The day the bill arrived

Any one of these events a year ago would have been headline news for a week!

We do live in interesting times!

So could this be the nadir?

It was clear once the voter friendly measures had been put into Paulson's bail out that it was going to be a bitter pill for the banks to swallow, hence the drop in share prices today (which have mostly been lead by financials).

But now we've seen the conclusion to sagas of the three latest names to be bandied about over the last few weeks as the next failures and will soon start to see some money from the US hit the system (albeit with strings attached).

There's a saying about the benefit of buying when everyone else is at their most desperate to sell. My (admittedly relatively uneducated) guess is that yes this is probably the worst day of the crisis so far but in a few months time we might just look back at today as the low and turning point.

Assuming we don't see any more huge shocks in the next few days which is certainly a big assumption.

Robert

Can you please explain to your readers that for a bank a deposit is a liability and a mortgage loan is an asset for them.

This basic accounting principle seems to be lost on most of them.

Small and medium sized companies have been laying off staff in increasing numbers over the last few months and it seems this will increase further in the coming months.
Companies that didnt do so are now finding funds running out and one can only forsee many companies going down, resulting in massive job losses to follow

The fall in tax and NI revenues coupled with the increase in benefits for those out of work will be reap even more misery on the Country.
Meanwhile this inept Government keeps spending, employing more and more consultants and advisors whilst pouring billions (ours) into failed banks.
I cannot see anything other than a long hard time in front of us.
The experts continue to claim they didnt see it coming, including Prudence himself. Anyone with an ounce of common sense could see the bubble building. All caused by borrow and spend and spend, spend again.

RBS is the next name on the list, but given the lesson of B+B I reckon that the banks may actually get together and do something about them on quiet, if indeed there is a problem.

In the immortal words of someone, "we're all doomed"

The August lending figures announced today make for very interesting reading.

Why should we be surprised that no one wanted a mortgage in August as they waited for Alistair darling to make up his mind re stamp duty.

Expect more problems this week and every week for the foseeable future.

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

RE 3:

So that means that depositors should immediately withdraw their deposits to reduce the banks' liabilities?!

Don't think so!

#2

Erm... no. You miss the most fundamental point of all - that most people do not have the resources to buy without borrowing, which they cannot. People do not sell on the basis of fear of owning the asset. People sell out of fear of needing cash instead of the asset at a time when the price is even less favourable. This is nowhere near the nadir of this particular recession. This is the brink. From here-on in, it is a desparate race for the bottom, until prices are actually low enough for people to be able to risk their own money.

Mark my words, the lady is not for turning just yet.

#1,

Whats interesting about it? We are in deep trouble.

Peston, pass me the razor blades.

The mind boggles at how much of these loans have been made against leverage rather than real value of assets. But then again what is real value any more?
I still like to think of them as phantom assets for no one seems to know what really exists and what doesn't.
In the meantime both taxpayers and banks continue to pour money into the dark abyss hoping there is something tangible at the bottom.
What will happen to the value of our currency in the meantime can only be left to the imagination.

next victims:
- ambac
- dexia
- the us dollar

Passing more pain onto the banks unders these condidtions was bound to cause their shares to crash and put them under more pressure. How daft was that, Darling?

Lloyds must now be thinking about pulling back from HBOS. Is that possible?

Is anyone else wondering how safe the last four banks are and whether or not we will all end up in HSBC?

Isn't it about time the Treasury put a halt to this by g'teeing the top 4+ or is this not possible?

Robert - could you do a recap of who owns what now in the financial space. Also, who has gone too? The big names are obvious but it would be helpful to see all the names in one place. kthxbai.

Some list Robert. Heard the other day one reporter saying how B and B was a victim of troubled times. Oh dear how sad for them.

#7

Despite what RICS would have you believe, I really doubt that 1% stamp duty affects the market that much. I also doubt the that dissapearance of 100% mortgages had a huge direct affect on it.

The reason no one is buying is obvious: who would buy at this point in a obviously plummeting market? We're a way off the bottom yet. If the last cycle is anything to go by we'll reach that when the average price is back down to £110,000 or so. And I suspect that will happen sooner than most people think.

Robert - unlike you to make things sound better than they are, but you forgot Glitner and Hypo Real Estate on you list of today's banking failures.

The bill arrived in the form of the laughing policeman ,informing us that what we call society is now an open debtors prison ,with no means of paying up to get out .

I do wish someone would explain to your audience that any loan is only an asset if someone is repaying it. Once there is no repayment it is a liability. If the asset the loan is secured against is falling in value it is a double liability.

Sharpen your pencil Mr. Peston the day is not over yet. Another one may go soon. It is a deck of cards.

A Newmarket bookmaker can run his business better than GovUK. He can balance his book.

With Brown and Darling in charge it is no wonder we have no credit-worthiness.

regards

...'Those CDS prices tell you that Austria, Belgium, Denmark, Finland, France, Germany, Sweden, and the Netherlands are all perceived to be more credit-worthy - to be in a better position to service their national debt - than either the US or the UK.'

As a US citizen, I will not speak about UK politics or policy--not my place to do so.

But as a US citizen, I will say that Mr. Peston's statement quoted here is due to the fact that our government--executive, legislative, and judicial--is a ship of fools adrift in a sea of nonsense.

I oppose this bailout with all my heart, because it is immoral to reward fraud with borrowed money for which the taxpayer is on the hook.

The only way out of this is a does of out of control inflation. Not pain free, not everybody's cup of team, but its the best way to erode the mess of debt we're in.

Britain best placed to ride out the economic storm? Ridiculous assertion that has come from increasingly ridiculous looking men.

Did anyone ever believe the claim that we were the 3rd biggest economy prior to the crunch?

I for one didn't because the economy was built on debt.

Yet even now its spend, spend, spend by the government.

The question now is how long before we need to go to go cap in hand to the IMF?

Robert:

Your list of bad news is missing one big item - the news today of a 98 percent decline, year on year, in new mortgage funds issued in August. The mortgage business has either collapsed or seized up, whichever you choose to call it. The housing market will do the same.

Those other countries being rated more highly does not surprise me one bit. They have more sound financial principles.

We have been living in a party of illusory wealth based on a borrowing binge and asset sales. This is wake-up time; the party is over.

#10

Sorry, slight misunderstanding I think.

I was talking about the possibility of share prices bottoming out right about now, I think you thought I was talking about house prices which clearly have a way to go yet.

And I'm basing that on (maybe) the worst news now being out of the way and the worst expectations being priced in but maybe I'm just being a little too optimistic.

As Robert Says its 'pay day'. All things have to be paid for and we are going to pay for the last few years’ excess. We are not doomed but we have to consume less and save more which is bad for economic growth...........but is that a bad thing? Lets debate that now we have the chance to build a new economic model.

Lets not be too downhearted, this could be a positive lesson; this is the most environmentally positive news we have had in a decade. We must stop over consuming so lets take the hint and look forward in a different way.

This financial 'Armageddon' or payback time is similar to what we are going to shortly face with our planet - take note and lets fix that now as well.

Think positively everyone - we are creative people lets learn and move forward responsibly.

@9

Thats not what I am advocating but that is essentially the problem.
The banks have there assets tied up in mortgage loans, That gives them a liquidity problem.
If all depositors were to request their money back the bank couldn't pay its liabilities.
Hence the reason why now they have swapped some of those mortgage assets with the Bank of England for cash they are not willing to tie that cash up with the risk of issuing another mortgage asset or lend the money to another institution.

I thought that the FSA had banned the 'spivs and specs from short-selling?

Why then is the market dropping like a stone??

Oh, I forget the real money managers are getting rid of their toxic shares just as quickly as they can. (Which was always the reason the share prices were falling.)

What next? A ban on share sales? Seems like a logical step to me.

Interesting - I had a call from my bank earlier to tell me about a great new savings product and whether I wanted to take them up on it......


Desperate for deposits or merely the usual marketing?

First time it's ever happened, and no I'm not telling who it was!

"Banks are as worried as they've ever been about the credit-worthiness of their peers. Trust and confidence are almost extinct qualities."

Lets rephrase that "Consumers are as worried as they've ever been about the credit-worthiness of their Banks. Trust and confidence .........."

Banks and the stock market ensured my endowment was not on target to repay our mortgage. (60% shortfall).

Stockmarkets investments are for the long term so they say. Regarding our pensions, we are nearly at the end of "our long term."
Retirement is just 10 years away.

Banks aren't lending. Last time this happened my partners working week was halved. It still is. The company is hanging on by the skin of its teeth.

Banks aren't lending - rumours abound Banks want a u.s. bailout. Are they all insolvent?

Banks aren't doing anything to help themselves, they expect governments and consumers to do that.

Banks aren't lending. Are Banks indulging in a turf war, survival of the fittest scenario? Not in fact saving other Banks but asset stripping? Superbank creation, too big to fail?

Pity. The drive for profit got us into this mess. The drive for profit and survival of the fittest will have the last superbanks standing over the rubble of an economy they helped kill.

I cannot put into words how angry I am.

golfball1000

10 or so years ago, UK seemed a fairly quiet place where I live in Birmingham. Over the years it's got busier and overcrowded. Perhaps a decline in economic fortune is a positive. All the immigrants will go home.

Initially I want to congratulate Robert Peston, he is doing an excellent job. His family can hardly be seeing him of late- so it cannot be easy. Secondly might I suggest that in future self cert mortgagees declare their income in the knowledge that the information will be forwarded to the tax office-or is it not that income is being overstated- and that subsequently mortgages cannot be paid that is, at least in part responsible for the problems.

>>
brownandout wrote:
In the immortal words of someone, "we're all doomed"
>>

I find the song 'MacArthur Park', memorably sung by Richard Harris, apt and strangely comforting in these Gotterdamerung days:

MacArthur park is melting in the dark
All the sweet green icing flowing down.
Someone left the cake out in the rain.
I don't think that I can take it
'cos it took so long to bake it
And I'll never have the recipe again
O-o-h N-o-o!!

So what does all this mean for the beleagured Building Companies ?

In fact the complete seizure in the Housing Market can't continue much longer ?

Or will we see them go the same way as B and B?

Bosses saying all is well, then days later, collapse!

I still ask will Mr Pym keep his job after claiming on the 25th that all was well?

Could Lloyds theoretically still walk away from HBOS? I assume it would instantly generate a cataclysm in the markets and neccessitate Messrs Brown and Darling scrabbling around in their pockets for more money whilst still insisting that we 'are well placed...'

Could the govt afford to bail out someone the size of HBOS?

Will the govt be able to sweeten the deal enough to keep Lloyds on side?

What would be the wider picture for UK banks and RBS in particular?

How can anyone hope to conduct a business in this atmosphere of deceit and fear?

In fact where were the Non Executive Directors of these firms when all the shenanigans was going on ?

Who can the Private Shareholders trust ?

Is there anyone ?

Never mind, there was a blast from the past on today, a Halifax ad, jingle n all - Just pop in and see us and you can relax.

Wrt to number 2 and 10 - I agree with number 2, there is a lot of cash about and people are wondering what to do with it. At some stage somebody will decide that western civilisation isn't going to end tomorrow, the sun will rise and at some stage things will recover - at that point the stock market (very undervalued) will rise dramatically.

It's better to be there 3 months early than 1 day late.....

I was speaking to an acquaintance of mine who has been saving in a series of Private Pensions.

Her first Pension folded (Equitable Life), and her second Pension scheme wrote to her updating her on her likely benefits, and she said to me it was a third less than her original estimate!

Running her own business means she doesn't have to retire, but she wanted to in the next five years or so.

No chance now.

In fact she said to me she would have been better off just paying the money into a Deposit Account (she really meant that).

Enough to make one dread the future.

But hey, being English perhaps I should just make more Potato jokes!

The capitalist system has collapsed.

Any financial institution (including Banks) that have any 'asset' that consists in any way of mortgages has worthless assets - that is what the capitalist free market system is saying. It may be extremely silly, but that is what the free-market is saying.

So that trade can resume all dubious mortagages are being nationalised in the US, the UK and Europe - That is the cataclysm that is within the 100 pages of Poulson's bill.

The two question that arise now are:

1. How the state manages the mortgages it now owns?

2. As all savings and deposits are in effect state guaranteed what regulation should be in place over the deposit takers?

Oh, and some damn silly commentators still think a manipulation of the interest rates downwards will make a difference - they are wrong. (Any reduction will be wrong, in fact given the state of inflation rates should rise!)

@20

It doesnt become a double liability if the housing market falls. What it becomes is an overvalued asset.

The problem in the system is that because the assets have been overvalued the banks are keeping any liquidity to themselves.

Love them or hate them Bush and Paulson have this correct in that the banks themselves have got themselves in a tizzy where they dont trust each other to lend to each other.
What both they(the USA) and us (Brown and darling) have done wrong is that they didnt force these banks to audit all there mortgage assets and write them down properly in the first place. They missed the lesson of Japan circa 2002

We keep hearing all the bad news about banks, are there any who you would recommend as having a solid foundation to put money into......

Are all the Building Societies on rocky ground as well ???

Where should depositors look for solid advice,because all we are hearing is where we shouldn't risk money .

So once again it is back to the old question of
'Who is the Patsy ?'

For £612 million, Santander have got access to £20 billion of depositors cash.
That works out at a one-off 3% payment for access to £20 billion.

I suppose that quite a few UK banks would like to get £20 billion at that price of 3% even as an annual payment, never mind as a one-off payment.

Chuck in the fact that Santander also get 197 branches and 2.7 million depositors; and also consider that the UK Taxpayer picks up all the Debt, then it all starts to look like Darling and Brown have been falling over themselves to give Santander the 'real-cash' jewels.

And Santander is operating mainly in the Spanish Building and Mortgage Market which evidently is even worse off than the UK mortgage market.
So how secure does that make it ?

No doubt the UK depositors £20 billion will come in handy for Santander if it needs to prop up a few Spanish mortgage Defaults.

So the British Taxpayer gets well and truly knobbled with yet another load of Brown and Darling 'no-more bust, economy management' tripe, whilst they themselves off-load the real money to Santander and leave the UK Taxpayer with yet more debts.

ergo...The UK Taxpayer is the Patsy

An absolute disgrace from our Dumb Duo

Post 41 was meant to refer to Post 20 not sure if I did that

The whole financial equation is worked out arround bankers perception of their required bonuses [the goal standard within the egonomic system ']

Or to put it another way all bets [cds]are on the bankerrs bonus index going up


Theirfore if bankers bonuses are cut the system colapses and we all lose [what we do not really have]

If we wish to continue apearing wealthier than we are ,bluffing the sovereign wealth funds out of their assets ,we shall have to continue paying bankerrs more than they are worth

A small price to pay to keep the ponzi on its last legs ,until mathematicians formulate how to join the small end of the pyramid to the big end


Its all about maintaining cyber wealth delusions of grandeur

Millionaire status is shared by both the debt holder and the credit card holder

#25

No, I understood. You missed one huge point, and that is that share price is not dictated by what the market thinks the shares are worth, but by who is selling, and how may are being sold, i.e. how much can traders fleece the sellers for. Far and away the biggest impact on share price is whether or not the pension funds have to bail out. Any true collapse (rather than the current price corrections) will happen once they have to sell.

Post 7 and 17, I hope you are right with average price of a property 110,000, that would certainly make a lot of first time buyers happy, myself included.
return of FTB in my opnion is the only way the market can move forward.

26:

Great points. I addressed some of these issues on Robert's previous blog.

Which way we go from here depends on an issue that no one seems to be discussing yet - the very different nature of our society from here on.

Very many assumptions have now been blown away. Houses as investment. Mortgages. Trusting banks. Trusting regulators. Pensions. Gradually getting a bit better off each year. All exposed as either history or illusion.

My view is that our economy has been weakening for years, but we have lived an illusion of wealth paid for by debt, and by selling off assets. Despite what some economists say, consumption isn't wealth. The main reasons for economic underperformance have been easy credit, excessive bureaucracy and interference, plus short term thinking.

Initially, we are likely to lapse into the national habit of blame-shifting. Look at who has been blamed over the years. Government. Europe. Benefit claimants. Immigrants. Foreigners. And so on. Now, bankers. Anyone but ourselves, in fact.

Instead we should see this as an opportunity to rethink our values. Sound finance, very constrained borrowing, encouragement of saving, greater emphasis on non-material values, importance of manufacturing industry, trying to break away from material greed if we can. Reduce bureaucracy, encourage constructive (rather than speculative) enterprise. This is a wake up call - do we respond, or lapse into the blame culture?

I have been reading the draft of the bill for the bail-out, that was published by CNN this morning, and I am worried by the following section that seems to give Mr. Paulson carte blanche to let banks cook their books!
What does anyone else think of this:

"
8 SEC. 132. AUTHORITY TO SUSPEND MARK-TO-MARKET AC
9 COUNTING.
10 (a) AUTHORITY.?The Securities and Exchange Com
11 mission shall have the authority under the securities laws
12 (as such term is defined in section 3(a)(47) of the Securi
13 ties Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to sus
14 pend, by rule, regulation, or order, the application of
15 Statement Number 157 of the Financial Accounting
16 Standards Board for any issuer (as such term is defined
17 in section 3(a)(8) of such Act) or with respect to any class
18 or category of transaction if the Commission determines
19 that is necessary or appropriate in the public interest and
20 is consistent with the protection of investors.
21 (b) SAVINGS PROVISION.?Nothing in subsection (a)
22 shall be construed to restrict or limit any authority of the
23 Securities and Exchange Commission under securities
24 laws as in effect on the date of enactment of this Act."

source: O:\AYO\AYO08C04.xml
[DISCUSSION DRAFT]
110TH CONGRESS
2D SESSION H. R.

Why don't the US and UK governments just suspend the trading in financials for two weeks, or even a month?

It's probably going to come to that in two week's time away, so why not get it over with now?

We are all floundering- none of us can possibly know where and when it will end. To talk of one of the big 4 banks as next on the list is crazy- they are all too big to let go and they have strong balance sheets by any normal measure. However we are in crazy times.

What the US is doing will work as is what UK Gov are doing but what is the hot money in the City doing to try and make a buck? Perhaps they want to destabilise the West? Bank shares are not good news as they will not be able to pay good dividends and I suspect their profits will be lacklustre for some time.

The system is broken - we all knew it but were happy to take the money. Now we have to get back to building real businesses and make the capital markets work for wealth creation for businesses and society not for those who deal in bits of paper.

Once we are through this crazy spell- we really do need to review market capitalism from top to bottom. Markets are still better than intervention but they must be free markets not ones that are manipulated by governments, sovereign funds and cash that sloshes around the world trying to make a buck on a turn. I suspect the first step is to create a new baseline currency- dollar is a dead duck and the Euro not strong enough yet so I think a new mechanism is warranted.

Back to panic and worry!!

On the affordablity of homes:

I heard on the Radio 4 Today programme today about a 36 year old full time laboratory employee of the NHS who could only afford a rented room, not even a rented flat. The cheapest homes in her area are 24 times her income. This is social insanity.

We MUST engineer circumstances whereby people on the average income can afford a family home - if we do not then only the most dire of results will occur. Another few years of this and there will simply be no blue or white collar familys - no blue or white collar children of two parent families - and no society!

(I know that Mrs Thatcher said society did not exist but for myself I prefer not to live in her choice of a human jungle.)

@43

By taking on Bradford and Bingleys depositors Santander have taken on 20B of liability not 20B of cash
The asset that Santander got to sweeten the deal was Bradford and Bingleys buildings

Anyone else finding that certain messages cannot be posted?

#43

Surely Santander hasn't got 20bn cash out of this? If B+B had 20bn knocking about they wouldn't have been in that difficulty.

Santander have taken on the liabilites for the 20bn to improve their share of the retail market (ie branches and depositors) surely not the cash itself.

Or have I really missed something

50:

Good idea to suspend trading. They won't do it, though. They'll cite 'confidence', but actually it is slavish devotion to the market ideal.

52:

So true. In rural areas of England, average house prices are GBP 230,000, average incomes less than GBP 18,000. In some areas the multiple is even worse. Yet those of us who campaign for affordable housing are told "no, people buying second homes are good for the local economy"!

Where I live, jobs are mostly retail and leisure, low paid stuff. Before the recent falls, even little terraced houses were over GBP 300,000. If you work here, you cannot afford to live here. This is dreadful and absurd.

I run a recruitment business and we have had our best month ever in September. We place Accountants staff and Secreterial staff in central London.
Our job order book is up our client database has expanded....I have not come across one candidate in the last 6 months who has been made redundant apart from those at Lehman's, the vast majority of whom have now informed us they have been offered employment as part of the new deal.
Our competitors are doing the same kind of business but no-one wants to know..no-one is interested in businesses that are recruiting and expanding
It annoys me that the press concentrates on bad news and job losses. These have simply not happened on the scale they suggest. I understand some people will loose their jobs but so far this has been on a much smaller scale than the "100,000 job losses" headline I saw last week.

It's insightful to see the complete misreading of what is occurring by the Tories. The idea that someone somewhere will take all the losses without Govt intervention is just wishing for a fairy godmother to turn up.

Like it or not we are all either going to pay more tax in the short term to shore up the banks. Or pay no tax and be living in cardboard city. Most of us will opt for the former.

Maybe another causalty will be Tory economic credibility this week.

This is the end of the begining and it is downhill from now on.

In some ways I am relieved as the phoney recession is now over so we can now get on with the real one.

Unemployment will now begin to seriously aggregate and it will not just be finance and building sector jobs. Retail is already badly hit and the media is starting to crumble at the edges. How high will it go is anyone's guess.

We now need demand in the economy and that has to come from tax cuts: not simple freezes as articulated by the Tories.

Mind you, the illusion is not over as when I arrived at work this morning I went into one of the offices to ask a question and they were all discussing a game with a ball that had taken place over the weekend. I remarked that whilst western capitalism is collapsing the British people can only articulate concerns about football.

The masses have their opiate so GB need not worry too much about DC.

The FSA's and SEC's ban on short sales will now exacerbate the markets fall, as no one will be allowed to control their trading books.

It just shows how dumb not only the regulator but the government actually is.

Ok they may speak well and even l;ook slick but whats the point when the fundamental solutions offered clearly show a total lack of understanding of the problem to hand.

We are now in a sublime case of lunatics running the asylum compounded by paying them over the odds to what now looks distinctly like totally screw it up.

55

I would expect Santander to now have the deposits. Thus B and B no longer have 20 billion of liabilities.

Don't forget though, the money isn't theirs - it belongs to the depositors.

What it does do is deleverage Santander nicely!

55:

Right. As I see it, depositors are the part of the banking biz that's worth having. Mortgages are the bit you don't want. Santander have been canny.

Though I wonder what the state of their domestic business is, because the Spanish economy is nearly as bad as ours and housing, apparently, is even worse.

I don't want to sound doom and gloom but the simarities to the Secondary Banking Crisis in '73-75 become greater day by day
1. A significant run up in oil prices. Check
2. War in the Middle East. Check
3. Years of large increases in property prices. Check
4. Lax lending policies. Check
5. large increases in public expenditure/debt
Check
6. Banks bailed out in Govt. Check
7. Sudden tightening of Credit. Check
8. Uncertainty after Collapse of Bretton Woods System (Proxy: Dollar's fall as reserve currency) Check.
9. City culture that encourages speculation. Check.

5 years of Stagflation followed, culminating in the short sharp shock of a deflationary monetary policy of 1980's.
If our policy makers read their history books we can avoid a protracted recession.

Before I get picked up for it I will ammend post 53

Santander do get some cash
19.1B to cover the liability of 20B
So essentially you can add 900M to the price they have paid for the branches.

The government get all the mortgage assets which are currently valued at 25B i beleive so they have picked up 25B in asset for 4.5B of government cash,
The rest of the cash given to Santander being picked up by the depositors insurance scheme which the banks themselves pay for.

@55

the full deal was Santander pay 650M for the branches
They take on the liability for 20B depositors and get 19.1B cash to do that net result they pay 900m for the customer base.
the 19.1B is 4.5B from government the rest from the depositor insurance scheme

So total cost to Santander for the buildings and customer base is 1.55B net

Great point from no. 32 re tying up claims of income for mortgage purposes with Inland Revenue returns.

I'd go further. What government protection there is for bank deposits ought to depend upon how carefully they've weighed up the risks of lending money in the first place.... perhaps involving a factor of what they've lent individually against what that individual has declared to the Inland Revenue.

And in turn the amount of guarantee for deposits in any bank ought to relate to the tax paid to the Inland Revenue on previous declared profits by the banks in question.

A friend of mine was phoned up by his bank and asked whether he had considered paying his fixed term loan off early to save on interest payments. I won't mention the bank but it is one generally regarded as being better capitalised. They must be desperate for cash.

I sold my shares.

fractional reserve banking is based on the *assumption* that all of the depositors will never ask for all their money back at once.
as history shows, this assumption is *wrong*.

therefore, the theory of fractional reserve banking is invalidated.

it thus follows that systems built on this theory will be unsustainable.

fractional reserve banking creates money out of nothing.

what we are seeing now is all that money returning from whence it came - nowhere. it is evaporating before our eyes, because it never existed in the first place.

it was not really money at all. it was a token of DEBT - banknotes are simply a promise by the bank to pay.

the difference between money and currency is that currency actually exists.

examples of currency include salt, camels, and gold.

Reference whether savings account balances are assets or liabilities... firstly look at a bank statement, and you'll see which side of the ledger the Banks have always thought of credits into an account...as an increase in their liabilities. But I am struggling to work out what Santander have actually got, because they certainly haven't got a pot with lots of twenty pound notes in it, what they have got is all the account balances of all the savers, which they, Santander, now owe to all the savers. Now, if all those savers withdrew their money, then Santander will certainly be under no illusions as to whether they have an asset or a liability. Might be fun to watch that scenario, worth an extra bag of patatas frittas, eh what. Bring it on.

This reminds me of the Sir Richard Mottram comment.
I can't repeat it as the Mods don't allow swear words but look it up at:

https://en.wikipedia.org/wiki/Richard_Mottram

I understand that Northern Rock and the toxic part of B and B will be re-named the Brown and Darling Bank, shortened to The BAD Bank.

59:

Tax cuts - yes, that has to be the right idea. Nick Clegg and Vince Cable have said this. I am not a Lib Dem, but they have been so right on the economy.

On earlier blogs I have highlighted bureaucracy - the ever-rising number of state pen-pushers in an era in which IT should be replacing them. I think we could shed half a million pen-pushers, then hand out the savings.

And we should target who we give it to. Ignore Labour's "poorest in the community" nonsense, because that just means giving more to benefit claimants. The people who really need and deserve help - and should get tax cuts - are working people on low incomes, struggling with higher costs.

Labour might do well to remember what the party's name means - work. Working people.

Working people on low incomes spend most of what they earn - it goes straight into demand for goods and services.

We have a public sector which is so big that we cannot afford it any longer. Time to change direction.

#38

Sorry I don't think the stock market is under valued at all. In fact I think totally the reverse. It's been over valued for a while now.

I think the stock market will definately go below 4500 maybe, probably below 4000 and if things get marginally worse 3500.

Why ? Un-employment, PFI, national debt, private debt, commercial debt, inflation, weak currency and the olympics. Top this off with the fact we don't make anything any more because the wise and wonderful exported all the jobs abroad. Yep we are in quite a pickle.

It's just a matter of time before the penny drops again. Except, strike the penny and think more 10 tonnes of lead.

Times are tough and getting tougher, and people are still arguing about what Santander have got out of BB.

What they have bought is a liability since they need to give the cash back to the depositors if asked. The reason they have paid money to acquire a liability is because they calculate that they wont be asked to pay it all back in the short term.

This being the case they get to use money and extract value for themselves, value that they calculate will be greater than the cost of buying the liability in the first place.

The British get to keep the assets of BB - the mortgage book. This is because no-one wants it and whilst technically an asset it is also a real loss and is value destructive to anyone that owns it

This is why the whole BB deal represents a transfer of value to Spain. Santander have only acquired a liability in the technical accounting sense of the word. In the everyday world they have access to 20 billion of cash, and will have unless and until depositors demand it back.

Not an economist, but I am interested in complex systems in transition (in the life sciences). So my perspective could be very wrong; but it looks to a humble metabolomics geek as if the growth of the money supply, thanks to the 2nd and 3rd generation financial derivatives, has vastly exceded the growth of the real world asset base over the last decade or so. If so, collapse is inevitable once the limiting (including environmental) factors to asset growth start to pinch, leading presumably to a rash of currency devaluations as vast amounts of money chases dwindling real assets. If we get to that stage, hold on to your hats. I doubt the social concensus / fabric is strong enough to deal with the ensuing pain, or that our political elders and betters will handle the resulting disruption at all well.

Cheer up, one day we'll all be dead. I cast my mind back to the time following the bursting of the DotCom bubble and the rapid reduction in US interest rates to under1%. And there they stayed for month after month and, of couse, the housing market rocketed. Alan Greenspan was lauded by almost all the commentators for saving the world. Anyone who was brave enough to criticize the policy of near-free mortgage rates was either ignored or ridiculed.

I am so angry that my fears have proved justified. Here, in the UK, Gordon Brown told us that the economic cycle had been abolished. His gargantuan public sector spending spree, coupled to hefty off balance sheet borrowing, caused hardly a ripple in the stockmarket. The prices of bank shares reached the stratosphere. He now tells us that he is the best man to steer us through the forthcoming slump. Perhaps he is - he knows where the mines are buried.

Anyone who believes the fallout from the banking crisis will be short and shallow is either ignorant or insane. If we are smarter than the leaders who allowed the crash of 1929, then why are we here? Please don't say it's different now - it never is. Those who ignore the lessons of history, are doomed repeat them. God help us all.

Judging by the quality of the posts on here, Brown and Darling must have spent far too much time taking advice from the "Great British public". The deal with Santander is as absrdly simple as it is disadvantageous to the Treasury. Santander has acquired the high street deposit taking business for 600m pounds. It is also taking on the 21bn of deposits due to BB's depositors (i.e. liabilities) and will receive 21bn from Treasury for accepting this liability.

If Brown had not presided over the catastrophic inflation in house prices over the six years 2001 to 2007 (i.e. after he started throwing billions at the public sector) then we would not all be in this mess.

And to try to blame Thatcher for this beggars belief!

#49

It appears that it has (quietly) been acknowledged that one of the causes of the crisis is the Accounting Principle of Marking to Market in respect of financial investments. Although the Subprime issue is clearly the snowball that started the avalanche, M2M has turned it into a thundering wall of Ice.

By requiring companies to value their financial investments on a M2M basis, they are required to value at each year end their assets and liabilities at the open market value on the balance sheet date, but as we all know this is currently zero. By removing M2M then they can value them at value to maturity - which (in my opinon) will more accurately reflect the value of these companies in the current situation.

On the plus side (discounting the view that many will see this as an accounting fudge) the rise in profits from such an accounting adjustment should give lots of windfall profits, the tax on which should go some way to making good the US Govt $700bn...

66:

Superb idea.

63:

Spot on. We did survive the 1970s, but not until we'd had stagflation, three-day week, power cuts, wage escalation, secondary inflation, widespread labour disputes, winter of discontent. Let's hope, as you say, that politicians remember and learn.

Look at it from a different angle - after Fortis was sorted, someone attacked Dexia in Belgium. Find that someone and you find who's playing the world economy against the wishes of the Governments. Is it possible the Western Banks have become puppets dancing to a different tune, Chinese, or Russian, or Indian, or Saudi/bin Laden Group?

The inverted Pyramid collapse is gathering pace! In 4,5 or maybe 10 years we can pick throught the rubble of financial ground zero and build again!!

Anyone still going to talk about supply and demand of houses as a 'light at the end of the tunnel/prices will soon start going up again' line of argument.
Some guy on the BBC news earlier sent an e-mail asking whether he should start trying to look for replacements for his 4(!) buy to let mortgages with B+B - the fixed rates expire in 2009!!

There is still a long way down before we reach the bottom!

The Army will be on the streets yet!

I'm a UK worker and taxpayer and I demand a 100% loan to value mortgage from the banks that I now part own, at the Bank of England base rate, as I've been having trouble even getting a mortgage - people like me are paying to clear up this whole mess, it's only fair we have something to show for it.

Personally though, I'd rather my hard earned tax quids went to the deserving rather than those who through their own stupidity, greed and sheer arrogant short-sightedness have brought this on us all and expect the rest of us to just pay up and bail them out.

Sorry, my cost of living is soaring and it's a daily struggle to make ends meet.

#53 and #55

The depositors 20 billion is now under the management of Santander.

The toxic loans and the deposits have now been separated - UK taxpayer gets the Toxics - Santander gets access to the Deposits

Santander only need to keep a small % of the 20 billion available as cash for depositor withdrawals and they can then 'invest' the rest as they see fit.

Whether you call it an asset or you call it a liability, Santander has still got themselves access to the best part of 20 billion to play around with.

Of course depositor cash in the accounts is a 'liability' to balance against those 'assets' which can be withdrawn (deposits).

But it is still 20 billion of real money, the best part of which, Santander can use how they want.

And 'investing' and 'lending' investors cash for the benefit of the Banks is what got the Banking system into the mess in the first place.

But if you say that the 20 billion of investor deposits are not there, then besides running a bad business model, B and B have frittered away the Depositor cash as well.

Brown and Darling are the Patsies at the financial poker table, playing with the Depositors and Taxpayers cash - and losing heavily

Or as the failed gambler quoted
'Send more depositor money, system nearly working well - just a few more hands and I think I will have cracked it'

Another viewpoint on the BB housing portfolio - if that lot had gone bad without intervention, local Councils would have ended up with a load more on the Housing Lists and nowhere to put them on the one hand, and a load of empty unsalable property on the other. This way, anyone who defaults simply gets put on the Rent rolls and the Council Housing stock gets rebuilt on the quiet and on the cheap, as it's at the marginal cost of the defaulter.

@41 pot-kettle

I just passed a block of flats the other day. Completed and sold. Most are up for resale.
No residents therefore no insurance.

They are being vandalised, someone may consider them assets, I dont. An asset has a value, they dont, no one will buy them.

There is lots around now, they are liabilities not assets in anybody's book.

You are indeed correct they are overvalued but they are not assets

regards

76:

Yes. The key point is surely throwing billions at the public sector. Just think how much better it would have been if half of that same money had been handed out as tax cuts to working people on low/average incomes, and the other half saved from government borrowing.

Things would have been better still if Brown had imposed sensible credit policies (cautious multiples and LTVs, limits on self-cert) and managed interest rates with reference to asset inflation rather than just CPI. These measures could have prevented over-inflation of the housing bubble.

Brown is clueless.

In the modern world every company needs a mission statement or a pharse that sums up their ethos.

The Bradford and Bingleys is, or was, we'll help you get where you want to be.

If it wasn't so sad it would be funny.

#10

The advice I got from my first stockbroker was "never invest what you can't afford to lose and never, ever borrow to invest"

A major problem that none of this inter-bank stuff is not solving is that the average Brit or American is so deep in debt that no sane bank will lend to them (and we are seeing what happens to the insane ones now). Until the net debt of the US and UK consumers has been reduced or converted into savings there will not be any consumer driven recovery.

IMHO House prices will continue to fall for a while yet and will then sit at the bottom for a long time as people will not be able to borrow the extreme amounts that they have borrowed in the last few years. I expect the stock market will suffer a similar fate.

Quick point.

The issue with fractional reserve banking to my mind isn't that it exists (I can't see a genuine working alternative for the modern world) but that the fractions held in reserve have been too low.

Hence the drive to recapitalise / deleverage and the reluctance to lend.

Once this process works it's way through and (assuming) banks maintain a higher fraction of reserves it will also reduce the money supply - slowing growth certainly but reducing inflation.

I'm no expert but my prediction would be that stagflation isn't going to happen but worst case we could find ourselves in a deflationary situation in the medium term - which is going to make those debts worse I suppose

The more I think about the govt's populist gimmick of unloading the BB liability onto the other banks, the more daft it seems.

With the principle established that the banks could be similarly penalised if BB is repeated, how on earth are businesses going to be able to borrow for normal day-to-day purposes?

Economic idiocy. Thanks Gordon.

Mr Preston, if you are trying to cheer me up you are failing by some margin. In the past a government might have looked to cause some foreign upset or tension to distract the populace. Unfortunately we have that as well. So is it stagflation, deflation or hyperflation ??

Post 74,Isoflavon,

Excellent comment,and don`t worry about being "qualified" .
This was all indeed predicted many years ago.
Please read Professor Hubbert`s prescription for survival,the steady state economy.
I defy anyone to fault his analysis,or his proposals.
https://www.hubbertpeak.com/hubbert/hubecon.htm

#57

I agree. I run a medium sized retail business and August was our best month in 3 years (by far). We're only one business, but even the government's retail figures keep showing "surprising" growth. It's not a surprise if it keeps happening!

Just because a few high street retailers are seeing some chickens coming home to roost after churning out low quality crap for years it doesn't mean that the whole economy is screwed. The technical recession we're about to enter is entirely caused by the removal of the phantom profits from the stats that the banks have been providing.

Despite the predictions of impending financial catastrophe, anecdotally this particular bust seems limited to the financial services and property sectors at the moment, along with any business that was in severe debt (ie going under anyway). If liquidity can be sorted out in a reasonable amount of time, so that small businesses do not have borrowing restricted in their unseasonal months (march/april for many), then I can't see any reason for this to spread far outside the sectors that have had such a ridiculous bubble in the last 10 years.

I predict a golden xmas for retailers! (and I predict that the economic pundits will be flabbergasted, proving Taleb's assertion that none of them really know what they're talking about).

PS

Is it really true that not just other banks have to pick up the tab for BB, but govt is making building societies contribute as well? Crazy.

#52

If you must retread that quote from Margaret Thatcher, at least get it right:

--Quote Starts
I think we have gone through a period when too many children and people have been given to understand"I have a problem, it is the Government's job to cope with it!" or"I have a problem, I will go and get a grant to cope with it!" "I am homeless, the Government must house me!" and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves and then also to help look after our neighbour and life is a reciprocal business and people have got the entitlements too much in mind without the obligations, because there is no such thing as an entitlement unless someone has first met an obligation and it is, I think, one of the tragedies in which many of the benefits we give, which were meant to reassure people that if they were sick or ill there was a safety net and there was help, that many of the benefits which were meant to help people who were unfortunate—" It is all right. We joined together and we have these insurance schemes to look after it" . That was the objective, but somehow there are some people who have been manipulating the system and so some of those help and benefits that were meant to say to people:"All right, if you cannot get a job, you shall have a basic standard of living!" but when people come and say:"But what is the point of working? I can get as much on the dole!" You say:"Look" It is not from the dole. It is your neighbour who is supplying it and if you can earn your own living then really you have a duty to do it and you will feel very much better!"
--Quote Ends

But getting it right is *so* much duller isn't it? And it doesn't allow you to score cheap points.

To me, Lady Thatcher's words seem apposite to the current situation.

https://www.margaretthatcher.org/speeches/displaydocument.asp?docid=106689

Mr. Preston...you FINALLY have it right today! No one wants to be a pessimist, but many of us Americans wanted to WARN you. WE TRIED FOR YEARS!!! We had "golden parachutes", now they're giving us "golden showers" and still calling this SELL OUT a "deal"... it's a bad deal, I believe it is a crime. The worst part about this $700 Billion beginning of this "deal" is that it will not work. I think that the blind spot that our British cousins can not or will not see is the obvious racism, greed, theft that has gone on with the our government knowing it. Citizens in America have seen how foolish and wrong this was for years. We saw the destruction coming...do you actually believe the fraud that caused this breakdown can be used to correct it? I really fear you folks are in for it too, and as a LOYALIST American, I'm sorry for it.

#52

Oh dear, "...no such thing as society". This is one of the most over-quoted-but-out-of-context attributions ever made. You really need to look at the totality of the whole quote;

"I think we've been through a period where too many people have been given to understand that if they have a problem, it's the government's job to cope with it. 'I have a problem, I'll get a grant.' 'I'm homeless, the government must house me.' They're casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It's our duty to look after ourselves and then, also to look after our neighbour. People have got the entitlements too much in mind, without the obligations. There's no such thing as entitlement, unless someone has first met an obligation."

Prime minister Margaret Thatcher, talking to Women's Own magazine, October 31 1987

This is very relevant to the current problem. If there is a 'silver-lining' to this crisis then perhaps more people will be inclined to live (and, only when necessary, to borrow), only within their means. Personal debt is not society's fault, it is in many cases down to (lack of) personal responsibility and in a small number of cases personal misfortune. That is their obligation.

That the Government has been the chief cheerleader (and also the main culprit i.e. PFI obligations, public sector pension liabilities, increased borrowings), behind the decade of credit growth and the associated personal debt is shameful.

We, as taxpayers, will be paying for this for many years, not only in higher taxes but a generally lower standard of living.

#87

Sensible man. I'm guessing that this was more than 20 years ago, if you could find yourself an ethical broker in London, rather than one that would not only advise you it was perfectly safe to borrow to invest, but also provide you the cash...

82, 53 and 55

My understanding (it's great being an armchair banker) is that when a loan goes bad, it's written off against equity.

So, in Fractional reserve banking terms,

Say B and B had 50bn of loans and 20bn of deposits, they are leveraging those deposits at 2.5 times.

However, say 10bn of loans go bad, the 10bn shortfall has to be made up from equity (i.e. the deposits) and thus they are now leveraging 4 times (40bn of loans to 10bn of equity)

Take it to it's extreme (and it doesn't need to be much of an extreme) say 20bn of loans go bad......errr there's no equity left.

And that's my understanding of what has happened (don't think it quite got to 20bn of bad loans, but you can see the pyramid effect)

This then meant B and B were no longer viable and thus invoked the FSCS (financial services compensation scheme) which guarantees depositors money.......

Only there wasn't enough money in the FSCS to cover £20bn. In fact I don't think there was very much at all in the scheme.

Thus in charge B and D on their white horses to save the day.

I believe the treasury has leant the FSCS the money to be transferred to Santander.

There is usually someone that comments about Roberts blogs as being too pesermistic...where are the optimists today?

Surely something will happen overnight and we'll have a 500 point bounce back tomorrow??????

As for house price over inflation...haven't we all forgotten what has been preached over the last 5 years. Things are different this time around. It's not a bubble. Strong fundamentals, strong demand and all that.

Anyone seen Kirtsy, Phil or Sarah Beeny recently? Lets see them come out and face the music from the unfortunates that listened to them!

On the plus side, most people have a tent and a camp bed left over from the festival season!!!

A bank deals in money so depositors are like suppliers. What they supply remains an asset even though their bill (interest and the right to take back the goods) represents a liability. So liabilities v assets is all well and good providing we understand this nuance otherwise we will be calling cash in hand a liability.