Can they do it?

It is going to take a mighty pile of debt to cover this year's fiscal deficit. The debt management office has a sales target of ₤220 billion. So far this year, the DMO has sold ₤57 billion.

Can they do it? Its a big ask. Even if they succeed, they have to the same next fiscal year.

Another beautiful chart

This financial crisis has produced some wonderful charts. Recent numbers either dive to the depths or reach for the sky.

I particularly like this one. It illustrates loan loss reserves of US banks. The reserves are expressed in terms of total loans.

The chart tells us two things. During the boom years, banks ran down the spare cash they put away to cover bad loans. Just before the crisis they were putting away barely one percent of their total loans.

Then, along comes the crisis and banks suddenly realise that they don't have enough reserves. Everything goes into reverse, and banks start accumulating reserves like crazy.

I reckon this number can only go higher. Soon, it will exceed the previous highs in the late 1980s, and hit an all time high.

US long term unemployment on the rise

The length of time that US workers remain unemployed is at its highest level in over forty years. The median number of weeks without a job is now 18 weeks. The previous peak was around 12.

The US labour market is creating a large pool of long term unemployed.

The seven principles of good economic management

There is an old adage that no one seriously argues whether two plus two equals four. In contrast, the more dubious the argument, the more violent the discussion.

For many years, economics had a solid repository of reasonably uncontentious claims. In terms of macroeconomic management, these claims could be summarized in seven straightforward principles:

1. We cannot inflate our way out of a recession.

2. Faster monetary growth leads to higher inflation.

3. Large fiscal deficits mean higher government borrowing, which pushes up interest rates, and discourages private sector investment.

4. A large public sector debt stock imposes huge interest rate costs on the taxpayer, and limits socially important public expenditure such as health and education.

5. Banks will always sacrifice liquidity for higher profitability and therefore must be closely regulated.

6. Negative interest rates discourage savings, reduce investment, and constrain long-term economic growth.

7. State guarantees on loans encourage banks to take excessive risks and generates moral hazard.

Although these principles didn't quite have the reliability of arithmetic, they did a decent job at ensuring economic staiblity. Before the crisis, economists did not debate the validity of these principles. Nor, for that matter, did the government or the Bank of England.

From the moment Gordon Brown became Chancellor he talked about fiscal prudence and the need to limit large government deficits. Countless speeches from members of the monetary policy committee warned against the dangers of allowing inflation to run out of control and how sound monetary policy was the key to a stable economy.

Today, the UK government and the Bank of England have abandoned sound macroeconomic management. Instead of following these seven tried and tested principles, Brown, Darling and King have a new guide for policy. Simply stated, credit is the lifeblood of the economy and it must be sustained at all costs.

However, credit is just another word for debt, which has to be repaid. If the solution is more indebtedness today, then we must expect more misery in the future.

It is time to return to what works; it is time to rein in the deficit, limit the growth of the money supply, and ensure that interest rates are positive. It is time to stop state intervention in the financial system, and cut out the guarantees and implicit subsidies.

It is time to return to orthodoxy and put an end to experimentation.

The true objectives of UK monetary policy

In case anyone was suffering under the illusion that the Bank of England was focused on price stability, MPC member Andrew Sentance helpfully clarified the matter in a recent speech:

“Over the last nine months, the Monetary Policy Committee has been focussed on providing support to demand – through dramatic and unprecedented cuts in interest rates over the autumn and winter – and more recently through our current policy of “Quantitative Easing”.

This programme of substantial asset purchases aims to boost the money supply to support spending in the economy, going beyond the stimulus that can be provided by very low interest rates.

I am confident that these policies will help to support economic recovery – through their effect on asset prices, financial conditions and ultimately spending by households and firms.”

It all comes down to one simple point: the MPC have cut rates to almost zero and started printing money to inflate house prices.

Thanks for that, Andrew.

Should he stay or should he go.....

I can see this kind of row kicking off here in the UK. A new Prime Minister, a discredited governor of the Bank of England, and a purge of all the architects of our financial ruin.

Today, it is Iceland, soon it will be the UK.

Iceland’s week-old government was locked in its first serious crisis on Monday after the governor of the central bank accused it of instigating a “political attack” against him and angrily rejected a demand by the new prime minister to resign.

David Oddsson, a feisty former prime minister and architect of the free market reforms that revolutionised Iceland’s economy and then led to its collapse, was reacting to a letter from the new prime minister demanding his resignation.

(from the FT)

Icelanders hoofs out their government

Frankly, it was astonishing that Geir Haarde lasted so long as he did as Icelandic Prime Minister. Rarely has a European government done such a comprehensive job destroying an economy. He, and the rest of his sorry cabinet, have hit the road after Icelander's patience with the currency and banking crises finally ran out.

I can see the same thing happening here. Just give it time.

The global economic crisis claimed its first leader yesteday, as Iceland's prime minister announced the immediate resignation of his government following the collapse of the country's currency and banking system. Geir Haarde said as recently as Friday that his coalition would remain in office until early elections, called for 9 May, after violent protests at its handling of Iceland's tottering economy.

Yesterday he threw in the towel, saying that his Independence party and its Social Democratic Alliance partners were quitting immediately as he could not accept a demand by the Alliance to take over the premiership.
(From the Guardian)

Bank of Japan cuts rates from almost zero to fractionally above zero

Cutting rates from 0.3 to 0.1 percent looks like an exercise in futility. Perhaps the true benefit of a 0.2 percent cut is more political and economic. The Bank of Japan is seen to be doing something. These days, that is all that matters in the world of central banking.

From the FT......

"The Bank of Japan on Friday cut its policy rate to just 0.1 per cent – three days after the US Federal reserve moved its rate almost to zero – and announced it would take the unorthodox step of directly buying commercial paper in order to ease a corporate credit crunch.

The 20 basis point reduction to the overnight call rate – the BoJ’s second in two months – came amid a slew of economic news and recent rises in the yen to 13-year highs.However, Masaaki Shirakawa, BoJ governor, said no member of the bank’s policy board now seemed to think that expanding base money would stimulate the economy.
The Bank of Japan reduced its overnight call rate to 0.1 per cent from 0.3 per cent, amid a rapidly deteriorating economy."

Silly money

Iceland - So what exactly is the terrorist threat

It is a very dangerous precedent. When Brown used anti-terrorism laws to freeze assets from Icelandic banks, he put the frighteners on us all. If Iceland can be labelled as a terrorist organization, then anyone can. These anti-terrorist laws pose a grave threat to civil liberties.

From the New York Times....

LONDON — No one disputes that Iceland’s economic troubles are largely the country’s own fault. But there may be more to the story, at least in the view of Iceland’s government, its citizens and even some outsiders. As grave as their situation already was, they say, Britain — their old friend, NATO ally and trading partner — made it immeasurably worse.

Icelanders have posted photos on a Web site protesting a decision by the British leader, Gordon Brown, to use antiterrorism laws to freeze the British assets of a failing Icelandic bank.

The troubles between the countries began three weeks ago when Britain took the extraordinary step of using its 2001 antiterrorism laws to freeze the British assets of a failing Icelandic bank. That appeared to brand Iceland a terrorist state.

"I must admit that I was absolutely appalled," the Icelandic foreign minister, Ingibjorg Solrun Gisladottir, said in an interview, describing her horror at opening the British treasury department’s home page at the time and finding Iceland on a list of terrorist entities with Al Qaeda, Sudan and North Korea, among others.

Lloyds staff will get their bonuses

According to the Guardian today:

"The chief executive of Lloyds TSB, one of the banks participating in the £37bn bank bail-out, has promised staff they will receive bonuses this year despite Gordon Brown's promise of a crackdown on bankers' pay following the investment by taxpayers."

There is something quite amusing about the taxpayers putting in £5.5 billion to keep Lloyds afloat, only to see it disappear a few weeks later in bonuses. However, I am beyond outrage. The world has gone mad and there isn't much we can do about it other than sit back, relax and watch the show.

Today's announcement confirmed one thing. Whatever Lloyds might call their Christmas giveaway, these payments are not performance bonuses. How could they be? Lloyds, like virtually every bank in this country, is on the verge of insolvency. The share price has gone through the floor, asset quality is deteriorating rapidly, and growth prospects are extremely dim. These are failed businesses, and if it wasn't for their essential role in the payments system, should now be in receivership.

These ridiculous bonuses conceal a deeper truth. Banks are not actually profit maximising firms run to maximise shareholder value; they are workers co-operatives. The employees have taken control of the business and rather than pay out profits as dividends, the employees conspired to suck out all the value added as bonus payments.

This credit crisis is just the terminal point in this scam. Shareholders have been the losers all along. Bank share prices have fallen, and now shareholders will see the equity further diluted as the government injects new capital. In some cases - NRK, the Bradford and Bingley, Lehmans, Freddie, Fannie and Washington Mutual - shareholders lost everything.

We shouldn't feel too sorry for these shareholders. They allowed bank employees to take over. When they handed over control, it was inevitable that banks would be run primarily in the interests of the employees, and that means paying out huge unmerited bonuses.

G7 bank bailout special weekend bubble wrap

The crash of 2008: now the pain sets in

"The British Chambers of Commerce (BCC), in a survey of 5,000 members, said confidence and business activity had slumped. “The alarming third-quarter results point to worsening dangers of a major economic downturn and rising unemployment,” said David Kern, the BCC’s economic adviser. "

Leaders at wits' end as markets throw one tantrum after another

"For most of the past year, senior bankers have struggled to avert a collapse of faith in modern finance. Tragically, as this month's events show, they have largely lost this fight. Now, however, this war has entered a new, and potentially even more dangerous, phase. "

IMF warns of world financial system 'meltdown'

"Are Central Banks Making Libor WORSE?"

"The Fed’s massive and numerous liquidity facilities are making things worse. The problem is more than banks unwilling to lend to each other, they are also unwilling to borrow from each other. Banks can get all the funding they need (and then some) from their central bank so they do not need to seek a loan from another bank."

Ireland's economy ends long winning run

"Davey McKeever was down to his last bet slip of the night, crumpled in a sweaty fist, at the Shelbourne Park greyhound track. The remnants of McKeever's first unemployment check would rise or fall on the ironically named Nest Egg."

Spain rescue fund to buy high-quality assets

Does Spain have any high quality assets? If so, do they need rescuing?

French property prices expected to fall steeply in next 12 months

"The property market in France is beginning to show signs of stress although it has not been exposed to the US sub-prime crisis in the same way that other European markets have."

Gas prices: Down 10 cents in 2 days

Fannie, Freddie Commit to Waste $40 Billion a Month Taxpayer Money

"Not content to waste $700 billion of taxpayer money, Fannie and Freddie are going to waste another $40 Billion a month buying troubled assets."

Icesave Iceland special

It just gets worse

Iceland PM says govt has full trust in central bank board

Iceland takes over biggest bank, shares halted

Dutch gov't refuses to guarantee Dutch savings at Icelandic bank

Iceland: undecided on IMF, Nordic swaps last resort

Brown: UK taking legal action against Iceland

Brown Blasts Iceland Over Banks

Icesave and Iceland update

What a mess......

Iceland Drops Krona Defense; Abandons Bank Purchase

The shortest ever exchange rate peg. They fixed it yesterday and abandoned it today.

Britain threatens to sue Iceland to protect savers

Seems fair enough to me. But will there be anything left by the time we get our day in court?

Meltdown in Iceland hits High Street in Britain

Melt...ice.... very funny....

ING acquires Icelandic bank savings

Tiny Iceland's huge banking debt led to downfall

Alice's Icesave bubble wrap special

Big chill hits Iceland's economy

British customers of Icesave are protected under the Financial Services Authority scheme which covers the first £35,000, rising to £50,000 with effect from tomorrow.

Icelandic Banks to Sell Assets; Government Guarantees Deposits

Wounded Iceland takes over No. 2 bank, seeks Russia loan

Iceland should turn to the IMF, not Russia

Icelandic saga spreads chill from freezer cabinets to soccer clubs

Iceland Seeks Loan From Russia, Pegs Currency

Icesave customers face anxious wait

Icesave collapse: Case study

UK Savers Face Cash Application

The true cost of the Icesave meltdown

Savers frozen out as Icesave website collapses