Gordon Brown warned on banking collapse in 1997

Gordon Brown was warned that the changes to the banking system he was bringing in, in particular removing the role of bank regulator from the Bank of England and putting it into the hands of the FSA would lead to a systemic banking failure.

When discussing the bill that passed the changes to the banking system the Conservative Shadow Chancellor, Peter Lilley said:

With the removal of banking control to the Financial Services Authority--the "super-SIB"--it is difficult to see how and whether the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.

And further:

We have no objection to the objective of trying to bring greater simplicity and one-stop shopping to the business of financial regulation, but we fear that the Government may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day. We shall observe closely what is going on in the development of the proposed legislation.

You can read the whole section of the debate here (several pages), the quotes were drawn from here.

Now that Gordon Brown has admitted some liability for the banking collapse it is interesting to see Labour spinners, and indeed Gordon Brown lying about how the banks were run before his disastrous changes. They allege that the banks were self regulated before Labour came into power. This is, of course wrong. Barclay's did not regulate Barclay's, nor did Lloyd's regulate Lloyd's, the Bank of England supervised them all, keeping a close eye on balance sheets and risk which as we know is a movable feast. Previously they had taken failing banks over and had them restructured in a weekend.

You can read more articles on the Bank of England here.

I would seriously recommend reading the whole debate. Robert Chote gets quoted quite a lot!

A long slow fragile recovery

So says Mervyn King the Governor of The Bank of England.

Why?

Well mostly because of the effects of massive public and private and corporate debt.

Well, government debt is getting larger by the minute and even if a government with some sense of fiscal control took over in the morning it would still be cataclysmically bad.

Labour now insist that they can't be responsible now because taking money out of the economy would lead to a worse recession.

The problem is that government spending is taking money out of the economy because money that the government has borrowed is not available for private industry or indeed consumers, to borrow.

Meanwhile whilst politicians are insisting that banks should lend more, including government ones, government is telling (via the FSA) banks to lend less to private individuals and to hold more government debt.

Labour tell an interesting lie about government debt. That is that is was lower when the recession started than when Labour took power in 1997. It is an interesting lie because it is absolutely true. We started the recession with government debt at 38% and in May 1997 it was 40% of GDP. It is a lie because it is used to hide a startling truth and that is that government debt going into the 1990/1991 recession was 20% of GDP, and paying for that recession added the extra 20%.

This is important, because that Labour lie covers up another big issue which is that Gordon Brown has been borrowing massive amounts of money whilst the economy has been growing, not saving up for what is now a very rainy day.

So much for prudence and no more boom and bust!

The BBC has this.

The truth about Bank interest rates.

Some people are having a go at the banks for the interest rates they charge, particularly as the Bank of England base rate is at 0.5%.

People claim that the banks are making a big profit by charging interest rates of 4.5% and above when the Bank of England rate is so low.

The problem is, as I have said before, that no one cares what the dreamers in the Bank of England set interest rates at, no one is lending at that rate, particularly to banks. They are not even close to that rate to the government. Banks are paying much higher rates for the money they buy in to lend so are charging more for it. It is as simple as that.

The fact that the Bank of England is in cloud cuckoo land will however cause real long term problems.

The BBC has this.

Remove the power of the Bank of England?

There is an interesting article in the Times, by Jamie Whyte suggesting that powers be removed from the bank of England rather than given to it.

Specifically the power to set interest rates.

As it happens I think that the Bank of England should supervise banks, and have the power to do so.

That said Jamie makes a very powerful case for removing the power of the Bank of England to set interest rates. The only comment I would make though, is that it has already lost them. Many banks are paying much more than 0.5% for savings and lending at much higher rates as well, and Libor is much higher than 0.5% as well. In fact what the bank currently does with interest rates is mostly irrelevant.

Banking regulation

I was quite interested in the reports of the Mansion house speeches by Mervin King, the Governor of the Bank of England, and Alistair Darling the alleged Chancellor of the Exchequer.

The bottom line appears to be this:

Alistair says that his predecessor is not the bringer of doom, and there is nothing wrong with the current regime, though obviously the Bank of England has to take responsibility to make the system stable.

Mervin says that's all well and good, but if you want us to make the system stable, is there any chance we could have the powers back that the bringer of doom took away from us when he created the ridiculous tri partite system back in 1997.

Needless to say Alistair is in a difficult position, because his boss is Gordon Brown, the bringer of doom.

The BBC has this as a report and this from Robert Peston.

The Global Banking Crisis

It is interesting to note that Gordon Brown and his merry band of spinners, including John McFall (chairman of the treasury select committee) keep saying that the banking crisis is global.

Well, it is, in the sense that if American and British banks go to the wall, the globe is truly screwed. It does not mean that every bank in the USA or UK were or are on the brink of going to the wall, but enough are.

What it isn´t though is a global banking crisis if you mean everyone´s banks were all at it. They were not. As an example, Spain´s central bank, when asked by its banks if they could get into buying securitised debt said yes, but you will need more share holder capital. Needless to say they did not bother. Lebanon´s central bank just said no. Not only that it told its banks to get out of a number of American banks with so much advance notice that the net loss to them has been $20 million, which is peanuts.

That is a crucial difference. Those central banks were not regulating their banks but supervising them, much as the Bank of England did prior to Gordon Brown taking over and hoarding power to the Treasury, whilst giving away the fig leaf of independence to set interest rates with a government appointed committee to government set targets on what inflation is.

So the banking problem is global in its fallout, but make no mistake, it is not global in its causes. They were for the most part authored in London and Washington.

Counter productive interest rate cut.

The Bank of England has cut its base rate of interest to the lowest in history.

This is of course entirely ridiculous, and they ought to be ashamed of themselves.

The Bank of England lost the ability to control interest rates in the market place months ago as a result of the credit crunch. It can set its base rate to what it likes, no body is taking any any notice.

In order to cure a problem, you need to start with the correct diagnosis. This clearly has not been done.

The problem that ails the economy is not the cost of money (or lending) but its availability. You could set interest rates to what ever you like that in principle, is not going to do anything to fix the problem. In fact if you set them too low it will (and is) making the problem worse, or in this case, much worse.

The problem we have is that there is far less on deposit from savers in this country then there is currently out in loans. Our banks do not have the access to money to lend. That is the long and the short of the problem.

All cutting interest rates will do is make it less attractive to lend into this economy.

It gets worse. (No, really, it does). Whilst all those on trackers, without collars, or those who have not yet had them applied are getting cheaper money on existing loans, as in their repayments are less (the equivalent of a tax cut for them, 4.5 million people) those trying to get new loans are having to pay much higher interest rates if they can get loans at all.

I did hear the economically illiterate Yvette Cooper (Mrs Balls) who is Chief secretary to the Treasury speaking yesterday. She said that the banks ought to pass on the cut as they were getting cheaper money! Where from love? The banks are not even getting Libor rate and are paying very good rates compared to base for savers prepared to make a long term commitment.

So what we need is for the Bank of England to stop trying to fix a problem we do not have (the cost of money according to base rate) and start fixing the problem we do have, which is that no one is prepared to lend to us at very low rates.

The BBC has this.

Mandelson to wring blood from a stone!

Apparently Lord Peter Mandelson will be meeting with bank executives on Monday to try and get the banks to lend.

Well, this will be like wringing blood from a stone. They have no money to lend. Our banks have lent £700 billion more than they have on deposit since 2001, and that money has been borrowed short. As I pointed out in my articles on Bank of England interest rate cuts, banks are trying to buy money from consumers at as much as 6%.

Clearly the government are in cloud cuckoo land and may even let the presses roll.

Andrew Rawnsley has this in the Observer.

The Bank of England's pointless interest rate cut

Many people have been calling for the Bank of England to cut interest rates, even after last months massive shocker of a 1.5% cut which I said was pointless when it happened.

Well, they have done it again, and cut interest rates by 1% to an all time low of 2% which has not been seen for 57 years. If it goes any lower it will be lower than since the creation of the bank.

It seems some people think that what the Bank of England does on interest rates is relevant.

It isn't. Not even a little bit.

If you don't believe me try lending money to a bank, offering good terms for how long they keep it, and see how much they are prepared to pay. You will find that it is considerably more than 2%, or even 3%. In fact it is more likely to be at the range of 4.5% to 6%.

It is also clear that the Bank of England has absolutely no intention of lending money to banks at 2% either, so where is this money going to come from?

It should be noted that UK lending institutions have since 2001 lent £700 billion more than they have in domestic deposits. Non domestic lenders must think we are mad if we think they are going to buy a rapidly devaluing pound with high inflation to lend at a very low rate which will see their original capital devalued. In essence we are asking for people to give us money on a non commercial basis.

What is more savers are being savaged.

Here is a thought, going against just about every other commentator.

Put interest rates up, so that people are prepared to lend to inflation + 1%.

I know lots of people will howl, but the problem we have right now is less that banks are charging lots for money, and far more that they just do not have the money to lend, especially as lenders can get a far better rate lending to our government which is about to swallow a massive amount of cash.

The BBC has this.

Bank of England's pointless interest rate cut of 1.5%

The Bank of England has cut interest rates by 1.5% to 3.0% which is below the Eurozone interest rate which has also dropped today to 3.25%.

This cut is pointless. British banks for the most part don't have enough deposits to cover there lending by a gap of some £700 billion. They have to borrow from the Libor markets which ultimately means from people who do not care what the Bank of England base rate is.

The net effect of course is that banks who have to honour tracker deals will have less money available to lend on new deals.

In other words Gordon Brown has lost complete control of Tue economy, unless he can replace the £700 billion the banks have got from overseas.

The BBC has this and this.