A bold bank plan, interest rate cut, and help for SMEs

Peter Kenyon Wed Oct 08, 2008 at 12:57:08 PM GMT Print-friendly version Facebook

Anyone worried about their job, pension or personal wealth might be wondering why the British Labour government's bold plan has not stopped a further slide in share prices on the London Stock Exchange. Stock markets don't trade in political boldness. They price future profits - usually 18-months out.

At PMQs Gordon Brown floored the opposition with an announcement of an internationally coordinated interest rate cut of 0.5% points, plus help for small and medium sized enterprises. The FTSE down over 300 points early on is recovering. 




The bank plan is about solvency of the British banking system, adequate capitalisation to lend, and liquidity in the money markets. But no bank is going to lend if a business plan doesn't stack up i.e. demonstrate capacity to pay interest and repay a loan on the part of the prospective borrower.

Uncertainty about future profitability is much more difficult for governments to manage. Interest rate cuts, public works programmes and tax reductions for those most likely to spend (rather than save) are among the major tools available to government - not the market to use to help pave the way to restore confidence in stock markets by improving their ability to price future profits.

Democratic socialists (that's what all members of the Labour Party are - it says so on our Party cards) will note that Gordon Brown's government is emphatically eschewing taking either control or an equity stake in the UK banking system. It is offering to buy preference shares with a fixed rate of interest and no voting rights for the purposes of underwriting bank solvency and improving capitalisation. The politics should come in the measures taken to boost confidence in the economy, encourage future profitability and win back the trust of the electorate that the Labour Party is fit to continue governing the country. (Citizens of Glenrothes, please take note - Scotland/Iceland what price independence?)

The independent Bank of England (and I hope it stays that way) has a particular responsibility when its monetary policy committee (MPC) meets tomorrow to decide whether or not to cut interest rates. As former prime minister Tony Blair is reported to have advised Peter Mandelson, when offered a job in last week's cabinet reshuffle: "It's a no brainer".

Let's hope the Labour government's boldness in doing its part is not lost on the MPC either, and it takes the market by surprise with the size of the interest rate cut to help kickstart the real economy. Next development to watch - the pre-budget report.

UPDATE: 1205 Bank of England cuts interest rate 0.5% as part of concerted international action. Very timely - FTSE losses look as though they have eased. Will the banks pass on the cuts immediately?

UPDATE: 1210 UK government to advance payment of invoices to 10 days from 30 days for small and medium-sized business - Conservative leader David Cameron is being pummelled by Gordon Brown at today's Prime Minister's Question Time - a knockout IMHO

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A bold bank plan, interest rate cut, and help for SMEs | 19 comments (19 topical)

Re: A bold bank plan, (#1)

by oratorhunt on Wed Oct 08, 2008 at 02:26:02 PM GMT

Sorry Peter, it's a tacit recognition that the idea that interest rates should be determined with primary reference only to inflation targets was misconceived from the moment we made the Bank of England independent.  The rate cut is too little too late - as Will Hutton writes in today's Guardian a cut of at least 1% point would have been needed to meet the needs of our current economic climate. 

Interest rate decisions are inevitably political, whether they are taken directly or through the political ruse of declaring them nominally "independent'.  What about growth?  About aggregate demand?  About strenght of currency and exhange rates?  Interest rates have a clear bearing on much more than inflation. 

I take no great pleasure from saying this as a Labour party member, but Vince Cable has been consistently ahead of the game on our economic problems and the action necessary to steer a clear course through the turmoil.  He was right about the levels of debt, right about the need for the state to take a role in stepping into take a stake in the ownership of repossesed homes to protect those who can't pay, right about having to part-nationalise the whole banking sector, and is right to speak of the need for the government to take emergency control of the setting of interest rates as part of a holistic aproach to macro-economic protection and stabilisation.


Re: A bold bank plan, (#2)

by snowflake5 on Wed Oct 08, 2008 at 03:04:00 PM GMT

Not sure why everyone is surprised at the interest rate cut - same thing happened after 9/11, a cut outside of a meeting. Arguably it is more necessary now than then. Downturns always reduce inflationary pressures.

I'm very happy with this plan. We're the only country in Europe to come up with something thought-through and comprehensive, and our plan is way better than the American one.

As for the markets - they've moved on to the next thing, which is watching the USA.

Banks have agreed to participate, but it will take a good few weeks for the agreements with each bank to be thrashed out, and money released. Though the preference shares will have no voting rights, there will be strings attached at the point the deal is done.

And savers shouldn't panic - given that the Treasury is guaranteeing the Icesave depositors, it looks like no British saver will not be allowed to lose a penny. So hopefully now people will stop panicking and get on with their lives.

Re Vince Cable - of course as an opposition member, he is free to go pontificating on television. Government can only talk behind closed doors for fear of spooking the markets. This plan was actually long in the making. Just because Alistair Darling hasn't got loose lips, doesn't mean he hasn't been thinking and planning. 


[ Parent ]

Re: A bold bank plan, (#3)

by oratorhunt on Wed Oct 08, 2008 at 03:21:49 PM GMT

hmmm...I think they were resisting this right up until the point that it was made clear that there would have been a sustained run on the British banks and a potential financial catastrophe - hence they were still dotting i's and crossing t's until 5am

As for just getting on with our lives:
"The world economy is entering a major downturn in the biggest financial crisis since the 1930s, said the International Monetary Fund (IMF). "

Sounds like reason enough to worry to me. 


[ Parent ]

Re: A bold bank plan, (#4)

by snowflake5 on Wed Oct 08, 2008 at 04:55:58 PM GMT

I think it was Roosevelt who said in 1933 in the midst of the 1930's recession, that "the only thing we have to fear is fear itself" (I paraphrase).

Seriously, running round like a headless chicken is unproductive and will bring on the feared "biggest downturn in the world ever" in a self-fulfilling prophecy.

People getting on with their lives is the only sensible thing to do. Govt has produed the bailout, govt has demonstrated with Icesave that it essentially guaranteeing all deposits, people should stop whipping up hysteria now and get on with things.


[ Parent ]

Re: A bold bank plan, (#5)

by madasafish on Wed Oct 08, 2008 at 05:26:14 PM GMT

Markets fall because we are in a bear market. Bear markets last 2 years on average. LIBOR rates are rising despite interest rates cuts.

I anticipate the FTSE 100 going to 3250 or maybe lower before the market turns.
Market sentiment is FEAR> Fear of a complete banking system collapse which the UK had HAD to prevent.

The Fat Lady is not singing and will not sing again until all the banks have worked out the losses from their systems.

With this bailout comes 5 years of hard graft to repay the debt. 

UK house prices still have 50% to fall...

The good news is oil and food prices are going to fall big time..

The bad news is we are in a deflationary environment or will be in 2009.  Japan's has lasted 20 years..

It's time to batten down the personal finance hatches... and yes I did see it coming...

This is the worst banking crisis in the UK for over 100 years. Period. Even in 1929 the UK banking system did not collapse...and require a major bailout.

No political points here: the facts are dire and things are going to get MUCH worse... 




[ Parent ]

Re: A bold bank plan, (#6)

by snowflake5 on Wed Oct 08, 2008 at 06:17:47 PM GMT

The FTSE fell to 3287 in 2003 too. So what? I agree that markets are full of fear, but there is no need for householders to huddle under their blankets. Hysteria is fun for some, but quite unproductive. The best thing people can do is literally get on with their lives - they'll find things work out better that way.


[ Parent ]

Re: A bold bank plan, (#7)

by madasafish on Wed Oct 08, 2008 at 07:11:45 PM GMT

Houseeholders have:
reduced credit.. loans will be MUCH harder to get. like mortgages.
Unemployment will rise: 2.5 Million looks a cert by end 2009.

Wage inflation will fall to 1% or less.
Council tax and income tax bills will rise to pay for the debt.
Services will have to be cut.

That is how recessions work...

Been through 3 major ones in my life: they are not fun...


[ Parent ]

Re: A bold bank plan, (#8)

by adwilliams134 on Wed Oct 08, 2008 at 07:50:18 PM GMT

You must be an old git like me.  Wrong side of 50.

I'd like to know the the seriousness of this though.  Surely Councils can't bank money overseas?  Surely there's a bloody law against it and if not there should be.

http://news.bbc.co.uk/1/hi/uk_politics/7659783.stm


[ Parent ]

Re: A bold bank plan, (#9)

by madasafish on Wed Oct 08, 2008 at 09:27:08 PM GMT

Wrong side of 50? Just a lad then:-)
Add 10 years :-(

I remember when BCCI went bust. Western Isles lost £20 million.

It is obvious people never learn:-(

I looked 2 months ago at Icelandic accounts and came to the conclusion I could not sleep at night#. So used Post Office instead - an Irish bank...:-)

# A rule I have come to trust. If it looks too good to be true.. and feels strange... avoid like the plague...

Works every time...


I'm expecting a few more banks to go pop and some insurance companies...


[ Parent ]

Re: A bold bank plan, (#10)

by adwilliams134 on Wed Oct 08, 2008 at 09:30:43 PM GMT

If it looks too good to be true.. and feels strange... avoid like the plague...


Could be talking about Tony Blair there


[ Parent ]

Re: A bold bank plan, (#12)

by Floating voter on Thu Oct 09, 2008 at 08:13:13 AM GMT

"Surely Councils can't bank money overseas? Surely there's a bloody law against it "

Apparently they were following Treasury advice to maximise interest on their financial holdings. The Icelandic banks were credit rated AAA.

Source: Today program.


[ Parent ]

Re: A bold bank plan (#11)

by NB on Thu Oct 09, 2008 at 06:09:06 AM GMT

The collapse of Bank shares was caused by Gordon's insane decision to do a big reshuffle and set up the National Economic Council instead of focusing on solving the banking crisis. As a result the package was not sorted out at the weekend which has caused confidence to collapse further.

It makes you weep..


Re: A bold bank plan (#13)

by Little Tim McGuire on Thu Oct 09, 2008 at 10:20:09 AM GMT

This is desperate sub-Daily Mail stuff.  The banking crisis had nothing to do with events in the USA and around the world but was caused by Gordon'ss decsions to move Lord Adonis to Transport?  Good grief.


[ Parent ]

Re: A bold bank plan (#18)

by NB on Thu Oct 09, 2008 at 02:59:49 PM GMT

Tim: Of course the problems of our banks were similar to those in the US.  But the 2-days delay caused by Gordon's dithering and incompetence made the situation much worse: eg RBS went down 38% compared with 8% for citigroup.


[ Parent ]

Re: A bold bank plan (#14)

by rwendland on Thu Oct 09, 2008 at 11:47:41 AM GMT

Not what I heard on the radio. This has been cooking for a week or two, but the banks were very resistant to taking government equity or similar, and were delaying until a complete crisis hit. In fact HSBC won't, and Barclays is/was still hopeful it could raise more private finance.


[ Parent ]

Re: A bold bank plan (#15)

by rwendland on Thu Oct 09, 2008 at 12:29:28 PM GMT

... and while that could be spin, certain facts back it up such as Barclays saying on Monday "We have categorically not requested capital from the government", only to reverse that the following day.

BTW Govt money going to Barclays poses major difficulties re their partial Lehman takeover. Barclays has promised to pay about $2.5 billion back bonuses to Lehman staff as part of the takeover, so any UK govt money given to Barclays might directlt/indirectly be used to pay massive bonuses to ex-Lehman staff in New York! (while UK Lehman staff are tossed aside!) Or maybe hijacked to pay U.S. Lehman creditors.


[ Parent ]

Re: A bold bank plan (#16)

by MatthewStiles on Thu Oct 09, 2008 at 12:59:30 PM GMT

I also heard that about the banks resisting the equity plan for over a week. It was on Newsnight I think.  Also a great post over at http://plattitude.blogspot.com/ on the 1983 Labour manifesto and its section on banking.  Looks quite moderate now.


[ Parent ]

Re: A bold bank plan (#17)

by snowflake5 on Thu Oct 09, 2008 at 02:35:54 PM GMT

Sorry - this plan has been cooking for some weeks (and possibly months). The first leak came on the weekend, when Conservatives blabbed what was in it, after they and the LibDems were briefed out of courtesy. The deal could have been released Monday, but the banks were resisting. It's believed the banks themselves leaked on Tuesday to pressure Alistair Darling (very foolish of them, their hand is weak as it is).

This was a very good plan indeed, pretty much the best on offer in the world, and only the churlish are carping. Nothing this good would have been released by the Conservatives.


[ Parent ]

Re: A bold bank plan (#19)

by adwilliams134 on Thu Oct 09, 2008 at 10:02:47 PM GMT

I note that the Government felt so generous yesterday that they committed to pick up the tab for up to a mere extra 4 BN for Icesave depositors.

Surely the Government knows the AIG saga?

those not up to date AIG said they only needed $20BN to continue in business to start with three days later they needed an $85BN bailout and would you believe it a very short month later AIG have got through the $85BN and have been bailout again with a futher $37.5 BN

I can now see the taxpayer being on the hook for at least twice the  £500BN before this nightmare not of our making is finished.

I also note the Darling Alistair is definately not guarenteeing that the taxpayer will end up with a profit,  I notice that he's not even guarenteeing they'll break-even.  The words 'hopefully' and 'should' have been very much in evidence.


[ Parent ]

A bold bank plan, interest rate cut, and help for SMEs | 19 comments (19 topical)