The G7 Five-point plan is a load of rubbish

It is amazing that we are letting them get away with this sort of complete and utter drivel:

1. Take decisive action using all available tools to support struggling financial institutions and prevent their failure.

2. Take all necessary steps to unfreeze credit and money markets.

3. Ensure that banks can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4. Ensure that savers' deposit insurance and guarantee programs are robust so savers have confidence in the safety of their deposits.

5. Take action, where appropriate, to restart the mortgage securitisation markets.

What are the little clues that tell us that this is pure and utter hokum? Briefly:

1. "Decisive action" = using taxpayers' money to enlarge The State's powers as well as indulging in rampant corporatism = all these politicians will need jobs once they get kicked out of office. "... and prevent their failure" Wot? Banks are not like other businesses - it's a pure balance sheet exercise, annual profits and losses are not so important. Let's define 'failure' as them suffering losses that are so large that not even ordinary depositors can be repaid in full. In the case of the Bradford & Bingley, this would mean that they would have to suffer losses of over 50% on their buy-to-let mortgage advances - things might be bad, but they are not that bad!

2. "unfreeze credit and money markets" Wot? Over-reliance on the 'money markets' was exactly what got e.g. Northern Rock and Bradford & Bingley into this mess in the first place. This is a relatively new phenomenon, the experiment did not work, why try to revive it? As to credit, now that the house price crash is merrily underway, gross lending is going down again, in other words, total monthly mortgage repayments are larger than new mortgage lending. So mortgage lending is cash-positive for the banks, isn't that A Good Thing? Whether they want to hoard that cash or on-lend it to businesses is their decision.

3. "ensure that banks can raise capital from public as well as private sources" Wot? They shouldn't be getting money from 'public sources', that's taxpayers' money for crying out loud! And the more they take off us in tax, the less we have for repaying our mortgages or indeed investing new funds. Banks' recent rights issues have been a miserable failure, so we can forget that as an option for the time being.

4. "Ensure that savers' deposit insurance and guarantee programs are robust" Nope, not necessary, see Point 1. The best insurance that depositors can have is that they are preferential creditors, in other words, shareholders and bondholders will bear the brunt of the losses.

5. "restart the mortgage securitisation markets". Nope. Mortgage securitisation is, just like over-reliance on the 'money markets', a large part of what got Northern Rock and Bradford & Bingley into such a mess. Why can't we go back to traditional banking where banks raise money from households/businesses and lend money to other households/businesses? If you add up UK banks' balance sheets, it appears that the money has gone round in a circle nearly three times. Total lending to households/businesses is considerably less than £2,000 billion (a tad more than one year's GDP); but the banks' total assets are £5,000 billion.

Clue Number 6 is that the International Monetary Fund have got in on the act. Now I know that they are lying. This is a storm in a tea-cup, or would be if we actually understood a bit about banking and finance ...

Here's the MW five-point plan to sort this out once and for all:

1. Banks forced to make sensible provisions against primary mortgage assets (i.e. where a borrower owes the bank money, not secondary mortgage assets like mortgage-back securities, or else you double count the loss) on the basis of likely property price falls from peak/borrowers' income/borrowers' payment histories etc.

2. Banks forced to close out and net off all other derivatives not directly related to mortgages (interest rate and currency swap etc) and recognise the net liability to/receivable from other banks and financial institutions.

3. Those banks who end up with liabilities (customer deposits plus outstanding bonds) in excess of assets (fixed assets, investments and mortgage advances) have to cancel some of their long term debts/bonds and compensate bondholders with new shares (debt-for-equity-swap). In the very rare cases where net assets are insufficient to cover ordinary customer deposits in full, the extra corporation tax collected from Point 4. should be more than enough to cover it.

4. Other banks - the prudent and the lucky - will end up ahead of the game; it is a zero-sum game, after all. Good for them. But we can collect 28% corporation tax on those profits, which might, in extremis be required to reimburse ordinary customers in Point 3.

5. Where banks subsequently end up with large holdings of shares or bonds in other banks (which will have a proper open market value, possibly involving further write-ups, write-downs) are forced to sell these off (over a period of a few years) and use the cash to repay liabilities as they fall due.