Monday, February 16, 2009

Banks could make Britain go bust

The banks could now make Britain go bust

The pound has been plunging as international investors have got the jitters about British banks' $4.4trn of external liabilities. Add a large chunk of these to our other national borrowings, and we could reach a point where we can't raise the money to pay the bills. What's more, we have form. Don't forget in 1976, we had to call the IMF for help.

Posted by damien @ 11:29 AM (2327 views)
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21 thoughts on “Banks could make Britain go bust

  • What I find irritating is the continuous references to bank “losses” when in fact, these losses are obligations to existing depositors, and the majority of these deposits are not the 30 year savings of a factory worker, but the false fraudulent profits of the boom years. “Loss” has a very strong “disappeared” ring. In fact, the taxpayer is being asked to replace payments on behalf of an over-leveraged buyout for some mundane shopping chain (existing payments staying with management), or a fraudster with a self-certified loan (heaven and earth being moved to keep the fraudster in the property).

    The UK should default. I personally see no reason to honour existing savings accounts. People must accept responsibility for their choice of financial intermediary (bank). There is no reason why, for example I, should lose my own ability to save in order to rescue the feckless domestic market. Hopefully there will be some way I can avoid doing so. Hopefully for you there might be some way you can avoid losing your savings. There obviously is no middle way and we will eventually run up against a real crunch, not this 3% recession plaything. The future of the UK looks so extremely grim.

    In perspective, there are 300 tonnes of UK gold reserves. This is currently valued at ~10 billion. Lloyds-TSB just announced losses equivalent to our entire gold reserves.

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  • Stillthinking

    Frightening isn’t it.

    I hope you’re not suggesting they seize the Gold to pay off bank losses are you ?

    ”I personally see no reason to honour existing savings accounts”.

    Are you serious about this one. Surely savers money on deposit should be safe whatever happens to the bank. Likewise any unpaid debts (loans mortgages etc. I would assume would be sold on and still require repayment in full.

    I can’t quite see why a bank with a full infrastructure to cover day to day business and personal banking activities can’t be set up and owned bythe tax payer. A bank which offers a saving rate of x% a secured borrowing rate of x% and an unsecured borrowing rate of x%.

    With this in place (either set up from scratch or taken over) then I don’t see why all other banks shouldn’t be allowed to fail through their own stupidity and incompetence.

    But cash on deposit must always remain safe.

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  • stillthinking says:

    Saver’s funds aren’t there. The debt backing the savings is in default or expected to default, or expected to come short. Government is stepping in by borrowing. The only way for the government to pay back the subsequent debt is to tax the savers. In other words, a tax against the savers is used to honour their deposits. Further, all are dragged in.

    If you are a saver with 100K in the bank, and the government honours your deposit with borrowing that requires future taxation of, say 40K, against your savings, then in what way are your savings honoured? Effectively you are only going to be able to spend 60K worth after you get the taxed on purchases or earnings. Admittedly there won’t be a tax on savings (below real inflation saving rates notwithstanding) and the current argument is to put the onus on NI contributions, but if you are a saver who works then it is the same thing.
    What I don’t like is that mainly, I and many others are dragged in and have our own wealth appropriated, without any involvement or benefit, and I also don’t like the pointless endeavour of a government without any funds guaranteeing savings through future confiscation of potential savings ! It’s wealth redistribution and obviously the net transfer will be from people -without- savings to people who have them.

    Why must cash on deposit always remain safe? Isn’t the main cause of the problem lack of governance, nobody was looking? There was a perfectly understood limit to the financial protection scheme. The savers have their funds in insolvent banks. They did not look or care. You could say cash on deposit must always remain safe, you could also say cash in shares must always remain safe, you could say that sterling itself should retain value in comparison against other currencies.

    If you are a pensioner with savings in Spain, looking to continue to enjoy your retirement, your savings are gone. Why should a UK pensioner living abroad suffer a loss of wealth, but not a UK pensioner?

    Anyway, the point is that if the money is gone if there are defaults, and if the only source of money the UK government has is the UK population, then it is meaningless for them to honour the savings of the UK population. A circle of funds. A dog chasing it’s tail.

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  • stillthinking says:

    In fact for me it would have been perfectly responsible for people who recently sold houses to have additional guarantees above and beyond the 50K statutory amount. I would also have been happy for the limit itself to be raised.
    By missing the chance to default in 2007 the government made a grave mistake. The idea of a run on a bank is nonsense and misleading rubbish, what would have happened after the run on NR would have a run against sterling. NR was propped up and the other banks have been propped up to save sterling, what is left of it. As you can see, sterling has gone into a continual decline since then so it hasn’t worked. The reason for the decline IMO, is that people who have enough time to think about these things have removed the large sums (top 20% of the population have 80% of the wealth etc) so instead of seizing the perfect default moment at a MINIMAL cost to the general public (covered by statute), all that is now left in these insolvent shells are the savings of the -general population-, who probably did actually -work- to generate the savings.
    Of course too late now, the wealth is gone and the dangers of default have moved to the working population, because New Labour did -not- seize the appropriate time to default. Hanging on in there, as far as the UK is concerned, is a losing proposition.
    Completely missing the best default chance because of waiting for GB to pick up an economics book and read it, does not mean the best outcome is no longer default. It still is, but will impact in a much worse way upon the average UK saver/pensioner, who lest we forget, are New Labour voters.

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  • I think this means that Gordon Brown is absolutely finished……..

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  • stillthinking says:

    GB/New Labour have a tame voting “regime” consisting of public sector workers, public sector pensioners, those now living in hope of the stimulus, and a fairly large immigrant population, all of whom benefit individually (not in aggregate) from a continuation of New Labour. Kenneth Clarke is already shooting his mouth off about public sector cuts in the future.
    It is not necessarily the case that New Labour will lose. The election will not be fought on the basis of -avoiding- an economic crisis, but on managing one. The Tories, sadly, have established a collective folk memory of brutal reforms.

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  • GB/New Labour have a tame voting “regime” consisting of public sector workers, public sector pensioners, those now living in hope of the stimulus, and a fairly large immigrant population, all of whom benefit individually (not in aggregate) from a continuation of New Labour. Kenneth Clarke is already shooting his mouth off about public sector cuts in the future.

    Dont forget the rest of the uk!

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  • stillthinking:
    Nonsense. Which party has ever had a “tame” set of voters? You may as well say that about the bosses, bankers and landowners being tame Tory voters (probably more true to say that actually). Yes, the Tories do have something of a reputation for brutal reforms, for those old enough to remember, and they produced their economic miracle too (as enunciated by Norman Tebbit) which was pretty much the same as the one we’ve just had – a credit binge followed by a bust.

    Labour or Tory – same result. Inequalities: high pay for a minority, subsistence wages for many more, lousy education, establishment of a hopeless underclass. This is our real special relationship with America.

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  • stillthinking

    I understand your point and I myself spread savings around before NR happened to keep under the then £35k limits.

    But savings in a bank are not like speculating with shares, if you have no where safe to put your money then society breaks down completely.
    There must be a safe place for savings.

    You talk as though you have other arrangements in place – would you mind giving us a brief breakdown of where in your opinion monies should currently be allocated.

    hp watcher

    ”don’t forget the rest of the UK”

    I think you only need about 42% of the vote to win an election (yes more than half the country votes against the winning party with our system).

    I read somewhere that 50% of the working population are civil servants of one sort or another. That is a very significant proportion of the voting population.
    Totally unsustainable for UK PLC IMO but, if they think they’re safer with Gordon than David (which they will be) guess which way they’ll vote on the day.

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  • As Alex Jones said:

    “Liberal Democrat, conservative Republican,… ”

    [which may be replaced in the UK with “democratic socialist Labour Party, centre-right Conservative And Unionist Party,… “]

    “…it’s all there to control you, two sides of the same coin! Two management teams, bidding for control of the CEO job of Slavery Incorporated! The truth is there in front of you, but they lay it out in this buffet of lies, and I ain’t gonna take a bite out of it, do ya got me?!”

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  • Stillthinking are you a “pensioner with savings in Spain”?
    Those who have moved to Spain or elsewhere made that decision by themselves.Tough.
    I really do not understand your thinking and logic.
    ” I personally see no reason to honour existing savings accounts.”
    Please explain.
    If that does happen then it really will be Anarchy and blood on the streets.

    As for Gordon Brown, i think his grip on Number 10 (and reality) is over.
    He will not be PM next xmas.IMO.This is no time for a Novice.

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  • Stillthinking……

    Very interesting read. I like your take on this debacle. I am also of the opinion that default is the answer and not a choice. Savers have never had guaranteed 100% security in banks other than a nominal figure, which has been widely known for many years. Certainly plenty of savers were ignorant of this fact, mostly small savers I would think,in which case it wouldn’t matter anyway.
    These bail-outs are to save the skins of the top 20% who happen to include VIs,who have multiple investment portfolios anyway. Like you say they are being funded by ordinary folk who have little or no savings by the government.
    So basically it’s one big con. On one side of the Atlantic we have now in place a Super Salesman, and on this side? Well, what label can we use?
    Consider this also : Much savings are held under convenient names in banks for tax and debt avoidance. This is not actually true savings as it wouldn’t be there in truth. Therefore the true assets are even less in reality. They serve to guarantee only and create more debt.
    The more I look into this,the more of a mess and a scam unfolds. IMO this system is going to go down or break down big time.

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  • Theoretical arguments about defaulting debt destroying the savings that funded it aside, there is little doubt that allowing savers (excluding the overseas piles of loot) to lose their money would collapse the economy. Without savings there is no lending and therefore no economy, as we understand it anyway. It’s the scale of default that is the problem, and to keep the economy going, govts have to step in. Yes, we’ll all end up paying in some measure, but that is better than reversion to a jungle (a wilder jungle that is).

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  • Stillthinking I’m a bit lost on the point you are making. The “bailouts” thus far have simply been attempts to shore up capital adequacy as so called “assets” are marked to market and found, to understate it, wanting. This means the banks are technically insolvent and have to fold unless capital is “injected”. In reality however the real losses have yet to begin. The real losses being how far property falls, now many businesses fail and how many become unemployed. The losses will be so huge there will be no solution to it in the sense that there is any prospect of economic growth for years, everyone will bear the pain not just savers and indeed as eg Roubini, Taleb, Pretcher Steve Keen suggest for now savers have never been better off as assets (every asset) is falling in price. Like you I am concerned that this might change, but as I think Techieman inferred yesterday that will show up in the market before it is apparent.

    This is the best expose of the idea I have – sorry if a repost

    http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html

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  • Also if NR had been allowed to fail what would have happen to the mortgages it was owed?

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  • Put another way it is impossible to reflate out of this in a gradual way as the market will just anticiapte it, sterling will fall in value or bond aunctions will fail.

    There is then only the nuclear/outright hyperinfaltionary option – say give everyone £100k or write off mortgage debt.

    Everything else is meaningless tinkering, the govt trying to appear as if it doing something.

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  • stillthinking says:

    letthemfall,
    “without savings there is no lending”

    Savings do not fund lending. Our banks are run as balance sheets, if there was no risk of default they wouldn’t even need any capital. You go into a bank for a loan to buy a house for 200K, and they will write -200K in your column and +200K in the sellers column.
    Existing savings are not required.
    The reason why credit is impossible to obtain at the moment is because the risk of default is high. That is all. If you have an asset to secure the loan greater than the value of the loan then the world is your oyster.

    “Theoretical arguments about defaulting debt destroying the savings that funded it aside”

    This is not theoretical. Defaults really do mean that obligation to work for the saver is gone. Imagine you have an IOU of mine, on which I clearly state I will provide the work/asset equivalent of £100. This little note can do the rounds and everybody is happy. Holding the note is in itself saving.
    How much is that note worth if I announce that I will no longer honour it, and am protected in law by bankruptcy procedures? Of course it is worth nothing.
    The whole sorry episode is about the defaults ! What kind of banking crisis do you think there would be if everybody paid back all their loans?

    …excuse my use of bold.

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  • stillthinking: “Savings do not fund lending.”

    Well, that’s not entirely true. Banks create money, yes, but the FR system does mean there needs to be some savings there before they can do that, even if the amount is arbitrary. The principal that there must be something concrete to loan remains; work has to be repaid somewhere for the whole thing to carry on operating. What you say about the IOU is right, but the idea of a central bank (govt) is to step in and cover the IOUs when debtors default, so that the whole pack of cards doesn’t collapse in am awful mess.

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  • Stillthinking, letthemfall – have you read bellwether’s link? It talks about what youse are both getting at – my understanding is that there must be a reserve in order to lend, but while frb says that the cash should be there to lend, banks in reality tend to lend and look for the cash later to balance the books (I think). This makes more sense to me because I always had a problem resolving the textbook explanation of frb with what actually happens.

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  • stillthinking says:

    From bellwether’s link,
    “There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth.”

    Bank capital is wealth/savings prepared to be lost in the case of defaults. That is all. If a bank has 10K capital and lends at a 5% risk of default, then that bank can lend an amount to the value of which 5% is worth 10K, or the bank can lend 200K.
    If you are prepared to adjust your risk of default to 1% risk of default then the bank can lend 10,000K.
    If you are prepared to adjust your risk of default to 0% (as UK banks have done in our house prices go up for ever scenario) then you can lend an infinite amount of money.
    Fractional reserve is purely for hard money banking systems, and we don’t have one. Further, the more credit that is created, the more “money” that finds its way into bank capital.

    Banking is a balance sheet exercise, capital is there in case of defaults, fractional reserve has NO meaning.

    Aside from anything else, isn’t it obvious from any fractional reserve rubbish chart that money expansion hits a limit ? In which case how would our “healthy” perpetual 2% inflation be maintained? Answer, this is not our banking system… Try overlaying a supply of money which grows each year at 2% on this chart. How would that work if money growth hit a limit ?!!!

    letthemfall,
    you are right, there was a required amount of base money, which still exists as 2-3% of our money supply, but the central bank can’t step in because they don’t provide clothes,shoes etc. They can’t provide an obligation to provide labour/assets, only the government can do that because of the provision under duress of taxes.

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  • stillthinking says:

    d*mn right shipbuilder, I had a problem too, until I realised that the fractional reserve system is historic.

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