Yesterday I heard an account of where we are and what we need to do next.
In the popular mode of self assessment I had hoped we would be told the financial establishment were “gutted and dissastisfied” with their performance so far. Instead, our spoeaker blamed the bankers, told us the Regulators had to do more regulating, and advertised the attractions of investment in UK government securities.
He did not give us all the usual regulatory warnings. We were not told gilts could do down as well as up. We were not told to seek independent advice, as gilts may not be suitable for all investors. We were told they are “safe”.
I guess we are going to hear a lot more of this from the authorities. I understand the Treasury has a few to sell, understand the Bank is rather long of them, and understand the FSA is recommending them to banks on an heoric scale. If you look at most of the gilts available in the market, the one thing you can say for sure is you will make a capital loss on many of them if you hold to repayment by the government, as many are priced at more than £100 per £100 of repayment. It is true you could make a profit in the shorter term, if government and Bank buying power is used to push their prices up some more, and to force interest rates down further. It is also true you could lose money if markets worry about the volume of issuance and the extent of the borrowing requirement.
I would expect to hear from a measured public official comment on how the authorities plan to get us from a position where gilt prices are heavily influenced by a large government buying programme, to a position where the authorities can offload them again and sell the large volumes they need to sell. I want to know how the authorities think they can curb the mighty and rising deficit. I wish to hear how they can in future set interest rates which stabilise the economy, instead of continuing on the ruinous roller coaster ride we have suffered in the last decade. I wish to be told how they will start to make the right calls on banking cash and cpaital, not that they are going to intrude into an ever wider range of detail in banking in lieu of making the big judgements they are paid to make.
So, in the spirit of self examination, I am “disappointed but not surprised”.This site has offered advice to set interest rates, government borrowing and spending and banking rules in a way which would stabilise instead of destabilising the economy. That does not make me “pleased but not satisifed” with its performance. I remain “angry and unhappy” because the financial establishment has been so determined in the UK to make the cycle more violent, whatever we say.
Expect representatives of the public financial establishment to act as gilt salesmen from here. Pity the poor banks and pension funds which will be made to buy these stocks, locking into low yields after a long bull market in bonds. If all goes well they will earn 2-4% per annum interest on them. That’s not enough to fill the black holes in their accounts. If all goes badly they will be showing some unpleasant capital lossses at market price.