"The only thing we have to fear is Big Government itself"

Politicians are always itching to help themselves to taxpayers' money and/or award themselves greater powers. The easiest way to do this is to whip up a climate of fear - whether of foreigners, terrorists, unemployment, avian 'flu, climate change, that does not matter, all these threats are largely illusory, and even if they weren't, there is usually little that a government can do to improve matters.

Their latest excuse, cooked up over the past couple of months, is the myth that their is going to be some terrible financial 'crisis' or something, which I have done my best to debunk, and unless we hand over wodges of taxpayers' cash and allow the gummint to take control over all banks ... well, Something Terrible Will Happen.

Depressingly, even Tim Worstall writing at the Adam Smith 'blog has succumbed to this nonsense.

This sentence riled me particularly: "Either we get the banks back on their feet and lending to each other again or we cut interest rates strongly or we start to suffer from deflation."

I commented as follows (subject to a few links and tweaks):
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Sorry, does not compute. I find it always helps to stick to logic and facts when faced with the a serious possibility of the most rampant outbreak of large-state corporatism since WW2 (or whatever the last big outbreak was):

1. The banks got themselves into this mess, they can get themselves out of it. The merest hint or sniff of a bail out just leads them on.

2. All this cheap credit has just flowed through into inflated land values (which always happens in the absence of Land Value Tax, just look at the eighteen year cycles). Nothing was created that would be destroyed. So if credit is withdrawn from mortgage borrowers, this will just speed up the house price crash, or "return to sanity". Withdrawing credit from productive businesses is of course a slightly more serious topic.

3. With falling land values, new mortgage lending is less than repayments on existing loans. This is a simple observable fact.

4. The worst case write-offs of mortgage lending in the UK, even assuming 42% fall in house prices and one million repossessions is possibly £40 billion, plus 10% of unsecured borrowing makes £60 billion in total out of over £1,400 billion household borrowing. If banks' capital ratios fall too low, that can be fixed with cunning debt-for-equity-swaps, matching risk and reward and all that.

5. So, let the banks write off 5%, but most borrowers are repaying 6% interest plus capital repayments over 20 years, the total cash inflow from current UK stock of mortgage lending is thus between 10% and 15% of the total outstanding, i.e. £120-plus billion money in, every year.

6. If potential FTB's were just told to wait a couple of years, new lending would be nil. So banks have got a modest upfront P&L hit of £60 billion which is not cash flow, they just tell their bondholders that each £1 of bonds has been cancelled and replaced with 80p of new bonds and 20p new shares. But they have £120-plus billion a year coming in, which is plenty enough to pay 5% interest on customers' deposits and bonds (to the extent that they are not cancelled and replaced with shares), with the balance available for lending to new and existing businesses, should they require it.

Armed with facts and logic, let's turn to the sentence I quoted above...

"We" (the taxpayer? the government? who are "we" in this context?) do not have to do anything.

Interbank lending, securitisation, borrowing in money markets etc is a relatively new phenomenon - it has developed over the last ten years or so - it was an interesting experiment, it clearly didn't work, why revive it?

"We" (whoever "we" are) cannot just cut interest rates, it is pushing a piece of string. Interest rate setting is best left to the markets. In any event, interest rates are not particularly high by historic standards, i.e. inflation plus 2% or so, which seems 'about right'. Eligibility criteria for e.g. new mortgages have tightened, and rightly so, this is a completely different topic.

What's so terrible about deflation anyway?

And so on. The politicians love whipping up a climate of fear because that it was Big Government does. Anybody who believes Gordon Brown or Alistair Darling more than they believe me is fool, basically.