Britannia Radio

Firstly here is an assessment of the parallels of what is happening 
in the USA and here in Britain.

Since this was written commentators are saying that B&B looks set to 
join Northern Rock in taxpayer portfolio.
They doubt Bradford & Bingley will make it through the weekend as a 
privately owned bank

Then Ambrose Evans=Pritchard contradicts the piece by Jeff Randall I 
sent before!  He emphasises the deadly seriousness for all of us of 
what is happening

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TELEGRAPH   26.9.08
1. Britain needs a US-style financial system bail-out
Trust is in short supply during a financial crisis, so asking for 
someone's complete and undiluted faith right now is a risky gambit.

By Edmund Conway, Economics Editor

This, though, is precisely what George W Bush and Hank Paulson are 
doing with their bail-out scheme for the American financial system. 
It is a bold move, However it raises a significant question for 
Gordon Brown. Given that a bail-out of this scale was needed in the 
US, do we not need a similar scheme in the UK which is, by most 
accounts, even more vulnerable to the financial crisis?

In Britain, like the US, banks are unable to lend because their 
balance sheets have become so soiled by the toxic sub-prime 
instruments associated with the US and UK housing crashes. The White 
House's solution is to create a taxpayer-funded vat into which the 
banks can throw the worst of these instruments. It isn't pretty but 
neither is the alternative: a major economic collapse.

Both in the US and on these shores we are stuck in a financial 
vicious circle (the economists call it a negative feedback loop but 
ignore them for a moment).

House prices are falling, consumers are spending less and some are 
unable to pay their mortgages. This makes banks less willing to lend 
money. They then tighten their lending standards, which means 
consumers find it even more expensive to borrow. Households spend 
less, and the circle begins again.

As banks spiral downwards, they keep having to raise more cash in 
order to keep their balance sheets in order. This is why they have 
had to go cap-in-hand to existing shareholders, through rights 
issues, to the new rich of the East and Middle East and a few rich 
investors like Warren Buffett who are willing to take a punt.

But now, with no-one keen to stump up the cash for shares in banks, 
they are left with three options: first, to collapse (for example, 
Lehman Brothers); second, to be bought by a richer bank (for example, 
Merrill Lynch and others) or third to be bailed out by the Government.

This is why even die-hard free marketeers in the Republican 
administration have gritted their teeth and put their weight behind 
the Paulson bail-out. It simply is the last hope for survival for the 
American financial system.

Here in the UK, by contrast, almost all of the actions by 
policymakers have concentrated on "sticking plaster" manoeuvres which 
keep the financial system from sinking but hardly offer it lasting 
buoyancy.

There is a small chance that the system will self-correct, but far 
from showing signs of strength in the past few days it has lurched 
from one panic to another. The cost of borrowing money wholesale shot 
up dramatically yesterday in the latest sign that the sense of fear 
and paranoia has hit new peaks. A US-style bail-out looks 
increasingly inevitable.

Which brings us to the sticky subject of the bill. As the $700 
billion US plan shows, financial bail-outs rarely come cheap. If 
Britain was to emulate the US scheme it could cost somewhere between 
£50 billion and £100 billion, although more conservative estimates 
put the bill at £20 billion.

However much it costs, the scheme will shatter the Treasury's 
borrowing rules far more dramatically than anyone had expected. 
Britain would almost certainly find itself with a bigger budget 
deficit than it faced in 1975 when it was bailed out by the 
International Monetary Fund.

Yes, this solution will be ugly. Yes, it will be expensive for 
taxpayers. However, it is essential if we are to avoid a repeat of 
the 1930s.
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2. Even Hank Paulson's bail-out plan cannot detox global banking
Can the rescue package really halt our slide into a new Depression, 
asks Ambrose Evans-Pritchard.

Even if Congress backs the Paulson bail-out, the $700 billion blast 
cannot save the US, Britain or the world from the deepest economic 
slump since the Thirties. If Congress balks, God help us. The credit 
system is suffering a heart attack. Inter-bank lending is paralysed. 
Funds are accepting zero interest on US Treasury notes for the first 
time since Pearl Harbour, because no bank account is safe.

Wherever you look - dollar, euro, sterling Libor (the rate at which 
banks lend to each other), or spreads on credit derivatives - the 
stress has reached breaking point. If borrowers cannot roll over the 
three-month loans that are the lifeblood of business, they will 
default en masse.

"Money markets are imploding. If no action is taken very soon, there 
is a significant risk that the global economy will collapse," says 
BNP Paribas. Almost every trader says much the same thing. So does US 
treasury secretary Hank Paulson, who as Toby Harnden reports, 
literally dropped on bended knee to beg help from Democrats on 
Capitol Hill.

Republican refuseniks - defying their president - have a grim 
responsibility if they now tip America over the edge, setting off the 
"adverse feedback loop" that so terrifies the US Federal Reserve. 
Like players in a Greek tragedy, they seem determined to repeat the 
"liquidation" policy that led to the Great Depression - and to 
Democrat ascendancy for years.

Lehman Brothers' collapse showed the chain of inter-connections that 
can cause mayhem across a clutch of different markets. That was just 
one bank - albeit with $630 billion or so in liabilities.

Credit is the lubricant of a modern economy. A seizure now would 
probably lead to the bankruptcy of General Motors and Ford in short 
order, but it would not stop with the US car industry. Waves of job 
losses would set off a self-feeding spiral. Yet more people would 
default on their mortgages (and car loans), driving house prices down 
even further. That, in turn, would threaten the solvency of the best 
banks. That is the way to Armaggedon.

As Mr Paulson says, US taxpayers are on the hook whether they like it 
or not. A $700 billion fund to soak up toxic debt and stabilise the 
credit market is the cheapest way out. It is certainly cheaper than 
Depression.

Hopes that the world can cruise happily on as the US buckles have 
been dashed by the violent downturn across Europe and Asia over the 
summer. The Baltic Dry Index measuring freight rates for ships has 
plummeted by two thirds since May. Japan's economy is already 
contracting. China's may be close behind: a third of all textile 
factories in Guangdong have closed this year. House prices are 
tumbling in Shenzen, Beijing, Shanghai.

Albert Edwards, global strategist at Société Général, says Asia built 
its boom on shipping goods to the US: "The emerging market boom is 
going to collapse and this will shake investors to the core. The 
great unwinding has only just begun."

In Europe, an arc of states from Scandinavia down through the core of 
the euro zone is already sliding into recession. German GDP shrank by 
0.5 per cent in the second quarter. Its manufacturing orders have 
fallen for eight months in a row, for the first time since records 
began. Spain is at the onset of a calamitous bust after a property 
bubble that surpassed even the excesses in America.

This is debt deflation - partly imported from America, partly home-
grown. It is global. There is nowhere to hide. Even oil-rich Norway 
took emergency action this week to shore up its banks.

How will it all end? Europe assumed - wrongly - in the early Thirties 
that it could withstand the Atlantic gales after the collapse of the 
Bank of the United States in December 1930. However, Austria's Credit-
Anstalt failed in the early summer of 1931, setting off contagion 
across the central European banking system.

In the end, it was America that muddled through. The US produced 
Roosevelt: Europe lost half its democracies. We now live in more 
benign times, but unlike America, it is far from clear whether the 
eurozone has the machinery to rescue its economy in a fast-moving 
crisis. EU rules prohibit big fiscal bail-outs. There is no EU 
treasury to take charge.

America's serial bail-outs - nearing $1.6 trillion, or 12 per cent of 
GDP - are playing havoc with the US budget. The deficit is above 6.7 
per cent, near a 60-year peak. But claims that the US is going bust 
are frivolous. The US Treasury is not taking on permanent debt: it is 
behaving like a giant wealth fund, hoovering up mortgage securities 
selling far below their real value for reasons of panic. Famed 
investor Warren Buffett expects it to make "a considerable amount of 
money".

The system will recover, but it may take a slow purge for a decade or 
more to rid us of the debt toxins. There will be no quick rebound 
this time.