How do you pick up the pieces?

It is important to recognise that yesterday gave the lie to the idea that the financial collapse is just a US problem, or a global problem made only in the USA. The European Stock markets fell by around 5% again, revealing serious problems in European banks. These banks, like their American counterparts, have extended too many loans to people and companies who may not be able to meet the payments. They did so under European regulation, not US, and did so in response to low interest rates set by European Central Banks. All this happened before we learned of the vote in Congress.

The defeat of the Bush plan will force the US authorities to think up a better package. The next one should avoid the suggestion to American voters that Main Street is baling out Wall Street. The weakness of the world banking system and the freezing of the credit markets means we are in for a very serious economic downturn, which will make the position of the banks even weaker, as more people and companies find they cannot pay the bill for the interest on what they have borrowed. If the authorities allow too steep a downturn we will have a company borrowing crisis on top of the mortgage crisis.

There are many options that can be considered. There is the old Brady plan which entailed an element of federal insurance and the swap of assets to get banks through a collapse of confidence to buy them time. There is the possibility of changing temporarily from mark to market for banks assets – as there is no proper market in most of these assets – to an agreed way of calculating longer term value whilst we await a return of confidence in markets. There is a need for Regulators behind the scenes to work with many banks to get them to raise new capital urgently to reassure people banks will have enough cash and capital to do the job. The Central banks have to keep on supplying cash as lenders of last resort. The Bank of England and the European Bank need to cut interest rates to start to combat recession, rather late in the day. The Europeans need to stop thinking of this as a US problem and realise this is also a serious EU and UK problem that needs treatment here as well as in Congress.

I called for Parliament to meet in early September to discuss this and to seek some remedies from the government. The longer we leave it, the worse the problem becomes and the more difficult it is to find solutions big enough to work. The scrappy and late responses of the authorities to a big banking crisis means more lost jobs and bankrupt businesses. There is a price to be paid in lower pensions, damaged savings and lower earnings. The sooner the authorities on both sides of the Atlantic take more action that might restore confidence the better.

More political bickering about bail out just makes it worse. The deterioration has been fast and huge. Remedies that might have worked in early September are probably no longer sufficient. It now requires something dramatic to bring back confidence. That is what Paulson wanted to achieve, but he mishandled the politics, undermining confidence further. He also made both the US Presidential candidates look weak. They backed a plan which significant numbers of Congressmen and women voted against from their own parties. Their authority too was badly damaged by the vote on the Hill, and showed the growing gap between what the political establishment thinks and what the public thinks.


  1. Matthew Reynolds
    September 30, 2008

    A major package of deregulation on construction industry , mortgage market and the labor market is needed I think just to cut costs & boost investment .

    Suspending CGT , stamp duty on shares and tax on income from shares & savings for a year would help as would exempting the first £500,000 of all property rates from stamp duty while cutting rates to 1% . All basic rate taxpayers could get a £500 refund . This is over four times what Brown & Darling did over 10p tax – I think a big boost is needed to help retail spending and disposable income .

    QUNAGO's could be cut to peg back the PSBR while the inflation target needs to be 2% on RPI-x so that confidence improves .

    This would I think address the problems facing the housing market , the Square Mile and the high street while ensuring lower unemployment and inflation and greater economic stability .

  2. Stuart Fairney
    September 30, 2008

    Thank God for congressional oversight. American taxpayers were rightly protected from having this nonsense foisted on them by their elected representatives.

    Meanwhile back in the UK, parliament is still on its summer holidays as if nothing much important is happening and Gordon is putting us in another £40B of debt by decree with no accountability or examination.

    Who has the better constitutional system?

  3. Mark Wadsworth
    September 30, 2008

    Nope. Debt-for-equity-swaps are the way to go.

  4. Kit
    September 30, 2008

    "Congressmen and women voted against from their own parties."

    Politicians putting principles before tribal loyalty – those crazy yanks 😉

  5. Knowledge
    September 30, 2008
  6. Rose
    September 30, 2008

    It seems to me that commentators are missing the point in saying it is capitalism or the free market which has failed. Why not say it is democracy which has failed? It has been too greedy in the things it wanted for nothing and right away. Or personal discipline and morality which have been lost, and which must always underpin any liberal system, whether political, economic, or religious.

  7. Rose
    September 30, 2008

    PS the commentariate are also a little too certain about the remedies on offer, saying it is a choice between right wing free market bankruptcy and left wing nationalisation. But Gordon Brown's socialist method of nationalising Northern Rock and B and B is very different from the American plan which is to extract the poison and then return to the free market.

    I would also like a bit more honesty about why over generous mortgages were made availabel to poor African Americans in the first place. It was not greed on the part of the banks, but political correctness: the money men were accused of discrimination in not enabling African Americans to get on to the housing ladder as easily as those of European descent. Naturally this stung them into devising a clever method whereby they could do that and get share the risk invisibly with everyone else.

    1. Stuart Fairney
      October 1, 2008

      It's even worse than that, in fact they were legally obliged to by the very same politicians who are now attacking them. Read up on the community reinvestment act (CRA)

      (You may need to skip past the welcome screen)

      1. Rose
        October 2, 2008

        Thank you Stuart for that reference.

  8. Blank Xavier
    September 30, 2008

    (Public money was used to assist a bank which had lent very badly -ed) including "liars loans", where the mortgagee was not required to prove income or employment.

    Frankly, if you lend that badly, you deserve everything you get. The company is not competent and should fail, because the capital is had *should to be better spent for the greater good of us all*.

    The number of jobs in an economy is *directly* related to the amount of capital available. The more capital you have, the more jobs you have, because capital does not sit idle – it is put to work and it causes jobs to exist.

    When organisations which handle large volumes of capital use it so very poorly – basically throwing it away – they are doing us all a disservice. And then we pay through the nose in tax to rescue them.

  9. Freeborn John
    September 30, 2008

    You’ve just got to love the US system where the elected representatives of the people in Congress can shoot down the 3-page memo from the President for up to $700 billion of tax revenue. Compare that to 26 parliaments in Europe nodding through the Lisbon Treaty many of them doing so against the wishes of their electorates.

    The president should draft another memo requsting funds to insure the deposits of creditors but not to prop up Wall Street institutions that created the mess.

  10. no one
    September 30, 2008

    oh dear conservative party ranting on tv today about poor little middle class kids with dyslexia

    since we all know pushy middle class parents always claim dyslexia to get little johnies exam marks bumped up (and they always seem to have a hamster die around exam time for the same reason) can the conservative party not see how silly this looks?

    working class parents hardly ever appeal exam decisions, never claim dyslexia (cos its a fantsy condition?), and expect their little johnny to get on with life when their hamster dies

    given that we have people dying of cancer for the want of simple treatment i really dont think the conservatives should be promising to throw money at poor old dyslexia suffers which even the medics dont agree is a genuine condition

    and we sure dont want the middle class manipulation of the system spreading wider!

    come on conservatives look harder at how this stuff looks to a typical working class person!

  11. Acorn
    September 30, 2008

    I have just listened to your interview on Five Live.

    You have got to get back on the Tory front bench John. This situation is now so serious that we have to have the wise old heads back in charge. The guys that have the knowledge and experience of life, the universe and everything. The guys who have been there, done that and bought the T shirt.

    The French and the Irish have today introduced 100% cover on bank savings, the UK should do the same. This is vital for our million plus small to medium enterprises. These are the foundation of our economy, they should not have to be worrying about the security of there capital reserves at this time. We need them to keep doing what they are doing; making and selling goods and services; employing and developing our trade skills base. They desperately need help to do this.

    We need to free up are Universities to develop the science. We need our technologists to develop that science. We need engineers to turn the technology into products. We need to develop a much higher skills based workforce.

    I think we are all agreed on this site that there is too much government. We need to get the "socialised economy" back to about 33% – from the present 47% – of the GNI. We need to move at least a million public sector employees out of the socialised economy into the non-socialised economy (i.e. the private sector) where they can make a start at generating real world wealth.

  12. jon f
    September 30, 2008

    The upside is that there are a few back gardens in Wokingham which may be saved from third-rate flats.

  13. Mark J
    October 1, 2008

    Will somebody in the House of Commons (Mr Redwood?) please call a vote of No Confidence against this Labour Government. This situation is becoming very 1979, except its not Jim Callaghan making the gaffs, but Gordon Brown. We need David Cameron (preferably) or Nick Clegg in now, not in 18 months time!

  14. Tears for Tear 1
    October 1, 2008

    This evening, The Mail and The Telegraph are reporting that Brown has increased the Guarantee on Retail savers' deposits to £50k.

    I sit here with my head in my hands as I consider what a poor decision this is, pandering to greed and encouraging the very moral hazard that the "end of blah blah" was suppose to have stopped.

    The nearly bust Icelandic banks are now going to be able to hoover up £3.5bn+ of internet rate tarts money, guaranteed and insured by ordinary "safe" retail depositors and "safe" banks and building societies, just so they can keep some bunch of Russian mafia crooks going for an extra 2 weeks.

    Cry my beloved country,

    -and start panic buying in Salisbury's.

  15. Tears for Tear 1
    October 1, 2008

    …, that should read Sainsburys but one panic is much like another I suppose.

  16. StevenL
    October 1, 2008

    "The defeat of the Bush plan will force the US authorities to think up a better package (JR)"

    The way I see it, clever people thinking up 'better' and 'better' packages has a lot to do with why we are in this mess in the first place.

    I'm told (via the media) that Congressmen were lobbied 100 or 200 to one against the bailout.

    I'm not surprised – after WMD Bush is the boy who cried 'wolf'. Congressmen and found it easy to accuse him and his crowd of scaremongering. There are also a lot of questions that no-one has been able to answer, fuelled by a lot of rumours.

    For example can a mortgage only be in one CDO at once? I heard someone say that some mortgages have found their way into more than one CDO. I asked him if he was thinking about CDO squared, and we just ended up confusing each other. Neither of us knew what we meant, but we managed to agree that if we were going to buy them we'd sure as hell want to know.

    If we (taxpayers) buy the CDO's do we set the collections policy for the underpinning loans and decide when to persue legal actions and ultimately reposession?

    If you own a CDO and a mortgage that is connected to it defaults do you get the rights to all the money raised from reposession? How much does the originator of the loan take as commission for doing this if not?

    If a mortgage payer defaults and their mortgage has been packaged into a CDO, does the CDO holder have the right to demand that the house is surrendered to him (i.e. the taxpayer) after repossession as opposed to auctioned off in a fire sale?

    How on Earth do these 'Synthetic' CDO's work, the idea seems to be that the 'trustee' holds onto the 'high quality capital' and earns interest on it in order to pay for the defaults when they arise. How does the trustee earn interest exactly? Did they by any chance buy more CDO's with it?

    What if, after buying the CDO's, the originator breaches their contract by not collecting the money correctly, what if they go bankrupt? Can the new owner of the CDO's take on the collections responsibility? If so how, and how quickly?

    If politicans actually focussed on trying to explain things properley, instead of trying to bully, intimidate and scaremonger us into making a rash decision, surely this would be better than simply thinking up a better 'package'.

    It didn't work with the EU Constitution (thanks to the Irish) and I hope Congress don't let it work with the dodgy mortgages until someone can set up a website to tell Joe Taxpayer exactly where he stands!

    1. mikestallard
      October 1, 2008

      "Didn't work with the EU constitution"! I like it. First of all, we are getting the EU constitution (flag and anthem last week) anyway and now, the EU are accusing the Libertas organisation of being bankrolled by the CIA!
      Present tense in future please; we are getting …….

  17. mikestallard
    October 1, 2008

    This reminds me so much of a car crash where everyone is trying to reach forward and grab the wheel. Do you turn into the skid, or away from it? Do you apply the brakes? If so, how hard?
    Meanwhile, the Parliament is not sitting. Genius Brown, the Best Chancellor since the Roman Empire, takes all the decisions.
    In Europe, I read in almost every European newspaper, that the Euro is rapidly unravelling. The German and Italian economies are facing totally different scenarios and both are unable to react because of their straightjacket.
    The real villains, I reckon are the BBC especially Newsnight where that lean faced woman – I forget her name – in her most scathing tones reminds Mr Cameron, sotto voce, that in 1992 he worked for Mr Lamont.
    To quote Dad's Army: We're all DOOMED!

  18. Tears for Tear 1
    October 1, 2008

    Now the Daily Mail is reporting that the deposit protection scheme is to have no upper limit at all!

    The Moral Hazard implicit in this is staggering.

    Come on boys and girls, stop worrying and wasting money by leaving your life savings in nice safe HSBC stuff the lot on line with (badbank-ed) and everyone else will bail you out if they go belly-up.

    Truly, Truly astonishing incompetence.

  19. DWMF
    October 1, 2008

    Those who blame Capitalism or Democracy are most likely the right ones to point the finger at. Blaming Capitalism or Democracy is like blaming the horse for getting lost instead of the rider. Ayn Rand answered this very point in her series of essays in "Capitalism – The Hidden Ideal".

    What is operating in the West is not proper capitalism – it is a perverted, "controlled", semi-free enterprise model. Straps instead of shackles. Casting the banks loose and letting free market forces operate is the best solution. You would be surprised how quickly the pieces can reassemble and recover.

    It is better to whip off the plaster with one big scream, than a long series of whimpers.

  20. Conservative Freedom
    October 2, 2008

    I agree that cuts in interest rates would be most helpful. Few would dispute that.

    Labour's rush to introduce nationalisation is perhaps symptomatic of their contempt and cynicism for the free market. Furthermore, this might have been partly to appease the more leftist elements.

    I have great faith in the tenacity of the free market system, and have no doubt that in time, with minimal government intervention, that stability and vibrancy will return.

  21. Matthew Reynolds
    October 2, 2008

    If the long term trend for inflation is downward then indeed monetary policy must be loosened to avoid a major recession . The MPC bods must get their heads round the fact that most folk do not want economic melt down and that the Bank of England has been manipulated so that interest rates stayed too low after 2003 and are too high now . All the indicators point to a major economic down turn and restrictions on the free market must be eased to get a recovery underway .

    We need to make the Bank of England more independent by giving members seven year non renewable terms who can only be appointed after vetting by the Treasury select committee and a vote in a reformed House of Lords . That would ensure the best people got into the MPC and that it was less open to political meddling as has happened under Labor . RPI-x is a far more reliable inflation measure – HCIP was just a fix because they use it in the Euro-zone . As we will be keeping the £ why bother with a false inflation measure ?

    The Bank of England must be empowered to help failing banks and to boost liquidity and it should regain debt management powers too with a view to stopping anymore Northern Rock style mess ups . The tripartite system is too complex & unwieldy and no one seemed to know what was going on prior to Northern Rock and how to respond . Surely the end of the FSA and a clear demarcation of Treasury & Central Bank responsibility over who does what might simplify things somewhat ?

    Inflation must be tamed to stop it ruining livelihoods and stopping business investment – a stable economic framework is vital for a lasting recovery . Setting a two year inflation target of 2% for the MPC to aim for every month would help stop future price spirals .

    Fighting inflation is a wise idea – but as conditions point towards deflation gathering pace in 2009 lower interest rates now might not be a bad idea . Falling base rates on the back of diminishing inflationary pressures could be what the Doctor ordered as far as the economy is concerned as businesses go to the wall , unemployment rises , the housing market falls apart , the economy shrinks , disposable incomes fall and manufacturing industry & business investment decline . Even the service sector is going to the wall – we need lower interest rates now !

    Would the MPC care to talk to Sir Stuart Rose about how the retail sector needs a boost ? Food sales falling by 7% and GM sales 6.5% down in the UK's favorite store shows that action is needed now !

Comments are closed.