it is extra-ordinary that such crass/reckless lending should be bailed out

Well, at least Merv is showing some balls (in public, at least) by "insisting that taxpayers should not pick up the bill, if the economy turns down so sharply that banks start to suffer serious losses on their mortgage lending." It's his job to be optomistic and to 'look out for the taxpayer'

Of course, once the shtf and our economy catches up with the US downturn (downturn is putting it mildly), all these brave words will go out the window in a flash. All major high street banks will be bailed to the tune of hundreds of billions, if not approaching trillions.

Spin, spin, spin.

If the banks still pick up the tab for the pledged assets going bad, and the new liquid asset injection is only to help meet current obligations, then in what way does this aleviate the situation, except so far as short term liquidity goes? Indeed, if current indicators are to be believed, current liquidity is not an issue at all, except for the stupid banks who have fundamentally misjudged the funding for their business. The real problem is that banks may have paid a whole load of money for a bunch of assets which really aren't worth a lot. Now the music has stopped, everyone is struggling to find a chair. Indeed, they are all stacked on top of each other, to extend (confuse?) the metaphor.

The bottom line is that a whole load of people are going to have to go through some pretty bad short-medium term pain in order to achieve longer term stability. In other words, as a country, we've picked the rapids whereas, perhpas, the US has picked the smoother route straight to the waterfall. We both go down the same amount, but the question is in what state we reach the bottom.

My biggest concern is that the banks still appear to want us to go the waterfall route, and seem to be oblivious to the danger in doing so.

How can the MPC reduce base rate when King forecasts CPI will rise to 3%, and real inflation will probably hit double figures soon?

Will reductions to BoE base rate have ANY effect whatsoever on LIBOR, or high street banks saving and loan rates?

What reward does King get for making statements such as that house prices will be 'broadly stable', which he knows to be 'economical with the truth'?

The banks probably aren't that fussed about lending to each other. It's just that they would probably prefer to borrow from the Bank of England, as they get a better deal. And despite what the BoE say now, they will probably dump any bank problem bills in the future straight to the tax payer. Because of the Rock, other banks know this and will do what they always do - suck all the money they can out of the situation.

Lets all hope that Mr King sticks to his conditions for accepting the 'assets' in question in return for taxpayers' money.
The western central banks are in danger of becoming 'toxic waste dumps' at the prompting and pressure of banking and investment institutions. Only so much of this is acceptable before credibility of the central banks is seriously impaired.

This post just highlights how little confidence banks have in each other at the moment.

There is a huge information gap out there and until this gap is filled by a full disclosure of exposures to various structured finance vehicles; the banks assets compared to loans outstanding and just how much cash banks have it isn't going to get much better.

There seems to be a huge game of "chicken" going on in the finance markets to see who will blink first.

Will the Bank of England be forced to cut interest rates by more than 0.25% at a time?

Will inflation ease allowing the Bank more room to manoeuvre or will it rise again giving them no room to move?

Will Alistair Darling blink and act to ease the situation?

Just what is going to happen to commodity prices notably oil and by definition the price of petrol and diesel at the pumps and also common food stuffs?

The truthful answer is that no one really knows. Some people are no doubt sitting on very exposed options looking to make, or possibly lose, a fortune over the next few months.

I fear we are in for much more bad news than good news this year.

How long before the Bank of England and the Treasury confess to the public that this credit crunch has been mainly caused by irresponsible lending, the large majority of which is mortgage lending that has gone into overpriced housing. The greed of the public and the banks over the last 6 years has ended up making the majority of housing in this country unaffordable and pricing young people out of the housing market and the security to raise a family in a dwelling that is not going to change at the whim of a landlord. This housing greed has brought the worlds financial markets to a standstill to the point where we are now looking over the precipice to recession and possible depression. The only way that this mess will be fixed is for house prices to return to normal levels in-line with salaries and for people to stop thinking they can make "free money" out of investing large quantities of "borrowed" money in housing. Ultimately someone has got to pay for it and in the end it is going to be painful one way or the other.

The BoE's conditions are nice in theory but will fail in practise. The UK taxpayer will be liable unless they insist on greater collateral than the loans issued. Otherwise if the borrower goes bust the bank is left holding the loss.

RPI is rising at an annual rate of 4.1%, so 6% cash leaves only 1.9% real. Meanwhile Mr King is already suggesting even the bowdlerised CPI figure may hit 3%. Surely the problem is that even though interest rates are too low, the banks unwisely bet on them going even lower?

The level of toxic waste in the system must be so great that the banks look at their own book and then presume that the other banks have the same level of bad and doubtful. Only a recovery in asset prices will sort this mess out and thaat requires funding, hold on to your hats!

Whilst many seem to take pleasure in seeing financial institutions undergoing liquidity problems - the reason that they may receive support is try and stop this becoming (even more of) a systemic problem.

When people talk about reckless lending do they mean lending to UK mortgage holders, UK credit card holders, UK businesses? These will be the groups who ultimately suffer if banks stop lending to each other and credit continues to get more expensive.

It is time to get real about the impact on the housing market if mortgages really become difficult to get hold of.

How many will be rubbing their hands with glee at the bank's problems then?

$1.2 trillion in bad debts globally according to Goldman yesterday.

Assuming lending has to go onto balance sheets now and that Basel capital adequacy ratios apply, wiping out $1.2 trillion of capital will constrain existing lending capacity of the order of $12 trillion.

I don't think most people have a concept of what those numbers in isolation actually mean. To put it into perspective, total UK household debt is about $2.8 trillion. The total value of US housing is about $14 trillion. The total value of all US banks is about $1 trillion. So yoiu can see $12 trillion is not a trivial reduction.

Asset prices (houses and stocks) will collapse if lending capacity is reduced that much. That could lead to higher levels of default...that's where the central banks come back in.

I'd like to second all the comments praising the Bank's refusal to write a blank cheque to these deadbeat banks.

Why it should be one rule for them (free and easy money on demand) and another for the consumer (overdrawn for one millisecond? pay up your charges, you are now credit risk!) has not been explained.

I've never been charged by a bank for any financial misdemeanour but how they can justify the double-standard is beyond me. Perhaps the BoE could implement a billion-pound "administration fee" whenever the banks get any help?

Someone, somewhere needs to start unpicking these CDOs that seem to be all the banks have left as security. Until the true risk is known, and the toxic waste is sorted from the sound paper, the financial system will remain stalled. Sorting the problem out will take resources and time, but the longer the wait, the worse the problem will become and the more damage the global financial system will sustain.

The banks (commercial and investment) got themselves into all this trouble through greed. Now they expect help from the BOE (and the taxpayer). The banks should be left to sort out their own mess, whatever the worse case scenario.

How much collateral are the banks expected to put up for these loans? Is it a pound of security per pound borrowed, or is the Bank of England factoring in the possibility of the mortgages losing value by making the banks put up more for their loans?

The banks need to de-leverage and fairly quickly. They need to swallow some serious pain and this is where the BoE can help. I agree that King should resist calls to hand out cash but he could use the back-stop of the BoE to extract serious concessions from the banks including ridding themselves of the huge counter-party risk that they carry.

Perhaps Robert could blog a little on the nature of the derivative risk and the impact of the hedge-fund activity in the markets. This is where the hidden risk lies that brought down Bear.

http://hf-implode.com/

balance sheets need to deflate by about 30-40% in order to get to a level where valuations become sensible. this would mean equity values need to come off by a similar amount before order and calm can properly be restored in the markets and lending can start again in earnest.

LIBOR @ 6%
BoE @5.25%
Any idea who's making a killing in the 75 basis points inbetween Robert?

Isn't it an illustration of the current madness that the marginal cost of lending on my two year old offset mortgage is cheaper than LIBOR? Given my mortgage is currently charging 5.74% I'd love to offer my available funds into the LIBOR market and make some cash!

The reliance on consumers driving the economy by spending was bound to have an eventual cost. Consumer spending is still outstriping inflation. This false internal loan driven economy was bound to end in tears so why is everyone acting so suprised?

I totally agree with all the comments particularly #15.

Why does BoE continue to service banks' bad debts and encourages 'irresponsible lending' when banks took the risks and now should pay the price. Why does the taxpayer bail out the banks?

Either nationalise the banks or charge them an unauthorised overdraft that will pay for critical services such as Education and Health.

When banks make profit, they don't share it with Government so why does Government underwrite their risky asset? Clearly BOE have a double policy; one for Northern Rock and one for current climate.

Not surprised that LIBOR rates are climbing despite recent cuts in Base Rate. I'm busy pulling my dosh out of accounts paying a miserly 5.25% where it's been for years and finding no shortage of better homes for it yielding 6.25% to 6.76%. I expect there's a few million people doing the same. If Mr King and the MPC make further cuts in Base Rate are they in danger of losing control of Monetary Policy?
Ray, Weston-super-Mare

Modest Proposal

Tell the UK Banks that they must do their part like any other business faced with a cash shortage / dodgy balance sheet. Raise more capital. Say £100bn should be the target and in short order too. Otherwise no more support from B of E.

Ian Post #15

To respond to your comment and I hope this doesn't sound rude, but you aren't exactly important. If you file for bankruptcy tomorrow it won't really effect that many people. However if a bank such as RBS collapses tomorrow and it wasn't saved, the whole banking industry could possibly collapse. Why you might be asking? Well banks trade huge amounts with each other and if a bank goes down then it is likely to not be able to repay its debts, which then causes a knock on effect throughout the whole sector.

Again you might be thinking who cares if the banks collapse, those greedy buggers?! Well Charles Post #13 explains, if the banking system collapses then we all suffer. Business won't get money to invest in projects, individuals won't get mortgages etc...the whole economy would collapse.

Does it all make sense now?

How ever it gets dressed up the simple fact is that the banks are worried about running short of money.
They are like junkies fretting about where their next fix will come from.
They are used to being able to pay their overheads and bonuses from the difference between the rates what they can borrow at and the rates that they can lend at.
Quite simple.
All the banks in all the countries are getting nervous about being caught short though. Who can blame them if they want to hold tight onto the money they have?
That behaviour does not pay the bills though.
This is where Mervyn comes in. He has access to a bottomless pit of money and the bankers want it.
It does not matter that every billion he lends dilutes the money already in circulation. The bankers need it. They need their fix now.

If any other group of citizens wanted money then they would be given short shrift and told to leg it or get on their bike (Remember that?) and get another job.

Bankers are different though.
What else can they do?
They know how to bank and that's about it.

So Mervyn will give them their money to keep them off the street and eventually the system will correct itself.
Galloping inflation and lack of work in the real economy will bring down the value of wages - and houses - to levels where we can again compete with Chinese and Indian labour.

The jobs at Jaguar will indeed be safe after all.

The bankers meanwhile will still be moaning about the competitiveness of the workforce.

Here is an idea let the Banks borrow from the Central Banks but instead of using mortgages, issue additonal shares (a rights issue in-effect) of the bank that are held by the BofE. Redemable when the loan is cleared.

Win-win, BofE provides cash that is needed, earns money in form of dividends for HMG and more importantly this mechanism should not induce the scourge of Moral-Hazard as it should concentrate the mind of the Bank's Board of Directors to resolve liquidity issues.

The truly, madly, deeply screamingly insane part of these loans is that Mssrs Brown and Sarkozy do not make this lending contingent on the full disclosure of the extent of the "off balance sheet" and other funny money stuff that is causing this problem anyway.

Earlier this week these leaders made a statement that this data should be disclosed, rightly so. How can it be that the BoE and the European Central Bank that have been making these loans do so without asking for this data?

On a simplistic level it is like J Public asking for a loan saying "I don't know how much I owe, lend me anyway".

More concerning are thee other possibilities:
1) The banks actually do not know.
2) They do know but will not let on , because it is so much it will trigger an avalanche of other Northern Rocks.
3) Our elected leaders are actually powerless to require this information, when threatened by the might of the retail lenders.

I’ve just been onto the Bank of England’s web site and downloaded their 2007 annual report.

I am no accountant that’s for sure, but I am perplexed by this whole so called ‘credit crunch’ situation. Please, I ask again, as I have in a couple of other posts, could someone, anyone, please explain it all to me…

The annual report can be found here at http://www.bankofengland.co.uk/publications/annualreport/2007full.pdf

On page 35, there is a summary combined balance sheet. It basically says that the banks total assets (including loans and advances by the way) are £77.763 Billion, total liabilities are also £77.763 Billion.

Now, being a simple minded chap, I interpret this as meaning, the things it ‘owns’ (including loans made to others by the way) are equal to £77 billion, and the things it ‘owes’ are also equal to £77 Billion.

So, if you wound the organisation up, it would neither own, or owe, anything.

This is where I am I think being dumb, but, to me, that means, I think, that it’s net value equates to zero.

My big question is this then….

Where is the money that it is lending to the banks to bail them out of this credit crisis ?

Is it borrowing it from elsewhere to lend to the banks ? if so, where is it borrowing it from ?

If not, is it just making the money from nowhere, on the assumption that the tax payers will cover the loan it is making ????

Please, somebody, help me, because I can’t get my head around this. The Heisenberg Uncertainty Principle yes. This stuff, no !

This is a good article in my opinion…

http://blog.myspace.com/index.cfm?fuseaction=blog.view&friendID=3678221&blogID=361954011

To make the world right we don't need weapons, we need an honest money system.

Don't you just love these capitalists?

Marconi? 'Bad leadership and reckless investment and therefore it must go to the wall'.

Northern Rock (and most other high street banks)? 'Bad leadership and reckless investment and therefore must be bailed out by the TAXPAYER'.

Let the weak go to the wall or the result will be ever higher risk taking with ever higher bonuses paid to gamblers when things go well and ever higher costs to the TAXPAYER to bail them out.

And depositers must NOT be bailed out either (other than the £35k guarantee) - they have to learn that there is an ever higher price for this madness.

A question I haven't seen asked here (pardon me if I've missed it). Given that as Graham Found (#23) says:
"The reliance on consumers driving the economy by spending was bound to have an eventual cost."
why have the UK, and US authorities allowed, and in fact encouraged, the asset/credit bubble? Well, how else do you fund an unpopular and enormously expensive war while keeping the populace quiescent? If the Afghan/Iraq war had been as easy as the neocons said (and, I believe, thought) it would be, the USA would have been in a position to subordinate Iran, manipulate the oil market to suit the US economy, keep Europe and China in line, and throw Blair, Berlusconi and Aznar some crumbs. As it is, our lords and masters are in serious trouble, and I'm torn between schadenfreude and terror.

Things are worse than what they let on, if bank lent more than the capital they had, the tax payers should not bail them out. Monetary policy isnt working, next will be some kind of fiscal policy and we all know whos going to fund that.
Banks have made home unaffordable, no control on house price inflation has always ended up in tears. Lucky i dont have debt, no credit cards etc... only fools have those.

Reported the week before last.
Bear Sterns was leveraged at 31 to 1 based on cash to loan commitments.
The remainder of the NYSE is also leveraged at 20 to 1.

A 5% reduction therefore in the value of the 'real assets' held by these companies, leaves them technically insolvent.

As for the U.K. Expect one of two things. Rampant inflation with house price stagnation, or House price deflation.

Only this will re-align the earnings to average house price ratio which is well out of keel.

Personally. I suspect it will be a combination of inflation and house price correction, but, either way, it is unavoidable.

This is not a liquidity issue, this is a solvency issue. The banks are insolvent, and that's why they can't lend to each other - they know the game's up.

It may well be that the tax-payer has to bail out the banks, in order to avoid a complete melt-down of the banking system and currency.

However this should only happen once:

a) The Banks shares have been completely given over to the Govt (ie nationalisation).

b) All bonuses paid to bank staff are completely stopped and salaries are reduced to civil-service type levels.

I suspect that the people bleating here about how we must support the banks or we will all suffer are in fact people who work in banking, or bank shareholders.

For any other citizen it is completely unacceptable that their money should, in effect, be used to reward those who have brought this upon us.

The government and banks should pay heed to this; A few hundred thousand people made bankrupt and homeless might not phrase things in such a dignified manner.

I bet Bob Diamond wishes his mugshot was not on the front page of the BBC Business section!

#36 - Joe I think is probably right. It will as usual be the provident, who suffer with inflation, paying the price for the speculators (I include greedy folk like my neighbour and his ridiculous extension) and those, who financed them. Like the FSA, it will not be those, who have messed up, who will face the sack.

While Merv (whom I have never rated) is right to prevent the attemp[t to shift hte risk on to taxpayers, why did he not listen to those of us (me included), who have consistently said that interest rates were 0.75 to 1% too low and were only causing a dangerous bubble? Is it because the BoE is not actually as independent as Brown would have us believe? That "oops, ingflation is over 3%" letter, which Merv will be writing in June will hopefully illuminate this falsehood.

Whilst I stand to loose as much, if not more, than the next person I welcome all the termoil and mayhem.

Easy credit has hidden too many problems from view by preventing them from becoming a financial issue. I would like to see the days of easy credit disappear. Forever. Credit should not be easy to come by and only given if prudent. The cost to Joe public and companies alike is going to be painful but if we at least learn a lesson and don't go back to 'ignorance is bliss' we should all be better for it. "Considerably" better off.

At any rate. I personally hope that
1) things get bad enough that people learn an important lesson. Borrowing can be risky. Unnecessary borrowing is an unnecessary risk. Unsustainable borrowing is not an option.
2) House prices fall “significantly” and enough to make both buy to let and buy to tart up untenable options. Ironically enough this could also prevent a future credit crunch as banks won’t need nearly so much money!!
3) The country (and by that I mean Joe public) adopts a more sustainable lifestyle.
Live within your means if you can. If you can't find a better paying job or double check your definition of 'a necessity'.
4) The long term cost of this comes off the wages and mind boggling bonus's awarded to the people that earn silly money.
5) It would also be nice if politicians actually did stuff "for the people" that would actually improve everyone’s (rather than their) lives but that might be asking the impossible.

So, in answer to comment no 3. I hope Mervin sticks his finger back in. The current global business model is wrong and needs to change at all costs. I for one don't want a "strong/growing economy" if it means I pay the cost by becoming insolvent and destitute at a young, middling or old age.

The system is broken. It doesn't matter what the bank of england does or doesn't do. It is a part of the problem. All it can do is delay the inevitable.

We need to put these crooks and fraudsters in prison where they belong.

We need a return to one hundred percent reserve banking.

A Barclay's 'chief' trousers £20 million plus while the current carnage is killing people financially and it has not really started yet. Are the banks just having a laugh?

Why do I have this niggling little doubt in the back of my mind that this is only going to make matters worse.

This flies in the face of aversion therapy. The banks have been naughty and we are rewarding them and not only that we're letting them continue in their naughty ways. This will only encourage them to be more naughty in the hope we will give them an even bigger reward.

What the banks in fact really need is a sharp slap across the back of the legs, sending to bed with no supper, then a talking-to with the offer of reward only if they are good and do as they're told.

This is a bad move and will end in tears all round (except for the banks)

What a lot of people don't seem to realise is that when the expression
"Banks won't lend to each other"
the problem is international rather than just being between Lloyds and
HBOS (to give a UK based example).

Looking at the figures for just one country - Germany,

In 2007 Germany had a trade surplus of over £12 billion. In comparison the UK had a trade deficit of over £4 billion.

The Germans don't like credit cards. In contrast "Britain's household debt levels are the highest of any major economy in Europe or North America" according to a Telegraph article.

In conclusion for years alot of the
money people have been borrowing has
actually been coming from abroad.
The countries who have been lending it now want reassurance that it will
paid back before they lend any more.

Is the bank of England in a position to resolve the issue I suspect the more money they pump into the system the more money will be held by the banks this appears to be the case in the US they have dropped rates, injected several hundred billions of dollars and effectively taken a failed bank onto the Fed Balance sheet (although JP Morgan have brought it the FED have taken Bear Stearns debt on their books), and all of this effort has yet to show that it is making any imapact on the current credit issues. I very much doubt that the Bank of England will be able to do what the Fed so far have unable to achieve. If the BOE start injecting more liquiidy are we not just bailing out the bankers and potentially putting an unbearable inflationary burden on the UK tax payer in the future?

If money is so hard to come by, why is M4 still going up at 12% per annum? Who is getting this money, because it's not consumers.

Growing the money supply at this rate will only end one way.... inflation. Where's my 12% pay rise?

What does LIBOR stand for?

For real? Banks want the tax-payer to bail them out? They have really got to be absolutely kidding, with how they've fleeced and treated the British Public for years with there illegal bank charges.

Let the whole banking sector rot in h*ll. They've bought it on themselves, and if the BofE bails them out, there WILL be rioting on the streets, guaranteed.

If this does happen the government better declare martial law first. I for one stand for such an action.

For real? Banks want the tax-payer to bail them out? They have really got to be absolutely kidding, with how they've fleeced and treated the British Public for years with there illegal bank charges.

Let the whole banking sector rot in h*ll. They've bought it on themselves, and if the BofE bails them out, there WILL be rioting on the streets, guaranteed.

If this does happen the government better declare martial law first. I for one stand for such an action.

Mr. Peston, This response is on TATA. I had been an avid reader from childhood & I used to wonder why the English stories & Nursery rhymes(which had mostly British background) were filled with gory & avenge and reference to wily Step Mother’s and suffering young daughters’ of a Timid Father . In contrast, Indian stories & rhymes were more about life & its beauty and value. The discussions, I read here, represent crowd who read those stories and relive on their past. Well, one should grow up and distinguish right & wrong!! Dont be of Coloniastic mind.. It's past & World has moved on..!!!

My view on the Bank of England is that it has thus far played the crisis fairly well (and probably an unpopular view) - in that it hasn't made any drastic interest rate cuts and in that respect still has some ammunition left to put out any flames in the coming months.

E searched