Brown/Darling/Mandelson. We're going to nationalise the banks.

Would you please invest in them now, so we can get your money for nothing?

their manic leveraging that has brought our banking system to its knees.

So all this money put into the new bank won't be geared in any way what so ever?

Nick

Sound analysis as usual. But surely there is another way to get the banks lending again, and that's by competition. Some of the millions the government is spending on buying the shares of failing banks could provide the capital for a new bank which, by definition, would have none of the bad debts and liabilities that threaten the solvency of the existing banks.

Let's call it the "Business Bank", funded initially with public money but also inviting capital from private/institututional investors. It should be managed by experienced bankers: there is a large crowd of high calibre people who would probably jump at the chance of joining a new bank. Some of these may have been retired early, not least because they disapproved of the hotshots and their manic leveraging that has brought our banking system to its knees. Others would probably be only too happy to jump ship from some of the existing banks.

It's vital that the dead hand of government bureaucracy is kept well away from interfering in the actual running of the bank, a couple of nominated directors on the BOD should suffice. The bank's remit would be to lend to business, particularly small businesses. Hence necessary lending and competition for the existing banks.

Banks lend a multiple of their capital.

When they make loses it comes from capital.

That means they have lost the ability to lend, the multiple of their losses.

Unless they replenish their capital.

They have lost money, so lost capital

That's part 1.

Part 2, is that when the economy is bad their losses will rise.

That means they need lower the multiplier, or increase their capital.

1) It can be done with retaining profits.
2) It can be done with lowering losses.
3) It can be done with cutting costs.
4) It can be done by increasing profits by charging more
5) This can be done with injections of capital.

So what's the government doing.

On one hand, it's pumping some capital in. However, by saying its going to nationalise, no-one else will inject cash. Idiotic statement number 1.

Preference shares at 12%. That increases costs and means capital won't recover quickly. End result, it's not attractive to invest.

Forcing banks to lend to bad borrowers is what they mean when they say, start lending. They will also bleat about the rates. That means less profit, and the capital suffers from lack of profits, and more defaults.

They clearly don't know a thing about what they are doing.

The most clearly argued analysis of the banking crisis and the choices available that I have read. Implementing your sensible recommendations requires abandoning party politicing and using real administrative competence. Unfortunately our "GREAT LEADER" knows only how to look for party advantage, and has a twelve year track record of ZERO administrative competence.