From the Archives

The following post is from June 2010. In October 2012, I see no reason at all to change any of the conclusions. Interestingly, this piece evoked not one single comment.

June 30, 2010 · 6:30 am

ANALYSIS: BRITISH BANK DEBT IS A QUARTER OF GLOBAL TOTAL.

The reason we’ve got ultra-low interest rates made clear at last

For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings due to be repaid to Threadneedle Street amount to about $1.2 trillion by the end of 2012.

The global total owed by banks to their Central counterparts last night stood at a fraction over $5 trillion.

You may ask why a small offshore island is in this position, and the answer is the same one as to my 2008 question, why did the UK banking-system bailout cost more than the US one? It is that we are so hopelessly overdependent on financial services here – or so amazingly good at being mad, whichever way you prefer to see it – that while others will get flu over the next few years, the UK could very quickly succumb to double pneumonia.

Once again this week, the Government (because civil servants do spin as well) has been rattling on about how our banks are ‘far more robust’ than they were 18 months ago. It’s true of course – but they’re still broke. If they weren’t, they’d be lending.

Richard Barwell, an economist at the Royal Bank of Scotland in London, yesterday told Reuters, “If rates rise and banks are unwilling or unable to roll over funds, that would trigger forced deleveraging, there would be a sharp contraction in credit conditions for those within and outside financial markets, putting considerable downward pressure on activity and asset prices.”

This is moneyspeak for ‘Bank lending will stop totally and there’ll be a property crash….and by the way, we’re going to keep interest rates down for another year’. But it has (perhaps rather late in the day) made The Slog wonder if this was the reason for interest rate barminess all along.

Back in early 2009, Slog mother-site nby was virtually alone in suggesting that we should put interest rates up, not down – to get people saving again, and banks into the black via deposits, and lending to business in trouble on the move under government direction.

Oh hahaha, dear me, what a silly idea oohoohooohohohahaha they all went. How would business then afford higher rates, they asked? To which I replied, “95% of business doesn’t want credit at any price, because they know what’s coming”. (Hence the tendency of corporate entities in the West to store up cash-piles over the last 18 months).

As we saw, business didn’t want or get any money….and that 27% of the population partly or wholly dependent on investment income went through the biggest salary cut in UK history. Now there’s more than my own moaning self-interest at stake here: over 55s are the biggest credit-free spenders on durables, gifts, electrical goods and entertainment. To keep them spending would’ve made the VAT cut look like a drop in the ocean.

But there’s more: not only would the banks have much healthier balance sheets today had this policy been followed, the Government’s tax income would’ve increased hugely.

So why did we do it? And the answer, as always, is political.

Cast your mind back to late 2007. At that point, Mervyn King told the banking system in general – as the disaster at Northern Rock became more obvious – that the BoE was “not in the business of bailing out people with imprudent business strategies and lending policies”. This was precisely at the moment when Gordon Brown was planning a snap election, the thought of which had later never occurred to him at all. The collapse of a bank in Labour-held territory could not be tolerated. The Treasury was ordered to do whatever it took.

Secondly, rising interest rates would’ve stopped Brown’s everlasting boom in its tracks – and caused unemployment to rise rapidly.

And third – a self-fulfilling reality – once having rescued lots of banks (and loaned them vast amounts of money) any rise in interest rates became unthinkable – otherwise the banks would go bust trying to manage the debt. Vicious circle now closed, Ithangyoo.

This case history contains all of the three great lessons of our time: put off pain, and it’ll be much more painful later on; at the bottom line, everything comes down to banks; and above all, vote-centric politicians will themselves vote for anything that wins them votes.

The US fiscal deficit is down to saving Wall St banks. The eurozone crisis is down to saving Franco-German banks. Britain’s debt is down to bailing out banks. Britain’s unwillingness to go further into EU federalism is about not wanting to bail out Eurobanks. And idiotically low interest rates became a trap from which nobody could escape – to save indebted banks. ‘They must be saved’ was a cry that first came (natch) from bankers…but it was the political class that did their bidding – virtually without a whimper of opposition.

‘Naive’ is the insult normally thrown out by highly educated but blinkered economists and fiscal ‘experts’ towards any observer suggesting such contrarian ideas. Far from being naive, they represent a practical reality. There was absolutely no need in 2008 to save the institution Northern Rock, any more than we needed to save Icelandic Banks to recompense UK savers. It was done to make a collapsing financial mirage constructed by New Labour look safe.

To compound the crime however, the Rock’s perfectly sound deposits book was sold to….JPMorgan, a US company. And the intermediary employee who facilitated this was Anthony Charles Lynton Blair.

In my view, even in the case of HBoS, the savings book could’ve been acquired by other banks (HSBC and Barclays would’ve leapt at it) and the corporate entity quietly closed. The result in all these cases would’ve been a short-term steep rise in unemployment…in one sector where just 47,500 are employed in the UK. Hardly the stuff of which Jarrow Marches are made.

I am on the record as saying in 2006 that, had Greenspan called a halt to the US boom in 2004 – including a good old-fashioned credit squeeze – the withdrawal from retail therapy would’ve been unpleasant, but the bloodbath of 2007-08 avoided. But that didn’t play well with the Republicans’ Noo Paradigm, and so instead Big G printed a bit more money and allowed credit to become insane. This was in turn encouraged by pc lunatics desperate to ensure that no ethnic, gender or class ‘isms’ were involved in the lending. Thus was Sub-Prime created.

The human desire to avoid painful reality, banks and politicians: they explain almost every snafu in history: and their influence will never be reduced until a new culture of material life arises to render it as anti-social as smoking is today.

The conclusion of this piece, however, is more immediate: the next time someone tells you Britain’s plight is being exaggerated, tell them about bank debt.

21 thoughts on “From the Archives

  1. A friend of mine was going on about the dangerous level of Dutch bank’s debt – internal (mortgages) and external (Spain et al) and saying how irresponsible it was.

    It is peanuts compared with what the British ones got up to, and you have not even mentioned the off-balance sheet stuff. Run up with automated reciprocal pdf signatures … the Lord only knows how many of them there are!

  2. You know John, after a while you get pissed off hearing about banks and of course that’s what they are hoping for. It’s only thanks to people like you that we are reminded of the situation. It’s saturation news coverage. I’m about I would reckon the same age as you. I’ve just moved to Spain on a permanent basis. Is the country going down the tubes? Do I care? I’m 58, if I’m lucky I’ll get another 20 years. Do I want to spend it in the UK? Aye, right! (I’m Scottish).

  3. On a practical note,do we really believe our currency will hold up and where is our money really safe?
    The Fed has lent the world trillions of dollars,the repayment will be in dollars,to my mind at least,the dollar would be the last currency standing,yes including the Chinese Renimbi!Or is this naive?

    • I would say its blowing up in our faces day by day. But it’s like watching a movie clip in slow mo. Its been blowing up in our faces for 5 years now, right across the globe.

      We watch each new financial scandal appear, on an almost daily basis, sigh with dismay, and try to get on with our repressed lives.

      Meanwhile the global financial house of cards continues to collapse around our ears, very slowly, but very surely.

    • no, but keep an eye on interest rates. they cant hold them down forever. They will be the battering ram that starts it all kicking off big time

  4. History is very clear on a few points:

    1) The math always wins. Eventually.
    2) If central planning could override financial reality over the long term, there would be no collapses, and we would all be speaking Latin.
    3) When things do collapse they tend to collapse very, very quickly and often there is considerable violence and bloodshed accompanying the collapse. This is either manifested in war, revolution or social chaos.
    4) The survivors are those who are most nimble and most mobile.
    5) As with the Soviet Union, the situation can often be sustained for generations before collapsing no matter how grotesquely oppressive or financially unsound it may be.
    6) It is frequently external events that catalyze the final phase of the collapse.

  5. These things are still in progress and all the mainstream media keep saying we are doing fine with ZIRP and QE. Really? Don’t think it has even started yet myself.

    1. They are just trying to make the bust survivable for themselves and that means somewhere to park you money = a viable bank somewhere. Got to be secure through the final stages. Now nobody wants to be sacrificed and certainly no single bank so the all the banks have to be kept.

    2. The current policy is to attribute the blame on to everybody else but themselves and preserve their postion! It is no good having money from 1. if you have no position and vice versa. As a sidenote a person on benefits does not write their own payment it is what is given so all the incurred debt on this issue was their policy. You tell people they can have enough for a bowl of rice, then that is all they get!

    Now when 1. and 2. are securely in place you watch how they will then persecute people. Interest rate and tax rises in conjuction with even more draconian cuts whilst preserving themselves. (Think it is so obvious).

    Since 2008, 4 years has expired of what I reckon to be a maximum of around 10 years tops because so many ” human nature” agreements are of that order of time. I think that is their timetable. On the current plan and they call it plan A I think more along the lines of an eventual culling the population who lived by their failed policies and all previous promises are being thrown out. Might not be affordable, they still took the money and promised it though.

    Maybe this is too cynical but that is how I see it. What you want to do with them in the end I don’t care anymore so do whatever you want. Unless of course you get those in power to debate the above points. They won’t of course as this would open up so many closed minds to the possibilities.

  6. The BOE has not been independent for years. Their failure to raise interest rates benefits the biggest borrower. The UK Govt. The wholesale failure of the MSM to report an iota of correct information regarding the fiscal bomb we are sitting on smells foul to me. Maybe I am paranoid but last week on Sky News Eamon Holmes remarked to his City Editor “But the deficit is coming down isn’t it?”.” Yes, slowly” was the reply. Eh? Borrowing is skyrocketing and public spending has INCREASED some 7 pc. Austerity? Its a fiction.

    Again maybe this is subject-the-bleedin obvious to everyone here but I recorded BBC1 news and Sky News from 7-7.30 am last week and the items were identical, almost presented iin the same order. Both just regurgitating whats fed to them. Gordon Brown coined the lie of omission “reduce the deficit” i.e reduce the rate at which it increases, and everyone has used that phrase since. The public I believe genuinely thinks that austerity measures are temporary whereas I, as a layperson in the subject cannot help but see huge icebergs looming. With nukes on top. And ebola plague.

  7. On the flip side consider these points:
    * Vast amounts of cash flow through the City, where “profit centres” are denominated in £.
    * Huge amounts of this is from non UK owned banks (JPM’s, GS, et al)
    * A drop in value of GBP will cause havoc on the balance sheets of said names. (Or looking at it the other way, massively strengthen UK banks to the competitive detriment to the US ones)
    * Our lax, in US terms, regulation is far more profitable, so we will continue being some sort of worldwide banking tax/legislation haven

    IMHO this is the US-UK special relationship, and has contributed at least as much to the decision making as domestic politics.

    Classic example:
    http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/revealed-why-gordon-brown-sold-britains-gold-at-a-knock-down-price/

  8. John, agree that Labour’s “growth” was a fake boom, borne of credit.

    I’m not so sure about banks leading the charge into cheap credit. Consider this alternative:

    Governments know cheap credit pumps markets, so they keep interest rates low (even when housing went up 20% Merv cut rates back in 2004). They also know housing is the key to “prosperity” to get people spending unsustainably. They under-report immigration figures which boosts GDP and puts pressure on housing stock. They also keep planning laws tight. The supply and demand balance is set.

    Banks are banks – they don’t care – they just want to make money. I’m not naive on this score. But it’s easier to make money when interest rates are higher. When they are low you have to loan more to get the same profit. So because of the low rates they start to ramp up credit. BoE knows this and yet not only does nothing but also lowers rates. Sit and stir from 2000 to 2008.

    Right now we have financial repression. Savers are forced into ever riskier assets to keep pace with inflation. The riskiest being housing. The govt is loaning *direct* to citizens using FLS as banks fear to tread here. They have also suspended lending margins so banks can now lend against housing at even greater multiples – unlimited in fact. Even Clegg’s pension transfer into housing. This is the last, desperate gasps of a system. But once a bubble stops inflating it starts deflating. And the effects will be huge.

    The country is walking on a tight-rope – any external issue and we are going to see much more financial repression. Not the cozy stuff like under-reporting inflation or RPI vs CPI, more Portugal very high taxes, restrictions on how much you can move out the country etc.

    Boomers are going to find out they can’t downsize, and with no pension to speak of, or if they had one it’s ravaged by inflation, we are facing a demographic cliff. They will then try massive immigration as the solution, for under 30s. This will of course (they hope) pump housing again.

    All so we could all pretend we lived in a house 20 times our wages.

  9. “Nick Hurd

    Nick Hurd, Conservative MP for Ruislip-Northwood and son of former foreign secretary Lord Douglas Hurd, is the current minister for civil society. He spent fifteen months as the party’s charities spokesman while in opposition, before taking on the ministerial role following the 2010 general election.

    Hurd was elected to parliament in 2005. He has served on the environment audit committee and in 2006 successfully took through parliament a private members bill, the Sustainable Communities Act. “

  10. One of the ‘green shoots of recovery’ signals in the US has been the deleveraging of the household debt by circa $ 1 Trillion but as Zerohedge point out today $ 800 Billion of that can be explained by Mortgage Foreclosures/ defaults!

    No doubt these underwater properties will soon be owned by the Fed with it’s new $4 Billion a month asset purchase scheme (QE4/5).

  11. Sir, I read your blog now and then, and find it useful. Reading this blogpost makes me think you will be inclined to like the economic thinking which is called the Austrian School of Economics.

    I recommend you to look up people like e.g. Murray Rothbard, Peter Schiff and Ron Paul. If you prefer watching Youtube you should look at the videos called “Overdose: The next financial crisis” and “Fraud. Why the great recession.” I hope you will like it. I certainly do.

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