Britannia Radio

First comes the usual Gordon Brown tactic of telling you something 3 
times.  Once in advance before it happens; then the big one early in 
the day it is to happen; and finally as a damp squib on the day 
itself.  It may have backfired this time as the critics were ready 
for him and this bit of spinning has got a dusty reception.

Then I add for all of our general education an account of the 
mechanics of what has happened to us.   Inforemative, perhaps; but 
equally it doesn't in the end answer the Queen's basic question which 
is posed here : "Why did no one see the credit crunch coming?"

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TELEGRAPH   23.2.09
1. Desperate Gordon Brown plans £500billion bank gamble
A £500 billion banking bail-out will be at the centre of a rescue 
package announced by Gordon Brown this week amid desperation over the 
Government's failure to save the economy.

By Andrew Porter, Political Editor

The Prime Minister is to unveil a series of key measures that will 
see the Government insure the 'toxic assets' of major lenders and 
pump around £14 billion into the mortgage market through Northern Rock.

Five months after Mr Brown's first bank bail-out, there is a growing 
acceptance in Downing Street that it has not worked - beyond stopping 
the total collapse of the banks.

Businesses are continuing to go bust and workers are losing their 
jobs as the financial crisis continues to deepen and banks refuse to 
start lending.

The Government has drawn up a new rescue package that will start 
today with an announcement that Northern Rock, which was nationalised 
last year, will increase mortgage lending by up to £14 billion over 
the next two years.

Ministers will this week also pave the way for "quantitative easing" 
- the so-called printing money option - with £150 billion being spent 
on buying bonds and gilts from banks.

On Thursday, the Treasury is expected to announce plans to form a 
"toxic bank", using taxpayers' money to insure £500 billion of bad debt.

In addition, Mr Brown has signalled that he wants a return to more 
'sober' banking practices, with a possible ban on 100 per cent 
mortgages to ensure people must save a deposit before buying a house.

European leaders meeting in Berlin yesterday agreed that there also 
needed to be greater regulation of all financial markets, including 
hedge funds - a move that could adversley affect the city's pre-
eminence. The meeting was in advance of the G20 economic summit being 
held in London on 2 April.

Mr Brown said: "We have got to show together that we can restructure 
the banking system around sound banking principles that deliver the 
integrity and the trust and the openness and transparency that is 
essential for people to once again trust the banks."

Next week Mr Brown will travel to Washington for a meeting with 
Barack Obama to discuss the agenda for the London summit which the 
Prime Minister has placed so much emphasis on.

This week's package of measures represents Mr Brown's third attempt 
to save the economy. Despite the £37 billion bail out in October and 
measures in January aimed at getting banks lending again, they have 
been stubbornly refusing to lend in anything like the volume necessary.

Labour has been sliding in the polls despite Mr Brown's initial 
"bounce" after the first banking bail out. His party now stands 20 
points behind the Tories.
Last week the Sir John Gieve, the outgoing deputy governor of the 
Bank of England, warned Britain is at "serious risk" of entering a 
decade-long recession similar to that experienced by Japan in the 1990s.

Figures showed that Britain's national debt could more than double to 
almost £2 trillion later this year.

On Monday, Alistair Darling, the Chancellor, will outline the new 
business plan for Northern Rock to ensure it again becomes a big 
player in the mortgage market.

Under the plans, Northern Rock will undertake around £5 billion of 
new mortgage lending in 2009 and up to £9 billion from 2010 onwards. 
The new lending will be on commercial terms so it represents a good 
deal for the taxpayer, the Chancellor will say.

This week the Treasury is expected to announce it will take a step 
closer to allowing "quantitative easing". This would see the Bank of 
England writing cheques to banks in exchange for gilts and bonds, 
effectively putting more money into circulation.

Stephen Timms, the Treasury Secretary, hinted that quantitative 
easing could happen "quite soon" and Treasury sources said the first 
steps towards it were likely to happen this week when officials meet 
with the Bank of England to discuss the necessary details of any 
buying up the assets.

The amount that was being suggested was £150 billion. Ministers deny 
that it is "printing money" and instead say it would encourage banks 
to lend to consumers again. Those customers would in turn have more 
money to spend, so stimulating the economy.

The removal of toxic assets from banks, under an "asset protection" 
scheme, expected to be announced by the Treasury on Thursday, will 
also have that effect, it is hoped. It will effectively be a "bad 
bank" with those bad assets underwritten by the Treasury.

The banks likely to use the scheme immediately include Royal Bank of 
Scotland (RBS). It is understood that RBS will place at least £250 
million of toxic assets in the scheme to protect it against future 
losses.

Lloyds and Barclays are also likely to put assets into the scheme 
with some estimating that the total then covered by the taxpayer in 
the form of guarantees will be pushed to more than £500 billion.

The move will mean that the banks do not have to be fully nationalised.
Mr Brown made a plea over the weekend for a return to more prudent 
banking and Downing Street briefed that the Prime Minister would ask 
the Financial Services Authority to look at whether 100 per cent 
mortgages should be banned.

Mr Brown said: "We do want to see the reinvention of the traditional 
savings and mortgage bank in Britain, for loans to be made on prudent 
and careful terms, not just to people with large deposits, but to 
those on middle and modest incomes who wish to buy their home but who 
have not been able to save a huge deposit," the Prime Minister said.
"We have got to get the balance right between serving home owners 
better and encouraging responsibility in the housing market."

But Philip Hammond, the shadow chief secretary to the Treasury said 
the Government was acting too late.

He said: "Gordon Brown is trying to shut the stable door on 
irresponsible lending long after the horse has bolted. It was his 
regulatory system that failed to spot the boom and allowed 125 per 
cent mortgages from Northern Rock and HBOS."

Vince Cable, the Liberal Democrat treasury spokesman, added: "Until 
very recently Gordon Brown was trying to justify 100 per cent 
mortgages. He was seriously behind the curve since even the industry 
is no longer making such products available."

Lord Myners, the Banking Minister, said banks were "foolish" to offer 
100 per cent mortgages.  [Oh!  Came the dawn ? -cs]
==============AND ---->
2. The Queen's tough question about the credit crunch has not been 
answered
Why did no one see the credit crunch coming? That was the awkward 
question Her Majesty the Queen asked on a visit to the London School 
of Economics last year.

By Peter Spencer

It would make a useful addition to many economics and finance 
examination papers this summer.

I would argue that it was hard to predict simply because nothing like 
this has ever happened before. History is littered with financial 
crises, but the collapse of the market in liquidity that lies at the 
heart of this problem is almost without precedent. The only case I am 
aware of is the collapse in international trade finance that took 
place after the assassination of the Archduke Ferdinand in Sarajevo, 
in the run up to the First World War.

The roots of this collapse lie in the global imbalances that have 
been building up for decades, making the world economy increasingly 
vulnerable. Huge savings in Asia depressed world interest and 
inflation rates and were channelled through the US banking system to 
western borrowers, reinforced since the millennium by the flow of 
petrodollars.

That helped drive the boom in UK mortgage and housing markets and the 
fall in the saving ratio. In 2006 our mortgage lenders were handing 
out £10bn of mortgages every month - and only getting in £5bn of that 
from savers. The rest was coming in from overseas banks.

The result was an overseas debt of £740bn between 2000 and 2006 - 
worth more than half of our gross domestic product - typically with a 
very short maturity. These dollar inflows had to be converted into 
sterling, which is why the exchange rate was so strong and exports so 
weak.

I think we all knew it could not last. It didn't matter whether you 
looked at the global imbalances; the level of house prices, or the 
125pc mortgages that lenders were blithely handing out: this was 
clearly unsustainable.

People had been predicting a sticky end for years, but the dance just 
went on and on. Gordon Brown was repeatedly warned of the risk we 
were running with high levels of borrowing by the OECD, the IMF and 
other institutions. However, the music was so loud he could not hear.

He was not the only one. The Bank for International Settlements 
clearly warned of the threat to the global financial system posed by 
financial engineering and high levels of leverage. However, the 
markets refused to listen and just carried on dancing.

When it finally came, the end of the credit boom was much more sudden 
than anyone imagined. Like myself, most economists thought in terms 
of a gradual rebalancing as the debts built up and house prices 
became unaffordable, with the brakes applied gently. We expected 
things to turn round gradually, moving in a cyclical way rather than 
screeching to a halt. The surprise was that this time the 
international banking markets simply froze, suddenly halting the 
inflows into sterling and the credit markets. So what we got was more 
like a car crash. The economy had to adjust suddenly rather than, as 
we thought, gradually

Regrettably, very few were wearing seat belts. Now all of those heavy 
short term debts have to be repaid. Northern Rock was of course the 
first casualty, and the housing market quickly followed, dragging the 
rest of the economy into recession. The pound has been another casualty.

As I say, economists usually expect things to turn round gradually 
rather than abruptly. Financial markets can turn on a sixpence, but 
they usually remain open for business, even after a stock market 
crash. As Hyman Minsky observed, credit markets swing from elation 
and speculation to panic and contraction. But they have not shut down 
before, at least in peacetime.

Interest rates and financial prices can react violently in a crisis, 
but usually they manage to get demand back into line with supply. If 
confidence collapses it may take a big fall in the stock market to 
tempt bargain hunters back in, but eventually this happens.

Credit markets seem easier to understand than the stock market but 
are actually much more complex. If the supply of bank finance is cut, 
interest rates will normally rise to help bring demand into line with 
supply. But as Joseph Stiglitz pointed out in a famous paper with 
Andrew Weiss in 1981, this will discourage prudent borrowers who tend 
to be price sensitive, increasing the proportion of bad risks on the 
loan book. It is hard to prevent this: bank managers can't really 
distinguish the bad risks; otherwise they would not get a loan in the 
first place. Credit risk rises, particularly if a recession results, 
meaning that a rise in the loan rate can actually reduce the 
profitability of the loan book.

In this situation, banks tend to ration their customers rather than 
raising rates any further. A similar effect seems to have shut down 
the inter-bank and other wholesale credit markets in August 2007. 
Inter-bank rates naturally moved up as the market began to worry 
about bank losses on sub-prime loans.

But they reached a point at which they began to raise questions about 
the borrower's ability to repay. Any bank that was prepared to pay 
1pc or so over the odds clearly had a liquidity problem. It might 
also have a solvency problem, especially if it was relying on high 
cost wholesale funds to fund a historic portfolio of low cost 
mortgages. So any banks that did have surplus cash simply hoarded it 
rather than risking it.

Of course there was more to it than that. Once Northern Rock failed, 
it became clear that wholesale depositors could not rely on the bank 
regulators to monitor the banks properly.

This also raised doubts about the Bank of England's ability to help 
out banks without stigmatising them, even if they just had a 
temporary problem with their liquidity.

Moreover, when the credit markets dried up it was no longer possible 
to place a market value on many of the banks assets. But whatever the 
reasons for this, the banks simply stopped lending to each other. 
Then they stopped lending to us.
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Peter Spencer is Professor of Economics and Finance, University of 
York and Economic Adviser, Ernst & Young ITEM Club