Two Things I Never Thought I would See

As Peter Mandelson was sworn in ermines, entering back into Government with a salary of over £100k per annum and a 3 year pay off from the EC of over £200k per year, I blinked as I watched three bastions of the capitalist era, Lloyds TSB, RBS and HBOS go into majority State ownership joining Bradford & Bingley and Northern Rock.

Well I would never have thought either could happen.

The cost? Apart from Mandelson's comparatively minor burden on the taxpayer, a cool £37 billion yesterday. Thank God we saved Fred Goodwin's pay off.

So What Do We Get?

The city and academics both say we, the taxpayer. are party to a potential windfall. After all we now own around 60% of RBS and 40% of Lloyds TSB, we are not sure at what the share price paid was but those are minor details. As the world recovers, the theory is the Government and hence the taxpayer will reap the benefit of the wise investment.

Dream On

When was the last time the UK taxpayer got direct benefit from a public owned company going back into private ownership?

Further £37 bn is borrowed money at a rate of interest which we the taxpayer pay - a mortgage in so many words collateralised on future tax to be collected. In the meantime, the plan is that conditions are reset to mid 2007 and all the banks start lending again, there is cheap credit available and we all start spending again.

Was that not what got us into this mess or perhaps I dreamt the last year and all those clear diagrams and explanations the bankers told us about?

Reality

The reality is that the 'Credit Crunch' was a symptom of a much deeper problem. The house market had grown out of kilter to average wage rise, rentable values and the average household savings had slipped into negative. At the peak, 49% of all new mortgages were re-mortgages as people leveraged the equity in their homes. In the last year we are told that average house prices have dropped by 10% with a further 18% to go by some estimates. In the last quarter Estate Agents averaged less than one house sale per week. Savills alone have seen an 80% drop off of high end sales.

The engine is broken - it is irrelevant how much fuel you put in, it just won't work.

Economic Slowdown

Brown's huge gamble is that the economy, i.e. consumer spending, gets back to pre-August 2007 levels. In order to do that he needs a return to cheap, freely available credit and above all, leverage of our growing assets to raise more money to spend - after all wages are actually falling in real terms and tax is rising.

But inflation is rising at the highest level for 10 years, unemployment is up to the highest level in 11 years and we have allowed at least 1m extra foreigners in to do low level, unskilled work. The sort of jobs that will disappear fastest when the recession (and we had better believe it will) bites. No more meals out, morning exotic coffees, hand car washes - the little things will go first and that's where the majority of those workers currently are.

As they fall out of employment, the burden on the state rises.

The slowdown will affect corporate earnings, there is a real chance China will lurch into recession and job prospects are already lowering as the number of open positions have already dropped dramatically.

The Price We Will Pay

So if you think £37 bn will yield us a profit, think again. Britain faces a dramatic slowdown in its economy and kick starting credit will not rescue us. Our borrowing as a nation is now 50% of GDP and rising - we can only cover further tax shortfalls as the recession bites by borrowing more.

There was little Brown could have done in the face of the crisis other than rescue the banks and pay lip service to the greed that caused the crisis. But it was his hubris, arrogant self confidence that he knew what he was doing as Chancellor that steamed us right up this blind alley in which few have gotten rich quickly, the general populous thought all these second properties and hi tech electronics were here to stay and always affordable and the polarisation of rich and poor, have and have nots around the globe got ever more evident.

Just don't forget, the man who put us in this mess is the man trying to get us out. He wants a return to 2007 spending to save his neck - I hope we do not fall for it because it will surely mean a future crisis far worse than we are experiencing now.