Saturday, 17 January 2009

UK bailout - £1 trillion - we deserve it

As I read this article from today's telegraph, one question kept cropping up. "Who is responsible for this disaster?" Just take note of the numbers, which I have highlighted:

In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week. The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders' bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government's total commitment to solving the banking crisis to almost £1 trillion in taxpayers' money that has either been spent or pledged. That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain's annual GDP of £1.4 trillion.

Two-thirds of UK GDP is now on the line. That is the current price tag for years of reckless lending and housing speculation. It is a staggering, scarcely believable amount of money.

The easy thing would be to hang the blame for this mess on the hapless leader and former Chancellor - Mr Brown, but that would be too easy. In truth, we are all to blame for this catastrophe. Collectively, we allowed the New Labour, the Bank of England, the FSA, speculators, banks, estate agents, property rampers and BTL chancers to grotesquely inflate house prices and destroy our financial system.

Perhaps it is right that the bill is placed unto the public sector. At least, we can be sure that we will all end up paying.


A said...

If the UK Gov were smart then they would buy these toxic assets at market price (don't know the exact figure, but 30p on the pound?) and make a profit on the deal in a few years time and you keep people in their homes too. The banks take the hit on 70% loss, but clean out their books to get back onto a more normal (whatever that is these days) footing.

The sad thing is that very little attention is being paid to the root causes. The UK finances changed forever in 1999 when we became a net energy importer. Labour/Con/Libdem just stuck their collective heads in the sand.

RenterGirl said...

I agree with A that all governments encouraged the debt needed to buy things we don't make, and also the housing bubble. The idea of the market-as-infallible-god surely began in the Big Bang of the eighties? And now, it's started again. Wages are low, and jobs increasingly insecure, and yet the stated aim of everyone, economists, politcians (Vince Cable being the notable exception)is to get us spending again, and therefore back in debt. It's like we are a doing some kind of deathly tarantella: we are dancing ourselves to death. Who can make it stop?

A said...

Who can make it stop?
Ultimately only we can make it stop.

The big road blocker, is that truth doesn't exist any more. Facts have been so obscured by spin that its impossible to even get close to anything resembling the truth.

Anonymous said...

A or L

A = Argentina = Depflation.

L = Japan = Deflation.

As we enter a depression there seem to be one of two paths that we can travel. One path accepts that there has been a debt bubble, that this is the cause of the depression. The other path does not accept there was a debt bubble and that it will be policy responses that will stop a depression: Bernanke Panky is a master of the 30s and Japan’s slump, his wisdom will save us from a depression.

If you accept the L then you accept that it is better to let the market find it is price and not bailout the badly run businesses. You go cold turkey. You do not run up massive debts on the State’s balance sheet, which only leads to higher taxes. You want people to save. You want the State to cut it’s cloth, to face the new reality that the high tax take from the debt bubble is not coming back. The delusion is dead. You want the State to cut business regulations and taxes. You want all your focus on nurturing wealth creating industries that can sell their goods and services globally. You give grants to such companies.

If you accept the A then you accept that you can manipulate the price in the market and bailout badly run businesses. You put off the day of reckoning. You run massive debts on the State’s balance sheet. You want people to borrow and spend. You want the State to expand and you expect the pre-bubble days to reappear like magic. The delusion lives on. You continue to over regulate and tax business. You want all your focus on spending and piling up debt. You give money to the profligate who ran up too much debt, you start printing money.

Life in the L is like hell. Many lose their jobs and GDP collapses.

Life in the A is horrible. Many lose their jobs and GDP collapses.

L lasts three to ten years as the economy is re-engineered to sustainable wealth creating industries. House prices fall 50%+ from peak to trough, with little chance of rising for many, many, years. People start saving. Money is sound and the Pound holds up relatively well, considering the situation. With sound money the populace is able to clothe and feed themselves, the lights stay on. The State supports those in trouble. It invests in retraining.

A leads to a collapse in the Pound as the markets realise that the country can never repay interest and principal. This leads to unsound money and rising inflation as import prices explode. Interest rates need to rise but this will gut the debtors. Wage policies are enacted and a spiral of inflation takes hold. This leads to hardcore poverty for millions as the Middle Class sees it’s wealth vanish. With a collapsed currency few are able to holiday abroad. The IMF are called in and State spending is slashed.

Both A and L lead to a drop in living standards for the populace. The key plus for L is that once the pain is out of the way a new base for growth and prosperity can be engineered. The balance sheet is strong enough.

With A the balance sheet is wrecked and the Middle Class has been devastated. Argentina is a prime example of what happens when the wealth of the Middle Class is squandered.

In the L one gets a sharp painful deflationary depression.

In the A one gets a multi decade long depression that could lead to inflation = Depflation. The country becomes an Undeveloping Nation.

Our ruling elite and most of the punditocracy are taking us to A.

No Way Back:

dearieme said...

Don't blame me: I voted Conservative. And UKIP. And Natural Law. And Independent Liberal.

mike said...

I agree with a bad bank if it can be clearly proven that the toxic assets will at some point in the future regain it's value. Otherwise we are just throwing money at the unknown and perhaps buying assets that should never have been classed as assets in the first place.

Anonymous said...

I am most certainly not to blame at all for this situation.

I always voted, and always against those who got us here. And both parties have some blame. I don't for a minute believe things would have been any different if Baldrick Brown had been replaced by some other clown ( of either party ).

I have saved while all around have spent. I have watched friends buy portfolios of houses while I put my cash on deposit or ISA for the time when I will be pensioned off and the state will try to steal my house to pay for my hip operation or for Tracy the care assistant to wipe my ass for me.

I have argued vocally for years that it was unwise to build an economy on borrowed money and questioned how people could afford ever bigger houses and BMW's when all my customers who employed people at £12 an hour were closing and those laid off were getting minimum wage while yet another strip housing scheme was built on their workshop sites.

In so far as the general buoyancy of the economy meant I made a decent salary, sure I have benefitted from the boom, but I am sure as hell not responsible for any of the bust.

I object that as a saver I am getting robbed to pay the bills of feckless borrowers, and to keep the bonus sucking parasites who have gorged themselves on this gravy train for years in a job.

I am not alone. I am not guilty. But I am being punished.

QG said...

Interesting contribution from "A or L".

I think that part of the problem is our dishonesty. If we were realistic enough accept that our standard of living must be adjusted (it's not the end of the world) then we could turn ourselves around in time. Instead our 'leader' desperately tries to be seen to be doing things and I suspect that many of the electorate are all too happy to let someone else take responsibility for their problems.

Small government and personal responsibility in the UK?

Flap flap. Oink oink.

Budvar said...

"The idea of the market-as-infallible-god surely began in the Big Bang of the eighties?"

Ah yes, Thatcherism. Gone are the days where we generate electricity using that nasty smelly coal and now have clean burning gas fired power. That's thatcher speak for "Those clog and flat cap wearing, tin bath in front of fire, ferret down the trousers northerners have held the country to ransom for the last time!!" Whereas now we're just held ransom by the friggin Russians.

AntiCitizenOne said...

> "The idea of the market-as-infallible-god surely began in the Big Bang of the eighties?"

Eh? This credit bubble was created by the state. It lowered reserve ratios, and thus expanded credit. It engineered lower than real inflation stats by excluding property from them and thus excused lower interest rates.

The state created the bubble, banks allocated it.

We've hit Peak Credit. If we try to keep mal-investments in the economy the debt servicing will kill the economy.

Sackerson said...

We already have plenty of Bad Banks.

Jo said...

I'm a psychologist so my approach is "grasp the facts", decide what to do, move on.

What do people need to know?

What questions to ask their MPS and how to engage with the political debate?

Where to store wealth to protect themselves.

Cool if you can blog about any of these questions.

Where opportunties will be so they can position themselves.

How to explain the facts to other people to calm them down.

Taking short term steps when in uncertainty.

Anonymous said...

What has this to do with energy imports? The UK recieves less than 3% of its gas imports from Russia. (Do some research Budvar)

This is the result of the 'me generation' born in the years following WW2. It is a result of their own self centred desire to earn more and pay less, to own more than one car or one house (usually in France or Spain and yet have the audacity to complain about UK immigration).

That generation have had it good and the younger generations such as mine are the ones to pay, just like the debt we have accept to go to university, something other generations got for free. Thank guys.

Budvar said...

"The UK recieves less than 3% of its gas imports from Russia."

North sea oil production peaked in 1999.
We've gone from a net exporter to an importer. (yes I know we've always imported oil from the M.E for different cracks like lubricating oil etc)

Russian gas imports may only be 3%, but since the construction of the pipeline is growing exponentially YoY.

Speaking of being held to ransom, don't even get me started on imports of electricity from French nuclear generation.

Anonymous said...

I live in Japan, but got my mum to buy gold kruggerands about a year ago, so she's up about 40% so far. Also try and get an account outside the UK, has one in Switzerland.
There are several articles on 'After the collapse in Argentina' around on the net. Food, headlamps, medicines, all good stuff to have. You won't get the power cuts for a while, but they coming.

A said...

Russian gas. WTF has that got to do with anything? Its just Russia playing an excellent game of chess, while the west is watching telly tubbies. Very funny really.

The Russian's are (deservedly) getting very pissy over being ringed by US controlled bases in ex soviet countries. Brit/US politicians & media are that dumb they don't even know when someone (Russia) is giving them a clip round the ear for being so stupid.


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