That’s another fine mess you’ve got us in

Yesterday was a disastrous day for the UK. The government had to tell us that its first banking package, amounting to £487 billion of share buying, loans and guarantees, had not done the job. They are now planning another package which includes new loans, new guarantees, the possibility of quantitative easing and an insurance scheme for bad debts.

The timing of this announcement seems to have been related to the publication of the news of the huge losses at RBS. The government had not completed the negotiations with the banks, and had not filled in much of the detail of its proposals, implying it had been rushed by events. We do not know which bad loans or obligations of the banks will be eligible for the insurance scheme, we do not know how they will be valued, we do not know what the insurance premium will be and we do not know the total taxpayer commitment. What we can guess is that the commitment will be large if the policy is to have any beneficial impact, and that pricing the insurance will be very difficult. There is no static and measurable pool of bad and doubtful debts. In this recession the lake of underwater debt is growing at flood rates.

In these circumstances a rumour spread that UK sovereign debt is about to be downgraded by a rating agency, whilst sterling fell again against the dollar and yen. The share prices of RBS and Lloyds plunged, leaving the taxpayer sitting on large unrealised losses on the shares the government has so recently purchased in these two major banks.

People often ask me now, how bad can it get? They have in their voices the apprehension of people who still have their jobs but are worried that all the bad news will one day cross their threshold.. They are relieved that petrol is a bit cheaper and maybe are benefiting from lower mortgages costs, but concerned that things might get tougher for them in some unforeseen way.

The answer is they could get a lot worse. The government has to avoid moving from a very serious problem of weak and overborrowed banks, to an even worse problem of a weak and overborrowed state. We need to be able to keep confidence in our currency and in the government’s capacity to borrow and spend sensibly. Were the government to lose the confidence of the bond markets and were the continuous decline of sterling to become a rout of the currency we would be in for much higher interest rates, much higher unemployment, and a further cut in living standards for many.

The starting point for the government’s analysis should be my simple point that the major banks in the UK are too big for the state to assume all their liabilities, or all their bad debts. The Chancellor yesterday confirmed they were looking at insurance for all the overseas loans as well as the UK ones, and seemed unclear on all the derivative and other financial instrument activities that these banks undertake. Put together, this all amounts to too much risk for taxpayers.

The second perception they need is that the private sector is short of cash. Companies are short of orders and revenue, Many individuals are overborrowed and are having to pay off credit card debts and other loans. They need more money. They are not necessarily going to go out and borrow more, even if the banks suddenly are in a position to lend it. The government does need to work on the money supply to ease the squeeze.

The government does need some combination of the schemes it announced in outline yesterday. It also needs to put some limit on the amount the state will spend and borrow, to start to instil some confidence in its own finances again. It should be seeking to dig its way out of its expensive and so far disastrous share buying amongst the banks, and finding cheaper ways of seeing the banks through a painful period of adjustment. Short term loans against security, the provision of banking cash and maybe guarantees on inter bank and new lending are the least bad ways of doing this. The banks themselves have to cut costs, change their business models and reduce their risks. Subsidising them too much delays this necessary process. Buying their shares just puts the taxpayer in line to pay the losses, which as we saw yesterday are eye wateringly large. When I first said the three banks the government was buying shares in could lose the equivalent of the defence budget, many people looked surprised. That is what RBS has announced on its own just a few weeks after the government bought shares!

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

39 Comments

  1. backofanenvelope
    Posted January 20, 2009 at 9:17 am | Permalink

    Whatever The Great Helmsman says, there is no sign that the State believes things are as bad as the press says they are. All of them, local and national, are carrying on as if nothing has changed.

    We need to cut state expenditure and lower taxes. Cuts should be focussed on areas and things that do not increase employment.

    I read today that it will cost “billions” to rebuild Gaza. How about announcing now that we will not be contributing?

    • Cliff.
      Posted January 20, 2009 at 12:32 pm | Permalink

      Too late, Mr Brown has already pledged £20m and the use of our navy to stop weapon smuggling….I wonder if this is the same navy that has most of its fleet mothballed in port as we can’t afford to have them in service due to the oil prices and has had to delay the new aircraft carriers.

      I wonder if Mr Brown is so free, easy and generous with his own money or if it is just the taxpayer’s money he throws around like confetti?

  2. Alfred T Mahan
    Posted January 20, 2009 at 9:19 am | Permalink

    John, I’m sure you will have seen this morning that Jim Rogers has said the UK economy is finished, and it’s hard to disagree with him. The government is obviously in headless chicken mode, which together with general financial uncertainty scares me witless. It must surely only be a matter of weeks now before the markets call time on Brown’s borrowing binge – if UK government debt is in danger of being downgraded today, it’ll only take one more bout of really bad news to tip it over the edge, and it’s foolish to think there won’t be one. As usual, your prescription is the right one although I’m afraid now it’s getting close to bolting the stable door.

    It’s funny, isn’t it, how large a part character plays in these great events? I’m absolutely certain that Brown’s inability to admit any sort of error is a major factor in his refusal over the past year or two to rein in public spending in any way. Something for us all to ponder as we sit huddled around a single lump of coal next winter!

    • Stuart Fairney
      Posted January 20, 2009 at 10:36 am | Permalink

      That’s a very good point. I cannot think of a single admission of error from Mr Brown, can anyone assist me?

      Any psychologist will tell you that believing oneself to be perfect is usually the sign of a delusional character.

  3. alan jutson
    Posted January 20, 2009 at 9:22 am | Permalink

    John

    Gordon Brown says that this financial crisis is Worldwide and gives some examples (probably his own interpretation on figures) as usual.

    What is your take on the World scene, the accuracy of Mr Browns comments, and which Countries have escaped/faired best the Banking crisis and why ???

    Reply: Iceland, Ireland, the UK and the US have the worst banking crises brought about by overextension of their financial institutions. The problems in Germany, China and Japan come in strong export economies with the sharp contraction in world demand, not from their own banking errors this time round. The UK has a nasty version of the crisis, owing to poor regulation of UK banks and very poor monetary policy from the Bank of England.

  4. Letters From A Tory
    Posted January 20, 2009 at 9:38 am | Permalink

    It is extremely worrying that the government are continuing to release policies – be it bank bailout or mortgage rescues for homeowners – which haven’t been agreed, finalised or spelt out in full.

    It just goes to show how politicised this economic crisis has become, and for that we will all end up paying an even heavier price than we are already lumbered with. One can only hope that Mr Obama has more sense than Brown when it comes to getting the detail right.

    http://www.lettersfromatory.com

  5. oldtimer
    Posted January 20, 2009 at 9:45 am | Permalink

    It seems to me, to borrow a famous phrase, that this attempt to free up credit could also turn out to be “pushing on a piece of string”. In short, it will not work as intended.

    There is an evident need for the UK (government, private sector and some businesses) to deleverage from the present excessively high levels. The question is how quickly or slowly will this occur and with what consequences for the economy and everyone working in it. Presumably a slow, measured and controlled contraction would be preferable to enable a more or less orderly adjustment to be made. But it is at least as likely that the sudden contraction already witnessed (with the flight of foreign lenders) will continue apace with dire consequences for the economy. The government`s measures will not buck the market.

    That leaves the politicians with the trillion dollar question – what do they do then?

  6. Stuart Fairney
    Posted January 20, 2009 at 9:51 am | Permalink

    As ever a good analysis but I think for Mr Brown, it’s all about ego and survival and nothing much at all about sound economics. I think in private, even those close to him must see these packages for the dangerous nonsense that they are. It is now up to them to put country before party or self and act, because the danger to the UK is now as you say, looming and manifest. Come on Milli… or Jackie… or someone?

  7. Andy
    Posted January 20, 2009 at 10:13 am | Permalink

    I’ve only recently started reading your blog, and find it very good reading. I wonder if you can answer a question for me (and perhaps all of your readers):

    Where has the money gone?

    My understanding of economics is pretty superficial – however, my engineering background means I’m not scared of the numbers. As far as I can tell, it’s pretty hard to destroy money and more importantly, value; even in terrible times like this. Let me give an example:

    Alice buys a house in 2007. She borrows money to do so. That loan is secured against the house. In 2009 her house is worth 1/3 less than what she paid. Bob buys a house in 1999. In 2009 Bob’s house is worth 50% more than what he paid. He buys Alice’s house with the profit. Effectively, Alice’s loss has become Bob’s gain. No money was lost from the economy. Of course, if Alice is bankrupt by this process, it is the bank that suffers the loss because the security was insufficient, which is bad for them, but the money wasn’t lost, it’s still in the system – Bob used it to buy a bigger house.

    Reply: the government bought into a bank which thoughts its assets were worth x, and then a few days later decided they were only worth x minus many billions.
    The write offs were necessary as the bankers paid themselves lots when they made the original loans, and the company borrowing paid people too much to create assets with the borrowings. The money has been spent, and the capital values have fallen.
    There is one way to get rid of money of course, by burning your assets. If I started buying gold bars then dropping them into a volcano, that asset is gone for good.

    My question then becomes: who has been burning money? When gamblers lose in a casino, the gambler has lost, but the casino has won. When a bank loses 20 billion, someone must have gained 20 billion. Where is Bob?

    Am I being naive?

    The only solution that occurs to me is that this wasn’t real money in the first place. That the banks were presenting their accounts as showing huge growth, but that that growth wasn’t real. One way I suppose that could be done is by valuing virtual assets on the balance sheet. I could say that my company this year has become more loved by its customers, and so has an increase of goodwill worth 10 million pounds. It’s not a real 10 million, but it’s on the balance sheet. Once it’s on the balance sheet it can be used as collateral for a loan and converted into cash.

    I for one would value a post explaining where you think all these enormous debts and losses are coming from.

    • Andy
      Posted January 20, 2009 at 10:29 am | Permalink

      Thank you for your reply. I’m still not clear though. You say that the money has been spent, which is fine, I understand why the banks are posting losses, but why has that carried to the rest of the economy? The key word is “spent”, what was is spent on that now has no value?

      I wonder if I have answered my own question. Is the problem that money has been spent on things with no value? In effect, burning it?

      Reply: Much of it may have been spent as income in a way which leaves no capital investment.

    • Waramess
      Posted January 20, 2009 at 11:03 am | Permalink

      Surely the only way for money to “disappear” apart from burning it is to reduce the velocity.

      If the velocity of circulation is reduced by 50% it gives the appearance of half the money supply having disappeared

    • Waramess
      Posted January 20, 2009 at 11:09 am | Permalink

      And, if A buys a house from B for £100,000 and then finds he can only sell it for £50,000 money has not disappeared because B still has it. In other words A has lost £50,000 to B by having bought an overvalued asset

      • Andy
        Posted January 20, 2009 at 12:19 pm | Permalink

        Well yes, that’s what I said and is kind of my point.

        If we add up the total money in the economy before and after in this small example, then it hasn’t changed. Money has moved from A to B, one loses, one wins, but it’s all still there. Given that, my question was how is the recession being created?

        John’s reply is suggesting that the money is spent leaving no capital value. To me, that still isn’t sufficient because money has to be spent on something: either turned into an asset, in which case it still exists, or used to buy a service, in which case the service provider has it and the money still exists.

        • StevenL
          Posted January 20, 2009 at 9:29 pm | Permalink

          It’s all in China, the Middle East and offshore bank accounts? Even that’s not a good enough explanation, because China and the Middle-East seem to have bought T-bills secured against the US taxpayer with all the money we’ve winged them.

          Lot’s of people think their money is ‘in the bank’ but of course a lot of it isn’t. The bank lent it out to someone else to buy and overpriced ‘luxury’ flat from the developers, we saw with Northern Rock what happens when everyone wants it all back at the same time.

          The developers who sold the flat have to pay back the mortgage on the land to the bank, and pay their staff, who pay their mortgages, buy more Chinese goods and petrol. The government take their slice of the petrol and pay it out in tax credits so that someone else can afford to pay back a bigger mortgage, buy more Chinese goods or petrol.

          I’m not sure who keeps creating the money. There seems to be one theory doing the rounds that when you (or the government) borrow it the bank don’t actually physically have it and just create an entry in their books to balance the asset you have given them (your promise to pay). Then other people say that this isn’t true, that the banks borrow all the money they lend you either from depositors or other banks.

          One things for sure, someone keeps creating more money, because the numbers keep getting bigger and bigger. Then again, I guess money, like a house or a share, is only worth what people believe it is worth.

          Did you ever read about the tulip bubble?

          http://en.wikipedia.org/wiki/Tulip_mania

          The housing bubble wasn’t much different, neither was the commodities bubble. With both plenty of sensible people were fooled into thinking that it was different this time. They reckon Sir Isacc Newton lost money in the Southsea bubble and said “I cannot calculate the madness of men.”

          I don’t know who prints all the money to keep the bubbles (or ponzi schemes if you want to be really cynical like me) going, but it’s a good scam and it makes life more interesting trying to figure it out.

          Let us all know if you ever find the answer!

        • Waramess
          Posted January 21, 2009 at 9:04 am | Permalink

          Your question was “where has all the money gone? And you go on to give a pretty good example of how money does not disappear from the system.
          You are right of course, even if the Indians and the Chinese and Americans all withdraw from the UK, they turn in their sterling and take home their own currencies, so the stock of sterling remains unchanged.
          The answer to your question is the one I gave earlier: velocity.
          A reduction in velocity of circulation by fifty percent has, by way of illustration, a similar effect to making half the money in circulation disappear, and holdings of bank deposits (a major component of Money Supply) during the Great Depression, for example, slumped from $44,323m to $24,545m or by 45pc over the October 1929 to April 1933 period. This was not because people chose to spend rather than to save, on the contrary: it was because the speed at which money circulated around the economy had slowed due, amongst other things, to people not spending.

        • Andy
          Posted January 22, 2009 at 11:03 am | Permalink

          @Waramess

          You are quite right. The idea has settled itself in my mind now. It is the motion of money that is key. It is analogous to the concepts of energy and work in physics. Both are measured in Joules, but one represents something happening (work), and one represents a stored capacity for work (energy).

          Here is the example I use to justify it to myself.

          Alice builds fences, Bob bakes bread. Alice wants some bread, Bob wants a fence. Alice borrows £10 from Charlie and uses it to buy bread from Bob. Bob uses that £10 to employ Alice to build a fence. Alice repays Charlie his £10. At the end of the day, Charlie still has his £10, Alice has a load and Bob has a fence. All the money is exactly where it started though. It was the flow of money from Charlie to Alice to Bob to Alice to Charlie that created some new wealth in the form of bread and a fence, not the money itself.

          Thank you everyone for your insights. I am a lot clearer on this matter now.

  8. rugfish
    Posted January 20, 2009 at 10:19 am | Permalink

    Helmsman ?

    Gordon Brown is behaving like a drunken sailor with our money.

    Maybe I don’t get it entirely. Maybe I need a surgical restraint of some kind, but if I’m not and I don’t, then clearly Brown and Darling are not hallucinatory ghost like apparitions of a pair of wartime naval personnel home on leave, but are in fact a Prime Minister and a Chancellor, which have I believe, have a certain amount of duty to keep this nations interests “safe”.

    I’d be really pleased ( and not disappointed therefore ), if either of them can tell the public exactly how they intend to do that by “buying worthless shares in banks which have incalculable losses”, “Cutting VAT on products which no one has the means or the inclination to buy”, “Not delivering survival loans to productive businesses either in time or at all despite they have major controlling shares in the same banks which could action such loans but have not”, and by “Insuring World Debts, which not one soul on the planet can tell you where they are, who has them, how much they will be, and when they will fail” – Despite this, the only thing we know about these overseas debts, is that they WILL become more sizeable and will not become smaller like the value of our own “investment” in bank shares which are themselves worthless at this precise moment with no immediate or future likelihood of regaining their value – within our lifetimes – to the amount which the government kindly spent on our behalf.

    RBS shares went from £3.90 to 12p the last 12 months and this is a hill too steep to climb unless we have an economy to do it. Do we have an economy? Will we ever, with this amount of debt to carry ?

  9. Jonathan Cook
    Posted January 20, 2009 at 10:34 am | Permalink

    John,

    The Treasury must be awash with financial experts. Do ministers have a totally free hand to over-rule civil servants?

    To what degree can civil servants force the government to follow common sense?

    It is surely madness for the tax payer to continue to take on more risks that we don’t properly understand.

    Reply: Yes Ministers can overrule advice, but they cannot break the law

    • Adrian Peirson
      Posted January 20, 2009 at 1:29 pm | Permalink

      They are breaking the Law, I’m pretty sure our constitution says that money can only be gold and silver, or other precious metal, but, if that were adhered to, Govt would not have the control it does.

      Who was it that said, Give me control of a Nations Money supply and I care not who makes her laws.

      Our current monetary system is illusory, it is not money, a £5 note is not money, it was originally a reciept for £5 worth of Gold held in secure storage by the Bank for our convenience.
      Pretty soon, people began using these receipts as is they were money, the Moneylenders realsing that few people actually came back for their gold realised they could make even more money by printing More Receipts than they held, and lending these in gold, and so began the Practice of Fractional Reserve Banking.

      Now that Govt and the Bakers have us believing that a £5 note is actually worth £5 ( in fact it costs only about 1p to print ) they have absconsed with the Gold, ( the recent gold Sell off )

      We are left holding IOU’s.

      Economics is really about hiding this really very simple fraud from the public.

      • mikestallard
        Posted January 20, 2009 at 7:49 pm | Permalink

        This was dealt with by Niall Ferguson in his recent series on money. In the middle ages and in ancient Rome, all money was in metals and it worked except, of course, that there could be no credit and also it meant huge wagon trains to carry the stuff about. Sometimes, too, it got lost. King John lost the lot right here in Wisbech.
        It was very refreshing when people began to use paper to record transactions.
        By the 17th century, Spain was flooded with silver and gold from the New World. That didn’t work either, because the value of the silver and gold went down, just as you say paper money does, as Europe became awash with the stuff.
        Rather like Mr Brown or John Law in France (another Scot), governments that provide too much money enjoy raging inflation and then bankruptcy.

      • StevenL
        Posted January 20, 2009 at 9:48 pm | Permalink

        Honestly Adrian, your just reading conspiracy nonsense, by all means read it (I like reading it too) but please treat it with a bit more sceptisicm.

        “I’m pretty sure our constitution says that money can only be gold and silver”

        We don’t have a written constitution as such Adrian, if you like the entirity of our law is our constitution. You could argue that the Human Rights Act is our constitution because it overules any other Act of Parliament that a court decided was not compatible with it. However, even judges decision (or common law) form part of our constitution.

        So in terms of money I’d guess that the legislation that creates the Treasury and Bank of England and give them both their powers are our constitution. Sterling is legal tender in the UK, despite what the conspiracy theorists tell you. In terms of fincnail services most of our legislation comes from international agreements and EU directives from what I’m led to believe.

        What I’m getting at is this. If the Financial Services and Markets Act disagrees with the Magna Carta, I’m afraid its the FSMA that courts will decide takes precedence

        Gold, or any other metal is only worth what people believe it is worth too you know. Tell you what, if you really believe your sterling is worth nothing, I’ll buy it off you, say 1 oz of gold for every £1,000?

        • Waramess
          Posted January 21, 2009 at 12:52 pm | Permalink

          With the purchase price of Gold today (as opposed to the market price) that’s a pretty good offer. How many oz’s can you deliver.

          Adrian is right however, our system of currency is a fraud. listen to Hans Hermann Hoppe on the subject which you can download from http://www.mises.org

        • Adrian Peirson
          Posted January 21, 2009 at 5:58 pm | Permalink

          The British Constitution is written ( and it’s a lot shorter than the EU ConstiTraityTution, how many pages is that one )

          The only reason Straw et al keep spreading the Myth we do not have a Constitution is because it is not the Constitution he wants us to have. It’s also the Reason why our children are not educated about constitutional matters in school.

          http://www.britsattheirbest.com/freedom/f_your_own_choice.htm

          http://thejournal.parker-joseph.co.uk/blog/_archives/2007/10/21/3305358.html

          Constitution
          http://www.tpuc.org/node/65#comment-63

        • StevenL
          Posted January 21, 2009 at 10:00 pm | Permalink

          Guys, I’ve read all the conspiracy theories. My personal favourite is the ‘derivatives death star’ article:

          http://tinyurl.com/5wuoqo

          But, like the rest of the conspiracy theories, I think it’s nonsense.

          The government are allowed to change the constitution if the puplic vote yes in a referedum. We voted yes in a referendum on accession to the Treaty of Rome, we implemented this with the European Communities Act 1972.

          It is now part of our constitution that EC regulations have direct effect in the UK and that we have an obligation to implement EC directives into our national legal framework.

          These conspiracy theorist make the most outlandish claims, even New Labour are more believable.

          As for gold prices, again, I think you are misinformed. Do a simple google search for ‘gold ingots’ and have a look.

          I was joking about wanting to sell you any by the way, I have none to sell.

  10. Lola
    Posted January 20, 2009 at 10:39 am | Permalink

    You penultimate paragraph describes the plight of many. Do I understand you correctly that you are advocating that to get money back to private individuals and private business the Government needs to cut taxes on private income, business profits and capital? And at the same time cut state spending?

    Private individuals and private business (except the banks!) are generally already very close to the minimum of spending. There is very little more fat to be cut. What we need is to be able to keep a lot more of our money as this will allow us to repair our balance sheets or for those in a reasonable position spend more or save more.

  11. Ron
    Posted January 20, 2009 at 10:57 am | Permalink

    Like the previous person, I also don’t have a background in economics but what I find frightening is how almost all of the economists, even the Nobel Prize winning ones, were blind to this impending catastrophe. Worse still, they are still telling is one thing one week and rescinding them the next.

    The politicians, of all colours, seem to be more interested in wining points against each other rather than facing up to the alarming situation that exists. Brown may be a disaster but at least he is making an attempt at steering the ship Great Britain. Everyone else is standing on the deck criticising, which is not particularly constructive.

    The one thing that I have learned so far from this historic event is that I shall never trust a politician, banker or economist again in my life.

    • Andy
      Posted January 20, 2009 at 12:33 pm | Permalink

      I once worked for someone who said an almost identical thing to me:

      “You are so negative. Every meeting we have is always depressing because we only talk about what is wrong”

      My response:

      “Of course they are negative. There is very little point wasting time talking about what we’re doing right. I assume it’s a given that we’ll carry on doing that. The most constructive use of our time is to decide how to fix the things that are wrong, not to slap each other on the back for things that are right.”

      Your metaphor, “Brown may be a disaster but at least he is making an attempt at steering the ship Great Britain”, is disingenuous at least. In a crisis, you will always find people running around shouting “do something, do something” (in my experience it is usually the boss), this is often taken to mean “do anything”. Doing something for the sake of doing something has a staggeringly low success rate.

      Not knowing the right answer doesn’t mean it doesn’t exist. Not knowing the right answer instantly doesn’t mean it can’t be found out.

      The sinking feeling I have is that “do nothing” is exactly what the government should be doing right now.

    • Adrian Peirson
      Posted January 20, 2009 at 1:34 pm | Permalink

      There were people predicting this 5 yrs ago, they coud predict it because it is all planned, destroy our independance to usher in the New world order.

    • John Evans
      Posted January 20, 2009 at 4:57 pm | Permalink

      I wouldn’t say all economists were blind to this.The Austrian School of economists have been predicting this for years, especially after the Greenspan response to the 2000 stock market crash.

      Austrian economists would also explain that the money has actually disappeared thanks to the corrsive effect of fractional reserve banking when the economy goes into decline.

  12. Quentin
    Posted January 20, 2009 at 11:58 am | Permalink

    John, do you think Brown will instigate measures to restrict savers withdrawing their moneys from banking institutions if the situation deteriates much further. Given that the interest rates (for savers) are so poor now, there must be many of the 20 million savers, like myself, who are feeling that it would be better to take all their money out of the banks rather than lose or have it tied up by Brown.
    I have got to the stage where I have NO faith or trust in this government and to me their ‘guarantees’ are worthless.
    Reply: I hope not!

    • Adrian Peirson
      Posted January 20, 2009 at 1:36 pm | Permalink

      Buy silver, not silver certificates because they have been caught selling more silver cerificates than they actually hold in Silver.
      a sort of Fractional Reserve silver Certificate.

    • alan jutson
      Posted January 20, 2009 at 3:18 pm | Permalink

      Clearly you have a short memory or are a bit younger than me.

      I remember Harold Wilson forbidding anyone (by Act of Parliament i think) taking Sterling out of the Country to spend on their holidays, back in I think the late 60’s.

      From memory each person was only allowed to take £35.00 out of the Country in Sterling.

      The ruse: To protect Sterling and our balance of payments against the huge deficit that had been built up.

      Remember the old Wilson saying the pound in your pocket is not devalued just because we have devalued the pound

      He was correct, until you tried to spend it !!!!!!!!

      That was a Labour Government as well.

      History has a habit of repeating itself.

      Lessons never seem to be learnt.

      Just wait and in the meantime be frightened.

      Reply: I think it was £50, and it told people it was cheaper to go abroad than they thought!

  13. Rob N
    Posted January 20, 2009 at 12:46 pm | Permalink

    Here is one thing the government should be doing.

    Singapore Cuts Government Salaries as Slump Deepens.

    (http://tinyurl.com/87jw9d)

  14. Bryan Davies
    Posted January 20, 2009 at 1:44 pm | Permalink

    John – not sure I understand the “Toxic Insurance” as suggested by HMG. Suggested in the media that banks assess their toxic loan losses and then obtain insurance cover for the residual “good”element of their loan book. For example, say 20% of toxic loans are bad – and they take the hit on their balance sheet -leaving any losses subsequently realised on the remainder 80% to be covered by HMG insurance.

    So whats to stop the banks not taking a realistic approach to losses? Suppose they only own up to a 10% but in actual fact know that their losses are 20%. Seems to me HMG insurance – thats you and me – pick up the loss and the banks reduce the hit on the balance sheets allied to reducing presure on ratios.

    We could have some serious wool pulled over our eyes here/again.

    Reply: Yes, you have identified one of several problems with identifying and pricing this debt.

    • alan jutson
      Posted January 20, 2009 at 4:20 pm | Permalink

      If the Government is Insuring the debt in the name of the Tax payer then it also one assumes has an obligation to collect that debt due, and will have to hire Baliffs to go and collect it from those who then owe the Government/Taxpayer money.

      If the Government does not act in this Commercial way those of us who have been prudent will be paying for the excesses of those who have not.

      If this is not the case then perhaps we should all go and borrow as much as we can, and live the good life while we can.

      What a thought, an army of baliffs working for the government knocking on the doors of millions of its citizens.

      Come to think of it Northernn Rock seems to be doing exactly that if what I read in the press is true. !!!!!

      • StevenL
        Posted January 20, 2009 at 10:28 pm | Permalink

        Northern Rock sliced, diced and securitised a lot of their mortgages and sold them onto other investors from what I read.

        So basically the government are providing a debt collection service not just for the taxpayer, but for his pension fund and the banks he lent his savings too aswell.

        It’s one almightly paradox. On one hand, they punish the prudent by borrowing in his name, slashing savings rates and devaluing the currency in an attempt to save irresponsible bankrupt borrowers and lenders. On the other hand, if they let all the banks go bust how would anyone collect all the loans to pay back the depositors?

        Now they figure that if they don’t guarantee the debt securities (in other words the taxpayer issue uncosted payment protection insurance covering millions of unknown borrowers – again the solvent bailing out the insolvent) which are the assets of the banks, then the banks assets will have to be downgraded more, making more banks bankrupt and further risking the savings and investments of the solvent. The solvent pay the insolvent to save their own solvency?

        It’s a crazy situation when you think about it, I’m sure it all seemed really clever too when it was going well.

        Now this about about the UK being up the proverbial, I’m thinking perhaps the rest of the world do have an interest in making us believe that.

        So much of this turbo-capitalism paper shuffling is administered over here that surely no other developed country can afford for us to let it all collapse for fear of a chain reaction that effective resets the world financial system and leaves an irretrievable mess.

        The people shuffling the paper also surely have the power to hold the world to ransom (thank God bankers aren’t heavily unionised!). Notice how ex-Lehmans staff demanded mega-money to help wind it up, seriously, how would a accountant know how to wind this mess up?

        I suggest a new approach, we chain the bankers to their desks (or nationalise them so they can’t abscond to Frankfurt) and tell the rest of the world we’re going to put them all into administration unless they cough up a couple of hundred billion dollars between them?

        The reset button will wipe out the rich remember, they are bound to have a whip around rather than lose the lot. Why should UK taxpayer pay to keep the system up and running when we’ve got a load of rich foreigners by the danglies?

        Best get the Army back first though!

  15. Bob Layson
    Posted January 20, 2009 at 3:28 pm | Permalink

    Is the prime minister drunk on power or simply additcted to stimulants?

  16. Bob Layson
    Posted January 20, 2009 at 3:28 pm | Permalink

    make that ‘addicted’ – hick!

  17. mikestallard
    Posted January 20, 2009 at 6:08 pm | Permalink

    Mr Mainwaring’s office in the bank:
    Now come in Mr Brown and sit there. Have a snifter, it looks as if you need one.
    I have looked through your account and find that you are losing a lot of money every year. Is there any way you can cut back – give up smoking, going out to restaurants, taking your family out, giving less money away to your many servants?
    No?
    Well, that’s that then.
    How about earning a little more? Are you in line for promotion? No? You are taking all you can out of the firm at the moment. I see.
    What’s that?
    You have promised five of your friends that you will pay their gambling debts? That is very serious.
    Do you have any idea how much they are up for?
    No?
    Hmmm.
    Well, if you cannot cut back on your personal expenditure, you cannot earn any more money and you will not tell your friends that you cannot afford to support them, I am afraid that I can only advise declaring yourself bankrupt.
    Good bye!

  • 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.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page