Monday, 21 April 2008

What was the alternative?


Many in the media and elsewhere are bashing the Bank of England for its U-turn on the Credit Crunch. Now the bank is to lend £50 billion, maybe even £100 billion more to the banks to try and end the crunch.

In return and taxpayers will guarantee the assets that the BOE is taking on, even though these can include some unsecured lending such as credit card debt.

All this seems a rum price to pay to the highest paid (celebrities not included) profession in the land. No hint of the bonus' being handed back and I note the share prices of the banks are rising. Shareholders may have taken a huge bath this past year, but if they hold on now they know all will be well within a couple of years.

I saw a BBC interview today with Simon Hills of the British Banker's Association, he blithely refused to answer any questions Declan Curry put to him and then condescendingly went on to note that the banks play such a key role that what else was there to too.

So what was the other option? To let the credit crunch drag us all down into a depression. I would not want for that and nor would most rational people.

However, with Northern Rock as the precedent and also with the actions of the Sovereign Wealth funds, the Government should have demanded some shares from the banks. Not much, but a few percent to make sure the taxpayers benefit from any upside. At the moment the risk is nationalised, not the profits or upside.

A cannier Government would have spotted the opportunity to balance the equation.

hat-tip: Bill Quango

17 comments:

Blue Eyes said...

I thoght Roger Bootle's article in the 'graph was quite interesting, basically agreeing with my highly (non-)educated suggestion that we should let inflation take the pain away and cut rates strongly.

dearieme said...

An emergency income tax rate on the salaries and bonuses paid by any banks accepting the deal, retrospective to last year and for the current year, could usefully have been part of the package. Say, an extra 35% on everything over £200k per annum.

CityUnslicker said...

blue eyes - Can't agree here, inflation kills those who really have saved like pensioners. Inflation rewards the feckless who have debt and no savings!

CityUnslicker said...

Dearime - A good suggestion this. I think that it is a mistake to let the victims pay and not the perpetrators.

Shotgun said...

I think the banks have outwitted the Government completely and were, probably, well able to weather the storm but with reduced margins. British banks were better placed than most US banks and others.

I agree the Government gave it all away effectively, and I further think their dithering and spineless actions now will have repercussions as bad as any recession because, simply, they don't have the 50 billion to give away.

We've averted some pain by agreeing to other.

CityUnslicker said...

Selling the bonds puts us further into public debt which we can ill-afford, so you are right Shotgun.

Blue Eyes said...

So what's IS the alternative - starting from this dreadful position? Let the whole thing unwind naturally?

Semaj Mahgih said...

Yes OK - not much choice once they found themselves in this position but they should never have been there in the first place. Sheer greed.

Dr Ed said...

I don’t understand why they didn’t just nationalise the Rock and any other bank that can’t afford to pay it’s debts. If someone want to buy the bank/its assets from the government then I’m sure that would be fine (assuming that bigger balance sheets give the treasury a headache) and then the tax payer would get a large proportion of any potential profits to be made by the turnaround.

The government could even have leant out its 50+bn via the rock to try to stabilise/up it’s value.

monoi said...

So, if I understand correctly, its all the banks fault and the politicians are not to blame in the slightest.

Funny that.

Schadenfreude said...

What we have here is a rather lovely scheme by which the government is buying debt that can be defaulted on (mortgage debt) for debt that cannot be defaulted on (government bonds). Government bonds don't (usually) default because they are secured by the government's ability to extract cash from the taxpayer (at gunpoint if necessary). Unless, of course, an incoming administration decides it would never have agreed to the massive amount of debt run up by Labour and decides to default because it simply cannot pay the interest anymore...

Anyway, there are two points to make about this:-

1] A £50bn debt swap is a big transaction when such a bail-out would not even have been countenance 6 months ago. And there is £100bn available if needed. If you haven't realised just how bad the situation is, those numbers should help you wake up. So far the housing slump hasn't even started. Where will we be when house prices have fallen by 30% and the margin calls are coming in thick and fast? Where will we be when the recession in the US starts dragging down the global economy and the 30% of our industry that exports is being hit hard and shedding jobs by the bucket load? The Titanic hasn't even hit the iceberg yet and already panic has broken out!

2] Its a debt swap. And the purpose of it is so that the banks can release more debt to consumers in the hope of propping up the housing market. And who would take up that debt when house prices are predicted to fall by 30%? Idiots, that's who. Sub-prime idiots. Just look at that moral hazard go! Sub-prime mortgage idiots whose loans are effectively guaranteed by a government that is absolutely determined to delay the inevitable. And what happens when all that lovely debt is used up? We are right back where we started - but the problem is now even bigger than before! Oh, and nastier, because if anyone takes up that debt they will be the ones most desparate and most foolish. Still, the government is obviously hoping that a £100bn injection will be enough to carry the economy on a stretcher through to the next election. After all, its quite a big proportion of GDP already and having created the precendent there is no reason to believe they won't do it again soon. Gordon has set out his stall. Get ready for government debt to go throught £1trillion!

Gordon's moral compass is pointing straight to hell. He's got us all loaded up on the handcart and he's pushing faster than ever! Its a race between Gordon and the economy and the finish line is two years away.

Shotgun said...

Blogger Blue Eyes said...

So what's IS the alternative - starting from this dreadful position? Let the whole thing unwind naturally?


That, in my very humble opinion not knowing anything about economics, depends on how you like your pain. Do you want it short, sharp and likely to be a brief period where most are poor and struggling, relatively, or do you want it like Labour ideology...long and drawn out where everyone is poor, miserable and struggling?

I don't think we should forgive or forget who is the real villain of the piece. To me I see shades of the mid to late seventies, only the money has been wasted and squandered by the Government directly instead of indirectly.

CityUnslicker said...

Blue Eyes - the alternative was to do much the same thing, but extract some sort of price from the banks. Now we have underwritten their exposure to no benefit apart from possibly escaping a deep recession.

Lord Asda said...

And unfortunately it hasn't worked.
"Banks very unlikely to reduce rates in the near future, and rates are more likely to rise soon." ITN News.

We would have done better to have used the 50bn to issue 1-2 year loans for people who have become / do become redundant or can't remortgage in the short term, secured against their homes.

The loans must be paid back, starting in 'x' years time at 'y' interest rates but it would give a breathing space and stop the repossessions while people sort another job etc.

the fact that peoples homes may not contain the equity is immaterial. As a government you are tiding the people over until normal banking service is resumed, and hopefully the housing market restores itself.
As a government the problem of what to do with unemployed, homeless people is going to land in your lap anyway.. better to head it off yourself. {you are after all just effectively paying the mortgage for them in the short term.}

nomad said...

Presumably all those who have credit card debt which they are not paying (or cannot pay) off will have their cards removed, blocked or rescinded and their names placed on a financial blacklist somewhere preventing them ever getting a new card in the future? If not, why not? Why should irresponsible profligacy be rewarded with more of the same?

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