Any thoughts on our government's "rescue plan" then?

[T_i_B]

I'm just wondering what people in the UK forum think of what's going on with UK banks being nationalized and the markets slumping, and what's being done about things.

http://news.bbc.co.uk/2/hi/business/7658277.stm

The key points of the plan are:

Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
An additional £25bn in extra capital will be available in exchange for preference shares.
£100bn will be available in short-term loans from the Bank of England, on top of an existing loan facility worth £100bn.
Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

[muriel_volestrangler]

1. I think it leaves the public holding the baby

If everything goes perfectly, and there's no more bank failures of any sort, and the British and global recessions are as short as possible, then in the long run we won't lose too much money. But if anything goes wrong, it'll be us who takes the financial hit; and I suspect raising the money to do this on the international money markets won't be easy (the US has to raise more, and other European countries will probably end up in the same position as us, though maybe not as badly, since our economy is based around banking). So I think this and the next government will have to trim public spending in some areas, in case we have to spend even more after another failure, and there's no money anywhere left.

I'm not happy, and some decent regulation would at least make me feel the same things won't happen again in 20 years' time. We're getting the hangover from the Big Bang and 20 years of worship of Mammon under the Tories and New Labour. But I can't suggest anything that I know would work better, right at the moment.

[fedsron2us]

2. It is better than the Paulson plan

since it at least gets the taxpayer a cut of any upside. Personally I would have liked to see the government nationalise one of the big banks, like RBS, out right, and then use it as a means to direct money where it is really needed in the economy such as supplying the short term financing needs of wider UK business (mainly by becoming a buyer of the commercial paper issued by many companies). I suspect fears of damaging the competitiveness of other banks scuppered this option

The problem as always is how effectively the arrangement is managed. Past regulatory oversight has been appalling so they are going to need to raise their game. The key factor is to introduce simple legislation that limits speculation but does not crush aspiration. For a start some simple rules on consumer credit and mortgage lending need to be enacted. For example, people should be compelled to put down a 10% deposit and be limited to borrowing no more than 3.5 times their income when they buy a property. Financial institutions should also be compelled to keep their leverage (capital to asset ratio) to a limit of 1:12.

Funnily enough I think that the current banking crisis will be resolved once the US elections are out of the way. The longer term problem for the UK is that we need to address the structural and cultural issues that led to the crisis. This means putting a brake on the boom/bust cycles that have plagued the UK since the end of the 1960s and have been a major form of malinvestment. We need far fewer people speculating in asset inflation be they financiers or homeowners and far more interest in long term investment in industry and infrastructure. Much of this money should be aimed at tackling real world issues such as building sustainable energy generating facilities in the UK. Sadly, I think we have a long, long way to go before resolving these issues.

One good thing from this crisis is that the financial sectors ability to bully and intimidate both the government and people of UK, Europe and the USA is likely to be considerably reduced once this is all over. The next time some 'Master of the Universe' starts pontificating about how all the rest of us need to 'change to survive' or to bow to the forces of 'globalisation' the reaction is just going to be derisive laughter.

[LeftishBrit]

3. I agree on this.

I think that a lot of the problem here does stem from Britain having become (under Thatcher and her sucessors/clones) a country which depends too much on the money-for-its-own-sake industry, and too little on industries that actually produce something. Other Europaean countries are in trouble too, but those that are less dependent on the banking industry and/or where banking is more regulated seem to be in somewhat less trouble.

I think your last paragraph is important. In particular, there has been a pervasive attitude that the public services should be run like big businesses 'because that's more efficient'. This has had some pretty horrible consequences for health, education, you name it. At least this crisis has shown how *inefficient* big business can be - something that was pretty obvious to some of us for a long time!

The important thing now is to stave off a serious recession with massive unemployment; not to mention people losing their life-savings and pensions! I think there's at least more chance of averting this with our government's plan than the Paulson plan.

[muriel_volestrangler]

4. It seems to have the thumbs-up from Paul Krugman

What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.

But on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital — the equivalent, relative to the size of the economy, of a $500 billion program here — together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.
...
Why this weekend? Because there happen to be two big meetings taking place in Washington: a meeting of top financial officials from the major advanced nations on Friday, then the annual International Monetary Fund/World Bank meeting Saturday and Sunday. If these meetings end without at least an agreement in principle on a global rescue plan — if everyone goes home with nothing more than vague assertions that they intend to stay on top of the situation — a golden opportunity will have been missed, and the downward spiral could easily get even worse.

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

http://www.nytimes.com/2008/10/10/opinion/10krugman.html?_r=2&oref=slogin&oref=slogin

[emad]

5. The financial turmoil has morphed into a lack of confidence in the

Bush-led fiasco of the last eight years.

TOO many banks chasing too little business and treating the swill-trough as their personal gorging ground.

[T_i_B]

6. Two million Britons on the dole by Christmas

:-(

http://www.guardian.co.uk/business/2008/oct/12/recession-unemploymentdata

More than a million Britons will be out of work and on the dole by next month as the toxic fallout from Black October filters down to ordinary families, economists are warning.

A bleak Christmas lies ahead for many as the City turmoil spreads into the so-called real economy. Companies are now being squeezed on two vital fronts, with shoppers abandoning the high street and bank lending drying up, making it almost impossible for smaller businesses to get credit to stay afloat.

Official unemployment figures for September, due on Wednesday, are expected to show another increase in job losses - although this will not yet be the sharp upward spike which is expected as the full consequences of last week's stock-market crash filter through. Some forecasts suggest that unemployment will hit two million by Christmas.

Some government officials warned that those slipping into unemployment could find themselves much more isolated than in the last recession. They pointed out that unemployment benefits had slipped relative to earnings and there were now fewer council houses available.

[fedsron2us]

7. We are going to see unemployment back at early 80s levels or higher

when I like so many others of that era left education to be faced with the dole queue. If the unemployed feel 'isolated' I would recommend that they follow the example of their forebears from the Thatcher era and simply riot on the streets. City centres going up in flames usually concentrates the minds of the government.

[T_i_B]

8. Any thoughts on the new bailout then?

http://news.bbc.co.uk/1/hi/business/7838347.stm

Here are the key points of the government's latest announcement:

• Banks will be able to take up government insurance against their expected bad debts

• The Bank of England will be able to buy up to £50bn worth of assets in companies in all sectors of the economy

• Northern Rock has been given extra time to repay its loans from the government

• The government is increasing its stake in RBS to nearly 70% from 58%. RBS also said it was set to report a huge loss for 2008, with asset write-downs of up to £20bn.

[Albus]

9. Well, there is this....

Pound Slumps to Record Versus Yen; Rogers Says U.K. ‘Finished’


Jan. 20 (Bloomberg) -- The pound dropped to a record low versus the yen and the weakest level since 2002 against the dollar on concern the government will have to rescue more banks as the economy slips into its worst recession since World War II.

Jim Rogers, chairman of Singapore-based Rogers Holdings, said the “U.K. is finished” and investors should sell the currency. Commonwealth Bank of Australia said there was a high risk of a cut to the country’s credit rating outlook and lowered its pound forecast. Prime Minister Gordon Brown authorized a 100 billion pound ($142 billion) bailout for banks.

“I would urge you to sell any sterling you might have,” said Rogers. “It’s finished. I hate to say it, but I would not put any money in the U.K.” Rogers correctly predicted the start of the commodities rally in 1999.

The pound slid to 127.44 yen, the weakest since at least 1971, as of 2:23 p.m. in Tokyo from 130.71 yen yesterday in London, according to data compiled by Bloomberg. It declined 2 percent to $1.4133, the lowest since March 2002, and last traded at $1.4185. The currency slid 1.1 percent to 91.58 pence per euro.

Rogers said the currency will fall below its record low of $1.0520 reached in February 1985.

Yesterday’s package to stabilize the financial sector comes after October’s 50 billion pound bank recapitalization program, which includes a 250 billion pound bank credit line.

Commonwealth Bank of Australia, the nation’s biggest bank, lowered its forecast for the pound to $1.50 by the end of June from a previous estimate of $1.60.

U.K. debt may now be greater than forecast due to the additional bank bailout plans announced by the government since the publication of the government’s pre-budget report on Nov. 24, wrote Sydney-based Richard Grace, chief currency strategist at Commonwealth Bank in a research report today.

[dipsydoodle]

11. I posted in the wrong place below

Should've replied to this.

[dipsydoodle]

10. Looks a bit like they're going back

to the old liquidity rules in some shape or form.

In general : we've been through the current situation with regard to the £ in the '70s, '80s and '90s and we've come out the other side ok on each occasion. This time round we haven't got the issue of inflation with which to contend at the same time. They're talking about simply printing more money now - I wonder where they got that idea from ? ...lol Apparently the situation is also being compounded at present by a substantial increase in the general level of propensity to save albeit that to my mind that is preferable to people effectively consuming their homes by remortgaging them to pay off their credit cards etc.