BBC BLOGS - Stephanomics
« Previous | Main | Next »

How much is it all going to cost?

Post categories:

Stephanie Flanders | 14:20 UK time, Monday, 9 March 2009

The International Monetary Fund often saves its best stuff for Friday afternoons. So it was last week, with the release of no fewer than eight weighty reports on the costs of the financial crisis so far. I wish I could tell you that I had now read every word. But I've read enough to think them worth sharing.

imfHere are the headlines for the UK.

The IMF reckons that the British government has spent nearly 20% of our GDP - £285bn - in up-front support for the financial sector since the crisis began. That compares to a figure of 6.3% of GDP for the US and an average of 5.2% for the advanced economies within the G20.

That's the money that has actually gone out the door. Adding up the "headline" amounts for all the various schemes to support the banking sector, the IMF reaches a grand total of 47.5% of GDP - or £684bn.

That sounds like a lot, but on this wider (probably less meaningful) measure, we're not even in the top three.

The Irish government, with its blanket guarantee for all the nation's retail deposits, has made financial sector promises with a paper value of 263% of GDP, while the headline commitments of both the US and Swedish governments come to upwards of 70% of GDP.

This study was completed at the end of February, so the UK figures don't include the most recent billions for RBS and Lloyds or the Asset Protection Scheme. Those would push the up-front cost up to well over £300bn and the broader "headline" number up to £1.3tn - closer to 100% of GDP. That might push us ahead of the US on this measure, but the US has also unveiled some big new programmes of its own since this study was done.

The big headline numbers sound breathtaking. But they haven't much value on their own, because you're throwing a lot of apples and oranges into the mix. These tallies don't come close to telling you the figure you really need to know, which is how much this is all going to cost us in the end.

For instance, by far the most expensive financial sector support policies to date have been the Special Liquidity Scheme and the Asset Purchase Facility, both operated by the Bank of England. Between them, these two account for 85% of the up-front cost of the crisis identified by the IMF.

If you talked to officials at the Bank, they would tell you they expect to get the vast majority of that money back. The £185bn lent out in the Special Liquidity Scheme is lent against high-quality collateral, with "haircuts" (discounts) against market value which officials say are in a constant state of review.

On the other hand, programmes like the Asset Protection Scheme involve the government underwriting hundreds of billions of pounds' worth of debt, much of which cannot now be properly valued, still less sold.

No-one thinks they will cost the government the full headline amount being insured (£585bn so far, for RBS and Lloyds). But you wouldn't expect them to cost nothing, either. Since they are "contingent liabilities", zero might well be the figure that appears in the national accounts.

If you think that sounds mad, you will be interested to hear that Eurostat, the EU's statistical body, is wondering the same thing. In the wake of the crisis, it's looking at the statistical treatment of all these support programmes, with a view to putting a lot of this on the government's balance sheet after all.

That could have some more horrendous consequences for the level of UK debt. But happily for the government, Eurostat is not known for its speed. It's still thinking about how to incorporate housing into the standard EU measure of inflation, the CPI, a change that was thought to be "imminent" when Gordon Brown changed the inflation target back in 2003.

To go back to the new IMF figures, you might say that Britain had got its bail-outs in early. We have poured more real money into the financial sector going into this crisis than other countries, but we should also get more back when (or is that "if"?) the markets recover.

Unless the Bank of England has got its lending terms hopelessly wrong, the Special Liquidity Scheme should make only a smallish loss - if not a profit.

So what about the net cost, once all of these various schemes and bail-outs have taken their course? An honest answer would be "nobody knows". But in this study, the IMF has a stab at something more precise.

When all is said and done, it thinks that the net cost to the UK taxpayer of the crisis in the financial sector will be around 9% of GDP. Funnily enough, that is not far off the guestimate that Goldman Sachs came up with earlier in the year. That's on the high side (the average for advanced G20 economies will be just over 7%), but it's not the highest - the net cost to the US is expected to be just under 13% of GDP.

Can we afford it? The IMF thinks we probably can - although, being the IMF, it does think that nearly all governments need to take an axe to their budgets once the crisis has passed.

There's some support here for the Gordon Brown line that we come into this with relatively low debt. Our public debt was 43% of GDP in 2006 - well below the 78% average for the richer G20 economies. By 2014, the Fund now reckons our debt will have risen to 77%.

You might think that sounds bad, but wait for it: by then, it thinks, the average will be 104% of GDP. It expects US debt to be touching 100% by 2014, and Japan's debt to be 222% (it's already 195%).

Of course, these latter forecasts aren't worth much - think how much the UK's forecasts for 2009 have changed in the past year, let alone those for 2014. But if he wants to feel better about the state of the public finances, Gordon Brown might want to take a look at this graph from the IMF report.

ratio_public_debt_gdp.png

It shows what happened to Britain's debt in the first half of the 20th Century. Credit derivatives may have been "weapons of mass destruction" for the 21st Century financial system, but Hitler did a lot more damage to Britain's public accounts.

Comments

Page 1 of 2

  • Comment number 1.

    And another imponderable - How long will it take to pay it back?

    Here are some guesses that anyone can do :-
    How much money can be collected in extra tax from the British population? Let's say a couple of grand a year for the 30 million taxpayers - 60 Bn a year. Now how many years will it take to repay the 645 billion then (excluding all mention of interest as the government has reduced it to zero - A GIGANTIC ERROR in itself)

    So that is a decade and a bit.

    Now if the country is squeezed that hard for the next decade economic recovery will not take place and it will be harder to get the tax income so in reality this could be fifteen years.

    Now in reality the .65 tn will rise / could rise to 2tn or even more and this just makes things worse!

    And of course there will be positive real interest rates.

    I think the very relevant question is: Is there not a more financially efficient way to solve the problem that has been caused by the politicians, regualtors and the greedy bankers? If there is not we might as well go back to cowrie shells as money is dead!

    Hyperinflation here we come - it is the only way to go and the Bank of England is (incompetently as usual) working towards it!

  • Comment number 2.

    Do these figures include all those PFI projects?

  • Comment number 3.

    Does anybody know what would be the effect of severing all financial ties with all overseas subsidiaries of the nationalised banks?

    I ask this because it will I think become quite a point of contention that the British taxpayer will have to bail out foreign subsidiary banks bad loans as well as the (purely insane) lending to the UK property and business (private equity) market.

    Will abandoning the foreign subsidiaries (as GM is reported as doing for its European car manufacturing subsidiaries) reduce or increase the cost to British taxpayers?

    And yes I know it is a protectionist move (tell that the GM!)

  • Comment number 4.

    Irrespective of the quantitative financial cost, the bailouts will break Great Britain.

    The bailouts will eventually prop up the price of a family home, such that both mothers and fathers have to work full time to provide a domicile, as opposed to a loving family home.

    Furthermore, our children will be taxed for their lifetime, to pay for the bailouts that result in an unnecessary mortgage burden.

    This teaches us and our children that debt is the only option and yet we are still blamed for reckless borrowing.

    Finally it is not worth saving, as this will only put you at a disadvantage when you come to retire.

  • Comment number 5.

    Hopefully, Britain will survive by the skin of our teeth; but the weakness of sterling still worries me. We are likely to end up with imported inflation and a stagnant economy.

    Given that necessities/ commodities are traded in dollars, the dollar is still more attractive than sterling, even though the USA has large economic problems of its own. Better to hedge against a fall in sterling by investing in US treasuries instead of British gilts?

  • Comment number 6.

    All of these figures chopping and changing day in and day out.

    It's enough to blow anyone's mind let alone the computer.

    Put rubbish into the computer and what do you get out?

    Even more rubbish.

    This just about sums up what we are now being fed by all sides.

    You may as well give the whole project to a class of 12 year olds. They couldn't make any worse a job of it.

    Computers are a great tool but only if the people who operate them understand what they are doing. Sadly it seems not to be the case.

  • Comment number 7.

    This is important information which should be more widely available and updated regularly. It is almost impossible to understand what the Government is doing with its multitude of schemes, some implemented, some not.
    I fear that for the UK the effective guarantee on the external liabilities of RBS and Lloyds will greatly increase the cost for the UK as the collapse of the pound will translate to a substantial currency loss. My understanding is that these liabilities are about 1.2trn so a 30% loss is going to be several times the 9% cost estimated by the IMF.

  • Comment number 8.

    Scary figures!

    But interesting to see the wider perspective and the historical context.

    There would seem to be so many unknowable unknowns that it's almost impossible to predict when/if we will get the debt under control.

    Let's hope we don't get imbroiled in any more wars. A glance at the IMF graph illustrates just how much this has cost us in the past.

  • Comment number 9.

    Stephanie your assessment makes your colleagues Robert Peston look like those of the kindergarden.

    What still has yet to be established and should make right monded person woried as hell is the complete lack of transparency shown by the banks in rgards to what their off balance sheet liabilities are.

    Until this is made absolutely clear all calculations are literally meaningless just as quite frankly is the value of the IMF.

    I would put it to you that teh government is apporaching this issue in a cackhanded and incompeteent manner putting politics before real time economics

    The cost of supplying capital should have been left to the markets as is now the case with all other industry.

    Details of the insurance scheme are still not in the public domain and extra funds thrown at them are demented until such time as we know the full extent of the damage which the banks appear only able to refuse to volunteer.

    What needed to be done given teh interest rate weapon has shown to be of no worth was to cut personal income tax togetehr with National Insurance and the taxes on pennsion funds gross income received.

    The overal cost to the taxpayer would be substantially less and the stimulus impact to contra the recession much faster.

    We also still have teh same unfortunate muppets running teh banks who have been clearly shown to be inept at worst and totally incompetant at best.

    Would you go back to a doctor who prescribed you the wrong prescription? There needs to be wholesale change at the banks and the FSA to ensure the same incompetenets are not anywhere near the scene of activity, unless that happens we really will be unnecessarily doomed.

    The G20 conference will deliver yet more rhetoric and we will all suffer for no reason other than because of political dogma.

    With a Prime Minister who is in total denial and just over a year to run, no rally will give him any credibility.

    We need more thinking impartially and less politics maybe we can then return to getting on with out liives. Socialists and Democrats only appear to know how to spend other peoples money when will they ever learn they need to think before they spend.

    Obama is a ray of hope where for change but I suspect his change will be seen to be regressive not progressive.

    Browns biggest most recent error was not calling an election when he had the chance to command credibility. Now he looks like afrustrated angry child blaming everyone else and upset for his own self inflicted mistakes.

    He will get no help from the USA as they are already seeing past him to the next incumbent here, hence the reception he received, polite but irrelevant.

    History and the game has moved on unfirtunately the British Prime Minister is locked in the 1940's and boy doesn't it show!

  • Comment number 10.

    No. 2. StrongholdBarricades wrote:
    "Do these figures include all those PFI projects?"

    I'd be very surprised if they do.

    On 3 March, the FT ran an article which estimated the PFI liabilities as GBP 2bn this year. There are currently 110 new projects out to tender with a capital value of GBP 13bn.

    https://www.ft.com/cms/s/0/c5c6f39c-0828-11de-8a33-0000779fd2ac.html


    Total exposure to 2032 is estimated to be GBP 215bn.

  • Comment number 11.

    Good article Stephanie, sparing us from some of the more lurid headlines we've experienced recently.

    It would be interesting if you could include some figures for Australia and Canada. These are also 'Anglo-Saxon' countries with relatively free market economies. Unlike the UK, they ran budget surpluses through the good years, and had much tighter regulation of the banks during the boom. As far as I know, their governments have had to put exactly zero into keeping their banks solvent.

    What does the IMF think will happen to those countries, and how does it compare to the UK? After your interesting article on how thrift and savings won't necessarily give Germany a better time in the recession, it would be interesting to see if low debt and solvent banks also turned out to be less of an advantage than they would first seem.

  • Comment number 12.

    Steph,

    "We have poured more real money into the financial sector going into this crisis than other countries,"
    Real money? What's that?
    "We are often cautioned that we must live in the 'real world' by folk
    who mean 'money', a concept more abstract than theoretical physics."


    ;-)
    ed


  • Comment number 13.

    interesting analysis and not as doom-laden as most notes at the moment, though I think we are facing a completely new kind of crisis so all bets are off really

    it occurs to me that the UK govt (ie we as taxpayers) are now playing the role of AIG by insuring up to 500bn or so of potentially bad debt; AIG were insistent that it was a one-way bet and that they could not lose

    we all know what happened to AIG ......

    a lot of the analysis of the long-term is also predicated on assumptions of a strong recovery within anything between 9 months and 2 years, but other factors such as the likelihood of peak-oil and environmental costs are effectively going to act as a feed-back mechanism that could blunt any recovery

    BTW #11 sweetsmellofsuccess you are right that Canada's banking system was well-regulated and relatively ok but govt there did put in $40bn of help and they are facing some serious problems because the economy is heavily integrated with the US in terms of both manufacturing (GM etc) and oil exports

  • Comment number 14.

    Thanks for this very interesting analysis. In response I have worked out what the potential "return on investment" is for the government.

    Having spent 9% of GDP on the rescue, what can we expect them to get back by privatising the government stakes in banks, and in increased tax revenues from preventing the recession from being even worse?

    The calculation is here:
    https://www.knowingandmaking.com/2009/03/returns-on-bailout-investment.html

  • Comment number 15.

    2 & 10...

    and of course there's the public sector pension liability to add in.

  • Comment number 16.

    The US Congressional Budget Office offers a very different estimate of the US future government debt held by the public to GNP ratio.

    [Unsuitable/Broken URL removed by Moderator]

    p27, they estimate that, for 2014, the figure will be 48.% of a GDP estimate of $14.6 trillion.

    What would account for a difference of over 100% in the estimates?

    Are the reports referring to different things?

    The CBO report refers only to the Federal Government debt, to the exclusion of other governmental bodies in the US. Do the IMF numbers refer to all instances of governmen, such as states, counties and cities etc.?

    Or, are different formulas being used?

    What else?

    I have no argument to make, pro or con.


  • Comment number 17.

    Do we know the full extent of the banks bad loans made overseas ? Also the cost of PFI and public sector pensions liabilities need to be included. The solution in the late 1970s was high inflation to erode debt away, but that would not be good for all those on a low income or relying on savings. The debt will be reduced by high inflation, some defaulting, high taxation and public spending cuts which is a great future that we can all look forward to. Much better to spend the money on improving infrastructure like new high speed railways, build the Severn barrage, gear up for an electric car economy as fossil fuels decline and build some nuclear power stations. This would help to get the economy moving again and the UK would have something worthwhile in the future.

  • Comment number 18.

    Stephanie,

    As you say, until the asset for Treasury Bills deals are matured, further bank losses stemmed, the BoE has sold back its private assets and the HMG has sold back our bank shares to the private market , the interest on the public debt calculated,one is not going to know the final tally.

    Listening to Mr Timms on the Lloyds bail-out he says we have a long way to go to restore the gap in lending capacity left by non UK banks and non bank financial institutions who were supplying credit but have now legged it home. Gordon says this deficit was 100billion in Summer 2007. Over half of new corporate loans and 40% of new mortgages over the last decade were being provided by these defunct institutions.

    HMG now see it as their role to step into the gap and bridge the difference. How much more is there to finance to close the gap. I suppose the gap narrows now with credit demand falling.

  • Comment number 19.

    "1. At 2:44pm on 09 Mar 2009, John_from_Hendon wrote:

    And another imponderable - How long will it take to pay it back? "

    Never.

    You simply inflate them into insignificance.

    I see the cure for the banks is going to be rather bad for the rest of the people in the UK.

  • Comment number 20.

    How much would it have cost to create a national commercial bank to lend to business and consumers, then simply allow the bad banks to collapse?

    Would it have cost 47% of the product of the country?

  • Comment number 21.

    This is all very interesting.

    There seem to be two schools of thought developing:

    - the one that thinks that it won't be too bad as there is both profit and loss in these numbers, and

    - the one that fears that that this is all inflationary.

    It seems you pays your money and you takes your choice.

    I think that both are overstated, there is still a lot of this to run before it gets better, and that this is all an experiment anyway.

    It is not just an economic issue any more. It is now definitely a social issue as unemployment and poverty grows. It is gradually becoming a political issue of quite dramatic proportions.

    The policy and attitudes we have now will be different in a few years time. Whilst it will be interesting to observe the developments we will also be fearful of the potential outcomes.

  • Comment number 22.

    When looking at future debt as a percentage of GDP it is not just the debt that has to be forecast - so must the GDP be forecast.

    Projections of debt falling back as a percentage of GDP will no doubt rely on GDP remaining around current levels.

    However, it may be that there is a structural adjustment and GDP in developed countries has to drop back more towards the GDPs of lesser developed countries as globalisation becomes a leveller of economies.

  • Comment number 23.

    Since the cost of fighting the wars in the 20th century all but bankrupted Britain (and would have done so if the US had not propped us up) it is scant comfort that the debt ratio after all this will be less than the ratio after the wars.

    If our debt does reach 77% of GDP, that would have been regarded as utterly profligate just a year ago. The government's own target was to keep this figure to 40%. And 77% would also bust the Maastricht Treaty limits, by the way.

    The real issue here though is RISK. The government now has two huge and ailing banks attached, whose balance sheets dwarf that of the government itself. Quite small drops in the value of those banks' assets could lose us all a great deal of money. The real figure could easily swing from 77% to 150% or more.

  • Comment number 24.

    Or another way to put it. The banking sector is a liability to the UK, not an asset.


    To the tune of well, 100% or so of GDP.

    And the very idea the BOE will make a profit? They can print money how on earth can the concept of profit be applied?

  • Comment number 25.

    'STEPHANIE'S' NEW CLOTHES?

    "We have poured more real money into the financial sector going into this crisis than other countries, but we should also get more back when (or is that "if"?) the markets recover."

    How will recognise it when this recovery occurs?

    If we had 65 consecutive quarters of continuous GDP growth largely comprising unrealistic property investment/building/financial services and other irresponsible/predatory lending for at least 16 years (averaging 2.5% a year) what exactly can the word recovery refer to other than a return to the allegedly irresponsible status quo?

    This is a genuine question, and it won't be the first time that it's been asked. No disrespect intended. Please answer the question, as without a clear, and attainable/sustainable target, what is all this for?

  • Comment number 26.

    The message from the graphs seems to be dont bother winning wars, too expensive.

  • Comment number 27.

    A couple of points that you might like to address for us, Stephanie.

    1. How much "independence" does the Bank of England enjoy at present ? It appears to be little more than a puppet for Parliament at present, despite its much vaunted autonomy.

    The main point is, are the B of E's decisions sound financial ones or based on the political asperations of Gordon + Co ?


    2. If we express our present borrowing in "per capita" terms instead of %GDP, are the graphs much altered, when comparing us with other nations.

    And exactly how much "per capita" are we in debt as a nation today, Monday 9th February ?

  • Comment number 28.

    You've forgotten your history Stephanie. OIn the Second World War, we fought the Germans, but we got our finance from the Americans. One of the US war aims was the destruction of the British Empire, which it achieved by bankrupting us. The misery of the 50s in Britain, reflected in your chart showing us repaying incredible amounts of debt, was the consequence of the deal that Keynes (our negotiator!) and Churchill struck in Washington. We have paid a heavy price for the rosy glow that we like to illuminate that war with...

  • Comment number 29.

    I don't think we need to worry too much about the literal cost of paying this debt off - Darling has already agreed to monetise 50-100bn of it and that is just the start. Add in a dollop of inflation and our national debt ratio will be the least of our worries

  • Comment number 30.

    Re mine @ 4 and JadedJean @ 25.

    What is recovery? There's no way we can plan to get there unless we know where 'there' is.

    As such, we should be able to ask the Government for their vision of ther future...

    Either they have one and don't want to tell us (it's only our money they're spending after all), or they don't have a vision (again it's only our money they're spending after all).

    So what is their vision for mortgage lending...

    I've read and heard alot of contradiction.

    See this:

    https://petitions.number10.gov.uk/LendingReform/

  • Comment number 31.

    Just face it, we are utterly screwed. The very real Elephant in the living room has arrived and his name is Peak Oil, why are we hiding it from the people? There is no way to grown our selves out of this mess over the next decade or more - the era of cheap available energy is over.

    Our Current financial system will either:
    continue us to complete collapse which it will try it's hardest to do (BAU)

    or

    we change the system and struggle through with what oil and gas and coal we have left and use it to build a better future, a new future of energy independence even if it requires a short term command economy.

    we simply have no choice now.

  • Comment number 32.

    It's time to press the 'reset' button.

    Cancel all dodgy debt. Wipe out all ill-gotten savings.

    Why prolong the agony??

  • Comment number 33.

    #19. At 4:44pm on 09 Mar 2009, true-liberal wrote about inflation in response to #1

    How much (hyper) inflation?

    Can't we make a guess about how much inflation?

    Now recessions/slumps/depressions are generally working themselves through an economy in (say?) 3 years. However the figures suggest we need 15 years (see #1) so (ignoring compounding effects which only make things worse) we will need 500 percent inflation in the 3 years or about 70 percent a year!

    Mervyn King (or his successor - soon please) hasn't a hope in hell of managing the inflation he needs to create!

    If interest rates take a year to 18 months to have any effect - he had better raise them NOW to 15 to 20 percent or more if he hopes to control the hyperinflation he wants to create - and raise them by 2 to 4 percent a quarter for a year or so before lowering them by a percent per quarter for a few years.

    These figures may be shocking - but if the whole concept of money is to be saved and trade is to continue it is inevitable!

    If the Bank of England fails to do this (or something very similar) the market will destroy our currency and we will all be paupers for twenty years or more and saving and all property and investments and pension funds will become worthless.

    Hope this is not too depressing!

    This is the price we are paying for the absolute stupidity of the last fifteen to twenty years of wrong economic management.

    It is still my view that it would be far better to keep interest rates high now (by high I mean 5 to 8 percent) - and rescue the repossed into public housing. Do it a month or two and the interest rates will inevitably be much much higher.

  • Comment number 34.

    Total_Injustice (#30) Without explicit answers which are 'transparent' and measurable which the public can see as performance indicators, what they're doing is unaccountable whilst all we really see is major loss of our investments/life-savings/jobs and lots of empty, but ever so sophisticted, euphemistic (QE) technical rhetoric, which in the wake of all the other global disaster tales is now wearing rather thin.

  • Comment number 35.

    Inflation is pretty much on the cards.

    The main problem is not so much how much British Pounds are worth, but what Britain creates to trade with the rest of the World.

    We need Consumers who can afford to buy goods in the Shops, and we need a balance of Imports and Exports.

    The Gov't should be making a priority of finding products and or services that Britain can provide for the rest of the World.

    In the short term Wage Inflation needs to be encouraged in order to generate Tax Revenue and Jobs.

    Wage Inflation amongst the ordinary workers is not something to fear.

    Collapsing businesses is something to fear, as it creates a downward spiral that is very hard to reverse.

    I have suggested a forty percent pay rise for the Public sector ,and I stand by that, as such money would circulate many times thro the Private sector generating profits and jobs for others.

    Pension reform in the Private Sector needs to be undertaken to ensure each employee gets a minimum level of Pension (instead of just the fat cat Company Directors).

    The Public Sector pension terms should be applied as the minimum the Private Sector should aspire too, rather than being used as a scapegoat and distraction from the City workers greed.

    Rich people should remember it is unwise to throw stones whilst standing in Glasshouses.

    And as a side note, no one gets to Heaven by stealing to become Rich, likewise, no one achieves Heaven, Paradise, Elysium , Valhalla (call it what you will) thro the use of Guns and Bombs.

    I'm quite sure the Valkyries never retrieved cowards........

  • Comment number 36.

    JadedJean # 25

    Well, here, at least, is something we see eye to eye on.

    Where we don't agree, it seems, is cause and remedy.

    ;)

  • Comment number 37.

    Now you can see why Gordon Brown would rather lend companies billions to spend on PFI projects, rather than simply spend it direct.

    PFI, Railtrack and Public Sector pensions push us higher than anyone but Ireland - and everyone knows they are bankrupt and it is only because they are so small that no-one pushes them over the edge. They would with Britain.

    But then off-balance sheet funding is one of those nasty banking tricks Gordon would never condone!

  • Comment number 38.

    As I posted earlier on the QE2 blog...
    It's all just a super gigantic Ponzi scheme...they Just got the idea from that Madoff bloke! (as every one else has forgotten who Charles Ponzi was!)

    ...accept it will be our children feeding into the scam that will prop up the whole of todays pyramid scheme.

  • Comment number 39.

    WE DONT NEED AN IMF REPORT TO TELL US

    GORDY & THE GANG HAVE BUST US ALL!!!!!

  • Comment number 40.

    FORGET TOXIC BANKS!

    ...it's fast beginning to look like the UK will become 'the' TOXIC ISLAND (you heard it here first!)...still...I suppose it may cure the illegal immigrant problem!

    https://news.bbc.co.uk/1/hi/uk_politics/7928880.stm

    Just what illegal immigrant would want to come forward for the amnesty and take on a share of our toxic liabilities???...man the lifeboats!

    Fiddling while Rome...blah, blah...yawn.

  • Comment number 41.

    It is obvious what the solution is.

    Stop the nutty projects and wasted expenditure so beloved by the public sector.

    Put it to the digital vote. After all GB is proposing subsidising internet connection for the digitally divided.

    So - How many people want a 50M high horse statue at 2 million+ or do you want to see the money spent on something useful. Say, keeping a school open. Or say special needs education which is throttled.

    Do you agree some govmnt dept needs X thousand chairs from the most expensive brochure available Y or N or would a somewhat cheaper brochure do.

    Do we need another Millenium dome type extravagansa Y or N.

    Do you want the Olympics Y or N.

    Should MPs be buying iPods on expenses Y or N.

    Deary me, do you want 14 billion plus on invading Iraq and Afghanistan or would you prefer this sum to be spent on infrastucture development in those countries and avoid the casualties on both sides.

    Do you think subsidising a pass plus driving course for young drivers at 20 quid a go when the real bill is 150 a go is sensible when there is no real evidence given that it improves their driving, could it be that those prepared to pay 150 are safety motivated and those that pay 20 may not be.

    Or what about building a multimillion garden centre miles away from urban centres so it has no chance of working financially, QED, needs millions is bailouts and is then paraded as a conference centre as though we need more conference centres.

    Should your LG be getting involved in a multimillion commercial development which has the risk of moving to a public money bailout of the private sector partner, otherwise it would be grabbed by the private sector as an investment opportunity from the start.

    Does city ABC really need a 60 million arts centre which is an experiment and highly likely to fail, thats why there hasnt been one there before, QED, ends up as a coffee shop.

    Do you need a very fancy footbridge on a site that has never had a footbridge before, no evidence of need, so when built very very very light use. What a surprise.

    Do you need a poor quality rusty metal sculpture on every roundabout in a town Y or N. Would you prefer some plants.

    Do you object to low energy street lights being swithced off to save the electricity bill when other savings could be made leaving oaps in the moonlight in the winter, when there is moonlight that is.

    Do you want your towns swimming pool shut because the 30k budget for repairs is being wasted on redoing the road markings done a matter of weeks ago because an official could not schedule the roadworks with the road marking the first time around.

    Need I go on. How much do you want to save. How much tax, some taken from workers on the minimum wage, do you want to waste. Its not exactly rocket science.

  • Comment number 42.

    supercalmdown

    Youre very consistent, you up your public sector pay rise request by approx 10 percent a month. Now up to 40 percent. Unfortunately the public sector budget is due to implode not expand. There is no magic pipe from the sky feeding money. Where do you think the money comes from. Who do you think is going to be paying for the extra 1 million approx unemployed benefit claims for example. If you work in the public sector and pay tax all you are doing is returning a small proportion of the taxpayers money supplied in the first case to pay your salary. All taxes ultimately come from the private sector, that is the problem. If you had not noticed the private sector is having a problem so tax income to HMG is reducing and will continue to reduce for sometime.

  • Comment number 43.

    Why dont the goverment instead of taxing everyone in the land for all these bank bailouts, why dont they instead tax the financial institutions/traders the cost of all these bailouts.

    Although may be a while before the banks will be paying tax.

  • Comment number 44.

    StrongholdBarricades @ 2 wrote:

    "Do these figures include all those PFI projects?"


    No, they don't.
    And if you watched Channel 4 this evening PFI so far is running at the least estimate at £240 billion plus interest at 16% plus unquantified "management charges"
    Repayments wil be made over a 40 year period, at the end of which we (or rather our children & grandchildren) won't own even one brick.
    Cost effective? Value for money? I wonder what the poor taxpayers of the future will think

  • Comment number 45.

    "Hitler did a lot more damage to Britain's public accounts."

    Yes,presumably that`s why we declared war on him,to waste lots of money we did`nt have :)

  • Comment number 46.

    Am I the only person in the country who is happy with QE?

    I love all the solutions being proposed. Bring on massive increases in public sector pay, bigger pensions for ex-government workers (sic) and please expand public works projects. All this plus QE (print money to buy government debt) will inevitably destroy the pound. Sadly, we don’t have an economy to destroy, otherwise it would do that as well. Why can’t they do it faster? I almost wish I had voted nu-labour, though I suspect a vote for either of the other two major parties would have been as good.

    My 1842 silver groat is happily appreciating as the country goes round the u-bend. My temptation to expound the obvious solution is almost under control although I do worry that one of the minnows, Iceland, Ireland etc. just might bite the bullet and switch to a sound money economy, so spoiling the party.

  • Comment number 47.

    The numbers are way off the mark. How much will it cost? More than you've got. More than anyone has got. More than the whole world has combined by far. And the longer the crisis goes on, the more obvious that will become. What's more, there is only one place that counts because until that part of the problem is fixed, nothing else can be either. And that problem is the US housing market.

    The scheme was built on an inverted pyramid. At the bottom of the pyramid are just a couple of trillion dollars loaned to people to buy homes they couldn't possibly afford. Why? Liberals wanted them to have homes like better off people. Conservatives' friends made money on each loan no matter what. And the regulators said the economy didn't need them anymore, the market could regulate itself.

    That would have been bad enough but on top of that came leveraging on those debts, in effect insurance policies guaranteeing that they would be paid back. Bundled together and tied in a ribbon of lies by ratings agencies, Investment banks thought they were buying a birthday cake when they actually were buying a ticking nuclear time bomb set to go off as the mortgages defaulted. How much? In the US I think around 62 trillion dollars worth. So by not fixing the 2 trillion dollar problem, a 62 trillion dollar problem was created. (US banks leveraged themselves 10 to 1 while European banks gambled 20 to 1 and even 30 to 1.) On top of that is another layer of investment instruments called derivitives that are so complex that few if any people actually understands them. How much? Some guess over 600 trillion dollars. So until the US mortgage problem is fixed, the rest just gets worse and worse. AIG is right in the middle of it and what started out as a few tens of billions of US government bailout money is now 160 billion with no end in sight. When will the US government stop throwing good money after bad? BTW, the European governments pleaded with former President Bush to not let AIG go bankrupt. Evidently much of the guarantees were made to their banks.

    How will it end? Nobody knows. We could just pay off those houses but nobody who would have to pay for it thinks its fair for people who couldn't afford a house to get one for free paid at taxpayer expense because they lied to get a loan. So that just leaves inflating the hell out of the currency so that these loans are paid back with very cheap newly minted easy to get plentiful dollars. Until we see a huge round of inflation, this is only going to keep getting worse and worse. If the stock market crash tracks true to the one in the early 1930s, expect DOW 1600 to 2000 by around this time next year and many familiar large corporations dead in their graves. If you won't mark real estate values to market, what will you mark it to, a fantasy of how it was in 2006? I'm sure many brokers and bankers of the era felt the same way about 1926.

  • Comment number 48.

    Morning Stephanie,
    well, I see from this blog that you are at it now. Producing figures (just like HM Treasury) to prove any point that you like. It's all in the future so nobody can dispute your conclusions (what a sad lot you economic journalists are).
    Meanwhile, back in the real world, all the stock markets around the world are reaching historic lows (all at the same time...now that's scary).

    Note for posterity, all the economic measures taken so far around the world haven't worked.
    Why do I say this, well investing in stock markets is simply a matter of confidence? You can't fight market forces , they always win in the end. So now we have it, the market doesn't believe that now is the time to invest (gamble) so we will spiral further down to capitulation ...and then?

    The IMF can only solve isolated country problems almost by definition. It cannot solve a global problem so I see that once again our beloved Chancellor has his finger on the pulse asking for the rich nations to give more to the IMF. You couldn't make this stuff up.

    I also note that serious questions are being asked of the bailed out banks in the US as to what they bought with their 350billion tax payers dollars! It seems like quite a lot was invested overseas rather than in the USA. When are the BBC journalists going to ask (and get answers) about where the monies invested by UK tax payers have gone?
    Please stop this journalistic fantasy and get some real statistics on what is going on right now (not in 5 years time).

    Time to take some more medicine for my ulcers.

  • Comment number 49.

    Because of our greed, the euphoria of financial wealth, through get rich schemes! No matter how the numbers are calculated/malnipulated, the band are still playing the same old tune and with not enough lifeboats available!
    Perrish the thought for those that survive and the legacy carried on to future generations.

    The insanity of doing the same things over and over again! History is a great teacher if only we take notice and learn from past mistakes and apply the knowledge of past events. However, selective amnesia proliferate around the global economies to ensue the blame game. Takeing a personal and collective responsibility for our past behaviour /actions can be a bitter pill. Though with the decline value of sterling, Quantitative easing and New Deal are these the solutions or is it game over and time to cash in the chips. And revaluate the meaning of money and financial wealth in this so called 21st Century.

    Finally, are we prepared to explain the financial and social problems we have created now to our childrens, childrens and the burden of debt they shall inherit!

  • Comment number 50.

    Stephanie:

    How much is it all going to cost? It is going to cost a lot of money....

    (**//**)

    They wait until Friday, because the media is not going to focused on the bad news until Monday

    -Dennis Junior

  • Comment number 51.

    Dear Ms Flanders,

    You've really got the green ink brigade going this time.

    I was intrigued by the analysis by inoncom at https://www.knowingandmaking.com/2009/03/returns-on-bailout-investment.html ; more striking however was the almost complete lack of attention it received from other contributors, most of whom seem determined to compete with one another in predicting 'apocalypse soon', even if they can't agree with one another as to how it's going to happen or when (I mean John from hendon, jaded jean, trueliberal and their friends).

    Perhaps they should have a web-site of their own at which they can come up with an authorised version, and let us know the results. Meanwhile, the rest of us can analyse more rationally what policy-makers are actually doing, why they're doing it (for the reasons they've given, perhaps?) and what a realistic range of the possible outcomes looks like, in a world where we all have to work for a living and have a collective interest in the success of what the elected government is doing, whether we voted for it or not.

    Keep up the good work.

  • Comment number 52.

    Wow, an almost cheery view of the future. Unfortunately the skeptic in me is nagging away in the back of my head, asking awkward questions like, "isn't this the same bunch who keep updating their forecasts because everything has got far worse than they expected even quicker than the expected?"

    While I would love to subscribe to this viewpoint, I cannot help but be pessimistic. When computer models come out with a result that is so against what common sense says, then I would re-check the computer. To consider afew points:

    The government only kept debt within their guidelines by moving large chunks off inti PFIs which are now being bailed out, hence the starting debt level was fudged.

    The BoE has begun QE, which is as good as certain to send inflation through the roof. Good news to get rid of existing debt. Not so good if you're a net importer and expect to have to roll over alot of debt in the future.

    I canot see that GDP will recover to the la la levels they reached pre-crash. So far every prediction for GDP this year has been wildly optimistic. If GDP is lower, debt-to-GDP is higher. Look outside and ask yourself, where is any GDP increase supposed to come from?

    While the banks may recover eventually and the bailouts paid back, this will take time and how much of the liabilities taken on for these bailouts fall due before then?

    Finally this government seems incapable of cutting back on public spending. I assume that the IMF figures assume some "prudent" reductions in order to reduce debt?

    Sorry to rain on the parade but this analysis just does not line up with what I perceive as reality.

  • Comment number 53.

    #51 verymuchso

    Having read the blog, the conclusion seems to be we may make a profit, we may make a loss but it all depends upon which numbers you want to believe and how the future works out. Either way the outcome is strongly dependent upon the regulatory system that gets put in place.

    I personally think/hope that the result of this mess will be a far stronger regulatory structure to avoid the excesses of the last decade. According to the blog this would lead to the bailouts running a loss.

    Please note that I don't wish to rubbish the analysis, just point out that the conclusion is unclear as it depends far too much on future events. At least the author has attempted to floow his line of reasoning through.

    The last comment is "interesting", like saying "don't worry if you're up to your eyeballs in debt, what you owe is only a small proportion of your earnings potential over your lifetime". Having been in debt and worked years to get out of it, I cannot agree with that statement.

  • Comment number 54.

    This idea that the tax-payer could somehow profit from the bail-outs is completely barmy.

    Alll through this crisis the government and BBC have been putting the most optimistic case. Every time they have been proved completely wrong.

    It is pretty obvious to me that what we are currently seeing is the inevitable collapse of paper money.

    While this is clearly going to be catastrophic at least we will have the satisfaction of seeing all those banking and ministerial pensions becoming worthless.

    The UK economy is irretrievably ruined and the idea of any kind of recovery within the next 10 years is laughable. Call me a doom-monger but we will see who is right.

  • Comment number 55.

    #35 supercalmdown

    You keep moving your lips (or keyboard in this instance) and saying nothing... 40% to public sector

    OK I'll run with it, you say that it will circulate many times through the Private sector generating profits and jobs for others.

    So let's start the ball rolling...... Oh no, that would be by taking the money for the 40% out of the tax payers pockets first!!!!

    Then handing it to the civil servants who, if we are lucky won't bugger off to Malaga and spend it all abroad, but might treat themselves to some luxuries, and once you have taken the percentage out that will go overseas to the original manufacturer the 80% left will circulate once and 80% of that will circulate..... and so on... 5 times around and you got just 33% left in the economy.

    This is the sort of thinking that got us here in the first place, we borrow money from banks that sourced it overseas, we spend it within the UK.... the only things that stays here at 100% is the original debt!

    This is NOT a closed economy, we sell things other countries make, to ourselves....

    It really is a silly idea!

  • Comment number 56.

    No. 14. inoncom
    No. 51. verymuchso

    There is no question the banks have to be prevented from going bust. We must keep them alive, even if we do not make any return on the investment. You estimate the tax payer will make a return on investment when the government sells its share holdings sometime in the future. However, you admit you don't know when the government will be able to sell its stake and you don't know at what price the government will sell its shares. Fair enough, no-one can know that at this point in time.

    My concern is the toxic asset insurance scheme. The total bad debts insured by the tax payer are around GBP 600bn. This is close to 50% of the UK's total GDP. That's a lot of money. But this only covers RBS and HBOS. There may be other banks and insurance companies which will need help in the future.
    It is true these GBP 600bn worth of potential bad debts will not crystallise all in one go, or may even be less than estimated. However, there is also a risk they could be more than anticipated or crystallise faster than expected. The point is no-one knows. If the tax payer is forced to buy all the bad debts of the banking and insurance industry, where are we going to get all this money from to pay for it? The economy is slowing down sharply and tax receipts are falling. If we haven't got the money we can't spend it on buying the banks' bad debts.......

    Balance sheets with holes in are the worst possible scenario one can encounter in business. Given the size of the banks' balance sheets around the world (not just in Britain) and the high degree of risk associated with their lending and the open derivatives trades (that no-one actually fully understands - the people who create them and deal them don't fully understand them) the potential hole in the combined balance sheets of banks and insurance companies is absolutely enormous. It really is a potential black hole in the world economy.

    It's all very very frightening.

    We are caught in a terrible debt trap, and only time will tell how bad the losses will be. It is too soon to talk about making any profit on the bail-outs. Right now we are in a fight for survival. All that matters is survival. There is no magic way out of the trap. Someone has to pay for the losses. We can only hope the cost is affordable, and spread out over many years to give Britain enough time to pay. It's a case of make do and mend, and taking each year as it comes. All we can do is hope.

  • Comment number 57.

    The trouble with the various mathematical models is that they don't or can't consider all the variables particularly the impact of small changes in behaviour by millions of people, so

    What is the impact of, for example, CFL light bulbs. I've been given a load by the electricity companies, I've bought them at high cost but the last lot were 35p. The average cost of acquisition is less than 50p.

    80% savings in my electric bill for lighting! Yahoo, down the shops or pay off the credit card. But that's also reduced revenue for the suppliers....... and reduced requirement for generating capacity and raw materials from somewhere else. This impacts on GDP doesn't it? It impacts on GDP elsewhere.

    Millions of people all over the western world are doing this sort of thing.

    Likewise, when petrol prices hit $4 a gallon in the US, millions of people changed their behaviour. They didn't nip across state lines on a shopping trip where sales tax was lower because the round trip at 15 miles to the gallon wiped out any savings. They saved their cash for the petrol to get to work. This reduced demand and why would you buy a new car when you're not going to take the old one out so much?

    Would it be a stretch to suggest that medium to long term city centres will become more attractive, that the vast expanses of american suburbs will empty?

    Is it possible that the UK won't be seen as an attractive destination to work or live in the future?

    Is it possible that I might find a UK national waiting at table as times toughen? (I don't mind that its not the case).

    Is it possible that the unintended consequences of a weak pound further diminish demand through millions of tiny daily choices?

    Is it possible that plastic bag manufacturers are having a hard time?

    Could I get thin if food prices continue to rise? Will I buy homegrown spuds or swede rather than mangoes from peru? Will peruvian farmers reduce the cost of the mangoes? Will they grow fewer as demand reduces?

    Its those herd or swarm like minute changes that we can't predict that throw the models out.

    What's worse is we, in our isolated way can't predict what all those other mrsbloggs13c2 equivalents in china of brazil or japan might do, individually. They might all want a Dualit toaster or an AGA. With luck, some of the might.

    Nevertheless, I have no idea how this or future governments are going to pay for the accumulated debt, on or off balance sheet without raging inflation.

  • Comment number 58.

    #51. verymuchso wrote:

    "Meanwhile, the rest of us can analyse more rationally what policy-makers are actually doing, why they're doing it (for the reasons they've given, perhaps?) and what a realistic range of the possible outcomes looks like, in a world where we all have to work for a living and have a collective interest in the success of what the elected government is doing, whether we voted for it or not"

    whilst him/herself offering no analysis of the IMF report which itself is offering a prediction of what will/may/should happen.

    For myself I have been looking at my estimates of likely optimistic outcomes and doing so by using arithmetic. If he/she sees this as overly pessimistic then can he/she provide a numeric analysis of how he/she comes to this conclusion? As I would be more than interested to debate the details with him/her.

    To my way of thinking it is quite reasonable to estimate the likely level of inflation that will be caused by the dramatic easing in the restraints in money supply.

    Further, it is my belief that we are deluding ourselves that any of the actions taken by the regulatory authorities are any form of managed or intellectually consistent response to the collapse in the World's financial systems. They are doing today things that up until last year would have been seen as heresy or insane.

    You write "realistic range of the possible outcomes looks like" - can you tell me how you will repay the gigantic gifts of money your regualtors have given to the banks?

    It is also my feeling that all of the 'dirty linen' within the accounts of the banks is far from being visible to the public as yet. There appears to be 700 trillion of (unsaleable and thus un-valuable and thus worthless) synthetic financial instruments (CDS CLO etc.) floating about the World's banking system - how many of these will become a liability to the British Banks is unknown - but the fact is that these figure are far larger than the total net worth of the World so there is no way of knowing what will happen - but does that mean that we should not provide our best guess?

    As to your implication that it is being in some sense 'disloyal' to everybody else by analysing the economic mess - we obviously differ. I am unable to see it as wrong to point out that you and your car are driving towards a precipice.

    The purpose behind my analysis is to highlight the, in my view, undeniable 'fact' that we are still digging a deeper hole and that is the wrong thing to do. We must stop digging. Just in case that my metaphor is too obscure: too lax an interest rate environment and ignoring asset price inflation helped get us to where we are today - so the remedy of an even laxer interest rate regime cannot be any form of solution - we are just multiplying the errors of the recent past and the inevitable destruction it will cause will also be multiplied.

    We have to live within our means, not at some time in the future but NOW, (also as part of this we must have real positive interest rates.)

  • Comment number 59.

    More positive spin from Stephanie ! The question is not how much as a %age of GDP are we borrowing compared to the rest of the world. The question is how will we or even can we repay it? I dont pay tax in the USA or Japan, I pay it here as will my children.

    The countries finances are a wreck and only those in the cushioned, pension protected, rarified atmosphere of the BBC dont seem to see it.

  • Comment number 60.

    It seems to me that we are still no further on, in understanding our total exposure after this article.

    What are the figures for?

    UK government debt
    UK Gov (Enron off balance sheet) debt & liabilities.
    UK Gov Bailout Costs
    UK Gov Possible Bank Balance sheet liabilities.

    Set against

    Reduction in GDP
    Increase in unemployment costs
    Increase in costs due to exchange rate collapse.
    1.5 Trillion Pound Private debt

    The critical question is can we afford all of the above when taking into consideration the effects of those below?
    This is a question more important than how exposed are the Banks?
    We need to know how exposed are we?
    Do the Government even know?

  • Comment number 61.

    I agree strongly with 51 verymuchso, and also agree that knowingandmaking is worth a read. Thanks Stephanie Flanders for balanced summary. As far as I can see most people have not yet suffered a massive decline in their knowledge, skills and resourcefulness (mass long term unemployment would be a threat-but we are a long way from that), most people still seem to want more stuff and services, even, dare I say, a better house. The economy has not come to an end. We are suffering the after effects of an asset price bubble - but it looks as though policy makers are doing better job than in 30s and Japan in 90s to get us through it. GDP will fall a bit but then will grow again. This is clearly not as bad as facing a World War (or a new 30 years war!!). Above all we should not be depressing our children with talk of dismal even apocalyptic future. After watching the Cuban missile crisis in early secondary school I have tended to be optimistic on matters as slight as economic downturns.

  • Comment number 62.

    the problem is that the government is taking a huge gamble with our futures....as these are the most toxic of the toxic debts then one could foresee a failure rate of over 50%. Given that, as i understand it, they only have to fail by 10% before the UK taxpayer is liable, then this could be the worst bet of all time.

  • Comment number 63.

    Stephaniue Flanders "Hitler did a lot more damage to Britain's public accounts."

    He was Time magazine's Man of the Year 1938'. Britain declared war on Germany in 1939 (but not the USSR which also invaded Poland), and Hitler [Unsuitable/Broken URL removed by Moderator]wrote that he never wanted a war with England or the USA. Go figure.

  • Comment number 64.

    i should have mentioned in my post#62 that of course these toxics are going to fail by more than 10% due to what is still in the pipeline....you thought sub prime was bad, wait until Alt A and option ARM hits the fan..

    https://www.youtube.com/watch?v=w_r-ASDViF8

  • Comment number 65.

    "56. At 10:06am on 10 Mar 2009, MrTweedy wrote:

    We are caught in a terrible debt trap"


    So bankrupt the banks. They have absolutely no qualms about doing it to you.

    My goodness, it's even where the word comes from.

    The banks MUST be allowed to fail. The government can set up a national commercial bank, and all creditors can transfer their investments there.

    In future, perhaps the supply of money should be completely government controlled. After all, counterfeiters are prosecuted and imprisoned.

  • Comment number 66.

    If I was an influential banker, I would make sure all my past mistakes, criminal or otherwise were buried in these bail outs.

    Are any civil servants checking that bankers are using this public money honestly ?

  • Comment number 67.

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

  • Comment number 68.

    It will not be possible to find a just solution to the massive public debt in the UK and in many other countries around the globe without restricting the massive tax evasion that takes place worldwide in tax havens and offshore banking. Profits are often privatised and debts are often nationalised.
    You can find more detailed information on these issues in the following blog article:

    https://globalinsights.wordpress.com/2009/03/04/offshore-banking-and-tax-havens/

  • Comment number 69.

    "It's still thinking about how to incorporate housing into the standard EU measure of inflation, the CPI, a change that was thought to be "imminent" when Gordon Brown changed the inflation target back in 2003."

    Well, Brown switched targets then from RPI to CPI because it meant cheaper rates for voters. Wonder if he's pushing for Eurostat to finally put housing back into CPI now that RPI is miles lower than CPI instead of above it, like is the norm.

  • Comment number 70.

    To all those detractors (#51 and #61) from the idea that an economics blog should be the place were the economy is analysed may I just add:

    "Worst crisis since 1930s says Fed"
    see
    https://news.bbc.co.uk/1/hi/business/7934920.stm


  • Comment number 71.

    #61. TSArthur wrote:

    "but it looks as though policy makers are doing better job than in 30s and Japan in 90s to get us through it"

    Do you think so?

    If you really do please supply your analysis?

  • Comment number 72.

    groberts2001 (#66) "Are any civil servants checking that bankers are using this public money honestly ?"

    Please consider how you would define the term 'honestly' in this or that context.

    This is a serious challenge, as Civil Servant's first duty is to their Minister, and it's ministers and their party which implemented the deregulative policies/passed deregulative legislation which created this mess.

    Still no answer as to what 'recovery' refers to. Why?

    We declared war on Germany in 1939 Stephanie.

    All we hear today is spin for public consumption. Journalists collude because ultimately, they're depedent on politicians' patronage for their jobs. They don't ask the hard questions which need to be asked, because those would cause trouble all round. That would risk holding people to account.

  • Comment number 73.

    #72. JadedJean wrote:

    "Still no answer as to what 'recovery' refers to. Why?"

    My answer (which I repeat) is: a return to sound money (modest positive real interest rates, solvent banks, borrowers that pay a reasonable price for their borrowing) and reasonable asset prices (e.g. house at 3 - 3.5 times average income) as well as reasonable employment levels. That is to return to the long term trend. Is that no a recovery?

    Oh look, is that a pig flying by! (or even a squadron of aerobatic pigs!)

    Not I think in our life time (next 30 years - I fear.)

  • Comment number 74.

    No 65 true-liberal wrote:
    "So bankrupt the banks. They have absolutely no qualms about doing it to you."

    It is tempting...........

    But
    (i) Causing the banks' foreign creditors to lose their money, would cause their creditors to lose money, and theirs. The chain reaction around the world would be severe.
    (ii) There would be a run on Britain by foreign investors, as Britain's credit rating fell to junk status.
    (iii) Foreign investors would sell all their British assets, and close all their British subsidiary companies.
    (iv) Sterling would lose all its value.
    (v) Foreign investors would not want to purchase any gilts from the British government.
    (vi) The IMF wouldn't rush to lend us any hard currency.
    (vii) The imported price inflation would be interesting.
    (viii) British companies with overseas interests would see their foreign investments fall in value due to the chain reaction of bad debts caused by (i) above. (ix) British assets abroad would be impounded by foreign governments seeking to make good on Britian's default.
    (x) Foreign customers would shun British products.

    That kind of thing, anyway...

  • Comment number 75.

    Re 72 and 73.

    It's time for the media to earn their keep and really push this issue.

    Posts 25 & 34 say it all.

  • Comment number 76.

    "74. At 3:24pm on 10 Mar 2009, MrTweedy wrote:

    No 65 true-liberal wrote:
    "So bankrupt the banks. They have absolutely no qualms about doing it to you."

    It is tempting...........

    But
    (i) Causing the banks' foreign creditors to lose their money, would cause their creditors to lose money, and theirs. The chain reaction around the world would be severe. "

    The money is already gone. It has already been lost and the chain reaction is already underway. All that is left is the debt.

    The only difference is the timescale over which this will be discovered. Months or years.

    Oh and who pays, of course.

  • Comment number 77.

    John_from_Hendon (#73) Yes, it sounds very sensible to me. But as you imply, it's not what we're hearing (or what Stephanie is reporting) is it? I suspect this is because practising the precepts you mention would mean that a large part of our dysgenic population, bred through ill thought through policies (e.g. mass compensatory (for our low TFRs)' immigration and mass 'female' education, which accelerates dysgenesis (many have seen this in the data for at least 20 years - cf. 'The Bell Curve') under successive governments since 1979, has rendered them far from ideal consumers/customers.

    What I'd like to hear is Darling, Brown and others saying what you and I know must happen, and how they will handle those who can't be treated as money-pumps anymore now that securitization has been exposed as the racket it was/is.

    It still sounds like they want to resinstate the problem not learn form it, and I hear many others sensible voices saying the same, if sometimes sotto voce.

  • Comment number 78.

    71 - John from Hendon -my view is a fairly common one. The early 30s was an era of serious protectionism. The USA’s Smoot-Hawley tariff of 1930 entrenched an already protectionist position and lots of other countries adopted similar measures – world trade collapsed (declining by about 66% 1930-34). The UK had already been shafted by Churchill’s return to the gold standard at pre-first World War parity in 1925 –leaving the UK with an uncompetitive exchange rate – only left that parity in 1931 when already too deep in crisis. In the USA the Fed had the powers to act to support banks but did not do so (or only to limited degree), large numbers of banks collapsed , loans were foreclosed and the US got the subject matter of Grapes of Wrath.
    As far as I can see Bernanke, who is expert on this, and most world leaders are trying to adopt more or less the opposite of all those mistaken (I think the evidence of 30s does suggest these were policy mistakes and they contributed to depth and length of recession) actions. While things are clearly bad I am simply arguing that the actions taken so far may produce some mitigation. However, as I have said before, I am concerned that someone will start cutting public expenditure before receovery is properly underway

  • Comment number 79.

    Rather interesting to compare the BBC's headline and bullet point report of Ben Bernanke's speech today and that elsewhere. The beeb picks up on the 'worst depresssion since the 30's'. CNN picks up on the fact that he says if the banks can be fixed we could have growth in 2010.

    I guess the good news did not fit in with the beeb's nihilistic editorial policy. Good job we have other sources of news isn't it - we won't miss you lot when your license fee goes

  • Comment number 80.

    MrTweedy # 74

    "(i) Causing the banks' foreign creditors to lose their money, would cause their creditors to lose money, and theirs. The chain reaction around the world would be severe.
    (ii) There would be a run on Britain by foreign investors, as Britain's credit rating fell to junk status.
    (iii) Foreign investors would sell all their British assets, and close all their British subsidiary companies.
    (iv) Sterling would lose all its value.
    (v) Foreign investors would not want to purchase any gilts from the British government.
    (vi) The IMF wouldn't rush to lend us any hard currency.
    (vii) The imported price inflation would be interesting.
    (viii) British companies with overseas interests would see their foreign investments fall in value due to the chain reaction of bad debts caused by (i) above. (ix) British assets abroad would be impounded by foreign governments seeking to make good on Britian's default.
    (x) Foreign customers would shun British products."

    Correct!

    And it just goes to show what a fraudulent con-job fractional reserve banking really is.

    Bank runs would provide a sorely needed slap in the face for government and the central banking system. It would teach them that we need to return to sound money and a banking system that holds 100% cash reserves for all demand deposits.

    However, this is unlikely to happen because a bank does not necessarily fear a run by depositors, they fear a run by another bank.

    Therefore, with a central bank the bank is protected from bank runs by other banks.

    For, as Rothbard wrote:

    "In a free-banking system, inflation by any one bank would soon lead to demands for redemption by the other banks, since the clientele of any one bank is severely limited. But the central bank, by pumping reserves into all the banks, can make sure that they can all expand together, and at a uniform rate. If all banks are expanding, then there is no redemption problem of one bank upon another, and each bank finds bank expansion of one bank upon another, and each bank finds that its clientele is really the whole country. In short, the limits on bank expansion are immeasurably widened, from the clientele of each bank to that of the whole banking system. Of course, this means that no bank can expand further than the central bank desires.

    Thus, the government has finally achieved the power to control and direct the inflation of the banking system."






  • Comment number 81.

    #51 Verymuchso,

    A few lines in response to your earlier post where perhaps you might have been a tad overcritical towards John Hendon and JadedJean.

    John has maintained a consistent line in that resolution of the current problem lies not necessarily in issuing more credit - thus a wider and better analysed solution is required.
    John's stance that a reliance on more spending by consumers will not prove to be a remedy is supported by an economic application of Maslow's Hierachy whereby people will retrench to naturally seek to protect their basic needs levels before aiming to fulfill higher needs of whatever they are
    ie less spend on non essentials and greater concentrate on home, food, job security, savings etc.

    JadedJean presents an interesting approach of seeking to bridge the gap between Behaviorism and Behavioral Economics and along the way is also consistent in identifying unclear thinking as demonstrated by the supposed experts, the effect of which may result in wealth destruction..
    An example of some of this unclear thinkings are identified in this Wiki link of Cognitive Biases
    ( do a wiki search for Cognitive Biases if the link is not available)

    link here
    https://en.wikipedia.org/wiki/Cognitive_biases

    However.....

    ....I formed the impression from your earlier posts that you were yourself somewhat critical of the current Government strategy - if indeed it could be called a strategy and there is some doubt about that.

    To qualify as a strategy there would need to be a clear identified goal(s), plus a recognised measurement of success in meeting those goals, together with appropriate designation of resource in time, money and effort to reach the stated success target.

    The start analysis should be along the lines of
    -where are we now, where do we want to be, what will it take to get there, how will we know when we are there.

    Whereas at the moment it appears that the Government and the BoE don't know the size of the problem they are trying to resolve, they don't know how long it will take, they don't know the consequential damage along the way, they don't know how much it will cost and they appear to not care how many savers, householders and pensioners get damaged by the Govt and Boe actions along the way.

    Thus a Government chucking money around without clear and defined goals is a matter of some great concern to a majority of the population, to put it mildly.

    And finally with regard to your last sentence where you say that we should all
    '....have a collective interest in the success of what the elected government is doing, whether we voted for it or not.'

    might be redrafted to say
    'The primary purpose of the Government should be to have an interest in the success of the electorate well being, whether they voted for them or not'

    In summary, it appears that everyone more or less approaches the Government actions from their own analysis of the situation.
    Providing that a reasonable analysis has been applied then surely that becomes the matter for debate, rather than asking them to depart elsewhere ?

    ps
    please don't suggest that the Govt have a strategy because my first questions would be - what is it, what are the goals, how long will it take and how will you know that the goals have been acheived.

    or almost as JJ said 'define Recovery'

  • Comment number 82.

    LibertarianKurt (#80) All the guru of Anarcho-Capitalism is saying there is that governments/central banks can control the money supply (to retail banks). The problem some of us are grappling wih is how, when many advisors put the crisis down to the fact that it was a) very low interest rates from the Fed and b) deregulation of banks which fueled the crisis, is bringing interest rates down down to an historic low (and then resorting to QE), going to help resolve the crisis? The banks no longer have securitization etc as a vehicle to get away with predatory lending, so why should they lend given the much higher risk of default they now have to bear?

  • Comment number 83.

    JadedJean # 82

    In order to respond to the important questions you raise, in my view, one must be familiar the Austrian Business Cycle Theory.

    It explains, using easy-to-understand "Crusoe-economics" analogies, how and why economic booms and busts occur. It also explains the crucial (true) role of money in modern complex economies without which economic calculation would be impossible. In addition, it also explains the role that banks play and why lending out demand deposits is fraud.

    Once the ABCT is fully understood, then the countercyclical policies a given government/central bank implements to counteract a recession, depression, banana or whatever one chooses to call it become almost amusingly predictable.

  • Comment number 84.

    JadedJean/LibertarianKurt

    The guru of anarcho-capitalism is also repeating what Keynes (the guru of statism?) said: that provided all the banks march in tandem there is no limit to the amount of money they can create (p17 Theory of Money Vol 1)

    The scary scenario is that the outcome of this so-called crisis will be a world central bank and complete state control of fiat money with no real market constraints. Their belief is, I fear, that then they (the governments) can inflate at will to pay for their pet projects. Of course the reality would eventually be lower productivity than communist Russia achieved as we all wake up and hang up our work boots.

    I must take issue with those of you who think the government does not have a vision of recovery. It is simply that it is one they cannot dare to voice. Clearly they are seeking to inflate the money supply to such a level that notional asset prices return to 2007 levels. At the same time they get to spend the seniorage on the newly eased paper money.

  • Comment number 85.

    There is too much fiddling around the edges. Nobody is admiting that the whole (debt based) monetary system and in particular the derivatives mountain and the actions of the (privately owned - profit making) Federal Reserve are both unsustainable and immoral. Here is Antel Fekete's latest, including a critique of Krugman's latest comments:



    https://tinyurl.com/agb8hk


  • Comment number 86.

    74

    Thanks for providing another good set of reasons why the banks should not be allowed to fail ... as well as the social impact and the economic impact that would occur if cash flow in the UK screeched to a halt due to a failure of one of the big four.

    The "banks must be allowed to fail" brigade need to appreciate that allowing the banks to fail and/or the creation and then destruction of the toxic bank (which is a national default in all but name) will have serious consequences abroad for UK credit ratings with the consequences you describe.

    IMO bailing out the banks wasn't Browns failing, in was letting them get to a state where they needed bailing out in the first place.

    Brown needs to give a better press to the public on why he saved the banks. In advertising this he also reassures international investors that the UK will do its very best to honour its commitments and hopefully improve the UKs position internationally.

    After all, we don't want to get into an Iceland position, where the governments refusal to honour its debts signed its own economic death warrant.

  • Comment number 87.

    rwolff # 84

    "...a world central bank and complete state control of fiat money with no real market constraints."

    Which is - as you probably know - what Keynes and Dexter White proposed over sixty years ago. Whether that is the intention of the politicians and central bankers of today is a moot point.

    Nevertheless, the prospect of something like the "bancor" or "unita" becoming a reality would be truly terrifying - rampant, runaway inflation with nowhere to hide!

  • Comment number 88.

    tufftimes # 86

    No one is too big to fail, and that especially includes the banks.

    If the failure of the entire government controlled banking system means a drastic decline in the standard of living in this country, then that must be necessarily so.

    We will know who to blame.

    In fact, a lot of good would come of it. It would teach the government that credit cannot come into existence (no matter how many paper tickets they print) without savings, and that savings cannot exist without foregoing some - if not a large - proportion of consumption.

    We as a nation need to start producing things again in order to pay our debts. For that to happen, wages and prices need to fall significantly. We will have to, by sheer necessity, get used to a lower standard of living.

    (Maybe the Chinese would be able to help us out on this one: They could send us all their bicycles and we could send them all our cars - because we are not going to have enough money to put fuel in them!)

  • Comment number 89.

    Libertariankurt

    I think you are taking too pessimistic a view here.

    We humans are basically rather adaptable; I include the genetically half-witted, for JadedJean’s benefit. Were we to be presented with a sound monetary system and no government interference I am confident that we would rapidly develop appropriate productive industry. Certainly the natural state would be deflationary but that in itself does not make us poorer; indeed over time it would make us much richer.

    You imply that we would be obligated to pay our existing debts, which may well cause us to struggle to get off the ground. I would argue that we as individuals have no obligation to pay debts incurred by the banks, governments or other institutions.

    We have all lived in inflationary times. Some enlightened folk are now recognising that this has been a deliberate and conscious result of government policy, made possible by the fiat monetary system. The brighter individuals mostly learnt that saving was pointless and that it was far more sensible to borrow as much as possible to acquire assets, leaving inflation to depreciate the debt whilst maintaining asset value. As it has transpired this caused excessive asset inflation to an unsustainable level.

    Despite recent events it remains sensible to borrow massively to acquire assets, just different, more resilient ones. These come in the form of gilts (for the gullible/timid), gold (for the cynics) and commodity/resource stock (for the adventurous) and, since credit is no longer so readily available, we are already seeing an increase in savings to acquire these things from income. Saving is emerging naturally, much to the chagrin of the Keynesians.

    The big worry is not that we might all be forced to live in mud huts as a result of the collapse of the banking system. Rather the worry is that state interference with the free market will work just enough to prevent people from taking action themselves, prevent the emergence of sound money and result in hyper-inflation thereby seriously destroying the wealth, such as it is, of the masses. Success in saving the banking system as we know it may well lead to mud huts or rather squatting in bank-owned houses.

    I am increasingly optimistic that the banking system will collapse and that no amount of state support can save it, having looked a little into the AIG catastrophe. AIG as we all know has received the biggest bailout of the lot. They are taking a bath on credit default insurance but they account for just 11% of this market. The banks themselves wrote the majority of this ultra-toxic junk, off balance sheet of course. It looks like we have only seen the tip of the iceberg.

    PS If you want an inkling of what might happen if you get rid of government try the bized virtual economy model https://www.bized.co.uk/virtual/economy/model/info3-4.htm and remove, as far as you can, all taxation and government spending.

  • Comment number 90.

    rwolff # 89

    Hmmm...perhaps my post seems somewhat gloomy in a post banking collapse environment, and the hardships endured - albeit relatively short - would only amount having to do without a few iPods and plasma screen TVs (oh, I nearly forgot, the government are going to ban them!) for a while or, quite possibly, postponing the biennial car purchase.

    As for debt obligations; I'm sure the government has got a few tidy assets (i.e. land, buildings etc) that could be sold off.

    The alternative - which the government is pursuing - will be, as you suggest, an altogether much darker proposition. Visions of living in that old tent acquired many years ago and consuming tinned baked beans for breakfast, lunch and dinner spring to mind.

    I shall, of course, read with interest the link you have provided as anything remotely connected with the removal of taxation and government spending always catches my eye.

    PS Riding around on Chinese-made bicycles was a bit of a leg-pull!

  • Comment number 91.

    Price inflation
    High unemployment
    Low demand for goods and services
    Low tax receipts
    High government borrowing
    High levels of household and business debt
    Low levels of savings and reserves
    Weak currency
    Large trade deficit


    Ooh er; bit of a hoary old chestnut.

    We couldn't get into this much of a mess if we tried........???


  • Comment number 92.

    Libertarian Kurt

    Isn't "Libertarianizationalism" an ugly word? No wonder we ended up in a pickle.

    The French do it with more style - what you really want is "La Belle Epoque"

    A golden age, characterised by new technologies which improved lives that were unclouded by income tax or socialism....

    It was the age of:
    Cartier
    Faberge
    Lalique
    Boucheron

    The Viennese Secession was more interesting than the Austrian economists.


    Does your heart not yearn for La Belle Epoque?


    https://en.wikipedia.org/wiki/Belle_%C3%89poque

  • Comment number 93.

    Libertariankurt (#89) "
    We humans are basically rather adaptable; I include the genetically half-witted, for JadedJean's benefit. Were we to be presented with a sound monetary system and no government interference I am confident that we would rapidly develop appropriate productive industry.


    Then you are going to have to explain the low GDPs (and poor infrastructure/health) of Sub-Saharan Africa (mean IQ ~70) and much of South Asia (~85).

    If you do, please bear this in mind as it's been brewed for decades by mass immigration and skewed ethnic birth-rates (bear in mind the ethnic mean IQs).

    An aside: Dexter-White, co-author of the Morgenthau Plan - prima facie designed to reduce Germany to a market-garden economy after the war, but probably (as a Soviet "agent of influence") really intended to drive West Germany (at least) into the arms of the USSR - hence the subsequent volte-face via The Marshall Plan. Release the brakes of naked-capitalism through the promotion of neo-liberal/neocon deregulative free-market economics, and what's ultimately going to happen according to a Marxist analysis? Russia may not appear to loom all that large on the world stage today, but Stalinist China and the SCO does.

  • Comment number 94.

    #63 Anyone interested should Google Hitler's Political Testament - after all, it's a public document.

  • Comment number 95.

    MrTweedy # 92

    So, liberty or freedom is an ugly word? Perhaps statism or slavery is more to your liking?

    It is a constant source of amusement to me that those who do not understand Austrian economics continue to pour scorn on it.

    What is also interesting is that while notable Austrian economists were pointing to the hurricane looming on the horizon, the mainstream still continued to sun themselves on the beach.

    Is that because Austrian economics is just not "scientific" enough?


  • Comment number 96.

    JadedJean # 93

    As an aside:

    In a forward to the German edition of The General Theory of Employment, Interest and Money (1936) Keynes wrote, "The theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire."

    Moreover, it is also worthwhile noting that Hitler was arguably the true protagonist of Keynesian ideas.

  • Comment number 97.

    JadedJean

    You ask me to explain low GDP and poor infrastructure in sub-Saharan Africa. In the absence of an example where a sound monetary system and no government interference exists, I find this too easy a task. It is caused directly by government, theirs, ours and proto-world government in the form of the UN,WB, IMF and of course the major aid organisations. All acquiesce in, and many consciously promote, corruption and the aggregation of power to government agents of coercion, be they civil or military.

    One might argue that similar if less blatant practices occur here too. This is true. The reason we are relatively more successful is that we had a period sound money and minimal government interference at the time we were creating our industrial revolution. More recently, some innovation has remained possible due to the relative freedom but this is increasingly reducing as statist/socialist thinking gains ground.

    Having viewed your video clip I guess you would like the answer to be lack of education. I found the content of the video saddening. It has a valid point that our education is rubbish but the solution proposed appeared to be more one-size-fits-all, authority knows (or should know) best.

    I am not well qualified to debate IQ, g, etc. but recall that you denigrated IQ as a measure when I pointed to the research findings of Flynn.

    To relate this to Stephanies question, How much is it all going to cost, I am becoming optimistic that the answer is the death of statism. In Africa, the west may no longer have the wherewithal to fund corrupt regimes. Here we can at least hope for the complete collapse of our own corrupt institutions now we can begin to perceive how they will implode.

    Workers of the world may well have to unite. It must be the responsibility of we enlightened people to nudge them away from a statist solution, which has always and everywhere failed. Instead we ought to be promoting notions of individualism, freedom from coercion and self-sufficiency. If this is the kind of education you wish to see I am all for it, provided it is optional.

  • Comment number 98.

    LibertarianKurt (#96) I was aware of that, but thanks or stating it anyway.

    If it were not for the genetic basis for human diversity and the way that gene-barriers account for geographical mean differences in human capital, I would not have been as critical of what you have been posting as I have been.

    I think these factors don't just undermine the neo-liberal (Austrian School) model, they make it predatory, as the basic assumptions about the individual are empirically unsound. The empirical facts make matters far more complicated than most economists make out.

    These inconvenient truths are currently censored by Political Correctness, I think, because they seriously undermine dominant Liberal-Democratic economic dogma. In the end, one can't buck reality.

  • Comment number 99.

    JadedJean # 98

    Firstly, I would just like to point out that the Austrian school is grounded in classical economics, so the descriptions neo-liberal or Liberal-Democratic are certainly not ones that Austro-libertarians would choose to be associated with. Those descriptions should be reserved for those who on the surface espouse liberty but are, in fact, underneath really adherents of the socialist agenda.

    Also, in your previous posts you have tried to associate neo-conservatism with classical liberalism or libertarianism and again I must point out to you that this is disingenuous. In fact, many Austrian economists were highly outspoken in their criticism of the Bush administration for expanding the size and scope of the state. If one was to remove the mask of neo-conservatism, one would be confronted with the same socialist/statist agenda of those who profess to be liberals and who now control Congress and occupy the White House. Obama? Bush? No difference.

    Furthermore, I understand completely why you have been as critical as you have been concerning my posts. Whether you know it or not, the Austrian school entirely rejects empiricism when it is sought to be applied to economic science.

    Why? Because we are human beings who, in an economic sense, think and act purposefully. We are not "capital", objects, specimens or whatever that can placed in a laboratory to be analysed and subjected to experimental verification.

  • Comment number 100.

    JadedJean

    I finally got round to looking at that stuff from Skinner.

    The only thing that really surprised me was something that he said about the mind not being a scientifically evident 'thing', if I understood him correctly.

    I think that this implies some paradoxical thinking. At the moment as far as I can tell, people do not actually perceive 'static' things. All 'things' are instances of categories of behaviour. If for example the eyes are presented with images that do not move relative to the eyes, we cannot actually see them. The eyes have to move microscopically to invoke a change in order to detect the stable patterns of behaviour that we categorise as a thing. Also, please supply contradicting evidence, but I do not see learning or correlation taking place between anything but 'actions' or 'events'. When significant changes in the environment occur, then some correlation can occur. Am I right? We learn through 'play', by provoking change to discover the 'verbs' that can be associated with instances of things, to build up expectations.

    What I have also come to believe (again please contradict if I am off base), is that our perceived world is entirely trajectories of action through time. We do not see a single moment, but at once we remember the past and have expectations for the future for everything we perceive. In this regard a 'static' object or a 'moving' object are the same in that we see immediately their history and short term future at once.

    Our 'self' (our bodies for example) are part of that model. By automatic selection of the most 'probable' future, in the same way as we would expect a passing car to actually pass, we observe our own choices.

    What we perceive as 'intent' (the belief that we 'choose' an action) is actually (in my opinion) the reinforced AND instinctive *expectation* that if the expected course of action of our *selves* is in anyway contradicted, then it invokes 'shock' (a flight/fight response).

    Contradiction of expectations always elicits either surprise (repeat, reinforce) or shock (doubt, fight/flight, reassess, discredit the expectations). If the expectation applies to the self, then we experience, and come to expect to experience, self-doubt and fight/flight.

    Actions are correlated, behaviours. Actions can accumulate into sequences of actions, and these 'processes' or 'strategies' also become correlated. These correlations are all expressed in terms of a probabilistic model, something Bayesian perhaps, where the weightings are adjusted according to the surprises or shocks we encounter as expectations get contradicted.

    So far this is the basis of my model for human decision making.

 

Page 1 of 2

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.