When Enough Is Not Enough

It’s just a bit embarrassing really but entirely expected by most people. The scale of the UK Government bail outs seems to have come up a few digits short. Nobody’s quite sure what or how many digits are missing but digits are required - some may argue all ‘Fiscal Stimulation’ requires as many digits as possible.

£400 billion doesn’t really sound much in reality. People are talking in trillions these days but to us in the real world we are more worried about the value of the Secret Santa gift we have to buy. Our concern is about not having more than two digits in front of the decimal point. Mervyn King is a little worried this week that we have come up short by not having perhaps 12 or 13 digits or more in front. The sort of number our calculators and even the famous Manhatten read out that counts the US National Debt (recently upgraded courtesy of some duff bankers) are not capable of handling.

‘Please Sir, Can I have Some More?’

It brings a tear to my eye to think of that wonderful scene in Oliver Twist, when the baby-faced Mark Lester asks for more gruel. The whole thing bursts into song and I think perhaps singing will help us through this current crisis. The song might be entitled ‘Additional Measures’ sung in the key of B for B***** off perhaps.

You see, Mr. King, the venerable Governor of the Bank of England, who knows a thing or two about money, has realised that slashing interest rates to the lowest levels since 1951, giving back 2.5% of VAT and stuffing a fat load of cash into the Banking system courtesy of a bunch of mugs called ‘Taxpayers’, is simply not going to be enough.

Indeed he has suddenly realised that all these current measures are not enough to bring back bank lending to ‘reasonable’ levels – maybe the Brown aim of pre-August 2007 levels he hallucinates about. While Mr. Brown enjoys the crest of a wave of new popularity in his nice red pants and cape with the ‘S’ logo on the front, Merv has tried to pee into his Christmas Mulled Wine – a pinch at the new VAT prices, sadly not available from Woolies this Christmas.

We Have Plenty of Money – Just Print Some More

With Bank interest tending to zero we have some new terms to conjure with on top of the sinister ‘Additional Measures’ such as ‘Quantitative Easing’ which basically is a process of taking old toilet paper and photocopying pound signs on it – as large as denominations as possible. I have tabled an idea to Alistair Darling as I have some spare inkjet paper that I could copy some £20 notes for him or and my nephew has a Christmas card press which may help also. Avid readers and watchers of Niall Ferguson’s ‘Ascent of Money’ will be aware that several former South American Republics hit the printing presses and produced so much money that it became not worth the paper it was printed on. Just use recycled paper chaps and heed The Dark Lord’s call for more carbon friendly business.


Agenda Item at BoE Monetary Committee Meeting – What was the bail out for again?

Yes, at the heart of the matter it seems that no one is quite sure what all that sensual ‘Fiscal Stimulation’ was meant to do. Obviously the first aim was to put a cork up a backside that was about to explode (sorry for the poor analogy but I am reminded of the old joke) i.e. the banking system. Certainly, as Mr. Brown’s ratings show, this was achieved. The unfortunate question that Merv and his team have to conjure with, this may work at the moment but how long will the cork stay in?

Central to Merv’s problem is that the banks are not lending enough – the poor lambs are having a fit of ‘commercial knowledge’ which seems to be verging on the common sense. From interbank lending, corporate loans and even mortgages, those bankers are just not lending enough which has the nasty repercussion of just deepening that recession that Gordon Brown told us could not happen to us because we have a stable economy – well not as deep as we have a better economy. Yes, Gordon, old chap, that recession that is causing all that pesky unemployment and shortfall in tax receipts you have promised to use to pay for the extra debt you raised on our behalf to keep spending and bailing.

The danger here is that we get a vicious circle – if we don’t lend we get more depressed so we lend less again and get more depressed until the banking system disappears up its own backside. Some may ‘good riddance’ but it’s actually a bad thing, at least long term after the smile of satisfaction fades.

Come On Boys – Lend, I say, Lend!

Brown et al definitely want plenty of lending – it has served him well over the last 10 years as it fuelled a great rise in the value of properties which we all capitalised on to use the increase in equity to spend a ton of cash which in turn fuelled growth in the ‘stable’ economy. So what he would like us all to do is to do that again. Get some money from somewhere and spend it in the High Street. It may have escaped his attention, but since August 2007, that peak of lending time when 49% of all mortgages were Equity Withdrawals (a form of fiscal contraception), house prices have collapsed by around 15% as a conservative estimate and lenders reckon there’s a further 18 to 20% to go. So all that equity we leveraged has disappeared and all we have is debt, so a) it will be difficult to remortgage without realising the losses and b) who would sell a depreciating asset like a house right now?

To boot, banks are cutting back lending because they got it horribly wrong and the same Government has ordered them to repair their balance sheets. So lending like salivating hounds around a dead fox is not a good plan. Without, of course, some nice chap pumping a whole load of new capital into their coffers – then they might change their tune. Naturally, we private sector types and our erstwhile investment funds aren’t going to do that, so the only alternative is that the Government will have to do so.

This ‘Additional Measure’ is termed by Mr. King as a wholesale nationalisation of the British Banking System.

Nice Thought – Anything Else We Can Do, Lads?

Well I suppose we could increase the bad debt insurance provision and make it less punitive but it stands at a paltry £250bn at the moment – far too few digits I am sure. The second is to guarantee banks’ lending to both corporate and individual customers which the Crosby Report (Sir James not Bing although you can’t be too sure these days) recommends and the Government is so keen it wants to extend it to mortgages.

Sadly, these ‘Additional Measures’ may not be enough, fabulously generous though they are. Mainly, as our banks still own many billions of dodgy mortgage-backed debt in the US housing market. It would be helpful if this debt too is bought or written off by Government.

Counting The Cost

I suggest we all club together and buy a new calculator with enough digits for Alistair Darling and Gordon Brown’s Christmas Stocking this year – they will need it. As only when they have totted up the above will they get anywhere near realising just how much the whole cost to us really will be. A ton of new capital into the banks is really the only way to shore up the mess created. And only at that point will we know if we have done enough to avoid disaster or if more is required.
There are a ton of missing digits between global output at $50 trillion and outstanding derivative positions at $535 trillion which contain the toxic debts everyone casually refers to. Somewhere in between lies the approximate answer the question – How much is enough? What is clear is that we have only plugged the gap short term – we will have to dip a long way into our pockets to find enough digits to sort this out.

In the meantime, keep smiling as the pain hasn’t started yet.