Monetary Crisis … with a few months hindsight


Let us go back and re-look at the events as they happened in the UK, with the help of a little hindsight.


After a lot of dilly dallying Gordon decided on Nationalising the Northern Rock rather than let it go to the wall, or lend Branson many billions to take it over.

Interfering with markets is a dangerous game … they can only work if given the freedom to do so.

Was there any difference between Nationalising and Liquidating?

Not really, maybe we didn’t send shock waves through the money markets … which would immediately have put a stop to extravagant lending, perhaps avoiding some of the later crises.

We are however running the Bank down, slowly realising its assets in the hopes that we recover the £30 billion or so that we pumped in, (liquidating it slowly).

Had the Government not interfered Northern Rock would have defaulted … been put into liquidation, the assets realised … the depositors paid eventually in full or in part. It would have cost the taxpayer nothing.

The history of running down a business to realise its assets suggest that you ultimately incur a bigger loss. Fully expect the Northern Rock bail out to eventually have cost the taxpayer every bit as much as the government initially pumped in as a short term loan, and probably a lot more.

No dilly dallying over Bradford and Bingley or in fact HBOS, RBS or Lloyds which are now either partially or fully nationalised … bugger the cost buy the cat another canary!

Shades of Japan all over again … there was no way the Japanese Government would let any of its Banks fail.

We observed the spectacle that followed the Barclays announcement that it had found the capital it needed in the foreign markets, having spurned the offer of The Bank of England. We saw the commentators create a big hoo-hah saying that Barclays didn’t want to have their ability to pay dividends and bonuses restricted by the government. Little do they see that the Barclays move brings permanent new Capital into the UK … in probability it is little more than a restructure of its balance sheet moving an existing liability into the equity section (in other words avoiding having to repay the money … or reducing the UK’s foreign debt). That this involves transferring a large part of the ownership of the Bank to foreigners might be a bit unpalatable … especially as they are Arabs … (yes racism is alive and well in the UK there would have been not a murmur if the foreign investor were a USA Bank).

The interest rate cut

Once again we had commentators greet the cut as a master stroke. To me it smacks of Flash at work again … no use going by halves go the whole hog. Smoke and mirrors I say. I think the veracity of the independence of the Bank of England is open to question … at the very least the interest rate committee have lent Flash their ears.

The initial reaction on the currency markets was for the pound to rise against the dollar … but, as the enormity set in, it carried on, on its path down South. The question is … can an interest rate cut kick start an economy?

Well yes and no.

There is an old saying in economics “John Peel will not accept 2%”

We are forcing our interest rates down to a level at which saving is not a viable option … we cannot expect inflation to ever be less than 2% over the long term.

Currently our inflation rate, even at the government’s measurement, is well above the new interest rate, and if my exchange rate projections are anything to go by we have a further cost of living correction in front of us. The message is clear it is better to spend now as the buying power of savings will be less in the future.

This rationale is fine when you are relatively free of debt, but, when your debt level exceeds five times your annual income (the current UK economy position) that decision is a little more difficult to make. When you see stormy times ahead, the squirrel instinct comes to the fore. No matter how much smoke and how many mirrors they use, people will largely be worried about their own futures. I see even those virtually immune from the effects of inflation adapting their lifestyles to the inflationary pressures that exist in the economy. I cannot see people going out and blowing their savings. In any event, the bulk of the population have a relatively small savings and for them to increase their spending would involve increasing borrowings. From where, we may ask. We have seen that the banks are not exactly flush with money … it is going to have to be plastic money … and that still carries interest rates of 15% and higher.

So yes an interest rate cut could stimulate demand and thereby kick-start the economy, but our situation is already well beyond that point … we are already borrowing, from overseas, each year the equivalent of 40% of our total annual output, just to maintain our current level of demand. Even if John Public is prepared to borrow like mad and go on a wild spending spree … are the people out there beyond the sea going to be prepared to lend. Keynes dropped the concept of a natural interest rate to one of a neutral interest rate for a given level of employment. The concept being if I increased money supply I would stimulate demand, thus increasing employment. Our situation is that we need to be certain of the flow of foreign money to keep the current status quo … can we be?

Then there is the question of Banks being prepared to lend to small businesses starting to generate losses. Prudent Banking says they should not. We hear Flash and co urging them to pass on these interest rate cuts and to support small businesses … alas it is but a few weeks ago that we blamed the imprudence of banks for all the troubles.

I was in fact surprised when I saw that banks were going to follow the full fall in Bank of England rates with their tracker mortgages … there are a lot of pitfalls involved with this, as it presupposes that all funds being lent are coming from the Bank of England lender of last resort facility to Banks. This means that Banks should no longer be in the market to gather depositor money … remember we are approaching our 2% rule, there will be no money coming from anyone after another drop, even at this level the mattress might be a better bet for many.

I consider therefore, that interest rate cut is no longer capable of kick-starting the economy. We should be looking at what is wrong and fixing that, rather than say lets put our heads in the sand and hope that smoke and mirrors can change anything.

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