Wow! What a package!

At last the authorities have woken up to the scale of the problems in the money and banking markets. Any sensible person this morning wishes the government’s plan well and hopes it will succeed. Let me begin with some supportive points.

It is good that more money will be made available to try to make money markets more liquid. The Bank of England can accept a range of assets as collateral or security for the loans, valuing them in a way which ensures no taxpayer loss. It is also sensible to try a government guranantee, with suitable reward for the taxpayer for offering one, to trigger interbank lending again. The sums involved are large, as they need to be. It is still better that any bank needing more share capital should seek to raise it from the private sector. At least we are not going the route of more bank nationalisation. Nationalising Northern Rock has just meant a more frozen mortgage market and P and L account losses for the taxpayer.

It is time now for those operating in the money and interbank markets to make their contribution to recovery.What more are they waiting for? Will they now start to resume more normal lending and borrowing to each other? Will the great banks now set about sensitive and sensible banking of all the businesses and individuals in the country, at a time of downturn and difficulty? That means making facilities available where a business has a potentially viable future. Given the extent of state support, the public will be expecting helpful and mature banking on the high street.

I am critical of the way the proposals to offer new capital to the banks was leaked. It led to a wave of selling of bank shares yesterday based on rumours of what might happen to existing shareholders. I had recommened some time ago that the regulators behind the scenes with no public announcement should have required any bank where they thought the capital inadequate to raise it from the market as quickly as possible. These things must not be done in public – they must be done promptly, in private, and once the decision is taken that must be communicated immediately to the Stock Exchange. Leaking discussion will undermine share prices, and make it more difficult for any given bank affected to raise money from it own or new shareholders in the market, the opposite of what the authorities should be seeking to achieve.

This site has declined to name any global bank that might need new capital or be in cash difficulties, until such a bank is being nationalised or put into Administration. I have taken the view that it is irresponsible to join in circulating rumours about individual world banks, at a time when there is a desperate need to rebuild confidence.

The Stock Exchange is still falling as I write this. That is no surprise. People are having to adjust their expectations to a very different economic prospect. Events in the banking sector do mean difficult days ahead for most other businesses. It does mean a bigger downturn than many forecasters were predicting. Readers of this site will know I have been pressing the government for some transparency on the UK’s economic prospects. The totally out of date forecasts the Treasury is using are not helpful. We need to know the government’s latest and best estimate of how bad it will be in 2008 and 2009, so businesses can plan accordingly. Quoted Companies are under a duty to report to the Stock Exchange any material change in their circumstances and forecasts. We now need similar transparency about the overall condition of business and the prospects for the next year or so ahead.

The economy still needs a fall in interest rates. Now the authorities are fully engaged in fighting the banking crisis, they also need to be fully engaged in fighting recession.


  1. "East Anglian T
    October 8, 2008

    I've just read that we, the British taxpayers, are to bail out all the cretins that put more than £50,000 into that dodgy foreign bank (Icesave) that was paying an excessive rate of interest. How stupid is that? In future should we move all our savings from the UK banks and put them with whichever minor, previously unheard of, foreign bank is paying a better rate of interest? Why be content with 6% when the Bank of Timbuktu may pay us 7%+. After all there will be no risk – our Labour Government would come to our rescue with taxpayers' money! Unbelieveable!

    1. APL
      October 8, 2008

      "We are taking legal action against the Icelandic authorities,'' Prime Minister told journalists at a press conference at 10 Downing Street today. "We are showing by our action that we stand by people who save.''

      Gordon really is (wrong-ed). The whole of Iceland is bankrupt and he is going to sue them.

      Actually, I rather feel sorry for the Icelanders. Brown desperate to garner votes thinks this is the way to do it.

      East Anglian Troy: "the British taxpayers, are to bail out all the cretins that put more than £50,000 into that dodgy foreign bank (Icesave) that was paying an excessive rate of interest. "

      Problem is EAT. the Great British government (AKA the FSA) permitted them to operate in UK territory (so it is not B Of Timbuktu ) and once again the regulators were asleep on the job.

      The FSA must be a contender for most useless organisation created by the Labour government. *WTF* have they been doing for the last ten years???

  2. figurewizard
    October 8, 2008

    Yes it is good news that the Treasury has stepped in and not before time but what we should not lose sight of is that the parlous state of some of our biggest banks haven't appeared out of thin air. It results from a combination of greed and stupidity on the part of these banks in investing swathes of their resources into an unsustainable housing bubble supported by reckless economic policies enacted over the last ten years by Gordon Brown. If this package does the job and stabilises the banks the other problem remains and that is the future of our economy; in particular the future of British business. This is going to add up to more than a drop in consumer confidence. Small and medium sized businesses account for more than 40% of economic activity and half of all private sector employment in the UK. Most are presently being charged 15% or more for bank facilities and are in many cases having these facilities cut back or withdrawn altogether. Alistair Darling has mentioned a commitment to small business today so is this going to manifest itself in addressing the above or is it just another sound bite? I trust that you will keep an eye on this Mr. Redwood and hold him to this promise in the house.

  3. Kit
    October 8, 2008

    "Wow! What a package!" should have read "Wow! What is the package?"

    Where is the detail? So far the information released has been too vague. Is it as hard-headed as Warren Buffet's investment in Goldman Sachs or foggy civil service fudge?
    The markets will keep wobbling until they know.

  4. StevenL
    October 8, 2008

    Part of the annoucement the Treasury made was to the market was:

    "In reaching agreement on capital investment the Government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers."

    It looks to me like semi-nationalisation by stealth. If the Treasury are no good at making accurate forecasts, and Gordon Brown's system of financial regulation is inadequate (as this blog frequently suggests) how can we have any confidence in their ability to go one step further and attempt to micromanage the entire industry?

    Will Brown be more interested in long term recovery or winning the election in 2010? There needs to be proper, transparent parliamentry scrutiny over any policy instructions given to the banks on behalf of the taxpayer. From what I just read this morning we've just potentially risked £500 billion.

    Up to £200 billion in the special liquidity scheme
    Up to £50 billion for direct recapitalisation
    Up to £250 billion in interbank lending guarantees

    That's £500 billion, or about half our GDP.

    1. mikestallard
      October 8, 2008

      To that £500 billion is also to be added the roughly £1.5 trillion pounds which John reckons we are in debt.
      I wonder how that compares with our GDP?
      I also wonder when we will have to leave the gaming table because we have lost our shirt?
      The last time this happened was, of course, in the 1970s (when the empire finally croaked) – and again in the 1940s (after the war with Hitler).
      Whole countries can go bust – Argentina, Rhodesia. It is not impossible.

  5. Mark Wadsworth
    October 8, 2008

    "I had recommened some time ago that the regulators behind the scenes with no public announcement should have required any bank where they thought the capital inadequate to raise it from the market as quickly as possible"


    It's called 'capital restructuring' or 'debt-for-equity-swap' (or any of a dozen other fancy terms).

  6. Acorn
    October 8, 2008

    "This site has declined to name any global bank that might need new capital or be in cash difficulties …". Will someone tell the BBC that! Robert Peston in particularly; this guy has made two statements lately that have moved market prices. If I was the affected banks, I would be calling the Lawyers and FSA regulators. The guy is breaking every rule in the book.

    As Gordo has now more or less adopted the Warren Buffet model for re-capitalisation, it would be nice if he would come clean on just how much debt the taxpayer has taken on via HM Treasury and the BoE.

    I am even more convinced that we need a new global central bank that can monitor and ring alarm bells when they spot a government printing too much money or a bank taking on excessive risks. It would also have to approve and issue a global specification for all financial instruments and how; when and with what pricing mechanism, they can be traded. They should also standardise on a global system of accounting for both public and private sector entities. The Bank for International Settlement would make a good foundation for such a system.

    Nice piece from Wolfie yesterday:-

    PS. I may have to rethink my bets on the next election. NuLabour may well come out of this mess smelling of roses!

  7. Michael T Farnworth
    October 8, 2008

    "The Bank of England can accept a range of assets as collateral or security for the loans, valuing them in a way which ensures no taxpayer loss."

    If the Bank of England can take assets as security and value them in a way that ensures no taxpayer loss then surely it is possible to sell such assets on the open market and there is no need for government intervention. There will always be people in the market for something safe on which no losses will be made. Surely the problem at the moment is that nobody can be confident that no losses will be made.

  8. anoneumouse
    October 8, 2008

    We are now on the road to hyperinflation

    If we can learn anything from history, it is that a government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment of politicians and unfortunately, that is now the situation we find ourselves in today.

    Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market.

    Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power.

    In an inflationary environment, when prices are kept high by excess liquidity, money wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys paper money wealth.

    Time to grab our pickaxes and head for them hills

    1. mikestallard
      October 8, 2008

      This is not what many people think.
      However, Ken Clarke, ex Chancellor, was on Newsnight last night and he was expecting inflation to come back again.
      The TU is bankrolling Labour too, and prices are rising fast.
      Also the government inflation figures seem to leave out all the rising prices.
      All inflation is, is surely, lack of confidence in the government's ability to be honest.
      Isn't it?
      So, why has it gone away?

  9. Tony Makara
    October 8, 2008

    The government should not have rewarded bad banking practice with a rescue package. The bad toxic debt should have been allowed to die, and in response the government should have established a brand new state bank which would have provided a safe haven for depositors and over time would have provided a reliable base for liquidity. Government is in a unique position in that it can issue and destroy money at will, can provide liquidity and restrict it as needs fit, but once again we see government looking to the taxpayer and public borrowing, which in reality amount to the same thing. I am disappointed that the government has caved in and adopted this quick-fix predictable solution.

  10. chris rowsby
    October 8, 2008

    Re todays PMQ's.What on earth is the Conservative policy?

    If they carry on sitting on their collective backsides instead of

    hammering Brown and the Labour government for the inept

    policies over the past years then Brown will look like the man

    who rescued our economy and Cameron like the 'novice'. The

    job of the opposition is to oppose not rubber stamp more

    socialism. Trillions have been squandered and all we had until

    recently was 'sharing the proceeds of growth'.This appears to

    have been replaced by mealy mouthed agreement with any

    half assed scheme that Brown comes up with.

    1. Tony Makara
      October 8, 2008

      David Cameron and George Osborne have allowed Gordon Brown to set the agenda and the prime minister has boxed them into a position in which they cannot now break ranks without looking foolish. This is because neither man had an alternative plan of action. Too much Conservative strategy has gone into developing social policy and nothing significant has been produced to deal with the severe economic problems that myself, David Belchamer and others were warning about well over a year ago. Cameron and Osborne are starting to look like starry-eyed pupils around Brown and instead of bludgeoning Brown over his failures they are allowing the prime minister to play roulette with taxpayers money in the banking system.

  11. Rugfish
    October 8, 2008

    We buy loads of stuff from Europe BECAUSE our government allows us to borrow money at higher rates than anywhere else in the modern world, on homes they allow lenders to risk against at loans to value which cannot be matched anywhere in Europe.

    Most are 60% LTV and most either rent, build their own or have a lifetime of clubbing in together between families to buy one outright.

    Nowhere except in Britain and the US are homes bought at the rate we buy them.

    Thus we have a load of DEBT to spread round Europe and Europe's economy meanwhile gets better, they get richer and we get poorer and in debt.

    The government is NOT on the side of people it is on the side of the money markets which lead to temptation and rob us blind with high interest rates and depreciate our assets when they turn the taps off, as is the case now as a result of their own poor judgment.

    Savings, home equity, pensions, all wiped out, and now jobs under threat and homes repossessed at twice the average.

    Meanwhile, we're paying tax on top of tax on top of duty and more duty through the nose for fuel, heating, tabs, beers, wines and spirits, and even the food we need.

    EVERYONE is walking around with a blindfold on thinking the government is wonderful because they've renewed their ability to have a string of credit cards, nice house, new car and that holiday to EUROPE to help the EU economy even more.

    Why are we paying Value Added Tax on everything ???

    Why are pensioners and everyone else paying VAT on fuel and heating ???

    Why are we without a decent opposition on these matters and why is the IMF in charge of our economic policy ???

    Why are we in Europe, why are we borrowing our own money, and why is no one wanting to change it ???

    1. mikestallard
      October 10, 2008

      Peter Mandelson has been withdrawn as the Commissioner for Trade in Europe.
      The vacancy is to be filled by Baroness Ashton who has been made a life peer.
      In June 2001 she was made a Parliamentary Under-Secretary of State in the Department for Education and Skills. In 2002 she was appointed minister for Sure Start in the same department. In September 2004, she was made a Parliamentary Under-Secretary in the Department for Constitutional Affairs, with responsibilities including the National Archives and the Public Guardianship Office. Lady Ashton of Upholland was admitted to the Privy Council in 2006, and became Parliamentary Under Secretary of State at the new Ministry of Justice in May 2007.(wikipedia)
      It is in no sense a personal attack on her to say that she has not, therefore, had that much experience with either money or trade.
      So why was she chosen?
      Jose Manuel Barroso wished to appoint a woman to balance the genders within the Commission. The fact that, being a Baroness she didn't leave a gap to be filled by a bye election has nothing to do with the matter.
      One really good thing about the EU Trade Policy is that it is transparent and also democratically accountable. It also depends on a skilled and experienced technocracy (NOT).
      And on her judgement and intelligence depends the European Project's Trade during the remains of the Credit Crunch.

  12. Puncheon
    October 8, 2008

    I despair of the Conservative Parliamentary Party. They have allowed themselves to be suckered into supporting a deadbeat Government policy, just like they were over Iraq. Bi-partisan politics is not in the interests of the citizens/taxpayers. It's just a get out for lazy/cowardly opposition parties. Cameron is not paid to sit their like a nodding donkey while Brown continues to destroy what's left of the UK, he is paid to analyse and oppose. Because of his love affair with the, largely imaginary, centre ground Cameron is bleeding votes the BNP and others. Osborne looks like a little boy who's wandered into a saloon bar fight and the others are little better. Only Clarke and Hague seem to know how to handle to rough stuff.

    1. Tony Makara
      October 9, 2008

      I feel very let down by the way the Conservative party has allowed itself to be railroaded into supporting this rip-off bail-out. I always thought the Conservative party was the friend and the staunch supporter of the ordinary taxpayer yet the party's compliance with the Labour government has been a complete double cross. Of course all this means that the scope for tax cuts has completely disappeared thanks to support for the bail-out. There is a stinking hypocrisy here because we know a Conservative government would never have bailed-out any other industry, but it seems the bankers get special status and are placed above the long term best interests of the taxpayer.

  13. anoneumouse
    October 9, 2008

    Why are banks being given preference over other businesses when it comes to competition rules.

    Why should Banks be favoured in this way when other businesses are abandoned, indeed often driven into insolvency, by the government for whom insolvency proceedings are a preferred method of tax enforcement?

    There is a fundamental point at issue here

  14. Michael Taylor
    October 9, 2008

    I surely cannot be alone in being hugely disappointed with the Conservative's lack of initiative or independent thought on this one. I'd like to make an observation, and offer a suggestion.

    First, identify the problem: it seems pretty clear that the problem is the Gordian complexity of banks' derivatives positions, particularly the credit default swaps which by my calculation now have a notional value approximately 1.75 times total bank credit. Since we have the stunning example of Parmalat to show that banks lawyers cannot in the end agree where the cashflows go when the credits on these go down, the market knows, or suspects, that there's potentially an almighty but unknowable contingent liability in practically every banks' books, and consequently are unwilling to lend to them. In other words, it's the sheer complexity of the situation that's killed the banks. Think of it as an engine, all smashed up inside: then think of the rescue package as simply adding fuel in the hope that it'll restart. It won't, because these financial institutions are broken inside.

    Second, a possible solution. We need to make a clear distinction between those bits of the system that are necessary, and those that aren't. I would suggest carving out all depositors' liabilities and reincorporating them into mutually-owned money market funds, if necessary backed by government assets and/or AAA corporate paper. Being mutual funds, these would need no guarantee, and, being mutual funds, would not be running loan/deposit ratios of more than 100%. These could get on and run themselves, operating in money markets effectively without further government intervention or protection. The rest – the great coiled and Gordian knot of unentanglable claims and counter-claims on the derivatives desks of the former banks – shouldn't be bailed out, but should rather be faced with the alternative of a radical netting-off or bankruptcy. If they go down, that's just too bad – depositors won't be affected, and money markets will still operate.

    Then, third, the Conservative Party could get behind the prospect of erecting in London a responsible mass-distributed post-banking system based on a myriad of money-market mutual funds offering the full spectrum of risk/reward saving opportunities, all privately owned, and all reflecting the transparent choices of their depositors/owners. To complement this, you'd need a separate company running a settlement system (Bank of England? private company running along the lines of the National Grid?); a whole new industry of credit analysts rewarded by their success at accurately measuring credit risk; and a revivified merchant banking industry doing their traditional business of sourcing and arrangeing loans from this new, safe, and diversified market.

    This is a fully private-sector, 21st century alternative to the essentially 17th century form of financial organisation called 'commercial banks' – a form of organisation which is a danger to itself and the rest of humanity. It would perform the essential functions better: by cutting out the middle man and ensuring transparency it would offer both savers and borrowers a better deal.

    But instead of this, it seems the Conservative Party has signed itself up to the erection of the People's Bank of Europe, in all its various forms and guises. We can do better, and should do better! Act now, vigorously, and we can secure London's lead as a financial centre in the 21st century. Carry on as we are, and someone else will do it first. . . .

    And you, John, are uniquely placed to help it along. Use the opportunity!

  15. Manga
    January 15, 2009

    […]Thanks for sharing your work with us! Your theme is just awesome![…]

Comments are closed.