You're answer is clear and understood and I thank you for pointing me in the right direction to see how utterly ludicrous it was of me to suggest it as in hindsight it appears there is more debt wrapped up in those instrument bundles than the entire globe could pay back in little shorter than the next 100 years.

My God !
Who actually owns the "real assets" for this or is that another stupid question as my hunch is that much of it is 'imaginary' ?

P.S. I didn't try to write a note of the trillions out there as I don't have a big enough piece of paper.

If the levy calculated a profitable return to the taxpayer ( like a mortgage lender ), then everyone would win and the banks and the markets would be free to operate again. Home values and the markets would stabalise, jobs would stabalise and the economy could go on much as it did before but with some constraints which would be laid down by IMF conditionalities as is the case now.

I also feel, given this injection of confidence to the system, that the assets we describe currently as 'toxic', may actually turn out to be good assets again and would likely be redeemed far quicker than 20 years if banks were trading again normally ?

A good point. But I also agree with Pete Chown, inflation has since the end of the war been an instrument of government policy.

It discourages saving, which if coupled with tax on interest paid, it is a wonder anyone bothers to save at all.

Oh! in the UK we have the lowest savings rate ever. So government policy has arrived at it's logical conclusion.

Lowest personal savings coupled with what appears to be the mother of all financial crisis. And now Gordon Brown has crippled the UK balance sheet.

Pete Chown: "Finally, it’s worth noting that I could transfer my own modest savings into gold .."

How long before the government re-imposes tax on gold purchases?

Quote:

"This is the price we’re paying for creating the illusion of wealth when in fact we were creating nothing more than a huge pile of debt. We’ve borrowed to buy houses; we’ve borrowed to buy cars, clothes and every other consumable conceived by man.
Banks, such as Lehman, were so keen that no one in the great new debt democracy should be left out that they started borrowing from each other. They used that debt to create sub prime loans and turned these riskiest of debts into apparently safe investments.

They traded these back and forth amongst themselves, even finding insurance for them in murky derivatives few people understand, called credit default swaps.

Many of the world’s biggest banks from Iceland to Japan now find themselves caught in this toxic mesh where they no longer know who’s holding what and who can repay, so they’ve turned the taps off and are hoarding cash.

In this environment confidence evaporates, banks can’t meet their short term liabilities so go bust and companies can’t raise credit, even for cash to pay the wage bill, and recession very quickly ensues. Faced with these prospects, investor sentiment collapses bringing down the price of shares with it. Panic selling was stoked even more yesterday by a fear over who’s been left holding Lehman’s liabilities"………….. continues….
http://www.telegraph.co.uk/finance/financetopics/…

It seems to me that liquidity within the banking system could be restored if a global bank such as the IMF just took over the toxic assets. Surely this would allow banks to pass them on to restore their capital assets and could be a way to give confidence back to the markets along with promoting lending between banks again?

If there was any diferential in the value of those assets then any loss could be offset by placing a levy on banking industry profits as a whole over a realistic period through what would in essence be a loan of the real loss but spread over a period which didn't harm capability to trade ?

Rather, it would allow banks to trade openly with confidence and place sums aside from profits in order to wash toxicity out of our system in a way it had less immediate impact on people, their homes and their economies ?

Would there be a problem with this Mr Redwood ?

Reply: The problem is, where would the IMF get so much capital from to do this?

Up to a point I agree with you. The aim of monetary policy should be stable prices (of consumer goods and of assets such as housing). It should not aim to give a fixed return to savers. It might be that savers' returns will even be negative at times.

What the government may be tempted to do, though, is inflate its way out of the crisis. If the economy is mired in debt, why not make the debt smaller with a bit of inflation? That is where it gets unfair: the government is simply transferring resources from savers to borrowers, in effect taxing the prudent to bail out the profligate. Many savers are pensioners who have put money by for their old age. Are we really reduced to bailing out the City with the savings of the nation's pensioners?

We should also consider that inflation discourages saving. By world standards, Britain has a very low savings rate. Is that left over from the days of 20% inflation, when saving must have been pretty pointless?

Finally, it's worth noting that I could transfer my own modest savings into gold with a few mouse clicks, and I'm not on my own. If the government thinks a run on the banks is bad, try a run on the currency, as the country's savers look for something safer.

I find 2 things worry me. The story about bonuses is a red herring. If we don't pay bonuses our brightest will go to those who will pay them. I feel that some people's anger is being focused in this direction – wrongly in my opinion.

Second, like Man In A Shed I am concerned that the Conservative story isn't getting coverage. Thus allowing stories about bonuses and this govt's analysis and approach to intervention to prevail.
Reply: The media refuse to run my approach to the crisis – they just want me in their story as a "deregulator", refusing to accept I was calling long before the crash for proper banking control from the Bank of England. I just shows the power of Labour spin control again.

On the other hand I've noticed that fairness is not a guiding light of many Conservative's views on taxation. I've argued on this blog that it seems bizarre to me that Conservatives would rather an indivual who inherits £2m of property pays no tax (compared with about £0.5m under Labour's proposals) rather than reduce the tax on a hard-working fireman or small businessman, but that is indeed their current policy.