Euroland extends,pretends, and is working on a plan…

 

           The decision to nationalise Dexia, and to offer Euro 90 billion of funding guarantees to this bank, alongisde creating a bad bank, shows they have learnt nothing from the crisis so far. Meanwhile the French and German leaders decide that they delay a few more weeks before having a working plan to deal with weak banks and overborrowed sovereigns.

        The last thing we need is to perpetuate the idea that governments can afford to bail out all these banks,and that taxpayers should stand behind all their bad loans. They are now well into the vicious circle – weak banks are made by regulators to lend money to weak sovereigns, which  in turn bail out the weak banks.

         Governments need to stop forcing banks to buy government bonds, and need to let banks go into controlled administration if they get into difficulties. Governments can stand behind depositors and clearing systems, but there is no need to stand behind all the other ways banks have found to lose money. We need private sector solutions to bank problems. Taxpayers should not be dragged into the mistakes made by the banks, urged on by the governments.

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29 Comments

  1. Antisthenes
    Posted October 11, 2011 at 6:55 am | Permalink

    Until governments allow the bust part of the cycle to run it’s course then the return to true growth is never going to happen.

  2. Robert K
    Posted October 11, 2011 at 7:23 am | Permalink

    I was struck by exactly the same thought when I saw the news on Dexia yesterday. There seems to have been a collective shrug of governmental shoulders when it comes to bank insolvency. “Hey, another bank, another 90 billion, what the heck.” The eurocrats seem hellbent on destroying any chance of lasting prosperity.

    • Mike Stallard
      Posted October 11, 2011 at 7:13 pm | Permalink

      If there was a “Like” button on here, I would have pressed it.

  3. lifelogic
    Posted October 11, 2011 at 8:11 am | Permalink

    I agree fully:-

    ” Governments need to stop forcing banks to buy government bonds, and need to let banks go into controlled administration if they get into difficulties. Governments can stand behind depositors and clearing systems, but there is no need to stand behind all the other ways banks have found to lose money.”

    • APL
      Posted October 11, 2011 at 10:06 am | Permalink

      Lifelogic: “I agree fully:-”

      So do I.

      JR: “Governments need to stop forcing banks to buy government bonds .. ”

      Problem is, the banks and the government(s) are now stuck in a deathly embrace. If the government allow the banks to fail, they have no one to buy their debt, therefore government spending will immediately contract ‘al la’ Greece.

      We shouldn’t have got ourselves into this situation in the first place, but since we are, we should be cutting government spending now.

  4. frank salmon
    Posted October 11, 2011 at 8:13 am | Permalink

    ‘Well you can say that I’ve grown bitter
    But of this you may be sure
    The rich have got their channels in the bedrooms of the poor
    And there’s a mighty judgement coming….’

    Leonard Cohen

  5. Richard1
    Posted October 11, 2011 at 8:38 am | Permalink

    Its very important to watch this development. David Cameron has left the door open for new UK state funding of RBS – presumably if there is a rights issue. We really need to learn the errors of the Brown bailout. The govt guarantees of the banking system is the root cause of the financial crisis. It is essential – as you say – that banks are made to go through controlled administration and we have proper market pricing of capital. Otherwise the credit cycle of boom and crunch will continue ad inifinitum

  6. Javelin
    Posted October 11, 2011 at 8:46 am | Permalink

    I see Trichet out this morning saying the crisis has reached system levels. He can say what he wants now he’s leaving – perhaps the truth – perhaps trying to scare Germany. Perhaps his last chance to reach his dream of fiscal and political union before the economic subsidence falls away beneath him.

    I take the Polish finance ministers views that EU integration is more likely to lead to war than simply a free trade union. Boyles law on pressure and heat was always going to hold across the continent. It was true in ancient Greece, in Rome it’s going to be true today. The argument that UNLESSS you integrate you are going to destroy your economy is coercive at best.

    * FAR BETTER TO INTEGRATE ON SELF INTEREST THAN SELF DESTRUCTION *

    • forthurst
      Posted October 11, 2011 at 2:05 pm | Permalink

      I don’t think Boyle mentioned temperature, unlike Charles or Guy-Lussac. I agree though that a new law of thermodynamics is badly needed to introduce some form of predictability into the Euro quagmire. I believe the variables would be the political pressure exuding from Sarkosy-Merkel, the increased volume of indebtedness of oi poloi as new money is pumped on their behalf into banks and countries, and the temperature of oi poloi; the only constant would be the stupidity of politicians who should realise that oi poloi will predictably reach boiling point.

    • sjb
      Posted October 11, 2011 at 2:26 pm | Permalink

      Javelin wrote: “I take the Polish finance ministers views that EU integration is more likely to lead to war than simply a free trade union. ”

      I would be surprised if that is Jacek Rostowski’s view because the former economics professor (& former member of the Conservative Party) is campaigning for more integration. He has suggested that if the the euro rescue fails then war may follow within ten years. There is some support for his opinion: a recent UBS note observed “almost no modern fiat currency monetary unions have broken up without some
      form of authoritarian or military government, or civil war.”
      Source: http://financialservicesinc.ubs.com/fa_staticfiles/faw/custom_attachments/PE06974_35850_9-6-11_Euro-Breakup_-_The_Consequences.pdf
      (p1, under the heading The political cost)

  7. Martyn
    Posted October 11, 2011 at 8:57 am | Permalink

    John – you say that “They are now well into the vicious circle – weak banks are made by regulators to lend money to weak sovereigns, which in turn bail out the weak banks”.
    Are they not in fact “continuing to accelerate in a vicious downward spiral from which there is no obvious escape route”.

  8. Brian Tomkinson
    Posted October 11, 2011 at 9:02 am | Permalink

    JR: “Governments need to stop forcing banks to buy government bonds……….Taxpayers should not be dragged into the mistakes made by the banks, urged on by the governments.”

    Isn’t that the problem – governments have caused the problem by spending too much and expecting banks to finance them. In the process they are bankrupting the banks and their countries as well.

  9. alan jutson
    Posted October 11, 2011 at 9:17 am | Permalink

    I have to say I am at an absolute loss in trying to understand the present lot of political leaders.

    As I understant it, we now seem to have politicians saying:

    We need to shore up the banks (with taxpayer money), before we can allow the sovereign nations to default on the banks, which may cause a collapse of the banks.
    So in the meantime we will shove even more taxpayers money into the sovereign debted nations direct, knowing they are going to have to default, so that they can survive (until they have to default), and until the banks have enough taxpayers money to stand the losses of the sovereign debt nations.

    Please, please somebody tell me I have misunderstood all of this, and got it wrong. Because if I have not got it wrong this is surely utter madness.

    Guess we can always print even more, and more, and more money, then everything will be worthless and we can all go broke together.
    Then at least Gordon will have got his wish, and we will all be equal.

    Reply: I am afraid you are right about the vicious spiral between bad sovereign debt and weak banks

    • alan jutson
      Posted October 11, 2011 at 9:29 am | Permalink

      Reply to Reply

      Thanks John, I thought it was me who was going crazy.

      But hey wait a minute, if its not me ……………………

    • Conrad Jones (Cheam)
      Posted October 11, 2011 at 4:38 pm | Permalink

      I think Gordon wants to be in the camp where people are more equal than others.

    • Denis Cooper
      Posted October 11, 2011 at 7:42 pm | Permalink

      I think you’ve probably got it broadly right – having stubbornly refused to acknowledge the possibility that the government of Greece and maybe the governments of other eurozone countries would default, they’re now trying to buy time to prepare for that to happen.

      No government could stand by and do nothing while the financial system, including the payments system, collapsed.

      In our case if necessary the government would make emergency regulations under the Civil Contingencies Act 2004:

      http://www.legislation.gov.uk/ukpga/2004/36/contents

      as in that statute the term “emergency” explicitly covers “disruption of a supply of money …”.

      Under Section 22, “Scope of emergency regulations”, the government could if considered necessary order banks to remain open, order bank staff to continue working, disapply every Act of Parliament or regulation which might get in the way (apart from the Human Rights Act, excepted under Section 23) and put the army on the streets to keep order.

    • sm
      Posted October 12, 2011 at 11:32 am | Permalink

      A cynic might think and or allege the plan had always been to ensure enforced transfer of wealth to private sector interests until this became impossible. Some would allege fractional reserve banking would always tend to this.

      This would not be rational even for those that may benefit, its seems just greed/fear is being manipulated once again on an epic grandscale.

  10. Martin
    Posted October 11, 2011 at 9:32 am | Permalink

    2 problems all countries to some extent we all are dealing with

    1) Over borrowed governments

    2) Banks that have loaned too much to risky governments or asset bubbles.

    there is a third problem in many democracies

    3) Convoluted checks and balances making decision making slow if not impossible. (at all levels from Brussels down to the local council).

  11. Richard
    Posted October 11, 2011 at 10:17 am | Permalink

    I beginning to think that politicians are carefully positioning themselves so that when the big collapse eventually comes they will be able to blame the bankers for the debacle.

    I can hear them saying :- “we have done everything we could have done to help the banks survive, we have done everything they asked us to do, we’ve given them hundreds of billions in aid, but they have failed us, they have carried on acting irresponsibly, driven by pure greed, so this huge recession is all their fault.

  12. Chris
    Posted October 11, 2011 at 11:07 am | Permalink

    See Barroso’s comments re the need for UK to contribute to Greek bail out. Also, Slovakia will apparently abstain this afternoon on critical vote re funding. Both from D Tel live blog.
    http://www.telegraph.co.uk/finance/financialcrisis/8782663/Debt-crisis-live.html
    09.10 The UK, and other nations within Europe that retain their own currency, should contribute to a Greek bail-out, says EU President Jose Manuel Barroso.
    In an interview with the German tabloid Bild today, he said that a eurozone crisis would “bring all countries in difficulties”.
    10.59 Freedom and Solidarity Party chairman Richard Sulik has announced that his party will abstain in a vote later today to ratify EFSF changes, forcing the government to seek support from the opposition. Today’s vote was coupled with a vote of confidence in the government by the PM. Sulik said:

    Joining these two votes is a definitive waste of a chance to approve the euro rescue fund. We disagree with an affair running counter to the cabinet’s policy statement being tied with a confidence motion … therefore we won’t take part in the vote”

  13. Tedgo
    Posted October 11, 2011 at 11:46 am | Permalink

    Isn’t the downside to letting banks go bust, or into controlled administration, that many commercial businesses are going to get caught up in it in a bad way.

    I could imagine many medium sized business having perhaps £100,000 to £10m+ in a bank account in anticipation of paying the employees wages and the companies suppliers at the end of the month.

    Am I missing something.

  14. Conrad Jones (Cheam)
    Posted October 11, 2011 at 12:17 pm | Permalink

    The root cause of Boom & Bust cycles is the accumulation of debt to saturation point which then turns into default or further rollover credit. Its a swinging pendulum whose severity of boom or bust is limp wristedly controlled by the Bank of England with the use of fixing interest rates.

    When mentioning to people that we should abandon Fractional Reserve Lending to 100% Reserve Deposit Accounts and Non Government Protected investment accounts, people say things like:

    1. But we’ve have Fractional Reserve Banking for hundreds of years
    2. It would cause economic chaos
    3. The economy needs the money that only Banks can provide

    The economy requires liquidity inorder to function. Without sufficient money, people sit idle and claim benefits. Work that should and can be done, is abandoned for a life on benefits paid for by the remainder of the work force who still have work.

    The Banks License to Print Money (through digital credit when making loans) does not create enough money to pay the interest pay the interest payments. Therefore, we are on a perpetual treadmill of debt that can never be paid. The economy does not benefit from this method of money creation as many vested interests would have us believe.

    The Government could pass a law allowing the Bank of England to create ALL our Nations money. This new money could be introduced slowly – gradually replacing existing debt based money. There would not be a need for a sudden shock as the critics of debt free money would have us believe. Critics of 100% Banking also forget to mention that Fractional Reserve Lending relies on someone else to be in debt in order for someone else to pay their debts. They also forget to mention that Fractional Reserve Banking creates the Economic Kangarooing effect every eight or nine years, and with a Central Bank setting Interest Rates – is about as far from true Capitalism and Free Market Enterprise as you can get. It is also a system which demands Tax payer bailouts on a regular basis. A subsidy – in affect; creating a form of Bank Socialism – with everyone else having to work harder and support the Banks.

    If someone proposed a system – like the one we have today; they would be laughed
    out of Parliament.

    “A system which protects Banks against all their losses and uses a new form of Income Tax for all other sectors of the economy. A Private Bank shall now be able to create money out of nothing with only the 3% Fractional Reserve as it’s restriction. A Bank will be allowed to gamble on the destruction of any Countries Economy – and make a profit using Credit Default Swaps, which – even though they stand to lose nothing, they will gain a if a Country Defaults on it’s debt obligations. The Government herewith – hands over the control of the quantity of money in the entire economy to Private Companies – known as ‘Banks'”.

    Wow! What a great system ? Not really.

    This is basically what happened in 1694. The old Debt FREE money – create by the King, was burned in the Parliamentary Buildings and forgotten. I wonder why that was ?

    • Conrad Jones (Cheam)
      Posted October 11, 2011 at 12:22 pm | Permalink

      Banks should always be allowed to lend money and carry out finanacial transactions for other industries and individuals. BUT, they should NOT be allowed to generate the money – that privilege should be in democratic hands.

      • A different Simon
        Posted October 12, 2011 at 12:05 am | Permalink

        J.R.

        What do you say to this and Conrad’s previous post ?

    • sm
      Posted October 12, 2011 at 11:37 am | Permalink

      Excellent post!

  15. Bernard Otway
    Posted October 11, 2011 at 4:33 pm | Permalink

    So it is now a vicious circle,when will the idiots realise if you spin around faster and faster
    you eventually disappear up your own xxxxhole,and by the way Javelin my friend SPOT ON
    about dexia in your list published here,any chance of the winning numbers for the next big Euromillions (etc)

  16. Chris
    Posted October 11, 2011 at 9:59 pm | Permalink

    Temporary holdup to Euro plans with Slovakia vote against ESFS. 55 for the bail out agreed in July, 9 against, 60 absentions, and 26 votes not registered. As Radicova tied the vote to a vote of confidence in her government, presumably she is now on the way out.
    http://www.guardian.co.uk/business/blog/2011/oct/11/stock-markets-ahead-slovakia-vote
    Rumours that another vote will take place later in the week – democracy, EU style?

  • 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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