Another day of bad banking news

The announcement of large losses at AIG and a further US taxpayer injection into the US insurer came alongside HSBC announcing the wish to raise more money from shareholders to buttress its capital position.

There is no easy way out of this mess. The banks and insurers need to work their way through their problems, cuttting risks and costs as quickly as possible. Too many state bail outs delays the adjustment and wrecks the public credit. The markets are beginning to worry about state borrowing plans because they are so huge.

The Monetary Policy Committee when it meets this week should not cut interest rates again. It will doubtless announce “quantitative easing.” All eyes should be on how much and how it intends to do it.

It is high time the government announced how it plans to get public finances back onto a sensible path. Watching this government is like watching a man with a bonfire. He had a big blaze.(easy cash and capital rules, low interest rates) In panic he doused and doused it with water (high rates and tougher rules) until it appeared to have gone out. Now he is busily tipping ever more petrol onto it in the hope that there is still some heat which will ignite the petrol. One way or another it is not going to have happy ending.

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11 Comments

  1. oldrightie
    Posted March 2, 2009 at 5:35 pm | Permalink

    All this talk about globalisation yet it seems this very issue has a domino effect that might well be worth avoiding in the future.

  2. TomTom
    Posted March 2, 2009 at 5:50 pm | Permalink

    Isn’t AIG the only insurer to have been rescued by taxpayers ? Isn’t that because it has been insuring Credit Default Swaps and the European banks particularly have heavy exposure so much so that the French Finance Minister virtually begged Washington to nationalise AIG.

    Is this the same AIG that has been insuring PFI and PPP deals in the UK and its collapse would put the British Government in a hole if PFI projecs came to a complete standstill ?

    Isn’t it remarkable that Gordon Brown has lost control of direct public investment and is now simply reduced to propping up banks desperate for capital to meet the regulatory Tier I that people like himself imposed in a fit of lunacy ?

  3. APL
    Posted March 2, 2009 at 9:31 pm | Permalink

    TomTom: “Is this the same AIG that has been insuring PFI and PPP deals in the UK and its collapse would put the British Government in a hole if PFI projecs came to a complete standstill ?”

    It also provides workplace insurance, which leads to an interesting question.

    If AIG becomes insolvent [well it has been bailed out again and again, so chances are it (could-ed) ] and workplace insurance is mandatory, who takes responsibility for the workplace insurance given that AIG probably can’t meet its obligations.

    Will half the UK offices and workplaces have to lock their staff out until they can find an alternative insurer?

    Reply: The US government seems very keen to make sure it is not insolvent, by pumping in large sums. I think it unlikely they will want to force it into bankruptcy at some future date if its finances weakened further after committing so much to it. If there is a market for a certain kind of insurance then someone- at a price- will supply that.

    • APL
      Posted March 3, 2009 at 8:08 am | Permalink

      Mr Redwood,

      Would you kindly post your opinions on Harriet Harman’s proposition that we should abandon the rule of law and adopt the rule of the mob.

      Do you agree with her.

      Do you think that someone who holds such opinions has a place in the United Kingdom parliament?

      Reply: No I do not think you can or should legislate to change a contract retrospectively, especially when a Minister was party to its terms. I could think of amendments to any such act that we might like that Labour Ministers would not enjoy!

  4. DennisA
    Posted March 2, 2009 at 10:07 pm | Permalink

    I understand that Manchester United are prepared to sponsor AIG.

  5. THE ESSEX BOYS
    Posted March 2, 2009 at 10:32 pm | Permalink

    Never fear…the arsonist has become the Chief Fire Officer!

    Oh Gord blimey struth!

  6. Johnny Norfolk
    Posted March 2, 2009 at 11:07 pm | Permalink

    Takes you back to Jim and Denis.

    Labour never learn and we are going to go through it all again.

    Does Brown realy think he can control events.
    Its another lesson he will have to learn.

  7. mike stallard
    Posted March 2, 2009 at 11:32 pm | Permalink

    Labour List seems to think that the Conservative policy is “far to the right” of the American Republican party. It also insists that the Conservatives have no plans and that they are also drifting towards the inevitable Labour position.
    Is that true? It seems to me that borrowing when you are in debt is a very bad idea. It also seems to me that the academics and politicians in the government are not as good as professional bankers and insurers at banking and insurance. Neither are they more honest or interested in either the poor or the common good.

  8. Ian Jones
    Posted March 2, 2009 at 11:52 pm | Permalink

    Totally agree with this, especially the QE as how this is done will determine if we go back to boom and bust or not. If the printed money is used to support business investment and smaller loans for cars for example then it will help. If they go for bailing out the Govts spending and chucking money at housing then we will simply be back in the brown stuff in 18 months after a boom with inflation….

    Trouble is the Govt is not looking to save the country, it is looking to get re-elected in which case an 18 month boom is all they care about.

  9. Matthew Reynolds
    Posted March 3, 2009 at 7:40 am | Permalink

    I think that the banks should have to build up bigger capital balances in a boom to sustain lending during a bust while bank lending ought to be curbed if asset prices are rising too fast. This will make things more stable by not letting booms run out of control while easing a credit freeze in a future recession. MPC members should serve a seven year fixed term that is non renewable and be vetted by the Treasury Select Committee prior to appointment. This would stop our Central Bank serving their political masters by reducing political influence on monetary policy decisions. The FSA should be ended and the Bank of England regain the powers it lost in 1997 so that debt can be properly managed & banks supervised properly while a 2% inflation target on RPI-x would boost confidence as it is a believable measure and 2% is low enough to stop it being a major problem. The previous harmonized prices index was just a way to align the UK with Europe ( it failed ) and to get interest rates too low to boost credit and thus maintain an unstable boom ( the results of which are evident for all to see).

    I also think that public spending plans need to be slashed by £45 billion over three years between 2011-12 and 2013-14 with a view to cutting public borrowing. We are dangerously over borrowed and our nations credit-worthiness could be seriously undermined while sterling falling in value suggests that investors are concerned about the fact that too much debt can produce an Argentine or Italian style crisis. The tax increases needed to balance the books could destroy any recovery from recession. Smaller government meaning that private investment is less crowded out and higher taxes less of a threat could help dig us out of this hole. Take away the threat of tax rises and businesses might invest more and people might spend more.

    As the Tax Payers Alliance has dug out £100 billion p/a of waste I think that 45% of that should be cut out over three years to rescue future generations from having to pay the debts caused by Browns incompetence. It is not fair to blight their lives with extra debt interest charges that could either be funding schools & roads extra or be paying for tax cuts. Ruth Lea & the Adam Smith Institute should be allowed to devise the reforms needed to generate the said savings within the said timescale – with help from John Redwood & Lord Forsyth.

    An audit must be done of small & medium sized business regulation – all the pointless rules that achieve little or nothing must be either streamlined or axed so that there more small & medium sized businesses around. They generate jobs in a dynamic economy – if we are to pay private firms to get the jobless back to work then we need jobs there in the first place ! Ending the New Deal and replacing Job Seekers Allowance and Incapacity Benefit with one sort of payment designed to slash economic inactivity is a supply-side measure that could lower long-term unemployment. If you have lightly regulated small businesses springing up all over the place and welfare dependency suddenly a lot less attractive financially speaking then if the dole queues do sadly hit three million then we could get them back down again via small & medium sized business deregulation & tough welfare reform. Getting companies to avoid sacking people and indeed to hire more would be wise. As a short term stimulant to the economy the VAT cut could be axed as could all Brown’s planned tax hikes. Instead a big cut in employers NI could take effect from April 2009 – funded to start with by selling off bank shares , Channel 4 , BBC and the Post Office and axing the VAT reduction. If employers know that employment costs are set to decline then they have less need to make people redundant and it might make recruitment more likely in some cases. That is a stimulus measure that will work as will help all businesses regardless of whether they are making a profit and will encourage overseas investment in the UK on the back of lower labor costs.

    The revenue shortfall caused by lower employer NI would in the longer term be met thanks to big public spending cuts and thanks to the government as an employer paying less NI it would save money and lower taxes foster more economic activity thus adding to the revenue base. If you make it cheaper to employ people then you get more jobs and thus less unemployment. So a big cut in employers NI would do the trick while ending the pointless VAT reduction and future tax cuts would make sense. The VAT cut has hardly sent the high street into orbit via a consumer boom and future tax increases could prolong the slump by deterring investment etc.

  10. Colin D.
    Posted March 3, 2009 at 8:14 am | Permalink

    Of the original bonfire, perhaps 70% was genuine and 30% was a blaze stoked by City and government ‘vandals’ and fueled by (bad) debt. The government is trying to recreate the 100% blaze instead of resetting its targets on the long term economically sustainable 70%. To do the right thing would require the government to cut its own expenditure by 30% but it won’t do or acknowledge this … certainly not until after the election! (They could start by banning all bonuses in the public sector).

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    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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