Tuesday, January 06, 2009

New Year; New Bank Bailout

A New Year, a new bank bail out. Forget the negative noises from Gordon Brown, the banks are in as big a hole as ever, and we are about to ride to their rescue once more. As house prices fall and businesses go bankrupt in 2009, the cash-strapped banks are heading for new and greater losses. According to the Bank of England, the UK banks have a £700 billion funding gap, which is the difference between what they lent during the bubble years and the deposits they have to from savers. Since 2001 this gap has been bridged by borrowing from other banks, which isn’t happening any more - so we have to do it. Again.

In November the banks swallowed £37 billion in the last great recapitalisation which saw the government nationalising much of the banking system. Stand by for the rest of the system to enter state hands in an extension of public ownership which would have shamed Fidel Castro’s Cuba. Where did the first £37 billion go? not to mention the £500 billion in loans, swaps and guarantees that the government offered to the banks after the October crash? It didn’t go to small businesses or first time home buyers, you can be sure of that. Some of it went scandalously to pay for last year’s City bonuses. But most of it has gone into bolstering the banks’ own balance sheets - paying down banking debt effectively. The banks have been lending our money to themselves.

But even as they do this, the values of the assets which underpin the balance sheet are falling along with UK house prices, which have already fallen 20% since the August 2007. The banks, remember, had been using mortgages as collateral for lending and now the value of those mortgage assets is collapsing. The banks are like a householder whose home is worth less than their mortgage - except on a massive scale. Some responsible financial institutions like Nationwide - which is funded entirely by deposits - are coping reasonably well with the problem. But they are being required to pay for the irresponsibility of delinquent banks like RBS who had been borrowing to lend and have £2 Trillion on their books.

By bailing out the banks indiscriminately, good and bad, the government has made itself the underwriter of all the worst practices of the bubble years. It has left itself with an open-ended commitment to funnel public cash into a black hole. This is NOT what Roosevelt did in 1933. The US President shut the entire banking system down while the US Treasury separated the bad banks from the solvent. It’s called triage, and only the sound banks were given access to Federal funds. fhis has not happened this here.

And there could be worse to come. There are reports that the UK government is considering adopting one of the US Treasury Secretary, Hank Paulson’s worst ideas: the Troubled Asset Relief Programme or TARP. The UK Treasury is contemplating gathering up all the bad debts of the banks into one big pot and then sitting on it. This would be the final folly of the age of irresponsibility - rewarding the worst banking practices in history by forcing future tax-payers to pay for its losses.

They might as well go the whole way and pay of Bernie Madoff’s debts for there is little difference between the Wall St fraudster’s pyramid scheme and the securitization scam employed by the UK banks to hide their liabilities. These banks are now in possession of a blank cheque signed by every taxpayer in Britain. Moral hazard is too small a word: it is moral self-annihilation: the wilful destruction of financial responsibility, wrecking the livelihoods of the next generation in a bid to revive the very financial monster that created the Great Crunch. The government apparently believes that by throwing money at bankrupt banks and by printing money we will all start borrowing again like 2007. Yes, they’re as mad as the banks.

We are being governed by people who have robbed words of their meaning. We are told that the Prime Minister is to launch a Green New Deal, promoting environmentally sustainable investment. But he plans to do this by pouring billions into a third runway at Heathrow and by bailing out Jaguar Land Rover, foreign-owned makers of high polluting four by fours which are not only an environmental abomination but vehicles no one actually wants to buy.

The final act of New Year madness will take place later in this week as the Bank of England slashes interest rates to their lowest level since 1694, debasing the currency, destroying what remains of our savings culture and stoking up hyper-inflation. Yes, I know we are all supposed to be worrying about DE-flation right now, but the official inflation rate is still at twice the level at which the Bank of England is supposed to intervene. The hardworking families Gordon Brown always talks of are still reeling from high food and energy costs. Clothing may be cheap in the sales, but with the pound losing a third of its value, the prices of imported food and clothes are going to increase dramatically - and we import most of what we eat and wear.

But what is the point of cutting interest rates even further when the banks have made clear they will not be passing it on? The only people who could benefit from a further cut in interest rates are be people with relatively small mortgages in large properties - a reward for mere occupancy. The losers will be the millions of people who have been saving for the future - in other words acting responsibly rather than living on debt. Now that savings rates are slashed below the rate of inflation, savers are actually losing money every day they continue to save. The government should have a care here because it is alienating the very people who decide the result of the general elections. Savers outnumber borrowers by seven to one; they are mostly over fifty and are much more likely to vote.

But the real reason why the low interest rate/high debt policy is objectionable is not moral, or political but economic. How are the banks going to meet their funding gap if they do not get more people to save? In the absence of the old securitizations scams, the banks can only meet their £700bn funding gap by attracting savings - hard cash from you and me. By destroying savings the government is only ensuring that it will have to bail out the banks again, and again until there is nothing left because public debt has risen to over 100% of GDP. Make no mistake, that’s where we are heading - unless someone gets a grip.

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