Jump to content
House Price Crash Forum
lets get it right

How Much Of The Deficit Was Spent On The Banks?

Recommended Posts

It seems the New Labour spin machine has decided to contest the accusation that the Coalition inherited a mess caused by Labour by saying that ...

'most of the deficit is because we bailed out the naughty banks and we had to do that otherwise people's savings were at risk - we did what we had to do etc.'

... and ...

'the deficit before the banking crisis was lower than they inherited in 1997'

I have heard this argument advanced, in almost identical words, a few times over the last week. It seems old habits die hard and, presumably, anyone senior in New Labour has been told what the message is. And to repeat it over and over again.

My question is ... is it true?

How much of our current borrowing is due to Brown borrowing money to bail out the banks?

And, what was the deficit in 1997 and 2007?

Share this post


Link to post
Share on other sites

It seems the New Labour spin machine has decided to contest the accusation that the Coalition inherited a mess caused by Labour by saying that ...

'most of the deficit is because we bailed out the naughty banks and we had to do that otherwise people's savings were at risk - we did what we had to do etc.'

... and ...

'the deficit before the banking crisis was lower than they inherited in 1997'

I have heard this argument advanced, in almost identical words, a few times over the last week. It seems old habits die hard and, presumably, anyone senior in New Labour has been told what the message is. And to repeat it over and over again.

My question is ... is it true?

How much of our current borrowing is due to Brown borrowing money to bail out the banks?

And, what was the deficit in 1997 and 2007?

not sure how it is possible to borrow from a banking system that needs cash to help it keep lending?

Share this post


Link to post
Share on other sites

It seems the New Labour spin machine has decided to contest the accusation that the Coalition inherited a mess caused by Labour by saying that ...

'most of the deficit is because we bailed out the naughty banks and we had to do that otherwise people's savings were at risk - we did what we had to do etc.'

... and ...

'the deficit before the banking crisis was lower than they inherited in 1997'

I have heard this argument advanced, in almost identical words, a few times over the last week. It seems old habits die hard and, presumably, anyone senior in New Labour has been told what the message is. And to repeat it over and over again.

My question is ... is it true?

How much of our current borrowing is due to Brown borrowing money to bail out the banks?

And, what was the deficit in 1997 and 2007?

I don't know the answer, but the two are not independent of each other, reckless lending by the banks to fund consumers lifestyles will have artificially propped up tax receipts for stamp duty, VAT, corporation tax etc in the short term, so whatever the answer is, it cannot be looked at in isolation.

Share this post


Link to post
Share on other sites

For some reason New Labour didn't include the bank bailouts in their deficit spending, it was filed off balance sheet.

The 2010 budget deficit will be around 10pc of GDP – much more than when the UK went "cap-in-hand" to the International Monetary Fund (IMF) in 1976. That doesn't include the multi-billion pound bank bailouts – which the Tories have buried off balance-sheet, like Labour before them.

My link

Either they don't know or they're deliberately sending us around in circles.

Share this post


Link to post
Share on other sites

For some reason New Labour didn't include the bank bailouts in their deficit spending, it was filed off balance sheet.

Yet the New Labour mouthpiece on Question Time last week (John Denham (think that's his name)) said that the reason for the deficit is that Labour were forced to bail out the banks. If it wasn't for that, everything would have been rosy.

And it went unchallenged.

Share this post


Link to post
Share on other sites

Erm, lots of 2007 and 2008 deficit was due to the banks. With some carry-over into Lloyds' rights issues in 2009.

But none of that's in the past 12 months. Unless there's something they're not telling us[1], NONE of today's deficit is the banks. Rather the reverse: if anything they're back to being net contributors to the profit and loss account!

[1] OK, I haven't looked very hard.

Share this post


Link to post
Share on other sites

NONE of today's deficit is the banks. Rather the reverse: if anything they're back to being net contributors to the profit and loss account!

How did you work that one out then? The banks have saddled us with debts that will take generations to pay off.

Sounds like the same magical ponzi accounting that led us into this mess in the first place.

Share this post


Link to post
Share on other sites

How did you work that one out then? The banks have saddled us with debts that will take generations to pay off.

Sounds like the same magical ponzi accounting that led us into this mess in the first place.

I'm more puzzled now than I was when I first posed the question.

It seems bank bailouts amount to getting on for a trillion pounds. Yet they haven't borrowed a trillion pounds.

If 'a trillion pounds' is involved - then I guess it is reasonable to argue that one minute everything was okay, the next the governement had to lay its hands on a trillion pounds and that is why we're in the mess we're in.

Edited by Let's get it right

Share this post


Link to post
Share on other sites

My question is ... is it true?

How much of our current borrowing is due to Brown borrowing money to bail out the banks?

And, what was the deficit in 1997 and 2007?

The government owns shares in RBS, Lloyds etc. Currently these shares are worth more than what they paid for them and they are actually sitting on a paper profit.

The banks have nothing to do with the deficit.

The only possible connection is through "boom" tax revenue that is no longer collected as they don't make much profit currently.

The deficit is caused by insufficient tax revenue to cover government spending.

http://www.ukpublicspending.co.uk/

http://www.guardian.co.uk/news/datablog/2010/apr/25/tax-receipts-1963

You may notice that the “cuts” actually involve increasing spending as well.

Share this post


Link to post
Share on other sites

How did you work that one out then? The banks have saddled us with debts that will take generations to pay off.

Sounds like the same magical ponzi accounting that led us into this mess in the first place.

That's the classic confusion of debt vs deficit.

The big problem is the deficit, aka the rate of growth of the debt. You could service a £100k mortgage (the debt) on a £30k salary. But if the mortgage is growing by another £20k each year (the deficit) you're struggling.

And when the whole economy is struggling, that £30k is unlikely to rise and at risk of falling (the double dip).

Bank bailouts are part of the debt because they were part of the deficit in recent years.

So why is the deficit still so high? Because it's been growing over a decade of profligate public spending, but was masked Enron-style by creative finance.

Share this post


Link to post
Share on other sites

If it wasn't for the greedy bankers, we'd be in double digit GDP growth now, so there would be no deficit.

It's easier to blame the greedy bankers, because 40% of the population didn't vote for them.

Remember that New Labour is the party of the nanny state. Not taking responsibility for your own actions is the order of the day. How well you can blame someone else is all that counts.

Poor Labour, what chance did they have against the evil bankers ?

Share this post


Link to post
Share on other sites

Yet the New Labour mouthpiece on Question Time last week (John Denham (think that's his name)) said that the reason for the deficit is that Labour were forced to bail out the banks. If it wasn't for that, everything would have been rosy.

And it went unchallenged.

The reason it went unchallenged is because even financially literate people like yourself keep using sloppy language to describe the status quo.

Bloo Loo alludes to this. When you ask:

How Much Of The Deficit Was Spent On The Banks?

It's akin to accepting such a thing could happen.

However, as you well know these are entirely different financial entities. For the sake of clarity:

The deficit is merely that money needed by government to pay for its outgoings ( benefits & services provided by the state & interest on government debt ) over and above its income ( taxes ). It's like the extra £100 you add to your credit card every month because your salary can't keep up with your shopping habits and bills.

The bailout was simply an "investment" in banks ( a forced buying of their shares ). It is usually refered to as an "injection of capital" because it involved an effective injection of cash. This cash came in exchange for the shareholding. This is like you buying a share of somebody's house so that they can pay off some of their ( crippling ) mortgage. The money reduces the outstanding debt of that mortgagee ( which in our analogy is the banking system ). It has the effect of increasing the amount of equity in the property. This equity and bank capital are equivalants.

But now look at your shopping again after you've "bailed" out your distressed OO borrower. You now own a share of a house and have probably taken on a big debt. Does that change the amount you have to add to your credit card each month? As long as you can afford the mortgage payments by other means, no. The deficit stays the same. Of course, unless the investment pays for itself ( rents cover mortgage ) the mortgage interest will indeed cause you to put more on your credit card - ie increase your monthly deficit.

Likewise, the government had to go into (deeper) debt to bail out the banks. Just like the mortgagee, that debt produces interest costs. For that reason, like a mortgagee, the government prefers low interest rates. However, like so many mortgagees up and down the country, they regard this debt as the other side of an investment. In theory they could sell this investment, so it represents a different type of debt to that incurred by overspending. Only the interest on this debt is considered equivalent.

When talking of debt, we often refer to principal ( the lump sum borrowed ), and interest ( the regular negative cashflows or costs to the borrower. The bank bailout was the principal. The interest payments we now face for this bailout are the interest.

So in respect of the OP's intial question :

How Much Of The Deficit Was Spent On The Banks?

The answer must be "none". However, a part of the deficit that prevails may well be used to service the debt assumed when bailing out the banks.

Porca adds:

if anything they're back to being net contributors to the profit and loss account!

But this will only be true if there is a mechanism to transfer income from the banks to the exchequer. The exchequer can't simply just appropiate profits. As an income investor knows, this can only come from dividends. However, the nationalised banks are not paying dividends, so thi scontribution must be zero.

HOWEVER, th eexchequer has one trick ordinary investors don't : TAX. The £2.5bn bank levy is a way of extracting income to pay for the bailout fiancing w/o allowing the banks to do the politically unacceptable : pay dividends.

Edited by Sledgehead

Share this post


Link to post
Share on other sites

Bank bailouts are part of the debt because they were part of the deficit in recent years.

Pretty sure the investments in the banks have never been part of the deficit figures, they are hidden off balance sheet. Otherwise we would have seen a huge spike (100-200bn extra 30% of GDP?) in the deficit in 2008.

The deficit figures published only represent Tax - Normal Government Expenditure.

Share this post


Link to post
Share on other sites

I don't think people are asking the right questions when they posit, "how much was spent on the banks?". We live in a debt based monetary system where (in the UK) 97% of the money supply is owned by the banks in the form of debt. Less than 3% of the money in circulation is created dedt free by the mint in the form of coin and note. If and when this is replaced then the banks will own 100% of the money supply.

A debt based system is like a pyramid scheme and in order to continue functioning the amount of debt created has to increase over time. That is why it is inevitable (despite the propaganda stating otherwise) that the current coalition government will increase the amount of debt. They have no choice. Unlike Labour though they will preach austerity and cut jobs and benefits whilst hiding there increased borrowings. They have no choice.

The credit crunch was simply the result of the banks refusing to play their only stupid games anymore. They simply stopped creating credit, and when you do that the system crashes. Since individuals no longer have the ability to take on anymore debt the government did it on their behalf, they then gave it back to the banks in expectation that they would then lend the money into the real economy. The banks instead viewed the real economy as a "no hoper" and instead bought government bonds and other "safe" investments, thereby increasing government debt even more. And so the game continues. The government borrows money from the banks to give back tothe banks who then loan it to the government at interest who in turn use it to buy shares in banks.

The GDP figures are cooked and include such things as QE, and that in no way can described as economic activity.

The debt cannot be paid off otherwise would lose 97% of our money supply and the deficit cannot be reduced as the the amount of debt has to increased year on year to service the existing debt, and continue creating inflation (aka growth).

The debt, the deficit, inflation, deflation, QE, interest rates are pretty much irrelevant now. The only thing you need to know is that at sometime in the near future the currency will collapse and since we live in a globalised market ALL currencies are going to be affected. Trade will cease and the fun will begin.

Share this post


Link to post
Share on other sites

The purchase of newly created bank shares was not the only bailout the banks got. They have also been trading their illiquid/non performing 'assets' for money in the form of bonds from the treasury, they are supposed to sell these on and use the money to repair their capital ratios and keep borrowing going to industry....of course that bit seems to be getting forgotten....the banks have just been holding onto the bonds and the bonds then bear interest in favour fo the banks, easy money at no risk. While we 'taxpayer' get SFA for the poorly performing 'assets'

So for clarity...the share purchase was only ONE small part of the bank bailout.....The public debt ballooned incredibly due to this. The crash due ot the bankers also caved in the economy as a whole and so tax receipts(income) also dropped and as companies folded they paid less tax and more people spill onto benefits(outgoings).....as well as coping with the massive amount of interest having to be paid on these newly created bonds.....straight into the bank coffers...

Share this post


Link to post
Share on other sites

Pretty sure the investments in the banks have never been part of the deficit figures,

Quite.

Imagine company A and company B.

Imagine they have combined profits P.

Imagine company A buys company B by borrowing an amount of debt D.

We now have company A&B.

Are we really suggesting the profits of company A&B are (P - D)?

Edited by Sledgehead

Share this post


Link to post
Share on other sites

Quite.

Imagine company A and company B.

Imagine they have combined profits P.

Imagine company A buys company B by borrowing an amount of debt D.

We now have company A&B.

Are we really suggesting the profits of company A&B are (P - D)?

No, just that the money invested in the Banks was not calculated as "real" government expenditure, the figures quoted for the deficits in 2008/9 do not include money put in to the banks.

We borrowed £150bn + because the government spent £150bn + more than the tax revenue that was brought in. No banks involved. That is all.

Share this post


Link to post
Share on other sites

The reason it went unchallenged is because even financially literate people like yourself keep using sloppy language to describe the status quo.

Bloo Loo alludes to this. When you ask:

It's akin to accepting such a thing could happen.

However, as you well know these are entirely different financial entities. For the sake of clarity:

The deficit is merely that money needed by government to pay for its outgoings ( benefits & services provided by the state & interest on government debt ) over and above its income ( taxes ). It's like the extra £100 you add to your credit card every month because your salary can't keep up with your shopping habits and bills.

The bailout was simply an "investment" in banks ( a forced buying of their shares ). It is usually refered to as an "injection of capital" because it involved an effective injection of cash. This cash came in exchange for the shareholding. This is like you buying a share of somebody's house so that they can pay off some of their ( crippling ) mortgage. The money reduces the outstanding debt of that mortgagee ( which in our analogy is the banking system ). It has the effect of increasing the amount of equity in the property. This equity and bank capital are equivalants.

But now look at your shopping again after you've "bailed" out your distressed OO borrower. You now own a share of a house and have probably taken on a big debt. Does that change the amount you have to add to your credit card each month? As long as you can afford the mortgage payments by other means, no. The deficit stays the same. Of course, unless the investment pays for itself ( rents cover mortgage ) the mortgage interest will indeed cause you to put more on your credit card - ie increase your monthly deficit.

Likewise, the government had to go into (deeper) debt to bail out the banks. Just like the mortgagee, that debt produces interest costs. For that reason, like a mortgagee, the government prefers low interest rates. However, like so many mortgagees up and down the country, they regard this debt as the other side of an investment. In theory they could sell this investment, so it represents a different type of debt to that incurred by overspending. Only the interest on this debt is considered equivalent.

When talking of debt, we often refer to principal ( the lump sum borrowed ), and interest ( the regular negative cashflows or costs to the borrower. The bank bailout was the principal. The interest payments we now face for this bailout are the interest.

So in respect of the OP's intial question :

The answer must be "none". However, a part of the deficit that prevails may well be used to service the debt assumed when bailing out the banks.

Porca adds:

But this will only be true if there is a mechanism to transfer income from the banks to the exchequer. The exchequer can't simply just appropiate profits. As an income investor knows, this can only come from dividends. However, the nationalised banks are not paying dividends, so thi scontribution must be zero.

HOWEVER, th eexchequer has one trick ordinary investors don't : TAX. The £2.5bn bank levy is a way of extracting income to pay for the bailout fiancing w/o allowing the banks to do the politically unacceptable : pay dividends.

Any of the money that comes from a levy to the banks, doesn't come from the banks. It comes from savers and other taxpayers. It's just one great big circular pocket picking exercise.

The idea of any tax from business just comes from the customers. All this talk about Tobin taxes just gives the banks another excuse to jack up the costs of their customers.

What should really be taxed heavily are the Derivative/SPV's. But you won't hear any politicians talking about this. Their masters don't like it.

Edited by Toto deVeer

Share this post


Link to post
Share on other sites

I don't think people are asking the right questions when they posit, "how much was spent on the banks?". We live in a debt based monetary system where (in the UK) 97% of the money supply is owned by the banks in the form of debt. Less than 3% of the money in circulation is created dedt free by the mint in the form of coin and note. If and when this is replaced then the banks will own 100% of the money supply.

A debt based system is like a pyramid scheme and in order to continue functioning the amount of debt created has to increase over time. That is why it is inevitable (despite the propaganda stating otherwise) that the current coalition government will increase the amount of debt. They have no choice. Unlike Labour though they will preach austerity and cut jobs and benefits whilst hiding there increased borrowings. They have no choice.

The credit crunch was simply the result of the banks refusing to play their only stupid games anymore. They simply stopped creating credit, and when you do that the system crashes. Since individuals no longer have the ability to take on anymore debt the government did it on their behalf, they then gave it back to the banks in expectation that they would then lend the money into the real economy. The banks instead viewed the real economy as a "no hoper" and instead bought government bonds and other "safe" investments, thereby increasing government debt even more. And so the game continues. The government borrows money from the banks to give back tothe banks who then loan it to the government at interest who in turn use it to buy shares in banks.

The GDP figures are cooked and include such things as QE, and that in no way can described as economic activity.

The debt cannot be paid off otherwise would lose 97% of our money supply and the deficit cannot be reduced as the the amount of debt has to increased year on year to service the existing debt, and continue creating inflation (aka growth).

The debt, the deficit, inflation, deflation, QE, interest rates are pretty much irrelevant now. The only thing you need to know is that at sometime in the near future the currency will collapse and since we live in a globalised market ALL currencies are going to be affected. Trade will cease and the fun will begin.

Tosh.

Share this post


Link to post
Share on other sites

It seems the New Labour spin machine has decided to contest the accusation that the Coalition inherited a mess caused by Labour by saying that ...

'most of the deficit is because we bailed out the naughty banks and we had to do that otherwise people's savings were at risk - we did what we had to do etc.'

... and ...

'the deficit before the banking crisis was lower than they inherited in 1997'

I have heard this argument advanced, in almost identical words, a few times over the last week. It seems old habits die hard and, presumably, anyone senior in New Labour has been told what the message is. And to repeat it over and over again.

My question is ... is it true?

How much of our current borrowing is due to Brown borrowing money to bail out the banks?

And, what was the deficit in 1997 and 2007?

According to the National Statistics Office:

Public Sector Net Debt Excluding Financial Interventions

Source: National Statistics Office, at http://www.statistics.gov.uk/cci/nugget.asp?id=206

Originally posted by Ash4781. Thread: http://www.housepricecrash.co.uk/forum/index.php?showtopic=145899&view=findpost&p=2591370

206.gif

Share this post


Link to post
Share on other sites

'the deficit before the banking crisis was lower than they inherited in 1997'

they are saying that the deficit during a boom was lower (and there shouldn't have been one either) than the deficit following a recession in 1996

what sad intellectually irrelevant people they are

Share this post


Link to post
Share on other sites

Any of the money that comes from a levy to the banks, doesn't come from the banks.

Whilst I accept the etiology of this rhetoric, I'm trying to make clear the distinctions between the various capital sums and cashflows. I believe this is a valuable thing to do because it arms people to make sense of the arguments put forward.

Believe me, as a sahreholder and saver, nobody is more aware of the subtlties glossed over by the sloppy usage of the nebulous term "bank". If I could make everyone refer to "bank management" and "bank employees" instead, I would.

Edited by Sledgehead

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 144 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.