Government May Inject 10bn Billion Into Northern Rock

[laurejon]

Rather than looking at the compexities of the banking system, which clouds the issue, look at the facts.

The banks are sitting on a huge pile of bad debt, and that debt is currently unknown, they cannot themselves unravel the complexity of their business. They are unable to determine today with any degree of clarity, what exactly their financial position is. Its not even a case of them not telling, its the case they just dont know.

From what I have read, they have what would appear to be cyclical liabilities, whereby they made loans and sold the debt on packaged up, then not realising bought the same debt back, sold it on, then bought it back again.

The Globalisation of Banking, and the lack of controls at a Global Level had created a situation whereby the Banks Executives have effectively run the banks into the ground, hiding the evidence in complexity their successors do no understand.

Any further loans by Central Banks today would only put off the inevitable, and maybe keep things going till the next election at best.

The hard cold facts are that the vast majority of loans lent by banks are secured on property, and that assett is ever depreciating, it bad enough for a member of the public to suffer a 50% drop in prices, but for a bank with Billions of pounds and security of hundreds of thousand of properties, its a disaster. Add the currrent defaults, and the projected defaults, it is clear that no amount of money will encourage banks to begin lending on property in any big way.

So 10 Billion to Northern Rock will do nothing other than put a few grains of sand into the huge black hole they are looking at currently, and the larger hole that will open up as even more people default in the future.

[Injin]

Evidence, please.

http://www.bankofengland.co.uk/statistics/.../final%20nc.pdf

[A.steve]

http://www.bankofengland.co.uk/statistics/.../final%20nc.pdf

I'd like to point out (since, I'm pretty sure I was the first person to post that particular link here) that "people" don't have Bank of England reserve accounts. I tried to stimulate discussion about these sums - and hinted about how they represent something unusual that (in my opinion) stimulates deflation. My argument went that if these sums were not held as BoE reserve balances, they'd be held as treasuries. The fact that the BoE has paid interest on these reserve balances (which are definitely distinct from cash) has one big consequence: a bank can chose to expand its reserve balance rather than un-repo a bond in the weekly OMOs... (with identical implications for the bank... but, potentially, keeping sovereign debt off the open market.) For banks with a surplus of cash, the reserve account clearly presents an alternative to the inter-bank market... hence preventing LIBOR from falling below base rate - even in extreme circumstances.

If you'd like me to think that issue of notes and coins is relevant, I'd ask what proportion of goods and assets you think are paid for using physical cash.

Edited January 23, 2009 by A.steve

[BXLONDONMAN]

http://www.bankofengland.co.uk/statistics/.../final%20nc.pdf

oh dear,oh dear,,now we have the proof things are much worse then i thought...it looks Bad really Bad oh shit..no hope for the pound now !!!!

[Injin]

http://www.bankofengland.co.uk/statistics/.../final%20nc.pdf

http://news.bbc.co.uk/1/hi/business/7703642.stm

£50 notes in circulation 'up 20%'

The number of £50 notes in circulation has increased by 20%, according to the chief executive of the world's biggest security transport company.

Nick Buckles, from G4S, told BBC Radio 4's Bottom Line that it appeared people were "hoarding cash at home"

http://www.moneynews.co.uk/5843/abbey-insu...g-cash-at-home/

Abbey Insurance: Brits hoarding cash at home

http://www.independent.co.uk/money/invest-...nd-1055316.html

We're hoarding the cash that they want us to spend

http://www.thisismoney.co.uk/news/article....mp;in_page_id=2

Banks are hoarding cash and Government must act (says Vince Cable.)

[Injin]

I'd like to point out (since, I'm pretty sure I was the first person to post that particular link here) that "people" don't have Bank of England reserve accounts. I tried to stimulate discussion about these sums - and hinted about how they represent something unusual that (in my opinion) stimulates deflation. My argument went that if these sums were not held as BoE reserve balances, they'd be held as treasuries. The fact that the BoE has paid interest on these reserve balances (which are definitely distinct from cash) has one big consequence: a bank can chose to expand its reserve balance rather than un-repo a bond in the weekly OMOs... (with identical implications for the bank... but, potentially, keeping sovereign debt off the open market.) For banks with a surplus of cash, the reserve account clearly presents an alternative to the inter-bank market... hence preventing LIBOR from falling below base rate - even in extreme circumstances.

If you'd like me to think that issue of notes and coins is relevant, I'd ask what proportion of goods and assets you think are paid for using physical cash.

The issue of the notes and coins is relevent, because all the other "types" of money trade on their limited value, just like gold used to when the goldsmiths issued loads of fraudulent claim checks.

[HAMISH_MCTAVISH]

MTM might decrease the assets of a bank using them to meet Basel requirements.

Which was my point. Expect further relaxation soon.

[1929crash]

OK, much as I like arguing....... It really would be helpful if people read the thread.

See earlier statements about "mark to market" accounting rules.

Basel is a bitch.

Yeah, I read your earlier posts including the boast about how right you have been in the last few weeks.

I think we are a little way past Basel, accounting rules for banks and so on. The crisis has leaked from the world of pixel pounds and dollars into the real wolrd economy where real jobs, production facilities and distribution networks are imploding, and not just in a little way, but massively.

This in turn is having an impact on even more fundamental things like investment in energy infrastructure with a slew of projects being cancelled and workers laid off - and unlike a bank account and a paper financial instrument the projects that are being junked now will take time to get up and running again. And that time will have a further impact on the real world economy and the financial system and so on.

Oh and please forgive me if I have a little less faith than you in the UK governemnt's credit rating. The AAA credit rating was bestowed on many financial institutions, almost up to the moment of death, and in any event that confidence does not seem to be shared by foreign currency markets.

[A.steve]

Which was my point. Expect further relaxation soon.

Or, maybe, the opposite.

[Injin]

Which was my point. Expect further relaxation soon.

The banking system is insolvent, it has no assets.

Thsi isn't much of a change, the banks haven't had anything to offer anyone for 70 plus years but the game where they expand the money supply exponentially to bail themselves out is over. It's done.

The accounting rules, the governments orders and all of that - none of it matters. The people in the government and banking system are playing king canute against a tide of rising money.

[BXLONDONMAN]

http://news.bbc.co.uk/1/hi/business/7703642.stm

£50 notes in circulation 'up 20%'

http://www.moneynews.co.uk/5843/abbey-insu...g-cash-at-home/

Abbey Insurance: Brits hoarding cash at home

http://www.independent.co.uk/money/invest-...nd-1055316.html

We're hoarding the cash that they want us to spend

http://www.thisismoney.co.uk/news/article....mp;in_page_id=2

Banks are hoarding cash and Government must act (says Vince Cable.)

all this cash people are keeping at home won't do much for the banks then !!

look's like we will pump in more money into the banks then, if more and more keep there cash at home instead of lending it free of interst, as the banks would love and god to the bankers brown has given them very low interst rates !! so they really do get it at very low interst rates i'am happy people are keeping it at home less risk then any bank !!!

[A.steve]

The issue of the notes and coins is relevent, because all the other "types" of money trade on their limited value, just like gold used to when the goldsmiths issued loads of fraudulent claim checks.

Modern currencies are not backed by gold - this makes your argument an anachronistic irrelevance.

If high-street banks fail and take demand deposits with them (which, of course, they won't) then notes and coins, too, will be worthless.

[_w_]

Rent a rating. Despite all this doom and gloom about massive bank liabilities, everyone knows damn well that the actual defaults will be tiny. The rest is just hype. Theoretical mark to market is killing the economy, as 90% plus of these loans will eventually pay off the full amount, and even those who default will likely repay better than half of what was owed. It's complete fairytale stuff to assume that actual liabilities will ever be more than 3-5% of total potentials.

I'm not saying they won't try (I think they will), but it's Groundhog day.

Do you have any idea that what you are writing here was exactly what started the crisis??? The model, rent a rating, the lot?

There could be no hype before the crisis started could there? So how come these failed models and approach made such a mess?

Edit to add: the UK government is putting itself forward as the new monoline for UK mortgages. Does it not worry you that every monoline (rent a rating) has gone bust (in one form or another)? Doesn't it tell you the model is failed? Or was it just hype?

Edited January 23, 2009 by williamdb

[A.steve]

all this cash people are keeping at home won't do much for the banks then !!

On the contrary. By keeping cash at home, there is corresponding treasury debt in the safe at the royal mint. This keeps up the demand for cash, paid for by the yield on sovereign debt. Cash is no great shakes for banks - though it might be for government... because cash transactions are seldom taxed.

[1929crash]

I'm not saying they won't try (I think they will), but it's Groundhog day.

Do you have any idea that what you are writing here was exactly what started the crisis??? The model, rent a rating, the lot?

There could be no hype before the crisis started could there? So how come these failed models and approach made such a mess?

Edit to add: the UK government is putting itself forward as the new monoline for UK mortgages. Does it not worry you that every monoline (rent a rating) has gone bust (in one form or another)? Doesn't it tell you the model is failed? Or was it just hype?

Excellent!

[billybong]

"..Abbey Home Insurance issued a warning to people not to cut back on their household contents insurance .."

Invest in secure bolts and chains etc at a fraction of the cost.

Edited January 23, 2009 by billybong

[Injin]

all this cash people are keeping at home won't do much for the banks then !!

look's like we will pump in more money into the banks then, if more and more keep there cash at home instead of lending it free of interst, as the banks would love and god to the bankers brown has given them very low interst rates !! so they really do get it at very low interst rates i'am happy people are keeping it at home less risk then any bank !!!

The money never used to exist, it was multiple claims recordings of the same cash.

Now it exists and has been handed out.

This is hyperinflationary. All it needs now is for it to pick up a small amount of velocity and we are zimbabwe/weimar and the government can't control that at all because it's not in their hands.

[Injin]

Modern currencies are not backed by gold - this makes your argument an anachronistic irrelevance.

They are backed by notes and coins. All unreal systems need a real world anchor - this is the fiat systems anchor.

I

f high-street banks fail and take demand deposits with them (which, of course, they won't) then notes and coins, too, will be worthless.

Nothing to do with that - it's taxes, licences and fines that count. As long as the notes and coins are relatively rare, then the rest of the system can sit on top of it.

In any event, this is easily testable.

[BXLONDONMAN]

The money never used to exist, it was multiple claims recordings of the same cash.

Now it exists and has been handed out.

This is hyperinflationary. All it needs now is for it to pick up a small amount of velocity and we are zimbabwe/weimar and the government can't control that at all because it's not in their hands.

so be it ...we will get a change of government if it goes the same way as zimbabwe..then we can roll out a new pound worth god knows what !!!

[A.steve]

They are backed by notes and coins. All unreal systems need a real world anchor - this is the fiat systems anchor.

...

Nothing to do with that - it's taxes, licences and fines that count. As long as the notes and coins are relatively rare, then the rest of the system can sit on top of it.

...

In any event, this is easily testable.

The first two points are contradictory. The last point is just bizarre... what test do you propose that will be "easy"?

[Injin]

The first two points are contradictory.

How so?

The last point is just bizarre... what test do you propose that will be "easy"?

I am presuming you are able to talk to people, so round some up and perform a little experiment. Start with a few quid*, then do the fractional reserve recording, then change the recording into actual notes and see what happens to the value of each pound.

Cake, tbh.

*Or take monopoly money, whatever.

[Quagmire]

Hamish is quite the agitator

I think he misses the point though.

OK lets give mortgages out like sweeties again! Problem solved!

Erm no. This doesn't make peoples jobs any more secure, it doesn't make a 1 bedroom shoebox for 200k any more desirable, it doesn't increase the sale of land rovers or jaguars, it doesn't bring Woolworths back and it doesn't increase the appetite for debt.

The people are licking their wounds, paying back debts, even saving given the economic uncertainty. They will soon be facing food and energy price inflation brought on by the weakened pound. Gordon is obsessed with the housing market, when the problem is much larger.

[A.steve]

How so?

You claimed that our currency is backed by notes and coins... then you said that taxes (licences and fines) are what counts... but these are not paid using notes and coins (almost universally.)

Fiat is backed by debt and implicit debt - i.e. tax obligations... not notes and coins.

If a currency is backed,

I am presuming you are able to talk to people, so round some up and perform a little experiment. Start with a few quid*, then do the fractional reserve recording, then change the recording into actual notes and see what happens to the value of each pound.

I understand perfectly how fractional reserve works... and how fiats require central banks.

When you judge the value of each pound, I strongly suspect, you ignore the burden of debt. It is these debts that prevent the value of each pound deteriorating. The value of each pound is undermined by real counterfeiting and expansion of government debt - or - to put it another way - government overspend. In the absence of fraud (and, no, fiat itself is not a fraud in this context) the value of each pound is preserved. The value of assets, however, can be manipulated if they are accepted as collateral for loans.

Edited January 23, 2009 by A.steve

[spivT]

Hamish is quite the agitator

I think he misses the point though.

OK lets give mortgages out like sweeties again! Problem solved!

Erm no. This doesn't make peoples jobs any more secure, it doesn't make a 1 bedroom shoebox for 200k any more desirable, it doesn't increase the sale of land rovers or jaguars, it doesn't bring Woolworths back and it doesn't increase the appetite for debt.

The people are licking their wounds, paying back debts, even saving given the economic uncertainty. They will soon be facing food and energy price inflation brought on by the weakened pound. Gordon is obsessed with the housing market, when the problem is much larger.

Incessant property ramping and lax lending is predominantly what caused the bubble, the two of the above will have to return in a big way [i'm talkin return of the 100% mortgage and wall to wall property porn] to change sentiment any time soon......even after the great reversal of fortunes coming in Q3/Q4 2009, eh mctavish ?

There is an argument that once there is mcnulty's light at the end of the tunnel and people come to the conclusion that redudancy won't happen to them, that they'll bounce back in to send prices shooting back up, but a lot of forces have to work together for that to happen. And i wouldn't underestimate the impact of grim unemployment news and how it will drive sentiment.

That's an easy predition for mctavish to make, calling a bottom in 2009 is a piece of piss......as it gives four quarters for the anticipated 15-20% drops we're likely to see. And beyond that there's a danger of overshooting on the correction, predicting the bounce back is a lot more difficult, and i think it'll be a lot more drawn out than he thinks in 2010, that's if the bottom doesn't come mid 2010 rather than late 2009. Perhaps he'd like to make a % prediction on the correction and timescale ?

I still believe prices to bounce around the bottom for a while. And as for the 10bn to NR, wonder if it needs most of that just to be able to maintain it's current customers after they come off their deals and still be in a position to pay back the govt. loan albeit not as aggresively. The 100bn figure that McTavish likes to quote is also a fair amount of smoke and mirrors going on.....or rather the devil in the detail. All i see is deleveraging i don't see an appetite to send prices to unaffordable just as they reach affordable. Despite our self-centredness, i'm not sure how much sentiment there will be for propping up prices despite improved liquidity. Maybe there will be an attitude of focusing on deposits and lower LTV from buyers rather than an all confsuming focus on monthly IO repayments and how much the bank are prepared to lend.

I don't think there's any doubt this has played out quicker than previous crashes, but the timing, duration of the bounceback and the green shoots of the next bubble will change month by month now as the predictors rush to type the latest govt. spin into their predictometers.

[Injin]

You claimed that our currency is backed by notes and coins... then you said that taxes (licences and fines) are what counts... but these are not paid using notes and coins (almost universally.)

Fiat is backed by debt and implicit debt - i.e. tax obligations... not notes and coins.

So if people want the latest trainers because of the endorsement of a football star, this changes their value compared to if they want them because they are a really good shade of blue?

Or doesn't it matter - if people demand them then the value is set by how many of each there are?

I understand perfectly how fractional reserve works... and how fiats require central banks.

Gold didn't.

When you judge the value of each pound, I strongly suspect, you ignore the burden of debt. It is these debts that prevent the value of each pound deteriorating. The value of each pound is undermined by real counterfeiting and expansion of government debt - or - to put it another way - government overspend. In the absence of fraud (and, no, fiat itself is not a fraud in this context) the value of each pound is preserved. The value of assets, however, can be manipulated if they are accepted as collateral for loans.

You don't really think that if they turn all the money into banknotes it'll retain it's current value, do you?

Every flat surface in the country would be covered in tenners!