Bank of England unmanned

Where are the tooth fairies when you need them ,have the bank of Englands tooth reserves been audited?

What happened to the huge profits the banks posted over the last ten years? For example, wasn't Barclays being criticised for making 7bn GBP in each of 2006 and 2007 while still charging fees to customers (those fees will be back soon, by the way, along with a whole lot more)? Didn't the other banks save anything for a rainy day out of a total profit of 38bn GBP in 2007?

Or is it the case that the huge profits never existed and were just based on notional values of "assets" which were hopelessly overvalued?

If that's the case have they really "lost" anything? Except the faith of investors and through paying cold, hard cash in bonuses? You can't lose what you never had -

If these companies were overvalued until 2008, then isn't it right to have this correction? If they've over extended themselves based on fictional balance sheets, then thats bad decisions made by bad management and they should all go to the wall.

Aggressive market share increases have led to this juncture, with banks lending money they don't really have to people who couldnt afford to pay it back.

In this sense, perhaps the HBOS / Lloyds merger isnt a bad thing, as clearly competitiveness DOESNT work in the banking sector? If one introduces a 100pc mortgage, the next will bring out a 110pc, then NR will bring out a 125pc! If one offers 2x income, the next will introduce 3x, then 4, etc. We may need to see much LESS competition and a much more stable market, so why shouldnt each smaller bank be taken over by a successively larger bank until weve only got a handful left (aside from the redundancies this would cause)?

If savings are guaranteed and mortgage debt is still a relatively reliable source of continued income and can be cherry picked from the rubble by the bank buying these mortgage books, I'm all for it. The consumer wont lose out, their payments will just go to a Spanish or Hong Kong / Shang Hai bank instead (more than likely).

Please don't let the government just throw cash at the issue, as in the US! Unless Gordon has a lot of banker friends he wants to ensure are personally liquid, rather than the institutions or markets they represent, it wont help, longer term.

America is over (for now) and we should concentrate on building relationships with our European neighbours!

Moral hazard... Moral bankruptcy more like (not just economic bankruptcy). I wonder if you can file for that..?

Robert, one day, maybe a year or two from now, I look forward to reading the book that you will have written about this crisis. I just hope I some money to pay for it!

Excuse my ignorance, but what does it actually mean when a bank "hoards" its money and doesn't lend. We are not talking about notes and coins here, so these assets must be invested somewhere... where? And how can all banks can be simulataneously short of cash - it's a closed system, is it not?
Also what does it mean exactly when it is said the BoE pumped Xbillion of liquidity into the system? How does it do this and why is the market still short?
I don't want to turn this into an economics class, but these things are banded about and it would be good to know what they mean exactly.

Why do so many seem to go along with Greenspan's and Brown's daft notions of doing away with the economic cycle?
Recession is part of it, rates need to reflect increased risk.
Priming the pumps is a band-aid, when starker medicine is needed.
You say channel funds at the right price. The key part of that sentence is AT THE RIGHT PRICE. Not at the price the politicains and stock market desire.

Due to years of toothlessness, this is getting truly hairy.

I understand the banks putting liquidity before everthung else.
They know they have depreciating assets on their books of an unknown quantity as the economic situation worsens.
At least it gives them time to start pruning back for without a healthy banking system we will all be doomed.
Good businesses will always survive and perhaps a trimmed back approach to lending is what is needed so everyone can appraise their position.
It is really a matter of survival at the moment until the mist begins to clear.

BOE s acting irresponsibly, as thing are now they should pump money and cot interest rate to 4% or below. Moral hazard, where was this before when interest rate was kept too low for a prolong period, might be BOE is trying to help the money men to buy thing on the cheap.

Also I believe the developing countries with huge amount of foreign reserves should help US and EU, as without us to buy their goods they are finished as well.

Its a poker game Robert, stop being manipulated.

The banking crisis has now dragged on for over a year. Part of the fear by banks is still based upon a belief that their partners in the industry are still sitting on toxic assets. I appreciate that many of these assets have tortuous paper trails to try and determine their underlying origins and hence values. Probably something most of them would prefer not to know. But surely a year is long enough to have undertaken an audit of the various derivatives to find out exactly what these pieces of paper are really worth? Failure to come clean suggests that the banks are still living in the hope that the taxpayer (government) will help them out of this mess on both sides of the Atlantic. Shame on them. Shame on us for allowing it.

The Bank of England is right to worry about inflation, but in a matter of months the causes of the current rise is going to have worked its way through the system. There is also considerable downward pressure on prices as demand slows. This being the case the Bank needs to grasp the nettle and be brave about cutting interest rates.
Bold, decisive action is required...

I'm sure it makes sense to make sure that there are no more big, fat, juicy worms at the bottom of the can, but a judgement will have to be made once the bank bail out in the US has gone through. Positive (even courageous) action is needed. Can Mervyn deliver?

1 - When I have excess cash I put it in my bank until I need it.

When a bank has excess cash it gives it to the BoE (or in more normal times - another bank)?

2 - When BoE pumps money into the system how does the accounting work?

?"Ok Mr HBOS, here's 2bn, I'll just get it out of my?......"

3 - If some of the banks have excess overnight liquidity, doesn't that mean that all the liquidity BoE is pumping in is just filling up the over night balloon of excess funds? So how is that helping to relive the problem.

Change the terms of the SLS. Any money drawn down from it must be used by the banks for business otherwise it reverts to the BOE after 14 days. Otherwise the liquidity flows as far as the banks and no further.

It is looking more and more like Alan Greenspan and Gordon Brown have supped far too much at the cup of Ayn Rand.

We have Lenin at one end of the spectrum and Rand at the other end.

Pity about the rest of us, stuck in the middle and about to be run over.

I know this is a bit off topic, but i 've started now...

I've just come back from France. There nobody is allowed a mortgage with repayments more than 30% of income.

It is normal for people to take a 3 hr lunch break and to have their main meal at midday, generally considered to be healthier.

The working week is 35 hrs.

The French have two indiginous motor manufacturers.

The European space program is mostly located and controlled from France.

The European passenger jet program is mostly located and controlled from France.

France companies own major British utilities including Water, Electricity and Nuclear.

The French nulear industry supply France and UK with energy cheaper than UK produced and is not dependent on unstable sources of supply.

French agriculture provides high quality produce to local markets at reasonable cost. Something we are only tentatively exploring. Okay it is supported by the CAP, but so are UK farmers and much of it goes to the grain barons. DEFRA was recently fined for being unable to hand out subsidies effectlively mainly because of its cronic bureaucracy and ineffciency.

While the French are bureaucratic, they are also pragmatic. It also important that something documented and in agreement and for a good reason.

France has it issues, but they generally do things for a right/good reason, even if it costs them a bit more. Not because some politician/bureaucrat/economist/banker/executive is looking at his bottom line, while paying himself and his ilk a fat bonus.

Andy.

Perhaps this is a daft question, but what if the Bank of England were to reduce the interest rate on overnight deposits? I seem to recall that the Swiss and the Japanese have, in the past, had negative rates. This would provide a greater incentive for interbank lending and would allow the risk premium to have a lower impact on LIBOR.

Dear Robert,
Ireland in RESSESSION, and Banks scrambleing for for bailouts, at twice the level offered, Gordon Brown in America and NOT Darling?, the ressession in the Uk started a long time ago, BUT now its going to be very very deep indeed, Share prices will tumble Friday through next week teh forcast by City Economists is twice that of the Governments expected Borrowing, no sir , we are in ddep pooh, so to speak. If the FED accepts the Bail out and goes 80% public no amount of money will be coming out of the USA to bail out London, did deep, and put money under the matress.for dozens of rainy days.

This comment was removed because the moderators found it broke the house rules. Explain.

Let me suggest something out of the ancient past.

So the bankers have gone on strike.

Time for beer, sandwiches and exhortations at No 10? If that doesn't work then nationalise the lot.

I have lost my patience with the bankers who seem to be behaving as if their profession was spelt differently.

I don't mind them wrecking their own industry but I do mind them wrecking every other industry. They have already had oodles of taxpayer support, far more than any other industry has had for the last thirty years. They are making me very, very moody.

Perhaps we should take all the banks into public ownership without compensation.

This is a credit crunch and our aim is to ensure that credit is available to house owners and industry so that the economy does not freeze up.

Instead of refilling the coffers of the banks for their use, why doesn't the Fed or Bank of England put their billions of dollars into a Taxpayers Bank which householders and industry can draw on? It alleviates the crisis wihout the bankers benefitting from the mess that they created.

a-m @ 2

"What happened to the huge profits the banks posted over the last ten years?"

dividends. no getting them back now, whether they were based on real oligopoly profits or false accounting profits.


prf101 @ 4

"what does it actually mean when a bank "hoards" its money and doesn't lend"

an account entry in the bank's books:
asset: cash
liability: overnight loan from fed / boe

the boe/fed providing liquidity is a short-term and relatively ineffective intervention. it is like giving a blood transfusion to a bleeding patient, without curing his wounds.

banks' problem is that they are overleveraged and hold too many risky assets versus book value of their equity. if your leverage is 6:1, it means you have $6 risky assets for every $1 equity.

boe / fed's interventions do nothing to address this. it gives them enough cash to meet their day-to-day operational needs (i.e. avoiding insolvency). it does not deleverage the banks, as it does not add to equity or subtract from risky assets.

reason banks are hoarding cash is because they don't want to increase risky assets any more (be it mortgages, interbank loans or corporate working capital facilities)

paulson's plan (yet to be replicated here) is to buy $700bn of risky assets, replacing it with cash (or maybe us treasuries?). so e.g. if our 6:1 leveraged bank sold $1 risky assets, its leverage reduces to 5:1

very good piece by soros in the ft today. one of his many insightful comments is that instead of buying these cra ppy assets, paulson would do better to spend his $700 buying equity in the banks. so if our bank sold $1 equity to paulson, its leverage would be reduced to 6:2 = 3:1. this move would also ensure (i) cra ppy assets retained by the banks who know their real value and best know how to realise that value given how complicated some of these assets actually are, (ii) taxpayer gets full participation in the equity upside (whereas in paulson plan the upside is limited to the workout value of the debt)

The frightening characteristic of this crisis is that, thus far, it remains largely "unreal" to the man on the Clapham omnibus. The time lag between the shocking level of failure and problems within the global financial system and its impact on the High Street (rather than Wall Street or the City of London) is akin to boiling a frog. The water is comfortable to start with (no problem), gets warmer (hmmmm, something's happening here - not sure what), gets warmer still (hey, what's going on?), gets hot (hell, I don't like this feeling - this is beginning to hurt), gets very hot (damn, I'm in trouble), starts to boil (oh god what's happening) and boils furiously (I'm dead ...).

One wonders how long it will be before the ordinary guy starts to feel the effects of all this. My guess is that, in due course, the impact on the real economy is going to be bad - how can it not be when one hears the sorts of numbers being bandied about at the moment? Hey Robert ... was the situation that preceded the Great Depression as bad as this? If not, where does that leave us?

straightalk @ 9

you miss the point. yes some assets are worthless / impaired. but most assets are not currently.

the problem is that the banks are leveraged up to the hilt. when they write down assets they write down equity as well. if a 4:1 leveraged bank writes down $0.50 of debt, its leverage ratio increases to 3.5:0.5 = 7:1. that is why so many banks were going to the market for new capital these last few months.

banks are desperate to deleverage. moreover, with the extremely uncertain economic and financial outlook, it is impossible to say which PERFORMING assets currently held (not to mention new assets that would be created by any new lending) will become impaired in the future. if house prices fall, consumer confidence collapses, corporates suffer a liquidity crisis, there are widespread bank failures, etc, etc then you can be sure that banks' balance sheets will start looking a whole lot uglier (and even more leveraged). it becomes a big downward spiral.

until (i) confidence is restored about the financial / economic direction, and (ii) banks are properly deleveraged, there will be no end to the crisis.

Either $700 billion was plucked out of the air or it was base on something tangible. If so why don't we know.

#9 sums it up perfectly and it leads me to believe that the $700 billion is owhere near the necessary amount.

Lets looks at it simply there is deemed $1.2 trillion toxic assets in existence of which banks so far have written off some $500 billion. That would leave $700 billion to write off.

The problem is that Paulson is suggesting the taxpayer may see all the money returned. That just is not going to be the case and we do not have to be central bankers to see that!

If the banks want a bail out they get it at the prevailing market prices which means pretty well near 1 cent inthe dollar. Accepting that may be be veryt concervative but fair throw in some good will on teh price and expect a premium interets rate to be paid to the treasury or Fed at bank rate + 7 %.

The banks must know this problem will be with them until it is cleared down and not left to the taxpayer. There is no other way to approach this mess.

Also as an aside the very notion that banks need pay the high salaries to people who have managed to so claasically screw things up seems wrong in extreme.

Perhaps this has shown beyond any reasonable doubt the banking masters of the universe are no smarter than those who could probably do a damn site better job than them but are unfortunately waiting for employment!

With results like these as a reference, the banking sector needs a thorough clear out of senior executives.

Um... Does the Bank of England not understand how a market works?

They can set their "policy" interest rates at anything they like, but if they don't *actually* lend at that rate then it doesn't really matter, does it.

#16 - solomanbrown

Gordon Browns in America, but he cant even get a meeting with Hank Paulson! So much for the "special relationship".

Course, Paulson is probably pretty busy, but still...

#19 - WonderWhyNot

Excellent idea!!!

I believe they recently acquired a North East bank which would suit this purpose perfectly.

Time for Northern Rock to justify its 3bn price tag

24:

Right, though it's not altogether clear that the BoE lending at their policy rate would actually make all that much difference.

Interest rates are set by the supply and demand for liquidity. Liquidity is now in short supply, therefore market interest rates are high, and are likely to rise further.

Or, to put it another way, banks' need to de-leverage means that interest rates need to be a deterrent to borrowing. At the same time, banks want to attract depositors in preference to relying on wholesale sources. That, too, points to higher rates.

Where I differ from the consensus is over the view that higher interest rates are necessarily bad news. We need to make a transition away from an asset/debt bubble towards sound(er) finance. Higher interest rates will help in that process. This hits borrowers, sure; but, offsetting this, it benefits savers.

I would also point out that a $700bn input from the US government would need to be borrowed, at least in the short term; it cannot come from taxpayers in one immediate hit. Increasing US government borrowing means increasing interest rates.

This comment was removed because the moderators found it broke the house rules. Explain.

23 - It's 'conjured' from Fractional Reserve Banking - ie money has noi value, money is generated from debt.

The 700BN hasn't, doesn't and never will exist. If it did the dollar would collapse and inflation would go through the roof.

It is notional credit for the system based on the value of the debts (sub-prime mortgages, loans etc) plus their interest on their end date. There will be an element that will be deemed irrecoverable even with debt enforcement and foreclosure - in this instance they are working on 10% - and that part of it is underwritten with gold.

That is part of the probelm. Parts of market is not convinced that a 10% default rate is realistic, they think 15% plus is more likely. Other parts of the market do not believe that the US has $70BN in gold (10%) to underwrite the bail out anyway.

Watch these 5 very short videos in this order:-

https://www.youtube.com/watch?v=ThXpjmfyiMQ
https://www.youtube.com/watch?v=sanOXoWl0kc
https://www.youtube.com/watch?v=kTv1fo6sKmo
https://www.youtube.com/watch?v=3qicabStQkc
https://www.youtube.com/watch?v=7kpSbkaD4tM

Robert,

"Bank of England unmanned"

presume you mean that it has had its 'bits' chopped off!

Rates have to get higher to stop daft "liar loan" lending starting up again, unless some other legal scheme is devised to separately control the return of gigantic loan-to-value mortgages at totally unsustainable multiples of borrower's income.

I like the idea of a new bank funded by the taxpayer rather than funding the unsavoury (to quote the Archbishop of England) 'Bank Robbers' who created the problem in the first place.

While I agree with your analyses about what might or could happen in America, because we do not have much information about the terms and conditions of the bail-out, I am surprised that you expected Gordon Brown to remain in UK to quote - PUSH - unquote the BOE to issue more finance to the Banks because they are asking for more.

The PM does not push the BOE into deciding these things, unless King asks for the PM's views about what he's doing in certain circumstances.

Secondly, our PM should be in the thick of it and that is the USA, even if he can at least manage to persuade sufficient Democrats to vote for Bush's bail-out.

Gordon Brown is also having discussions to put forward his views to change the rules and regulations of the Global Financial Markets so that investors have more faith in the system.

You know as much as anyone else, that if America goes down, then no amount of BILLIONS to the UK Banks will be sufficient to stop them from going under and throw us into the biggest financial crises these last 60 years.

AMERICA GOES DOWN, THEN THE WHOLE WORLD GOES DOWN WITH IT!

Are we now turning to Socialism and say that the Government should interfere in the running of an unregulated financial system of the Capitalist world?

The less intervention by the state the better, because that is what people voted for and that is what they expect.

We either work hard for a GLOBAL agreement or it would be futile for the BOE to put more money in circulation because the Banks are hording Capital due to uncertainty.

I think that your call for the PM to stay in UK was uncalled for. Let's hope your intentions were not politically motivated.

HOW THE STOCK MARKET WORKS:

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their efforts. So the man announced that he would now up the price and buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further so the offer increased to $25 each and the supply of monkeys became so scarce that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

In the man's absence, the assistant told the villagers. "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them back to him for $50 each."

So villagers rounded up all their savings, and bought all the monkeys from the assistant. They then sat back and waited for the man to return from the city.

However, they never saw the man, nor his assistant, ever again... only monkeys everywhere!

And so my friends, you now have a better understanding of how the stock market works.

Dear Robert
Globalisation
the ruin of the National Banking System, Funny how politicians let this Happen, thay did not even see it coming,
Globalisation
Rack and Ruin of Nations.but not a national player.
Globalisation
Has Failed the worlds Economy
Globalisation,
Is a Banking endeavour, that caused mayhem on the worlds markets, Banking has caused a major run of redundancies, and put a lot of people out of work aided and abetted by Politicians who did not stand up and say
this was not the agenda, who shall we blame.--- any one but the real culprits.

It's very simple, thanks to the forward planning of Gordon and our darling Alistair, we have a nationalised bank that can give loans to desperate businesses and individuals that really need them, with funding direct from the BoE!

How easy was that! Now, who is going to tell the people at Northern Rock and the Treasury??

Any action or inaction on the part of the Bank of England is pretty much irrelevent as there is nothing that can be successfully achieved (if success is defined as a reversion to the status quo of the recent past).

We have been running entire economies on the same basis that Enron was run. Take a look at the post mortems of that entity - there was not much that was criminal when viewed in isolation, but when all of the individual transactions and accounting policies were viewed in aggregate it was obviously bananas.

Same basic deal with the US and UK economies - but oh boy think of all the extra leverage (and bonuses) that you can get with an entire economy, all those $ trillions of derivatives that can be written.

The chickens are now coming home to roost but we´ve pledged the chicken coop to cross colatarilise a margin call on a derivative based on the differential of the number of brown and white eggs to be laid by the chickens in April 2023. At the same time we got a bit cold and so burned the chicken coop for firewood, but to offset this loss have entered into an agreement with a Caymen entity for supply of a virtual chicken coop. We´ve supressed a report from a vet that indicates all of the chickens will be dead by 2023, which if made public, may cause a trechnical breach to the terms of the original brown/white egg differential derivative... and on and on it goes.

@31

If America goes down then the whole world would not go down with it, but the majority of the economies based on the time bomb of fractional reserve banking that red lenin alludes to probably will.

As I think BankRSlicker mentioned on another thread, there are viable alternatives to the fractional reserve model. The only logical outcome for economies based on fractional reserve banking are crashes like we are experiencing now and have experienced in the past.

No idea how to even go about thinking about a solution to the problem. It just seems that the West has gone for so long with this insane system that any transition to an alternative way of doing things would mean a level of sacrifice that nobody would be willing to take.

Somebody will have to bite the bullet at some point, because societies will run out of bubbles to inflate and the resources to create them.

I would like to add a couple of further points here:

1. Although bankers (and government) are rightly copping a lot of the blame for this mess, I would also blame (a) those property developers who supplied inflated 'valuation' prices to enable buy-to-let borrowers to get round lenders' LTV restrictions, and (b) greedy buy-to-let 'investors' themselves. Both are now highly leveraged to the downturn.

2. The very fact of the 'buy-to-let' phenomenon should have given us advance warning that the asset bubble was becoming over-blown. In a rational market, mortgage costs should be higher than rent.

The idea of using Northern Rock as a taxpayer-funded bank, put forward by several posters, is a good one. But we must beware of trying to prop up house prices. More realistic and sustainable house prices are one side of the correction of the debt/asset bubble.

25. At 1:42pm on 25 Sep 2008, apollo_mcqueen wrote:

Paulson, doesn't spent time with time wasters. From what is on the news papers even Bush is not meeting them.

People believe Bush is a joke, when even he thinks our PM and Darling is bellow him; only God can save this country.

Brown and Darling has got to do number of thing here to do. I don't understand why they went to US; there is phone and video conferencing.

During the prolonged Waal St crash of 1929, the value of shares declined by 89% from their peak.

What we have today is nothing like this. Only the casino capitalists in the banking sector have been hammered. Let them and their investors loose everything. Introduce a Nationalised Bank to purchase any liquidated assets, don't pay executives any bonuses and limit their pay to £100000 per year. Prevent any executives in the failed companies working in that capacity again.

so the banks want liquidity (money) i have a £1 million but i have it under my mattress because it feels safer there and as the banks are offering savers below inflation interest why should i bother. So the answer becomes obvious, instead of bailing out the banks, just guarantee ALL deposits (not a measly £35,000 per banking organisation) and put up the interest rate to say 8%. I will be first in the queue in the morning lending the banks my money!

'And it may be dangerous to rely too much on the US to solve our domestic banking difficulties. '

Speaking from the western side of the pond, this is an accurate observation.

Sentiment here amongst the populace is deeply against the Treasury intervention, if I am reading it correctly.

This comment was removed because the moderators found it broke the house rules. Explain.

Dear Robert,

Does this not suggest that the base rate needs to rise. 6% would be a good starting point although I think that 7% will be ultimately required.

The Bank of England's ( and the Government's ) policy of low interest rates is out of synch with the new world that we are faced with where lending money now carries considerably more risk than it did before Aug 2007. This additional risk premium needs to be reflected in the cost of borrowing.

Higher borrowing costs would encourage Banks/Investors/Savers with money to lend to come off the sidelines and hence liquidity would improve.

I think that all us "bloggers" should chip in and buy the BBC moderators a box of best wines.
They must be worn out.
I bet they'll be glad when this crisis is over.

I'm all for Stan #18

Nationalise 'em without compensation! When the banking sector is better flog 'em off. Everyone is happy - the bankers and the tax payer.

40 Jolo13:

Good ideas. Rebalance the system towards sound finance, encourage depositors. Essential, in my view.

Bernanke and Paulson wish to give the banks $700,000,000,000 WHICH THROUGH FRACTIONAL RESERVE BANKING CAN SUSTAIN 7 times as much credit, nearly $5 trillion .[bankers bonuses will survive till christmas.]

Why does the government not agree to pay the shortfall on the subprime loans on a monthly basis thus restoring their book value ,answer,the banks need $7 trillion now for other expenditures

Bankers are hoarding cash because the lack of confidence in banks causes the money to flow out of the system[ into matresses depriving their christmas bonuses of funding] , rather than cycle within the system creating a credit multiplier each time it is deposited .

Alexander Solshenitsyn said that liberalism [shadow banking ]gives way to nihilism[125%ninja mortgages] followed by socialism [taxpayer bailout through centralised political authority]

Critique welcomed

I see my last post which contained the word -manipulated- has been blocked.

Anyway I'm afraid I havent seen anything yet which I could describe as surprising. Things decline unless there is something to change the dynamic. However perhaps a climate is being created where intervention can occur. It was never going to be bloodless. Banks are still interested in offering debt to customers it is just the computer says no more and managers cannot override the computer, another sophisticated management development. Some people seem to be enjoying the fear, thats all I will say.

I can't help but feel that in the end the only way out will be nationalisation of a large part of the banking system, either NR-style or by buying equity in the banks as Soros suggests. Maybe even by setting up some parallel state-owned banking system to keep things ticking over until this mess is sorted out.

If so it would be best to do it sooner rather than later.

I'm going to go down to the bank (RBS ) and withdraw my cash tommorow... i'll keep it under the mattress it will be much safer! Ill only put it bank in the banking system when they have earned my trust and are prepared to treat me honestly with 10% interest if that is a good enough return for Warren its good enough for me !

Why are we still waiting for Government to put Bank Regulation back under the sole charge of The Old Lady and not this FSA, Treasury, Bank of England triumvirate that failed so disastrously in the case of Northern Rock?

If an IFA had conducted business with his/her clients as, by its own admission, the FSA conducted business with Northern Rock he/she would simply be struck off.

It is interesting to read some of the comments.

If the Bank of England lent, at 5 percent on the money markets, it would reduce LIBOR.

The act of lending would give some extra confidence to the market, and very probably improve interbank lending.

Money it self is a system designed to unitise the authority to make use of resources.

Thats why in Britain we have the Queens head on our notes and coins.

Technically, the Gov can create as much money as they wish, as in the UK they are the originators of the authority tokens (money).

Likewise in America, the Gov may also create as much money as it requires.

However, public opinion, economic tradition and the tax structure are generally against Gov's wholesale creation of money.

So the necessary expansion of the money supply over time, are left to the Banks in their lend, deposit, lend role.

So, temporary lending by the Bank of England would be appropriate, and very likely would have many historical precedents.

Generally, the Gov's should be looking to enable the banking system to restore its function. Any loans to the Banks will have to be paid for with interest, so this isn't a case of the tax payers losing.

The shadow banking scam that was purely created to enable greedy bankers to secure ever increasing bonus payments (akin to a ponzi scheme) and this is the real root cause of this disaster.

The Soros suggestion for the Treasury to take an equity share in the cash strapped banks, that will benefit from the bailout, (on the face of it) seems to be a way out of this mess. But we all know that the best solution will never be adopted in these crazy times. Soros has previously stated that saving the entire system will always trump moral hazard.

Why should the Paulson/Bernanke bail-out plan (as currently proposed) be accepted firstly without any criminal procedings against the reckless and greedy individuals that have brought us all to complete economic anihilation.

What's needed is for the greedy banker executives to be rounded up, have all their assets seized and have criminal procedings brought upon them with a view to prosecution and custodial sentances...(or they could just be strung up by their closest assets!). only after this will the banking 'profession' learn anything.

I see that the FBI have already started investigations into a number of banks in the US.......WHY ISN'T THE SAME HAPPENING HERE IN THE UK?

The most basic function of the banking system, to channel funds at the right price to those who can best use it, has broken down.


Aaaarrrggghhhhh!!!! NOT AGAIN!!!

There has been NO BREAKDOWN in the function of the banking system, it is simply that everyone is trying to channel funds at theWRONG PRICE. Even you yourself, Mr Peston, observed a mere 31 hours ago that Warren Buffett had demanded a 10% yield for his $5bn injection into Goldman Sachs - when the Fed Funds Rate is 2%! Have you suddenly turned into a goldfish??? Returns/interest rates ARE TOO LOW. It is pointless - nay extremely damaging (cf the current financial and economic chaos) - continuing to try and propagate the myth that we can continue living in a cheap credit society! Such a state of denial is driving both this country and the US towards economic catastrophe.

Never mind, though, as long as those who borrowed recklessly to buy over-valued houses are spared having to take responsibility for their actions in the form of realistic levels of mortgage interest rates.

In trying to sell the massive taxpayer bail-out to the US public, George W Bush claimed that "not passing a bill now would cost these Americans a lot more later". It's a shame a bit of foresight wasn't employed 5 years ago and similar tough rhetoric used when there were ardent warnings about the ballooning debt levels. Instead interest rates were slashed to ridiculously low levels, forcing financial institutions to make riskier loans in an attempt to achieve anything like a half-decent return. What we have now are the consequences of actions taken to defy the natural economic cycle and prevent a recession by creating artificial economic growth. When will the self-professed Masters of the Universe learn?

# 53

The BBC reported this morning that the German Finance Minister sought to have both US and British finance officials highten controls,

but the respective governments wanted to protect, rather than correct, their bankers.

Could we not hang hang a few- "to inspire the others"?

This comment was removed because the moderators found it broke the house rules. Explain.

The government buys the toxic assets from the banks - but at what valuation? Currently they are worthless, as noone wants to buy them.

The government is trying to prevent a "bigger" crisis but none such exists yet. The crisis only exists with those that cannot repay their loans.

They should let the weak banks fail and nationalise them, at least then we, the tax-payers, own what we have paid for.

#52 "...Any loans to the Banks will have to be paid for with interest, so this isn't a case of the tax payers losing."

What about the bankruptcies and foreclosures?

Re. Islamic banks....

This is the start of the swing to the East.

Read on

https://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLO19694920080924

The most basic function of the banking system, to channel funds at the right price to those who can best use it, has broken down. ?

No the most basic system of the 'old' banking system is to give us all more credit cards than we can handle. to lend us too much money to buy a very overpriced house, to allow us to withdraw 'equity' from our hoses to buy overpriced cars we can't afford. this was great until we enter the day of reakoning where we are asked to pay for it all.

The banking system is dangerously overextented has lost our trust, and that trust cannot be bought with more credit

Robert

Excellent column.
But more serious than the credit crunch was your shirt/tie/suit combination on Newsnight last night. What was that??!!!
Circles, stripes and patterns?????TOGETHER?????

I saw that as well, it was an audacious ensemble.

Comment #60 is right.
We have enjoyed the spending spree, now we are going to have to pay for it. Deep down we knew it would not last. Not many innocent victims here I feel.

Re 59 and the Islamic bank.
I've always wanted a bank that performed like a building society of old.
With modern technology it should be possible to make a bank like that with attitude:
Takes your money and looks after it.
Allows you to transfer it to other customers at minimal cost (1p).
Doesnt waste time trying to sell you things you cant afford.
Doesnt let you go overdrawn.
Will do escrow for internet sales.
Stores excess in the BOE.

That should cover about 95% of what most people/business want and make a nice stable base for an economy - oh and bankrupt most of the other banks out there.

I also agree with comment #60.

It is time to go back to the old fashioned principles of previous generations. Consumers should not spend more than they can afford with credit card loans, or by using equity withdrawals from their property assets.

According to R4, we're going to see a bail-out deal in the US either tonight or tomorrow.

It looks like being Paulson's $700bn idea, but with three important modifications:

1. Oversight by Congress
2. Provisions to ensure that bankers don't make money out of it
3. Direct help for homeowners

On the face of it, this sounds encouraging. The Dow is up 245 points today, which seems to reflect optimism over the plan.

#11 Flubedub,

If you were hoping Mr Peston was going to explain how the money system works I'm afraid you have wasted your time. I have been trying for ages to get him to engage in that very debate but all we get is silence. My guess is he doesn't know.

The answer to your question has been posted here 5 times explicitly and once implicitly (ponzi, https://en.wikipedia.org/wiki/Ponzi ) by people who understand the root of the problem i.e. Fractional Reserve Banking. Look here for a reasonable explanation :
https://en.wikipedia.org/wiki/Fractional_reserve_banking

And the poster at #29 has provided some links for the Money as Debt video on Youtube. Whilst laid out in a sort of cartoon type format the basis of its explanation is sound. Don't be put off by the graphics. Stick with it to the end. If you've never seen it before, you will be very angry by the time you've finished.

The reason the system is collapsing is because a collapse is inherent in its design. It is a genuine pyramid selling scheme and at a certain point the foundation cannot support the weight of the fraud above it and it collapses. Every debt-based, fiat, fractional reserve banking scheme in the history of mankind has failed every time it has been tried. Why on earth would you be inclined to believe this time is any different? Isn't it logical that the authorities of the time and the general public went through the denial stage first before the evidence of collapse became utterly irrefutable. The only question is how far must the collapse go before it is acknowledged? No plan can be put in place to recover the situation until an admission is made that the fraudulent scheme of fractional reserve banking doesn't work.

Alternatives to the FRB system exist but all of them mean no profits for banks or the majority of the financial system. You can tell how much support thats going to get before the collapse is nearly complete - none. Mr Peston would be out of a job hence the reason for his silence on the subject.

Remember some time ago when lots of people queued up to take their money out of Northern Rock.

Next week there will be losts more queuing up to put it in.

Brown will claim a glorious success.

Quite right NorrieC et al.
This is should be a time for fundamental re-examination of this bloated and sick system,both political and financial(is there a distinction?)aspects of it.
Our country is being brought to ruin by those who have a higher allegiance.
The facts are easily discoverable,and undeniable.
Are the cynics correct to call humanity "homo ignoramus"?

Pumping more money and credit into the system only postpones the inevitable. On a national scale we have gorged ourselves on cheap credit like a drunkard at the punch bowl and sooner or later we have to face the financial hangover.

Throwing more money into the system is like refilling the punch bowl one last time, it postpones the hangover for now but just means it will be worse later.

Yes, businesses will fail. Yes, jobs will be lost. But the business that fail and the jobs that go will be the ones that a normal market would not have sustained anyway. If we let this die we can rise from the ashes stronger, just look at post-war Germany and Japan.

Re 67 NorrieC

Your wasting your time, in the same way who anybody who pointed out this lot was coming wasted their time (and some very prominent people have), or if you say what is going on, or what processes are in motion, or how the manipulation is in play - most people prefer not to know -even those who will pay, that is the clever thing about the system. I knew a staunch Labour supporter who said he was voting Conservative in the early nineties and I asked him why as the Conservatives planned to implement policy that would cost him his job but Labour probably wouldnt do that, and he said - I want interest rates to stay where they are, I'll worry about my job next year, if interest rates go up I lose my house. If that is an example of the level of strategic thinking about not a lot will change will it.

Bit simplistic, but perhaps credit insurance should be outlawed (for banks). If banks could not insure the loans they make, they would have to make certain they fully understood the risks associated with the loan b4 giving acceptance.

And as an aside:

Is Hank Paulson related to John Paulson??

I suppose the Bank of China, whatever it is called, has a pretty good grip on the financial processes in that country, and a pretty good idea of what to do in the best interests of the Chinese population.
I think that the UK would do well to get itself a government-owned 'Bank of Britain' run by a bunch of competent toughs under close public scrutiny and tight government supervision.
It could be started by taking over a half-decent outfit like Lloyds TSB, poaching all the talent it needs, and acquiring any assetts worth having from the remaining banks at the lowest possible cost, leaving them and their remaining shareholders and managers and staff to do the best they can with the remainder.
With public money to back it it could offer interest rates to savers and others appropriate to a risk-free investment and sufficient to raise some the capital necessary for its operations. It could offer loans to borrowers at rates and terms appropriate to their capacity to repay.
Failing institutions could choose whether to shut down or offer themselves for sale to this bank to obtain whatever residual value they might have.
As an agent of public government this bank could sensibly balance the legitimate interests of depositors and borrowers and the effects of inflation and currency devaluations and freeze dangerous speculation and extortion out of the economy, allowing their practitioners to go to the wall.
Having cut our cloth according to our national means we could eventually divide this bank up into competitive pieces and float them as public companies to start again with a cleaner slate under new, tighter regulation and management.
I think this is a better way of refinancing and stabilizing the system than throwing our imaginary Trillions at the existing problem banks.

benagyerek (#20), thank you for a number of enlightening posts since I started reading the comments on this blog last week. You recommend Soros in the FT today, which looks pretty good to me. I've also been struck by the comments of Luigi Zingales in the same rag yesterday, especially this on what you might call the Silence of the Experts.


"As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture. But if it is so simple, why no expert has mentioned it?

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in Capitol Hill; while the financial industry is well represented at all the levels. It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in."


I think that the fractional reserve critics have a point (they normally do) but so does morebalanceplease in the previous thread: this is the system we have to live with right now. In which case, we need experts as honest as Zingales (and, hopefully, Soros).

As much more of an expert than me, do you agree?

re 71 glanafon,

I agree with you almost 100%. Almost.

This is a David and Goliath fight of immense proportions. The chances of 'winning' are infintessimally small. But.... I'm an engineer to trade. I see a broken machine in front of me. I'm pretty sure I understand enough of it to know why its broken. I think I know the beginnings of how to get it fixed. I couldn't fix it myself but I think I could recognise someone else that has the ability and could be trusted to fix it. The UK needs its own version of Ron Paul.

Denial and apathy is the greatest enemy. The fact that the traditional media are complicit in the scam makes it all the harder to change. The shining beacon in all of this is the medium you are currently viewing, the internet. I read many posts on here and elsewhere from other like minded people. Of the previous attempts to beat the money changers in past history the one big difference this time is the ability of lots of people able to communicate their ideas almost instantaneously. At no point since the inception of the Bank of England in 1694 and subsequently the Federal Reserve in 1913 have we had such an opportunity to rid the world of this fraud. Whilst the current contraction of the money supply is being engineered it will cause great pain just as it did in the 1930's. When the public are feeling pain at least they won't be asleep in front of Eastenders or Big Brother. Thats the opportunity. It needs to be seized while it lasts.

I totally understand that this view can be looked upon as futile because of its slim chance of success. However, compare that to the 3m people who try the lottery every week with a 14m:1 chance of winning. I'm no activist but I'd like to give it a try if thats OK because there's rather a lot at stake.

Is Robert Peston a safe pair of hands?

As a journalist I suppose he is to be commended for being first with the news.

However, his breathless, alarmist and over-excitable reporting of Northern Rock caused a run on that bank. The first in 140 years and the taxpayer has had to pick up the bill, a triumph for socialism and nationalisation circa 1945.

He continues to mock efforts to stabilise the financial system upon which we all ultimately depend. Of Warren Buffet's puchase of $5 billion of Goldman Sachs stock, Peston writes, "Don't make me laugh".

His undermining of confidence in financial institutions and a stalled housing market triggered by his Northern Rock report and many subsequent reports and acerbic comments continues.

I look forward to reading Peston being constructive and positive for a change or is he the harbinger of a new age of socialist control of the banking system and society?

rdrake98 @ 74

a mandatory debt for equity swap has also been suggested by willem buiter (a uk-based economist).

just to be clear, we are talking about existing long-term creditors of the banks (people who have bought that banks' bonds or mezzanine debt) having some or all of their debt mandatorily converted into equity. this would significantly deleverage the banks' balance sheet by increasing the capitalisation (book equity) of the banks, thereby avoiding the need for them to dispose of risky assets.

personally, i see a number of problems with this proposal:

problem 1: if the government proposed doing this, it would take some time to implement. in the meantime banks would completely lose the ability to borrow, as nobody would want to make loans that will be turned into worthless equity

problem 2: who are the lenders that you forcibly convert? deposit takers? presumably not, unless you want to start a run on the bank. the fed/boe, which are the biggest lenders to some of these institutions in the current crisis? obviously not. presumably we are only talking about longer term loans (i.e. not short-term interbank loans), but where do you draw the line? 12 month maturity? this could be divisive

problem 3: the effect on individual banks will be very assymmetric, as it will depend on their existing capital structure, e.g. % of deposits, and more critically, the share of long-term vs short-term financing. the problem is that the banks that are really in trouble are the ones that have been relying on too much short-term financing, and are now most reliant on the fed/boe providing massive overnight loans. a mandatory debt-for-equity swap would therefore penalise most those banks that have sensible long-term financing, and least those banks that are on the monetary authorities' liquidity drip.

I can’t believe what a privileged position banks hold. They get themselves into trouble and hold their hand up – and guess what .... the government fall over themselves to pump bucket loads of taxpayers cash in.
Whilst any other privately owned business is unable to get a bean out of a bank. Business’s will fail and unemployment numbers will get out of control. I own a small £5m turnover business with plenty of adequate security and can’t borrow a penny !. Wish my company name ended in “Bank” – then I would get all of the cash I need.

Andy, 1:06pm. I agree with everything you say, but when you say 'the French' what you're really saying is 'the people of France'.

Our (English) problem is we don't want to do the right thing when deep down inside we know we should. We're fixated with our celebrity-dependent, something-for-nothing, get-rich-quick, buy-now-pay-later, London-centric society.

When the 'herd' decide to rush after a quick property profit, you're almost dragged along with them, or risk the chance of getting left behind.

We're all to blame. We were all free to chose whether to accept the mortgage for five (or six) times salary, whether to pay 20% more for a house than we would have done a year before.

We need to grow up, accept a bit of self control and self determination, be true to ourselves. Only then will we be able to live a more civilised lifestyle.

22. At 1:31pm on 25 Sep 2008, benagyerek wrote:
straightalk @ 9

you miss the point. yes some assets are worthless / impaired. but most assets are not currently.

If you read my comment, I did not suggest ALL the banks' assets are worthless or impaired and I agree that the banks are desparate to deleverage. My comments were really an expression of frustration at the way in which most banks involved in this situation have appeared unwilling to be transparent to the public about their balance sheets. Part of this may well be due to the problem they simply do not know the answer, in which case I should say they have exhibited a remarkable degree of irresponsiblity, which appears to be a view held by many members of the public in both the UK and US.

First post here (hence the unassuming nickname) so please go easy.....

I'm not a banker and my very limited knowledge come from searching the interweb.

My understanding of the whole debacle is that whilst it was triggered by the defaults on sub-prime debt, more pertinent would be the speculative trading in the credit derivatives and other such financial instruments.

Is it not these that have effectively caused the "how much shall we write down" scenarios?

Surely the original loan is one somebody's balance sheet somewhere as an asset with some tangible value.

However the value of these speculative financial instruments surely changes very quickly (i.e. intra day at the moment) with the onset of credit events meaning no one has a clue what their own exposure is never mind anyone elses.

Unfortunately the banking system is entwined with everything and everyone.

Take Fractional Reserve Banking - if we were to move away from that then money lent out must equal money held in deposits.

That must constrict commercial growth, and furthermore, would that mean that say 6/7 of the current homeowners would not be able to borrow money for a home (i.e. mortgage) as the deposits couldn't support it ?

We could let the banks fail (and I have some sympathy with that view), however:

a)will this not cause a domino effect as the banks are effectively exposed to each other - one or two fail and then there's more toxic debt for the remaining banks?

b) how much exposure do pension funds etc. have to the banks? We could see huge pension funds wiped out very quickly.

We could take the Paulson view and basically underwrite the existing toxic debt to free up the market.

a) Sounds a bit of a winner from the bank's perspective, but there must be some heavy regulation change or change in morality amongst the lenders (...fat chance) to correctly assess credit risk amd not to leverage this credit with dozens of financial instruments (particularly those off balance sheet)

b) From a taxpayers point of view, how is this debt guaranteed? If it's all toxic stuff then what will we get back? 50p in the pound?

We could take the Soros view (which I like best) in injecting equity rather than taking debt. It sounds more like a win-win for taxpayer and bank alike.

However what that does for pension funds and the like, not 100% sure, but surely a dilution of their funds, and the most important thing with this is that the banks must not be allowed to recklessly (sp?) leverage the new equity to dizzy heights again.

...late night ramblings...

Is everyone here missing the obvious.Why are homeowners defaulting on their loans?

Because they do not have suitable jobs. Instead of the government buying 700 billion worth of houses (and do what with those houses after?) why not invest that money in hospitals, factories, infra-structure (eg power stations, rail, bridges, water treatment facilities) - and then employ those jobless people?

That investment would go much further than simply bailing out the banks.

This comment was removed because the moderators found it broke the house rules. Explain.

It seems that there are so many experts! Where were you all when Wall Street was busily selling off its worthless bits of paper?

Anyone who knows anything about the way Americans operate in business would have left well alone. The principle tenets of American business procedure are 1/ "OPM.or OTHER PEOPLES MONEY and 2/ "CYA" COVER YOUR ASS! Their words not mine!

Add that to the fact that the late Paul Erdman ,an American economist and writer(also jailed by the Swiss for illegal banking practices) stated that the net worth of the USA was actually 5% of the quoted figure .
Apparently this was due inter alia, to the method by which American banks valued their assets. Since creative accountancy seems to have really come along since he made this claim,around 1980, Enron,springs to mind,only heaven knows the reality.

Barclays must be mad to buy a part of Lehmans,or is their rationale, that they had got off pretty lightly so they should have another go!! Bet you that its their American management that made the deal!!

benagyerek #77

Thank you. I learn more again and think I see why you prefer the Soros approach.

However (and there's a risk you won't see this here but I'll say it anyway) my question was not just about Zingales' specific proposal but his more general point about the experts being captive to special interests and the dangers for our freedom that may currently represent.

Although it may be naive to advocate full reserve banking may it not also be naive to ignore the anger many people feel about what often feels akin to blackmail in this kind of situation. "Oh sorry, all our huge past profits have been paid as dividends, and we now have this $700 billion hole in the system which unless you the tax-payer fill you the depositor may lose confidence in the system, and we all know the dark place where that leads, where you the suckers won't have a house or job or anything ..."

I resonated with Zingales because I sense it's true that many experts shy away for their own safety from any measure that may be painful for bankers (rather than banks).

However, your point about asymmetry and unfairness seems a powerful one.

I pray for honesty, courage and inspiration to be given to all considering these things, even those senators and congressmen most desperate for votes in upcoming elections.