Sunday, October 31, 2010

Fight, fight, fight!

As I've always maintained- the comments are the best part of this blog and a good fight is breaking out on the 'Benefits' post.

Can anyone actually explain in simple terms and without referring to some other article (which may or may not be true) just how much the banking crisis actually cost us? I've seen figures in the press ranging from zero to a trillion pounds, which I can't help but think is a rather generous margin of error.


Ben said...

Basically we stood as guarantor for the debts of the banks. It's pretty much the same as guaranteeing a mortgage or other loan. If it is paid back, it costs nothing. If the borrower defaults, we have to pay whatever they didn't.

We don't yet know whether they will default on a part of the debt - but having a guarantor allows them to borrow more cheaply (since the lender doesn't have to price the risk of default) which makes it easier for them to pay it back.

So we might lose trillions, but it is looking increasingly unlikely. It's certainly possible we will make a small profit.


London being the financial centre of the world, if you take into account all the corporation tax paid by banks in the past 25 years, we would still be well ahead even if it does cost us a trillion.

So the "squeeze the banks" idea is stupid. We may be cross that the golden goose has laid a stinker, but we have every expectation that the next twenty-five years it will be laying golden ones again. The last thing we should do is drive the banks to New York or Frankfurt.

Anonymous said...

We don't know. As Mark Twain said “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

I scanned through the benefits thread, and there's a lot of confident spouting of "facts" which had appeared in a paper, despite different "facts" in other papers, and all of those several times revised.

We were not told the actual problems of the banks (anyone who believes otherwise is woefully misinformed, and by the act of stepping in we ourselves have changed the fate of the banks (and therefore the valuation) beyond what it would have been. Then the government money-printing (world-wide) has eased the current deflationary period, which in turn has allowed banks to "mark-up" the value of some of the assets they had previously written down. It boosts their value (as we saw with "positive" results this year), but this is not yet over, so taking a snapshot today is as misleading as a snapshot a year ago. Can the government continue QE? That helps the banks, but of course negative elsewhere. Is the required deflation / correction driven through the financial system - if it is not, and we can't offset the effects (e.g. via QE) then the "value" of the banks will fall / costs will rise.

The latest mortgage-gate scandal / crisis in the US has the potential to send the banks into another tailspin, as the second and third lien mortgages they hold at full value have the potential to actually be worth nothing.

We're confidently asking about the result of a football match, meanwhile the match itself is still early in the first half. It's far, far from over, so I doubt there's much benefit to agreeing on the score.

Tim Worstall said...

Different ways of looking at this and which way you do will depend upon what you're trying to prove (or, to be more precise, which lies you prefer to tell).

1) How much cash did we have to shovel out of the Treasury and how much are we going to get back of it?

At present it looks like we'll get all of it back, possibly make a small profit.

2)How much have we risked and what'll we get back for that?

The answer there is that we have risked hundreds and hundreds of billions, maybe that trillion, by underwriting, even if only implicitly, the banks' liabilities (although they do indeed have assets to offset them).

We'll not make a cash profit against that as, well, while we have charged some of them something for this service, we've not charged all of them (this is what the bank levy is meant to solve going into the future).

In return we get not a collapse of the entire financial system which is something of a profit.

3) You can say, and some do say, that the real cost is the decline in GDP, the recession itself. This is somewhere between over egging the pudding and gross insanity but people are arguing it.

We'll not get this back at if you are going to take this view then no, we'll never get back what has been lost.

Boy on a bike said...

Christ, where did that lot come from? Is there nothing on the telly tonight?

Anonymous said...

It should be added that the bank levy of £2.5 billion is a red herring, and offset by the reduction in corporation tax, and banks using net losses to gain an overall reduction in their tax bill.

Lord Blagger said...

20 billion.

Compared to the government debts of 6,000 - 7,000 billion. Your share is 300,000 pounds, with interest.

When Tim says
At present it looks like we'll get all of it back, possibly make a small profit."

I'm not convinced. The 20 billion comes from the money shovelled into the Northern banks that went bust. Bradford and Bingley, Northern Rock, RBS, ... compared to the current value of the shares owned by the government. We're 20 billion down. On top of that there are loans to the banks. It's difficult to tell if they are paying any interest because its a state secret.

Now for Qantiative Easing. QE. Here the government has loaned the banks money, secured against assets, with a safety margin called the haircut on top. In the contract the banks have to buy the security back at the price at which they loaned the assets to the BOE. Baring any bankruptcy of a QE bailed out bank, the government gets all it's cash back. In reality all the money has gone into funding the deficit. So no losses here.

There are actual losses on compensating depositors in banks that were allowed to go under.

So what's a few billions compared to the trillions in off balance sheet fiddles of the government?

For example, you're a teacher. Try finding the liabilities on the books to pay your pension. You won't find it. That's either because they are cooking the books, or because they've no intention of paying your pension. In reality its a mixture of the two. They're going to partially default on your pension because they can't afford the 1,300 billion that you along with the other civil servants are owed.

ie. As civil servants your pension is a problem that's 50 times bigger than the banking problem.

SMAC said...

As a teacher, Mr Chalk should understand the simple mathematical concept of compound interest. On a long enough time line it approaches infinity. Trying to achieve infinite growth on a finite planet (or even universe, see Mr Einsteins work) is impossible.

Money is debt and needs to increase year on year in order that the interest may be paid. Unfortunately this means that "we", the taxpayer are now liable for amounts up to and including "infinity".

Since this is not actually achievable the reality is, currency war, trade war, actual war. You are watching the death throes of our current, financial, economic, and geo-political system.

Question) What is the cost of bailing out the banking system, Answer)The end of life as we know it.

The future of the UK looks very much like the present of countries like Zimbabwe.

Central government will certainly cease, along with jobs such as, nurse, fireman, policeman, and teacher!

People are simply asking the wrong questions.

rippon said...

The crux of the ‘fight’ on that thread is about undeserving people receiving taxpayer money.

Frank Chalk initiates that thread by implying that housing benefit recipients should be a major cause for concern when we judge who is undeserving.

The counter-argument is that that is an irrational choice of focus when housing benefit it put in the context of all government spending, one picture of which is here:

(That link doesn’t seem to be working +right+ now, for some reason.)

Anonymous said...

The fact of the matter is we will never really know how much this baking crisis cost us, cos getting raw data and authorative answers is impossible when the people holding this information stand to lose out if they disclose it.

My proposal (sadly ignored) was to bail the banks out week-by-week, and insist in receipts showing 80% of the weekly amount distributed back into the economy (to individuals, mortgages, non-banking companies). No receipts = no bail-out next week. OK we would need a few civil servants extra to validate this, but a small price to pay. They could then "trade-out" of the recession like everyone else. Instead, we trusted the banks and they sat on the money. You can't encourage all the time, you must sometimes enforce.

jut said...

Out of interest, other than banking and playing with imaginary money in the city, what does the UK *do* anymore? We don't make anything, unless I'm mistaken. Do we have any major exports other than educated workers?
It seems like the UK's put all it's eggs in the same basket for the future.

Paul said...

The Dim Left just blame the banks as a mantra. It sounds good if you are stupid, financially ignorant, and are desperate that your beloved party take no responsibility for its own policies.

Reality ; Brown was overspending before the banking problems, and continued to do nothing about the structural deficit after the banking problems, choosing to put off action until after the elections (unlike, say, to give him credit, Darling wanted to).

The Dim Left also can't tell the difference between guaranteeing a debt and actually providing money to cover a debt. If all the banks go broke overnight and have no assets then yes we are up to our necks in it. This won't happen.

jut said...

Paul, you assume I support a political party. Also you assume that New Labour were left wing.
Good economic decisions have nothing to do with left and right, a good decision is a good decision regardless. I don't care which party it comes from, likewise I'm not going to try to defend shitty moves from any party either.

Brown, when he was CoC got us into this huge mess in the first place with his lovely "keep it off the books" attitude so he could give the impression he was doing a great job, while setting things up so the next Govt took a fall.
Unfortunately for him, the shit hit the fan a little too early, Blair saw it coming and ran, and Brown was left wallowing in it.
To add further fuel to the fire, it was Brown who sold off our gold reserves at bottom market costs, against the advice of the BoE and just about anyone who mattered. Look at the price of gold now. That alone cost us £7 Billion

PFI was another tax payer shafting, started by the Tories, and continued with Brown. It kept expenditure off the books at great future cost to the tax payer. The NHS, which may have its faults, was stealth privatised under Labour, and it looks like the Tories are going to finish the job, which is going to end up being a disaster for those who can't afford private insurance.

Lilyofthefield said...

I hear the politics of envy. Bankers get paid huge amounts of money because theirs is a minority skill, like footballers or models, that requires in their case, a certain amount of personal or corporate dosh to back it up.

Of course it seems to an outsider as if they money for old rope, but it's all that this country's got to shout about at the moment. Crucify the financial sector and you have nothing. We cannot compete with our workers' rights, minimum wage for sweeping up and green fuel levies, in an international market. All we have left is finance, which is why the (deserved) punitive incompetence taxes didn't happen.

Life: not fair, and least fair of all to those who aren't already loaded. Get over it.

rippon said...

The post by Lilyofthefield (18:24, 1/11/10) is bursting with fallacies.

‘Politics of envy’ is a classic sophism, employed to duck one’s responsibility for challenging injustice. If you are mendacious enough to embrace it, then, logically, you could equally well argue that, when Jews bleat about the Holocaust, that’s just politics of envy – envy that they were mass-murdered whilst Christians were not.

“Bankers get paid huge amounts of money because theirs is a minority skill”
That’s pure bollocks, borne of ignorance of what banking involves. Moreover, if “minority skill” were the determining factor in pay, then nuclear physicists and circus acrobats, say, would be amongst the highest paid; but they’re not, their incomes range between peanuts and average. Lilyofthefields further undermines her own crass argument with “minority skill, like … models” – the suggestion that modelling is a “skill”. A tiny minority of models get paid massive amounts through sheer luck (God-given attributes) and connections. If Lilyofthefields knew anything about banking, then she would know that this actually also applies to a large extent in banking.

“Crucify the financial sector and you have nothing.”
Another fable. It is the very bluff that bankers themselves spout to scare us off taxing and fining them properly. Bankers have amply proved their capacity for dishonesty and hypocrisy; yet, despite that, Lily is mug enough to buy this bluff of theirs. We should call their bluff. We would find that if there was indeed any significant exodus (highly questionable), that would actually be to the nation’s advantage because it would basically be the “spivs and gamblers”, as Vince Cable accurately labelled them, amongst them that left. Moreover, ‘market forces’, which Lily clearly embraces, mean that they could all be replaced with (more competent) others at a fraction of the rats’ incomes.

Lily’s argument: bollocks. Get over it. (Come back when you have something less ignorant to say.)

SMAC said...

The phrase "money for old rope" originated when it was a popular form of capital punishment for wrongdoers and neer-do-wells. Since you could only be hung once, and since a frayed rope had caused some embarassment to the judicial system it was decided that a new rope be used for each execution.

The hangman kept the rope as a form of bonus as they could then sell the aformentioned. Depending on the notoriety of the individual the hangman could achieve a reasonable sum of money for what was in fact "old rope".

I think the comments made by Lily are proof positive of something that Frank mentions frequently. Namely that while people have been educated to read and write, few have been educated to a standard that allows understanding.

Finance is simply a pyramid scheme, and financiers have no skill beyond the ability to persuade some people that they actually have a useful function. They don't, Frank L Baum wrote The Wonderful Wizard of OZ as an allegory for the financial system. The bankers and financiers being represented by the wizard. It's all a giant hoax.

As Henry Ford (of car company fame) stated, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Being educated is a terrible burden, maybe our education is doing young people a favour, ignorance is indeed bliss.

Richard said...

We don't know the cost because the government hasn't actually given away very much money. Instead it has:

a) lent money, but we don't know how much the banks will be able to pay back;

b) bought bank shares, but we don't know how much the government will be able to sell them for;

c) bought assets (the right to collect on a customer's loan) from the banks, but we don't know how much those assets are worth; and

d) guaranteed banks' debts, but we don't know whether and how much the government will have to pay out under those guarantees.

Until we it's all over, we won't know how much it cost. Theoretically the government could make a profit (if it gets back all the loans and sells the shares at a good price); equally we could lose hundreds of billions.