Tuesday, 7 October 2008

The best way to sort out the banking crisis - poll results

So far, the 192 responses to the question 'What's the best way to sort out the banking 'crisis'? were as follows*:

Allow them to fail - 51%
Debt-for-equity-swaps - 22%
Nationalise them - 11%
Invest taxpayers' money in new share capital - 11%
Nationalise them and then allow them to fail - 3%
Cut base rates (aka 'pushing a piece of string') - 1%
Buy up their dodgy loans for more than market value - 1%
Taxpayer funded bail-outs - 0%

A big thank you to everybody who voted; to Alice Cook who kindly featured the poll on her 'blog and to the HousepriceCrashers.

I am surprised at what a bloodthirsty bunch you are, but the clear winner is "Allow them to fail". If politicians listened to what people were saying, rather than carving out new powers for The State at their voters' expense, then any option involving taxpayers' money should be at the bottom of the list.

If banks faced the real possibility of being allowed to fail, I am sure that they would quickly come to an arrangement with their creditors (the mysterious 'money markets'), which boils down to replacing some of their the short term liabilities (money they have borrowed from the money markets, aka wholesale lending, aka bonds, aka mortgage-backed-securities) with permanent liabilities, i.e. share capital. Any sensible bondholder will always prefer to take control of the bank as a going concern, and hope to salvage something from future profits rather than force a bank into liquidation, which would merely serve to crystallise their losses with no hope of future recovery. Which is basically your second choice, "Debt-for-equity-swaps"**.

I suppose, once banks are properly recapitalised, there wouldn't be too much harm in The State taking a stake, or even nationalising them (3rd and 4th place) but once banks had done their debt-for-equity-swaps there wouldn't be any need for this.

I hope that the five people who voted for "Nationalise them and then allow them to fail" were joking***.

Finally, what is really noteworthy is that only two people voted for "Cut base rates (aka 'pushing a piece of string')", despite all the propaganda saying that rates should be cut, thanks for that!

* With hindsight, I should have included "Government guarantees for all deposits" and "Allowing banks to fudge their balance sheets" as well.

** Debt-for-equity-swaps work best if coupled with a sensible provision against bad and doubtful debts, which would be no more than 5% of mortgage advances for most UK lenders. Perhaps I should have made that clearer.

*** The gummint has nationalised Northern Rock and Bradford & Bingley and is now merrily allowing them to fail. Which is not funny.


Anonymous said...

I nominate Hbos and RBS as the failers, the others can fight (like citi and wells fargo are doing in the USA) over the assets.

*the lloyds Hbos deal looks to me like just a piece of political maneuvering. in Safe harbour but the boat still has a 200 billion hit in its hull.

Unknown said...

I don't know where the BBC finds them all.

The Today programme has just subjected us to a steady diet of different people all of whom are demanding an immediate rate cut. No doubt they claim they are being impartial because there is a range of views of how much interest rates should be cut, up to and including one idiot who was demanding 300 basis points - 3% !

So let's get this straight.

We have a banking problem caused by interest rates that are too low. In these circumstances banks have to (and are encouraged to) make lots of loans in order to keep up their profits - in effect it is "sell them cheap so pile them high".

This creates a real estate asset bubble which combined with the dodgy loans means that their "assets" don't look too secure thereby undermining their capital reserve ratios.

So the banks need to rein back and rebuild their asset base.

They need higher interest rates - and LIBOR, the Inter-Bank interest rate, is much higher.

And so the BBC has a steady stream of people being interviewed all calling for lower rates.

Japan had interest rates at ZERO PER CENT and they were in recession for OVER A DECADE.

In other words, it didn't help.

And at the same time we have the example of Iceland, whose currency fell by 30% in a single day yesterday, to show exactly how dangerous it is if investors lose confidence in your currency.

And the BBC are interviewing people advocating a panic slashing of interest rates by 3%.

So why am I paying a license fee for these bozos to spread this garbage over the airwaves?

Mark Wadsworth said...

PB, WG, I have totted up worst-case losses from house price/credit bubbles bursting, banks might have to write down their mortgage advances by 5%, absolute tops. Big deal.

WG, the house price and credit bubbles are two sides of the same coin. Sounds like a job for Land-Value-Tax-Man!

Anonymous said...

Yes Mark, but that only deals with the here and now, going forward their is way too much capacity in the marketplace to sustain all these banks, and if the taxpayer or state is a shareholder in all off them that is going to make it hard to downsize?

Anonymous said...

Im with Mark on LVT, in a supposed capitalist economy we seem to tax labour instead of capital which is immoral if you think about it, even with setting aside the economic benefits of LVT directly dealing with the land asset bubbles we seem to attract.

Mark Wadsworth said...

PB, The People voted for nationalisation/public stake as options 3 and 4. I personally did not actually recommend either course of action.

Thanks for comment on LVT, but never forget; LVT is not a tax on capital!. I am a capitalist! LVT is more akin to a user charge - you pay for the value of local amenities that are enjoyed by owners/occupiers of each plot of land, remembering always that land value = planning permission x local amenities + scarcity value.

Anonymous said...

sorry im getting it mixed up with capital asset (productive land).

Ill try to keep up in future sir. Ill turn sky news off when posting to engage brain.