Friday, 7 November 2008

Banks ordered to lend

We are on the road to disaster.

Consider the problems before us:

  • Inflation is at a 16 year high and the BoE has just cut rates to a 50 year low.

  • The the economy is sliding into recession, unemployment is rising, and sterling is crashing.

  • We have a huge current account deficit, largely due to historically unprecedented levels of personal debt.

  • The banking system is largely insolvent, and is now in the process of being nationalized.

    As bad as things are, today's meeting between the Treasury and the commercial banks was an all time low. Darling called them in and ordered them to lend. Prudence, effective risk management, or commercial self interest - none of this matters anymore. For their own narrow political self interest, New Labour needs the banks to turn the credit tap back on. Darling may as well have asked them to merge and called the new entity Gosbank. This is the worst kind of crude state intervention. It truly is the worst kind of socialism.

    Today's meeting raises a deeper question. What kind of vision does Brown and Darling have for the UK economy? With the current policy framework of massive deficits, negative real interest rates, and credit policies determined by political priorities rather than commercial interests, where do they think the economy will be in 12 months time.

    Do they really think that more financial chaos is the solution to the existing chaotic credit crisis currently facing the economy? Do they think that they just have to order the banks to lend more money and a recession will be avoided?

    Make no mistake, the problem isn't the economy, the problem is the UK economic policy framework.

    Mark Wadsworth said...

    Banks are far from insolvent; people are too obsessed with the net capital/reserves figure attributable to shareholders.

    Actually, in economic rather than legal terms (i.e. 'what would the position be if they were put into administration'), the banks now belong to depositors and bondholders (incl. HM Gummint and BoE).

    And as banks' assets (mortgage advances less write offs) are broadly equal to total deposits/bonds (this is a simple question of bookkeeping) every £1 of deposits, bonds is matched with approx. £1 of mortgage advances less write offs (OK, with NR and B&B it might only be 80p or 90p for every £1 deposits, bonds, but hey).

    Banks are, in other words, in rude financial health, the whole thing is a huge great scam.

    MAB said...


    I'm in favor of NO government bailouts. NONE! Let the market sort itself out.

    What do you propose?

    Nick von Mises said...

    Putting the banks in a room and telling them to lend is not going to make them lend.

    Unless the government discovers some real leverage or administrative power, it just won't happen.

    Anonymous said...

    OK, let's tot up what we know at present: the current financial situation is that of a credit bubble, which is deflating. Labour have just won a byelection, which suggests that there are still a lot of sawdust-for-brains voters out there who vote labour.

    Brown is unexpectedly popular of late. Straw has been making silly noises about prisons. The banks have just been railroaded into pumping one last great splurge of cash into a deflating system.

    Brace yourselves, folks, snap election ahoy!

    vado said...


    What you say is probably true, the the attempt to force banks to lend is shocking enough.

    Alice Cook said...

    mab - I am not in favour of bailouts. However, I believe it is necessary to nationalize the banks on a short term basis. Naturally, the shareholders should be wiped out and the existing management should be fired.


    Barry said...

    Alice, the solution to the economic turmoil in the near future may see Britain join the Eurozone. That way the wretches who claim to run this country can pass responsibility to someone else. This will not alter the fact that we are right in it. Not that some Briton's seem capable of noticing. We have declined so far I find it difficult to believe what I am seeing.

    MAB said...


    Naturally, the shareholders should be wiped out and the existing management should be fired.

    That has merit, but it absolves the bondholders.

    The existing bankruptcy rules still seem like the best solution to me. Equity and preferred shareholders are wiped out and bondholders take haircuts and either sell assets or recapitalise the commpany. Painful, but effective.

    But what do I know, I still think the world is round.

    MAB said...

    But what do I know, I still think the world is round.

    Oops. I meant to say: But what do I know, I think the world is neither flat nor round, it's spherical.

    Rick said...

    I'm just waiting to see what happens in the commodity markets in December when buyers try to take delivery of non-existent gold they've bought at purposely depressed prices. With the level of monetary inflation both here and the US, commodity prices are set to soar next year!

    TED said...

    Brown has rolled the clock back sixty years. I am now waiting for the government to start controlling prices. Ration cards anyone?