Regulators and central banks think again

It is good news that the Bank of England is thinking about its role in modern markets, and that the US and UK authorities are to review how to handle banking liquidity and regulation in future.

This agenda should include:

1. Have the Basel regulatory arrangements encouraged too much off balance sheet lending?

2. How can a market in securitised good quality loans be restored? Should the authorities buy in or accept as collateral more of these loans, whilst protecting taxpayers against losses?

3. Has the UK Government burdened British markets with too much off balance sheet borrowing of its own? Can this be curbed?

4. Do the leading Central Banks have enough capital of their own to keep markets liquid enough?

5. Shouldn’t Central Banks try to keep market interest rates in line with their announced main interest rate by open market operations?

There is nothing wrong with the idea of banks bundling up loans and selling them to others in the market. That is healthy and helps the growth of the world economy. The danger arises if the banks themselves continue owning large quantities of corporate bonds or securitised papers in conditions where they find they cannot sell or value these assets at a realistic price. Market seizure for bonds or loan packages forces banks to cut their lending and to write down the value of these assets on their balance sheets in moves which can become a vicious circle.

The Central Banks need to find a way of keeping the high quality bond and securitised paper market in line with their chosen interest rate generally. That should be the main issue facing the US/UK Committee.

Meanwhile, the UK Government needs to ensure rapid and orderly repayment of the Northern Rock loans and needs to consider whether that is sufficient to give the Bank of England the financial firepower it needs. It also needs to cut its own appetite for borrowing, which is now in danger of crowding out other borrowers from the market. The Bank needs some of its old powers – and information – back from the FSA so it can understand banks’ positions more quickly and respond in money markets appropriately.


  1. APL
    March 31, 2008

    JR: "2. How can a market in securitised good quality loans be restored?"

    Simple. Let the market find the true value of the securitiesed loans. In a couple of years a good quality loan will be recognisable because of the price premium it will command.

    You are supposed to be a capitalist, you should know the answer!

    JR: "Should the authorities buy in or accept as collateral more of these loans, without protecting taxpayers against losses?"


    How can the authorities use taxpayers money to buy something that is worthless and at the same time protect taxpayers from the losses?

    By paying good money for something worthless, the 'authorities' have already defrauded the tax payer. How can you protect the tax payer in such a scam? By taking more tax?

    It has just occurred to me that when you say, "protect the tax payer" what you really mean is protect the banker.

    The CEO of Northern Rock has just walked away from the wreckage with £750,000 and a pension worth £2.5million.

    If Northern Rock was a success I wouldn't bat an eyelid. However, since he presided over the ruin of the company, he should loose the shirt off his back.

    Reply: I am not suggesting we buy things that are worthless – on the contrary good quality paper is now selling at a big discount to government paper. Timely intervention can make the taxpayer money, and can be done in a way which more than protects the taxpayer.

  2. Stuart Fairney
    March 31, 2008

    The Adam Smith institute made the following claim "If public spending had only grown in line with inflation since 1997, we could have abolished income tax, corporation tax, capital gains tax and inheritance tax by now, leaving the taxpayer £200 billion better off"

    If this is true, then I think I have your next election winning policy.

    "We will increase public spending in line with inflation. Give us two terms in power and it's bye-bye income tax"

    Any chance of abandoning the stupid attempt to outbid nu-labour on public profligacy and abolishing income tax in a decade? Really, I think this is a vote winner.

  3. Mike H
    March 31, 2008

    In my opinion, the answers to question 1 and the first part of question 3 are 'yes'.

    Maybe an accountant will argue differently, but 'off balance sheet borrowing' has always struck me as the equivalent of chucking household bills under the sofa. It's delusional for an individual to pretend that everything's OK in his or her household finances by hiding all the unpaid bills. Is it not equally delusional for corporate and government debt to be treated in a similar fashion?

  4. apl
    March 31, 2008

    JR; "I am not suggesting we buy things that are worthless .. "

    Suppose you are right, and there is some value to be had, how do you know where it is? It has just brought down Bear Stearns, Carlyle Capital, Northern Crock.

    The Fed. has been floating the idea that when a bank wants to sell this stuff it should be advertised at book cost, not the market value of the "security", toxic indeed! If that isn't fraud then I don't know what is, it certainly isn't capitalism.

    JR: "..on the contrary good quality paper is now selling at a big discount to government paper."

    Problem is, you seem to be thinking the problems are over.

  5. Bazman
    March 31, 2008

    It's always rubbed me suspicious when people and politicians talk about the 'market' in terms of the local market in town. Thatcher sold this one very well. Complex things made simple.
    I lost a little in the pensions farce by opting out of a company one to a private. Talked into this by a salesman. A 'financial advisor ' Peers selling to their peers. Both used by the people above. I got compensation and only lost a little as I can figure. Compensation to the fund that is.
    The endowment mortgage was swerved very well in the 80's. I just did not believe in easy money.
    The old chestnut of not investing in anything that appears to be good to be true, or you cannot understand has proved to be the truth. A bit like women really!

  6. Matthew Reynolds
    April 1, 2008

    Yes – the Bank of England should get its old powers back to help stop this mess happening again ! Labour are deceitful pushing loads off debt off of the balance sheet to meet their arbitary Golden Rule . Public expenditure must grow by 1% less than average GDP expansion a la Eire so that the PSBR can be slashed by enough to ensure long term tax cuts can be made . Saving needs encouraging in the tax system to try & limit personal debt . Isa's can be made more generous, basic rate tax axed on savings, shares & dividends , CGT axed on gains realised after a minimum of five years and IHT axed on money in shares & savings . The savings ratio needs increasing – axing stamp duty on shares would add more money to workers pension funds . This would boost share prices & the levels of savings at a time when we need The Square Mile to do better to avoid recession . Can we not learn from the American bid to streamline financial regulation in the wake of their recent problems ?

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