I am living in New York at the moment. I find that Americans who are aware other economies exist have one source of comfort: the US is in bad shape, but the UK is worse. Reading the Green Budget from the Institute for Fiscal Studies forces one to agree: the UK is in a mess. Yet it should still be a manageable mess.
How much debt is too much? Nobody knows. But the governments of highly indebted high-income economies – such as the US and UK – think they know the answer: more than today. They want even more credit to flow to their struggling private sectors. Is that an attainable ambition and, if so, how might it be achieved?
Nobody would want to start from here, least of all the bankers. A dearth of capital, worsening loan books and a lack of funding are a horrible combination. It is little wonder they are now as desperate not to lend as they were so recently to lend. Unfortunately, if banks stopped lending, they would create a depression from which everybody, including banks, would suffer. The economy cannot go “cold turkey”. A flow of net lending must be sustained.The starting point for any analysis must be with some harsh realities.
The first is that banks enjoy a state-supported licence to create money. No strictly private business can make a credible promise to do that. Banking is a utility in which taxpayers bear much risk. Regulators have to represent the interests of these risk-bearers of last resort.
The remainder of the article can be read here. Discussion from our forum members and contributors appears below.
By Martin Wolf
Is the UK on the road to disaster? Those who believe it is insist that it is mad to tackle a calamity caused by excessive borrowing with still more borrowing, this time by the government as borrower and lender of last resort. These criticisms are wrong and right: wrong, if the government remains creditworthy; right, if it does not.
By Martin Wolf
Stuff happens. Stuff has certainly happened to both the UK economy and the government’s fiscal position. What Alistair Darling, UK chancellor, delivered on Monday was not a pre-Budget report, but a crisis budget.
Continue reading “Darling takes a gamble on huge deficits”
Is this the time for the British to swallow their pride, admit they made a mistake and beg to enter the eurozone? A growing number of people argue it is. They are wrong.
The reason for having a floating exchange rate is that it should float. In an uncertain world, an economy needs mechanisms of adjustment. The exchange rate is the most powerful such mechanism. Only exceptionally flexible or exceptionally open economies cope well with big shocks without any exchange rate flexibility.
The UK is now suffering relatively severely (and so “asymmetrically”) from six large negative shocks.
The remainder of the article can be read here. Discussion from our forum members and contributors appears below.
Will the UK government’s scheme for rescuing the financial system work? The answer to this question depends on the meaning of the word “work”. I can identify three issues: will the scheme rescue banking? Will it cost too much? Will it prevent a recession?
First, though, what is the scheme?
The eight eligible UK banks are to raise £48bn in new capital, of which £12bn will be in preference shares paying a dividend of 12 per cent. The government is making capital investments in Royal Bank of Scotland and, upon merger, HBOS and Lloyds TSB, totalling £37bn.
The guarantee on new debt for maturities of up to three years will carry a fee of 50 basis points, plus the median credit default swap rates, over the year to October 7 2008. So charges will end up at 110-150 basis points.
The remainder of this column can be read here. Discussion from our forum member and contributors appears below.
By Viral V. Acharya
The G7 and Eurozone meetings have raised hopes of expedient recapitalization of several banking sectors with the use of public funds. Such recapitalization is rightly aimed at shoring up equity base of the highly leveraged banks whose capital is essentially eroded, and of better-capitalized banks whose equity base has suffered too due to a spillover from adverse news about the highly leveraged ones. In light of this much-needed response to the global financial crisis, it is important to remember that following the first round of recapitalizations, regulators should and will look for ways to “clean up” the system. To this end, well-capitalized banks and financial institutions need to be given incentives to acquire weak banks sooner rather than later.
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