Brown and Darling have had free pass with this Asset Protection Scheme. This scam has the potential to become a fiscal catastrophe. The government is about to guarantee £500 billion of bad assets in the banking system. That is almost equivalent to the total stock of public sector net debt. This guarantee amounts to 34 percent of GDP. It is astounding how the government can be so cavalier with tax papers money without anyone questioning the merits of this scheme.
One thing is for sure; the Banks have a strong incentive to insure poor quality assets, which have a very high probability of going bad. Therefore it is inevitable that the public sector will end up holding a mountain of rotten assets. Therefore, the question isn't if the tax payer will lose money; it is how much will she lose.
Here is my back of the envelope calculation about the likely losses. Currently, the UK banking system is about 4.5 times GDP. Roughly speaking, that translates into about £6.5 trillion. Therefore, the Asset Protection Scheme will insure about 7-8 percent of bank assets. Assuming that the banks end up with a bad loan rate of about 3.5 percent of assets; the taxpayer could easily end up with a loss of £250 billion.
A 3.5 percent bad loan rate is almost certainly a conservative assumption. Should the recession deepen, the rate could be higher. We may even see banks soaking up 100percent of the Asset Protection Scheme with defaulted assets.
If there is one lesson that comes from this mess; it is this; we must regulate banks and prevent them from ever creating a mess like this again. This time, the sound bite "no more boom and bust" has to mean something. There can be no more bubbles; no more double digit house price inflation; and no more consumption booms driven by cheap credit.
26 comments:
There will always be boom and bust in a free market. What I ask of my government is that we are prepared for when these things happen and that we are not left standing naked before the hurricane as we are now. I don't ever again want a PM who is so arrogant and inept that he believes he has cured natural economic cycles - and I don't ever again want our people to be so borish and brash that they believe it when they are told that a sense of confidence and entitlement is all that is needed to ensure a top place in the hierarchy.
God how I hate the Brits abroad.
Of this asset insurance - isn't the idea to underpin the foundations of our economy (in a round about way) ? Property. Restore faith in mortgage debt(property) then bad debt loses its toxicity ?
"A sense of confidence and entitlement ... "
With one bound we shall all be free.
(I have correspondents who are convinced that the property market is about to take off again)
There has long been regulation.
There will always be booms and busts.
What we need is the right variety of regulation and probably less of it overall.
The notion that 125% mortgage didn't involve the lender gambling the markets has to be history. For example; there should be no mortgages issued over 90% BY LAW. Prices will adjust and FTBs will cope.
As ever Alice you are right about this Asset Protection nonsense. It irks me that I can see a time when a bank pays back a piddling amount of the massive support they have received, and this will be heralded as a triumphant vindication of Labour policies.
It will just find another way to happen.The solution surely is to stop people like brown hiding the fact so action can be taken.
Never mind, with quantitative easing that 250 billion will soon be much reduced. Just imagine an inflation rate of 10%. Within 10 years we could have a more manageable 25 billion of debt. Though it could go all pear shaped if foreign investors refuse to lend more money on the basis that the money returned will be significantly reduced in value. This could start a fiscal crisis and following that a lot of discontent when things start to get nasty if the government runs out of money.
Alice keeps ignoring comments, but she keeps on about yet more regulation for banks.
WE DON'T NEED MORE (MAL)REGULATION.
Governments need to treat and regulate the amount of credit in their currency, like they regulate interest rates. There's simply no need for all the other regulation.
Governments need to raise the reserves/capital adequacy requirements for banks that expand their loan books.
They also need to lower the capital adequacy when requirements when loans start to fall. This is to prevent the current situation whereby loan losses lower reserves thus causing a systematic multiplier effect whereby around 30 times the number of loans are called in for each loan loss.
anticitizenone,
Naturally, I agree with you when you say that the amount of credit could be regulated.
I also think that capital adequacy and reserve reserve requirements should be established. (Frankly, I not sure that there are any right now). This, along with a few other requirements, is what I mean by regulating the banks.
I don't think we are that far apart.
Alice
"If there is one lesson that comes from this mess; it is this; we must regulate banks and prevent them from ever creating a mess like this again."
If that is the lesson you have learned, then you have not been paying attention in class. Stand in the corner facing the wall Ms Cook.
Otherwise you would have learned that Banks ought not to be protected by the state, banks ought to be allowed to fail if they aren't good enough to survive.
There is nothing written into the articles of association of RBS plc or HBOS plc, that says simply because they operate in the UK jurisdiction they should be guaranteed by the government. They are PRIVATE COMPANIES, that is all.
Gordon Brown being a stupid man, thinks he is protecting the banks, when in fact he is exposing the UK economy to terrible danger.
However we could (will have to) learn that;
1. Gordon Brown is dangerous.
2. A bank that offers to loan money to anyone, should: a) not be permitted to loan more than 80% of the value of the property. b) Keep the loan on its books until it is redeemed.
Note: Probably (b) is not necessary if (a) is enforced.
anon 12:10
True, we can only regulate banks established in the UK. Any bank making losses outside the UK is not our concern.
Whether we like it or not, banks are protected by the state. People won't tolerate losses on their deposits. So every country has some kind of deposit insurance available. NRK proved this point here in the UK.
Therefore, if the government gives insurance it has the right to regulate.
Alice
I can't believe all these people are so cheerful about booms and busts.
Are they latter-day Romantics who believe in a natural economic order where man-made interference contaminates everything?
Even in the Romantic era , the Physiocrats were saying that given total freedom, the market would push up land prices until they overwhelmed the rest of the economy.Hence L'impot unique or Single Tax on Land values.
There is no such thing as a free market .You are hunting the unicorn or Prester John.
You really want people to lose everything in bank busts? For house prices to become a global bubble?
Austrian Economics is a system for the simple-minded.
Mind you, market forces should be allowed to drag down house prices to the value of the assembled bricks and mortar plus 20% for land and then banks may resume lending on mortgages.
At that point a tax on house prices should kick in to stop them going up again ( more or less what Polly Toynbee said last week).Land value tax ,despite her preference for some kind of capital gains tax ( why not the old Schedule A on imputed rent?), is still the best option because it forces speculatively withheld land onto the market.Hence more building.
If there is one lesson that comes from this mess; it is this; we must regulate politicians...
and prevent them from ever creating a mess like this again.
This time, no more labour lies - the sound bite "no more boom and bust" has to mean something.
There can be no more bubbles; no more double digit house price inflation; and no more consumption booms driven by cheap credit.
AC: "True, we can only regulate banks established in the UK. Any bank making losses outside the UK is not our concern."
Er, yes. So what?
AC: "Whether we like it or not, banks are protected by the state."
No! Domestic deposits are protected by the state in the event a bank becomes insolvent. Any other liabilities the bank has are the concern of its shareholders and the banks creditors.
Secondly, and what I have been trying to get across. The banks are too big to be protected by the state. Such an idea is laughable if it were not so serious. Brown could (technically has) bankrupted the UK State in his attempt to bail RBS.
AC: "People won't tolerate losses on their deposits."
And neither do they have to, since there is a government sponsored deposit protection scheme.
AC: "NRK proved this point here in the UK."
What point did NRK prove? We didn't need NRK going bankrupt to prove the UK had a deposit protection scheme.
AC: "Therefore, if the government gives insurance it has the right to regulate."
Actually, the government was at pains to make the industry pay for the deposit protection scheme. Which is now utterly defeated by the government bailing the banks to the extent they have done.
But in anycase, I think we are disputing the extent and effectiveness of the regulation, not should there be regulation.
DBC REED: "( more or less what Polly Toynbee said last week)."
Oh Christ, no wonder we are F****d!
I thought the socialists just dragged Poly along out of a misguided " look we even accept thick public school educated rich twats into our club too" sort of inclusiveness.
But to actually cite Poly Toynbee as an authority on economics .......
@Anonymous said,
You are blinded by prejudice.She is one of the few journalists who have stuck to the line that property prices are overwhelming the economy.
Her last piece "Owners must be weaned off house-price drug"is very shrewd : about how local authorities need high land prices,as well as the relative tax-free status of investing in housing as an asset.She may be a figure of fun to the middle-class ,rage filled men who dominate the blogosphere, but they are showing no powers of discrimination.
She is right where it matters.
DBC REED: "She may be a figure of fun to the middle-class ,rage filled men who dominate the blogosphere,"
She is a figure, not of fun but of well deserved ridicule.
If she stopped talking hypocritical mindless drivel, it would be a start.
Even her former apostles in the Guardian comments section have twigged she doesn't have a clue.
DBC REED: "..but they are showing no powers of discrimination."
On the contrary old chum, it is just because they use powers of discrimination that her game is up!
DBC REED: "She is right where it matters."
Just because a rusty clapped out clock that has been thrown to the bottom of the briny, briny ocean is right twice a day, doesn't mean Poly who specializes in getting things wrong has bucked her trend.
It is amazing how a bigged up banking sector can generate such problems for the government's budget. If AC is right, then it wont take a huge increase in bank losses to screw government finances.
Another reason to clamp down on the banks.
Polly is a stopped clock.
I'm for an LVT because I like the idea of making every citizen a shareholder in the country, and then also being able to make every person in the country free of the slavery that is socialism.
She has no idea what she is talking about, all the time. Even when she is accidentally right, she uses the wrong arguments...
@ anon
Polly Toynbee is fairly sound on LVT; Richard Murphy,following her big property tax article, is looking at LVT; Tim Worstall is straight forward LVT-supporter.
But they all appear to hate each other.
There is far too much personal claptrap on the blogs.
She may be only right on property tax but this is the most important issue at the moment.
To my knowledge only Ashley Seager on the Guardian, Toynbee, and the biggies on the FT ,Sam Brittan& Martin Wolf look at the taxation of property favourably (from a straight LVT point of view in the case of the gents) so we should n't be knocking any of this small band, especially with the petit bourgeois bias that is routinely directed at Polly Toynbee with this "We all know Polly Toynbee has a house in Tuscany" as the sum total of the alleged argument.
Some of this patronising attitude is creeping into remarks about Alice Cook on this her own blog.
Mike at 11:29. A 10 percent inflation rate would render the 500 Billion debt into a more manageable 192 billions after 10 years. An inflation rate of around 35% would be needed to make it 25 billions. That's not to say that we won't get a 35% inflation rate. Our role model Zimbabwe has a worse one.
Percentages, I have found, are seldom understood by the public. And compound interest ( or inflation ) is also widely misunderstood.
Now if a person borrows money to the tune of 80 - 90 percent of their home's value, what is to prevent them borrowing another 35% of the value in unsecured lending? Credit cards? Car equity release? From your mum and dad?
When I bought my first house there was a period of crazy house price inflation. No matter what I earned or saved the runaway prices ran away faster. I lived on noodles for a year to get the place. We have expectations of an easy life nowadays. New house fully furnished. Holidays abroad every year. Kids getting mountains of toys at every christmas. And that was what NRk was selling.
Its not just the percentages being lent to people, or the income multiples. Many of us have gorged ourselves on cheap credit and a tomorrow will never come attitude. So lets all give up this blame game. Brown's an imbecile, kick him out this/next year. But learn to live within your means. It is better for everyone, and for our planet if we ask " do I really need that?", instead of "do I want that?".
DBC REED: "Polly Toynbee is fairly sound on LVT; Richard Murphy,following her big property tax article, is looking at LVT; Tim Worstall is straight forward LVT-supporter."
So Poly has tagged onto an alternative tax proposal that a lot of other folk have put into the public domain a while ago. Good, perhaps there is hope for her yet, but while she insists on prating on with her other ridiculous snake oil solutions, then ridicule ought to be her desert.
DBC REED: "But they all appear to hate each other."
Who cares if a group of people 'hate' each other, if they can agree that a particular measure is a good idea, then it might be a good idea.
DBC REED: "There is far too much personal claptrap on the blogs."
Well, they are essentially personal opinions, what do you expect. The reader is supposed to filter the claptrap.
DBC REED: "property tax but this is the most important issue at the moment."
I fancy it would have been the most important issue about five years ago. The depression and HOW the government is dealing with it is [IMO} the most important issue at the moment.
DBC REED: ""We all know Polly Toynbee has a house in Tuscany" as the sum total of the alleged argument."
But that is not the sum total. The problem with Polly is she a self appointed 'priestess' handing down commandments from on high, such as; we should not have two homes, we should only drive a motor vehicle of a certain engine size , must not fly for convenience, people who earn over a certain amount are immoral, people should pay more tax.
All that is hypocritical claptrap when we know; she has more houses than a sane man can shake a stick at, she uses huge amounts of energy to support her life style, earns excessively over the amount she thinks others should, pays only the amount of tax she needs when she is in a position to pay much much more. And finally, works for an organization that preaches, oh god, ad nauseam how we should pay more tax and be better citizens, then arranges its own tax affairs to effect a tax subsidy from the rest of the population.
DBC REED: "Some of this patronising attitude is creeping into remarks about Alice Cook on this her own blog.
"
I dare say Alice is more than capable of seeing off folk she disapproves of.
Finally. Personally, I couldn't care less if Polly Toynbee has £50 notes coming out of her kazoo**, she can spend it where and on what she likes.
I do object when some stupid hypocritical monster tries to ram her 'religious' doctrine down my throat. If she stops doing that, then as far as I am concerned she can sink into the oblivion she richly deserves.
**I don't know where a kazoo is and I have no interest in finding out.
If you don't know what a kazoo is,you should try listening to Stealin'Stealin' by the Memphis Jug band where this "Instrument", a variant of toilet paper and comb, is "played"in a solo by Ben Raney. Fortunately ,not even this atrocity can diminish this great blues.
If hypocrisy and arrogance were the issues,neither the Tory party nor the press would get a hearing.Somehow I do not think that if Toynbee were poor (and a man) she would escape your antagonism .
The fact that she is right about house price taxation is of no interest to you whatsoever.
Your remarks are just ad hominem ranting of the silly sort.
"a variant of toilet paper and comb,"
Of course that would be the old style tracing paper toilet paper? Ahh, the good old days!
" is "played"in a solo by Ben Raney. Fortunately ,not even this atrocity can diminish this great blues.""
An appreciation of Blues and Jazz, what do you know, we have some things in common.
"I do not think that if Toynbee were poor (and a man) she would escape your antagonism ."
Nope. It is purely because she mostly spouts rubbish.
There are plenty in the Tory party I wouldn't urinate over if they were on fire.
"The fact that she is right about house price taxation is of no interest to you whatsoever."
She may be right about house price taxation, but it isn't her idea, it has been around for quite a long time. Suddenly, she vomits something sensible, one swallow doesn't make a summer.
DBC REED: "Your remarks are just ad hominem ranting of the silly sort."
Well, what do you know? Now I have something in common with Poly Toynbee too.
Good night.
I'm still of the mind that the banks should have been allowed to fail. They wouldn't all have failed and of course the Government should have protected deposits... but nothing else.
Frankly, none of us can afford the massive levels of credit currently being pumped into the system. Also some of us without mortgages or loans don't much like the idea of having to pay for all this eventually... and pay for it we will!
@anon
You are not taking into account that all toilet paper was as hard as tracing paper in the the days of yore.
If you know so much about jazz and blues why have you never heard a kazoo?
The undiscriminating would recoil from Stealin,Stealin,because of the kazoo outburst in the middle: in the same way you cannot see that Polly Toynbee's more conventional remarks do not detract from her hard-nosed analysis of the housing market, which is far from fashionably lefty.
"You are not taking into account that all toilet paper was as hard as tracing paper in the the days of yore."
Well, I did call it tracing paper for a reason, it made better tracing paper than lavy paper.
"The undiscriminating would recoil from Stealin,Stealin,because of the kazoo outburst in the middle:"
Not bothered what instrument an artist uses so long as it is used with some skill and sounds good. In that respect I am undiscriminating, I enjoy Jaz and Blues simply because when played well, it is enjoyable.
On the other hand reading a Toynbee tract is not.
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