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11. cook the books.

ie sandbox the debts. so the banks can pay it off over time.[like south american crisis]

We are still on target to follow the 1929 monthly wall st chart [link posted in a previous blog] which means there is plenty of room to the downside. Assuming a 50% fall is 'necessary' to clean out the system that means ftse can fall to 3350 [now at 4700].

Its just a question of how fast we get there. The do nothing cabal say we get there quicker and any rescue is just dragging it out? The buying time people say we can prepare better by getting there slowly.

So why would we need time?

this is going to be a long game. The financial consolidation is just the first consolidation. With a new landscape of fewer lenders with less capital and a more cautious attitude will main st escape?

On Simon Mayo 5 Live show yesterday they reported you can by houses in Detroit for 1 dollar. Which shows how low it can go?

It all comes down to recapitalisation or liquidation. The former is more expensive, drawn out and risky in economic terms, the latter would be a short sharp shock, akin to what Sachs did to the Soviet Economy in the early 1990s but it would be very risky in socio-political terms, with mass unemployment and social dislocation resulting. I suppose those tending more towards a social view would choose the former course, those tending towards a purely free market view the latter. You borrers yer money, you takes yer choice. Let us not forget however, that the last time this happened we had 20 years of depression, fascism and war, largely as a result of the social consequences of deflation and liquidation. The Weimar Republic disintegrated not because of extremist parties but the extremist parties flourished because of the collapse of the Weimar Republic. I think we are concentrating far too much on the technical and economic aspects of this crisis and not enough on what the social fall-out will be if the liquidators get their way.

1 - YES
2 - maybe
3 - NO
4 - maybe
5 - maybe
6 - possibly
7 - YES
8 - YES
9 - NO
10 - not a good idea

Reasoning

1 - guarantee savings and depositors The market expects this so do it it will (should) cost nothing.

2 - What makes anyone think that Government control will be any better than the existing management? Recent Government performance has not been very good.

3 - DO NOT LOWER INTEREST RATES - presently there is an inability to borrow, not through price but through loan availability - Lowering Interest Rates will diminish the ability of cash rick savers to spend and may well compound the decline in the economy unless there is a vast increase in (cheap) loan availability - something that is unlikely.

4 - Liquidity will not work without confidence - unless the accounts are trusted and that means there is full disclosure of all off-balance sheet assets and liabilities no amount of liquidity will improve things.

5 - Print money >> hyperinflation risk.

6 - Nationalisation means that some politician is in change of the decision making and they have not proven themselves to be any good at it.

7 - Clearing House - OK so long as there is full disclosure.

8 - Getting rid of Hedge funds and artificial tax avoidance scheme is always a good idea slump or no slump - but how can it be done without exchange control?

9 - Really - history shows us the politicians are bad at picking winners and generally give jobs to their pals.

10 - The public will demand action! Politicians will oblige, but in the end the absolute size of some of the figures means that there is noting than anybody can do as it is impossible for governments than handle sums many times their GDP as Iceland is finding and I expect all countries will find a similar relationship between liabilities and national wealth.

and lastly

do NOT fiddle the books - this will not improve trust and confidence. (Start) Keep(ing) proper accounts!

For God's sake not # 9 surely? Politicians generally, and this government in particular, couldn't run a bath; why would we want them running the banking system? I know the current bankers are bad, but the politicians would just have to be worse. Bankers have spent that past 10 years simply responding to the monetary environment created by the politicians - and getting very rich on the back of it. We're now going to pay for that. However, whatever we do, we must not let the lunatics run the asylum.

Devaluation. Yes, I know those of us who are old enough will be screaming about Wilson and 'the pound in your pocket' moment but making the pound an attractive proposition - since eurozone countries seem to be creating their own national agendas - might be a good way of dragging liquidity into the economy.

It is after all liquidity that is the problem. There is still plenty of money around the global economy. It is simply not where it is needed. A good bargain might be exactly what is needed now.

Just to add that we do not have to go back to Wilson to see this. Remember Black Wednesday can be traced back to the high level at which the pound went into the EMS. A move towards Euro parity could make the prospect of monetary union mare attractive as the crisis winds down.

Absolutely right Paul. It requires all or nothing measures. The Govt has been dithering too long with this.

One question I would like to ask - What contingency plans were there in the Treasury for this eventuality?

1 Yes (though I think eventually the guarantee should only be for banks that meet certain FSA standards)
2 Perhaps (but could be overtaken by 6)
3 Maybe, but I think 5 is more likely to be effective in staving off recession
4 Maybe (BTW - if funds are being withdrawn from banks and from the stock market, are they going into Gilts? If so then the liquidity needs to be pumped back into the system)
5 Yes, as it seems more likely to work in the current climate than just dropping BOE interest rates
6 Yes - seems like partial nationalisation is going to happen anyway, full nationalisation will be cheaper for taxpayers.
7 Possibly
8 Definitely. Actually there seems to be enough money in the hedge funds to bail out the entire banking system.
9 I don't think that would help
10 Please no.

I'd also suggest an agressively redistributive tax change to keep the economy afloat. Take money from the very rich and give it to those on low/middle incomes who would be more likely to spend it.

(Further) devaluation. Will probably happen anyway.

And maybe we need to think about writing off debts? Tricky this, due to the perceived (and real) unfairness, but you could declare say any mortgage loan of greater than 4xsalary mis-selling and say it has to be written off.

SMALL IS MANAGEABLE?

What of the future? Would it be an idea to consider were we are going? Cartoons are full of escapes - always into another problem.

All kinds of life live in colonies. Only over-reached Man tries to go for 'ever greater union'. (I suspect THAT drive arises from immature need in the psyches of the elevated.)

Has anyone, convincingly, argued the case for global anything? (Apart from obscenely powerful, or rich, men?)

Man likes power and risk; when you add money and a global dimension perhaps it has to end in global sized tears?

"They said that the job just couldn't be done
With a will he went right to it.
He tackled that job that couldn't be done
And couldn't do it . . ."

Regarding number 3 - massive interest rate cuts.

I think that it is fairly easy to see that Base Rate has no relation to any of the borrowing or savings rates being offered by the banks at the moment, and we have all been told that this is determined by the LIBOR. So it could be said that there is no point in moving rates just yet.

However, from a purely selfish point of view, my mortgage is about to switch from an attractive fixed rate to a lifetime tracker set at 0.75% above BOE Base Rate. A 3% rate cut would do nicely right now!!

But seriously; I'm all for number 10 and hold on tight. My wife is a teacher (hopefully safe) and I work in an industry that is not affected by recession (fingers crossed). No, hang on, I'm being selfish again aren't I?

well, my wife and I are both university professors so we are even safer than you I guess Fabius-Maximus. However, doing a number 10 is probably the worst option at the moment, for everyone.

there are three problems:

1) liquidity crisis. this is to a large extent the symptom of the global deleveraging process. hedge funds, certain banks (with genuine capitalisation issues) and other leveraged investors are being forced to deleverage quickly. asset prices are falling, eroding their balance sheets and inherently increasing their leverage. they therefore must liquidate assets quickly in order to deleverage (and to meet margin calls), which of course in turn puts further downward pressure on asset prices, compounding the problem.

2) there is a global flight to quality. everyone can see the deleveraging process, but nobody knows where it will stop or which financial institutions it will sink. this is creating a short-term bubble in super-safe assets like gold and us treasuries. bursting of these bubbles could also cause problems further down the line.

3) long term capitalisation concerns - although the uk banks generally do not have undercapitalisation problems just yet, it is also true that the uk is heading into a serious recession and housing market slump, which probably means large scale defaults (not just mortgage loans, but also corporate and consumer debt), which certainly will put pressure on banks' capital.

i think the best short-term fix would be to make short-term wholesale deposits (and all retail deposits) akin to uk gilts by guaranteeing them without limitation for say 12 months. this would put the uk banks on the right side of the flight to quality. it would be even more ideal if the entire eu could coordinate a joint (not several) guarantee of the entire european banking sector along these lines, although it has to be said this is highly highly unlikely to happen.

the announcement of a major recapitalisation plan would also do a lot to restore confidence. the announcement (including in it a very large number, say gbp 50bn) should happen quickly in order to restore confidence, but the capital should be disbursed very slowly and cautiously. the current crisis is a liquidity crisis, not a capital crisis - it is not the uk banks that are desperately dumping assets in order to deleverage. i am glad the government is talking about preferred shares + warrants - this basically means they are saying they will provide significant equity investment (including potential upside to the public purse when the banking sector recovers), but reserving for now the option of taking direct control of the banks (which would happen if they exercise the warrants).

the capitalisation plan should be implemented in conjunction with a full public audit of the banks' balance sheets to determine their genuine capital needs, and should be open to the market to participate in on equal terms. i think the programme should be implemented over a period of months, not days.

i agree that raising interest rates is not a good idea. apart from anything it will be totally ineffectual until banks actually start lending. also pumping money should only be done to the extent required to maintain the banks' liquidity.

as far as hedge funds are concerned, the most important thing to do with them is to place a regulatory limit on their leverage - i.e. make them subject to basel-style capitalisation rules.

There are a spectrum of possible reasons for government to either take a stake in a bank or go for temporary nationalisation. The two ends of this spectrum might be described thus::

1. To restore confidence in the market. On this view the government doesn't necessarily have to do anything at all in terms of getting the banks to change their behaviour, simply stand behind them to give everyone confidence and then our otherwise perfect money markets start working again...
2. Because the bankers and other Masters of the Universe have made such a total pigs-ear of the economy they simply can't be trusted to go back to what they were previously doing without being told how to behave by government acting on behalf of the rest of us.

I rather tend to the 2nd view. But in practice, it is the first view which forms the end of currently 'acceptable' policy debate. But, pragmatically speaking, I really doubt that any nationalisation would be *temporary* on the Swedish model.

Britain- the most indebted of all the major Western economies - is a medium sized country with a world sized financial sector. We're way, way out on a limb in our role as a kind of giant 'offshore' casino for the world's hot money. That money will flee as soon as it can get it's value restored and won't come back without massive reassurances - reassurances which can only come, in the medium term, from moves against social spending and the restoration of the obscene differentials in income once provided by our casino economy. But if the government rescues the casino on such a basis there will be massive social upheaval.

Hi, I have a great respect for your opinion but I'm surprised that the concern for inflation is not more prevalent in your writing. What ever the wally's at the top decide, it must be SUSTAINABLE.

1. Guarantee deposits - little cost to govt or taxpayer, good confidence boost. DO IT.

2. Only allow govt stake in banks if it is ALL UK banks, else those who are not in the gang will be left unable to compete.

3. Interest rate cuts - Will temporarily help the economy but make it hard for the govt to raise capital on its bond sales. they may use taxes on the public instead which may spoil the original gain of cutting rates and make the UK unattractive for foreign savings investment.

4. Injecting cash is the same as printing cash. It leads to inflation. 'Work' has to be done by someone to justify extra cash. hand-outs do not do this.

5. As above in point 4.

6. As above point 2.

7. Too complicated. Any system that is complicated is open to a cock-up and to abuse. we need to keep it simple.

8. Tax havens are offshore for a good reason, they are attractive there. Leave them be.

9. 'With freedom comes responsibility' wise words that many at the top of the financial iceberg should heed. Govt does not need to control the financial system but it could make it legally a crime to try and abuse the system. This may instill responsibility in those who choose to exploit their freedom.

10. Do nothing is ridiculous. Capitalist survival is about reacting, adapting and creating. The UK is very good at this, why ignore the one quiver our bow could fire a long, long way. Lets make it happen and be in the lead of the rest of the world.

Andy

1. Total deposit guarantee

Are there any half measures we can take here?

2. Government takes controlling stake in banks

Not for the sake of it, but we should at least get equity for our trouble.

3. Massive interest rate cuts: 3% cut as wished for by Prof Blanchflower?

Certainly temporarily follow an inflation target that includes large rises in food and fuel costs. 2.5% is just false at the moment.

But money shouldn't be cheaper than free, so moderate rather than massive rate cuts.

5 Quantitative easing: central bank prints money to improve money supply

Yes. Doubtless some people are stashing cash under the floorboards. It has to be printed. If it stays under the floorboards it shouldn't contribute to the "money supply" and inflation.

That most of our money supply is in bank balances rather than cash, should perhaps not be seen as a policy, but as a consequence of people choosing to keep money in the bank. If that choice changes, the nature of the money supply should change accordingly.

6 Temporary nationalisation of commercial banks

Only when they fail

7 Create central clearing house for credit default swaps

Oh, is this a way to repackage the debt so that the risk gets lost in the system. Genius! Why hasn't it been done before. :P

8 Close all offshore tax havens and force all hedge funds onshore

What does this have to do with it?

9 Government takes control of the commanding heights of the economy with the power to hire and fire bosses...

Ha ha.

10. There is of course an alternative: do nothing. Let market forces rip and the strongest survive.

And perhaps confidence in banks is not rational, and there should be no banking as we know it.

bs @ 9

hungarians have an expression "everyone starts from themselves"

man is gregarious. technology shrinks distances. globalisation, including global problems that need global solutions, is inevitable.

Paul, it's a real joy to read your comments and get some really serious discussion for people in a public forum. You and Robert Peston are doing a tremendous job.

What can work? Many people keep raising the issue of fractional reserve banking and, to my mind, it is basically that simple, and, objectively, it is that simple. But no one will raise this issue. The simple logic of the system means that at some point the guardians of the money system - the banks - decide that the amount of debt out there isn't going to be paid back, so it becomes a race to stabilise yourself, survive and enjoy the benefits if you do.

If there is less money coming into the system then going out the economy will shrink, as it does so the means of transmission of money collapse: jobs, buying/selling etc. This means less money going round; more defaulting; more collapse. I believe that most people will have a fair idea of that now.

But reflating the economy? How? If we get back to where we are then there is still massive debts? The pump would have to be continually primed. Printing money is no guarantee that it will be spent, but could lead to a loss of confidence in the money commodity itself! Imagine - most people think that money actually represents something. Most people think that we operate under full reserve banking or something understandable. So some of the more extreme methods, especially Bernanke's comments, might actually undermione what is being attempted.

The run on Northern Rock is illuminating. There did not have to be a run. NR needed to borrow money and it got that money. Why the run? Did you notice the age of the people involved? People older who did not understand why they were so rich. Wealth can be just as de-stabilising for a society as economic hardship! The great run in house prices, because it has no been understood, has lead to less confidence amongst people. This is why thing are falling apart so quickly, in my opinion.

Can anything both kick-start credit expansion with debts as high as they are and with a public lacking confidence and CONFUSED? I doubt it. The logic of fractional reserve banking and human psychology suggests not.

People are looking to the New God, the State to step in, so that will have to be it, because it is the only believable strategy. Nationalise the banking system.

My question is: why are we so enamoured with the current corporate banking system? Clearly it has caused great inequity in society, but no we are "socialising" the losses (whatever the solution, the tax payer is on the hook in all countries).

So instead of the money supply being
Central Bank -> Corporate -> business

can't the goverment authorise a new system of
Central Bank -> Business

I realise that there would be fewer fat profits, less speculation, more sustainable wages, and more transparency in the banking system. I realise these laudable goals are anaethema to corporate banking, but isn't that how we got here?

This would shore up the "real" economy, destroy the city of london as the world's biggest casino / debt production center, and reassure the populace that massive systematic risk taking, means leeching the system.

Further suggestion.

Mortgages.

They must not be mis-sold.

We need simple rules to decide what is a good sale of mortgage and what isnt.

Institutions should NOT be fined if they are caught mis-selling.

Instead, force the institution to waive any mis-sold mortgages. They would soon ensure that they never mis-sold again as the hit would be painful.

I'm single, no dependants and no addictions, my mortgage is 拢700 and my income is 拢1500. I can live comfortably even though my mortgage is x 5.2 my salary.

Andyb

Nice one Paul. I'm glad that we can move the debate on from finding a silver bullet that will solve the crisis.

1. Yes and make it a rolling guarantee (3/6 months to keep things calm).

2. No, but equity stakes for capital - yes.

3. Yes, definitely. The problem is that we have an inverted yield curve (short term rates higher than long term rates). That needs to be reversed. 1-2% cut straightaway with further cuts if required. There was a good point about this in the Lex column last week.

4. Yes.

5. Seems unavaoidable given that we're entering a period of debt deflation.

6. Doesn't seem to be necessary - 2 would be better.

7. Don't know.

8. How much of a problem are they? If they are a risk won't that be priced in once markets settle down and start to assess (counterparty) risk more sensibly?

9. As politicians and central banks are also complicit in this mess (through extended periods of low interest rates and excessive money supply in the 90s and 00s creating serial asset bubbles) absolutely NOT.

10. Absolutely not. Millions of people who have not taken out large debts, have saved diligently and provided for their own pensions face being wiped out through the idiocy and corruption of others.

I would also add:

11. Find better politicians. 'Professional' politicians have been shown to be totally out of their depth in this crisis in the UK, EU and US.

The thing about all this is that everyone seems to have a different opinion about what to do and everyone provides rationale to justify their way of thinking.

The problem with taking a stance that isn't simply to let the market decide, is that when it doesn't work you will have an army of 'I told you so'.

Let the markets rip themselves to pieces and let's put it back together in a better way once it's all broken. Just don't leave it to politicians; get some real academics and professionals in to do the job.

Just a thought about No. 1: how do we as taxpayers guarantee all bank deposits? Surely the money to do that doesn't exist.

How to engineer an end game to the crisis? The circle of destruction tightens its grip, leaving an ever more alarming trail of collateral damage. Banks are becoming their own sector's quarry, weakness or simply suspected weakness threatening their very existence. Despite hundreds of billions of dollars in liquidity provision, bail-outs and underwriting, the self destruction is gaining momentum. The global authorities appear to have little to no control of this unfolding nightmare, a truism given validity by the distinct lack of tangible improvement. Meanwhile, as corporate credit lines seize, payment dates pass unfulfilled and unemployment rises, the real economy is obviously stumbling - directly into a potentially deep and prolonged recession if a more decisive response is not immediately forthcoming. How to engineer the end game? Governments and Central Banks have been trying in vain to fight fires window by window, allowing the crisis to develop into a systemic and latterly economic firestorm. The piecemeal approach, while at times ingenious, has in the final analysis proved to be an abject failure. The time for a concerted, finely coordinated all encompassing approach is now: A complete guarantee of all deposits, a huge government sponsored re-capitalisation programme - for a meaningful stake, substantial and sustained monetary easing, Central Banks completely by-passing the money market, to act as intermidiary to all and any institution, as the provider of short-term and period money. This combination, delivered simultaneously could provide a period of relative calm, that vital break in the circle, relieving the financial sector of impending attack and helping to ensure at least some flow of credit around the system. The even more epic task of re-building the long-standing conduits of credit and capital could then be undertaken in a less febrile environment. It might just work. Will it happen? The dearth of political colosi is not reassuring. SC

Anything but nationalisation.

We've already seen, with the banning on shorting, that government will pander to the populists. I'm sure the banks who have seen double-digit losses in share price will regard that as a great success.

Anyone thinking battling symptoms is a good idea is more of a manager, than the surgeon we need at this time.

Nationalizing the economy, the banking sector, will simply end up repeating Labours embarrassing rush to the IMF, just like last time they shafted the UK.

I'd be tempted to leave well alone, its counterintuitive given the state of things, but governments have a history of making things worse, then cooking the history books.

Just look at how soon this government as U-turned on regulation, Brown and Balls were lauding the free market and light-touch regulation a couple of years back, but now seem to have developed amnesia about that.

And Browns claim of wanting global regulation doesn't hold up - not when you consider he has pooh-poohed it repeatedly when the subjects been broached.

You want those spinning toads in charge of the economy? No thanks.

1. Yes we need total deposit guarantee for deposits in British banks and building societies.

2. Govt to take equity stake in banks requiring support. This need not be a controlling stake but it would add support to the banks and offer the prospect in the future that we might get more responsible banking practices. For example, a Govt stake could be conditional on the banks no longer gambling in the market like Nick Leeson.

3. No cut in interest rates - this will be ineffective anyway.

4. More liquidity is a good idea but I thought this was happening anyway? It seems to have had little effect!

5. Printing money - isn't this supposed to be the effect of the BOE increasing liquidity?

6. Temporary nationalisation of banks only in the event of preventing a total collapse.

7. Clearing house for credit default swops: Good idea. I surprised there isn't one already. There is clearing house for cheques and tranfers between banks which nets off transactions, so why doesn't this already exist for CDS?

8. Closing off shore tax havens cannot work without exchange controls. However offering savers far greater security here could bring funds home anyway! I'm not sure what the net effect will be of bringing hedge funds on shore.

9. No

10. Doing nothing is not an option!

paul, you might want to give this piece a read. i find the "short squeeze on the dollar" argument particularly compelling:

Perhaps we should try to get inside the mind of the share traders. Despite humbly referring to themselves as 鈥榬ocket scientists鈥�, most of them are not very bright. For years they have made massive bonuses by listening for rumours as to which share is due to rocket (Is that the reason for their name?). They then contacted their clients, for their main job was as salesmen, and persuaded them to get on the bandwagon. Of course, there no longer are any sure-fire rocketing shares.

Now, though, they have simply reversed their methods. Now they search out the weakling, the current runt of the litter; the ones the rumour-mill says are due to crash. Then they once more chase it until it does crash; regardless of its true financial position. The new rules about no 鈥榮horting鈥� don鈥檛 seem to apply to short-term (24 hour?) transactions; so this is the one way they can fill the purses of their clients 鈥� and, of course, boost their own bonuses.

The secret, which I admit I do not have, surely might be found in some way of bankrupting these cynical manipulators rather than the companies they attack! Any ideas!

In this context 鈥淲hy should all financiers be shot?鈥� The answer is 鈥淲e haven鈥檛 time to burn them at the stake?鈥�

Keep reminding, and believing, that 'Government money' is 'our money'. and that Gordon Brown works for us.

Don't use or accept language of 'the tax payer' or 'the saver'. No one talks about 'the shareholder'. Its always 'shareholders'.

We are the tax payers, in fact the population, not some individual 'tax payer' sitting disgruntled and confused in front of the telly, not looking beyond own pay packet or redundancy notice.

In short - we are it. And any government deal with banks needs to prioritise us, the people. 'We' are society, Maggie.

Brown has to let go of the mantra that we are 'the most liberalised country in the EU'. We didn't want to be, and its not true. Our welfare achievements (that he has tried to privatise) mean we are a social democracy.

Now his adherance to the mantra is stopping him from taking necessary action.

With that mantra exposed as rubbish, we can question all the flow-on we 've been conned into, from that mantra



Id like to use this space to congratulate the military guy in Afghanistan for having the balls to say that the war there is a no-win situation.

To me this whole crisis has been blown out of proportion by the lack of confidence in the market, as I posted last night -

"Never mind the EU , thats a just a distraction and just stating the obvious.

The Government needs to offer a accreditation system for our banks, banks only get it if they open up their books (full discloser) and allow Government inspectors to assess their viability(credit rating).

This could be repeated every month (in the current situation).

The Government could bring in a law that instructs all banks to put this to their shareholder for a vote.

This would bring some confidence to the markets, as banks would know who they could lend to or not.

Shareholders would know that their investment are safe too.

Banks that have run into problems and do not or can not join will need help, either restructuring or a bail out plan or a fire sale of debt (with first offers going to the borrowers themselves) till the bank can join the scheme.

Since Northern Rock in late 2007 there has been uncertainty, both by the markets and on the high street, this has to be ended as soon possible.

Someone needs to pull their finger out and start earning their pay grade !
"
I said the same thing nearly six months ago , granted I also have said increase interest rates 1) strengthen Sterling 2) attract foreign money into our banking system.

Maybe some kind of of Government 50/50 ownership deal for defaulting mortgage people would be needed, combined with a fire sale price sale to mortgage holders (as mentioned above).It's better the banks get 60 - 70% of their bad debts back than nothing ! Plus there is a lessoning of debt on the defaulting household. Plus give savers a boost (including pensioners).

I don't see the need of the Banks being owned by the state , some of them appear to be well financed (TSB 3/4 trillion in deposits if I recalled the figure rightly).
As mentioned by someone else Governments can not run commercial companies as they don't have a proven track record for such, hell some might say they can't even run their own departments competently.

One thing is clear, the lack of confidence has been around for a year now and something is desperately needed !

Either do Nothing (10)

or

Do the rest ( 1-9)

or

Say you will do 1 - 9 .

If the problems are real, and not hysteria then you may have to carry them through.

If the problems aren't real, then the market will adjust in the certainty that apocalypse will be avoided.

Hi Paul,

First time I have contributed to your blog - I usually loiter on Mr Peston's, even though he appears to choose to ignore my sage remarks 8-)


I would like to comment on just one of the points you raised:

3. Massive interest rate cuts: 3% cut as wished for by Prof Blanchflower?

As I have noted repeatedly on Mr P's blog, low interest rates got us into this mess, so they certainly won't get us out of them.

Supply and Demand are an axiomatic economic tenet. How does that apply to the current situation? Well:

- With interest rates at 5%, is there strong demand to borrow money? Yes.

- With interest rates at 5%, is there strong demand to lend money? Not really.

So supply/demand says that the cost of money is too low, ie interest rates should be RISING. And that's elementary economics before you even start thinking about inflation and the need to control that. Not only would higher interest rates reduce the borrowing demand, it would also increase the lending demand, ie IT WOULD INCREASE LIQUIDITY AND HENCE THE ABILITY TO BORROW - which is basically the problem with the financial markets. It's really not difficult, but the call to slash interest rates whenever there is any sort of economic problem has become completely Pavlovian. To see the MPC being blackmailed into rate cuts through all the irresponsible public appeals by prominent figures is very distressing. The MPC is non-political for a reason: so that it can do the RIGHT thing, not the popular thing.


On a separate note, here is a VERY radical suggestion:

Abolish private residential property rental in the UK.

I don't know if anybody else has ever had this idea, but it occurred to me a few weeks ago. If it were the case that only councils could OWN property that could be rented, it would probably have a majorly beneficial effect on this country's property market, and would certainly remove a considerable amount of speculation from an asset class which, at the end of the day, is fundamental to human existence. It all rather depends on whether you think the property market boom/bust cycle is beneficial or detrimental to the country's economy. The insecurity of living in privately rented accommodation is, IMHO, one of the principal drivers of the boom/bust property cycle. It's hard to get the correct balance of regulation for property rental, so the simple solution: remove the option in its entirety.

Open thy books



Dear Comrade Paul:


The markets' mute response to last week's $700B bailout by the US government and the subsequent sell-offs yesterday proves that no strategy would work now if banks don't come clean first. The credit crunch has dragged on and caused enough damage in financial markets worldwide and the economy as a whole. It is time to rip off the bandage and face the monster in the eye. If banks continue to keep their losses to themselves, people would only imagine the worse. That itself will cause panic selling and force even good, solvent banks to lose market value under the general climate of fear and suspicion.

If the current crisis is a result of the collapse of the banking system (as you said in the program), where banks have stopped lending to each other altogether, surely capital injection alone is going to fall into the abyss of the financial blackhole instead of helping to solve the problem.

Paul...

What you are proposing appears to be a takeover of the economy by the state and that would be a very dangerous step to take.

I would not want the state to be all powerful . Politicians whether national or local have been poor managers and giving them too much control would be both inefficient and potentially unhealthy . What is the point of swapping the rule of greedy bankers for that of incompetent politicians. What is needed is a system of distributed power where market forces and political power are balanced, with neither able to exert absolute control. The current mess is a direct result of politicians ceding their power of oversight to the market with regulation being weakened or simply not applied. To swing to the other extreme would simply mean swapping one set of masters for another. The market must be allowed to function , meaning those who succumbed to greed and recklessness are allowed to go to the wall. The government's job is to ensure the health of it's currency and the financial protection of its citizenry; by sensible monetary policy, by adequate regulation of the market, by ensuring adequate information is available to the investor and by instituting a tax regime that rewards those prepared to invest in the economic well being of the nation. That leaves the market free to function, individuals free to act in their own best interests and the state secure. Thus in answer to your suggestions:

1. A total deposit guarantee would involve a reckless financial promise that is simply not credible. Making promises you cannot afford to keep is to undermine confidence in government.

2. Government must not be allowed to take a controlling stake in the Banks. Banks and investors must be free to make decisions on a commercial basis and to live with the consequences. The Bank of England should be given greater oversight powers and the freedom to intervene as a last resort. Influence through regulation rather than direct control.

3. An interest rate cut may not have the effect desired. Banks will be able to borrow from us at that rate but will continue to charge customers whatever they think the market will live with. Real rates will thus remain high and only the Banks will benefit. There is also the alternative risk of hyper-inflation and threat to the currency.

4. Injecting even more liquidity is a solution looking for a problem. The actual problem is Banks sitting on their money and not lending it. Printing more money and giving it to Banks doesn't address the real problem. What's to stop them just sitting on it.

5. Printing more money is reckless and will simply undermine the currency and the government's financial standing.

6. No nationalization of Banks temporary or otherwise.

7. Central Clearing House for CDSwaps. If you mean the government buying the Banks toxic debts at a rate far higher than their market value then NO . There is no evidence that this will do anything but reward the guilty and undermine the essential requirement of moral hazard

8. Close all tax havens and force Hedge Funds onshore....... Nice idea but personally don't think it's possible to close tax havens created outside UK legal reach. As for forcing Hedge Funds onshore. Again don't know how you could do that without introducing currency movement regulations and am not sure if that is legally achievable without sanction from EU.. Pragmatically even if you unilaterally did this you run the risk of scoring an own goal by scaring of foreign investment.

Politics and the economy are inseparably intertwined. Our political freedom depends on having individual economic freedom to act. An overly powerful state apparatus exercising control in the interests of those in political power is a real danger to our democratic well being. We will at some point have to face the consequence of an all powerful market letting greed rip and savaging our economy. The quicker we face that reality and take the hit, the better we will be able to build again.

On the subject of interest rates, I've just noticed that the Reserve Bank of Australian has cut rates by 1% today. I wonder if we are going to see concerted action by the Central Banks to get rates down globally.

Huntingdonian #32

You are basically suggesting that the Govt should do nothing. That is a recipe for disaster.

You wrote "We will at some point have to face the consequence of an all powerful market letting greed rip and savaging our economy. The quicker we face that reality and take the hit, the better we will be able to build again".

How do you expect the economy to recover when savings are wiped out, business confidence destroyed and millions are unemployed? That disaster would be a far greater threat to our political freedom (remember the 1930s) than the state intervening and taking steps to stabilise the banking system with an equity stake.

My 'vote' would go for full or partial nationalisation, plus the two suggestions made at #30 by YummyCarolKirkwood. The only modification I would suggest is that all home rental properties should be owned by Housing Associations (regulated as at present), rather than councils.

As an aside, in case anyone should be thinking that lenders have learned their lesson....this morning, I was offered a mortgage of 拢64,000 even though I declared, truthfully, that I am retired, with a total pension income of 拢14,600 pa (gross). To test the 'system' I also applied online for a credit card (with the same organisation) and was immediately granted one with a credit limit of 拢5,200, despite having declared, truthfully, that I already have two credit cards with limits totalling 拢15,000 (more than my annual income!).

The argument that nationalisation would be bad, because politicians make bad managers, seems weak to me. Hard to imagine how even they could be worse than the current bank bosses and, in reality, polticians never directly manage nationalised organisations, anyway. Yes, they do meddle but they do that with the private sector too.

30 ....interest rates should be RISING...

firms trying to raise money offer up to 25% on their bonds [easy money you would think] and they still can't find takers.

So i agree its not an interest problem but a confidence one.

in my thesaurus the word credit brings up meanings like praise, honour, reputation, belief, trust, influence.

so if there is no credit there are none of those either.

Re: #36 bookhimdano

firms trying to raise money offer up to 25% on their bonds [easy money you would think] and they still can't find takers.


A couple of points:

(1) We are in a credit squeeze: the banks simply don't have the money to lend out - at pretty much any rate.

(2) With official rates at 5%, 25% implies junk.

Rather perversely, having official rates so low is an obstacle to companies being able to borrow. This is the elephant in the room! It may well be that the opportunity to improve liquidity by moderate rate rises has now passed. It's not impossible that we will see currency collapses, and thus very high inflation, requiring drastic levels of interest rates. It's hard to tell, but lowering interest rates to solve the current problems is simply a non sequitur. Have a read of the recent comments from Brazil:

Asked about it last week, President Luiz Inacio Lula da Silva replied, "Ask Bush, it's his crisis, not mine", noting that the days were over when the US sneezed and Brazil caught pneumonia.

The left-leaning government's policy of high interest rates (currently 13.75%) has helped deliver big profits to Brazilian banks, meaning they were not so exposed to risky finance such as the US sub-prime mortgage market.

Ironically the orthodox economic policies which help Brazil weather this storm were largely dictated by the very banks that now face collapse, a fact not lost on Lula who sarcastically lamented the demise of "meddling" foreign banks that used to spend their lives telling Brazil what to do.

(from

Oh yes, and one other fairly radical idea that I previously mooted on one of Mr Peston's blogs: the Bank of England should fix the Base Rate at an arbitrary level, say 8%, and leave it unchanged come hell or high water. This too would, I suspect, drastically reduce the boom/bust cycle (probably not eradicate it), and lead to a more stable, if less exciting, economy.

Since originally mooting that idea, it dawned on me that the current system is inherently unstable, as there are basically two principal inflationary drivers - interest rates and money supply - which are constantly changing, and with a system as complex as a macro-economy, you really haven't a hope in hell of controlling inflation with those elements constantly varying - think chaos theory. By fixing one of them and then concentrating on controlling the other, you at least give yourself half a chance! So, in my proposed new paradigm, central banks would leave interest rates fixed and try to control the conomy and inflation by adjusting the money supply.

But what do I know? After all, I'm no economist 8-)

Please let it be number 9鈥︹��.so, we won after all!

Just realised that my posts have veered very off-topic, and don't really address the issue of "blowing the head off this crisis".

FWIW, having now passed the stage where moderate rate rises could have put the economy back onto a stable footing via a relatively short, rather sharp recession, I think the least painful (and it is only relative) way out of this is predicated on the official acceptance of the following two facts:

(1) the property bubble has burst and property prices need to and will drop dramatically to much more realistic levels

(2) the UK banking sector is effectively insolvent, principally as a result of (1)

Of course, these are both politically unpallatable, which is why there has been a refusal to accept them so far. However, if these two facts are accepted, they can then be dealt with and steps taken to rebuild the economy. This is the price that has to be paid for allowing such huge asset and credit bubbles to develop in the first place (both of which were very politically welcome at the time).

Following acceptance of the reality of the situation, the next step is to raise interest rates to choke off inflation. The economy will be severely damaged by all of this, but a state of denial will not solve the problem, and will just make the whole thing more protracted and more painful. Such steps will give this country's economy the chance to "reboot", rather than carrying on as all the various applications one by one slowly crash (to continue the computing analogy).

Anyway, that's my twopence-worth.

No 8 is the key. Without the nefarious tax havens there would still have been a housing bubble and a normal recession but it was the boys on Wall Street and in the City who magnified unpayable debts by playing funny money games, and it was the offshore world that enabled them to do it. Until these mickey mouse microstates are terminated the financial markets will always find ways of evading effective regulation.







Quite apart from their role in contributing to the crisis the way tax havens enable the super rich to dodge their taxes is unconscionable in any event. As the great nineteenth century American judge Oliver Wendell Holmes (a Republican) observed: "Taxes are the membership fees of a civilised society"

Those at the top of the table can damn well pay up, otherwise they're stealing from the rest of us.

#38 Yummy...

I rather like the idea of leaving interest rates fixed and managing the economy by adjusting the money supply.

In fact I'd take it a stage further, on to the international stage. Tie all exchange rates at purchasing power parity and then fix *real* interest rates in each economy at the same value (eg 1 per cent above inflation). This would be robust and self-sustaining (impossible to speculate against), but still leave each economy with sufficient degrees of freedom to adjust to their own requirements.

Busby2 Comment 34

I share your evident frustration at the pickle we are in and your point about the possibility of political instability that might occur as a result of economic instability, is well made. I am sure governments are all to aware of that possibility. However to claim that I argued that government should do nothing is to misunderstand. Government's job is to regulate markets and commerce effectively, tax wisely and provide a credible safety net for its people. Our government has done none of these things. The problem is that having failed to act when it could the window for such action looks to have closed. The markets are now deciding our fate. The government cannot replace the market just as the market cannot replace government. As we have seen governments across the world are struggling to come up with an effective response and failing. The clamor to do something is a political imperative for them, as to be seen to do nothing, will ensure their ultimate downfall. But they singly and collectively clearly have, so far as I am aware, no effective response. Governments can and will have to try to influence the markets by increasingly interventions of one kind or another, but ultimately they cannot control them and they cannot take their place. They can use taxpayers funds to protect some savings and they can try to increase general liquidity but cannot protect all without either borrowing or printing money on a large scale. As lenders seem in short supply and printing money will simply delay and amplify the unpleasant consequences there doesn't seem much future in that. My last point is that to believe that we can somehow avoid the unpleasant consequences is I fear illusory. The best we can hope is that governments and Bankers come clean, face up to the truth and focus their immediate efforts on trying to protect the most vulnerable and in the longer term consider how best to reconstruct our economy from the mess this crisis will leave us with.

37

...25% implies junk....

GE, Ford etc junk?

a question for all - what is the best asset to purchase ahead of our entry into a barter economy?

i was thinking the following criteria would be important:
- nothing perishable
- nothing "luxury"
- nothing impractical (e.g. i don't think gold will be worth much once the entire financial system implodes)
- nothing too bulky (storage room in my attic is limited)
- nothing that could be stolen too easily
- nothing too flammable, toxic, etc
- nothing that runs on petrol
- something that i can buy at a bulk discount

cigarettes of course are the popular option in prisons. i was also thinking that a trip to homebase might make sense - hand tools may be in popular demand in the "new economy".

does anyone know what the most successful ersatz currencies were in russia's barter economy of the 90s?

Why does Newsnight have a load of old rich Conservative suits discussing the situation, still talking, for the most part, about 'the taxpayer' , but 'shareholders'; get the contrast?

Just saw you on Newsnight where there was talk of previous successes with a similar plan for the Nordic banks.

Time and place! This bailout happened at the beginning of the most sustained boom in human history. I don't know much about Scandinavian banking, but for all we know there are another four Icelands there. Banks probably couldn't fail at such a time...easily!

Can this bailout work at the beginning of a global recession? Remains to be seen, but I don't hold out much hope. Here's why: the money situation is imploding even as we speak. Ironically, every debt paid back, every loan cleared is causing further retraction. Add to that the money that is having to be written off, then money is gushing out the system and none is coming in. The numbers must be in the hundreds of billions and the bailout is just too small to be effective with those kind of figures.

And say it out loud, 'This bailout will allow the banks to lend at previous levels circa 2007.' It even sounds daft! But that is what HAS TO HAPPEN if the situation is going to stabilise.

Even if the government could create the monetary conditions for a boom, the confidence is so far corroded I doubt that there would be one.

AMERICA'S (AND EUROPE'S) PERFECT STORM

Here are a few other things to mull over .

1) Anti-Social Personality Disorder (which accounts for most crime) and Narcissistic Personality Disorder (equally incorrigible and destructive of other people's emotional lives) share half their Factor Structure, and as Robert Hare (pehaps the world expert on psychopathy (a subset of APD) says, if he was looking for psychopaths (snakes-in-suits) other than in prisons, he'd look in the stock exchanges, and we seem to be producing more of them. The tend to lack empathy and conscience. There's no point trying to get through to them that they hurt others. It doesn't work.

2) Political Correctness results in 'Light touch regulation', and it does so by stealth. This will continue to drive the crime rate up (whether reported, recorded and detected or not). People feel less safe today than they did even 20 years ago. Crime's been going up ever since WWII, and we've just been shown how it's gone unreported, unrecorded and undetected in the white collar financial services.

3) Perhaps, is the most depressing of all if one is looking for ways to curb 2).

4) was how Europe dealt with 'light touch regulation' the last time it got out of hand. This time, .

5) Some have been for a long time in these blogs (and elsewhere).

Tinkering with the economy probably won't make much long term differerence if it's the demographics of 'human capital' ('diversity': ethnic and sex differences in cognitive abilities), along with 'Political Correctness', which is driving this mess.

Sorry not to be more positive.

Whether it works or not in the form being offered by Darling, this is a huge public-private parttnership, the biggest yet. If it doesn't work, then the governemnt will up the ante. They will do whatever it takes, which means the actual measures are pragamatically taken. All or most or more than the list paul offers.
Who benefits?
This is a major step forward in the property-owners democracy launched by the Thatcher era

Re: #43 Huntingdonian


Here, here.

Re: #44 bookhimdano


37

...25% implies junk....

GE, Ford etc junk?


In this context, "junk" is short for "junk bonds", ie non-investment grade. Offering to pay a return of 25% when official rates are 5% does not inspire confidence, whether justified or not, and is what you would expect junk bonds to yield. But yes, I would definitely consider Ford a poor credit risk; not so sure about GE (not very familiar with their financial performance over the last decade), but I suspect they are still in pretty good shape with a good, diversified business.

Go back to first principles. A bank is basically a middle-man who lends out other people's money, assuming the risk that some of its debtors might default and using its skill to minimize this risk. As such, it lends out at a higher rate than it pays its depositors. The current situation is that banks aren't offering depositors sufficiently high rates to attract sufficient deposits. And they're not offering higher rates because, with official rates so low, to do so would - rightly or wrongly - suggest that they have some sort of financial problem. Therefore, they cannot meet the demand from its borrowers no matter how much the borrower offers to pay! If official rates were raised, it would enable banks to attract more deposits by offering higher rates without raising suspicions about their financial positions. The banking industry operates entirely on trust: the word "credit" comes from the Latin "credo, credere, credidi, creditum: to believe". Perception is more important than reality. And this is why official rates need to rise.

THE FINAL BALLS UP

Following on from JJs observations at #48, I was waiting in a school reception area, and picked up the Ballsian tome on how brilliant the latest plan for those poor kids is.
Leaving aside the crass juxtaposition of his assertion that families are vital to children's development - with the cavalier way kids are deprived of family through schooling, I saw nothing about nurturing sanity.

R D Laing wrote, in 1974, "A child born today is ten times more likely to enter a mental institution than a university. PERHAPS IT IS THE WAY WE ARE EDUCATING THEM THAT IS DRIVING THEM MAD." Note: over 30 years ago - Balls is 41?

This is another storm brewing, while our talented politicians whistle up more wind with their maddening policies.

Ed Balls is not untypical. As someone posted recently: WE VOTED THESE FAR-FROM-FIT-FOR-PURPOSE CIPHERS IN (mostly because they wore a rosette and party lies had been swallowed.) SPOIL PARTY GAMES.

well the package is a good one. but i think the voluntary nature of it may be its achilles heel - for a bank coming forwards to ask for help is not a good signal to the market. it would have been better for the government to audit all the banks and impose recapitalisation on the ones found wanting.

in any case, the markets are pricing in global recession now. this is very bad news. deleveraging will continue, which means so will the liquidity crisis, which means the brain damage to the real economy will accelerate. nothing our government can do about this. all very very bad. i am selling all the rest of my shares now - i've given up on waiting for a small rally first..


btw ford is junk and has been for the last 3 years:

This is my latest post on my blog.
Tuning in to the Today programme this morning I learned that the Government had announced its latest rescue package for UK banks.
The Government is going to make 拢50b available for banks to access if they require funds to shore up their capital. This is likely to be in the form of preference shares. The first question is where is the cash coming from if as we are being told constantly, the government has no available cash. Presumably it is borrowing this from the market place, that same market place that won't lend to other banks.
Secondly, what is the upside here for the British taxpayer? Bank shares are at a ten year low. Presumably over the medium term, with the guarantee of government support and a pledge that "we will do all that is necessary" these bank shares will rise considerably in value. Is the British tax payer getting the type of share that can be sold in due course and the benefit of the increase in share price realised?
The second element of the rescue is that the government looks like it is going to provide a guarantee for a bank which has to the market to replace it's short term borrowing used to fund its long term mortgage lending. eg HBOS may need to replace 拢100b of this type of funding in the next three years or so. If the money market will not replace this borrowing the government intends to act as guarantor for the banks ability to meet any repayments on this money, and to bolster the security given to secure it. Again, any shortfall on the security will be picked up by the British taxpayer!
My question this morning is whether the market will see fit to accept this latest offer. The government and the Bank of England have been intervening for months now by providing cash for liquidity, to little effect. This is a bigger plunge, and is significant, but the market is not driven by sentiment. My worry is that the market will effectively say, "Thanks British Government, that is a nice offer, but we think that you can go higher". Essentially they will play a game of poker and see just how far they can push not only our government but others around the world. If I am right and this is like poker, have we revealed our hand too early, and what else have we got to offer. Actually shouldn't we be calling the markets bluff and saying, that's it. Take it or leave it, there is no more.

THEY ARE LEGION

YummyCarolKirkwood (#51) "Perception is more important than reality."

For some people. Others see it as .

The language of science (Pursuit of Truth) strives to be austere, . It's anathema to some for that very reason.

Watching covereage by the popular news presenters of these momumental steps all they seem to dwell on are the negatives; cost to the tax payer, banks nationalised, NHS funding will suffer, etc, etc. Appreciate the A word - armageddon - is out but lets be real it was on the cards if this action had'nt been taken - as you skillfully aluded to last night. It's Confidence - the bearer promises to pay - the pound notes don't exist if everyone wanted them at once - a concept popular newscasters seem unable to grasp or are prevented from discussing. As much as I dislike this administration they've done something - at last. My concern - and this is not a negative - will these actions increase broad money supply fueling home grown inflation for the new/next gov to sort out letting this one off the hook for blowing their fiscal rules. Maybe this was behind Browns' twinkle

(#55) Others see it as the very reason why we're in this mess (and certainly isn't restriced to financial services).

There was a time when people really did expect to be censured for behaving hypocritically, predatorily and deceptively, but over recent decades .

There was a time when far more people appreciated what actually was, and why it causes so much suffering. But how many times in recent years has one heard that risk takers deserve to be rewarded? What behaviours/people must that select? What behaviours/people must
it censure? Maybe

Is perception more important than reality? Or was that just another PC (Bruneresque)anarchistic slogan (ultimately to facilitate 'light touch regulation' for some) which really just says we are prone to get reality wrong?

Hey - what's happened to JJ's post #48? It wasn't like that yesterday.

Decouple economic growth and % increase of GDP from effective development.

Concentrate first on the environment then social factors.

Allow whatever amount of GDP is needed just to happen.

In spite of being paid its 1 Trillion dollars, the banking fraternity is still refusing to go back to its job of providing credit. It is, effectively, withdrawing its labour. Refusing to undertake a task which it does not see in its own interest.
If a trade union was to take such action, it would be immediately branded as a blackmailer 'holding the public to ransom'. But as these are some of the richest men in the world, and their industry is a powerful enough to be a major political force, their demands must be met without question.
If and when the dust does settle on this predictable collapse, which saw the Archbishop of Canterbury citing Marx, any thinking human being will want sane people running the asylum, or better yet, a sane system in the first place.