Another Bit Of Unexpected News

[Blue Peter]

Remember the Special Liquidity Scheme and all the other wheezes the BoE used to replace the sudden drying up of wholesale funding. They are due to end in 2012, and people such as Merv have been saying that he doesn't expect to renew them. But that obviously begs the question of where the banks are going to get the money to repay what they owe. Well, it looks like the boffins have had another look:

Now the clear implication of the FSA's analysis of banks' £440bn financing requirement is that taxpayers would not be able to withdraw that £300bn of support in 2012 without precipitating another banking crisis, or an economic crisis, or both.

Which means that any new government has a very difficult decision to make more-or-less immediately after the general election: should that £300bn of taxpayer support be extended?

Pesto

So, the banks can't pay it back (despite record profits and fat bionuses all round), so I guess that, unexpectedly, muggins the tax-payer will have to put his hand in his pocket again. Marvellous,

Peter.

[@contradevian]

So, the banks can't pay it back (despite record profits and fat bionuses all round), so I guess that, unexpectedly, muggins the tax-payer will have to put his hand in his pocket again. Marvellous,

Peter.

The banks have absolutely no intention of paying this money back and will ensure their customers and taxpayers make good their losses. The banks lobbying teams will be working overtime at the moment.

[DabHand]

Yeah they couldnt possibly increase deposit rates and cover it that way... l expect this will somehow self correct when there is no future demand for credit because people are either maxed out, have no opportunity to make use of it, or are unable (no job etc).

We already had the pretend "economic boom/there is no recession" credit bubble. Its gone and there isn't another one to take it's place. Unless they intend to give money away by lending to people that wont pay it back, this sausage is done.

[ken_ichikawa]

The banks have absolutely no intention of paying this money back and will ensure their customers and taxpayers make good their losses. The banks lobbying teams will be working overtime at the moment.

no banks will be offering MPs lucrative positions for when they are no longer MPs, this is the reason money is being given to them.

if you can't afford to give them a massive massively well paid job then you will NOT get government assistance.

TATA for example could give Labour MPs massive jobs when they fall from office. So could EDS and BAE systems and the banks.

While companies such as LDV cannot afford to give high paying jobs to MPs post office therefore they do not get any 'assistance'

[R K]

and the little one said "roll over, roll over"

[Gone baby gone]

If they can't pay it back, it's time to dissolve them in a controlled manner. At the very least they should get broken up into smaller entities, with Value-at-Risk limits placed on their activities.

[Alan B'Stard MP]

It's a permanent monetization.

[Optobear]

It's a permanent monetization.

Absolutely is just that. The money is printed, and is their with the taxpayer owning (supporting) the banks.

The article by Peston makes it clear just how enormous the problem is, if we save as we have been, then we can only save £40bn out of the £440bn amount in 3 years.

Presumably the market could see this was inevitable which is why the pound tumbled against the euro so far a couple of years back?

All our pounds were devalued, all our houses dropped too.... but the sheeple haven't realised! Amazing isn't it!

Paper money, what a system.

Optobear

[lurker07]

"Protecting the Recovery".

[interestrateripoff]

I just love the unexpected, it appears that the experts are always caught out by the unexpected.

Still no one could have predicted it that's why it's unexpected.

Head in the sand.

[Realistbear]

This is why our present day banksters, once a breed of prudent and stable gentlefolk, are clearing the tills on the basis that it won't be there for much longer. The bonus schemes are launderies to salvage what they can for their personal accounts before the taxpayers realise the cupboard has been bare for years.

We have just been stung and stung big time. The biggest heist in history and no one will ever know the extent of the heist that has been pulled off under oour noses.

[Ben from Dover]

Remember the Special Liquidity Scheme and all the other wheezes the BoE used to replace the sudden drying up of wholesale funding. They are due to end in 2012, and people such as Merv have been saying that he doesn't expect to renew them. But that obviously begs the question of where the banks are going to get the money to repay what they owe. Well, it looks like the boffins have had another look:

Pesto

So, the banks can't pay it back (despite record profits and fat bionuses all round), so I guess that, unexpectedly, muggins the tax-payer will have to put his hand in his pocket again. Marvellous,

Peter.

If the government 'roll-over' this debt (and lets face it that is what is going to happen) the HPC will take 20 years rather than 10

[Dorkins]

I wouldn't worry too much, one way or another those debts are going to be written off.

We are currently paying £27.2bn a year (about £1300 per household) to service the interest on £799bn of government debt, an interest rate of about 3.4%. Say the average interest rate on government debt rises to 6%, that takes our interest payments to £48bn, or £2400 per household per year. How do you think the country would react to a £1000 per household per year tax hike? But wait, it gets better. We are currently running deficits of £178bn anyway, so at 6% we are guaranteeing ourselves a tax hike of £500 per household per year, every year, just to pay interest until the government gets the deficit under control. Then imagine we take on another £300bn in debts from the financial sector, that's another £900 per household per year to service. In 5 years the government could find itself asking each household in the UK to stump up over £6k/year just to service the national debt, taking the wild assumption that the government carries on with current spending, no tax rises, and there is a 2.4 percentage point rise in the cost of servicing UK government debt. That is more than most people pay to put a roof over their heads. Think that's ever going to happen? There are some absolutely massive cuts on the way, and not taking on the losses of the financial sector will almost certainly be one of them.

Edited March 11, 2010 by Dorkins

[Ben from Dover]

I wouldn't worry too much, one way or another those debts are going to be written off.

We are currently paying £27.2bn a year (about £1300 per household) to service the interest on £799bn of debt, an interest rate of about 3.4%. Say the average interest rate on government debt rises to 6%, that takes our interest payments to £48bn, or £2400 per household per year. How do you think the country would react to a £1000 per household per year tax hike? But wait, it gets better. We are currently running deficits of £178bn anyway, so at 6% we are guaranteeing ourselves a tax hike of £500 per household per year, every year, just to pay interest until the government gets the deficit under control. Then imagine we take on another £300bn in debts from the financial sector, that's another £900 per household per year to service. In 5 years the government could find itself asking each household in the UK to stump up over £6k/year just to service the national debt, taking the wild assumption that the government carries on with current spending, no tax rises, and there is a 2.4 percentage point rise in the cost of servicing UK government debt. That is more than most people pay to put a roof over their heads. Think that's ever going to happen? There are some absolutely massive cuts on the way, and not taking on the losses of the financial sector will almost certainly be one of them.

or some absolutely massive inflation

[Dorkins]

or some absolutely massive inflation

Inflation goes up, interest rate on government (and household!) debt skyrockets, back to square one. There is no inflationary escape from where we are now, that's why it's a depression.

[dances with sheeple]

I wouldn't worry too much, one way or another those debts are going to be written off.

We are currently paying £27.2bn a year (about £1300 per household) to service the interest on £799bn of debt, an interest rate of about 3.4%. Say the average interest rate on government debt rises to 6%, that takes our interest payments to £48bn, or £2400 per household per year. How do you think the country would react to a £1000 per household per year tax hike? But wait, it gets better. We are currently running deficits of £178bn anyway, so at 6% we are guaranteeing ourselves a tax hike of £500 per household per year, every year, just to pay interest until the government gets the deficit under control. Then imagine we take on another £300bn in debts from the financial sector, that's another £900 per household per year to service. In 5 years the government could find itself asking each household in the UK to stump up over £6k/year just to service the national debt, taking the wild assumption that the government carries on with current spending, no tax rises, and there is a 2.4 percentage point rise in the cost of servicing UK government debt. That is more than most people pay to put a roof over their heads. Think that's ever going to happen? There are some absolutely massive cuts on the way, and not taking on the losses of the financial sector will almost certainly be one of them.

Agreed, anyone thinking the banks will be bailed indefinately is going to be disappointed. Probably the reason as RB says that they are taking bonus and saying f*ck the morals, it`s over.

[ken_ichikawa]

Inflation goes up, interest rate on government (and household!) debt skyrockets, back to square one. There is no inflationary escape from where we are now, that's why it's a depression.

Ergo Injin world, they will keep on stealing until the entire system collaspes and run away with the proceeds coverted into something such as gold.

[Ben from Dover]

Inflation goes up, interest rate on government (and household!) debt skyrockets, back to square one. There is no inflationary escape from where we are now, that's why it's a depression.

(most) of the current debt is not indexed. Short - sharp burst of inflation would do the trick. The real question is how do incomes keep up. The answer is that they wont and we will see a decline in living standard. that is how we will pay the cost of the debt.

Don't believe me? - we have above target inflation, ZIRP, QE massive extra support for the banking system to encourage spending, new public sector jobs being created in an attempted Keynesian stimulus. that is a cauldron of inflation

[Nationalist]

I agree - inflation is the easy out. Most debt is fixed coupon. Make those nasty mortgages go away with inflation; rob the savers.

[Fudge]

Most of the wealth created in the economy was being channeled into banks and the City anyway although there was a illusion that is was being done willingly, thats whats been happening for decades.

All thats changed is that because people are upto their eyeballs in debt and in the middle of an epic recession people cant take on any more so

wealth will be taken in the form of taxes and given to the banks and the City boys because is cant be done willingly when people are suffering it needs to be done by force.

[Dorkins]

(most) of the current debt is not indexed. Short - sharp burst of inflation would do the trick. The real question is how do incomes keep up. The answer is that they wont and we will see a decline in living standard. that is how we will pay the cost of the debt.

Don't believe me? - we have above target inflation, ZIRP, QE massive extra support for the banking system to encourage spending, new public sector jobs being created in an attempted Keynesian stimulus. that is a cauldron of inflation

The government is not capable of engineering a short, sharp burst of inflation. They dropped the base rate to 0.5% and printed £10k per household in a year. The little bit of inflation we are experiencing is the death throes of the bubble, same as the dead cat bounce in house prices. I wish any business foolish enough to up its prices this year the best of British with getting punters through the door. People are up to their eyeballs in debt and nobody is getting much of a payrise. If prices go up, people will just buy less stuff, not take on more debt to buy overpriced junk. I know that deflationists are as unpopular on HPC as HPCers are with the homeowning British public, but things are only going one way from now on, fast or slow, and the direction is down.

[shindigger]

If they can't pay it back, it's time to dissolve them in a controlled manner. At the very least they should get broken up into smaller entities, with Value-at-Risk limits placed on their activities.

Id settle for "uncontrolled" too.

[VeryMeanReversion]

This thread is the biggest issue for HPCrs in my opinion. Everything rests on it.

Old system: House prices = Bank credit = Leveraged savings.

Mad system: House prices = Bank credit = Mortgage Backed Securities

Now system: House prices = Bank credit = Government support schemes

Future system???

I think it mostly comes down to the bond markets now. Will they or will they not force interest rates up? Will the government extend the support until the crisis is so large, it forces a new monetary system?

VMR.

[scepticus]

Yeah they couldnt possibly increase deposit rates and cover it that way...

you are right, that wouldn't work. A completely stupid idea.

[scepticus]

No I think this is different from the qe programme.

sls involved swapping mbs for gilts so they could trade it in the markets for cash.

(although the boe then went and bought gilts with qe money in the markets!)

But stopping sls is different from stopping qe - that is my point.

in a pure credit economy there would be no option but for the private sector to hold public sector debt and the public sector to hold private sector debt. over time one would expect the asset/liability differential between the two sectors to narrow since the current vast debt of the public sector would not be sustainable under such a regime.

The fact is we have already had a pure credit economy at least since the mid 80s, but this fact has been hidden by the robust expansion of credit since that time. The fact that the system then immediately expanded to maximum leverage as soon as the last vestiges of money were abolished in the 80s is not surprising.

What we have no gotten to is the next phase of the transition that comes after the initial inevitable inflation, which depending on your point of view ends in only one of two ways:

1) repudiation of credit money in its entirety. back to barter. Think 16th century.

2) a stabilisation phase characterised by price volatility and uncertainty but ultimately stability of velocity (if not stability of rates and prices).

Either is possible IMO but I feel 2 is more likely.

There are no intermediate resting points which don't resolve to either 1 or 2 before long.