The next banking crisis is not being deferred as George Osborne hoped. It's very clear that sometime sooner or later Greece is going to default. The hope is that it is done in orderly fashion with political stability maintained: the risk is that will not be achieved. If a Euro exit can be negotiated then Ireland and Portugal will follow suit, and maybe Spain and Italy too (Berlusconi's grip on power is fading and with it unity and the capacity to manage its debt).
All of this means that the capital of our banks is at threat again. Insolvency is almost inevitable once more. Let's not beat about the bush: the risk that it's going to happen is very real. It's not certain. I attach no probability on a date. But it looks likely.
I sincerely hope we are better prepared this time.
We will need to nationalise. Let's not pretend otherwise.
And we will need to print money - to do quantitative easing to ensure that they're solvent.
But this time we need to do more than that: we need to ensure that the money is then re-sued in the real economy. That's why nationalisation will be important - short term shareholder interest must not divert funds this time. There is a way to do that - explained here.
And this time we will need to reconvene Bretton Woods. The challenge we face is as big as that in 1944: we have a broken system and a need to build afresh. We have to ensure we get it right. The re-emergence of neoliberalism so soon after 2008 has plunged us into the current crisis. Surely it's time to move on collectively and start without the encumbrance of that failed thinking?
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I find it telling that we might spend countless public treasure on phantomic threats , yet a collapse in the financial infrastructure seems to be regarded as a fukushima style event. ie one that could never happen, let alone twice in a decade.
As far as I am concerned, money comes out of a wall, if the deposits (not the bets or bonuses) are guaranteed and the clearance system maintained then I will care as little as the next man for those who have abused their license.
Paul if you go over to the forums at PositiveMoney (Google it) you’ll find one of the guys there did an FOI request which reveals there simply isn’t any guarantee on deposits at all. My guess is they’ll protect a few people for some of the time but when TSHTF the government will cut and run like everybody else. Don’t expect your deposits to be guaranteed by the government; they aren’t.
BB
“… when TSHTF the government will cut and run.”
as the Isle of Man government tried to do!
The FSCS is mainly funded by the financial services industry. The costs of funding it obviously being passed on to consumers.
I’d move on the the Worgl model myself. Anything else is a variation on the same tired theme of governments rooking the rest of us. George Downing knew well what he was doing when he came back from Holland and introduced what Disraeli referred to as ‘Dutch finance’ here; he was setting up a system called the National Debt which had the specific purpose of transferring money perpetually from the poor to the rich. That entire system needs to be dragged into the sunlight and exposed for what it is, a scam and not at all (as we’re led to believe) the natural order of things.
BB
A Greek default is indeed inevitable sooner or later but the chance that it will be ‘orderly’ in any meaningful sense is vanishingly small.
UK banks apparentyl have relatively little direct exposure – ‘only’ 2.3 bn euros according to a recent Guardian article – but many other banks – in particular Dexia of Belgium and Commerzbank of Germany have huge exposures. We are talking dominos here.
http://www.guardian.co.uk/news/datablog/2011/jun/17/greece-debt-crisis-bank-exposed
Then there is Ireland whose finances are hardly better than Greece’s. I suspect they plan to slipstream a Greek default so they can say, “It wasn’t us, honest. We were dragged down by them.” And in recent days I have seen UK bank exposure to Ireland put at anything between £120 and £200 billion. If the actual figure is anything remotely like this it’s way beyond the ability of HMG to bail out the banks again.
Then there is the impact of credit default swops – basically insurance sold against a default on a loan. Amounts outstanding – possibly trillions though no one really knows.
HMG needs to plan for a chaotic collapse and FAST (as in by the end of the month). Suggestions include (1) totally separate investment and commercial banking, (2) make bank depositors (ie customers) senior to bondholders in a bank failure, (3) make CDS contracts unenforceable in UK courts.
Banks should be allowed to fail if they go bust then the banking system nationalised on either a temporary or permanent basis. This arrangement could provide money for public or private works at free or very low interest rates and the money, rather than going as profit to provide shareholders can be redistributed into the economy, perhaps off-setting taxes or prices.
If the EU fail, then there’s nothing to stop the government having he BoE simply creating the money supply rather than borrowing it. This would either be on a 50/50 basis (50% government created number money, 50% private bank created money) or on the basis that only the government has the right to create 100% number money and banks restricted to 100% reserve, that is, full backing of every loan they make, maybe using some sort of investment pool system.
There is no sense whatsoever in spending tens of billions of pounds per year in indirect subsidies to provide the government with money when the government could simply create it itself.
Greek default does seem logically inevitable, but the propensity of France, Germany, ECB, IMF to kick the can down the road may perhaps put it off for longer than we expect, despite ever gathering instabilities. Germany and France perhaps are not unhappy to see the euro weaken against the dollar meanwhile. There seems no orderly way to break up the eurozone so haircuts all round must come at some point. The firing line then includes Ireland, Portugal, Spain, Italy and now Juncker has added Belgium to the list. Is there a point at which bond holders in general see it as in their interests to achieve an ‘orderly’ solution or does the jungle prevail until the end as far as they are concerned?
It’s all starting to fall apart. This is what happens when you base your economies on debt. Brown and Balls sowed in the wind; their sucessors will reap in the whirlwind.
Not just Brown and Balls, Osborne does now and every Chancellor has for around three hundred years. Once the National Debt idea was explained by Downing (or rather obfuscated, as Clarendon complained at the time) every one took advantage of it. The real point of it is it’s a stick to beat us with. “We’re in all this terrible debt”, have bawled a succession of Chancellors whenever it suited them, “So your quality of life”, (pausing here to stick their snouts even deeper in any available trough), “will have to suffer till some of it’s paid off! The Books Have To Balance!”
Which is, when you’re a country and can create legal tender, utter rubbish. How the books are should be a matter of indifference. It’s the wealth and health of your sovereign citizens that should be of paramount importance.
What a nasty bunch many of our politicians have been and are.
BB
The Tories added £262bn to national debt between 1979 and 1997.
Labour following similar policies then added £423bn.
You can hardly blame labour for “sowing” in the wind. Thatcher did that.
We should not to save the banks by pumping cash into them. Instead any government support needs to go to the people who will be hurt by the banking collapse. If we continue to rescue banks then the lingering affect of their liabilities and poor capital position will prolong the economic crisis.
If you read The Money Bomb by James Gibb Stuart it suggests that Thatcher actually got the National Debt down by unmaking some of the money, about a billion pounds if I recall correctly. Money is generally created by banks as debt and Thatcher had part of the treasury create debt-free money, loan it to another government department and then null the debt. This had the effect of reducing the overall National Debt. More than that I don’t recall but I remember the overall implication – Thatcher gained her reputation for prudence not by actually being prudent but by reducing the National Debt artificially employing a brief reversal of the same process by which it was created in the first place. It struck me reading it that the entire National Debt could probably be erased using the same process… but that would give the game away of course, so that doesn’t happen.
BB
NATIONALISE RBS, fast.
I should have thought privitising RBS would make more sense. A large slice of RBS’s assets (i.e. customer debt) is based in Ireland which will do a “Greece” about 6 months after Greece goes. We don’t want to be holding baby when that happens.
We’d be better off with a brand new bank and perhaps a new currency too for a time. That though would require the government of the day to actually get to grips with the problems instead of trying to suck up the people that caused them in the first place. The more likely scenario is that we develop local currencies a la Worgl. We already have the Totnes pound and there’s something going on in Brixton too I believe..
BB
“I should have thought privitising RBS would make more sense. A large slice of RBS’s assets (i.e. customer debt) is based in Ireland which will do a “Greece” about 6 months after Greece goes. We don’t want to be holding baby when that happens.”
Do you not think we’ll not be holding the baby anyhow? Whether its private or nationalised, we’re still going to take a hit if the balloon goes up. Also, like I have said before, if private banks go bust due to their own incompetence, let them! Let the private banks pay for the consequences of their actions, which happens in every other commercial sector and let the state take over banking either until the banks sort out the mess they’re in or on a permanent basis.. That should be the way that the state picks up the pieces, NOT by taking on the debts of incompetent banks. If we must assume any debt from private banking, let us write it off.
What’s really absurd about Clegg’s plan is that if Greece does bring RBS down again Clegg would guarantee 45 million really annoyed people who would have lost about £1,000 each
I think that’s called electoral suicide
But then he’s probably done that already