In a move designed to prevent the credit crisis causing more damage to the banking system and the economy, the Bank of England has announced details of a $100 billion bank rescue plan.
This follows last week’s news that America’s largest bank, Citigroup, is set to shed thousands of jobs after being hit by more than $15 billion of write downs. It also emerged that the Royal Bank of Scotland would ask its shareholders for more than $10 billion to bolster its reserves in the aftermath of losses from investments linked to the US subprime crisis.
Injecting this money into the markets is designed to make it easier for banks to lend money to each other, to ease the credit crunch. At the moment they can’t sell or use mortgage backed assets as a way of raising funds, which means there is less money available to lend to people who want to buy homes, depressing the housing market with a knock on effect for the rest of the economy.
The Bank of England’s plan has been welcomed by the banks. But do you think that politicians should step in to stop private companies like banks from failing? Should the banks have used better business models to avoid this crisis? Or are the banks innocent victims of external global forces?Could the economy survive if a bank went under?
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I think they probably have to. Unfortunately the economy depends upon people spending irresponsibly, and they have to borrow money to do that. If there aren’t many banks, they cannot do that.
This will of course bring up the should we help the debtors too? You hear people saying that the people losing their homes should be helped out even though they bought homes they couldn’t afford. I ask you a question, pretend it were credit cards instead. Someone maxes out their credit cards because they are irresponsible. Should the be bailed out? Wouldn’t that only enable them to think there are no consequences for their poor decisions and will only do it again?
In principle I don’t agree with it, i don’t think this move will have good long term consequences. But on a practical level my savings would be lost if the Royal Bank of Scotland went under, as would the savings of thousands of people across the uk. So unfortunatly it has to be done.
I think Steve’s hit a good point – ultimately there is too much debt in the system – that is unsustainable and inevitably comes home to roost sooner or later. Where debt levels expanded over the last few years, so now they are likely to undergo a contraction.
Unfortunately, this is the nature of the capitalist beast. That said, some form of moderated government intervention to prevent a full-scale blow up must be welcomed. Perhaps what is needed is a measured contraction in credit. Govt intervention to assist this process is welcome.
However, falling asset values and strain on bank balance sheets may not yet be over. Ultimately, the market will clear – all assets have a price, be they houses or packages of debt linked to them.
In the meantime, let’s wait and see what effect this weeks actions have – will the govt have to do more is one key question. Will banks have to do more is another. Should there be tighter regulation on bank capital adequeacy ratio’s and credit rating agencies is another …..
No helping out a failing business only promotes further erosion of your economy. It is kind of like digging out a self inflicted gunshot wound slug with a dirty pocket knife.
“Free markets work”, so let them work. The banks developed a business plan that wasn’t accurate and sustainable. Many people invested in that plan not knowing anything about it. Many banks design such plans knowing they aren’t stable, but they assume the government will bail them out. They did it with the savings and loans, and now that are about to do it again. Anybody notice a pattern developing?
The other question is “where is the struggling government budget going to come up with that money”. Remember that your country has an absolute amount of wealth. your bill in your wallet represents your share of that wealth. If they simply print more, it means the bill in your wallet is a smaller (thing worth less) piece of that pie. You will have effectively been a “tax”. That is what is meant by a “weak dollar”.
I have to agree with Dwight.
I know a lot of people would lose savings, but surely people should scrutinise the banks they are using – after all it is your right to do so.
Banks must do there own job . We dont need a nother breake , we need to get used with cheaper competitor markets .. In the near future they trust the yen and leane cheaper .. if the politics choose for national selfsupport .. we can manage ourselfs …. in .. Invirement , water, food , this is the realistics invest, and the future for the bank. Because moral is not a insecure investing but commercial unneccecary invests withs is shamefully food for kids !
I think the Government has set a precedent with Northern Rock, surely they are obliged to help out with this latest issue?
There are always going to be those who favour it for their own reasons of not losing money, but at the same time the government can’t keep bailing out every bank going.
http://www.latimes.com/features/lifestyle/la-ig-bui13apr13,1,550922.story?track=rss
If you ever wondered why there is a problem, look at this.. People are simply irresponsible, and given access to credit, they’ll abuse it if given the chance, and excuses, this time it’s “the alcohol made me do it!”
“What, gentlemen, is the crime of robbing a bank, in comparison with the crime of founding a bank?” – MacHeath at the bar, in 3-Penny Opera.
Should politicians help out banks? Only if they want it apparent which banks they were bought by in the first place….
The current situation stems from people who don’t have a sophisticated grasp of financial markets operating in them using property. This is dangerous, as property is relatively expensive compared to income. Their poor choice is partly due to the absence of a good pensions system to save in. That has been a long standing government error.
Interventional tactics by the government after the disaster are both inconsistent with their pre-disaster light-touch stance and betray their lack of vision that the disaster would occur. The latter does not encourage me to think they will make a good job of any fix. Indeed their fix is poor:
That ‘fix’ equates to spreading the losses over time and to people who did not incur them. Apart for the unfairness of this, it will slow the economy for a long time as normalisation of the debt takes place. Better, a quick brutal correction to let the unwise get a good understanding of where they went wrong, but more importantly return the economy to a sound footing quickly, from which even the foolish investor may recover.
I personally favour a more interventional strategy, because residential property is too important a resource to be used as a tool for speculation. Without such control a new generation of fools will emerge to make the same mistakes again.
Most of us are fools and we are lead by blind fools.
Theoretically, I’m completely against helping out the banks. They should have known what they are investing in and every little child learns early on that with great profit comes a high risk. But then again… it’s not just us ordinary citizens who have their money in the bank (you name which one, it doesn’t really matter), but also the politicians – and they really don’t want to lose their savings.
While I was reminiscing about this, a thought occured to me: Why has nobody ever invaded Switzerland throughout the centuries? The answer is obvious enough: because all the hot-shots had their money and their treasures parked there, and noone wanted to risk losing it…
It’s kind of funny that the entire crisis the result of (1) political correctness (2) stupidiity and (3) greed.
I’ll start with (2) stupidity. This was the mistaken assumption of both borrowers and lenders that real estate values can only go up. Borrowers could get their ARM, and at the end, they could sell, and make a profit, because duh, real estate only goes up. For the lender, if the buyer defaults, you have this appreciating asset, so you can just foreclose and get the money that way. Reality hits, and values drop because they weren’t based upon something rational. They were going up because people could borrow more and more money. So if people have more money to throw around to pay for property, the demand goes up, hence the price goes up. Irrationality can only go on for so long.
(1) Political correctness. most of this situation is due to the “sub prime” market. Meaning people with not great credit. People with not so great credit shouldn’t be getting loans period, let alone for mcmansions that they cannot afford. There were accusations that banks were racist because they wouldn’t lend minorities money, because many minorities tended to have no credit, or bad credit due to historically low incomes and the consequences of that. But in reality, you can have bad or no credit regardless of your ethnicity. However, allegations were made that banks were discriminating against ethnic groups because they would use credit scores to protect themselves. So banks changed and started loaning out the money because property values were booming, and hence we go back to stupidity. It was never about ethnicity, it was always about credit score. Banks don’t want to lose money.
(3) Greed. This is obvious. The banks wanted to make money, the borrower wanted to make money by selling a house at a profit, rather than viewing a home as a place to live, long term. I’ve met tons of people who thought this way, viewed a house as an investment rather than their home…
The next crisis will be student loans. You’re going to have women’s studies majors, philosophy majors, and history majors with $100,000 debts straight out of university.
I think Steve’s points 2 & 3 are absolutely bang on the money – if you’ll pardon the pun !
Don’t know enough about the specifics of the US or UK banking systems to make an informed comment on 1.
Banks make money by lending it – as a bank, if you relax your lending criteria, voila, you can lend more and earn greater profits for your shareholders. That’s all fine in economic boom times, with geared asset prices rising, but clearly that cannot continue indefinitely. Sooner or later a correction is inevitable.
However, the situation is so out of kilter with long-run sustainable levels, that central intervention to assist a measured downgrading in asset values and lending must be helpful. A very serious alternative is a collapse in asset prices, a collapse in a few more banks, a collapse in confidence – those are all common features of a very severe recession or some would argue depression – no one should wish for that.
i think that politicians should help banks in a VERY LIMITED
basis…..
Not by giving them the kitchen sink….
Dennis from Madrid, United States of America