If Euroland wants to avoid a bleak new year, they need to take some more action to see off future crises. They need a banks strategy and a growth strategy.
Fixing the banks requires looking again at all the weak banks. The Regulators need to work with them in private, and require them to improve their solvency as quickly as possible . Some have enough reserve already. Some will achieve it this year through profits and retained earnings. Those that cannot need to sell assets, write off bad and doubtful debts, raise new capital or some combination of the three to be in better shape. If a bank is scarcely solvent it needs to be harried to reconstruct itself before it jeopardises the whole system. Shareholders and junior bondholders should take the pain. Profitable parts of the busineses should be saved or sold, and bad businesses put into work out or administration.
The EU as a whole also needs to promote more vigorous private sector led growth. It could start by cutting its own budget sharply, to allow lower taxes or less public borrowing in each member state. It should follow up by substantial deregulation, making it easier to set up a new business in the EU and cheaper to undertake business in the EU.
Member states in Euroland need to take action to rein in their own budget deficits, as some are and all are required to do. This will be easier if output and tax revenues start to pick up more rapidly.
The European Central Bank needs to stand behind all major banks in the Euro area and provide as much liquidity as they need. During the restructuring period it would not be helpful to seek premature repayment of the special facilities made available. Money supply is very restricted in the Euro area. The Bank needs to help rebuild confidence so it starts to expand a bit more.
Working towards a solution for the banking crisis needs to go hand in hand with curbing state deficits. The Regulators have made the banks hold large quantities of government debt as their prime assets, claiming this is “risk free”. The Bank of England and other Central Banks have made commercial banks buy more government bonds to hold as extra liquidity, getting them to pay high prices by historical standards, and setting them up for major losses should bond rates rise. At a time when Germany can still borrow for ten years at 3.1% Greece has to pay 11.9%, Ireland 8.5%, Portugal 6.4% and Spain 5.5%. If other countries join the danger list, or if there is further deterioration in these countries credit rating, it will simply weaken European banks more.
December 24, 2010
Almost none of the banks have an appetite for lending with blanket bans on some areas,
silly restrictions in others – anything non standard has very little chance. At the same time HMRC having been initially helpful to businesses with the payment help line it is now often demanding everything back at once and just closing them down, in a mincing machine type of way, even when it is not in HMRC’s own interest.
It is usually easier and cheaper to borrow from friend or neighbour than from a bank nowadays. Perhaps banks have decided that they would rather lend in countries with a low tax, pro business approach and a sensible government. Rather than the opposite as in the UK.
Banks are however very keen on taking deposits and paying you a fraction of a 1 % on it as it devalues through inflation.
Having Vince Cable as business secretary says it all. (personal and unflattering attack on his intentions and competence ed)Please could JR ask some searching questions about the revenue’s new approach to closing down businesses, it is now very aggressive, damaging and often self defeating.
December 25, 2010
The government guarantee to depositors is in some sense part of the problem. If they are giving this insurance to depositors they should charge an appropriate fee to the banks or depositors and evaluate/regulate each bank’s risk to ensure the fee matches the risks taken on.
December 25, 2010
Otherwise I set up a bank take £100M in deposits (by offering good interest to government protected depositors) place it on red at the casino. Either I will £100M or the bank goes bust, I loose nothing and the government looses £100M.
Sound like a good investment to me.
December 24, 2010
Meanwhile, what are the Tories up to? 10.8% increase in spending.
ie. Far from cuts, you are speeding up the rate at which the black hole is getting bigger.
December 24, 2010
An unsecured deposit at many banks (if outside the government deposit protection scheme) is in reality often a much higher credit risk than the loans the banks are actually lending on (usually on good security and at large margins) to customers.
Businesses really need to cut out these pointless risky middle men and borrow directly. The government should look as structures to encourage this (Eg relax pension investment rules) . Banks which are a higher risk than most of their borrowing customer have no real purpose as middle men so cut them out and encourage more competition to the sector.
Any one with cash at the bank please consider lending it (well secured legally) to good UK businesses you will get much higher rates and it will be doing more good for the economy and will be one in the eye for those useless robber banks as their deposits vanish.
December 24, 2010
John
Sensible comments again.
Many thanks for sharing your views (without a hidden microphone being needed) over the last year, on a whole series of topics. Very pleased that a change in Government has not caused you to moderate your arguments, and tow the Party line (at all costs) as many Politicians do.
Pleased that not only are you prepared to be critical of Government Policy, but offer and argue alternative positive solutions, which are then simply explained.
This blog, after a few revised amendments, is once again one of the best serious political forums for discussion, keep up the good work, I live in hope rather than expectation, of better times to come.
Wishing you and your family, a happy Christmas and New Year.
Alan Jutson.
December 24, 2010
All you recommend is far too sensible for the EU to implement. They are not a market orientated organisation and they hopefully will be washed away by the tide of events which in due course will overwhelm them. The leaders have no experience of real life and so cannot make the right decisions to save what little of their construction is worth saving.
I hope the same thing happens to this loathsome coalition.
December 24, 2010
Hallelujah and Happy Christmas.
December 24, 2010
John,
A very Happy Christmas to you and all who read your excellent blogs.
December 24, 2010
Whatever they should do and whatever they should not do we can be sure that the main players will be using the EU as the foil for ensuring that all the bad lending made by their banks is turned into preferred sovereign debt.
Nothing else matters to them
December 24, 2010
JR: “Fixing the banks requires looking again at all the weak banks. ”
After three years still wittering on about ‘fixing the banks’.
We don’t need to fix the banks, in a real capitalist economy, the market would have fixed the banks a long time ago. Northern Rock would have been fixed, Royal Bank of Scotland would have been Fixed, Halifax Bank of Scotland would have been fixed – instead of destroying a tolerably good bank like LTSB – thanks Flash Gordon! Citi would have been fixed. Bear Sterns was fixed, Lehmans was fixed.
But no! Politicians wanted to maintain the revenue stream, who knows where the revenue actually goes, perhaps even a little bit goes into the bank executive bonuses.
So the general population was pressed to support these financial cadavers.
We see the result in places like Ireland, where the general population is forced into debt slavery for two or three generations while the Bank executives haggle with the Politicians about the size of their bonuses.
Yes, we need banks. No! We don’t need these banks.
December 24, 2010
It’s going to collapse, the edge is coming everyone can see it including the Eurocrats still pedalling like mad to the precipice, and why ?, because these people know that unlike the rest of us, as the ground falls away they will open their parachutes and float gently to the ground cushioned by years of massive incomes and expenses fiddles, leaving the rest of us to the bone jarring crunch at the bottom. Nobody will face trial, nobody will have their illgotten gains sequestered, but our children and their children will probably have to pay Eurocrats their pensions for the rest of their lives.
Merry bloody Christmas
December 24, 2010
JR, I cannot agree with this comment, ‘Money supply is very restricted in the Euro area.’ While it is possible that Germany has relatively strict lending criteria, and the Spanish banks may be constrained by their homeloan portfolios, elsewhere in the Eurozone credit is almost being given away.
This is a headline from a French property website called Explorimmo.com: ‘ Pour acheter à Paris, il faut être le premier. Les prix viennent de franchir la barre symbolique des 7 000/m² à Paris – l’effort d’épargne pour se loger est devenu très important dans la part des ménages. Parallèlement à cela, les taux sont très bas, et cela participe à la volonté d’acheter pour être chez soi.’ Quite.
In fact, interest rates for home loans in Paris could not be any lower. The government has introduced a loan called the PTZ or Pret a Taux Zero. This is another headline from the same site. ‘Le 1er janvier 2011 marque l’entrée en vigueur du nouveau prêt à taux zéro, le PTZ+. Que vous ayez en tête d’acheter pour la première fois un bien immobilier, neuf ou ancien, vous pourrez faire appel au nouveau prêt à taux zéro, le PTZ+, qui sera disponible sans conditions de ressources.’ !!
Even ordinary mortgage rates are incredibly low. You can borrow for 15 – 25 years at a fixed rate of 3.5%. This may explain the record highs in Parisian property prices. The ECB and the French government are trying to create the same unsustainable credit conditions and house price boom that we have already seen in Spain and Ireland.
Years ago, there was a man called John Law who managed to destroy the French economy by printing too much money. The ECB and the French Government are his successors. We need to be watchful for similar problems here.
On that happy note, I would like to wish you and my fellow bloggers a Merry Christmas.
December 28, 2010
The story of John Law and the Mississippi Scheme is here:
http://www.gutenberg.org/catalog/world/readfile?fk_files=715236&pageno=8
What is extraordinary is the the South Sea Bubble followed on immediately (as it does in “Extraordinary Popular Delusions and the Madness of Crowds”). However, the South Sea Bubble was expunged much more successfully than the effects of John Law’s paper currency debasement, which arguably laid the foundations for the French Revolution.
December 24, 2010
Good piece. You are right to say the burden of recapitalising banks should fall on their shareholders and junior creditors. It is important that Gordon Brown’s rushed and ill-judged recap of British banks is subject to intellectual challenge – otherwise it might happen again. Besides the long-term liability it has imposed on UK taxpayers, the Brown bank recap has also given a large number of people an erroneous faith in the ability of the state to manage economic outcomes – and not only in the Labour Party.
December 24, 2010
If Germany was serious about the long term future of the Euro it would install a Euro bond and centralise the borrowing function of all the Nations. One Currency, One banking system and One set of interest rates paid.` Those Nations that are currently in trouble would of course push the interest rate the others paid up, but isn’t that exactly what happens with the Dollar? The US doesn’t have different rates for different states. The powerful economies would then underwrite the stragglers, which is what most of us assumed would be the nature of the Euro Zone in the first place. If Germany and to a lesser extent Franch are unable to make the required sacrifice there is no future for the Euro and the quicker it is wound up the quicker cyrracies like the Irish Euro can be devalued in line with what they are now worth.
December 24, 2010
I read that Ireland is pumping in another E3.5 billion into one of its banks. How come the ECB isn’t doing that? Is it that the Irish Bank has run out of collateral to offer up for the ECB Securities Markets Programme? When are they going to admit that those Irish banks are busted. Fitch has got 48 out of the 50 European banks on negative outlook.
December 24, 2010
Well, Mr R you seemed to have described the end game for fiat money – unless we get a ‘world currency’ – and then we, the people, really are going to be screwed by perpetual State inspired inflation/counterfeiting.
All that as predicted by Rothbard, Von Mises et al is coming true.
Happy Christmas.
December 24, 2010
Objectivity and Rationality shown above will sadly lose out, against the subjectivity of in house Euro POlitics and the position of Ms Merkel in Germany. The Germans are reaching a major turning point, do they support the PIGS within the Euro Zone or not? My guess is yet another January fudge which the Bond Market Raiders will pounce upon and devour very quickly.
What is your political take on all or any of the above happening, John?
December 24, 2010
If only.
December 24, 2010
Happy Christmas, Mr Redwood.
Thank you so much for a brilliant blog and my right to vent on it – even if I do post some utter tosh !
Kevin
December 24, 2010
Excellent.
Just one small doubt. The ECB is bust, isn’t it?
December 27, 2010
JR: You want Europe to “promote more vigorous private sector led growth.” Does that meaningful sounding phrase actually mean anything? Then in the next sentence you suggest that can be achieved by a smaller public sector.
I favour small government, but frankly I don’t see why the size of the public sector has much effect on growth. The public sector in the U.S.is half the size of that of some West European countries. Differences in economic growth over the last fifty years have been negligible.
Then in the next sentence you advocate less regulation. I suggest the optimum level of regulation is pretty well constant from year to year: that is particularly relevant to escaping credit crunches.
Not one of your best paragraphs, that one!
Reply: If the public sector becomes too large as a proportion of the economy and has a poor productivity record it clearly damages growth, as it uses the resources less well than the private sector.
December 27, 2010
I think that is a rather mathematical point can be weakened by a philosophical point, as follows. If the electorate decides it wants a larger public sector (or one of constant size relative to GDP), who is to say the electorate is wrong? More GDP equals giving citizens / consumers more of what they want. If it’s more NHS (even at constant NHS productivity) then they’ve got more of what they want. Therefor GDP has risen.
The democratic vote and the market are just different ways of valuing things. I don’t see that one is innately superior.
As it happens we have a Tory lead coalition in power, and assuming they were open about the extent of public sector cuts during the election, that is the real argument for such cuts, not the above mathematical point.
December 27, 2010
We have recently come back from Lanzarote. Playa Blanca on the south coast has a neckless of empty finished houses, empty half finished houses, empty just started houses and mile upon mile of roads with finished groundworks. All the building work has stopped and it now almost impossible to sell any house at any price.
No doubt the banks show the value on their books at the pre 2008 costs.
Add to this, the other Canary Island resorts (Fuerteventura is as bad) and the mainland Costas and I dread to think what the real losses of Spanish banks and Savings banks are when it eventually gets sorted out.
December 29, 2010
Can you explain the positives of being in the EU please and when you have, can you then state if these positives are worth the money we pay in…I do not expect you to state we should not be in until Cameron tells you this, I am asking a simple and plain question, is it better we stay in or get out?
reply: Don’t ask me, I voted No.