Sunday, 12 October 2008

UK's ingenious solution to the banking crisis caused by the credit crunch

I am tired of turning on the television and finding yet another Oxbridge educated journalist saying to a labour politician that "some of this government bailout package must inevitably result in a higher burden for the taxpayer (admit it - nod, nod, wink, wink)?". I studied neither at Oxford nor Cambridge but I do know the correct answer is "No, you twat, as the PM and the Chancellor have explained over and over again this is coming entirely from public sector borrowing, which does not inevitably translate into higher taxes. Case study the US debt mountain coupled with low domestic tax rates." I will try to explain why. There just needs to be someone somewhere willing to fund this debt. And right now the world is chocka with those people. Just take a look at government bond yields which have collapsed around the world in the last couple of weeks. Why are so many people willing to buy government securities? Because they don't want to put their money anywhere else. They would much rather take their assets and lend it to the government than lend it to a bank. This applies whether you are a depositor or a bank yourself. Hence the interbank liquidity crisis which has been feeding upon itself and has begun to branch out to retail customers.

This why the UK government's plan is ingenious and probably the best in the world. Now you must appreciate I have NEVER been a Labour party supporter but I think Gordon Brown has shown his grasp of financial markets is as sound as ever. Capital injection plus a liquidity guarantee. As big as you like. The ingenious bit results from simply recognising that as no-one wants to lend to banks but are rushing to lend to the government, it is a relatively easy step for the government to take the rush of funds with one hand and pass it out with the other to guarantee the inter-bank liquidity and put the capital back in the banks to rebuild confidence. Don't mess with natural flows - use them to your advantage. Or a better analogy use the opponents momentum to floor the opponent. Simple and brilliant. And the sooner the collective ignoramus of journalists and world leaders wise up to the simplicity and the effectiveness of the proposed plan the sooner we can get out of the financial mire and start to emerge from the financial crisis we face.

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