Is it time for the Conservatives to propose radical action to avoid a serious recession?

The FT today reports a shift towards greater interventionism from the Conservative frontbench.  It notes George Osborne's support for restrictions on pay and bonuses within any banks that receive recapitalisation from the taxpayer.  Mr Osborne made the interventionist noises yesterday, during his response to Alistair Darling's emergency statement to the Commons.

Conservative economic strategy will be developed further today by an emergency economic committee that Tory leader David Cameron has established.

Up until now the Conservatives have not offered a radical alternative to Labour's approach to handling the economic crisis.  Mr Osborne and Mr Cameron have preferred to emphasise bipartisanship.

The Liberal Democrats, in contrast, are urging much more radical action to prevent the financial crisis from developing into a serious economy-wide recession.  Vince Cable, LibDem Treasury spokesman, told the Commons that "radical cuts in interest rates" were necessary to "safeguard millions of jobs and homes":

"I have been a very strong advocate of the independence of the Bank of England; I made my maiden speech about it in this House 10 years ago. Does the Chancellor not think it appropriate, in emergency conditions, to make it absolutely clear that the mandate of the Bank of England must include responsibility for averting a meltdown in the financial and economic system? Those members of the Monetary Policy Committee who are going around saying that the problems go no further than the financial system need a line of communication back to planet earth. We do need to be thinking about radical cuts in interest rates. I know that the Chancellor has said that my comments on this subject are dangerous, and I recognise the dangers. These are very dangerous times, and decisive decisions are going to have to be taken over the next few days and weeks to safeguard millions of jobs and homes. I hope that the Chancellor will give us the leadership that we need on those issues."

Over on CentreRight, Andrew Lilico reviews ten economic policies that he hopes the Tories (and Government) might pursue.  His menu includes a £30bn tax cut.

Comments

[HF]

What are Osborne and Hammond doing?

[david1]

The position of the Conservative Party becomes more absurd the deeper this crisis becomes!

Cameron is now calling for the, 'part nationalisation of the Banks.' why part? If you are going to adopt the Bennite solution of the 1970's well at least go the whole-hog!

[DCMX]

Move to Osborne to the Chairman's office and put Ken Clarke in his place.

Clarke was the man who left Brown the golden legacy. We can bill him as the man to bring good times back.

[GB£.com]

So there is a choice of easing the financial pressure on businesses by:

a: massive business tax cuts to release capital set aside to pay the government, so businesses can use their own money to tick over.

b: massive recapitalisation of the banks to lend to businesses to enable them to tick over by increases their debts. And the banks will act on behalf of their customers? What happened at the beginning of this crisis when the BoE lowered rates? The mortgage lenders jacked up their rates.

And the 'conservative' solution is b? This crisis has really shown the true colours of Team Cameron; it is clearly to afraid to call for tax cuts to avoid companies getting into even greater debt.

There is nothing conservative in Cameron and Osborne's solution. Tony Blair could have come up with the same idea.

[Cleethorpes Rock]

George Osborne has never had a real job in his life- he went straight into the CRD in his 20s. Surely we can find someone in the party who has run a major business or who has some experience in the higher echelons of the economy?

Frankly, it's a bit embarrassing to have squeaky-Georgey on the TV going on about nationalising banks and government guaranteeing savings and matching public spending, when he has absolutely no authority on the issue.

I think it's time to get a heavyweight like Ken Clarke in, or get Ruth Lea of Global Vision a peerage or a by-election seat so she can be chancellor.

[Paul D]

A rate cut on that scale would be crazy given sterling is already fairly weak. Import costs will rise, the drop in the oil price will be eroded and people's savings will be depressed as inflation overtakes the interest rate

With policies like that it's a good job the LibDems are nowhere near power. If Cable's the best they've got then go back to your constituencies and prepare for oblivion

[Letters From A Tory]

Oh boy. Vince Cable is really not going to inspire confidence if we start messing around with the Bank of England as well as the banks. The Bank of England are not responsible for our economy, they are responsible for setting interest rates to match inflation - that's all.

[Alan S]

Australia cut rates by 1% overnight.

That was the right thing to do.

The Bank of England's mandate is too narrow.

I hate to say it but Cable is right.

[Arundel]

It would help if the party did not sack its MP who has an understanding of the city.

[GB£.com]

Alan,

Have you not seen the recent disconnect between BoE rates and lending rates? One is falling, the other is rising.

How did slashing rates helps the US?

What if the BoE slashes rates by 100bp on Thursday and lending rates stay the same or go up? What then?

[Andrew Lilico]

Interest rates will be cut aggressively in the UK. There's no need (at this stage) to change the Bank of England's mandate to achieve that. Interest rates will probably be cut by 0.5% this week, and if not then by 0.75%-1% next month. Inflation will peak either this month or next, and then drop like a stone. The Bank is going to have significant difficulty preventing deflation from here. Inflation is yesterday's story, and Cable is behind the curve.

[Andrew Lilico]

Incidentally, although interest rates will be cut aggressively, I don't believe there will be much effect. The banks need to delever - either through cutting liabilities, raising equity, or making profits. The scale of this delevering is well beyond anything that can be affected by interest rate cuts now.

[Norm Brainer]

Well someone had better stand up and do something.
the labour lot probably decided that they can't do anything right, so best to do nothing that do something stupid... well that was stupid as it cost £90bn.

Recapitalisation does seem to be fannying about trying to ensure nothing changes - it's time to do something radical and perhaps even conservative. Now is Cameron/Osbourne's small window of opportunity to prove themselves a heavyweight team, not just offering to help the children dither some more.

[stephen hoffman]

this is madness , it is socialists who intervene wholesale into the economy not conservatives. Conservatives in crisis are meant to offer spending cuts or tax cuts -we're doing neither - maybe this is a cameron rebranding step to far why doesn't he just call us the socialist party and go the full hog.

[Londoner]

If anyone thinks any main Board director of a nationalised or part nationalised bank will be getting bonuses for 2008, they are sadly deluded.

Equally if anyone thinks you can cut their base salaries, any more than you can cut anyone else's, other than voluntarily, they don't know much about employment law.

So I am not sure Osborne's reported view on bonuses and salaries amounts to much in practice.

[David Cooper]

It is sad but true that whether you agree or disagree with Vince Cable, he is masterful at capturing a platform for his views, usually the BBC but frequently the Telegraph. Where are the comparable efforts from our Treasury team - sidelined or non-existent?

[GB£.com]

The country's wealth in generated in the private sector.

Surely, for the future of the country, massive business tax cuts are needed to prevent further businesses going under?

It will clearly mean public sector cuts, but right now, job losses are unavoidable, but, on balance, surely it makes more sense for those losses to occur in the public rather than the private sector otherwise we will have less wealth generators struggling to support a bloated state.

I can't imagine that there is anyone in Team Cameron with the backbone to argue this.

Typical, just when we are in the midst of the worst economic crisis in 60 years, we have a tory leader who wants to be "to social reform what Thatcher was to economic reform."

Hello! We need a Thatcher, as the crisis is GDP not GWB!

Can Team Cameron change its narrative in the face of real change? I don't think so.

[Richard Woolley]

Slash interest rates to zero. It would not be crazy, if it weakened sterling so be it, it would give exporters a big boost. Stop being paraniod about inflation. I don't think that granting Bank of England independence was such a good thing now. Also slash taxes, wasteful public spending and wipe out the PSBR. Public spending should be frozen for at least the next 5 years.

[B.Garvie]

This financial crisis is so serious, delays from a dithering PM, employing weak negotiating skills, to coordinate with the other EU member states,is unacceptable. He has delayed too long. The EU member states have reneged on their promises and taken unilateral action.So much for closer integration that crashed the markets. Far better for DC & Mr Osborne to take the lead and push forward constructive proposals. Britain cannot literally afford to wait for Brown/Darling to react. They have failed, are confused and cannot be relied upon to act efficiently and employ good financial instruments.They are like startled animals caught in the glare of headlights.They are all talk but no delivery.

DC with his team must show the way forward now because this country will be damaged beyond repair; it needs strong leadership and positive policies to survive.

This debacle has demonstrate the EU member states cannot be relied upon in a crisis. Another very good reason for having our promised referendum.

[Joanna]

A lot of economically illiterate posts this morning. A huge debt financed tax cut would do very little now - people would pocket it not spend it, and markets would lose confidence in the pound and government bonds. The crisis is in the banking system which has sotpped lending. Left unchecked this will push us into depression. Osborne and Cameron are exactly right and have shown the courage to take a politically difficult position for the good of the country. A centre right government did exactly this in Sweden in what is now seen as the best solution to a banking crisis ever.

So please let's be supportive and not push the same old political agendas when the economy is collapsing around us.

[Christopher George]

The real problem is that our politicians do not know what to do about the financial crisis

[GB£.com]

Joanna,

If company A has 50k in the bank set aside for corporation tax, but needs 20k today to tide it over to stop it going bust, are you actually saying it would be better to pump taxpayers money into the banks so they can lend Company A 20k at a high interest rate, rather reduce tax now so it can instantly free up the 20k from its own account?

What if the banks decide that Company A is too risky to lend to? The owner will go bust.

[resident leftie]

It's great to see that Tory ideology is so coherent, and that you are all united in the face of this crisis.

It's much easier for Cameron and Osborne to keep their mouths shut; Labour will do the right thing, but whatever they do in these circumstances is liable to have some negative consequences, and then the Dave and Giddy show can blame Labour for it.

Giddy is proposing the nationalisation of banks and cutting banker's salaries. Is this from his deep-seated socialist convictions, or is it once again, crass opportunism?

My view is - screw the shareholders, save the depositors. I say this as a Northern Rock shareholder. I wouldn't be unhappy if the shareholder groups had a good look at the bonuses these greedy risk-takers have paid themselves and took legal action to to recover them.

If we need to nationalise, we nationalise, and take the potential rewards for the public sector as well as risks. Then ensure that there is proper collateral against credit, the removal of these dodgy financial instruments which separate risk and reward. We look at the original purpose of the stock exchange (raising capital for business), and see how much of the activity actually supports it. Finally, the private sector can take the banks back again.

Now is the time to borrow and spend on capital projects to stimulate the manfacturing base. Some public transport infrastructure, new power stations including hydroelectric from the Bristol Channel (screw the birds), and money for clean coal technology research would be just the job.

[Andrew Lilico]

Joanna@10:27

I agree that most people would save the initial tax cut (though it is possible that, by the time my proposed rebates would arrive (mid 2009), the situation in the banking system would be sufficiently dire that people would be liquidity constrained and that, in fact, a reasonable amount would be spent). Be that as it may, if people save their tax rebates, that will, anyway, provide additional deposits for the banks, assisting towards achieve adequate capital.

My proposed initial tax cut is not any "old agenda" - I have not previously argued for unfunded tax cuts; indeed I have opposed unfunded cuts. It is a response to the current circumstances - I've changed policy in the light of events, just as Cameron and Osborne would not, a year ago, have been supporting nationalising the banking system.

But there will need to be much bigger fiscal action later.

I believe that the analogy with Sweden (and indeed Finland) in the mid 1990s is flawed. The current crisis is much more globalised, rather than being isolated to national circumstances. Consequently there is not the same opportunity to access international funds.

The question is not whether we twiddle our thumbs whilst the economy falls into slump. The question is what is the best way through. And the way through that we seek should be a way that, as far as possible, trusts Markets and does not pre-commit us to decades of Socialism.

[Sean]

I don't think we have realised how far this situation is getting away from us. What is required is for us to get ahead of the curve, to promote some potentially radical ideas to restart the money markets. Think of us as a doctor; if your patient is having a heart attack you don't debate about whether or not you should do something in the event of your having to take responsibility for it.

[Tam Large]

It is tough times like this which show up lightweights - and boy, it sure is showing up the Blue-Labour media boys Cameron & Osborne.

Grinning and hugging won't get us out of this crisis boys. We need real businessmen (and women!) and real Conservatives to deal with this and ACT. Sadly the Cameron Party is led by neither.

[Sally Roberts]

"Now is the time to borrow and spend on capital projects to stimulate the manfacturing base."

Borrow from where, P.L.? We have been told often enough now that "the cupboard is bare"!

It is nice to see that you are principled however and living up to your Leftie credentials!

[Andrew Lilico]

Incidentally, Joanna, do you believe that £50bn will be enough? It seems to me that, in the absence of the re-opening of wholesale money markets, £50bn isn't going to be nearly enough. Presumably the hope is that injections on this scale, coordinated with international action, might get money markets going again? But I'm very doubtful of that. It seems to me that banks will not be willing to lend out to others until they have established adequate capital for themselves *excluding* wholesale funding. Once they have done that, then money markets will re-open and they will be over-endowed with liquid capital, thereafter running down their stocks.

If I'm right, that means that £50bn will not be sufficient to achieve anything except destroying private capitalism and shoring up a few institutions (probably including some insolvent institutions that may collapse, anyway).

[christina Speight]

I- and the Telegraph's leader - noticed the subdued tone of Osborne’s speech for the opposition. My original comment here was itself ‘subdued’ . (“Osborne’s response was polite”) because I couldn't believe that the tone of what I was reading was representative of the tone of his delivery! But I’m sorry to say, it was.

The Tory Shadow Chancellor is - in my opinion - lightweight. Indeed (attempting a weak joke!) he is the Shallow Chancellor. He was faced with a ventriloquist’s dummy of a Chancellor, wrecking the country by his total inaction and he had no clarion call to action at all . Sure,. he listed what needed to be done somewhat half-heartedly, just going through the motions.

Most of the media - for once - have noticed! Just see the front page headlines in the paper versions today

[B.Garvie]

DC and Mr Osborne must act now as this government appears incapable of solving this crisis.Whether people agree or disagree, this crisis has a political dimention and will only be solved by the Government using tax payers money for the liquidity fund.As Leader of the Opposition,David Cameron must challange the Labour Executive to act quickly and positively.

He flirted with Brown in the mistaken belief that it was statesmanlike to do so. However, instead of accepting the olive branch the Government has rejected his offer of assistance with scorn which has made them look strong and competent. No wonder 'New' Labour has gone up in the latest polls.

[resident leftie]

Posted by: Sally Roberts | October 07, 2008 at 11:04
Borrow from where, P.L.? We have been told often enough now that "the cupboard is bare"!

It is nice to see that you are principled however and living up to your Leftie credentials!

Regardless of what Thatcher thinks, folksy analogies between household budgets and national economies don't work. We need lower interest rates and revenue generating (or saving) investment. This results in growth in the economy, eating away at the debt. We have spare capacity, and the underutilization of this capacity is the problem.

I was expecting a solid monetarist critique of Labour policy, not a bunch of headless chickens. What are the grounding economic principals of Cameron and Osborne? Cameron can't even make his mind up if he's a libertarian or not! Is he a state interventionist or a laissez-faire man? For green taxes as a replacement for income taxes or not?

Thank goodness the Tories aren't in charge in this time of global crisis - no time for a novice, indeed.

[Jack Iddon]

Dear me. Talk about bubbles bursting! What a change in such a short time. Sadly it would seem that Cameron and Osbourne really are just a pair of insubstantial lightweight opportunists, basking in undeserved limelight when this appaling government are in severe trouble but with no answers, no proposals, no policies when given the opportunity to really show what they are made of arrises. Please get Clarke back in post. How can we ever hope to be elected back to government with this leadership?

[Bluto's Mum]

COMMENT OVERWRITTEN.

[Ron West]

Europhiles of both parties (but particularly Tory ones) have all been behind the (systematic?) asset-stripping and degradation of the UK to the EU over the last 40 years - so Ken Clarke is unfortunately a non-starter.

What's wrong with John Redwood for Shadow Chancellor?

[Jake]

"Move to Osborne to the Chairman's office and put Ken Clarke in his place." DCMX

oh for God's sake!
The situation calls for more than "bring back Reggie/Clarke". Clarke is man of the past and has no relevance to what is happening now. He would be completely out of his depth.

FWIIW I think the Cameron/Osborne approach is about right. It needs to be cautious. Amidst the clamour of short term volatility we don't yet have even short term visibility let alone a medium view.
One thing is for sure. The markets are still crashing overall. There is a massive shakeout going on and to dive in with "solutions" is to risk being swept away. Just stand back and let the government do it. It is what they are paid for and they are bound to get it wrong. Criticise from the sidelines.

One proposal should be for significant interest rate cuts (1-2%)which will be
a popular
b are coming anyway
c the economically correct approach

Another is for a restoration of BofE powers and trimming of FSA powers and clarity in the ridiculous existing "tripartite" BofE/FSA/Treasury regime which is directly attributable to Brown.

[grumpy old man]

With all due regard and the utmost respect to Andrew Lillico, the Conservative front bench should be keeping their powder dry because no one in global economics has a clue to what is going on! O.K. The EFFECTS are obvious, but the CAUSES are not. There are so many mutually exclusive myths circulating. Over the last few days, I've read that the present crisis is the fault of GB, the Democratically controlled House of Representatives, The Clinton presidency, Maggie, Ronald, the West's reaction post 1989, the Cold War, WWII, 1929, 1914, and even the formation of a Greater Germany post Waterloo. Doubtless someone will eventually come up with Eve's seduction by the Serpent as the root cause! (Sorry, 2 exclamation marks in one paragraph).

What is most certainly exacerbating the present situation is the EU political Leadership threshing around like netted salmon. The rest of Europe is proving to be as fraternal as a 1970's TUC convention.
Frau Merkel makes a solemn agreement with the rest of the Gang of Four. While GB announces to the world that he is an economic genius, Frau Merkel returns home to find that the second-largest German bank has messed on her lounge carpet. What follows is the biggest U-turn in German history since Admiral Speer saw Sir John Fisher's Grand Fleet emerging from the mists of Jutland. (Historians agree that Germany won the first half but lost the match on penalties)

Frau Merkel then sleeps on her decision to guarantee 100% of German bank deposits, and duly announces to the world that she only made, "a political promise". So that's all right then. European leaders can tell little white lies and the markets will respond in a prudent and responsible manner. (Just avoided another exclam. mark.) Ireland and Greece are already using the crisis to further their own ends, and quite rightly too. No doubt other European nations will quietly follow their own inclinations now that it is obvious there is no longer a unified policy at the top, apart from "we must all share the pain, except when it's me who's hurting."
In anticipation of howls of outrage from our resident euro-iconoclasts, I am not Euro bashing, just lamenting the human condition.

Many economists are questioning whether the policy of lowering interest rates and increasing borrowing is a sensible response to ameliorate a situation brought on by too-low interest rates and over-borrowing. What is the book answer to an apparently common-sense question? All I've seen so far is waffle.

[RichardJ]

Wakey wakey, recession is inevitable. Get it over and done with.

[Andy]

Passing Leftie

"Thank goodness the Tories aren't in charge in this time of global crisis - no time for a novice, indeed."

Instead, we have a maladroit history don whose only achievement is the utter destruction of the British economy and a provincial solicitor from Edinburgh.

I'll take the novices, thanks. They can't be any worse.

[RichardJ]

"Stop being paraniod about inflation."

Those of us who have quite a bit of cash stashed away in savings are understandably paranoid about inflation.

Those of us who put this crisis down to artificially low interest rates are also concerned about plans to lower them further. Malinvestments have been made and they need to be liquidated ASAP, no matter how painful this may be. Lowering interest rates will only delay this necessary liquidation and postpone the recession. Furthermore the delayed recession will come with a double dose of inflation so we'll all be screwed.

[Richard]

The simple answer is the remove George Osborne and make him Party CHairman. He should then be replaced by John Redwoon ASAP.

John Redwood was the only person to put forward a Conservative solution to deal with Northern Rock, he is respected in the City and is daily coming forward with solutions to the probelms we face. Anyone wanting to read these solutions can do so by visiting his blog.

One of the best speeches I heard at conference was from Redwood when he spoke in the Freedom Zone.

If Labour can bring back Mandleson surely we can bring back John Redwood!

[resident leftie]

Posted by: Andy | October 07, 2008 at 12:36

Passing Leftie

"Thank goodness the Tories aren't in charge in this time of global crisis - no time for a novice, indeed."

Instead, we have a maladroit history don whose only achievement is the utter destruction of the British economy and a provincial solicitor from Edinburgh.

That missing comma makes your sentence amusing than I suspect it was intended to be, and if it's provincial to come from Edinburgh then you have a very narrow-minded view of urban sophistication.

Brown hasn't "destroyed" the British economy - there is a world-wide financial crisis not of his making, and he's doing what he can.
What, specifically, is Brown doing in the current crisis that your front bench doesn't support?

[Opinicus]

Radical Change!!!

This is Cameron and Osborne we're talking about isn't it?

[grumpy old man]

"In anticipation of howls of outrage from our resident euro-iconoclasts, I am not Euro bashing, just lamenting the human condition." Sorry - three sentences into two. Should read " in anticipation of howls of outrage from our resident europhiles,I am not Euro bashing, just lamenting the human condition."

[Old Hack]

Brown and Darling are beginning to be accused of dithering. We should not take this unity in a crisis routine as a way of ducking our responsibility as a loyal and diligent opposition.

That said, I suspect that there is little that can actually be done which has not tried and failed elsewhere, including the supply side stimulus of tax cuts.

It may be the more courageous and brave thing to let the market take it's course then act later when stimulus could genuinely assist recovery rather than trying to forestall what may be inevitable.

[Andy]

Passing Leftie

"What, specifically, is Brown doing in the current crisis that your front bench doesn't support?"

I'm fairly certain we are not keen on the anonymous briefings to Robert Peston which, far from having the intended effect of making the Gobblin' King look involved and dynamic, simply frighten the horses and are tantamount to market abuse.

[Andrew Lilico]

Old Hack

Tax cuts in the US were attempted a little too early, in my view. Once private credit is sufficiently impaired, people will be more interested in spending their tax rebates.

In the meantime, if using government money to recapitalise the banks is really desirable (about which I am not convinced), why is equity injection a superior route to tax rebates for private individuals who then (on the stimulus-won't-work story) will save them - in banks. Then we provide deposit capital instead of equity capital.

[Jonathan]

This crisis in banking is a panic. Banks are not a s well off as everyone assumed them to be in 2007 and not as badly off as they are now thought either. Panic is borne of fear and a lack of knowledge. It is absurd to trash the pensions and fortunes of existing shareholders and allow British assets to be bought up cheaply by a lot of oil rich foreigners.

Suspend the trade in banking shares for six months until the true facts are known.

[Jonathan]

This crisis in banking is a panic. Banks are not a s well off as everyone assumed them to be in 2007 and not as badly off as they are now thought either. Panic is borne of fear and a lack of knowledge. It is absurd to trash the pensions and fortunes of existing shareholders and allow British assets to be bought up cheaply by a lot of oil rich foreigners.

Suspend the trade in banking shares for six months until the true facts are known.

[resident leftie]

Posted by: Andrew Lilico | October 07, 2008 at 13:59
In the meantime, if using government money to recapitalise the banks is really desirable (about which I am not convinced), why is equity injection a superior route to tax rebates for private individuals who then (on the stimulus-won't-work story) will save them - in banks. Then we provide deposit capital instead of equity capital.

And which banks, exactly, do you think they'll deposit the money in? The ones in need of finance or the well capitalised ones?

[Andrew Lilico]

resident leftie@14:34

They will save in banks they trust. So banks in which depositors have faith will become well-capitalised, and banks about which depositors have concerns will remain well below capital adequacy requirements, and if they cannot persuade private shareholders to provide alternative funds and if they cannot borrow money from the better-capitalised banks, they will probably be taken over by one of the more trusted banks (or perhaps even collapse altogether). And that is as it should be.

Also, are you really suggesting that the government equity capital injection should be restricted to banks the government decides to save? That it won't be an across-the-piece injection?

[Saltmaker]

If you wouldn't race to save a bank with private money, why would you do it with public money? Why is public money any less valuable, hard earned and not-to-be risked?

Even though it too easily results in a vicious circle, we should be civilised enough to provide financial support to people who can't provide for themselves. But the arguments today to prop up banks who can't make it on their own is rewarding weakness without fixing the problem. It's the very same argument that was tested to destruction on British Leyland.

[Faceless Bureaucrat]

If Eton is renowned for producing Leaders, thank G*d Churchill went to Harrow...

[snegchui]

A repeat of my post on "The 10 Things" as this this thread seems livelier.

Why the lack of trust? Primarily I believe this is due to the fact that all these banks are holding Asset Backed Securities (ABS)(mainly Mortgage, Credit Card: + Other Assets). (aka MBS or CMO)
These ABS were packaged to look like commodities. A big issue is that they are not commodities, ie you cannot definitely say that one and this one are of comparably equal value. So the banks are sitting on these instruments and really have no idea what each individual one is worth, though collectively they can say they are worth 80-90 p on the £ at present. So you are better off taking the whole lot than taking bits (which normally you would do to spread risk, a bit from A, a bit from B, a bit from C) But what if you are really unlucky and the 3 bits you take turn out to be the zero-performing bits of the whole portfolio running at 80-90%. Nobody even wants to think about it.
Because of that fear, large sums of money are frozen because individual packages for Repo or collateral cannot be priced if you use ABS.
Therefore the solutions open are
(a) The Govts take the underwriting risk and free up the markets again, with the gamble that as you avoid recession and business collapse, you stay at least at 80% performance for now, increasing in efficiency and price over a few years and realize a profit for the taxpayer. The gamble is nobody believes a word of it and house and commercial property keys start flying through the post, undermining the revenue stream to the ABS and you have the recession + huge debt.
(b) The banks work like fury to identify the crud and swallow the hit, which at the moment seems unachievable, and may not be achievable.
(c) Let the market proceed and hope the stronger ones can gobble the first fallers up. Concentrated banks, huge recession, floored savers, recession and huge job losses and proper Bonfires outside Parliament with a gibbet or two thrown in.
It is like a broken irrigation pipe, you have to keep the water flowing somehow or no crops.

[resident leftie]

In the meantime, if using government money to recapitalise the banks is really desirable (about which I am not convinced), why is equity injection a superior route to tax rebates for private individuals who then (on the stimulus-won't-work story) will save them - in banks. Then we provide deposit capital instead of equity capital.

You suggest that giving private capital as a way to recapitalise banks is a better way than putting public money in. Patently, if it goes to the banks which are already well capitalised, then it isn't an efficient way of recapitalising, is it?

[resident leftie]

Also, are you really suggesting that the government equity capital injection should be restricted to banks the government decides to save? That it won't be an across-the-piece injection?

No, I'm not suggesting that at all, I'm suggesting giving tax rebates will not help the situation, only exacerbate it, whereas at least an across the board intervention has a good chance of getting where it's needed.

[Andrew Lilico]

resident leftie@15:27

But that depends on what you think "the situation" is. I thought "the situation" of interest was that some sound institutions might have inadequate capital, and inadequate access to capital, because of a systemic problem. I hadn't thought that "the situation" to be addressed was that some badly run institutions are insolvent. Consequently I don't want public money to go into the insolvent institutions if I can help it. Consequently it is not something that particularly concerns me if deposit capital went into well-run institutions instead of badly-run ones.

And if your concern is that some well-run but poor-publicity institutions might not get deposits, then once well-run institutions are well-capitalised, the chances are much better that those well-capitalised institution would lend money to well-run institutions that still needed some. That would be a route into the re-starting of interbank lending - the only ultimate solution other than the end of private capitalism.

[West London Tory]

This needs to run it's course I think.
If houses lose 30-35% of their value, so be it.
This bubble, has been a large part of the cause of this, and was largely (but not entirely) home grown.

[Patsy Sergeant]

I agree totally with 'Joanna' @ 10.27 - 'a lot of economically 'illiterate posts' on this site today!

And Cleethorpes Rock @ 9.25, thats rich going on about George Osborne never having had a real job in his life ----- what the f have we got at the of the political tree in NO.10 at this very moment, why not concentrate on that aspect FIRST, but NO its always the safe - nag, nag, nag.

It always seems to me that the people who aren't obvious 'lefties' on here - and there are enough of them - yawn, yawn, at the moment - or LimpDems, prefer to spend their time trashing George Osborne and sometimes DC (as if either Osborne or Cameron can actually solve the current mess), rather than suggest measures that this pesky government can adopt.

No, it seems to me that the naggers - whatever their allegiance actually is - want GC and DC to produce some whizz-kid financial strategy on a plate, which Gordon Brown can then adopt.

Well I am sorry, but unless there is some sort of official coalition recognition between the two main political parties - on the part of Mr. Brown - I don't agree at all with George Osborne or David Cameron being expected to come up with policies to supply this bankrupt government (bankrupt both of ideas AND money!). Since every indication so far from Brown is that even if Osborne came up with a miracle of a financial idea, Brown would pinch it and not give Osborne the time of day.

I am quite happy with what GO and DC have indicated so far!

Also despite the fact that I don't often agree with Andrew Lilico, at least he has come up with a choice of possible ideas which just might help, and which is at least positive!!

[GB£.com]

"Since every indication so far from Brown is that even if Osborne came up with a miracle of a financial idea, Brown would pinch it and not give Osborne the time of day. "

Oh for fark's sake Patsy, I don't think this is the time for party political pointscoring.

If someone in the Tory Party has the best solution, then they should be banging on Brown's down to implement it for the sake of the country, not holding back and waiting for meltdown for fearing of not getting the credit.

What a piss-poor attitude.

[snegchui]

It is possible that some banks really are insolvent, ie their impossible to price assets are really junk all the way through. But the only way you are going to find out, that I can see, is let the market run on.
If you don't underwrite the toxics or recapitalise the banks by buying shares on the toxics, then today gets worse. Nobody knows or trusts and investors flee the bank stocks just in case and then the banks will call in their loans and not issue new ones to pay their own bills, and some will go under.
If you give the lifeline, but then monitor the performance of the ABS you will identify those banks that have the most toxicity, which is bad for them, but will liberate the rest from suspicion and doubt. You should also keep more players in the game this way.
Taxcuts and interest rate cuts will enable businesses to keep going a bit longer, but will not directly work on freeing liquidity out of banks that can't convert "toxic" assets into cash or collateral.
Or shall we tell businesses to approach the Chinese Banks and go down that road? Or like Iceland today offering the use of Keflavik to the Russians for $4bn to support Icelandic banks?

[Patsy Sergeant]

WHO is 'party political pointscoring' precisely!

AND you didn't read my comment properly.

If you bang on someone's door, for instance Brown's, if the door is not opened, it would not matter if you had the solution to life itself - WOULD IT! Would you really have us believe that MR. Brown is welcoming the Opposition into his front room in a friendly fashion, for a discussion of ideas? Suggesting that DC and GO are 'holding back' and 'waiting for meltdown', may suit your political fantasy, but PROVE IT!!

[M Dowding]

I am at a loss to believe some of the drivel being posted. Over ten years of reckless, wild extravagance to buy votes and we are not united in condemnation of these charlatans. Look at "Leftie's" solution, MORE borrowing.
We need a new Government with access to the books. The real state of the finances will be seen to bordering on criminal.
What is more we need to be aware that those evil twins Mandy and Cambell are about. Mendacity in spades, lying as an art form.

[christina Speight]

RichardJ at 12:31 "Wakey wakey, recession is inevitable. Get it over and done with."

Recession isn;t inevitable - it's here right now and unless someone does the needed _ cut interest rates, deal with the mark to market problem and recapitalise the banks, we won't have a recession or even a slump - we'll have a banking system crash and then heaven help us all

[christina Speight]

resident leftie at 13:25 "What, specifically, is Brown doing in the current crisis that your front bench doesn't support?"

He's doing NOTHING at all in the current crisis !

except that as I type this we learn from Sky News -
- - - - - - - - -
- |Brown Calls Crisis Meeting
BREAKING NEWS4:30pm UK, Tuesday October 07, 2008
Gordon Brown has called a crisis meeting with Alistair Darling, Mervyn King and Adair Turner, the head of the FSA|
- - - - - - - - -

That's NEWS? Doesn't he meet them every day as a matter of routine in such a crisis? If not, what DOES he do all day?

[Patsy Sergeant]

Exactly Christina!!!

[Richard North]

And not one of you has mentioned the EU finmin meeting today - or any suggestions as to what they should be doing, or should have done. You are all still thinking in local, national terms, as if we were not members of the EU and that they had no part to play in this drama.

As it happens, the finmins have recommended the suspension of the mark-to-market rule, which will perhaps have a significant effect on the course of this crisis - something which was in the gift of neither Brown nor Darling to do ... but one which both Cameron and Osborne have been recommending.

Seems to me that both sides - europhiles and eurosceptics - need to wake up to the reality that what happens in the EU is as important if not more so that what is happening in Westminster and Whitehall.

Brussels is part of your government folks!

[David Cooper]

Slightly off topic, but just to echo a fairly ferocious debate on Guido's threads today about the latest bank shares turmoil, there was a short but sweet announcement from Royal Bank of Scotland posted via official channels today at 12.49 simply stating: "Contrary to press speculation, RBS did not make a request to government for capital". Given that it may not be unreasonable to conclude that Downing Street inspired leaks are partly responsible for what has been going on today, may we expect this to be raised at PMQs at the very least?

[Carlisle Mack]

Brown said that this was no time for a "novice", on that he is right; but it is also no time for a ditherer. Whilst the PM and Darling engage in yet another round of meetings instead of taking the necessary steps to bolster confidence, Messrs Cameron and Osborne seem to be giving this administration a blank cheque to destroy this country's financial sector.

As Angela Merkel vividly demonstrated on Sunday, national interest should trump vague EU "initiatives" and the need to be seen dancing to Sarkozy's desire to be centre-stage. Is it too much to ask that Ken Clark be brought back to put some backbone into the Tory front bench?

[snegchui]

The Mark-to-Market is not a response directly within the EU remit. They have to pressure the International Accounting Standards Body to agree it. Ganging up on mass will of course help.
Mark-to-market was brought in on much simpler instrument models. People want it revoked now to "fair accounting models over time". Who sets that?
It comes back that Enrons and Worldcom drove the attempt to cleaning up funny accounting, The complexity of current financial instruments is such they can't be marked-to-market because nobody wants to trade them (thus admitting they don't understand them) so are valued at zero or very close to. Which is the big writedowns.
They have got be worth something is true, but who decides? The firms themselves? The Govt? The regulators? IASB? None of them can, because nobody can untangle the exact composition of the intruments to its component parts.

[stephen hoffman]

if we nationalise more and more banks , this just gives the taxpayer a massive pile of debt and also defeats moral hazard ie the banks stuff - they get away with it - we could have kept the moral hazard principle if we had let northern Rock deservedly go to the wall. why should the taxpayer have to bail out poor business practice?

[christina Speight]

snegchu @ 1936. I think you'll find you are quite wrong as the Americans abandoned the full 'mark to market' some time ago now and it has taken us all this time to do it too. Our dithering lot sat around waiting for the EU when if they'd any guts they'd have done it anyway independently.

The EU takes at least two weeks to set up meetings when the crisis works in hours and sometimes minutes. The simplest form is to do all valuations on purchase price and only on value if they will be realised in a short time frame.

[snegchui]

Christina:
No the EU does not control EU mark-to-market, the IASB does and the EU must negotiate with it or thump it.
Fair value as practised by the SEC is mark-to-market except in exceptional circumstances, you cannot ignore market data if it is available.
It is why the concept of distressed debt is so central to the US plan.

[Patrick Harris]

If anything, the lasr 5 days have shown that the EU cannot work in concert. The ink was hardly dry after the finmin meeting decided on the 50.000 guarantee and Holland and Portugal went to 100,000. Germany was guaranteeing then not guaranteeing, it was financial , it was political.
It has developed into a mess.
Who is going to bail out the tax-payers?

[Scott Wichall]

I am afraid that this is somewhat pointless in terms of what our politicians will or will not do. The decisions rest in Brussels, by our unelected masters. Anything we do will fall foul of EU legislation. For example Mark to Market accounting rules are part of the problem, and guess who controls them? Thats right, you guessed, Brussels (behind closed doors)

[Richard North]

snegchui | October 07, 2008 at 19:36

"The Mark-to-Market is not a response directly within the EU remit. They have to pressure the International Accounting Standards Body to agree it. Ganging up on mass will of course help."

You have been reading the Economist ... always rather dangerous.

Mark to market is part of Basel II which is partly implemented by Directive 2006/49/EC of 14 June 2006 "on the capital adequacy of investment firms and credit institutions". Its short title is the Capital Adequacy Directive. This must be read in conjunction with Directive 2006/48/EC.

Pillar III accountancy and disclosure standards are implemented by Commission Regulations under the aegis of Council and European Parliament Regulation (EC) No 1606/2002. These implement IFRS agreed at Basel II, the promulgation of which is delegated to the International Accounting Standards Board.

As you should know, the IASB is a non-profit private organisation, not a regulatory body. Therefore, its standards have to be implemented via EU law.

In the absence of an IFRS, the Commission has the means to initiate its own standards, through the the Accounting Regulatory Committee (known as the ARC) and Contact Committee - which it is preparing to do as a fall-back if the IASB does not deliver.

[GB£.com]

Richard,
Do you think this crisis is going to be used as cover to create more centralised powers that will require the UK to join the Euro?

I can almost see PM Cameron on TV explaining how joining the Euro will "ensure we never go through a similar crisis again" etc etc.

[snegchui]

I never said the IASB is a regulatory body. However any changes to an agreement the EU has signed with IASB would then change the terms and conditions of, in this case, Securities Valuation. That could have ramifications that are not immediately apparent, so consultation would involve not only the EU but other international bodies.
The lead into the IASB was actually from American sources that also did mention The Economist as the only British source that seemed concerned about the issue.

[Malcolm Dunn]

Best post of the thread Grumpy Old Man. Let's face it, we are completely in uncharted territory. No politician or indeed any banker that I've heard has a clear idea of what to do.It is not a time for political point scoring (Passing Leftie?) but the key is trying to restore confidence in our banking system if we fail to do that we are stuffed.

[Kris Taylor]

You said it Malcolm Dunn. It beggars belief that most of the posters on here speak as though it status quo for the economy will return in due course and continue with petty point scoring.