The Bewilderness

2009: heigh ho, silver lining

I understand that this will be one of the coldest New Year's celebrations for many a year and the first this century. As I look out at the blue skies, the sun and the heat, nothing persuades me to entertain a celebration at home when I can make my resolutions in a warmer and sunnier clime. That was my resolution a few years ago and I have managed to achieve this for a number of years.

My chosen venue this year is Miami South Beach, a set of mangrove swamps transformed by human capability and property bubbles into a charming city with the widest disparity in income within the United States. Does this matter? Not really. Inequality only matters if it is permanent and there is no way for those at the bottom to aspire. As we know, only socialists pull the ladder away .

I wish any readers who pass by an auspicious 2009, and remember like is harder, faster, better and more exciting the further we explore this new century. The darker the clouds, the better the silver lining.

Recession extraordinaire

Are we due another crisis? We know that the banks fell apart during October but we have not seen a full accounting of their bad debts or whether they have set aside sufficient reserves to meet these requirements.

The process of deleveraging has hit the real economies hard. Now, the United Kingdom is passing through the first stages of the recession where the onlooker does not know how hard, how fast or how long the downturn will take. Every week we hear another phase of terror wander the garden of punditry: Japanese style lost deflation, a longer lasting recession than any other advanced industrial country, the potential sterling crisis and so on.

Let us be clear: no one knows if this downturn can be described in orthodox terms or compared with previous recessions. Gordon Brown is arrogant enough to believe that he can affect this tsunami through a splurge of borrowing but, if I stick my finger in the air, this money will have no effect at all in the long run, and will do nothing to cozen the pain. What desperate measures will Brown turn to then?   

Gordon Brown flies to neverland

The lackwits and illiterates are now in full cry. If only we were to cut interest rates, then we could begin to ameliorate the downturn and prevent a savage recession. After all, place banks in that position and then we could see that they are just acting in a conspiracy. So says John Wright, national chairman of the Federation of Small Businesses:

"We are asking for the MPC not to dilly-dally until Thursday but to take the initiative early on Wednesday so that it sends the right message," he said. "A lot of our members are being asked to pay more for their overdraft and more for their loans, and a cut in interest rates would put the bank managers under immense pressure to explain why on earth they are increasing overdraft rates and loan rates at a time when the Bank of England is reducing them."

"A full 1pc cut would make it glaring that banks were up to their old tricks if they did not pass it on."

After all, money that is not paid back to the banks can be used to increase consumer spending. Same old economy, same old drive. The problem is that the model is bust. Money is more expensive and too many people have spent their or my hard earned cash now and lived on the never-never. Reduced consumption is here to stay until such times as the deleveraging of the economy is complete.

Since everybody requires more capital, it seems perverse to reduce the price of money and, in turn, destroy incentives to save. Of course, there should be some suitable deals as the government bail-out is limited.

The final apotheosis of Brown's Britain is Micawberesque misery, as all that debt returns to roost, and a savings culture is laid to rest, ready to rise again if the state no longer sucks up resources for the sole purpose of re-electing New Labour.. 

Plotting confidence

Media attention focuses on the short term bounce of the monetary stimulus and nationalisation of the banks. Talk of confidence returning is premature. This will take a long time and can only be gauged by plotting the price of money. Just as LIBOR provides the graph that links the dissolution of capital and trust, so this will be the measure that quantifies the revival of confidence.

Brown gets his sweeties

Brown has finally made his statement on what he hopes will be a crowning success: the (partial) nationalisation of the banks. It is the implications of his statement that appear disturbing.

"This is not a time for conventional thinking or outdated dogma but for fresh and innovative intervention that gets to the heart of the problem.

"These decisions on stability and restructuring are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and businesses."

If the government views banks as a necessary utility, providing cash and investment (not money or debt, as it is properly called), then Brown must see the opportunity to intervene and direct their resources to whatever 'investment' he deems appropriate. If Brown and Balls succumb to temptation, then we could see a huge misallocation of capital in the midst of this crisis.

Brown morphs into finance's Mr Hankie

After another torrid day on the stockmarket, whose cause is unknown (and unknowable?), the bailout is coming into place:

HBOS shares slumped by 42 per cent today, Royal Bank of Scotland was down 39 per cent and Lloyds TSB dived 13 per cent in another torrid day for the banks.

The taxpayer will take a stake in banks that seek assistance through the purchase of preference shares, which the Chancellor will say could mean ordinary people making a profit once the crisis is over.

There have been a myriad of rumours over who leaked the news that government and banks had met last night to organise the structure of support for the banking sector. The news was placed on Robert Peston's blog and contributed to the loss of confidence in the banks.

Ministers are putting the blame for the disclosures firmly on the banks who were accused of briefing the BBC about a meeting between Mr Darling and Barclays, the RBS and Lloyds TSB and other institutions on Monday night. At that gathering Mr Darling was urged to speed up his bailout plans. But the leaking of what went on was denounced as “irresponsible” by Downing Street. For their part the banks accused Mr Darling of dithering for not going ahead with his announcement earlier.

A government that blames a bank for briefing is in denial, especially when Robert Peston is known for his close links to the Treasury. The whole operation bears the hallmarks of Brown's oppo: leaking for political advantage, ignorance of the wider consequences and smear anyone but the culprit. So tonight, after Darling's slated announcements and the final bailout of the banks, long trailed and with no guarantee of success, the government takes action. It is partial, chaotic and gives the appearance of helping out 'our friends in the City'. You could tell there was trouble as Macavity had left the building: especially when £4.5bn was lost by Savers in icesave.

Tonight, there is a whiff of turd world incompetence and banana republic antics from this dying government. Iain Martin says it all:

But the handling of this today has been beyond appalling, in policy and presentational terms. When it is all over, reputations will have been shredded, answers will be required and there will have to be a reckoning. Otherwise we will have become a banana republic. Sorry, what's that I'm hearing from Robert Peston? The government is going to announce in the morning that we are a banana republic.

The mantra spreads

The mantra spreads: Broon's "we will do whatever is required" becomes adopted across Europe:

A statement by Alistair Darling, the Chancellor, to Parliament failed to calm nerves with the stock market taking a further dive as he spoke.

The Chancellor refused to outline firm plans to deal with the crisis – however, he confirmed the Government was working on a radical scheme which could be implemented in the coming weeks.

European leaders issued an unprecedented joint statement pledging to do whatever is necessary to help struggling financial markets.

The answer is that none of our elected leaders know what to do and they are wasting our money in an attempt to get re-elected by demonstrating that they have our interests at hearts. That is why our taxes are recycling our savings across Europe. Just shows that the overwhelming sum of individual human transactions will always drown the state: on the way up and on the way down..

The swedish model

As I suspected yesterday, though it were not a difficult suspicion, the government intends to follow the Swedish model, if matters get worse:

Among the plans that will be discussed is a Treasury scheme to take shareholdings in the country's biggest high-street banks.

Alistair Darling, the Chancellor, could give the banks billions of pounds in return for shares in an emergency bailout plan to be enacted if the finacial crisis worsens....

The bail out plan would allow the Government to provide banks with billions of pounds without attaching conditions on how it is spent. By receiving shares - or an option to buy shares - in exchange for funding, taxpayers stand to profit when the banks recover.

A similar scheme was introduced in Sweden in the early 1990s when the country was facing a similar banking crisis. Swedish taxpayers eventually profited from the bailout. The mechanism, used by Warren Buffett, one of the world's biggest investors, to provide £2.8 billion to Goldman Sachs recently, is being closely studied by the Treasury.

At least, we know that this worked, costly, expensive, but probably better than the alternatives.

Germany injects hypo, rejects club med

This will be the last that we hear of 'beggar thy neighbour' policies now that we know Germany has guaranteed all private bank accounts following the collapse of Hypo Real Estate. Maybe this step, already in the minds of German policymakers, was the lever that allowed Angela Merkel to reject a bail-out at Saturday's meeting of European leaders. As a step, it marks the end of any unity from the EU in respect of this crisis, as Germany refused point blank to bail out Club Med.

The country's second-largest mortgage lender, Hypo Real Estate, has announced it is on the brink of failure after a £28bn bail-out deal fell apart.

Chancellor Angela Merkel warned that if the German government fails to salvage the rescue plan, the institution's crisis will become "a crisis for the entire system".

A finance ministry spokesman later announced the move to guarantee all private savings accounts, according to the AP news agency.

Gordon Brown's paralytic activity has resulted in rhetorical questions and spindoctor mantras without involving much destruction of taxpayers' cash. The piecemeal approach may not allay the systemic crisis but it has so far prevented the wrong policies from being applied as our neighbours have been forced to undertake. His ratrun of international meetings and conferences with the collectivity of decapitated chickens will not prevent or slow down the storm.

Will we have to take the same steps that the Swedes applied in 1990?