Comments on: If you find it repugnant to take stakes in banks Mr Paulson, don’t do it

By: not an economist

not an economist — Thu, 16 Oct 2008 07:16:12 +0000

RE(1): Currently he has, but there are the longer term implications. In particular whether or not his ploy will work. The market rallied earlier in the week but the question is whether it will continue to do so and if it doesn't what next? More nationalisation? More bail outs? Yet further increased public borrowing to fund these bailouts which will presumably have to be monetised and so will ulitmately have inflationary repercussions as well as destabilising the pound? Plus this is only beginning to hit what the Americans call Mean Street. Soon there will be bankruptcies throughout the economy as it inevitably slows.

In some respects – and I accept this will be heresy around here – I hope Labour does win the next election. (Indeed I have been expecting them to win for a while now despite what the opinion polls say). Labour were instrumental in creating this mess. It would be nice to see them having to clear it up and make all the hard, tough, unpopular decisions to sort it out instead of a conservative govt having to come in and do that for them and accordingly getting all the flack for those decisions. This, I would argue , happened when the Tories won the 1979 election and had to tidy up after the Wilson/Callaghan govts (and, to be fair, Heath's effort of a govt in 1970 to 1974).

Re (3): I sort ofagree here. I woullreally like to see an indepth article/analysis of why the nationalisation of the banks is bad for the economy, esp in the context of the recent credit crisis. I mean, it feels sort of weak to say nationalsiation would be bad for the banking industry 'cos of innefficiency etc.., when you condiseder that arguably privatisation of the banks has resulted in the financial turmoil of the last year or so.

By: Worried Al

Worried Al — Wed, 15 Oct 2008 23:29:04 +0000

I too find bank nationalisation distateful and I am very nervous of using public money to bolster bank's balance sheets.

The only flaw to Mr Redwood's argument is that some banks have assets that no-one wishes to buy as private buyers are worried about the future.

And why are private buyers worried? They are worried because US and UK are in recession. With or without certain banks failing we would still be in recession because after a boom period markets have become saturated – how many mobile phones, DS Lites, flat screen TVs etc are people expected to own? Bank balance sheets are now reflecting that we are in recession – they have duff assets no one (but Government) wants.

Finally, do any bloggers remember what happened with the Lloyds syndicate crisis in the late 1980s? Toxic assets (ie. CDOs and derivatives) are stakes in a debt and so liability can increase geometrically if things go wrong. The Lloyds syndicates were underwriters for insurance policies and were the final port of call for insurance claims – the liability from the underwriting was unlimited. Are there any lessons to learn from the Lloyds disaster?

By: Lola

Lola — Wed, 15 Oct 2008 21:18:54 +0000

Now Mr. Redwood sir, you know full well that this bank nationalisation has nothing to do with the state of the banks finances or their abaility to raise their own capital. You know full well that is has everything to do with Gordon Brown's public finances and political capital.

By: Derek

Derek — Wed, 15 Oct 2008 20:39:56 +0000

Someone mentioned the Competition Commission, who were last heard of noisily producing a whitewash on the supermarkets. The banks are coalescing into ever smaller numbers to choose from whilst Philip Green is buying up whatever's left of the High St he doesn't already own. If nothing is being referred to the Competition Commission surely it should be mothballed and a large, taxpayer funded, payroll bill saved?

By: mikestallard

mikestallard — Wed, 15 Oct 2008 19:37:16 +0000

In all the confusion, here are a points on which, I think, most people agree:
1. Gordon Brown has won the publicity battle. The conservatives are nowhere.
2. This is all rather rushed and therefore very sinister. Rumours are bound to spread. But we can trust Gordon Brown because, as he says, he is a Rock you can depend on.
3. Nationalistation of the banking system, or part thereof is sinister to Tories, but nobody has clearly spelled out why think this. To Labour supporters, however, it is a victory which they could not even dream about a year ago.
4. Everyone is agreed that things are getting better after the crisis.

If I were Gordon Brown, I should pencil in a general election for early November, before people see through the con trick and spin.

By: Socrates

Socrates — Wed, 15 Oct 2008 19:12:08 +0000

If the Government is buying stakes in some major banks – why do we need the Lloyds HBOS takeover? Surely in the future, providing the socialists have gone – when the shares are sold back to private ownership we will have allowed the creation of a megabank which we would normally consider to be anti competitive – why would this be a good idea?

By: mikestallard

mikestallard — Wed, 15 Oct 2008 18:36:05 +0000

Stuart Finlay – I totally agree with your excellent, clear, compelling and lucid analysis. I have been reading up on all this, just like you. But, unlike you, I came at it fresh.
Even the staid, boring old Telegraph today, in the Leader Column, referred to French and Spanish bankruptcy at the height of their power.
National bankruptcy is a very real possibility.
Maybe the bluff will work, though – for a bit. Nevertheless, sooner or later the money will have to be repaid. In Germany (1920s) the currency collapsed with all the debts. Remember the Rouble at Perestroika? Maybe, as you say, this will happen here.
Either way it is the middle class who go onto the streets and sell things in the snow to pay for their next meal.
The only thing I can disagree with you on, therefore, is this: not so much thank God for spreadsheets as thank God for Charity Shops and E Bay.

By: David Herr

David Herr — Wed, 15 Oct 2008 18:04:20 +0000

I share your trepodation about de facto bank nationalization, but, at least in the US, there is a good reason for the government in inject capital into the banks. Here in the US, some $4.5 trillion of deposits are insured by the government; another $2.7T in deposits are uninsured, mostly corporate transaction accounts for payrolls, inventory, etc. If the deflationary spiral in real estate continues, and the banks become insolvent and have to be closed, the full bill to the taxpayers would be staggering. I, for one, will take adding $250B, or, for that matter, $700B to the national debt to add to bank capital, to prevent, if possible, a complete collapse that would cost taxpayers $4.5T in direct costs, and trillions more in expense if the uninsured deposits are wiped out (because the government would never let payrolls get wiped out).

The keys are to invite private capital to participate alongside the government, and to establish a timeframe on which the government preferred shares are bought out. I am thinking 10 years — that is how long it will take for lending to recover, after sane lending standards are reimposed.

As for US debt, even after the Bush deficits, the US government's publicly held debt stands at under 40% of GDP, which gives the government room to borrow. The extra interest costs might even force a reduction in domestic spending, which has exploded under Bush. Borrowing an extra $1T at 5% would cost $50B per year. Believe me when I tell you, at least 5 times that amount could be cut from the budget with hardly anyone except plugged in lobbyists feeling any adverse effects.

The U.K.'s higher public debt to GDP ratio constrains their government a bit more, but as I understand it, Brown increased spending a lot during the boom years, which means that there is ample room for cuts to make up for the higher interest expense.

By: APL

APL — Wed, 15 Oct 2008 17:08:55 +0000

Ex Northere Crock saver: "(1), (2), (3)"

It's the same brainless forced merger that was tried in order to save the british motor industry creating British Leyland. The result died.

If the government do this to the banking industry, the same thing will happen, instead of (getting into financial difficulties -ed) today, it'll happen in a few years time, after being stuffed with government subsidies and stupid policies about equality and the other socialist claptrap.

By: Tinxx

Tinxx — Wed, 15 Oct 2008 14:49:46 +0000

" Three questions spring to mind re Lloyds TSB and HBOS:
(1) If Lloyds were sound enough a couple of weeks ago to takeover HBOS without Government financial support, why do they now need a capital injection from the Government?
(2) If they were not sound enough, without this capital injection why were the PM and Chancellor supporting their acquisition of HBOS?
(3) If the proposed acquisition were cancelled would Lloyds still need the capital injection from the Government? If not why not cancel the acquisition and save the taxpayer money?"

I think a fourth follows from this:

(4) If the competition rules were being overridden in the national interest back in September for Lloyds to take over HBOS – is there still a justification for that now? If not, why are we tearing up these concerns when a simple "bail out" of HBOS – or merger with Northern Rock as a state bank would still have allowed competition on the high street but without the need to put any capital into Lloyds or demand a slash of their dividends?
With the implication that until the 12% pref shares are redeemed for the WHOLE combined entity, no existing LLoyds shareholder will get paid a dividend, one wonders why any LLoyds shareholder would want to vote for this unless they are Victor Blank who is being given licence to run – with Government support and confiscated shareholder revenues – a UK megabank.