Brown moves to head off new banking crisis

By Margareta Pagano, Business Editor

Sunday, 18 January 2009

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The Prime Minister, Chancellor and Governor of the Bank of England are thrashing out the details of another emergency package this weekend to shore up the banking system and get credit moving through the economy.

Treasury officials said yesterday that Gordon Brown, Alistair Darling and Mervyn King are looking at options ranging from introducing "quantatitive easing" – printing money – through underwriting or insuring the toxic assets of the UK's banks, to full-scale nationalisation. Speculation that the Government is set to create a "toxic bank" to isolate all the sector's bad debts was, however, played down by the Treasury because of the complexities.

One UK bank chairman said: "There are many different plans being considered. But I'm not sure if the plan is at the joined-up stage."

The latest crisis has been sparked by renewed worries of a secondary banking collapse in the US following Washington's emergency $140bn (£95bn) rescue package for Bank of America and concerns for Citigroup.

This prompted sharp falls in the shares of Barclays and Royal Bank of Scotland as investors feared that the UK banks had greater problems than already exposed and that there would be new calls for fresh capital.

After a 25 per cent fall in its shares late on Friday, Barclays took the unprecedented step of previewing its figures for 2008 two weeks early. It said profit before tax, after costs and impairment (bad debts), would be well ahead of the £5.3bn consensus. A senior Barclays director said that the bank had no intention of raising new capital or turning to the Government for help. But he added that if there were further problems, Barclays would either sell more assets or shrink its balance sheet.

A forecast from a leading economist this weekend that Britain is set to suffer its biggest fall in growth since 1946 will further undermine confidence. Peter Spencer, chief economist at the Ernst & Young Item Club, predicts gross domestic product will contract by 2.7 per cent in 2009 and fall by a further 0.5 per cent next year.

He also predicts consumer spending will decline by 2.5 per cent and house prices will fall another 22 per cent this year.

While Mr Spencer accepts that the Government has moved swiftly to prevent the collapse of the monetary system, he calls on it to take more aggressive and immediate action to prevent a deep recession turninginto a depression. Figures out on Tuesday will confirm that the UK entered recession last year, while consumer inflation numbers will show a fall to the 2 per cent target.

Mr Spencer said: "Quantitative monetary policy techniques should be adopted immediately, without waiting for lower interest rates. That would mean government purchases of gilts and mortgage-backed or other securities." This would, in effect, replace the assets in private portfolios with notes and coins or bank deposits with the Bank of England, which form the monetary 'base'."

Comments

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perhaps quantitative easing is just a new stealth tax?

1800printmoney wrote:

Sunday, 18 January 2009 at 06:32 am (UTC)

the cost to the BOE of printing new money is 0. however, this will not be inflationary in the sense of increasing aggregate demand for goods and services, thereby increasing capacity utilization and thereby driving up the CPI. on the contrary. the purpose of a new tax is to increase revenues accurng to government. if the gorvernment gives itself the ability to print money (which it always had) but chooses to use that power to purchase existing financial rents (bonds: specifically mortgages) then the government can effectvely buy the outstanding private stream of rents (mortgages) at no cost to itself. of course, the policy may not have the intended effect of improving growth - but at least the government and all its officials continue to live in fine style :-) equally, the private banks do not need to lend to grow their profits. all they need is for their assets to grow in value faster than their liabilities. this they can achieve by swapping out mortgages to the government and buying in gilts at declining yields and thus rising prices. none of this is good for joe public - but then joe public never mattered.
if the government can buy itself income with no obvoius cost and claim it is "helping" then it will!!!

the orthodox financial community is pretty naive. those who hold sustainable rents (like the power to tax and an infinite abillity to print costless coupons to buy income wherever it can be found) actually profit from deflation. just think japan - the government has never felt any pain from deflation.

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mykleboon wrote:

Sunday, 18 January 2009 at 10:35 am (UTC)

If you print money to buy up bonds or other financial assets, then that money does indeed add to the stock of money in the system, since the people who used to own the bonds now have money instead. So, despite what 1800printmoney says, it WILL cause inflation. Indeed that would be the reason for printing the money in the first place. If you forecast deflation, then one way to combat it is to create an equal and opposite inflation - so that, overall, prices remain stable. However, your forecasts had better be right - and, if you were that good at forecasting, you would probably be sunning yourself on a beach somewhere with a white coated flunkey serving you your favourite tipple, (or whatever else turns you on)!

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