Will Gordon Brown's New Bailout Save U.K. Banks? 10 comments
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Another day, another bailout. This time it's on the east side of the Atlantic, where the UK authorities have organized another capital injection/loan guarantee program for (some of) Britain's troubled banks.
Last Friday, the feel-good rally in equities and sterling was rudely interrupted by a late-session swoon by some of the UK banks deemed most vulnerable, a turn of events sufficiently troubling that "Flash" Gordon Brown and his Darling sidekick have organized another bailout.
Flash Gordon may have saved the world with his earlier bailout, but he didn't manage to save RBS, still reeling from its catastrophic acquisition of ABN Amro little more than a year ago. Not even Ming the Merciless could lose £28 billion in a single year, but RBS managed the trick. The good news for RBS longs is that there is good long-term support on the chart 28p below the current price.
At the same time, the Bank of England has been given the power to buy turds...err...assets from banks to help them shore up their balance sheets. Roll on quantitative easing, UK style! The question is how low Merv and co. might want to take rates in conjunction with any asset purchases. Macro Man has a sneaky suspicion that they'll be reticent to trim below 1%, though that hasn't stopped the short sterling strip from rallying a bit this morning.
Sterling the currency has come under a bit of pressure, however, as the market engages in a knee-jerk "sell the quant easing currency" Pavlovian response. EUR/GBP has traded up 2p from Friday's lows, and GBP/USD has shrugged off early-session strength.
But surely we've seen this movie before? The market had a pop at the dollar (for whatever reason) in December as the Fed moved to quantitative easing....and the buck has subsequently retraced most of those losses.
While Macro Man comes second to no man in his disdain for Flash Gordon, in his view the UK's troubles are pretty fully priced into the currency markets. Macro Man calculates fair value for EUR/GBP at roughly .75, making the pound some 20% undervalued against its European neighbours. While that is not necessarily a catalyst for an immediate sterling rally, EUR/USD in 2008 demonstrated what can happen when the valuation rubber band stretches too far.
So Macro Man is shockingly somewhat constructive on sterling in the medium term, though there can of course be plenty of short-term setbacks.
In the meantime, Macro Man looks forward to Flash Gordon claiming victory with his latest initiative. There is, however, no word yet on whether he will change the national anthem from "God Save the Queen" to something more up-to-date.
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I think you are being a tad optimistic. My reasoning:
A or L
A = Argentina = Depflation.
L = Japan = Deflation.
As we enter a depression there seem to be one of two paths that we can travel. One path accepts that there has been a debt bubble, that this is the cause of the depression. The other path does not accept there was a debt bubble and that it will be policy responses that will stop a depression: Bernanke Panky is a master of the 30s and Japan’s slump, his wisdom will save us from a depression.
If you accept the L then you accept that it is better to let the market find it is price and not bailout the badly run businesses. You go cold turkey. You do not run up massive debts on the State’s balance sheet, which only leads to higher taxes. You want people to save. You want the State to cut it’s cloth, to face the new reality that the high tax take from the debt bubble is not coming back. The delusion is dead. You want the State to cut business regulations and taxes. You want all your focus on nurturing wealth creating industries that can sell their goods and services globally. You give grants to such companies.
If you accept the A then you accept that you can manipulate the price in the market and bailout badly run businesses. You put off the day of reckoning. You run massive debts on the State’s balance sheet. You want people to borrow and spend. You want the State to expand and you expect the pre-bubble days to reappear like magic. The delusion lives on. You continue to over regulate and tax business. You want all your focus on spending and piling up debt. You give money to the profligate who ran up too much debt, you start printing money.
Life in the L is like hell. Many lose their jobs and GDP collapses.
Life in the A is horrible. Many lose their jobs and GDP collapses.
L lasts three to ten years as the economy is re-engineered to sustainable wealth creating industries. House prices fall 50%+ from peak to trough, with little chance of rising for many, many, years. People start saving. Money is sound and the Pound holds up relatively well, considering the situation. With sound money the populace is able to clothe and feed themselves, the lights stay on. The State supports those in trouble. It invests in retraining.
A leads to a collapse in the Pound as the markets realise that the country can never repay interest and principal. This leads to unsound money and rising inflation as import prices explode. Interest rates need to rise but this will gut the debtors. Wage policies are enacted and a spiral of inflation takes hold. This leads to hardcore poverty for millions as the Middle Class sees it’s wealth vanish. With a collapsed currency few are able to holiday abroad. The IMF are called in and State spending is slashed.
Both A and L lead to a drop in living standards for the populace. The key plus for L is that once the pain is out of the way a new base for growth and prosperity can be engineered. The balance sheet is strong enough.
With A the balance sheet is wrecked and the Middle Class has been devastated. Argentina is a prime example of what happens when the wealth of the Middle Class is squandered.
In the L one gets a sharp painful deflationary depression.
In the A one gets a multi decade long depression that could lead to inflation = Depflation. The country becomes an Undeveloping Nation.
Our ruling elite and most of the punditocracy are taking us to A.
quote
Messrs. Brown, King & Co are desperately trying to encourage lending and spending with a debased currency. Encourage an alcoholic to drink more bad booze? The problem has less to do with banks not lending but more with the United Kingdom s lack of competitive industries, saleable goods and services to world markets when at the same time North Sea oil reserves are dwindling. For my part my portfolio is clear of Pound Sterling. Only good thing is the floating exchange rate – otherwise all would be in place for an Encore by Mr. Soros.
unquote
Have a good day
'Three key proposals are being finalised. The government will offer guarantees on new consumer loans...'
To all deflationists and inflation-deniers, you who claim that the banks cannot be made to lend, and that consumers cannot be made to borrow: here is part of your answer. Do you believe that the Fed is going to allow the banks to sit on that $500+ Billion dollar bonanza they printed up and gave to the banks? The money will be forced out the door via reserve policy changes and loan loss guarantees, just as I have previously stated. Imagine a small policy change where the Fed stops paying interest on excess reserves and starts charging a fee for them. There would be loan officers standing on street corners handing out loan apps, equipped with mobile funding vans and self-serve funding bins.
This is a globally coordinated effort, and similar measures will be taken across the globe by all major central banksters. It won't be long now.
Currency destruction dead ahead.
Thus, based on cost of consumer goods, it seems that the natural ratio is close to 1+VAT = about 1.2. The main reason the GBP commanded a premium was that the UK interest rates were substantially higher than US rates. Now that the US has ZIRP, and the UK is approaching ZIRP also, shouldn't the GBP/USD ratio be converging towards the 1.2-1.25 range again?
"Offering loan guarantees to a broad array of banks is reportedly among the options being considered by incoming President Barack Obama as he seeks to restore economic growth."
We're doomed. The taxpayers will guarantee more new, bad loans that will never be repaid. The losses will be hoisted onto the backs of taxpayers. We will all be forced to be debt slaves, even if we live debt-free.
Bailing out banks and silly stimulus packages are next on their agenda. So in short the answer is no, Gordon Brown will only mess up the economy like Bush Jr. except he will still be around, an unfortunate fact for UK citizens that will fund all the expensive economic delaying activity until a new administration takes over and must suffer the bottom of the cycle. Just like Obama must now face.
Now if the UK Government buys truly valuable assets and leaves alone those that have no value, and the companies from whom they purchase them agree to accept treasury notes in payment then the Bank of England could print money to the value of those treasuries for use in the wider economy.
Post sale, the treasury notes could be used to back the investments the sellers wish to make. This would be a much better way for the UK to go as it will be businesses that lead the non-inflationary investment to rebuild the economy.
In my experience Governments are profligate at spending our money and have very little idea as to how to build wealth, but they certainly know how to claw it off people.
Separately, kudos to MacroMan for writing an entire article without water-boarding JCT. A demain??