A bonfire of taxpayers' cash
Fraser Nelson 10:31am
And what, exactly, is the point of this mind-blowingly large bank insurance scheme? I haven't blogged on this so far as it just leaves you numb: as Charles Moore says in his Notebook in this week's magazine, you just stop reacting. Another £300bn? A £10bn loss from Lloyds/HBOS - and that's our problem now? Or is it? Whatever, Mr Brown. The taxpayer has endured so much pain that the new blows don't register. Our nervous system is already in ruins. Billion is the new million. Trillion seems a made-up word, although it's popping up with greater frequency. The next in line is quadrillion, which sounds like some kind of a 1980s boy band. But what is unnerving me is the absence of any scrutiny, or strategy.
No one is keeping tabs on how much taxpayers' cash is gone forever, how much we can hope to get back, what the paper loss to the taxpayer is so far. UBS has issued a damage report otulining the numbers for their shareholders - see here. Why the hell hasn't RBS done one? The answer is that its owners, the government, don't really want people to know what the damage is. Instead of keeping tabs on behalf of the taxpayer, Gordon "two books" Brown has just started a new series of national debt excluding the banks. Purpose: to conceal from the taxpayer what he's done. He rejects the ONS definition of national debt, but won't give us a new one. Just his own make-believe set which excludes every penny sent down this vortex of the imploding banking sector. What's the real story? He won't say. There are all too few banking experts in the press able to find out. In politics, complexity is the second last refuge of the scoundrel (pension funds are the last - or, in Brown's case, the first).
One final point. When banks are nationalised, the cost of their being able to borrow should - in theory - converge with that of the government. Household debt is the no.1 problem issue in Britain right now, so relieving the cost of servicing that debt would represent (as Brown likes to say) real help. It would allow more repayments to be made and the debt pile to be reduced. But Brown's moves are not achieving this basic goal.
The below graph shows what aficionados know as the Libor-Sonia spread:
the difference between the base rate and the inter-bank lending rate (the latter being far more relevant in setting retail interest rates). It is soaring. The real cost of borrowing is not being helped by these bailouts. So what's it all about, Alfie? What Brown seems unable to comprehend is that our problem is not lack of new debt - but the increasing cost of old debt. And if his bailouts won't fix that, there's no point.
Previous
BrianSJ
February 27th, 2009 11:16am Report this commenthttp://hoklife.com/2009/02/18/the-size-of-the-stimulus/
has a lovely set of graphics to help visualise these huge sums of money. They really are big.
t.blog
February 27th, 2009 11:27am Report this commentRBS :any-one in business commiting these amounts would INSIST on 76% of the business (contole/ownership) i predict that brown will make sure the UK taxpayer remains under that shareholding..leaving us effectivly without ownership.
Wilhelm
February 27th, 2009 11:31am Report this commentGordon Broon cuts a very pathetic figure, doesnt he ?
GJTory
February 27th, 2009 11:37am Report this commentGillian Tett today in the FT suggests a CDO auction. This seems a good idea. One of the biggest problems facing the banks (keeping them in Zombie mode) is that no one believes that their assets have been fully written down. An auction would resolve this issue. Either the assets would be found to be worthless at auction, in which case the banks keep them and write them down to zero or they sell them and a market price is set.
A coordinated sale (or series of sales) for all banks in receipt of government insurance schemes or government capital would seem a good idea. It would likely draw in some of the capital sitting on the sidelines in distress debt funds or private equity funds. And if the banks are cleaned up in this way, private capital may be invested in the banks' equity, allowing the government to get out and a millstone around the neck of sterling to be removed.
Of course, this won't happen because it would make the insurance scheme and RBS's bad bank scheme pointless.
C Powell
February 27th, 2009 11:44am Report this comment"No one is keeping tabs on how much taxpayers' cash is gone forever, how much we can hope to get back, what the paper loss to the taxpayer is so far."
Well, why don't you? It should be relatively easy to find out how much was pumped into the banks last October in Bailout no. 1, how much in Bailout no. 2 and how much this time, the change in share prices over this period. While crude this gives some idea of how much has been spent. It's a start at least.
Faceless Bureaucrat
February 27th, 2009 11:49am Report this comment"And what, exactly, is the point of this mind-blowingly large bank insurance scheme?"
Why, my dear Peter, to ensure an incoming Tory administration hasn't got a hope in H*ll of balancing the books.
But a thought filters into my consciousness - in THEORY, an incoming Administration is not bound to implement or even continue the policies of the outgoing one. As such, surely once the Conservatives were in office they could rejig (cancel) the 'guarantees' put in place by their predecessors and start removing some of this extraordinary level of debt from the government balance sheet?
Publius
February 27th, 2009 11:52am Report this commentThe only way out of this disgraceful debt mess is going to be deliberate inflation - i.e., debauching the currency. The prudent, in other words, will be forced to bail out the feckless.
Pete Hoskin
February 27th, 2009 11:58am Report this commentFaceless Bureaucrat: Fraser wrote this post - the wrong byline had been attached. Has been corrected now. Apologies for the confusion!
Sterence
February 27th, 2009 12:01pm Report this commentIndeed, Brown's action in trying to exclude this cost of the bailouts from the national debt can be expected to have the effect of hanging over the gilt market without reducing the cost of bank capital. The same can be said of his failed attempts to transfer risk to the private sector via PFI deals. It is the worst of both worlds.
Someone savvy in the Opposition should be ripping into this - Redwood is highlighting it in his blog and says that he is prevented from asking the questions in Parliament. For the sake of the country, we have to know the true figures.
GeoffH
February 27th, 2009 12:05pm Report this commentFB: "an incoming Administration is not bound to implement or even continue the policies of the outgoing one."
Agreed but Sir Fred's defenders would all accuse them of breach of contract.
We can all go to hell in a handcart just so long as Sir Fred's 'contract' is honoured.
Sky Blue Peter
February 27th, 2009 12:33pm Report this commentI assume Gordon Brown is, even as we speak, signing away his huge pension rights. This would be an appropriate acknowledgement of his responsibility as the man in charge when UK PLC became effectively bankrupt, and had to be bailed out by generations of taxpayers.
SJH
February 27th, 2009 12:36pm Report this commentIf quadrillion is a 1980s band, no doubt Mr d'Ancona will be extolling their merits in a post soon
Moraymint
February 27th, 2009 12:46pm Report this commentSurreal. Just surreal. Am I really living through this? What in God's name does all this mean for me and my family in practical terms over the next 5 years? Repeat "practical terms". I'm thinking it may be time to opt out of "normal society" pretty damn quick and forge a new life on a croft. How on earth are we going to pay for this screaming madness? Is Gordon Brown sane?
Ray
February 27th, 2009 12:46pm Report this commentTurn the graph upside down and it charts Gordon Brown's tumbling credibility with the voters, as well as the pound's remorseless plunge against other currencies.
fulcanelli
February 27th, 2009 12:52pm Report this commentBrown couldn't care less about the country, only his own personal political future. He is so hell bent on screwing things up for the Tories, that he will do anything to try to gain some ground in the polls. If he can't, then he will make damn sure he leaves a scorched earth for the incoming Tories.
This man must be stopped at all cost!
Tiberius
February 27th, 2009 12:53pm Report this commentThat's a good description of the shredded nerves of many who know what Brown is all about, Fraser.
The problem is that knowing about him is not enough. There is no mechanism, certainly constitutionally, which can bring about his removal. If there were, he should have been removed from office and sectioned after the pensions raid and gold sale.
Personally, I have found the post-1997 political ladscape in Britain very disturbing. It is literally incredible that NuLab have got away with so much incompetence and duplicity, even allowing for the disarray in the Tory Party for most of that time. After 12 years, one does start to weaken in one's raw anger, rather like a slave who has been whipped into near submission. Government (capital G) failure becomes expected as the assumed basis of our system of government, honesty, is serially side-stepped.
Britain has to face up the fact that it has returned to power three times, a government which will at best bequeathe us our own "das Jahr nul" in 2010.
Ivy Eileen
February 27th, 2009 12:55pm Report this commentFraser,
I'm sorry, but base rate doesn't come into it. LIBOR is London Interbank Offered Rate, which can be for 3 months, 6 months etc and, yes, it is relevant in setting interest rates. SONIA (Sterling Overnight Interest Average) benchmarks the cost of funds in the overnight sterling market and provides a methodology for fixing Overnight Indexed Swaps.
The "O" can cause confusion, one is for Offered and t'other is for Overnight.
Brown isn't "relieving" anything, just transferring the cost onto the nation's balance sheet .... for years and years and years. He's just out-of-control.
@ Faceless Bureaucrat - sorry, you can't just cancel the debt as if wiping something off the blackboard. That would be reneging on one's liabilities ... and the whole infrastructure of the UK would as a consequence collapse, independently of the effect upon the UK's integrity in the world.
Fraser, any idea please what the UK's current Credit Default Swap rate is ?
Austin Barry
February 27th, 2009 1:04pm Report this commentBrown is playing Whac-A-Mole with a mallet of the taxpayers' dosh. But the destitute banking moles keep popping up with increasing frequency and Brown's frenzied attempts to force them back is absurd and doomed - as is his Government. Appropriately, the collective noun for a group of moles is a labor.
Pete Clark
February 27th, 2009 1:25pm Report this commentLooking at the skiploads of (our)money being dumped into our bad banks and, perhaps more to the point, bad bankers'pockets... I wonder if it is possible, and of course, I stress the word possible, that Brown's previous best friends in the (Scottish) banks, might, by any slight chance, know where some bodies are buried?
Fraser Nelson
February 27th, 2009 1:26pm Report this commentIvy, you;re technically right but I perhaps didn't make my point clearly. As Jennifer Aniston once said, here's the science bit - or my understanding of it, at least.
Sonia is set according to the overnight interest rate for repo activities with the bank of England. That is then used the the reference rate for the floating leg of a 3month, 6month etc swap based upon the overnight interest rate – eg I receive 0.4% 3month sonia, then pay each day the actual interest rate.
The difference between the 3month sonia rate, and the 3month libor rate is the difference between the rate you can repo eligible collateral with the bank of England, and the rate UK banks will lend unsecured to each other. So I have used this as being - as far as I can determine - a proxy for the difference between government set and private sector interest rates.
Obv the libor rate is much more important for corporate and household borrowers as it is the reference rate used to set most loans and securitisations. So it determines the actual cost of funding much more than the base rate.
The relevance of this is that while bank of England rates – and expectations of future rates - are falling, libor rates are not. This means that interest rate cuts are again failing to be passed on to borrowers.
The UK CDS was about 155 last week. It's just all so depressing.
Ivy Eileen
February 27th, 2009 2:31pm Report this commentFraser,
thank you ... but the "difference between the 3month sonia rate, and the 3month libor rate is the difference between the rate you can repo eligible collateral with the Bank of England, and the rate UK banks will lend unsecured to each other" - so that's the arbitrage.
Regarding your comment (absolutely true) that "This means that interest rate cuts are again failing to be passed on to borrowers", that in my 'umble opinion is not because of any interest rate level but because there is a complete lack of confidence in the market - not helped by a lack of confidence in the Govt. and its (mis)handling of this financial mess.
Now, if we had an election then (whoever won) I believe the country as a whole would determine to go forward with hope and expectation ... starting points for confidence.
Amen.
jim
February 27th, 2009 3:57pm Report this commentI'm surprised that some people still don't believe we will default on this debt. With our GDP collapsing we will only have two alternatives, default or hyperinflation. Take your pick.
Philip Wright
February 27th, 2009 5:19pm Report this commentFraser I very much share your horror at the way this is unfolding with the constant drip feeding of ever more bad news on a daily basis Not even Brown and Darling's faux outrage at Goodwin's pension can really disguise how dire the situation is.
Iain Martin over at the Daily Telegraph has blogged today about the taxpayer likely to be in the can for close to £100bn, which is probably still a conservative guestimate. When you add in Lloyds, who don't seem to be asking for quite as much toxic debt "insurance" as RBS, you could probably add around another £50bn - £75bn to that figure (God those figures are so easy to type but don't half creep me out if I think about them!).
Whilst it is us the taxpayer who will pick up the tab in the long-term the Govt will have to fund it in the short-term by debt. If you add these putative figures to the (to my mind underestimated) future borrowing needs in last year's PBR the patience of the international investor community is going to be sorely stretched indeed. Even before then the cost of servicing the debt, especially the currency denominated debt with sterling at its present low levels, can only exacerbate the situation. I also now think a downgrading of our credit rating by either Moody's or S & P (or perhaps both) is more and more likely further adding to the cost.
Finally add to this toxic mix a little reported story, which Ivy Eileen and I exchanged some comments about on the Northern Rock post earlier this week, of bondholders getting jittery after the Govt started changing the terms on some subordinated debt of Bradford & Bingley then the picture looks decidedly grim. No wonder the head of the Audit Commission warned this morning about the "Armageddon of Debt".
TrevorsDen
February 27th, 2009 5:27pm Report this commentWhen the BBC's main economics reporter is a Labour stooge - can we be surprised at the lack of investigation of the Brown mania?
I foresee a 'jackanory' Budget in the spring - a complete fairy tale.
TGF UKIP
February 27th, 2009 5:30pm Report this commentFraser, yes but the latest YouGov poll still has Labour on 31% with the Tories just 10% ahead. In other words, given the elecoral imbalance, Gordon is still in touch.
Part of the problem which you touch on above, is that with all these billions being floated round for so many months now the voting public have just become inured to all these mega figures.
What is needed is it for it to be spelled out just what it all means in taxation terms when (and you'll correct me if I'm wrong) 1p on income tax is just £3bn.
Pointless to expect your propaganda useless mates to bring it home to the public but at least you have a pulpit and the talent to bring home just what all these billions might mean.
Can I suggest, therefore, for a NoW column you set out just how, say, £100bn would need to be recouped out of taxes.
At least that might get the message over to some voters.
Fraser Nelson
February 27th, 2009 9:03pm Report this commentSJH, I should defend my editor in that I don't think he's ever written in praise of an 80s band and has only referred to contemporary music relevant to the age in which we live. I, however, have posted paeans to The Vapours Pet Shop Boys, Proclaimers and Kylie on these pages. I do think Quadrillion is a great name for a band. I'm getting too old, though.
Andrew
February 27th, 2009 9:11pm Report this commentIf you're interested you can get all this data and more from the Bank of England's statistical website at http://www.bankofengland.co.uk/mfsd/iadb/
I've graphed the daily 3 month sterling LIBOR rates from 1978 on my site at http://interest.rates.cx - it's interesting to see just how much the LIBOR rate varied in the 1980s compared with recent years.
hadrian
February 27th, 2009 9:46pm Report this commentI couldn't agree more with TGF UKIP. The public need to have the pants scared off them over the practical repercussions of all this at a personal level-apart from job insecurity.
I must say I do love the graph- what lovely psychodelic wallpaper it'd make!
Fraser Nelson
February 27th, 2009 11:16pm Report this commentTGF, we did it in NOTW two weeks ago - and Marr opened his programme saying"Good Morning. I dont often wave the News of the World around but they say that to balance his budget Brown would have to disband the army, navy and RAF, open the prisons, cancel all unemployment benefit..." Which is all precisely right.
What I am trying for NOTW this weekend is a version of that link BrianSJ posted (at the top) but I've wasted all day trying to work out how many £5 notes you can fit into Canary Wharf tower. I reckon about £30 billion worth, but still toying with assumptions.
TGF UKIP
February 28th, 2009 1:06pm Report this commentFraser, yup, saw and liked that and Marr's contribution. Still don't think it get's it personal enough, though.
The taxes most people are most directly conscious of are income tax inc NI, fuel tax and VAT, in that order. So what I am suggesting is to illustrate what cocktail of those would be needed to raise £100bn
If I may make the point, it would be exactly the sort of tactic Brown would use himself.
BTW, your Tory mates need much better mega debt soundbites. Coffee House competition?
Robert
February 28th, 2009 2:54pm Report this commentWould an independent Scotland have to pick up the 'British' taxpayers' loans etc to RBS ? Labour of course does not want an independent Scotland.
marqthompson
January 28th, 2010 10:12am Report this commentThis is a wonderful article. The things given are unanimous and needs to be appreciated by everyone.
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