Who is responsible for the Governor’s black cloud?

The Governor of the Bank of England in a doom laden speech told us that the Euro crisis leaves a “black cloud of uncertainty” hanging over us. This, he says, damages confidence. This leads to “lower spending” which “leads to lower incomes and a self reinforcing weaker picture of growth”.

He is right to say that the Eurozone catastrophe is bad for confidence. It does do damage to export prospects, and to wider confidence. However, if he wants to find out why spending in the UK has been depressed recently, he should also look at the big impact high UK inflation has had on real incomes. There has been a progressive squeeze on our real incomes. It began at the end of the Labour era thanks to their massive bust and the collapse of output. It has continued under the Coalition, thanks to the Bank’s singular failure to control inflation. Inflation has been running twice as fast as wage increases in the private sector, leaving people strapped for cash.

Will this latest scheme help? I have two main worries about it. The first is, it does nothing to relieve the squeeze the banking regulator is placing on the banks. Some of them will still lack balance sheeet strength to put more loans on their books. Second, they still are not breaking up RBS, our largest bank. This bank is not functioning well as disunited conglomerate. Why don’t they get on with creating some banks that work from amongst the assets and liabilities they hold in RBS? These very large banks do not seem very interested in lending money to individuals and small businesses. It appears that we are a nuisance, unable to pay the very high fees their senior executives expect. They can charge big business and governments these high fees, so they prefer to go that way.

The new scheme will need some detail on who takes the risk. If the Bank is to lend to the commercial banks against their new loans, the big issue is how much of a haircut or discount will the Bank apply to the loans offered as collateral for the borrowing, to protect the Bank and therefore the taxpayer? In addition, how will the Bank ensure the new loans being financed by the Bank of England are genuinely new loans? Commercial banks could offer exisiting clients new terms for old loans and present these for Bank money, unless there is an effective anti avoidance provision in the scheme.

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  1. lifelogic
    Posted June 16, 2012 at 6:35 am | Permalink

    There seems to be a general view among the “BBC thinkers”, Labour, Robert Preston et al that the banks have plenty to lend and the problem is a shortage of sound and willing borrowers. Clearly they are not trying to borrow and simply do not have a clue. Loan to value has been cut hugely, from perhaps 75% to 40% in some cases with other absurd restrictions (virtually no second charge lending for example). This might mean a business needs nearly three times its own funds as before to complete any development or investment.

    Other loans are being cut back at renewal hugely restricting working capital for trading companies and often forcing individuals to use high leasing, HP, invoice financing and other last straw finance. This has caused a huge squeeze through the system at a time when all are struggling anyway.

    Using dis-functional banks to distribute this money is perhaps not the best way to get it to businesses. Surely the way is to get a few good banks going and to relax the Basel restrictions somewhat. I would extend the HMRC’s business payment help service too which has helped many but is being restricted.

    I see that RBS repaid government the £163 billion emergency loans it received from the government recently. Where did this money come from? I assume most was grabbed back from their good borrowing customers, forcing them to repay, refinance or reduce borrowing with a huge effect on growth and the economy. Sucking the blood from the wealth creators and wasting their time too.

    Anyone who thinks Natwest/RBS provided “helpful banking” as they perversely claim in their adverts must not be one of their borrowers.

    There is no reason for banks to pay the lending managers more than perhaps £40,000. It is not difficult to lend money securely for a very good return at the moment. Almost anyone could do it if they have any money to lend.

    I would also completely relax the absurd restrictions on use of pension funds so that directors can use theirs in their businesses to benefit themselves, the business and the country. The best solution, at the moment, is perhaps to cut out the dis-functional banks and lend or borrow directly if you can.

    • lifelogic
      Posted June 16, 2012 at 6:44 am | Permalink

      The Eurozone catastrophe is indeed bad for confidence. But so is the clearly anti business secretary Vince Cable, Cameron’s new retirement rules, the virtually no firing rules, the gender insurance rules, the over taxation, the dis-functional banks, the lack of a positive vision from the Socialist Cameron, the expensive green energy tosh and the huge “gifts” of taxpayers money to the PIGIS.

      Finally the fact that Cameron clearly looks set to lose the next election through his socialist over tax, over borrow, over regulate and endless general waste incompetence.

      • uanime5
        Posted June 16, 2012 at 5:29 pm | Permalink

        Given that the UK has the third most lax employment laws in the OECD it’s clear that the UK doesn’t have ‘virtually no firing rules’.

        • lifelogic
          Posted June 16, 2012 at 10:07 pm | Permalink


          “Given that the UK has the third most lax employment laws in the OECD” where do you get that from ? I rather doubt it, but even if it is true it is no reason for the UK to have such daft laws too.

          You cannot really fire anyone, without a risk of a claim the outcome of which will be uncertain (almost random) and expensive and distracting for you and the company – even if you win the case.


          • uanime5
            Posted June 17, 2012 at 1:10 pm | Permalink

            Well if businesses didn’t harass their employees, discriminate against them, or fire them for no real reason they wouldn’t keep getting taken to an employment tribunal. A company that’s hated by its employees sows the seeds of its own demise.

            Also if you don’t like the outcome of the employment tribunal you can appeal it.

          • lifelogic
            Posted June 18, 2012 at 4:30 am | Permalink

            Companies do not do that it is not in their interests so why would they. They just want people who can do the job efficiently.

            Any legal cost arise even whey are are in the right and cannot be recovered by them.

    • lifelogic
      Posted June 16, 2012 at 7:11 am | Permalink

      I see that the BBC radio 4 have dragged up Sir Jonathon Porritt again this morning. Rather like John Major and the rest of the pro EU, pro Euro, tax borrow and waste lot they hold in their cupboards. When people’s past predictions have been so totally wrong why do the BBC persist in still regarding these people as “experts”. They are just soothe sayers who have already been proven wrong, time and again.

      I see he initially trained as a barrister, after Eton College, would you trust this man to build a bridge or even light a bonfire, let alone design a country’s energy system?

      • zorro
        Posted June 16, 2012 at 5:06 pm | Permalink

        Indeed, as we have mentioned before the Basle requirements are counter-intuitive. If we were cynical we might think that this economic scenario has been engineered to cause a collapse and prevent a recovery, therefore ‘making a case’ for fiscal union followed closely by political union. Fortunately, we can rely on ‘Eurosceptic’ CID (Cast Iron Dave) to keep us out of any such arrangement. What could go wrong….?


      • Tad Davison
        Posted June 16, 2012 at 7:01 pm | Permalink

        I agree totally LL. And Major must rank as one of the worst, most gutless politicians this country has ever produced, let alone the worst Prime Minister of all-time, even surpassing Brown! At least the latter kept us out of the Euro, where Super-whimp would have taken us in, aided and abetted by all the other socialists in Tory clothing , like Clarke, Howe, Brittan and Heseltine. I’m afraid the British people are long on memory, and short on forgiveness.

        Perhaps it’s time to purge the Conservative party of such people, but that will take a new leader with a new agenda. He’d certainly have the support of the people, and I venture, UKIP supporters into the bargain.

        How can the present Conservative party leadership be so short-sighted, that they cannot get the measure of public opinion, unless of course, they don’t really want to win the next election, because they know an in-coming Labour government would do all their pro-EU dirty work for them!

        Tad Davison


        • lifelogic
          Posted June 17, 2012 at 6:31 am | Permalink

          Indeed how can we forgive Major, Clark and the rest when they still have not apologised and would clearly do the same again give half a chance?

    • zorro
      Posted June 16, 2012 at 5:06 pm | Permalink

      Indeed, as we have mentioned before the Basle requirements are counter-intuitive. If we were cynical we might think that this economic scenario has been engineered to cause a collapse and prevent a recovery, therefore ‘making a case’ for fiscal union followed closely by political union. Fortunately, we can rely on ‘Eurosceptic’ CID (Cast Iron Dave) to keep us out of any such arrangement. What could go wrong….?


  2. A.Sedgwick
    Posted June 16, 2012 at 6:37 am | Permalink

    The highly academic Governor has hardly been a resounding success.

    RBS long since should have been unbundled.

    Bank charges are obscene and are possibly a bigger disincentive for business and the public to invest as the availability of ample credit.

    Cameron being hung out to dry at Leveson when he created the process to get off the hook is a further example of the country being led by people who quite simply haven’t a clue what they are doing.

    • Tad Davison
      Posted June 16, 2012 at 7:15 pm | Permalink

      Mervyn King and David Cameron are both Villa fans, that must surely say they have a lack of sound judgement. That’s a double-edged sword though, I married one!


  3. Mike Stallard
    Posted June 16, 2012 at 6:45 am | Permalink

    Who is responsible for the Governor’s black cloud?

    Greeks want to get back to the year 2000 so that they can borrow like Germans and behave like Greeks. The Labour Party want to go back to 2000 so that they can spend like Lady Bountiful and borrow like Germans. Voters want to go back to 2000 so that we can have a popular young PM and borrow on our plastic.

    Now the bills have come in.

    So who do we blame………Let me see………

    • zorro
      Posted June 16, 2012 at 5:08 pm | Permalink

      Yeah….I feel sorry for the Germans for a few seconds…..and then I think of history…


      • Lindsay McDougall
        Posted June 17, 2012 at 12:57 pm | Permalink

        You don’t need to feel sorry for the Germans, for the simple reason that the Germans will just say ‘no’. If Mrs Merkel were to say ‘yes’, the German electorate would kick her out, cheered on by the Bundesbank.

        It’s not just Greece. Portugal, Spain, Italy and even France are holding out their begging bowls. Germany can’t pay, won’t pay.

        So place your bets now:
        (1) Germany leaves the Euro zone.
        (2) The weaker nations, starting with Greece, leave the Euro zone.
        (3) The entire Euro zone collapses.

        Shed not a single tear. All the pro-federal fanatics were warned in advance that the whole Euro idea was unworkable without political union. And we certainly don’t want that.

        • zorro
          Posted June 17, 2012 at 8:10 pm | Permalink

          Don’t worry Lindsay, I didn’t shed any tears……Option 2 I would go for with a retrenched Eurozone core with heavy pressure on the UK to join the small core when we get targeted by the currency speculators/’markets’……No matter what they say…..


  4. Alan Hill
    Posted June 16, 2012 at 6:55 am | Permalink

    Getting the government off the backs of small businesses would help more than increasing the amount of money that they are too nervous to borrow anyway.

    You can rely on our politicians to get almost everything wrong.

    • Bernard Juby
      Posted June 16, 2012 at 4:03 pm | Permalink

      We’ve been telling them for long enough. Why don’t they b****y-well listen?

    • libertarian
      Posted June 16, 2012 at 4:04 pm | Permalink

      Totally agree

    • lifelogic
      Posted June 16, 2012 at 6:11 pm | Permalink

      Many are not too nervous to borrow and very many sound projects are on hold and people thus unemployed, due to a lack of bank lending on sensible terms.

      But getting the government off their backs would help just as much. Alas we have Vince Cable who says – I have see no evidence that hitting small business people over the head once a week is in anyway holding them back or restricting growth (or something similar that I remember).

      • lifelogic
        Posted June 16, 2012 at 6:18 pm | Permalink

        Excellent blog by Delingpole about the high priest of the Gaia religion.


        “A glorious interview with James Lovelock in today’s Guardian. Essential reading for everyone, greens especially. In it, the inventor of Gaia theory and godfather of modern environmentalism declares that wind farms are hideous, renewables are a waste of space, nuclear power is good, sea level rises aren’t a worry, environmentalism has replaced Christianity as the global religion and that we should all be “going mad on” shale gas, which he considers our best energy hope for the immediate future.
        My favourite line, though is this one:
        “I’m neither strongly left nor right, but I detest the Liberal Democrats.” ………….

  5. David Price
    Posted June 16, 2012 at 7:15 am | Permalink

    Charles Moore wrote a cracking article this morning in the Telegraph about reigning in the business barons, those individuals who consider they are worth 100 times more than the average employee and come ahead of the business owners. He made the point that the unions are a good thing for employees but that by the 70’s the union leaders had become disconnected from the members and weilded their power too much for their own purposes. Thatcher won because she forced the control of the unions back to the membership with secret ballots.

    Regarding the extraordinarily high rewards for the bank execs ….

    Charles Moore likens todays over paid executives to the union bosses and suggests the same clean up has to be done, by the Tories. These people are giving capitalism a bad name and all the ammunition Milliband and Balls need. The Tories need to clean the stables to avoid the positive aspects of capitalism and private ownership being dragged down with the barons, the Enterprise and Regulatory Reform Bill is a good step.

    It strikes me that the same also applies to the Conservative party, that the leadership have also become totally disconnected from the core principles of the party and membership. So how to clean the CP stables?

    • lifelogic
      Posted June 16, 2012 at 4:10 pm | Permalink

      Certainly many directors have indeed been able to rob shareholders of value, often even while running businesses into the ground. Some proper shareholder control is clearly needed just a nuclear options as now for them is useless. Was not our, anti business secretary, going to do something on this? A good company shareholder democracy control mechanism would be excellent news – something useful for him to do a change.

    • zorro
      Posted June 16, 2012 at 5:09 pm | Permalink

      These people are the epitome of crony corporate capitalism…..


  6. JimF
    Posted June 16, 2012 at 7:26 am | Permalink

    Spot on.
    Why have banks at all when the government is effectively doing their job by telling them whom they should lend to, how much and at what rate of return?

  7. Brian Tomkinson
    Posted June 16, 2012 at 7:27 am | Permalink

    Why was this not announced first to the House of Commons? Has any of it yet been properly thought through or are these panic measures which it was thought needed to be announced before the result of the Greek elections? As for lightening the “dark cloud of uncertainty”, King has intensified it as far as I am concerned. I am inclined to the views expressed by your colleague Dan Hannan here:

  8. JimF
    Posted June 16, 2012 at 7:27 am | Permalink

    Oh and when government is guaranteeing the money they lend. It really is nationalisation in all but name, without the blame when things go pear shaped.

  9. oldtimer
    Posted June 16, 2012 at 7:51 am | Permalink

    I believe that the IFS reported that real incomes had declined by 8% since the onset of the financial crisis. Add to that the necessary deleveraging by many families and it is unsurprising that the economy is flat. Perhaps those in charge should pay more attention to the impact of tax policy on incomes and less to seeking to inflate their way out of trouble and blaming the rest of us.

  10. matthew haynes
    Posted June 16, 2012 at 7:54 am | Permalink

    Don’t think VAT at 20% helped spending or inflation

  11. Jim
    Posted June 16, 2012 at 7:54 am | Permalink

    Why do the people in power in this country think they can make their voters wealthier is by loading them with more debts? Has it never occurred to them that a wealthy person has no debts? And no need to borrow money? That the more debt they foist onto the public, the poorer we (collectively) get? When are they going to realise that borrowing to invest makes sense, as one ends up with a productive asset, whereas borrowing to consume merely ends in penury?

    • lifelogic
      Posted June 16, 2012 at 4:26 pm | Permalink

      Most really wealthy people do indeed have debts in my experience. Just more assets than liabilities. There are usually good reasons for this, often to do with tax, exchange rate risks, investment strategies and the like. Also if you can borrow very cheaply (as they can) and buy investments that return rather more (than the interest) then why not.

      The government always calls everything an “investment” but it usually looks more like a big dustbin to me. What was the cost of the opening ceremony for this jumped up school sports day – £41M or something not to mention HS2 the PV and wind nonsense. Has Cameron had to go to one of his parenting classes in view of his parenting oversight recently. I suppose the classes are called an “investment” too.

  12. Pete the Bike
    Posted June 16, 2012 at 7:59 am | Permalink

    The reason this ridiculous policy is never going to work is that people and business have had to cope with theft via huge tax rises, theft by inflation, no correction in asset prices to reallocate badly invested capital, increasing regulation and grossly inefficient public “services”. Add to that uncertainty about the Euro and you’re got a toxic mix that would stop anybody in their right mind taking on more debt if they can avoid it.
    If Dave and George had ever run a business or even lived in the real world they might realise that until the backlog of bad debt and bailed out zombie banks are cleared there will be no recovery. That’s the thing about an economic correction – it has to be allowed to correct the economy.

    • Mark
      Posted June 16, 2012 at 7:53 pm | Permalink

      Very true.

    • Bob
      Posted June 16, 2012 at 8:22 pm | Permalink


      Can I make a small correction there:

      hugely expensive and grossly inefficient public “services”.

    • The Realist
      Posted June 16, 2012 at 8:33 pm | Permalink

      Totally spot on sir !

  13. Paul H
    Posted June 16, 2012 at 8:42 am | Permalink

    “These very large banks do not seem very interested in lending money to individuals and small businesses. It appears that we are a nuisance, unable to pay the very high fees their senior executives expect.”
    Spot on – all this is going to do is put (more) money in the pockets of bankers. In the meantime, we are supposed to believe that a group of people who are unable or unwilling to pursue their basic mandate are suddenly geniuses who know how to get us out of the mess. A similar situation exists in EU-land where the regulators whose bank stress-tests were so perceptive and successful (!) now want to supervise all the banks directly.
    I am afraid that your mate Osborne is being singularly unimaginative, uninformed and in thrall to narrow vested interests. Perhaps he ought to spend less time worrying about Tory party political strategy (which is not what we pay him for) and more time seeking to inform himself open-mindedly about economics and the wide range of interesting views that it encompasses.

    • zorro
      Posted June 16, 2012 at 5:11 pm | Permalink

      Just wait until they try and unwind QE…..doesn’t bear thinking.


  14. waramess
    Posted June 16, 2012 at 9:06 am | Permalink

    Gone are the days when governments would look after the interests of the taxpayer. Now it’s every man for himself. The public good is whatever a politician cares to say it is.

    Money printing is called Quantative Easing whilst the taking of inferior asset classes as security is called Qualatitive Easing, words just to lend respectability to an otherwise totally scandalous activity.

    Be certain that this latest nonsense will not do the trick. Every move the government makes is to avoid taking the course they should be taking. They hope that it will all suddenly and magically come right, just like it did last time. but it will not.

    They, like the other governments of Europe, need to cut the size of government and cut fast because if they do not the markets will eventually do it for them.

    They need only to look at the likes of Greece to see that the sudden effect of not being able to raise funds will result in chaos. They should do it now whilst they are still able with some degree of comfort

    • Bob
      Posted June 16, 2012 at 8:35 pm | Permalink

      Cameron and Osbrown need to be told that prosperity is not something that can just be printed at will.

  15. Tad Davison
    Posted June 16, 2012 at 9:59 am | Permalink


    That’s how shaky everything is, thanks to the mess and turmoil that cursed place has left in it’s wake.

    It will take a brave (or perhaps foolish) person to venture outside their comfort zone, take out one of these loans, and risk investing, at a time when the continent of Europe faces economic collapse. Yet unless brave souls show entrepreneurial spirit, Britain can’t grow it’s way out of trouble. So the onus and responsibility is heaped upon them.

    I just hope that by using this capital, they can do what Cameron said he wanted to do in the first place, and transfer labour from the already bloated state sector, to the private sector, and relieve the tax-payer of this burden.

    The fault ultimately lies with all those politicians who took Britain ever-closer to the EU. If they couldn’t see that it was living beyond it’s means, and there would be an inevitable day of reckoning, they should never have been in their jobs in the first place.

    If they could, but still took us in anyway, they should be shot at dawn!

    So into which category do we place Cameron, Osborne, Clegg, Miliband, Balls, Brown, Blair, Major, Clarke, Heseline, Howe, Brittan, Heath, and a host of others?

    Round-up day is long overdue, as is our exit from the European Union!

    Tad Davison


    • lifelogic
      Posted June 16, 2012 at 4:31 pm | Permalink

      Even Thatcher went along with it under duress perhaps and certainly nearly all the Libdems who are clearly wrong on everything – other than civil liberties perhaps sometimes.

    • uanime5
      Posted June 16, 2012 at 5:35 pm | Permalink

      This problem was caused by the banks loaning huge amounts of money without the capital to back it up, not the EU. Leaving the EU will not fix this as the current eurozone problems are effecting countries outside of the EU, such as the USA.

      • Lindsay McDougall
        Posted June 17, 2012 at 1:06 pm | Permalink

        So be logical. This problem can be solved by letting the failed banks fail, without attempting to prop them up with a government and EU Ponzi scheme. There’s going to be low growth for a while. People and companies are quite rationally reducing their debts. For the next few years the people and companies that succeed will be the ones that don’t have to borrow much; makes a nice change, doesn’t it? We don’t need inflation or masses of red ink. Banks will have to improve their reduced lending capability SLOWLY.

  16. Nick
    Posted June 16, 2012 at 10:02 am | Permalink

    More debt. More debt.

    The problem is debt, and in particular the fraud going on in government hiding its debts off the books.

    So much for campaign promises to publish the debt.

    Still hidden.

    • Bernard Juby
      Posted June 17, 2012 at 2:04 pm | Permalink

      Have they forgotten the fundamental economic truth from Mr Micawber?????

  17. Neil Craig
    Posted June 16, 2012 at 10:09 am | Permalink

    Ig the stagnation of the EU were a real cause of lack of confidence here then the 6% growth in the rest of the world, where 60% of our trade goes, would be causing massive confidence and growth. Indeed if Mervyn King truly believed it was simply a matter of confidence he would be talking far more about the 6% growing bit than the stagnating bit. On the other hand if he were simply looking for an excuse for failure he would be doing precisely what he is doing.

    Yet more quantative easing will do no good. It is already acknowledged that their is more than enough money to invest to grow our economy if the opportunities were there. It is simply that the government parasites are knowingly and deliberately preventing investment in these industries.

    • uanime5
      Posted June 16, 2012 at 5:38 pm | Permalink

      Care to explain why the USA or Japan doesn’t have 6% growth despite not being in the EU.

      The reason the economy isn’t growing is because businesses are hoarding money and banks are refusing to lend. This is a failure of capitalism and the private sector, not the Government or the public sector.

      • lifelogic
        Posted June 16, 2012 at 10:20 pm | Permalink

        No it is capitalists sensibly investing the money where it produces the best return, ignoring countries like the UK with a huge state sector, huge over taxation, over regulation and led by big state, socialist, green wash, PR is all PPE graduate.

      • Sebastian Weetabix
        Posted June 17, 2012 at 11:59 am | Permalink

        The US economy is growing. Ours is not. And the money supply across swathes of Europe is collapsing – but not in Germany, which is where the capital is flying to from the rest of the Eurozone. The EU has produced sclerosis through excess complex regulation and impoverishment of its periphery due to the very existence of the Euro. The only winners are the Germans who enjoy an undervalued currency which boosts their exports.

        Whatever we get from the EU, it isnt capitalism. It’s a hidebound corporatism that is killing SMEs and ultimately our prosperity.

      • Neil Craig
        Posted June 17, 2012 at 12:58 pm | Permalink

        unameg asks “Care to explain why the USA or Japan doesn’t have 6% growth despite not being in the EU.”

        As I have explained to you before on several threads where you asked variants of that stupid question – an AVERAGE growth rate, or indeed any other average requitres that some be above the average as well as some below 😉

        Thank you for once again demostrating the disconnect common across the ecofascist movement between knowledge or even the abuility to learn knowledge and them.

        If there was any part of Un’s 2nd para which even aspired to such intellectual heights I would answer it, again.

      • Lindsay McDougall
        Posted June 17, 2012 at 1:15 pm | Permalink

        No, it’s the stupidity of particular people, such as Gordon Brown who didn’t include asset price in the target measure of inflation, the Governor of the BoE who didn’t protest enough and who is not even now hitting his inflation target, and individual banking CEOs like Freddie Goodwin.

        The response should have been to let failed banks fail. Lehman Brothers should have been the prototype. It’s not capitalism that has failed. It’s everybody who has interfered in its natural processes that has failed. In Iceland, they got it right. The debts of their (mainly private) banks were so large that they had no option but to get it right.

  18. Matthew
    Posted June 16, 2012 at 10:19 am | Permalink

    Agree the RBS should be divided up – need leaner fitter small banks. The RBS label is discredited.

    One thing is clear, banks need to lend against good business plans that offer security and relevant covenants and ratios (this is what they have not being doing)

    It’s not clear, to me, is if the banks are to lend and be wholly or partly indemnified by the government, in the event of the loan going bad. If so this has got to be a bad thing – the government is not a bank and to this end got rid of Northern Rock to Virgin as it would be better run in private hands.
    It could all go wrong when the bad debts come in.

    The other thing that’s not clear to me is if this £80bn or so is “funny money” from the same place as the QE money. If so why not take up Mr R’s suggestion of newer smaller banks going to the stock market for capital?

    All in all, it doesn’t sound too convincing, wasn’t explained very well and the impression given is that Mr Orborne and King are floundering a bit.

  19. Denis Cooper
    Posted June 16, 2012 at 10:40 am | Permalink

    With these new schemes in the offing I thought it was timely to see how a previous scheme, the Asset Protection Scheme, aka “Darling Insurance”, had worked out.

    At inception it looked extremely risky, with potential losses far exceeding the premiums to be received, but in fact it seems that taxpayers have dodged that bullet.

    There’s an explanation of it here – NB that in the end Lloyds decided that it didn’t need to take advantage of it, so only RBS assets are covered:


    “The APS operates like a conventional insurance policy. RBS pays an annual fee to participate in the APS (like the “premium” in a standard insurance policy), in return for which the Government insures the value of certain assets that RBS owns.

    If those assets fall in value, RBS will absorb the first £60 billion of losses (like the “excess” in a standard insurance policy). Any losses beyond the first £60 billion will be shared by RBS and the Government at a ratio of 1:9 (i.e. RBS taking 10 percent of the loss and the government taking 90 percent).”

    As of December 31st 2008 the total assets insured were valued at £282 billion, so in the worst case the Treasury could have taken massive losses; but according to this Interim Report for April – December 2011:


    that was down to £132 billion, as I understand about three quarters of the expected losses have been crystallised – £32 billion out of a projected maximum of £47 billion – there is now a very low chance that the Treasury will have to pay out and it should make a small profit, maybe £5 billion, from the scheme.

    The expected residue of up to £15 billion losses doesn’t exactly square with the recent claim that RBS is sitting on undeclared losses of £18.2 billion, out of a total of £40 billion for British banks:


    but it’s pretty close.

    The March 2012 Business Plan is here:


    It claims:

    “The APS is the virtual bad bank scheme created by the UK Government in 2009 as a result of the global economic downturn.”

    but I don’t see it quite like that, as the dodgy assets remained with RBS rather than being taken over by the APS.

    • waramess
      Posted June 17, 2012 at 9:43 am | Permalink

      Top of the class for this post Mr Cooper. An excellent piece of research.

      The problem is that only certain classes of assets were included in the governments asset Purchase scheme so £15 billion does not tell the whole story.

      Perhaps the reason why there has been no attempt to split up or liquidate RBS is that the underlying hole between good assets and total liabilities is too horrible to contemplate doing anything other than trying to muddle through?

  20. Lindsay McDougall
    Posted June 16, 2012 at 10:46 am | Permalink

    Who takes the risk is very far from being a detail. The amount involved is £140 billion, about 10% of UK GDP. So we had better be told where the hidden subsidy is and who will pay it.

    A propos of breaking up RBS, I wholeheartedly agree with you. But it isn’t me who matters. Why aren’t you asking this question of the Prime Minister and the Chancellor in parliament, not in a confidential meeting but in open session?

    It is becoming clear on a number of issues that a searchlight needs to be shone on the thoughts and actions of Tory Wets, be they ever so exalted.

  21. Gary
    Posted June 16, 2012 at 11:02 am | Permalink

    The banks will NEVER lend to the public if they can get free money , buy central bank backed govt gilts and pocket the spread in the risk free trade of the century. Whoever thought this would spark lending to the public is asleep.

    It was never meant to be about public lending, that is lip service, it was and is always about the banks and the elite.

    • zorro
      Posted June 16, 2012 at 5:19 pm | Permalink

      Agreed Gary, this will turn into more bankster welfare, and help them absorb some Greek losses.


    • simo
      Posted June 16, 2012 at 9:31 pm | Permalink

      Inflation linked gilts are currently being bought at below inflation rates.

      I.e. the return is inflation – 0.02pp, they are not making the purchaser money.

      The government’s short term bonds are being sold at below current inflation, and the medium and long term bonds are being sold at rates such that any rational government could borrow, invest (in growth producing capital projects), and repay at a profit.

      In fact, it looks like Osborn may actually be about to do this with his gov. backed loans to companies. Probably slightly less cash-efficient than directly investing, but that would probably be a u-turn too far, I expect.

  22. Gary
    Posted June 16, 2012 at 11:04 am | Permalink

    The banks will NEVER lend to the public if they can get free money , buy central bank backed govt gilts and pocket the spread in the risk free trade of the century. Whoever thought this would spark lending to the public is asleep.

    It was never meant to be about public lending, that is lip service, it was and is always about the banks and the elite.

    PS : if this post appears twice, please accept my apologies.

  23. J Mitchell
    Posted June 16, 2012 at 11:27 am | Permalink

    The analysis of the problem in your article suggests that in great part the problem is that squeezed consumers are not spending money due to realtively falling incomes. It has also been widely reported that consumers are busy paying down their debts and have no appetite to incur further debt to fuel spending.

    The banks are very unpopular. No one really understands why they are being given more money, which we will have to pay for and are paying for, to bail them out from the consequences of their own bad decision making. The banks are simply sitting on this money because they are required by their regulators to strengthen their balance sheets. They are not therefore lending it. At the same time they are greatly tightening their lending criteria (probably overtightening them, then does the pendulum not always swing too far) to avoid a repeat of the problem that got them into trouble in the first place.

    Would not a politically popular thing to do be to give money to the banks on condition that it is applied to writing off consumer debt? This will improve the banks’ balance sheets because they will have less debt outstanding (against which they have to make provision for bad debt) and more cash in hand. It will improve consumers’ position because they will be relieved of a portion of their debt and therefore have money to spend, which is otherwise being applied to paying down debt. It will prevent resentment at the bank bailouts. Whislt we still have to pay for it, at least we will all feel we are getting the benefit of our money rather than, as at present, simply watching it fall into a black hole knowing we are going to have to suffer the consequences.

    • Caterpillar
      Posted June 16, 2012 at 3:34 pm | Permalink

      “It will prevent resentment at the bank bailouts.”

      It wouldn’t prevent my resentment. The indebted have already been bailed by using a ZIRP policy to redistribute from the prudent, pensioners and target savers. If the banks first foreclosed on the indebted and the assets were sold, then some paying down the bad debt might be reasonable (but even this seems more moral hazard encouragement).

    • Denis Cooper
      Posted June 16, 2012 at 5:08 pm | Permalink

      As I understand the banks won’t be “given” money.

      They will be lent it by the Bank of England, and will be expected to repay it, and the plea that they’d used it to write off consumer debt, ie forgive consumers their debts, won’t be accepted as a reason why they shouldn’t repay it.

      But as I’ve been careful and have no consumer debt to be forgiven, I’d like to know how you’d reward my prudence if the banks were to be “given” money.

    • zorro
      Posted June 16, 2012 at 5:20 pm | Permalink

      Of course it would make sense to pay off customer debt but it will never be intended for that purpose…..


  24. Gewyne
    Posted June 16, 2012 at 12:22 pm | Permalink

    Which banks and business will have access to the money – will the majority Spanish owned banks in the UK get access to any ?

    And why does the government keep channeling these schemes through the banks ? We know they will charge higher rates to business (and that’s if it’s not just used to plug yet more holes in banks balance sheets).

    How about giving the money to local Chamber of Commerce and let them do a Dragons Den style of interview and release money that way. At least we would then know the money would be getting to local business.

  25. Scary Biscuits
    Posted June 16, 2012 at 12:35 pm | Permalink

    John is right to say RBS should be broken up. It is an empire for the aggrandisement of top management. There is no good reason, other than justifying the existance of the top layers of management, that a bank and an insurance company should be one. Worse, they have learnt nothing from mis-selling scandals such as PPI and continue to conspire against their customers, the corrupt insurance fees system being only the latest example.

    It is striking how little has changed since the credit crunch. The banks’ failed business model continues essentially unchanged. Godwin was a token sacrifice (now living out a very comfortable retirement).

    All the businesses that he bought (NatWest, Coutts, DirectLine, Privilege etc) should be sold off as separate businesses. Sir James Goldsmith created huge returns for shareholders from converting unprofitable, management cartels into smaller profitable businesses in the states. There is every reason to believe this would work for RBS too.

    Far from this being a costly distraction, it is urgent. We cannot afford any more bailouts. Another £140b was announced this week.

  26. Leslie Singleton
    Posted June 16, 2012 at 12:35 pm | Permalink

    I deprecate this whole idea of trying to force banks to lend. Anyone thinking that bank management can or should encourage lenders to lend has it precisely wrong because lending money to meet target totals is very easy for lenders to do (They just say Yes to the next few loan requests) once they get over the shock and disbelief of what they are being asked to do. The amount the Bank of England is willing to lend to the banks has precisely nothing to do with whether prospective borrowers are good credit risks–as I understand it the banks have lots of cash. The idea should be to train the individual lenders to decide which loans they are likely to get back. This is inconvenient for macro demand management which is tough because it is the only sensible way. If the Bank of England were to carry some of the risk (which I gather it is not but I might be wrong) it would of course be different.

    • Leslie Singleton
      Posted June 16, 2012 at 1:14 pm | Permalink

      As Mr Heffer says today there is enough bad debt around as it is.

      • lifelogic
        Posted June 17, 2012 at 7:00 am | Permalink

        We do not want to force them to lend just relax the restrictions and regulations on them that are preventing sound lending at the moment, even making them pull sound lending back from good customers in many cases.

  27. RDM
    Posted June 16, 2012 at 12:37 pm | Permalink

    Break up RBS, Many new banks, new loans/Startups; Well said JR!

    Can I get a loan? I’ll start a new bank! One that takes a state in Strategic/High Techology/long term investments!

    But, if I was too bet on a particluar technology, currently, I’d pick one of the three (that I know of) gas extraction industry’s. Coal-mine gas, Fracking, or Gasification.

    Mmmm, I need a cunning plan, again!



    • Alan Wheatley
      Posted June 17, 2012 at 8:10 am | Permalink

      The re-inention of thorium reactors needs a cunning plan! Could be a lot of money to be made.

  28. Derek Emery
    Posted June 16, 2012 at 1:53 pm | Permalink

    A major factor must be lack of demand from the public. The UK is primarily a consumer economy. The public are choosing cheap supermarkets over mainstream, car usage is low outside of essential getting to work and pay-day loans are booming. Retailers serving the cheaper end of the market have gone into liquidation. Food prices ratchet up as do energy prices but salaries do not. This tells you a lot about the financial situation for many of the public

    New bank loans for SMEs will probably not make up for the lack of consumer demand from the public. Large companies are sitting on cash because of lack of demand and not looking for loans.

    I understand the IMF have suggested a wide range of new policies including policies to boost demand see http://www.imf.org/external/np/ms/2012/052212.htm

  29. Bert Young
    Posted June 16, 2012 at 2:12 pm | Permalink

    Bank loans to the smaller company are over expensive and I like your idea of exchanging old loans for replacement lower cost loans . Large established companies are not starved of cash – in fact , published results suggest they are storing cash . Banks could become an intermediary for these cash surpluses and release them to other needier outlets . The Bank of England can provide the back-up security and , by so doing , inject yet another stimulus into the economy.

    • Alan Wheatley
      Posted June 17, 2012 at 8:19 am | Permalink

      If large, established companies have spare cash, I think they could sensibly invest directly in their own SME start-up, such as innovative R&D targeting new ideas that could be incorporated into future large scale manufacture.

      • lifelogic
        Posted June 17, 2012 at 9:29 am | Permalink

        They are doing but mainly abroad if they have much sense given the UK’s hugely anti business stance and socialist government.

  30. Bernard Juby
    Posted June 16, 2012 at 2:29 pm | Permalink

    How dare he have the brass neck to make that comment about “lower spending”???
    He is Robin Hood in reverse since by his policies of “Quantitive easing” – weasel words for inflation and lowering in value of all hard-earned savings – and infinitessimally low interest rates for so long, he is effectively robbing the poor to pay the not-so rich.
    Businesses of all kinds need customers to buy their goods and/or services. Since over 94% are micro or small (most of whom trade locally) they are more than any-one reliant on local spending power.
    Is he too thick to see that his very actions are removing that very life-blood from re-energising the economy?
    Can’t he see that his actions are removing that spending power away from the vast number of pensioners and retired people who once upon a time saved or spent their money?
    It’s a pity that he may not read yout Blog. He should be ashamed and eat his words.

  31. Tony Houghton
    Posted June 16, 2012 at 2:42 pm | Permalink

    John Does each word ‘Bank’, in the last para of your blog, refer to the “BofE’? Tony

    Reply: Yes

  32. Normandee
    Posted June 16, 2012 at 2:45 pm | Permalink

    Sticking to the horse driven theme, the government is now cantering to defeat at the next election, obviously the trot they have been at is not fast enough. Watch out for the gallop, getting off at that speed is dangerous, off course all the politicians will have nice feather mattresses to cushion their fall, not so for the rest of us.

    • Electro-Kevin
      Posted June 16, 2012 at 4:19 pm | Permalink

      I don’t think it matters who’s in power any more.

      Had the Tories lost the last GE the blame would have landed on Labour’s shoulders and the Tory party would have ditched its Lefties and reformed.

      Our country would have had more of a chance than it does now.

    • Tad Davison
      Posted June 16, 2012 at 8:47 pm | Permalink

      I e-mailed a senior politician recently to urge him to mount a challenge to Cameron’s leadership. I won’t compromise him, but I’ll simply say I’m hopeful.

      The writing is on the wall for Cameron. We expected him to take a firm anti-EU stance. He must have thought all his Christmasses had come at once when he formed the coalition with the Lib Dems, because he then knew he didn’t have to deliver.

      That tells just how disinterested he is in the fight against EU integration. He uses any excuse not to do anything about it. Good old Nadine!


  33. Roger Farmer
    Posted June 16, 2012 at 4:09 pm | Permalink

    Connect with http://www.positivemoney.org.uk/consequenses/consequenses-debt-based-money-video/in-depth/
    for an interesting view of our current predicament.

  34. Electro-Kevin
    Posted June 16, 2012 at 4:15 pm | Permalink

    I noticed that inflation was running high long before the end of the Labour Government. Perhaps measured inflation wasn’t so high but it was those unavoidable costs that were getting more and more expensive and many people – including myself – were using credit and overdraft simply to tread water.

    Credit (debt, as it was previously known) and inflation have been allowed in order to perpetuate the illusion of wealth in a declining economy. So too the expansion of the public sector.

    The loss of major industries has been the chief cause of the ‘black cloud.’

  35. sm
    Posted June 16, 2012 at 4:25 pm | Permalink

    Commercial banks could offer existing clients new terms for old loans and present these for Bank money, unless there is an effective anti avoidance provision in the scheme.

    An effective anti avoidance provision…. indeed that’s the spirit…applicable in a lot of area’s but that will only work if parliament ensures its meaning is clear. However one may be forgiven if they thought MP’s could be deliberately vague to hide their true intent.

    How about reforming the Lords to ensure parliaments will is clear and plain enough (the law) to allow such avoidance provisions to work and to transparently unveil any potential loopholes. To do this it must not be partisan or corrupted, rather a vehicle for engendering transparency,trust and good laws.

    So…. we are where we are then.

    • Denis Cooper
      Posted June 17, 2012 at 6:22 am | Permalink

      I’m afraid the present House of Lords is not as you imagine it to be.

  36. Boudicca
    Posted June 16, 2012 at 4:40 pm | Permalink

    The Government is lending (ie UK taxpayers will pay) the banks £140 billion at low rates. The banks will then lend that money to small businesses and individuals at considerably higher rates, immediately generating a profit. .

    In due course the banks, with all those easy profits, will pay their senior Executives humungeous bonuses, justifying them on the grounds that they made substantial profits and the share price rose. Cameron will huff and puff but say that they can do nothing about the banking bonuses, as these are private businesses.

    The British people are being scammed by their own Government.

  37. John Orchard
    Posted June 16, 2012 at 4:43 pm | Permalink

    Look at Nigel Farage’s latest video on Youtube. Here is a Man that tells it like it is. It’s a pity Cameron and Co didn’t take a leaf out of his book.

  38. norman
    Posted June 16, 2012 at 4:45 pm | Permalink

    I saw a tweet from Douglas Carswell today saying that the Chancellor said last night on the BBC news at ten that ‘the debt has been dealt with’

    Can we do nothing to rid ourselves of this disingenuous little man or do we have to wait until 2015?

  39. Martyn
    Posted June 16, 2012 at 4:59 pm | Permalink

    Here’s something the government could do, if they had the backbone….

    French finance minister Pierre Moscovici (pictured) announced plans on Wednesday to limit the salaries of French state companies to 450,000 Euros per year. Moscovici said the measure was needed to “make state companies more ethical.”

    Can anyone imagine for a moment that Mr Osborne would try something like that?

    • uanime5
      Posted June 17, 2012 at 12:59 pm | Permalink

      Does anyone in the public sector earn more than £450,000? That’s more than twice the Prime Minister’s salary.

      • David Price
        Posted June 18, 2012 at 7:55 am | Permalink

        In 2010 some GPs were paid around £465K while the DG of the BBC was paid £over £830K. The replacement DG in 2012 salary is apparently £671K.

        So the two bastions of the left quite happily pay their senior civil servants around 18-26 times the private sector average pay while the people who provide the front line services are being made to feel the pain by the middle management minions in those organisations.

        Doesn’t it make you feel proud to be a socialist?

        The BBC has lost it’s way, it is not supposed to compete with commercial broadcasters for ratings etc. It can’t even do the job required of a public broadcaster when it comes to the jubilee or the fiasco over the Bomber Command memorial – is “cash in the attic” really so much more important!?

        If the employees of the BBC wish to receive the same rewards of a commercial enterprise then they should suffer the same risks, the majority of the BBC should be sold off with asset value returned to the taxpayers. Keep a rump to cover news and essential public programming but no more. Above all the enforced licence fee must be eradicated.

      • Richard1
        Posted June 18, 2012 at 12:49 pm | Permalink

        Its 3x. The answer I’m afraid is yes – I think the exec chairman of the Post office is or was > £1m. the head of the BBC is on something like £3/4m. See the Taxpayers Alliance website (an excellent think tank) for detail on public sector fat cats

  40. simon
    Posted June 16, 2012 at 8:45 pm | Permalink

    The BoE rate is a blunt instrument. Increasing the rate to reduce inflation would also reduce growth, and any reduction in the last couple of years’ rate of growth would likely push it towards being negative. The other – perhaps – option to reduce inflation, no QE, would have made it very hard for banks to re-finance, again terrible for growth.

    True, the modal wage growth for the last two years has been zero, but, reducing growth would have been worse for the average man in the street than the – decidedly medium, rather than high – inflation we’ve had; he’d have been much more likely to be unemployed for a start.

    While the Bank was late to the party pre-2008 and pretty lackluster for a while afterwards, keeping rates low has meant that lower housing costs (mortgage rates running below inflation) have staved off many repossessions.

  41. rd
    Posted June 16, 2012 at 9:00 pm | Permalink

    Does this ‘Project Merlin’ failed? As for the banks how about Building Societies? As for the ‘stimulus spending’ as far as I can see it’s all supply sided. If there is no demand side stimulus – tax cuts etc – then it’s wasted. But we cannot help what will happen in primary export market that is sadly Europe. We need our businesses to find new markets for sustainable growth and boosting supply is useless while we are constricted by European trade agreements when Europe is imploding financialy.

    • uanime5
      Posted June 17, 2012 at 12:56 pm | Permalink

      While the pound is stronger than the dollar or euro the UK’s exports will remain more expensive.

  42. David John Wilson
    Posted June 16, 2012 at 10:47 pm | Permalink

    Rather than attempting to make the banks lend more, the government should be concentrating on helping the reduce the need for small companies to borrow more.

    Most small companies and individuals in business need to borrow to improve their cash flow. One method of releasing them from the burden of their cash flow is to change the point in the business cycle where taxes etc. are collected. Thus rather than reducing VAT the government needs to look at reducing things like employers’ NI contributions. It would be much more effective for many other reasons to do this than invest in providing loans.

    If existing companies reduced their need for loans by improving cash flow then more money would be available for new loans.

    If we look at the large companies that are sitting on cash hoards we will find that it is these same companies that impose very long payment periods on their small suppliers. Government action that reduced these payment periods and perhaps even required large companies to make staged payments to their small suppliers in advance, would move these hoards to where they are needed without using the banks.

  • 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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