Monday, December 22, 2008

Why banks?

Banks require re-capitalisation. The capital is required to cover losses. Capital is also needed for assets returning onto their balance sheet (as the vehicles of the “shadow banking system” are unwound). This capital is required to restore bank balance sheets. Additional capital will be needed to support future growth. Availability of capital, high cost of new capital and dilution of earnings will impinge upon future performance.

Satyajit Das (htp: Jesse)

Nope. Banks need destroying, as does all this bank-created debt. The mistake is to try to keep things as they are. How did we come to buy houses "on tick", then cars, and now our clothes and groceries? Why is there any lending for consumption, seeing how it only means reduced future consumption? Why should banks be kept going, requiring a significant proportion of our earnings, so that wages have to be high for us to live on what's left, making us uncompetitive with the developing world?

I am reminded of the pitiless response of the Comte d'Argenson to the satirist, Desfontaines:

Desfontaines: I must live.
D'Argenson : I do not see the necessity.


Varun Gupta said...

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Sackerson said...

Hi Varun, and Merry Christmas. Readers can link to your blogs from your comment.

Anonymous said...

I was thinking about this when I wrote my last comment about slashing the debt in half but doubling interest rates.

Problem is that it can't be done. It won't really solve the problem. The problem is that the debt is already out there and has been spent - re-circulated around the economy several times.

Imagine that you buy a house. You can't pay for it so you go to the bank for a mortgage. So the bank pays for the house on your behalf. Except it doesn't. It gives the seller an IOU for the money, in the form of a bank statement. All this works fine as long as only a small proportion of the people turn up and ask for their cash at the same time. If we all turned up at the same time and asked for the cash there wouldn't be enough to go round.

If the banks issued IOUs instead of something that looks like cash, then this would be more obvious and perhaps sellers would be less keen on being drawn into this game. They would say "No, a fistful of IOUs is no good to me, I build you a house and then you repay me in real cash over ten years". But since banks IOUs (the numbers on your bank statement) can be traded 1:1 with real cash (whilse stocks last), then the banks get away with what is really a scam.

So, where the debt has been used to buy new things there is nothing to be done. New schools, new cars, new houses - all these things were created to meet the demand artificial arisen from too many people getting their hands on cheap credit. But the people that did the work deserve to be paid back, so the debt that is associated with what they have done cannot be written off - it must be paid for.

For things like second hand houses you could claim that the pricew of houses and thus the debt associated with it was purely driven by the debt itself - but unravelling a complex series of transactions over the last seven years to try and decipher who was responsible and who should be punished would be impossible.

However, this leads me to a conclusion. If the rapid inflation of assets was caused by too much cheap debt, then there is an immorality in that inflation itself. The moral solution is therefore to PRINT MONEY! If we print money, those that would be hurt most would actually be those that too the most benefit from creating debt, because we would be saying "OK, for every £1 of debt I will repay you one real £1 and one Mickey Mouse £1".

"Never a borrower nor a lender be". But the borrowers are not best placed to take a moral stance. The rich lenders are. It doesn't matter where the original capital came from to underpin that lending. In the end it was aimed at profiteering from the mistakes of the weak. So the punishment must be aimed at the lenders and their financers.

Naturally, this printing of money will cause inflation and reduce the value of assets. This is often claimed to be the "thief of the middle-classes". But in reality if the money printing is done openly the middle-classes will GAIN. They will use the rapidly expanded supply of cash to own the big house they bought with cheap debt and live mortgage free. The people that will lose will be the landowners that sought to profiteer from them in the first place.

Print money.

Sackerson said...

I think I agree, Anon - we should own our houses, they will be worth much less than today, and we can use such capital as remains to stimulate production. Now for some economics whiz to work out exactly how to do it, without giving the bankers warning so that they can find a way to steal what's left and flee the country.

Can you float off a cliff? We need the economic equivalent of a hang-glider.

James Higham said...

U.S. notes over there and British greenbacks over here. Let the war then begin.

AntiCitizenOne said...


Anonymous said...

I think we need to look into all debts that are secured against property and consider "printing" money to reduce the size of those debts by 50%. The reason why I have come to this conclusion is that the release of enormous amounts of debt into the property market (both domestic and commercial) was the driver for the dramatic increase in prices. People were actually competing to maximise how much debt they could get into and thus competing against each other to push up prices with debt. Of course they didn't see it that way because they just wanted to put a good roof over the head of their family, but they were suckered into it. Since the inflation in house prices was already caused by the debt then printing money to pay off half the debt will not in itself cause further inflation. Simply handing over the freshly printed cash to the banks for half the existing mortgage debt will repair their balance sheets. It will also mean that people will be unlikely to lose their homes and will have more confidence in the future. We will need to restrict lending, however to prevent the banks getting too free with lending once their balance sheets are repaired because too much fresh lending would result in inflation.

PFI lending: Probably not much we can do about this. Fact is that all these new schools and hospitals will need to be paid for. We benefit from them so we must pay, even if it takes 25 years. Our kids also benefit from them so why shouldn't they pay too? Of course such things should be paid out of normal taxation and subject to a rolling programme of maintenance and replacement. Since we can't trust government to do this for us because they simply try to buy votes with debt, we need a new constitutional arrangement whereby the Crown limits the levels of debt that the government can get into.

Other government debt: once again the government seems to be over-spending by some 25% on day to day expenditure. We need to reduce government expenditure to acceptable levels and pay back the debt. There is no way around this since we have paid wages that we didn't fund through taxation. Again, we need a constitutional arrangement to stop corrupt government using debt this way to jerrymander the vote. Reducing government spending will actually mean fewer people working in the public sector which will free them up to work in the private wealth creating sector, which is what we need to re-balance the economy and pay off our foreign held debts.

Corporate debt: Some of this is related to the property ponzi scheme and can be repaired by printing money. Much is related to M&A activity and Private Equity deals. I don't think there is much that can be done here. These deals were often crazy to start with. My guess is that as the new owners are dragged down by the debt they will go bust and the debt will be written off, leaving the underlying businesses as the viable enterprises they were before some mad b*gger decided to use cheap debt to buy them. It will cause a lot of pain to the owners but they probably deserve it.

Other domestic debt: Mortgages are the worst and are too high due to the property Ponzi scheme that has been running for the last 10 years. Just solving this problem with printed debt for half of it will get mortgages down to a reasonable level and leave the remaining debts manageable. If people have run up huge credit card debt then they only have themselves to blame as the consequences of such debt should be clear on each credit card statement.

So that is my solution for the credit crunch - "print" enough money and give it to the banks to write off 50% of all debt secured on property and let everything else unwind naturally.

Sackerson said...

Hi Anon: my feeling re each para:

1. Yes, and Denninger said so, too. Then strict controls on loan-to-income, the lender alone to bear the consequences of any excess.

2. Who will bell the cat?
3. See (2)
4. Bust 'em, starting with the banks. No bailouts. If there's demand for the business, close, screw the creditors and reopen without debt (which is what they're thinking of doing with Whittards) - except, inconveniently, the creditors may then be forced to do the same.

5. Credit cards - make the debts on these unrecoverable from real estate.

But how would it all work out in practice? How would we get to there from here?

Sackerson said...

James, hi again, and thought your Abraham Lincoln/greenbacks story very interesting and pertinent.

ACO: welcome again, and once again as I said in my last comment here, "How would it all work out in practice? How would we get to there from here?"

Anonymous said...

As I said before, the problem with screwing the banks is that it would hurt the people with deposits as much as anybody, Good hard-working people. The money supply that has trebled in the last 10 years exists only on the accounts of the banks that together played a part in creating this money supply. Pull the plug on them and you will have the moral satisfaction in seeing a unfeeling, uncaring entity "punished" but you would be cutting off your arms and legs as well as your nose to spite your face. The fact is that if you shut down all these banks the money supply itself would collapse causing a dramatic reduction in the money supply. Then we really would be in a Great Depression scenario because that was exactly what happened then - a sudden contraction in the money supply after a long boom as the banks went bust one after another in a short period of time.

Of course, if you want to punish the bankers rather than the banks, this is a different matter - but it would require legislation that is retrospective and that isn't really popular with anybody. Would you like to be found guilty of doing something today that won't be a crime until tomorrow? Give them the push and turn them into social pariahs - its about the best you can do. We should adopt the same approach with Labour politicians too...

As for policing the printing of money - well that is the difficult part. I strongly believe that Labour will print money over the next year - and it will do it to pay off its own debts so it can release yet more debt. This will result in hyperinflation, since it will add to the money supply, rather than convert it from one form (debt) to another (cash). The Labour government is utterly corrupt and we can only stand back and watch aghast at how far they will stoop to keep themselves in power. If the British people are foolish enough to be suckered in by Labour again in 2010 then I am afraid they only have themselves to blame for the consequences. For those of us that realise what is going on then it will pay us to be vigilant and act accordingly. I see no moral imperative for helping those that have voted for what they perceive as the easy option. If they are foolish enough to vote again for the buy now pay never option of NuLabour then they will suffer - and I will happily pick up their assets at low prices when the time comes.

Sackerson said...

Cogently argued, Anon (and I could wish you were not anonymous - do you have a blog of your own for us to read?).

And yes, I do want to punish the bankers, and retrospective legislation might not be necessary. I've said before now that they could be said to have:

(a) a fiduciary duty to their depositors;
(b) a duty of care to the people who took loans from them:
(c) a general duty to the country, the money supply, the social order etc.

I think you could get many of them on the first two, and if the government hadn't crazily bailed them out that's exactly what they'd be facing now. And I'm not sure that you couldn't argue a case for the third under the heading of one of the public order offences. Or treason - coining was punishable by hanging, drawing and quartering (for men), burning (for women) as late as 1789, so a charge of conduct likely to result in a breach of the peace would be to let them off very lightly indeed.