Nationalisation by stealth

Merv is going to have to take a more 'holistic' view on this and exchange BofE wonga for banks junk.

Because the taxpayer will be hurt even more if the system freezes completely.

The time for spanking is not now.

I trust that the banks as any organization going through a tough time will tighten its belt and impose zero pay rises and zero bonuses - else I'm afraid Mervyn should close that valve.

We have to see the City change its ways. Actions seek louder than words.

Those numbers are interesting. So, wholesale funds contribute £650bn or so implying that should they roll over each month that rolled over/new funds of around £50bn are required every month which is a lot. Compared to this figure, amounts raised via rights issues (c£12bn for RBS) seem rather than small and it is clear that HM Treasury taking an equity stake would not help much either. It is clearly down to confidence, the state of the economy and of course public finances - in that HMG is a competitor for funds with the banks so lowering public borrowing would boost availability of funds to banks and sterling.

£625bn is an awful lot of money: is it possible for the Bank of England to pay this out? Does it have that much money?

We are told if the Bank of England does not pay up we will all be in dire trouble. What is the impact on the taxpayer if they do pay up?

So the Bank of England would not only own half the residential property in Britain it would have to take on unsaleable commercial property depreciating cars and god only knows what else they've lent money for.
All this at the beginning of the recession.
This is the stuff of nightmares
Poor Mervyn King. How does he retain his sanity at such a proposition and how do you having to write about it?
The madness is spreading.
You may as well put Great Britain up for sale.
What on earth will we hear next?
It's starting to sound like the 'goon show'

Ever since I read this from the ceo of a company I used to work for I have tried to make sense of his "anything else" comment and now I am rapidly learning what he meant!

In an interview (The Daily Telegraph Personal view: Science is key to how we add value and create wealth 24 May 2006) chief executive of Rolls-Royce Sir John Rose said,
“There are only three ways of creating wealth. You dig it up, grow it, or convert it to add value, anything else is merely moving it about. In a high-wage economy you must focus on high converted-value activities. To achieve high converted value you need good education and differentiating skills."

Robert has presented this as if the B of E is just being awkward. Mr King knows that Britain needs the big 4 banks functioning properly. He knows that the real economy needs a functioning finance system and without it the taxpayer suffers.

So why is he reluctant to agree with the other banks? Are we only getting half a story from Robert with the B of E side not being properly explained?

Who lends the money to the British Banks? Does it come from Asia?

Isn't a 'simple' truth, that the wholesale markets need to be kick-started, albeit with less leverage, more transparency and better controls. The alternative is be prepared for even more massive consolidation, contraction of economies an deconomic growth prospects.
If you like, wholesale markets are a necessary evil. There aren't enough depositors around for banks to rely on otherwise.
The generalisations around 'toxic' assets hasn't helped any real understanding of what the system is / can be.
BW

This story just gets better and better......I can't put the book down. You just couldn't make any of this up!
There's a poster on Paul Mason's blog called 'bookhimdano' who's called this accurately. It's all about the bonds i.e. the bonds don't lie. They tell you who really is up to their necks in deep doo doo.

If the £625bn shortfall is as at end 07, isn't it more likely to reflect dried-up money markets than a surge in new lending post Aug-07?

The Governor will presumably only want to provide enough funding to meet maturing and non-replaceable interbank depos.

If so, further deleveraging is inevitable.
The Bank may or may not 'get it' - it doesn't matter either way - cheap credit is gone, and expensive credit is scarce; the only point at issue is the speed of the adjustment process.

Of course, the government may want to use 'Bradford Rock' to be a new government funding corporation (a la 1960's) to keep the property bubble afloat - there is only about another 50% to go before we revert to the mean house price trend line, so it will soon be safe to lend again...?

The following is interesting: "And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero."
- So the rot did indeed set in under Brown's watch!

I get increasingly worried about the government guaranteeing bank deposits. In the end the only way they can do this is to print some more money. OK you get your money back, but if it is only worth say 50% of today's value by the time you get it what's the point ? Better than nothing at all I suppose.

again, people are confusing symptoms with the cause of the crisis.

the inability roll over interbank loans is basically like a run on these banks by the other banks. but ask yourself this - why are they running? it is because of the fear of insolvency - i.e. that some or all of the borrower uk banks are experiencing more losses on their loan book than they have capital provided for, meaning they won't have enough money to repay their debts.

the solution imo is for the government to announce a standby capitalisation fund, and a review of all the banks' balance sheets to determine whether the government needs to recapitalise them. a fund of gbp 50 - 100 bn size should be more than sufficient (assuming a capital adequacy ratio of 8%, this would be the equivalent of guaranteeing gbp 600 - 1,200 bn worth of assets). this would restore confidence in the uk banking system and stop the outflow of funds. if it could be done in conjunction with the rest of the eu, all the better.

No6 Quoted Sir John Rose of R-R:

"There are only three ways of creating wealth. You dig it up, grow it, or convert it to add value, anything else is merely moving it about."

We seem to have a declining manufacturing base, which after this current little fracas will be even smaller, as small (and large) companies pack up or are shut down.

Our own bank has been very quiet of late, but I'd be interested to hear of any general directives by the BOE vis a vis small and medium sized companies and their loan/overdraft positions.

Peter

I am a Mervyn King fan. His reluctance to make bank managers happy is not about spanking someone for their past sins (terrible sins indeed) it is about change for the future. What most people here refuse to understand is that the main implication from all of this is that business as usual is off the menu. There simply will be no Britain based on bloated banks tomorrow and King just doesn't have any reason to try and save the banking system as it stands. It needs to slim down significantly and this does mean that some of it will simply have to disappear.

What's happend to a new economics blog? If there is one, put a big link on the front of this blog, if not, what happened to that Flanders woman? It would seem a really good time to reinvigorate this blog...

I know not relevant but you can email the answer. Thanks

US Banks propped, sold etc plus bail-out bill. If 700+billion dollars needed in US for bail-out bill and same culture imported over here then surely pro rata needed here, maybe not so much due to different circumstances but still more than will go down well with voters. Why do people think that a system with flux can be limited to the US, its already shown it can flow to Europe, and what is worse Browns economy has imported more US money than any other EU member for years from what I can see.

Could be Mervin King waiting to see just what he has to do when the US bill coming thru. Action may not be needed at all but if it is there is no point in any unless US bill implemented as no terra firma in US. No bad news is good news but unsurprising if it comes, surely. How many apple pies was it per family we might have to eat, 2000.

Good to ask for good security from banks surely, not just pick up any old wastepaper they should understand that as that is what they like, must enjoy working in a culture they understand. Send them away a couple of times to make them get really serious.

Gap between deposits and loans just another sign of imbalance, spending money domestically not generated domestically. Personally I hope Mervin King keeps the government out of it as much as possible, just gets them to rubber stamp whatever he and his team come up with.

Be interesting, that word again, to see how the UK public react if negative developments, if same anti intervention lobby as US errupts.

I am still uncomfortable about the situation when a bruiser like Paulson is agitated. Of course the Sun might shine tomorrow and everything be fine, in which case great.

The banks' want Merv to accept CAR LOANS? He'd be bonkers to accept them. They will be worse than toxic mortgages. Many car loans have been taken out on gas guzzlers etc. Cars lose their value quickly.

Do even Homer could work that out!

Errm, where is anyone supposed to find £625 billion? The BoE don't have that to give.

So essentially the British banks are on life support, soon to be terminated along with the UK economy.

Why would anyone keep their money in a British (or EU) bank? I'm off to Switzerland I think...

From Mr Peston:
"But the banks ARE RUNNING OUT OF THE GOOD STUFF(my emphasis),and now want to swap commercial property loans,loans to companies and car loans for readies from the bank of England"

And what happens when they run out of even these "assets"?

I'll just add, do the maths and you can see how much the UK economy is in trouble. We've gone from sucking in £650 billion in 7 years to now having to pay that back. We will go from 7 year boom to 20 year bust.

Super-hairy.

Re 6 weath creation

The problem is that there have been very few, if any, in government for decades who have had anything to do with wealth creation as you have described so there is virtually no understanding of the concept.

Other countries have more of a grasp. The corollary of the concept is that if you don't take care and maintain your knowhow capability you end up with a low wage economy replacing high waged jobs with low waged jobs, now where could that happen.

An excellent article by Nicholas D. Kristof about the banking crises can be found in yesterday's New York Times.
Please read:
Save the Fat Cats
https://www.nytimes.com/2008/10/02/opinion/02kristof.html

Enough said.

Somebody somewhere must have lent this money to them and have made the profits. Why should the UK tax payer keep bailing the banks out?

Perhaps they should just shut up and take their medicine.

Its simple, either you expect the people you have lent to to pay you back or if you have lent too much to idiots who have over extended them then maybe, just maybe, you deserve to go bust.

The BOE and Meryvn are the only people standing up for the future of the taxpayer and this country, while Brown would sell your children out to preserve the bankers.

So lets get this right - in addition to toxic mortgages being swapped, now the bankers are demanding that all the years of 'purple loans' adverts aimed at th.e unemployed, county court defaulters etc...starring Carol Voderman together with any other junk they have are swapped for gilts, or we all collapse from credit famine in a great depression!

What nonsense. If there is a line to be drawn in the sand its got to be this to protect the taxpayer and the national debt.

No taxpayer should close the gap between 'investors' and savers on the banks balance sheets funding thier mad 'assets' (loans) - i.e. collosal years of junk and 'asset' expansion.

The banks balance sheets will gradually contract back down to size when both sides of the balance sheet contract - i.e. Instead of Savers deposits + investors funds funding mad lending and a giant property/asset bubble, its now got to be savers deposits funding rational property values at 3 times earnings.

Meryvn is right to raise the bar now, to prevent taxpayers from eating certain junk. Something will be passed in the US in a week or so, and credit will get moving again.

The bankers here prob. see only a small window of 'systemic panic time' to demand to unload a whole lot of junk onto the taxpayer (via the BOE and Brown) before the crisis abates and the more gradual contraction in banks balance sheets starts.

Banks have billions in bondholders who can be eaten before the taxpayer has to step in. This bondholder bonfire is what occured in the swedish banking crisis before letting the taxpayer on the hook.

Why on earth would Lloyds want to take over HBOS in these circumstances??? Sounds like ALL our banks will be doomed if takeover goes ahead unless massive Government bail-out.

"But King's not keen to forgive the banks for their past sins and bail them out even more than he has been doing. He views them rather as a parent sees a mischievous child, as needing to be taught a lesson."

Do you really think that King's attitude is driven primarily by this? Is it not at least possible that he is waiting for some concrete evidence of understanding, acceptance and reform, before allowing the financial sector back near the cookie-jar from which they have been so recklessly gluttonous in recent years?

Could it in fact be that what King fears is that we will have a bail-out without meaningful reform, and that the public-sector's wealth will end up being p*ssed against the same wall as the private sector's.

How much improvement did we get from an unreformed NHS from throwing billions of pounds at it?

Perhaps Mervyn should get 'supernanny' in to put them all on the 'naughty step' and not allow them to leave until they've thought about what they've done..

#6 jimrait,
"There are only three ways of creating wealth. You dig it up, grow it, or convert it to add value," or Gorgon Brown's favourite....just print it !

Ooh, I forgot, that falls into the category of "anything else is merely moving it about." (And, gulp, you end up like Zimbabwe, full of zillionaires.) Its particularly odious because it robs the labouring classes of the purchasing power of their (inflated) pound and gives it to his cronies (PFI crooks, Commercial Banks, Defence Contractors) who receive the nice new shiny pounds first and get to spend it at the old (pre-inflated) rate. The the commercial banks 'lend' 40x (eg Northern Rock) that value to its 'customers' and charges them, say 5% interest. Except its not 5% interest on the borrowed amount, its 5 x 40 = 200% interest on the only 'real' bit of the money they ever had. Nice job if you can get it. (I, of course, would be thrown in jail for fraud if I tried it)

Inflation of the money supply is a deliberate and heinous tax perpetrated indiscriminently by stealth on the populous with the complicit silence of the media. That's you ..Robert. In case that was too subtle for you to realise.

The title of your latest "expose" and inciteful analysis had such potential -"The big flaw in the British banking system " . You nearly had me going there, you tease. (At least that is the title on the index page but a completely different one from the one above. I'm sure the Advetising Standards Agency would have something to say about that - Promising one thing and delivering another !!!). But as we've come to expect, your detailed analysis is no more than platitudes and propaganda for this failed wretch of a government.

How many 'scoops' has Alastair sent you this week? Are we to see the name Peston in the forthcoming New Years Honours list I wonder, for services above and beyond the call of duty in the obfuscation of the news?

Here's a tip - There's no need to spend hours and hours analysing the minutiae of how the banksters spend all day pushing valuless pixels around a screen. Once you understand the workings of a Fractional Reserve Banking system all becomes clear and the mystery evaporates. Go on...try it....once you understand you'll be able to get a second job to fill in all that free time you're going to have. In the near future you're going to need a second job just to pay your mortgage.

Robert

I have a bone to pick with you.

Your comments are insightful and witty. However, this argument is imbalanced.

You are in effect saying that the Bank of England (or perhaps it is your personal opiniion) values the creditworthiness of commercial loans and secured lending to businesses making up UK plc as "not of high quality".

Most banks have bad debts or impairment provisions, but these are usually no more than 1% of their total loan book as a write off each year.

Having run finance companies for decades, I really think your comments are damaging and insulting to the hard working majority of all businesses. 98% of UK companies are SME's and most of them employ less than 50 people.

Banks have lent to these organisations because they make goods and offer services here and abroad that are in demand and want to buy. Without that, how can we grow our GDP, notwithstanding the financial services industry 20% contribution to GDP in recent years.

Don't throw the baby away with the bathwater by ill thought out comments. Banks do have more good quality assets - loans to well organised and largely profitable trading and manufacturing businesses. After all Robert, these companies employ millions of tax paying staff and ... lest you forget... the tax payers pay your wages!

Don't bite the hand that feeds quite so quickly.

Let's just put this in perspective.

Good UK money is leaving the country, probably to Arabia or Asia, because UK banks have to pay back short term loans.

That money has been lent out for goods which now have a low asset value and the prospect of getting the money back is questionable.

Basically the UK has been destablised by overdosing on foriegn investment and then going cold turkey.

Getting the B of E to lend money just makes the matter worse. Good money will be exchanged for junk. At least if the banks failed then money would potentially not be leaving the country. No wonder the pounds value has been dropping.

I imgaine Mr King is pretty peed off with high street banks having a direct effect on inflation.

Does this have more to do with politics, war and religion ?

With all this alarming - I might have added alarmist - analysis, there is one question which perhaps Robert, or other contributors, might answer. It is a question that non-technical people ask a great deal.

The financial economy is in dire straits. But the 'real' economy is still there. Houses, vehicles, roads, schools, hospitals, factories, they are all still there. Nothing has been vapourised yet. This is money-market trouble; it is not physical destruction; it is not Chernobyl; it is not Nagasaki.

So, how can we rebase the financial to the 'real' economy?

A naive question, of course. But I'd appreciate a neat, understandable answer that I can give the next time that someone asks me!

Is this lack of confidence in the UK banking system on the part of savers a good reason for joining the euro to ensure our economic security?

Savers like voters vote with their feet, or is it their pockets?

Compared to a puny Bank of England struggling to preserve the value of an isolated and declining currency, the European Central Bank can act in concert and bring massive resources to bear enough to daunt and deter currency speculators and financial market predators.

Nato offers one for all, all for one military protection which has ensured the peace for over sixty years.

In times like these we need the same kind of economic security which savers do not feel is provided by the Bank of England or this government.

Seems like the banks have been given enough rope to hang us all.

".... at the end of last year, there was a £625bn gap ..... as recently as the beginning of 2001 the funding gap was zero."

Heads must roll!

As I have said previously, if the banks cannot get the funding they need, they should either be allowed to fail or go the way of Northern Rock (and now Bradford & Bingley). If this means that all UK banks are nationalised, then so be it. The US should be adopting a similar approach (nationalising banks as they fail), rather than a rather expensive $700bn bailout experiment.

It was interference in the natural economic cycle following the September 11 atacks that sowed the seeds for the current financial crisis. Further interference may offer some short term, palliative relief, but you can guarantee it will just result in even bigger problems down the road. As ever, short-termism appears to be the order of the day.

Plus ca change, plus la meme chose...

"The big vulnerability of British banks does not come from the danger that retail depositors, the likes of you and I, might shift our money around."

That is a culpable lie.

The banks balance sheet is made up of some 'real' deposits and the remainder a combination of fantasy money created out of thin air (Fractional Reserve Banking) and casino bets. The ratio of 'real' deposits to fantasy money can vary from 12:1 to 40:1. If the public acted in concert and retracted their deposits from a single bank on a particular day the Fractional Reserve Scam is exposed for all to see. (For every one pound which is removed by a depositor it must unwind £40 of its fantasy money. Thats why the collapse is so sudden.) The bank closes its doors because it does not have sufficient reserves ie deposits to give the depositors their money back. Want some proof? Northern Rock. Leveraged 40:1 on the day it was yanked. I have a vague memory of some journalist making hay that day. Can't remember his name exactly....

For such blatant misreporting you deserve to be sacked. The term Public Service Broadcaster rings more hollow now than at any time in history.

"Because if the banks were to run out of collateral they can swap for Bank of England loans, well in the current inclement weather, that would be lethal."

So what do you suggest? That Merv should change his mind and accept cr@p in exchange for more, newly printed, fiat pounds which then devalue all of the existing pounds in your pocket thus have Joe Public pick up the tab via his debased savings? This is the policy of elitist '#?%$^*s and financially illiterate clowns.

And, having asked one naive question, I would like to ask another, again about the 'real' versus the 'financial' economy. Again, a neat straightforward answer would be helpful, so I can tell people who ask me.

Businesses need credit to carry on their day-to-day activities. Government lends to banks in huge volume, but this support doesn't reach 'ordinary' businesses.

Simple question: if the middle-man (the banking system) isn't doing the job, why not cut out the middle-man and do this directly?

Well Done to Mervyn King!

Stand firm. The CEO's of Investment banks need their knuckles firmly rapped and I applaud you for taking a stand.

How does this sound for an idea? - maybe you should float it with the bank of England Rob? If a company needs more cash then everyone in that company from ED up to takes a 75% pay cut (including bonus and options) which lasts for at least 3 years until after the money borrowed is paid back, with the entire board taking a nominal £1 per year until the companies are back in shape.

Why should the taxpayer be the only element to suffer because of director bad judgement?

Stringent personal terms like this would make directors more financially aware of the pain which they have been partly responsible for.

I think it is a good idea. Rob you going to float it with the BofE?

@ 6
"is to print some more money. OK you get your money back, but if it is only worth say 50% of today's value "

The money has in effect been 'printed' by the banks which is why money has declined in 'value' by c. 10%+ pa since 1997 It's just that the State will underwrite it so it won't vanish into thin air along with assets against whose value it was created and which is now very questionable.

However it is inflationary which Mr King realises and also that a drop from 5% might trigger further weakness in Sterling, CPI up further and a real need for much higher rates to control Sterling and therefore prices.

Can Peston comment on the amount of money lent to banks by a) foreigners b) companies [which may need the cash] ?

The Treasury should offer the banks a deal:

Treasury creates a bank specific self liquidating vehicle into which the bank places illiquid securities at a price of its choosing and the Treasury buys them with T-Bonds with matching maturities. However the securities must be priced low enough to cover with a margin the cost of the Treasuries.

The bank sells the Treasuries receiving cash.
The bank and Treasury also have a deal whereby any loss in the specific vehicle is compensated by issue of bank securities convertible into equity on agreed terms until which the Treasury ranks alongside HMRC as a creditor.

"I'm off to Switzerland, I think..."

Where are you going to keep your money?

UBS?

Let's just hope like mad that the US Congress read this, then they might act sensibly! Absolutely terrifying but extremely well written - thank you Mr Peston!

We bought some HBOS shares yesterday and are currently showing a 24% profit. I bet we will not be able to realise that in the morning!

Hold on a minute. So now is not the time to spank the bankers. Well it's not the time to reward them either. Take Barclays, if they are so hard up then why is it that the first thing they did on taking over Lehmans was to promise to pay the bonuses to Lehmans bankers? Yes the very same bakers who contributed to lehmans going bust. What about Goron Bust paying for the deficit in mine and others pension funds?

Robert,

I've no problem with the financial side of your postings. I do think you should work on your actual presentation. I know that it's not meant to be so important to blogs, but you shouldn't start a paragraph with the word "But". Feel free to use over 1 sentence in the same paragraph. If it's really bugging you then use bullet points.

So, Robert, what does need to be done to fix this. Or, in your opinion, should nothing be done?

@benagyerek: I don't think many are confusing the symptoms (lack of liquidity) with the problem (doubts about the asset quality). The point is that a decade or so of Gordon Brown's (inevitably futile) search for and end to boom and bust was always bound to end in a classic bust, unless the low stable interest rates had been counterbalanced by controls over the amount of credit available. The question now is whether the (de facto) nationalisation of the banking system too high a price to pay to delay, or fudge, the correction?

Banks need to wean themselves off the aberration that is the wholesale credit market and cut back their lending to what their deposit base will support. A few did not make it, but the rest are in better shape and will be much healthier for it. Just think of it as the latest detox diet.

Mervyn King's stance is correct, that seems to be happening rather nicely. Gordon Brown's solution is to give them more juice and inflate a bigger bubble atop this one. That is all he knows.

Besides, is this not foisting a supply side solution onto a demand side problem? What if banks are bailed out, encouraged to lend, but no-one borrows? If the consumer is barely keeping up with taxes and repaying existing debt? What if the real crisis in banking is saturation?

The bank of England should accept teeth as collateral on which to lend ,its a tried and tested method of recapitalising those that wasted their pocket money on the good ship "lolly" pop

I also have have two sets of false teeth that chatter and wriggle accross the tabletop to the recording of the laughing policemen ,which should net me the equivalent of three trillion s worth of CDO's[ book value]


Finaly I have some clay left over from the creation of Adam and the remaining three tons of authenticated bones from Francis of Assisi

If Mervyn King buys the worst of the toxic waste from the city, then they in turn can finance Gordons increasing public sector borrowing requirement .This menage a trois of unrequited narcisum will keep the show on the road for some time yet

"Bank of England figures show that at the end of last year, there was a £625bn gap between the money lent by our banks and what they took in from conventional deposits"

I assume that economists measuring the money supply were including that £625 billion at the end of last year? Or were they ultra-stupid?

In which case, contraction of the wholesale funding since the credit crunch represents a clear case of contraction of the money supply.

Assuming that Mervyn King wants to manage the money supply to stabilize inflation, it is his duty to provide funds from the central bank to replace the missing wholesale funds.

If not, why did he allow the money supply to be inflated over the last few years, by allowing British Banks to use wholesale funding to make loans?

All of us who were horrified and mystified over the last few years at where the British property and credit boom was coming from: now we understand how it happened.

The question is: Why did the Great Economists, such as Mervyn King, allow it, and why do they still hold their jobs?

Buy a good mattress.

Dear Mr P and all
Thanks for all the positive?/informative comments over the last couple of very unpresedented weeks.
To the educated financial whix-kids out there could someone please tell me what to do?
I am a business owner in metal fabrication (some call me a metal-bangers boss) although very interested in every aspect of the world economy and how it effects myself and my employees)
With inflation rates inevitably going to increase significantly, what-ever the next few days brings about, how do I tell my work-force that a below inflation pay rise is prudent and for the good of the company and their jobs

We need to take some pain. The reason we are here is because of easy credit. Give the banks what they want without change will not cure the patient.

Wow! And I thought that our problems over here
were bad!

The money markets and wholesale funds are pulling out of the UK bank market as fast as they can, and the BofE loan's are taking their place. So is the taxpayer bailing out the banks, or the money markets and wholesale funds?

What would have happened if the government had only guaranteed retail deposits when nationalising Bradford and Bingley the other day, as opposed to also guaranteeing wholesale deposits, derivatives , swaps and covered bonds? It would be nice to know who these creditors are that are being bailed out with taxpayers' money.

I Just got a call from my credit card company (MBNA).
They are offering me
1) - 0% on all other credit card transfers to this account for 9 months !!
2) offer of transferring 95% of my remaining credit to my back account at 0% interrest for 9months again - for a one off 3% of balance transferred.

Do they know something we don't?

#38 friendlycard

I notice you ask the other posters rather than Robert. That's a good idea. It avoids the embarassment of him admitting he doesn't know.

I recommend you start here for the fundamentals of the fraudulent system:

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

Please watch these short videos one at a time. Don't be put off by the graphics and the cranky format (people trying to spread the truth don't have the budget of the BBC to make a costume drama production) They are highly informative. You may have to watch them several times before the enormity of the fraud sinks in. After you get your head around fantasy money you then need to think through the ways it permeates through the economy or come back here and simply ask for the next thrilling installment.

About 5 yrs ago I had lunch with a bank manager when the press were beginning to report on uk borrowing running at 1.3 trillion pounds. I asked "who is lending this money ?"he replied " the banks and building socs". i replied that could not be possible as their total assets were probably not worth ten percent of this amount . he replied " I`d never thout of that" The next few months we put our house up for sale and moved to a country where some sanity still prevailed-- FRANCE!

About 5 yrs ago I had lunch with a bank manager when the press were beginning to report on uk borrowing running at 1.3 trillion pounds. I asked "who is lending this money ?"he replied " the banks and building socs". i replied that could not be possible as their total assets were probably not worth ten percent of this amount . he replied " I`d never thought of that" The next few months we put our house up for sale and moved to a country where some sanity still prevailed-- FRANCE!

Robert,

Thank you for the excellent blog/reporting, once again.

I would not want you (or the BBC) to get carried away (.....ha, perish the thought), but making the complex simple has got to be the best definition of intelligence yet articulated.

So now we have it.... the FSA/BoE/Government (however you guys want to allocate your responsibilities..... ah, er, ok, so it was actually Gordon who was in fact the architect of this particular construction), as well as monitoring the overall level of consumer debt in the UK, should also have been monitoring the 'exposure' of UK banks to short term financing. (I had absolutely no idea that the country as a whole was exposed in this way - quite shocking)

As someone has already said somewhere in these blogs, we in fact need an increase in the MLR.
The rationale in monetary terms would be.... because the BoE now needs to reflect the increased risks in accepting less than blue chip security for lending its money. This would mean that those bankers who think that Merv still 'does not get it' will feel more pain still - well good - and may need to raise more capital - well good - and dilute existing shareholders further.

There will also then be a greater incentive for people to save, so we can get back to a better equilibrium on a national basis of savers and lenders.

OK...so if this all happens at once, it would mean the economy would be pushed further into a recession.

To prevent this happening, the government should produce a fiscal stimulus - reduce basic tax rates big time, and increase government borrowing (i.e. .....even more).

This would absorb the stress in the economy not via printing more money and creating inflation, (i.e. going back to the bad bad old days of UK plc, of just rewarding anyone who borrows an excessive amount) but create an economy which rewards savers.

I'm here hoping.... nay, praying.... that.... with Mervyn there, we damn well ain't going to inflate our way out of this one (which is what is coming to the US if they pass the bill).

Sorry, I can't find the bit where Mervyn King, the FSA and gov.uk said to any of the bank before all this happened : No, no, you shouldn't fund credit from the money markets. You should restrict lending only to the amount you take in deposits from customers.

I've looked high and low for a quote of this sort from Merv and the gang, but still can't find it. Anyone help? No?

Well, in that case what are they doing moralising in hindsight?

Come on Merv, you know you've got the wonga stashed away in that vault of yours. Cough up and let's get this over with.

I believe that house price inflation has averaged just over 3% per annum from 1945 through to the early 1990's.


Over the past ten years, it has averaged 18% per annum.

It has now dropped just 12% in a year, so you can see that there is still quite some way to go before it returns to trend.

PS. A poster on this threaad mentioned that some 98% of businesses in this country are SME's.

I have noticed during this crisis that senior American politicians have stated that 'families and small businesses' are their concern.

But not a single peep from 'our' senior politicians about the plight of SME's.

In my opinion, SME's are shat on by HMG day-in and day-out.

Comment 33 : Friendlycard

The real economy, as you call it, is not in a state of sustainable equilibrium, as many dreamers would like to think that it is. There are some major distortions and dislocations, many of which have been the result of the "real economy" reacting to the nonsenses that have been going on in the financial sector. A great amount of resource has been deployed in industries that produce goods and services for which the demand is only there courtesy of the bubble of unearned prosperity created by the financial shenanigans of recent years.

Ever since this retreat from reality began, there have been sound rational arguments cautioning against allowing it to continue - NOT because it will lead to comething awful happening in the financial sector specifically, but because the explosion of non-sustainable demand will lead to immense resource misallocation through the economy as a whole. THIS is what reasoned thinkers have been saying, but when ever has reason had any effect on the decisions of eejits enjoying a party?

Credit 101 for Bankers

In December 1863, H. McCulloch, U.S. Comptroller of the Currency and later Secretary of the Treasury, wrote to all national banks. Here are some of the paragraphs.

“Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
“Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
“If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
“Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
“The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
“Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.”

Mr. McCulloch’s wisdom is as relevant today as it was in 1863. Every credit 101 today preaches those principles. However greed acts to ignore them.

The sub-prime mortgage debacle should serve as a reminder, yet again, that deposit taking is a sacred and heavy responsibility of commercial banks and that; commercial banks must remain separate from investment, insurance, and brokerage entities. These entities are no banks and their executives are no bankers. The culture of bankers, articulated by Mr. McCulloch, is stranger to the culture of non-bankers.

The emasculation of the Glass-Steagall Act contaminated commercial banking with the free wheeling and dealing of gamblers in the pursuit of quick and big profits and millions of dollars in ill-earned bonuses.

The next U.S. administration would do well to restore Glass-Steagall and bring back sanity to managing peoples’ saving.


Elie Elhadj
Author: Experiments in Achieving Water and Food Self-Sufficiency in The Middle East

Normally BOE and other NCBs would offer repos against AAA securities with only short/medium terms. Now it might make sense to expand all the criteria to include lower rated stocks for longer terms and also more Buy/Sellbacks...in effect this would be a sell off commerical banks assets for liquidity.

Given the static securities market - this might be a reasonable option. However, would this just be a case of finding a way to hide the problem?

All measures are stopgaps until the fundamentals of credit risk are resolved. Toxic assets need to be purged whatever the cost else the plumbing will be forever bunged up.

#46 idormaine
"So, Robert, what does need to be done to fix this. Or, in your opinion, should nothing be done?"

You're wasting your time asking. Silent complicity is Roberts strong point.

"I know that it's not meant to be so important to blogs, but you shouldn't start a paragraph with the word "But". Feel free to use over 1 sentence in the same paragraph. If it's really bugging you then use bullet points."

Yes, yes, Robert, and whilst you're about it get those deckchairs rearranged like I told you. Yes, the ones below the sign that says "Titanic"

Robert Peston wrote
"Bank of England figures show that at the end of last year, there was a £625bn gap between the money lent by our banks and what they took in from conventional deposits....And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero".

My big question is why this was allowed to happen? Who was responsible for not preventing this huge influx of wholesale credit coming from abroad which has de-stabalised our banking system and caused the housing and credit bubble?

Surely the man responsible is Gordon Brown. It happened under his watch and he was responsible for setting up the regulatory system, which was clearly not fit for purpose.

Gordon Brown said at the Labour party Conference that this was not the time for a novice to take over but experience shows us all too clearly that he is not, and never has been, up to the job. We can only expect more and ever costly mistakes from him and his miserable and incompetent Govt.

The myth that Labour managed the economy in a sound and prudent way has been well and truly obliterated.

friendlycard

your two questions:

1) how does the financial crisis feed into the real economy?

the real economy comprises many different people who need to borrow. this comprises both (a) short term borrowing (credit cards, overdraft facilities, working capital facilities for companies) and (b) long term borrowing (mortgages, corporate loans, etc).

there is no doubt that there has been too much borrowing of all kinds in the last few years, and that the total amount of borrowing needs to be reduced going forwards. this will (and should) primarily affect long term borrowing, which basically finances the long term growth and structure of the economy.

unfortunately the current crisis is also hitting short term borrowing in a big way. if the crisis continues unchecked, pretty soon people in the real economy will find they cannot use their credit cards, their overdrafts will be cut back and companies will not be able to raise short term money to finance their day-to-day operations. this will happen irrespective of whether those individuals are sensible borrowers and those companies are profitable businesses.

the current crisis is basically a liquidity (cashflow) crisis. liquidity crises are very dangerous if they are allowed continue for too long. it is a bit like cutting off oxygen to the brain - after a while all the brain cells start dying. in other words, if people suddenly find themselves without access to ready cash, it forces them to sell assets (at a deep discount), lay off employees, postpone important purchases, etc etc. people are forced to make damaging decisions because they are desperate to raise much needed cash. it can push the whole economy into an unnecessary downward spiral.

2) why doesn't the government / boe lend directly to the people that need the money instead of the banks?

the government / boe are not in the business of making decisions about creditworthiness of borrowers, or rationing and pricing credit. doing that requires a lot of manpower. we can have an argument about whether central planning is preferable to financial markets (it is not), but i don't think that is the point of your question, and anyway the boe is simply not capable of this as things stand.

when the boe makes liquidity available to banks, it typically does this via a repo (in effect a collateralised loan) of gilts (government bonds). so if the borrower bank goes bust, the boe can sell the gilts (which usually have a higher value than the loan) to recover the value of the loan. the repo is also very short term, so the boe does not even need to think about the long term creditworthiness of the borrower bank. so the kind of finance that the boe provides (very short term loans collateralised by gilts or similar) is completely inappropriate for the end-borrowers that the banks deal with.

nb the problem with the boe taking lower grade assets as collateral is that it is much harder for the boe to assess their credit quality. it basically means that the boe is taking (marginally) more credit risk. when you multiply this over a very very large number, it becomes a genuine problem. all the same, i think the question for the boe is not whether these assets should be accepted or not, but how much the haircut (overcollateralisation) should be.

I just don't see the point in the taxpayer supporting all the UK banks. Surely it would be better to just back a couple of the least reckless and let the rest go to the wall, while protecting depositors.

Although unemployment would rise, and some shareholders would lose their pile, we would at least end up with some kind of independent banking system.

More importantly it would give a strong signal to bankers that reckless behaviour will not be supported.

We really are in a big big mess and we are rapidly approaching the point where the pretence that the house of cards can stay upright cannot be sustained,

from boom to bust, ive been scared to watch the news in case we have lost all our savings, and those who caused this melt down will yet again escape to do it all over again,and this government wring their hands and say we will secure your savings, rubbish, who do they think there kidding.

Robert,
Am I right with my calculations that there are 350,000,000 people in the US, and $790 billion is $1,700,000 each person? So why not give each US citizen this amount,
Surley that would be better given to each person to spend in the US ecomony, no one would NOT be able to pay thier motgage, or their credit card fees, etc. Wouldn't this be a better way of pouring the $700billion into the US economy? What do you percieve as the disadvantages of this. As I see it the banks would still get the lions share as most people would deposit at least some of it?

Comment 48 : WerringtonSilent

"Gordon Brown's solution is to give [banks] more juice and inflate a bigger bubble atop this one. That is all he knows."

I believe it's time we really started to look at what Gordon Brown has been trying to achieve over the last 11 years.

Is it any longer possible to believe that this red-eyed socialist firebrand of the 1970s and 1980s suddenly changed his spots when the iron curtain collapsed, and became a genuine admirer of the capitalist philosophy?

Or is a more likely answer that, out of pragmatism, he became a faux supporter - a fifth columnist giving every possible indication of being one of the converted, yet working away behind the scenes to attack the very foundations of the system he professed to support? Is this the reason for the abandonment of any meaningful regulation? Not that the system didn't need it to survive, but because without it survival was impossible.

Don't more of the crass stupidities of the last 11 years look more understandable if seen from the viewpoint of being by design rather than by mistake?

Is the real philosophy of New Labour, and of Gordon Brown in particular, no more than a duplicitous strategy to wreck the free market in the UK, to free the path for the introduction of the sort of State authoritarianism that has all the time been their idea of utopia?

By way of light relief, and we could do with a little light relief, I have to say that words such as 'wonga' and 'spanking' were neither in my volcabulary or experience until I started reading Robert Pestons blog.

Which just goes to show how easily cross-contamination can occur.

However, I will draw the line at 'top myself', although it is tempting when perusing the latest pension statement from 'Grabby Abbey'.

yareth31 @ 52

because the alternative is that your company will go bust and they will all be out of work. make them aware of the urgency of the situation, and make sure they understand that you are suffering personally for it as well. your story is going to become much more common over the coming months. they will understand.

sorry i can't offer anything better. it's going to be tough going for everyone.

I run a small business and whenever I want to borrow money the bankers insist on personal guarantees from all the directors. supoprted by a charge on our homes. Now that the same bankers are coming to us the taxpayer (via Mervyn King) for £200bn surely we should be taking personal guarantees from the fat cats backed by charges on their home(s).

PS It would be interesting to know if they are confident enough in their business model and the security they are offering to stump up.....

molieres @ 47

depends what kind of a correction you want. don't fall into the mental trap of the classical world of economic equilibrium. there are many possible dynamic outcomes to the current situation, some of them much less desirable than others.

recapitalising the banks allows for a more orderly (ergo rational) correction. imo a more orderly correction is a less expensive one.

e1 @ 73

incompetence is always my favourite conspiracy theory.

Just as a small glimmer of light in all this gloom.....

Very pleased to see that Markham Blue, made by Andy and Sandy Rose from Wokingham, has cleaned up at the recent British Cheese Awards.

A portfolio of this one plus maybe some old Worcester White, some Ribblesdale, and some Caerffili, packaged up and used as security for a large loan could maybe prove much more useful than one of those CDO thingummyjigs when eventually called in...

Thanks Robert for clarifying this issue, which is nothing more than leverage, in fact, borrowing money to 'invest' ie lend in their case, which has brought the banks to their knees. This is intensely deflationary and the money being poured in risks going into a black hole. The system itself needs changing

For the whole idea of Mervyn King loaning the banks money from their balance sheet assets seems flawed to me, at least in this loss making deleveraging environment as they must pay it back using lower and lower types of 'asset'. That road makes no sence and it hasn't worked either

I do not see why instead the treasury can't inject money directly to roll over their existing loans and spread out the pain, allow them to deleverage with the aim of returning to the old system based on deposits. Am I missing something here?

The dodgy loans they made may well fail and some banks may well go under but it's obvious they are not going to earn their way out of this by new lending into a recession! Will not fly

The US plan makes good on the bad assets by directly buying them at the value the accountants wish for, well that seems an expensive way to do it as the full cost to taxpayers must be made up front in one hit. It's too big for that quite evidently from the numbers. It's insanity really

But why not help them make their interest payments with long term loans and force them to hunker down and return to the old ways of doing things?

It would be a painful remedy and reduce credit substantially but at least it would ring fence the national currency somewhat. It's the same with mortgages, why not extend the repayment terms instead of risking mass defaults and a big fat zero on the true worth of all those loans! It's not pretty but if my mortgage term were doubled it would free up money to spend in the real economy and keep me in my home, and long term the banks would make more from it

Propping up the current system risks a true meltdown as 2+2=4, always has and will, the bubble has popped well and truly

Oh, and it's high time that bankers took a substantial pay cut for this mess!! They will still be earning more than me!

Come on Mervyn think outside the box

Why do you think Robert compares the level of deposits versus interbank lending at end-2007 with the position at end-2000? Here's my theory.

In March 2000 we saw the end of the dot com boom, and the start of a very severe sell off in equities. We were nine months into this by year end, and FTSE was down 10% in 3 weeks in March and April. It was flat for the rest of the year. Investors were highly spooked by this. Consider, for instance, that sales of Equity ISAs fell by 45% in Q1:2001 versus Q1:2000 (Q1 is the main sales season for ISA investments). What did people do with the cash that wasn't invested in shares? They kept it in cash.

In 2007, however, the market did not peak until October. There was a sell off in Q4, but only 5%. Consequently, people would not likely hold cash in preference to equities. That's why bank deposits are down: just a simple asset allocation decision as a result of equity market performance. Maybe RP could dig out the numbers from end-1999 (one year earlier and the height of the tech boom). That would be a better like-for-like comparison of cash holdings at similar stages of the equity market cycle.

In short, RP is again presenting a one-sided case. It is becoming increasingly clear that most of his stories are being fed to him by the banks, eg the one about BoE needing to lend longer than overnight, the one about how good the Lloyds/HBOS deal is for Lloyds shareholders, this one about how the banks are slaves to interbank lending.

As I've said before, the market is now sorting the survivors from the lame. The Treasury should sort out how to put down the lame most humanely. There may well be more of them. I don't have great confidence in Treasury claims that no more UK banks are in danger (actually, RP also carried this one in one of his blogs). They said this about NR, HBOS, and BB, none of which survived more than a few days. A bit like the dreaded vote of confidence in football.

Mervyn King is right not to put BoE's own balance sheet at risk as part of this. He's been clear that he sees taking credit risk on the banks as the Treasury's job, not BoE's. He said it in evidence to the Treasury Select Committee and he's now being consistent. He will provide short term liquidity, but rightly thinks the banks need to work out how to rebuild confidence in each other, and start increasing interbank credit lines, at least to those institutions that look as though they'll survive the current cull.

Oh, and another peice of good news that RP doesn't seem to have noticed (or considered worth reporting as he maintains his crisis focus). UBS announced its first profitable quarter in over a year today. UBS is widely reckoned to have had the highest exposure to MBS of any European bank. They have taken the hit by selling a big proportion of their MBS holdings and still turned a profit this quarter, suggesting much lower writedowns on this stuff than in pervious quarters, ie the market is finding a floor to prices for this stuff. They expect a small profit next quarter as well, and profits in 2009.

I've thought for a long time that the day a bank like UBS made this type of announcement would be the end of the downward spiral. It was derailed today by the falls on Wall Street in fear than the HoR won't pass the bailout. European markets were up strongly before that, and I wouldn't be surprised if they recover tomorrow.

Sorry, but I think the reporting of this crisis now needs to focus more clearly on who is still in danger, instead of claiming the entire financial system is about to crash. We've probably avoided that now, and the US bailout will provide insurance and time to rebuild a smaller number of well capitalised banks.

akaPinpot

you are a factor of 1000 out.
The figure is $1700 per person in the US.
A billion is a thousand million (in US numbers) and not a million million as your math assumes.

Varona

I suspect that one of our problems is that no-one in power has taken Money Supply seriously since the late 1980's -at the moment it seems to be shrinking fast on most measures. That is not a good thing!

Robert,

This is a crisis only if we allow it to become one.

The biggest problem is the tension between the pragmatist who want to keep things going at all costs and the theorists who what to do the correct thing.

The Irish are firmly in the pragmatists camp whereas the UK authorities simple cannot see the express train of a disorderly savings market throughout the whole UK retail banking system that is coming towards them at an accelerating pace. The Chancellor did not act over Northern Rock for several days after the queues formed and he and his boss and their advisers are still turning a blind eye to reality.

Offer the guarantee to all savers and depositors of the UK's retail banks, like the Irish have done today and we will avert the train crash.

This must be done BEFORE this weekend. (Bet you it isn't - but will have to be done next week only after some damage has occurred!)

57, 64, 69:

Thank you all for some very perceptive and helpful comments.

My questions may have seemed - indeed, intentionally were - naive.

Reason: I understand this stuff quite well - my job requires it - but I was looking for answers that I could give to very non-technical people, in language they could understand.

You all give great, really answers. You should be running this blog. Thanks.

57 Norrie C:

You noted that I asked posters, not Robert. Glad you spotted this. The posters here supply very good insights.

I'm coming to recognise that Robert, unfortunately, has a subtext (see below). I will watch those videos tomorrow. Thanks.

64 ExcellenceFirst:

Retreat from reality describes it exactly. From now on, my answer to people who ask this question (which they so often do) is, in a nutshell: the previous value of your house, the mortgage you secured against it, the borrowing you've added to that, and the lifestyle we've all been living, are unreal. We need to adjust, downsize, de-leverage. I think the non-technical people I'm trying to answer will understand that. Politicians may not; they are either idiots or self-servers. Thanks for your thoughts.

69 Benagyerek:

Great, clear answers to both of my questions. Liquidity is critical in the economy, just like cash flow management in running a business. Government/BoE not being able to manage micro matters is also a very insightful explanation. A long, helpful post, for which many thanks.


P.S. Robert's subtext, I'm sorry to say, is this:

"This is no time for a novice".

(Meaning "things are really bad - let's write some scary headlines - scare them into sticking with Gordon") (Personally, Friendlycard will NOT be voting for GB).

#53: Ditto.

#26: You assume the House will pass the bailout. Do not be so cavalier--House members are hearing loud and clear that the voters are AGAINST this scheme, overwhelmingly.

The House Republicans are now literally the Thin Red Line that stand between the free citizenry and a surrender to socialism.

Yes, there will be pain. Lots and lots of it, in our house as well as yours.

And, the sun will rise tomorrow anyway.

Without the Constitution, there is no America left.

Without a societal system that rewards wisdom and punishes folly, there is no basis for an economy, and we are left with the law of the jungle.

It will get very ugly in the next few weeks.

In the meantime, on both sides of the pond, I urge us all to remember that we are free societies, built on the rule of law, not the rule of the Most Politically Well Connected.

It is time to return to first principles, and the values that build culture and prosperity instead of destroying it.

This is the opportunity to begin, right here, right now.

84 John:

BRILLIANT post. I just hope they'll get your message before it's too late.

Incidentally, NR now seems to be doing rather well, cutting rates to turn away investors. Seems to prove your point about providing reassurance!

Nationalising the banks? An interesting response to the wrong problem.

How about this as a radical idea?
-people don't need a bigger house
-people don't want new cars evey year
-people dont want the extra foreign holiday
-people dont pay extra for designer clothes
-people dont "need" to have the newest TV/ipod/mobbie
-people are not sucked in by slick advertising
-people are happy with what they've got
-Access is not our flexible friend
-people say no to extra credit.....

The banks are not solely to blame. PEOPLE BORROWED THE MONEY! Now ask yourself why the politicians are not focussed on that....

Re. 70
Wykhamist - spot on !
(I wish 72 akaPinpot calcs were right though).
An aspect of all this that I haven't seen mentioned is the brainless notion that swirling cash and credit around the markets in ever-increasing circles can be considered 'economic growth'.
It is just exactly this City of London activity that Brown has been bragging about for a decade while truly productive enterprises have been sold to overseas buyers.
A country-wrecker !

Time for a change:

1. Time for a change to those tedious small print conditions on loan agreements - "Youre mortgage provider may be nationalised if you fail to keep up repayments"

2. Time for a change to the remorselessly negative reporting on the finance industry. This has been a fanstastic engine for growth in the global economy - not all loans will default, many businesses could never have started without funding based on the wholesale markets. Entreprise depends on the finance market. It's not all about "Fat Cats"

3. Time for a change in the political landscape. Someone on the right needs to grow a pair and start defending capitalism. I'm tired of the self serving parochialism of just about every politician on the tv at the moment. Where are the elder statesmen?

REVELATION "I will send a strong delusion to those who would believe a lie "

A politicion or bankerr is often someone who looks at which direction the lemmings are running ,and whilst running in the same direction says authoritateively "follow me things can only get better"...

Until they reach the sign that says "hold onto your declining assets this way" at which point the lemmings turn to eachother and say "Thats democracy for you "


The lemmings that survive the dashing ,will turn to eachother and say "well!now we know that things can only get better BEFORE they get worse"




We have a subprime bubble economy built on staggering levels of imported debt

Or to put it another way a credit bubble funded by our balance of payments deficit
shoveled into our expansive AAA's

Now that the titanic is going down due to excess liquidity , Prudent Gordon will have to lead us onto the stable iceberg ,we can sit it out with the polar bears

On the other hand it might only be the Mary Celeste

#88: You are right, people who took on debt share the blame. But that list is especially true right now, we are seeing people being very reluctant to take on new debt. I think we are seeing a paradigm shift in the background, with so many people's finances extended to the max by debt that there is no new market big enough into which to lend to reinflate and fuel an economic recovery. The bad economic news is also encouraging people not overextended to cut back and pay down debt. We are going to see a recession whatever happens because people need or want to be rid of old debt from the previous cycle before they can afford the new. Your take-home pay caps the interest you can service, no-one can deny it. These are bad fundamentals for banks as they need to lend in order to make money. Credit demand might be different in business, but with consumer sentiment today, it would be like lending into a brick wall. So bailouts may not on their own make the banking industry profitable in coming years. The demand side problem is immutable, only time will cure it.

#6, stuntedmonk, wrote "what happened to that Flanders woman?"

That gorgeous Flanders woman is currently on sprog-leave. I'm sure she has all our congratulations!

#38 Friendlycard - cut out the middle man - Friedman called this "helicopter money", read all about it: https://en.wikipedia.org/wiki/Liquidity_trap

#52 yareth31 - how do i grant a below-inflation payrise - show your workers the books, ideally along with 2 charts, show them how the wage increase will affect profitability, if they can see red numbers, that can be convincing

#73 ExcellenceFirst - GB did it on purpose - I think that's giving him a bit too much credit. Never attribute to malice that which can be explained by incompetence. I'm more of the "he did nothing" school, aside from claiming credit in the good times, and hiding in the bad.

#81- JayPee28bpr - "Why do you think Robert compares the level of deposits versus interbank lending at end-2007 with the position at end-2000?" - I had assumed this was because prior to end-2000, the ratio of deposits to reserves was also imbalanced. Some might suggest this is a cyclical thing and that we can find an instance, approx once every 7 years, when the books are momentarily balanced.

Robert, you are under-playing the significance of banks losing their retail deposits. The Telegraph highlights Credit Suisse reasearch today and states 40%, or UKP500 billion, falls outside the current guarantee cap. It's not just about moving it from bank to bank, the banks can lose the funds out of the banking system to National Savings, Gilts etc quite easily. I have moved some deposits already and will continue to move unless a full guarantee is given. I am retired and now is not the time to take a risk with my families savings.

Your article goes on to highlight the very reasons we need a full guarantee and therefore encourages people to make their deposits safe.

About time our leaders got off the pot.

"And, to be clear, this dependence on wholesale markets was a problem of the banks' recent making, because as recently as the beginning of 2001 the funding gap was zero."

Robert, where have you been?

The 'gap' as you put it, between deposits taken and amount loaned out is a function of Fractional Reserve banking practice.

A practice, it is worth commenting, that recognises the 'obligation to redeem all deposits on demand'. That we now feel we are being given this as a bonus in those rare instances such guarantees are made is a sign of how lost the man-in-the-street has become in relation to his basic finances.

The Central Banks and Treauries and various financial service authorities betwen them should have enough legislative clout and market intelligence between them all to recognise when and where the formula needs to get 'tweaked' to reflect current and expected short term trading conditions.

Ah, I see Greece are now also guaranteeing all deposits. And then there were two ... How long before a big country follows suit? This will put Robert's assertion about moving funds abroad to the test. It really ain't that hard, particularly not for those with very large amounts...

Hi Robert,

I simply want to say thank you for your articles. I really enjoyed reading them.

You've de-mystified some aspect of the banking and finance system for me - at least in relation to the credit crunch and financial crisis.


Thank you.

#73
"Is the real philosophy of New Labour, and of Gordon Brown in particular, no more than a duplicitous strategy to wreck the free market in the UK, to free the path for the introduction of the sort of State authoritarianism that has all the time been their idea of utopia?"

Yes, damned clever of him. Even cleverer that he managed to achieve the same effect in the USA and further afield too.

I would rather trust Mervyn King than the Chancellor. Mr King has banking expertise, Mr Darling is an MP!

The banks have repeatedly broken the golden rule of banking - "Do not borrow short and lend long!"

They have also lent where they should not have lent. They have paid big bonuses to those who did not deserve them for making supposed profits made from bad, bad, bad lending which has now turned into bad debt.

Maybe it's not the right time to spank the banks, but Mervy King has every right to rub their noses in the brown stuff and tell them to shape up or ship out!

How many of today's top bankers are qualified - how many have passed the bankers' exams? Or are the top echelon in banking just glorified salesmen?

It's no use the bankers snivelling that Mervyn King does not understand them. He knows them all too well! And we, the taxpayers of UK, are paying the price for the banks' lousy practices and broken rules!

(By the way, I am an Associate of the Chartered Institute of Bankers (ACIB). I passed the bankers' exams! I spent nearly 30 years in banking before I was made redundant when the banks decided to get rid of experienced bankers and bring in salesmen)