The markets fixed; UK banks forced to bet on Government

As the current market rally continues, many of the share prices recovering quickly are the same stocks which took big hits. Banks like LLoyds and RBS, property companies like Taylor Wimpey and Minerva.

Clearly, from the G20 and all the QE jazz, we know the Government has been working hard to ensure a pain-free recession. However, as time passes, this is looking more and more like the UK edition of the Greenspan put. Where the US put off disaster for 4 years, but which has now cost it an even deeper recession.

Many of the fundamentals remain in deeply dark territory as regards the economy and even the Chancellor sees no hope of the recovery starting before next year.

However, Public spending is the real albatross in the situation, with Gilts sales failures and a set of accounts that would have a public company calling in administrators, such is the parlous state of cash flow.

Into this market, the Government has sent its newly owned banks. Here is a link which tells you how much the Government is ordering RBS to lend to the UK market this year. Where can they find enough demand in a stagnant market to meet this criteria?

What will the solution be, well, qui bono? The solution will be to pour money into PFI schemes and social housing schemes. Anything which the Government underwrites is both less risky and of political benefit to the bank, to say nothing of the Government.

The UK will though then have a nationalised banking system built partly on printed money lending to chosen government projects that produce a return for the Government. The wheel of the State is complete. How much PFI finance will Barlcay's and HSBC back in 2009/10?

Then we have the Bank of England asset finance scheme, which will lend more money to banks to take a chunk of the risk away. I 'wonder' what asset classes the Bank of England will choose to participate in?

The Government is making a huge leveraged play on itself. This will all end in tears, it seems as if no one can remember the 1970's when various governments applied all these same ideas on industrial policy rather than financial. This time, the mistake could be even more expensive.

Would you like a mortgage with those stamps?

Business Secretary Peter Mandelson has said he is in favour of widening the financial services already offered at the Post Office. The continuing talk is of creating a post bank or, as it is predictably being touted in New Labour speak.. 'A People's Bank.'

Post Office currently provides a range of financial services from bill payments to insurance and savings accounts in a partnership with the Bank of Ireland, while also providing access to the governments own National Savings and Investment products. The new scheme is set to take things much further and create a state bank. A complete U-Turn from the huge closure program that ended only last month, but you can see why Mr Darling may be keen to push ahead with the scheme. The Banks are still not doing what the government wants them to do. John McFall MP has repeatedly said that the restriction of credit lines to business and bank lending risks dooming the economy to an even greater depression. The establishment of a State Bank will allow the government to deliver on its lending targets. It seems that the government has rather belatedly realised that it already owns the largest network of branches in the UK with 12,000 Post Office branches and all of Northern Rock's and Bradford and Bingley's. A new motion [EDM 412} has already been tabled to create a Post Bank.

The idea of a State Bank has been greeted with horror by all good capitalists. The dead hand of state interfering and undercutting and under performing and overmanning without regard to profits or shareholders or customers. However, much good can come from a State Bank. The new Savings Gateway account,to further the relentless end to child poverty, aimed at those on very low incomes,has been signed up to by ... zero banks. Only the Post Office is on board. That's not surprising. The Post Office already has the lowest income and high benefits families as its customers. The Bank's don't want them. They doesn't really want the smallest business customers or the smallest loan customers either.

La Poste's received almost a quarter of its turnover in 2007 from its 11 million bank accounts and it only became a post bank in 2006.. Italy's BanoPosta achieved its first profit in 50 years after it became a post bank. If you want a profitable mail service, then allow it to be a bank so it can generate profits and achieve all government's vote-worthy social agendas, that the banks would much rather avoid. What is unclear is if the government will provide provide any financial backing or guarantees to the move – or how they would set with European competition rules.

What is odd though is that at the same time HMG decides on a State Bank it is looking to privatise Royal Mail by flogging bits off to TNT, totally against the wishes of the unions, the workers, the public and loyal MP's.. Post Office to state and Royal Mail to private sector seems to be the plan.

Left hand, right hand?

Bank Bailout: Out of Ammo

There are a raft of initiatives out this morning from HM Government. We looked yesterday at the Insurance idea. Pondering further overnight I see this as a great opportunity for the bankers to take the taxpayers to the cleaners. the premiums will be too low and the losses more than expected.

In effect, the Government will become like AIG and the monoline insurers - see here for a good, if technical, description. That worked well as a business model....

However, converting preference shares into ordinary shares was a good idea for Lloyd's and RBS - but not if they end up in Government hands anyway. RBS is down to 13p a share right now so that is looking very likely as of now.

The other measures are all good ideas to get lending going again and a good fist at trying to stop a depression resulting from the credit crunch. If only they had been done a year ago...

UPDATE The key measure from now on in is printing money. The UK can not really bailout the banks as their assets are too big for us to handle. This leaves interest rates and inflation as the only way out. We paid our money, took our chance and now the wheel has stopped...