Another week-end – two more European banks in the news

The decision of the Dutch government to put more capital into ING is strange. A week ago when ING took on deposits from a failed Icelandic bank,and on October 17th in a press release, we were told that ING was in a strong financial position. Now we are told it will have extra taxpayers capital. The governments and Regulators have raised the bar over how much capital a bank should have, and are now having to pay up to meet their own higher hurdle to appease the markets. Meanwhile a French bank loses substantial sums in “unauthorised trades” so the three bosses of the bank resign. One wonders why the top people have to resign at a bank if employees broke the rules, but not at all the banks which got into financial difficulties by doing what the Directors asked or authorised.

It is good news that many in the political and media classes reckon we have now lived through the worst of the banking crisis and think it is now all on the mend. A return of confidence in banks is a necessary part of recovery for the rest of us. However, the authorities have to understand that you cannot have strong banks without a stronger economy. They need to do more to ease the recessionary forces, otherwise banks will face much larger losses right across their portfolio of loans. The issue now is whether we can stave off a corporate loan problem to run alongside the sub prime mortgage problem being experienced on both sides of the Atlantic.

It is also worrying that the main property specialists, who were very complacent going into the housing downturn, forecasting a very shallow decline in prices, are all now telling us to expect another year of substantial falls in UK house prices. If they are right this time round that means more grief on the mrotgage books for the banks, as well as many individual tragedies as the nation plunges more into negative equity.

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10 Comments

  1. Nick
    Posted October 20, 2008 at 9:38 am | Permalink

    Off topic. Burning our money has this snippet.

    Back in 1991, the Crossrail Bill reckoned it would cost £1.4bn. Which means that in just 16 years, costs are up by well over 1000%! Over the same period, the general price level (the GDP deflator) has increased by just 50%.

    Even 4 years ago, costs were “only” £10bn. Now they’re £16bn, 60% higher. And the project still hasn’t got going yet.

    John, you’ve been in favour of this scheme. However, from the numbers and the cost it is pure pork barrel.

    Are you going to can it?

    Reply: I am not in favour of spending large sums of public money on it. I agree the costs have grown in an unacceptable manner.

  2. rugfish
    Posted October 20, 2008 at 9:49 am | Permalink

    Peter Oborne’s article in the Mail on 20th September 2008,

    http://www.dailymail.co.uk/news/article-1058601/Apocalypse-Now–New-world-order-devastating-implications-Western-nations.html

    gave what many would think is an alarming view of the future. Now government is seeing his words come true with figures of home repossessions and bankruptcies having doubled. This is coupled with a rise in unemployment and a drop in spending, and an increase in government borrowing.

    The government has taken action by bringing forward spending plans in order to attempt to stem the downward spiral of job losses, it’s asking banks to go easier on evictions which have doubled to 45,000 this year, it plans a £100 million budget to retrain people who have lost their job however waht jobs will there be avilable ? Further, it’s ‘asking’ banks to start to lend to businesses but cannot force them and should instead give access to business loans through government or else reduce their taxes.

    Whilst the governments intentions may be are worthy and sensible its current policies don’t add up to ‘action’ yet. It has to be said that a business cannot survive forever without customers and some will not be able to continue with diminishing or non-existent profits. Stabilising the the means for consumers to continue to spend is the main priority which will help the economy, and at the moment there isn’t a strategy to stabilise the asset values nor is there a strategy to help maintain their incomes beyond some of those who are employed in the construction industry, but even that is a short-term offering as future jobs will be lost when those works are completed unless new jobs are created by the private sector which by then will be out of business.

    Despite governments praiseworthy intervention to bring forward public works, sales in the high street will continue to slip and this will lead to more job losses as the real economy continues to nose dive to levels previously unseen. One reason for this is because 40% of the remaining part of our economy is based on retail trade and the other 60% ( finance ) has taken a hammering which is still being counted notleast in how much the effects of lost jobs, bonuses and big pay packets will effect house prices and the buying of high value items which led to the consumer boom in London and other places, but also in terms of what capital banks have lost and will lose, which compels them currently to hold back the capital businesses need in loans and overdrafts.

    Falling house prices as a result of our gloomy economy will remove the legitimate asset growth of homeowners which in turn will hit their spending habits, along with the profits of many who invest in the housing market. Pension funds for instance will lose significant amounts which will incur a greater future need for higher levels of public spending which in turn will require higher taxes.

    Taxpayers will lose out somewhere along the line regardless whether they are homeowners unless public services ( QUANGO’s ) are cut at that point, so looking forward, somewhat pessimistically or perhaps more realistically, one can easily see that the future may well hold a degree of social unrest, a greater amount of poverty and less ability of government to deal with many problems which could have been avoided and would have occurred in part as an unnecessary consequence of its failure to act sooner to stabilise the housing market.

    Unless government acts or intervenes to save the housing market then much of our economy will be lost until the ‘real economy’ can be rebuilt again, but even then we’d need more trade in exports in order to promote the growth needed for the economy to right itself as large parts of it would have declined.

    Without consumers in the real economy there is no chance of revival because this is the lifeblood of our economy. Further, in order for spending to continue to sufficient, albeit lower levels, consumers need the means of money and jobs along with confidence that what they buy will hold value otherwise they’ll have no incentive to buy.

    People who were once prospective house buyers for instance faced with unsustainable falls in home values, would likely develop a “why bother” syndrome, and what will follow will be boarded up shops and other outlets and a loss of jobs in retail and manufacturing across the nation as we see big names disappear.

    The building trade will all but perish all but for public works as private finance becomes in shorter supply and is depleted further as a result of less demand in both residential and commercial requirements, and manufacturing per se, will have less demand which will lead to increased foreclosures of supply businesses which will have defaulting customers on contracts which will increase bankruptcies further and yet more job losses.

    Unless government intervenes to stabilise housing then we could be in for far longer period of recession which could well bring on many changes in how we run things too. Politics for instance might well take a right turn as people begin to see centre parties failing to grapple with ‘real issues’, such as protecting their jobs and incomes. Immigration will be another public issue and so will repossessions, homelessness, poverty, waiting lists in the NHS and rising crime.

    Naturally, there will be a tendency of more to look toward a more nationalistic and greater protectionist view of politics and this view will rise in precisely the way it is doing now unless some action is taken by government.

    I think people could well start to question for instance, the need of government to have levels of further government in European and be asking why they’re having to pay VAT for instance. What’s it for ? Why when a person is unemployed or living a meagre existence is the government charging VAT on fuel needed to keep oneself warm, or on the food we buy?
    Wouldn’t we all be better off VAT wasn’t charged at all on essential items?

    I think there are many potential problems if government fails to see there is a real need to support the housing market and one way to do this is to re-introduce MIRAS, another to remove stamp duty which could just help buyers and homeowners enough to stabilise it.

    Placing stamp duty for instance on the seller would recoup duty from lenders repossessing homes. Also, I’m sure sellers would be more eager to pay duty at say 5% rather than see a reduction of 25% or more in their house value?
    MIRAS offering relief at the equivalent income tax base rate on an amount of £80,000 would see homeowners with some real money in their pay packets and it would help to stem repossessions, bring more money into the economy for those struggling businesses and make it easier for First Time Buyers to get on the ladder especially if placing the buden of stamp duty on the seller instead of the buyer.

    So whilst talking about helping the economy is good, I think people want something tangible in the way of action, and for that to happen, either government or the opposition must take the lead to save housing quickly.

    I see some have already started incidentally.
    Sweden says:

    http://news.bbc.co.uk/1/hi/business/7679355.stm

    “The government is proposing powerful new measures to ease the effects on Swedish households and companies of the financial turbulence,” Mats Odell, the country’s finance markets minister said.

    • StevenL
      Posted October 21, 2008 at 2:17 am | Permalink

      It all smacks of fighting the market to me. I think government should butt out and let it all come tumbling down. What we are seeing is just a healthy correction, not the end of the world as some homeowners would have us believe.

      If government is going to intervene it should be to cause price/wage inflation and allow us to deleverage against a background of inflation rather than deflation – which would be a lot less painful in my opinion.

      Failing an international policy of price/wage inflation we should just let the correction happen and accept the job losses that are the inevitable result of the 'age of irresponsibility'.

  3. Letters From A Tory
    Posted October 20, 2008 at 10:44 am | Permalink

    I'm an ING Direct customer and have been bombarded with emails and letters over the past month assuring me that my money is safe – and now I read about this in the news! Cheeky buggers.
    http://lettersfromatory.wordpress.com

  4. APL
    Posted October 20, 2008 at 10:55 am | Permalink

    JR: "It is good news that many in the political and media classes reckon we have now lived through the worst of the banking crisis and think it is now all on the mend."

    Given that the political and media classes were entirely taken by surprise by the credit crunch, their opinion now hardly inspires confidence.

    I would rather listen to people who have a record not only of forcasting this desperate scenario years ago, but publishing their forcasts for anyone who wished to, to read.

    Peter Schiff – http://www.europac.net
    The financial sense website – http://www.financialsense.com
    Karl Denninger – http://market-ticker.denninger.net/
    Mike Shedlock – http://globaleconomicanalysis.blogspot.com/

    To name but a few, there are years worth of commentary discussion and analysis.

  5. michael, islington
    Posted October 20, 2008 at 8:14 pm | Permalink

    Methinks, thou dost protest too little …

    I know that many of your readers are just interested in your thoughts from the point of view of a mugging in the media at some stage, as you probably realise. So you're forced to play the critically supportive – a modified version of the bipartisan – card.

    But the UK is on the precipice of chaos. More taxpayers' money is going to have to be stuffed into the mouths of the banks. Lots of businesses are going to have to go belly-up. Lots of us are heading for the dole queue. We aren't coming out of the mincer until five or six years down the line.

    There comes a times a time when withholding one's real thoughts for "confidence" reasons equates to singing "Rule Britannia" to stave off the firing squad.

    Just a thought.

  6. Acorn
    Posted October 20, 2008 at 8:26 pm | Permalink

    While agreeing with the APL, we have to stand back and look at the big picture.

    The money supply initiatives by central banks and their associated government Treasuries, has to come out to fuel inflation eventually. Precious metals and oil will suffer considerable inflation eventually.

    The Dollar is holding its price because everyone wants it, for the moment, to hold their cash. The stock markets are suffering major withdrawals of cash, this is a temporary situation; there are a lot of bills to pay, particularly credit default swaps – ING for instance.

    Nothing cures a debt problem like rampant inflation. Global growth depends on energy, be it oil; coal or whatever. The prices for these are low at the moment, a year from now will be a different story. Redwoodians know where they have to put their money.

    • Nick
      Posted October 21, 2008 at 10:27 am | Permalink

      Inflation doesn't cure a debt problem when it comes to the government.

      Most of its debt is RPI linked, or even worse Rossi index linked. That's 6.3% and that's the pay rise the unemployed are going to get unless there is a lot of publicity about it.

      State pensions in all forms and benefits are RPI linked, and they are the big liabilities. Crossrail, olympics, nuclear decommisioning and most PFI deals are RPI linked.

      ie. Nurses get 2%, chavs get 6.3%. If that is widely known, then I suspect the government will cap benefits at 2%. That's a tad over 4% saved off the budget.

      Nick

  7. mikestallard
    Posted October 20, 2008 at 8:49 pm | Permalink

    Unemployment is forecast to rise to over 2,000,000 in the near future. The government, typically, wants to do something about this. and, typically, the idea is to fling money at it. So houses will be insulated. Crossrail will be looked at again. The government has the ideas, the government pays, the government controls.
    The problem, of course, is that the government is totally broke.
    What it should do is to let small businesses off the leash, stop passing laws about whether or not they are allowed to employ part time people, stop taxing them out of business and organise some excellent training programmes with the people who have been laid off teaching the others.
    Idealistic? This is what happened when I was on the dole in 1992.
    Even so, the pressure from government in tax, laws, restrictions and so on was immense. It was – and still is – virtually impossible, for instance, to start up a school nowadays.
    So, although the crisis is over, I feel the problems are just now starting for two million people.
    (PS we all know that these figures bear no relevance to reality.)

  8. bill Quango mp
    Posted October 21, 2008 at 1:51 am | Permalink

    "Stop lying please!".

    Good for you. Robertson looked really surprised. i thought he was going to get teacher…More Tory and lib dem politicans should start using much harder language with these Labour liars.

    "Spending is under control"indeed.
    Under control my Miras

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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