    Would the government not consider tax relief? As I mentioned in an earlier comment does my money really has to do the run around? Leave it in my pocket and I'll make much wiser fairer and profitable use, both for me and the economy!

  • Comment number 11.

    Instead of bailing banks out, let them fail and get the government to pick up the pieces and gain ownership. (cost saver)

  • Comment number 12.

    I don't understand why people keep talking about "the taxpayer" as if this is a separate entity from "the real economy".

    The real economy is composed of taxpayers. So, if the "real economy" is starved for credit/funds, that's because the tax payers it is composed of are starved for credit/funds. THE REAL ECONOMY IS SIMPLY THE WORD FOR A GROUP OF TAXPAYERS - THERE IS NO DIFFERENCE BETWEEN THEM.

    Thus, it doesn't make sense to act like the tax payer can lend to the real economy because the tax payer has nothing to lend. They are the same person.

    Think about it like this. If a person has 2 pockets in his jeans, and a £10 note in the left pocket, moving to the right pocket doesn't create any more than the £10 that was already there. If the real economy and the tax payer are the same person, by acting like the tax payer can guarantee loans to the real economy, you are just shuffling finite amounts of value around. You are acting like the person with £10 in his pocket now has £20 to his name because he "lent" £10 from his left pocket to his right. But, he still just has £10.

    There is no easy solution to this crisis, and the pain absolutely must be felt. All the stop-gap measures by governments are simply delaying the inevitable and making the inevitable worse. We borrowed from years into the future, and we've spent all of it, and now we have to pay it back. Unfortunately, that means that we'll have to live on pretty much nothing until the debt is repaid.

    Anyone who is an optimist on the economy at this point is simply ignorant of the facts and the big picture.

  • Comment number 13.

    reading between the lines
    - banks can not pay back the loans with (or without) interest,
    - truth be told either can we, (or the gov/guv)

  • Comment number 14.

    Oh dear. Sounds a bit like social engineering on a vast scale, intentional or otherwise.
    Drive prices down, curb lending, stop growth, reduce savings income and equalise the populace to the same level?
    If we are to be poorer or mark time for the next two years, paying our tax bills to pay for it all, we might be better off with industrious and inventive individuals to 'coral' the working population for projects that could 'create wealth' or 'new money'.
    (Shades of the Chinese revolution)
    With so little in the nation to materially export, surely the nation must be able to tap into the brains and skills of those recently unemployed, amongst others, and sell them on as 'consultancy resources' to developing and needy nations?
    HMRC would love taxing them and of course, the fees that it would bring in.
    Anyone feeling a project coming on or are we to spend the next few years, reading Robert's blogs and along with bank managers, spend our time navel gazing and wishing for better times?!

  • Comment number 15.

    The rise in robberies of security vans and other raids is the real indicator of things to come. Sub-prime brokers have clearly gone back to straightforward blagging for cash as their tele-scams collapse.

    The ruthless people previously in the financial scamming business are getting desperate and we should all be worried. Invest in a good quality safe and home security system. Buy gold and diamonds. Ignore this government - they are a lost cause and the measures they take are increasingly ineffective.

  • Comment number 16.

    The banks wont lend, because, in the current market, it is not in their interests. Effectively the return is not worth the risk.

    A government bank, which returned lending to Brown's 2007 levels, would effectively be losing money by taking on the risk the Banks wont take.

    Naturally the taxpayer will be paying for this. Again a situation of guaranteed income will exist, which will be exploited by rich speculators. However the window granted may be big enough to make Brown electable again which is all he is worried about.

    Eventually this re-run of the 70's is going to have to end with 10-15% inflation stealth tax that will wipe out the value of the debts.

    Let's hope Brown does not give us Argentina II.

  • Comment number 17.

    What we are seeing is the mutualisation of capitalism, something I have been commenting on for a while (see Kubernetes! from November 2006!).

    The signs have been there for ages; consumer activism, the sustainability agenda etc. Big corporations that do not deliver super-normal growth have to consider the broader social agenda. Yes they have to deliver a profit and return on investment, but how and why that profit is generated is more important than the fact that there is one.

    What I consider to be "raw" capitalism, where massive profits and big individual rewards are generated will (and should) be confined to genuine entrepreneurial activity i.e. commercialising new ideas that deliver real new benefits (e.g. low carbon technologies)

    The big companies, (probably starting with banks but also then moving onto utilities, transport, retail etc) will increasingly be run or regulated to run to benefit the whole of society rather than just investors or management.

    Where the government is missing a trick is holding their investment in any company directly. The government is just a proxy for society so let society i.e. individual taxpayers (or voters) own these stakes, increasing democracy in business and removing the opportunity for political interference.

    Specifically what they should do is transfer ownership to a mutual structure e.g. a building society for financial services; a co-op or something like John Lewis for other industries.

    It seems ridiculous that the so-called Co-op MP's (e.g. Alun Michael and David Drew) in the Labour party are not publicly agitating for this.

  • Comment number 18.

    In a nutshell we're all doomed.

    Who in their right mind would have possibly thought that Goldman Sachs would be advocating a state bank to provide lending??

    Did anyone think that it was in the realms of possibility that we'd need convincing that capitalism was a good thing??

    I fail to see how we can get out of this mess other than to let it run its course and for the state to help people who lose everything.

    This recently meddling in the house market will simply prolong the downturn - we all know that house prices are way way overvalued and need to fall another 20-30% - only then will some normality start to return.

  • Comment number 19.

    This has been pretty obvious to anyone with any knowledge of the property industry, both commercial and residential. They are all 'worth' substantially less than the loans secured on them. That makes the UK banking system bankrupt, PERHAPS with the exception of HSBC. Add to it all the non-jobs in banking/accounting/estate agency, and retail and givernment and you have a larger Iceland.

    The repeated sticking plasters are pointless. The goverment should formally nationalize the banking system fully, how would t make any difference to what we have now where it is ostly nationalized anyway.

    We need a good kicking from the IMF, drastic drops in standard of living, reduction in the size of government and the benefits system and higher interest rates to rebuild some savings. Only the IMF loan conditions will shake out our tendency to live now on tomorrow's money that is mysteriously 'created' in various bubbles.

    Thanks to Brown, the IMF is exactly where we are headed. It is ominous that international money managers are refusing to buy assets even backed by the Treasury, given that it is indirectly linked to the worst housing bubble inthe world.

    Let's all get used to it.

  • Comment number 20.

    Why am I laughing about all this?

    Surely I should be crying?

    The game is most definitely over people.

  • Comment number 21.

    ..'coral' the working population for projects that could 'create wealth' or 'new money'..

    Do you mean gamble a couple of pounds on the weekend football? .. I go to ladbrokes and william hill too

  • Comment number 22.

    The government is, as usual, operating at 2 levels.

    On the one hand it is making it look like it is doing something to reduce the cost of borrowing by lowering interest rates and insisting that the banks pass the savings on.

    At the same time it is failing to do anything about the interest rates it charges the taxpayer. I am sure there are more examples but at the moment anyone with a legal aid bill is paying 8%.

    People in glass houses should not throw stones ,Mr Brown. Lead by example and cut the ridiculoius rates the government charges the taxpayer when they are unlucky enough to owe the government money, or shut up and let the banks make the commercial decision to go for a bit of profiteering the same as the government is!

  • Comment number 23.

    We were told the banks had to be saved because they were a vital cog in the economy. Without them, apparantly, are normal way of life could not continue.

    Now it appears we require the Govt to take on the roll of National Bank to its people. If this is to be the outcome then why have we propped up the banks in the first place, they should have been allowed to fail, depositors protected by the Govt. and borrowers pursued by administrators.

    It just proves that no-one knows what they are doing and are simply making it up as they go along.

  • Comment number 24.

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

  • Comment number 25.

    My tax is due to pay in January (I'm self employed) - I don't really want to pay it as I'm not happy with it being given away so irresponsibily.
    If it wasn't for the bully boy tactics of HMRC I'd try to argue it.
    Don't rate my chances of getting away with it and certainly don't want the fines.
    Perhaps I should be as forceful in demanding some return from the vast amounts I've already donated!

    I'm not threatening it like some but am really leaving this country - enough is enough - I'm fed up of being ripped off. I've never been in debt, always worked, always paid my way, my wife is the same.
    Sold up 12 months ago - how lucky was that?

    We're off to somewhere where we are appreciated and our savings earn decent interest (at the moment, anyway).

    5 month and counting....

  • Comment number 26.

    This all sounds rather like the Third Option - between socialism and capitalism - inbetween WWI and WWII and that went nowhere, or like Fanny and Freddie in the US.

  • Comment number 27.







  • Comment number 28.

    I known all this talk on the economy is rather depressing but in the face of adversity we need to stand and fight.

    What do I mean?

    Reduce your debts, start now!
    Reduce personal taxation, now!
    Increase interest rate, now!

    Capitalism has rules, these may be implied but rules it has. Those rule have been broken and the treatment may be unpleasent and loose votes.

  • Comment number 29.

    Re my pst 24


  • Comment number 30.


    Thats been my position from the start.

    No company Bank or otherwise should be propped up by the state.

    If the Government hadnt squandered that money propping up the banks they would have had leeway for real fiscal stimulus instead of the ineffective meddling that we had in the PBR.

    They should have all been allowed to go into administration until the administrators got a competant buyer to run the business.
    There are plenty out there, and they're still waiting for the green light to take over.

  • Comment number 31.

    I feel like post 19. Depressed!

    It seems like we've either got years of state intervention and non-stop dam propping initiatives tying everyone up in complex peter robbing paul daily announced state initiaives. I.E. putting off the inevitable.


    We just let the correction happen as post 19 suggests and just get used to a completely new landscape of failed businesses and mass unemployment but with a levelled playing field at the end of it from which to re-build with the magic of real confidence.

    Therein lies the enormous failure of the Blair Witch and Bluff and Bluster, Boom and Buster Brown's handling of our nations affairs. What a disaster!

    I vote for short term pain and long term gain.

    Bring on the recession!

    No more state sticking plasters please!

  • Comment number 32.

    Let us rejoice that the poisonous, reckless selfish ideology introduced into the UK by the middle class upstart from Grantham has come to an end. It is sad that ordinary people will have to pick up the wreckage. However, working people will still retain their skills to, grow crops, build houses, and create every other 'real' product required for life to go on. The most important task now is to create a legislative framework to ensure that the wreckers will never again be allowed to exercise such influence. I remember when Gordan prefered Maxton to Friedman.

  • Comment number 33.

    So an industry "expert" now starts to preach the need for a state bank. It is entirely typical and utterly hypocritical.

    There is nothing mind numbing about it. It is just crocodile tears!

    An example of one of the major players who see's themselves in a losing position now preparing the ground so that they don't loose in the future. Future profitibility must be maintained, that is their sole position. It is utterly nieve to think otherwise.

    The same old story, privatise the profits and socialise the risk.

    Sound money usually indicates sound goverment, what do we have...?

  • Comment number 34.

    One obvious solution is to peacefully help, teach and develop africa to help themselves and set up fair trade to supply the world. The UK could be a partner to help educate people set up the system if they wanted us to.

  • Comment number 35.

    Actually I think I've read this book before, and I can just about recall the final chapter. I'm pretty sure it ended in a nice big war. Or was it a revolution? One or the other.

  • Comment number 36.

    I have been saying for a long time that it should be possible to create a major mutual bank particularly in Scotland where one well run and regionally focussed bank would be a huge benefit to the economy.

    Similarly of course there could be a "Bank of Wales" and/or a "Northern England bank".

    What has to happen though is that the banks are disconnected from the City and the Treasury and its malevolent influence not just over banks but the entire UK economy. By mutualising the banks this puts them under the influence of their members and the trusts that should run them.

  • Comment number 37.


    If this is your answer to this mess along

    with all the other DIRE FISCAL PRUDENCE.

    You YES YOU LOT???


    LETS ALL GO DOWN LIKE 1920s/1930s



  • Comment number 38.

    It was interesting to hear Mr J O'Neil Chief Economist of Goldman Sachs talk on Radio 4 (link contained in your text - thank you) about the Gov't PRINTING money as a solution.

    Money as an asset class will almost inevitable suffer along with many other asset classes....perhaps not initially as disinflation may be the first port of call as the mess unravels...but when the hurt really hurts printing money may be the next or even last port of call in this unpleasant journey.

    The Issue Dept of the BoE 'allows' money to be printed in exchange for Treasury Bills and Bonds to finance the Gov't's spiralling debt.

    As I blogged you yesterday Mr Peston the UK becomes more like Weimar Germany as each day passes . At the early stages at the moment....but one or two years down the line, who knows.

    Next time you walk down the Wilhemstrasse (oops sorry, I meant Whitehall) and turn into Voss Strasse (oops again, I meant Downing Street ) to converse with the Good and the Great you could make a suggestion :

    Buy up all of the still remaining Printing Presses from the old Reich's Bank at the best possible price.

    I hope you are continuing to enjoy the usual round of parties your job entails at this time of the year.

  • Comment number 39.

    Yet more doom mongering Robert! Your entry contains contradictions though. You bang on about the £600bn "and rising" figure of government loans, capital and guarantees and then explain in the next paragraph how the £250bn guarantee scheme is too expensive and banks won't be using it. You also fail to state that the additional government borrowing is asset-backed rather than borrow-and-spend. It is the net additional debt and the net additional interest payable that we should be concerned with - you're only considering one side of the ledger.

    You also talk about the "winner-takes-all" market of the last 25 years. I don't recognise that, maybe you could point it out. The last time I checked, the billions in City bonuses are taxed at over 50% immediately on payment (the employee pays tax at 40%, plus 1% NI and the employer pays NI at >10%). Hardly winner takes all. Sounds more like winner-splits-50/50-with-the-taxpayer to me. Who do you think has been funding our schoolsandhospitals for the last 10 years?

  • Comment number 40.

    I'm sorry, they wanted it all ways and now it looks like they lost the lot. This hand was the one who first wrote this particular Mene Mene Tekel Upharsin on this wall the day that this crisis first hit. They were warned, it was plain as a pikestaff and it's now inevitable.
    What kind of economy are we headed for? One which will be a lot more socialist, but also paradoxically a lot less secure - I always said I doubted if I'd retire aged 65, and now that's almost certain to go for a burton. Salaries and state benefits of all kinds are going to be hammered too - get digging those flowerbeds, folks, we're headed back to the less idyllic side of Lark Rise, keeping a pig for the meat and a garden full of vegetables, if we get our acts together, or outright starvation if we don't. Tescos and the rest will also become a balloon, as no-one will be able to afford them, even Aldi. A wise man buys a pony and a paddock now...

  • Comment number 41.

    The only way out of this mess is to create wealth, not more debt.

    Government effort should be targeted at policies to assist the manufacturing sector to expand into export markets where UK industry can be competitive. As regards UK markets, the government needs to be consciously pursuing the support of UK manufacturers and suppliers of goods and services.

    If that sounds like protectionism, too bad.

    Until this country can be ruun at a profit (i.e. a balance of trade surplus) we haven't a hope in hell of getting out of the mess we're in. Safeguarding jobs in the financial sector by propping up banks that are technically insolvent and currently a drain on national resources makes no sense whatsoever.

    If general living standards have to fall before there is a general improvement, that is the price of the last ten years of unrestrained, debt fuelled consumption, and until the politicians have the courage to get that message across, we will remain in a deep slump for many, many years.

  • Comment number 42.

    Interesting and challenging article, Robert. Please accept my compliments.

    If the taxpayer is to fund the government to fund the banks to fund the businesses in which the taxpayer is employed, then why bother with the two middlemen?

    Let us just get rid of the government and the banks and fund our own employment.

    Since Big Government and Big Business caused this entire mess anyway we might be a whole lot better off without these greedy busybodies who want to control everything because they are psychologically immature.

    If I recall capitalism started from the cottage workshop or, maybe this time, we can all stay as meek Diggers and truly inherit the earth.

  • Comment number 43.

    Is it meant to be ironic, you putting a link to Northern Rock's website on your blog?

    I'm sure they'll appreciate the plug!

  • Comment number 44.


    You sound a bit worried by all the chaos, contradictions, spin and hot air.

    We all now know the final destination and it is exactly the same place as many of your contributors have warned of for years.

    Deep Recession/Depression with a bankrupt UK

    accompanied by 0% base rate and a disgraced, morally and intellectually bankrupt government printing money as the last pointless gasp before the new world order begins.

    You ask Robert "what kind of capitalism will emerge form the rubble"

    Answer: the same kind as always but the power will be else where. China and those with the resources.

    It may be worth pointing out to those that currently applaud this talk of 'quantitative easing' and view the huge wave of inflation that is just around the corner and the reality of a currency crash as something to embrace because they think it keeps their little property empire going or allows them to continuing spending more than they ever earn, will find out they are still in debt and have no money. However as always the poor will experience the greatest pain. In addition extreme pressures on our society will grow with an ever increasing risk of violent protest or worse.

    We are already seeing every day on this web blog borrowers set against savers, home owners against tenants. Every decison this government has made is the obvious empty cowardly populist one, and wrong every time. If you want to know what serious inflation can do look at Germany 1930's, look at Argentina 1990's and now Zimbabwe where people are reduced to drinking faeces infected water and dying of cholera.

    Inflation was here all along we just pretended it wasn't by conveniently excluding housing costs.

    Inflation is harmful because "it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals."

    Sounds like the UK under Nu Labour. Those words were written more than half a century ago.

    Savers get Euro's. Gordon Brown was not democratically elected either to party head or Prime Minister. Do not trust him.

  • Comment number 45.


    Why don't you inform us why we will be unable to understand the logic of what the government is proposing to do without presupposing the all-important concept that private risk can largely be eliminated by central control?

    Because, if we continue to have in our minds that there is private risk, none of what the government is proposing to do makes any sense. The only way we can accept that the government is driven by constructive objectivity, rather than by self-protective dogma, is if it can be explained to us why the new philosophical concept of risk is more appropriate than the old one.

    At the moment, the public is judging the government's actions on what effect they are likely to have on private risk, and, quite rightly, judging that they are contradictory and largely useless. But if the government were to explain why it sees the solution to the present difficulties not as intensive care to private risk, but as immunisation against it, wouldn't that at least tune us all in to the same wavelength when deliberating about what's happening?

    The debate we should be having is about the correctness or otherwise of the immunisation argument, not about the quality of the intensive care - because it's not intensive care that's being given.

  • Comment number 46.

    It's extraordinary the degree to which, amidst occasional outbursts of big, blunt interventions, policymakers are just bewildered by what is happening. Half of what they do and say contradicts the other half.

    Perhaps some of the measures you discuss will be wheeled out in the coming weeks, and months ...

    But it's likely to be too late. This crunch has now truly spilled over from finance, and particularly vulnerable sectors like housing and retail. Mainstream manufacturing is at significant risk: and order-books for 2009 are dreadful, non-payment of suppliers is rampant - irrespective of borrowing difficulties and interest rates.

  • Comment number 47.

    We have yet to realise the full impact of this financial Tsunami. American Banks are vitually bankrupt and kept "alive" by life support from the Fed, who is just printing money (e.g. Citigroup). Technically, most of UK Banks are insolvent as well. Gordon Brown has lead this country to financial disaster with his over-spending policies. Jobs in the government sector has risen sharply since "New Labour" took office, while the manufacturing sector has shrunk.... who is going to produce the wealth for this country... Quangos!!!!
    Prudent families who live within their budgets are now penalised in order to rescue irresponsible people who took out loans for their lifestyle. Yes, help should be given to people who are made redundant but not to over-extended individuals and businesses.
    As the Sun Newspaper stated in 1992... "Will the last person who leave Britain turn off the lights!".
    I am emigrating to new pastures while I still can afford to do so.

  • Comment number 48.

    About 6 years go i phoned Credit Suisse in

    London about deposit account,the Account

    Director asked me what my attitude to risk


    I stated NIL unless i fully understood the

    risk i was to be involved in.

    He then said he was too busy,and asked if

    he could ring back.


  • Comment number 49.

    Not only the the taxpayers finance the economy; it is primarily the savers.

    No wonder people don't save when it is a mugs game. Those who have saved have been massively punished by taxation, inflation, capital depreciation, property price collapse, equity collapse and low interest rates.

    Only savers save and only taxpayers pay tax; why not avoid being in either category and live off others? Many do.

  • Comment number 50.

    Is this a serious pitch for 'the workers shall own the means of production' ?

    I understand the skittishness of the banks but if they won't touch certain areas of business because of the perceived risk then why should the taxpayer ? Do we know something they don't?

    There is lots of evidence that the dead hand of government is not the quite the ideal organisation for running commercial enterprise and again there is clear evidence that an innovative finacial sector does lead to greater prosperity across the economy

    Seems to me we need a less risk accepting culture in financial institutions but I would be perturbed if risk averse government came to dominate the sector - comrade

  • Comment number 51.

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

  • Comment number 52.


    'and until the politicians have the courage to get that message across, we will remain in a deep slump for many, many years.'

    And there lies the answer. At the moment everything that is being done, or suggested, by both the Govt. and opposition is politically motivated towards the next election. Telling the truth about how bad things are about to get is not a vote winner, but it is what this country actually needs. Some realism needs to be injected into the Electorate. Lets just be grateful than Brown did not go to the polls earlier this year (before the s*!t really hit the fan) because we then we may have had this pathetic bunch for another 4 years plus.

    But thankfully they couldnt even get that right.

    At least the US has a new administration who will have four years to address the problems with a mandate for wholesale change. Wheras we wil just have to wait for something.............answers on a postcard to MR Brown.

  • Comment number 53.

    No. 44 MaxRelax

    Well said. can you enlighten me wh you are not running either HMG/BoE/FSA and why we have the muppets we have in teh first place?

    Does anyone not find it AMAZING that we have had not ONE single person in authority prescribe anything that resembles sanity. ALL the poweres that be seem intent on everything you listed, i.e. printing more money, inflating away the problems, re-starting the debt binge and shafting all forms of prudence.

    I find THIS the biggest failure. Even Vince Cable harps on about lower borrowing costs and protecting the profligate. What am I missing?

    In my humble opinion, the best thing we can do is CRASH the property market at FULL speed. Its amazing what reaching the bottom does to bankers, developers, FTBs, loan books and external investors that will start buying GB's debt again.

  • Comment number 54.

    Could the government have just paid out to all UK Taxpayers, past and present, a share of the money given to the banks? That way we would have all had to pay the money directly into our bank accounts and if the banks were still proving not to pass on cuts in interest rates, etc, then we could always move our money to another bank? Probably a daft suggestion but it seems to make some sense to me and would not leave us behold to the will of the banks who have let us down!

  • Comment number 55.

    When will you, Robert, begin asking questions of those in power about when they knew their actions would create this problem?

  • Comment number 56.

    This is the Taxpayer scenario:

    Imagine you’ve just borrowed a lot of money and bought a worthless casino. Then you dress up, go to your own casino, and start gambling in the hope of winning some money to pay back the loan. It’s not gonna work!

    The only (legal) way to pay back this loan will be:
    A massive inflation that will erode the value of the loan, so that you can sell a couple of roulette tables and some spirit bottles and pay back the whole loan.

    Inflation and high interest rates is the only solution to the problem we have caused.

    Agree Robert?

  • Comment number 57.

    So money managers don't want to invest in the UK housing market. No wonder, everybody knows it's way over inflated.

    They should want to invest in British businesses though as they remain some of the best in the world. Britain's infrastructure has been massively improved over the last 10-15 years. We are well positioned. Stop fretting the recovery will come and houses will be affordable again.

  • Comment number 58.


    The first solution is to take mortgages out the the banking system.

    Take a look at the Danish mortgage bond market - the most sophisticated, liquid and transparent financing model in the world for mortgage credit.

    The model would have to be forced on to the banks by a government which has the vision to create the long term structural changes required to re-define the credit and capital markets

    The banks would be very uneasy about such a system, as the strict cover principle means that the institutions/banks would have to pass on all interest rate risk to investors, which significantly limits the source of income and profit margin for banks/mortgage providers.

    Removing property mortgages out of the banks, would free up their balance sheets allowing them to focus on commercial lending and unsecured personal loans - thus kick starting the eccomomy.

    What the government needs to do is stop listening to the banks, stop abusing the taxpayers - and start to “think out of the box”

  • Comment number 59.

    heheheh it's Friday afternoon and looks like this blog is building up a particularly good head of steam on the favourite topic - DOOM AND GLOOM



    I hope you're reading this Gordy; your magnets are out of alignment mate


    As for these Goldman Sach's people advocating state banks etc come on we all know they are just trying to get us to 'socialise the risk'. But they will be back later to privatise the new profits when we start to come out of this crisis in a year, or two or three


    Real social movements need to take the opportunity to move the so-called centre ground back to a place where more than the few benefit. For years we've watched the corporations withdrawing from the wealthy democratic west until our economies were hollowed out; abetted by politicians and the corporate banks and their CDOs


    We're in for a bad time now for sure, and no amount of govt tinkering or intervention will prevent it (though much tinkering is needed to cushion the fall); so let's get out there and get some fresh air on our new allotments, go on some marches, do some chanting, and stop it all from starting over again in 2012

    Oh and the good news: this downturn is going to slow down or even prevent a lot of harmful climate-change, buying us one last chance to smarten up our act generally before it's too late; don't forget the march tomorrow in central London - it's about the real economic crisis

  • Comment number 60.

    "Lets just be grateful than Brown did not go to the polls earlier this year (before the s*!t really hit the fan) because we then we may have had this pathetic bunch for another 4 years plus."

    Contrary to my normal position I disagree to some extent with the above. If he had gone to the polls and by some miracle won, then at least now he would have to be doing something for the long term, not just meddling around trying to last until he's forced into an election

  • Comment number 61.

    Crikey !
    What a long blog.
    Very informative though.
    Explained the situation well.

    This idea of state bank (as against banks that are in a state) seems to have been floating around for a while.

    Isn't it about time somebody in Westminster stopped talking about the idea and got on with the job of implementing it.

    I thought the Government had said they would do whatever is necessary ?

  • Comment number 62.

    As usual a clear summary of the mess we're in.

    The real issue here, though, is that the "global financial crisis" (solved, we are led to believe, by Gordon Brown) has gone from bad to worse. It's just that we've put off the inevitable collapse and our politicians are now scared witless of allowing the laws of economics to run their course.

    Sooner or later (probably sooner) we must face the reality of the debt bubble bursting and taking out one hell of a lot of individuals, businesses, even countries when it does eventually go bang.

    Self-evidently, Gordon Brown is economically incompetent. He's also arrogant to the point that he genuinely thinks that ordinary folk (like me) believe the tripe that he and his government spew up about how they're dealing with this problem, how they're directing banking policies and how everything will be alright in the end. Yeah, right.

    Robert Peston's latest epistle screams "disaster waiting to happen". My advice is don't rely on our political elite to sort this out in a hurry, if at all.

  • Comment number 63.

    We need Capitulation in the housing market.
    We are a long way from it

  • Comment number 64.

    The trouble is everything Flash Gordon has achieved was based on debt and so now he is having his last throw of the dice, when really he should be walking away from the table, as the game of debt is over but he just cannot see it and keeps throwing hoping a seven will come up.

    Please Robert tell him that the dice only goes up to six, a seven was just an illusion.

    As with all gamblers he will end up losing everything, unfortunately so will we.

  • Comment number 65.

    Here's a crazy idea...

    After nearly a decade of unearnt partying why doesn't the UK have the hangover now before it gets alcohol poisoning. Why is a reversion of housing prices to its long-term trend a "disaster"? Why would a massive cut-back on the expenditure on public services be a disaster? Why would have people who have irresponsibly borrowed getting their come-uppence be a disaster?

    Has nobody noticed that all these schemes expire after the next election?

  • Comment number 66.

    Post 58 Sevtak

    Great idea!

    Let's have a non-profit making taxpayers mortgage bank.

    Cleanse the banks balance sheets by moving their entire toxic mortgage loan book to this with a Gov't guarantee.

    Let the NEW mortgage bank charge what it wants for mortgages.....and savings. Say 7% for mortgages and 6% for savings.

    Then savers can deposit loads of money and the NEW bank can lend loads of money with a Gov't guarantee.

    Ban all institutions from offering mortgages unless they act as agents only for the new bank.

    This will get lending again to the mortgage market, thus making the housing slump less severe and helping the economy to recover.

    Savers will prosper too!

    Time to think outside the box!

  • Comment number 67.

    You will have to do better than that if you want to be taken seriously.
    We do not elect Prime Ministers in the UK.
    Mr Brown was elected in the same way as every other Member of Parliament.
    He was elected unopposed leader of his party. A common occurrence in democratic organisations.

  • Comment number 68.

    #25, may i recommend the far east?

  • Comment number 69.


    we need inflation . its the only way of reducing debt

    oh ! and then the little problem of the public sector pension schemes, a bit of de-inflation on these please

    come the revolution

  • Comment number 70.

    This merely confirms that capitalism is a fair weather success. Communism collapsed because it was forced to resort to massive state spending, financed by international credit, which was, in the long-term unsustainable. You could say that the fall of the Berlin Wall was caused by a state sub-prime crisis. [Unsuitable/Broken URL removed by Moderator] The capitalist west managed to postpone the crisis though the privatisation of debt and the reliance on consumption at any price. Now the winter of the long wave is upon us and there is little we can do other than pull the blankets tight around us and hang on until it passes. The only question is what the social and political consequences of this will be. As long as we stick with capitalism though, this sort of long-wave boom and bust will continue.

  • Comment number 71.

    Mr. Peston's blog today offers a seriously mistaken view of how the banking system functions and the transmission mechanism of monetary policy. In particular, his comments on the desirability of new FSA demands for banks to hold lots more government paper are completely backwards.

    The fundamental problem within the global banking system is a shortage of truly liquid assets. Banks worldwide during the good times used a host of high-yielding assets (e.g ABS, RMBS, CMBS) as collateral in repo operations in the open market. The assumption was that such assets were highly liquid. That was a horrificaly bad assumption. Liquidity in secondary markets for such assets has dried up, with the central banks becoming the interbank markets of last resort.

    The bank funding model in the US and UK is broken and it is essential that banks hold a considerably greater amount of truly liquid assets (i.e. government paper).

    But that is largely an argument about structural changes in the banking system. The large take-up of government debt by the banks would also be a very positive short-term macroeconomic development if it actually were happening! In fact, the Bank of England's own data suggests that the Debt Management Office has been overfunding the government deficit in the last six months (i.e. selling more government paper than is required to meet the net cash requirement). This is partly to blame for the weakness of the UK economy.

    It is completely backwards to argue that bank holdings of gilts somehow detracts from their ability to lend to the private sector and hence economic activity. First, the risk-weighting on holdings of government paper are minimal compared to those for mortgages and corporate lending. Secondly, in an environment where new lending to the private sector is stagnant (the constant references to 'savage contraction of lending' is total drivel - one only needs to look at the data), the only way to prevent banks balance sheets in aggregate from contracting is for them to lend to the public sector (or hold more government debt). Such a policy would prevent the stock of broad money in the economy from falling. In extremis, the Bank of England or HMT could buy securities directly off the private sector.

    Far from hurting the economy, banks desperately need to hold more gilts, not less. This will boost to stock of broad money in the economy - hence activity - and give banks a bigger stock of liquid assets to alleviate strains in the interbank market (they have no liquid assets for repo purposes in the private market!). HMT and the Debt Management Office have not grasped this, in turn worsening the downturn in the economy. Until policymakers and the media get past this obsession with lending to "small businesses and hard working families", we are all going to be worse off.

  • Comment number 72.

    The main thing we all need to is to be given some indication that SOMEONE KNOWS WHAT THEY ARE DOING AND HAS A PLAN.

    We need the government and the banks to come up with a scheme to rescue the economy and provide as smooth a transition to a SUSTAINABLE system.

    This involves.

    1. The government printing money and exchanging it for debt.

    2. The banks lending just enough to get money circulating, all the while looknig to reduce the amount of credit and improve their reserve ratios.

    3. Any bank which doesn't play ball (and since the government owns a lot of them is should be possible) should have all support removed.

    A prime example of the problem at the moment is the cut in interest rates. When the BoE made its cut there should have been a (pre-planned) spontaneous response from all lenders. All that is currently happening is that the banks look greedy and heartless and the government looks weak and powerless. Whilst this may be true they should give the image of co-operation

    At some point all of us (banks included) have to stop moaning about and pursuing our own NARROW MINDED AGENDAS and cooperate to bail ourseves out of the sh*t.

    A lot of mistakes have been made and a lot of stupid and/or greedy people have been allowed to do whatever they like. THAT IS THE PAST, we must learn from it and move on. When the dust has settled we can think about punishments.


  • Comment number 73.

    Just what are we trying to save here Robert? An over inflated Global Economy!

    It seems to me that nothing has been learnt from the past decade!

    The UK, along with many economies, over inflated its economy and now we are paying the price (and will be doing for some years to come)

    But if you believe in a free market and capitalism then the whole mess will sort itself out. It may require a little short term help (and a little legislation to help it remember), but if the market demands lending, eventually someone will step in and lend (at the going rate) – in exactly the same way that if someone wants a new TV they’ll buy one OR NOT if they can’t afford it. This seemed to work OK for 100’s of years.

    What we have to do is realign our expectations – spend less in other words. But if this really is a global issue surely the playing field is level!

    Won’t credit be just as difficult to come by globally!

    If so are we really at a disadvantage?

    You never know, ‘Doing without’, might be the new ‘Black’

    Unless of course we are is a worse mess that other Nations..... over to you Mr Brown for the answer.....

  • Comment number 74.

    As efforts to save the Titanic continued the captain updated the passengers on progress.

    "We have installed a lot of extra pumps to pump water from the flooded sections. Some of these pumps have not been switched on because the Chief engineer informs us that we haven't the power to run them. Some have been found to be discharging the flood water back into the flooded sections and they are now underwater and we cannot relocate them.

    The capacity of the ones which are correctly installed appears to be insufficient to stem the flooding and the ship continues to sink.
    However we think we know where some more are stored and are looking for them now - we however understand that these operate on a different current and we may need to change the electrics to use them.

    The decision to take back on board a large amount of passengers luggage which they had relocated to the iceberg has not helped but the passengers affected seem to have calmed down. The extra weight is causing some additional flooding which we are ignoring for the moment.

    The designer of the engines has said that he believes they are fundamentally faulty and are no longer safe to operate. The purser has found some paddles, sticky tape and a wind powered generator and is attempting to construct a replacement - thus far it has produced a lot of hot air but failed to make a significant difference to the efforts to save the ship.

    On a lighter note the remaining stores on the shopping deck that have not flooded are offering a special 2.5% discount deal to passengers. Please take advanatage of this special offer as due to a shortage of currency (the safe is now flooded) charges for all meals will be increased from the next sitting. First Class passengers will now have to pay for their meals and the all you can eat buffet service is withdrawn until further notice.

    Due to the increased charges some customers may find they can no longer afford their cabins - as all crew cabins have been flooded we will now no longer throw these passengers overboard immediately. Instead we will let them stay for an extra 6 months without paying then throw them overboard.

    The engineering team met yesterday to review the ships situation and decided that due to the ship's continued settling in the water they would throw some further ballast overboard. We are sorry that a number of elderly passengers where unfortunately hurt during the operation.

    The patron of the ship came on a flying visit earlier this week - due to circumstances we were unable to offer a full menu.

    We are very sorry for breaking into the cabin of a leading member of the passengers action commitee but we had information from a kitchen porter that his cabin might be the source of some additional leaks which could put the ship in danger. The washer in the tap has been replaced though the sledgehammer used for the job has caused some collateral damage.

    We understand that the Passenger Action Commitee has a plan to repair the damage to the ship which can save us.
    Their 5 minute presentation yesterday was most enlightening as I was not aware that the ship had struck an iceberg previously and that people in the forward compartments had been affected by the flooding of their cabins and workspaces.

    I am a little concerned that their proposal to share the plan is dependent on them taking control of the ship and the current officers leaving the vessel. Let me be clear - the only way I'm leaving is if the ship sinks or the other senior officers make it clear they have lost confidence in me. My compliments to their families at their home addresses.

    The PAC's initial suggestion of throwing a significant number of the crew and passengers overboard to lighten the load whilst scientifically sound may leave the crew at risk of unpopularity. We have taken on some new crew memebers to discuss this in more detail and see how we can lose some weight without throwing too many people overboard.

    I would add finally that despite it being clear that there are indeed 4 compartments which have been holed in the collision we remain in considerably better condition to recover from this than many of the other ships in the area most notably the Ragnarok which appears to have sunk with few survivors."

  • Comment number 75.

    Seeking Taxpayer's money is all the trend it seems these days. Today I heard in today's German radio that EADS has gone 'cap-in-hand' to their Goverment asking for 2 billion Euros.
    I can imagine the Chief Exec saying (like those from Banks and Car makers) "I am really sorry for 'screwing-up' and for not doing my job properly. So, can we have our money now?"
    Monty Python would have had a field-day!

  • Comment number 76.

    Apologies if you've all said this - I've not got round to reading the comments as yet, (same could be said of policy makers as well of course)... but is this a joke?
    At what point do we actually say: "Please stop losing and wasting my money. I do not authorise you to use it anymore, you are bankrupt and derelict!"

  • Comment number 77.

    ".. , winner-takes-all financial markets of the past 25 years."

    sounds like the philosophy of war not peace,

    [not condoning or encouraging war and greed should be a new house rule]

  • Comment number 78.

    If the government thinks i am going to apply for loans and other finance so that it can get out of the mess that too much borrowing made in the first place, it is sorely mistaken!

    I'm clinging on to every penny I have right now, currently living in fear that i might not have a job in a few months unless the economic situation picks up!

    I also find it funny that they want us to go on spending sprees to bail them out, cutting VAT does not make any difference to the money I have left in my wages after paying for the bills (Gas/Elec, Mortgage and so on). So how will 2.50 (or whatever) off of £100 that I don't have to spend going to "stimulate" the economy?

    "Nothing New Labour" have my vote - a VOTE OF NO CONFIDENCE that is.

  • Comment number 79.

    because the sunny economic uplands won't be visible again until a solution is found to the vicious, inexorable contraction of lending.

    I'll tell you what would work.

    A televised statement by the PM explaining what has really happened ie we've all been borrowing too much this past decade and now we have to pay it back.

    There will be job losses unless we take pay cuts. There won't be so much money to go around. I will cut borrowing. I will freeze public service pay and recruitment.

    The truth. That would work. It has to be worth a try.

    It's the misinformation and disingenuous blaming of the Americans, the banks, Uncle-Tom Cobbly and all to deflect attention from the fact that in the UK the biggest causes of this recession have been the failed policies of this government that means we're in this pointless period of threshing around while Gordon Brown tries to grab positive sounding headlines.

    We need to be told the truth. We weren't doing well at all the past decade. The entire past six or seven years of 'the longest period of continuous growth due to my prudent policies blah blah...' has been nothing of the sort. Indeed it was the longest period of irresponsibility and imprudence in history.

    Until the Maximum Leader acknowledges that or his focus groups tell him that (which is where the BBC and Peston should be taking charge) then nothing is going to happen that has a hope of fixing this catastrophe.

    Look at the latest insanity. We print 37bn quid to give to the banks. We charge the banks 12% interest (chosen only because it isn't the 15% figure Brown likes to ram down the Tories throat at every opportunity). He then has interest rates set to 2% and forces the banks to buy his 2% bonds at historic lows while he charges them 12%. And how much will these bonds be worth when he has to increase interest rates when the IMF get called in?

    A 10% paper profit on imaginary paper. Basically a 10% tax on the banks. More when the value of the bonds go down after he is forced to increase interest rates by the IMF.

    And then, for further political advantage he spends all his time bad-mouthing the banks for not 'passing on' his interest rate cuts. Oblivious or unheeding of the economic reality of how banks actually make money.

    The HBoS and RBS executives have all been trashed but I'm amazed anybody from Lloyds would want to sit through the coming hate-fest. Or why anybody would take over at RBS.

    This is another Railtrak on the cards. The banks will be bad-mouthed and publically whipped for political gain and then renationalised with the shareholders and pension funds left with nothing. Brown will make off with the banks which he 'propped up' with a 10% tax and the voters will be cheering him to the rafters having spent the past year being told night and day that this recession is all the banks (and the yanks) fault.

    Yeah. Stick it to the banks!!!

    Certainly not Gordon Brown's fault. No sirrreeee. Nothing to do with me.

    Utterly surreal.

  • Comment number 80.

    [cue Labour's 1997 election theme]

    Their problem is they believed their own hype.

    Maybe that's what you get for having a guy with a PhD in History running the country. Not a scrap of work experience in, say, management, economics or finance - he has no business qualifications at all. His last real job was a journalist. At least he's not in charge of the economy. Oh, wait..

    Read more on wiki.

  • Comment number 81.

    "US employers axed 533,000 jobs in November, the biggest monthly cut in 35 years, the US Labor Department said.

    In a dramatic indication of the worsening situation in the economy, the US jobless rate rose to a 15-year high of 6.7% from 6.5% in October.

    Since these latest figures were compiled, further jobs losses have been announced, including big cuts at AT&T.

    Oh boy are we in trouble!

  • Comment number 82.

    Houses are overpriced.

    Until prices are back near a "normal" level, mortgage backed bonds are a licence to lose money.

    The recession is inevtibale due to the lending bubble.

    Defalting it will always be painful.

    There are two choices:
    a short savage bout of deflation
    a long painful deflation lasting decades.

    There are NO OTHER choices.

    (except extreme inflation and busting the currency).

    Hobson's choice,

  • Comment number 83.

    We've had a crash in our car.

    Gordy's Garage is repairing it.

    When's he going to tell us that we won't get it back quite the same as it was before crash?

    When's he going to say that there's still danger on the roads, so he's had to put in a circuit-breaker so that only a government-registered driver can operate the car?

    When's he going to say that this "temporary" measure has proved so successful that it's going to be put in place permanently?

    When's he going to tell us that democracy has no virtue other than as a rubber-stamp for the decisions of the executive, to strengthen its ability to silence those misguided (courageous?) enough to hold maverick views?

  • Comment number 84.


  • Comment number 85.

    The only thing that struck me reading this was to point out that it is the inherent massive increase in the debt/equity ratios - particularly in the financial sector which has been the building blocks behind the crisis (15-20 years of a credit ponzi scheme). Certain capital rules are now one of the inevitible consequences too ensure that bank balance sheet leverage does not reach such unsustainable levels again. We are now part-way through a massive de-leveraging process the like of which we have never seen before; this will continue until levels and the total level of credit/GDP in the main countries comes down to a more reasonable level. Arguing that banks should be rushing to lend seems to ignore the issue that it was excessive credit creation that got us here in the first place. We unfortunately are going to have to return to reality - saving up for higher deposits on homes. Banks will want protection and a buffer when they lend money against a property in case you cannot pay the debt and prices are falling. I think you'll find that you will have no problem getting a mortgage if you have actually saved up a decent sized deposit - so I don't really think that is the issue. Not until the banks have reached a level where total leverage levels are more sensible; risk has been adequately priced (particularly credit risk) will the markets unfreeze.

  • Comment number 86.

    Oh what has gone wrong with our MPs - across the board they have lost their ability to debate the issues that matter to the electorate to find a solution for now apparently none can or be allowed to think for themselves

    Towing the party line and afraid to argue in the chamber for the people they represent they have so little regard for their own or for parliamentary privilege and essential independence they are happy to even loose independent speech over letting Mr plod improperly and or ignorantly into the centre of our FREE not Police state.

    Our MP’s will tow any party line rather than show any individual, felt through thought so that they never need to be reminded to toe the line that is still painted on the floor and represents some of the reason they are elected for to - hold vigorous and full house debate on our behalf.

    If we want twenty people debating our major issues call in a committee and close the house altogether it may make a good museum to how modern parliamentary democracy got started and then died.

    NO I have not forgotten the remit of this blog but the above point is essential to it.

    Our economy has like the world economy gone dreadfully wrong with many governments around the world complicit in allowing the bankers free hand to do as they wished in earning just what they wanted at the expense of every individual in the world.

    The banker’s greed has not only taken money respect and prospect of a better future from a Zimbabwean peasant to a Chinese rice grower to a Louisiana street musician but to UK a farmer, a sheet metal worker, or our major international businesses.

    The Bush and Brown domain based banks have had free running across the world and have stripped all of it and our true value so what is our governments answer when the gravy train hits the buffers.

    Take what money the bankers could not get to easily our taxes and had over what’s left of every citizens and their children’s heritage to these bankers so they can carry on doing the same.

    Seeking change and doing things differently has what has always moved us on

    Dong the same continuously has al ways left us moving backwards

    Doing the same and believing things will change is madness

    And even the Americans have realised if you want things to be different you have to change the way you do things.

    Banking is substantially old it has changed little in arrogance, immorality, pomposity and the principal of earning by risky trade, pillage and usury. We have to rethink the way we operate our nations, our world.

    The concept of pouring all our money into the same pot that has squandered our money our talents and our reserves without very strong and clear enforceable guide line supported by rigorously backed sanctions is the true definition of madness.

    Our politicians should stand up for the people they represent and start some very full and very detailed debates as to how we run a nation look after its people and play a proper part in world order for the future. Using their own wit and talent for which we elected them.

    And now

    But maybe if we don’t get our government, our constitution, our desires and our consumption into order the mother of governments will like all other governments find that something as obscure as Mother Nature has the last laugh with a plague of climate change on all your houses.

    Nothing in the world works in isolation and distraction of our representative’s duties to debate vigorously verdantly and virtuously all our issues in clear visibility of all our citizens is now essential.

    Wimps out, reformers to the front change is now essential - for clarity - that means doing many thing differently not the same.

    Got it - debate it - create it

  • Comment number 87.

    @ 74 Whistling Neil.
    Nicely judged.

  • Comment number 88.

    Seems to work for the Chinese!
    Gordon Thompson

  • Comment number 89.

    I cannot recommend post #44 enough and want to reitterate his last point.

    Gordon Brown was neither elected to the post of party leader by his follow party members nor was elected to the post of Prime Minister by the electorate of this country. He is by definition the least democratic PM this country has ever had the misfortune to witness.

    How is this relevant?

    Several posters have said things will not improve until 'the pain is felt'. However, it is precisely to prevent the pain being felt that the particular current choice of mearsures is being made. Brown is not opporating to an economic cycle but a political one. For example, he personally announced, after the Queen's Speach, the measure to delay repossessions for upto two years. A policy underwritten to the banks by HMG. Such a policy is directly against the best intrests of the morgage holder currently in arrears. It roles up both the principle and the interest and tacs them onto the end of the loan where they attract more interest. The term and size of the loan are thus increased for the indebted morgagee.

    In a falling market as we have now, a house now can be reasonably assumed to worth more now than it will be in two years time. It's sale in two years time if seized will return considerably less then than now and may even mean the house being sold with a negative equity gap still being sort by the morgager from the now homeless morgagee if the house's sale garners less than the amount of the outstanding morgage.

    Brown's only concern is that this is all pushed into the future beyond the next election. That election he hopes will see him return to office, with the a democratic mandate he so obviously currently lacks, allowing him the steamroller the freedoms that we in this country have for too long taken for granted.

    Viva lá Revolution!

  • Comment number 90.

    In effect Northern Rock has been made into a State Bank.

    Why don't they compensate the Shareholders of NR and B and B, and with whats left of those Banks create a National State Bank ?

    Mind you where would National Savings fit in to this ?

    Technically they already are a State Bank.......

    But high Inflation is already with us, and the Pound will fall further against the Euro and the Dollar.

    We just have to hope that British manufacturing can take advantage of the lower exchange rate.

    I have to smile when I hear of people being so fed up their leaving the country.

    Well, best of luck to them, globally most countries are feeling the pinch, some far less than others.

    I smile again when I read of people asking for higher Interest Rates.

    Well, to keep up with Inflation you would probably need twelve percent or more.

    Funny thats what the Gov't charges on its preference shares to the Banks !

    Its a funny old world !

  • Comment number 91.

    Today, Mssrs Brown and Darling live in Downing Street.

    OFFICIAL: from next Monday it will be renamed DROWNING St.

    By Order of the Permanent Secretary to the Cabbages

  • Comment number 92.

    Dear Robert,

    I find this astounding. When the good times rolled and profits were wonderful any state involvement was, to put it mildly, a dirty word. Now the caplitalists want state help so unsurprisingly the state is a wonderful thing.

    What I really want to know is if the market economy system had been left to its own devices without any interference what really would have happened?

    The credit crunch has shown that greed, gluttony and avarice have to come to an end. It is time for a better and fairer system which does not condemn people to, for example, poverty and place the world on the brink of an eco-catastrophe.

  • Comment number 93.

    Why can nobody see that the capacity for consumers and borrowers to borrow more money simply is not there? We're maxed out. Britain's are the most indebted people in the history of the world. It doesn't matter how low interest rates go - there's simply no more room for anymore debt.

  • Comment number 94.

    Will the Gov't abandon its policy of lying about Inflation to keep wage rises down?

    Or do they still wish to maintain the policy of trying to create a property rich class and a renting poor class ?

    An injection of demand into the economy through Public Sector pay rises would help boost the Consumer economy.

    Our consumer economy has been undermined by wage rises being held lower than the actual rate of Inflation.

    Thusly workers can not afford to spend money in the shops as their cost of living has risen faster than their wages.

    The Gov't knows this, and has it in their power to change this state of affairs at least for the Public Sector.

    Any boost to Public sector wages would trickle down to the private businesses in which people spent their earnings.

  • Comment number 95.

    My God! The emperor has no clothes ...

    Not only is he naked but as he chases his financial rear in ever decreasing circles he is in serious danger of disappearing up his own bottom.

  • Comment number 96.

    72 : iwanttoscream

    "A lot of mistakes have been made and a lot of stupid and/or greedy people have been allowed to do whatever they like. THAT IS THE PAST, we must learn from it and move on. When the dust has settled we can think about punishments.


    Co-operate doing what?

    What if the policy we're being asked to co-operate with is flawed? What's best? That we actually use the whole of human intelligence to devise the best policy, or that we ignore our differences and all pull together in the hope that those who happen to be making the decisions have made the right ones?

    There's been zero coordinated political debate about the most appropriate way out of this mess. Zero. It is as though the establishment has decided that the general population is not capable of understanding thereal choices, so they must be restricted to a cage in which they are encouraged to busy themselves with subjects of discussion that are completely tangential to what's actually going on.

    Meanwhile the power-elite is busy putting in place the new order, which will be presented to the general population as a fait accompli, to which Mr Average has had no input whatsoever, and which he has no prospect of modifying, let alone turning down.

    Good old Common Purpose!

  • Comment number 97.

    Robert wrote:

    "Money managers apparently don't want to buy into the UK housing market, even when the risk is covered by HMG".

    And I absolutely agree with the view. The market is overpriced by at least 50 percent and the funding of the lenders is simply too unknown.

  • Comment number 98.

    This is what happens when you bail the banks out,

    the banks hoard all the taxpayer money while the entire economy goes down the toilet.

    Nice one Gordon, your name will live on in Infamy!

  • Comment number 99.

    robert wrote

    "However, such a substantial increase in the provision of credit by taxpayers has to be a serious option, because the sunny economic uplands won't be visible again until a solution is found to the vicious, inexorable contraction of lending."

    For one thing the "sunny economic uplands" of the last decade or so were a fraud and another thing I'd give it a decade before stable conditions occur which will be compatible with economic growth. This is NOT doom and gloom - just realism and examining what happened in the thirties and before when asset bubble burst.

    The short depression and short duration deflation fly in the face of arithmetic. Indeed if the Bank really believed that the upturn would be steep and sharp as it is predicting then given the fact that economic policy relating to interest rates takes a year to eighteen months to take effect they should be radically increasing rates now, not doing the opposite. They are the same bunch of incompetents who gave us this depression.

    In fact let me throw this as a question:

    It is widely accepted that interest rates take a year to eighteen month to make any effect. The predicted upturn is in the 2nd to 3rd quarter 2009 so the Bank of England should now be increasing rates to moderate the upturn shouldn't it?

    Quite obviously the upturn will not, and is not, predicted to take place when they say it will and as they are saying it will they wish to fool us into spending as though it is a fact in the vain hope that it will happen.

    Are we really the Gadarene Swine they take us for!

  • Comment number 100.

    No80 The spam hoarder from Grantham was a chemist.


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