Banking rebooted – keep your fingers crossed

The banking and finance sector has just experienced the financial equivalent of the blue screen of death familiar to users of older versions of Windows. 

What Gordon Brown has done is the financial equivalent of a reboot involving part-nationalizing the major banks.  To give credit where it is due, this is undoubtedly the right approach.  This is a relief; as recently as last week Brown was talking only of liquidity issues (meaning roughly that banks had too much of their assets tied up in long-term loans etc leaving them short of ready cash for day to day operations) even as it was becoming increasingly obvious that (for some banks) there was also a solvency problem (meaning that they had lost so much on bad mortgages that they were bust).  

In such circumstances the only sensible option is to recapitalize the banks but how it is done also matters.  In the USA Paulson’s plan is to do it indirectly by buying bad assets off the banks for more than they are worth (as has the Spanish govt this week).  The banks’ profit on such deals gives them new capital, but the taxpayer gets nothing.  US taxpayers were right to be scandalized and to call this ‘socialism for the rich’.  The alternative is to take preference shares (or equivalent) for direct injections of new capital which is what Brown has done.  It has the huge merit of giving taxpayers a big stake in any bank rescued, a big say over policy (including executive remuneration) and the very real possibility of a profit in due course when the govt eventually unwinds its position.

Will it work?  It should provided that global markets aren’t too spooked and panicky (which unfortunately may well be the case).  We will only know in a few days but the evidence will be that UK banks start lending to each other.   Keep praying, keep your fingers crossed or whatever you do; but don’t expect the stock market to recover any time soon – it’s falling in expectation of a pretty severe global recession, probably even depression. 

What if it doesn’t work?  Rinse and repeat, persuade others to do the same where necessary but don’t copy Paulson’s bad plan which already looks to be failing.

But, we should never have started from here.  While I am more than happy to give Brown his due for charting the best route out of this mess, he cannot escape responsibility for getting us into it in the first place.  It is the direct, and ultimately inevitable, result of the ‘market fundamentalist’ policies he and Blair have been following since 1997 and the Tories before that.

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4 responses to this post.

  1. […] DALLAS ISD Blog | The Dallas Morning News wrote an interesting post today onHere’s a quick excerptThe banking and finance sector has just experienced the financial equivalent of the blue screen of death familiar to users of older versions of Windows.  What Gordon Brown has done is the financial equivalent of a reboot involving part-nationalizing the major banks.  To give credit where it is due, this is undoubtedly the right approach.  This is a relief; as recently as last week Brown was talking only of liquidity issues (meaning roughly that banks had too much of their assets tied up in long- […]

    Reply

  2. But thats the whole cotton picking point; preference shares do not give the huge amount of power you invest them with. They do not give you a say over executive renumeration for example; that is the condition of the capital so its just like a loan condition.

    Reply

  3. I agree that Brown must accept a large share of resonsibility for the mess we are in that happened on his watch, both as PM and in particular chancellor. I also accept that some form of intelligent intervention is necessary, my main concern now, is that government does not get too carried away with “whatever is necessary” and allows time for the intervention to flow through the system. I have covered this in more detail in my article here: http://www.power-to-the-people.co.uk/2008/10/government-bailout-breather-reflect/

    Reply

  4. Posted by liberaleye on 9 October 2008 at 1:26 pm

    UK Voter,

    Good point.

    We really need the rest of the World, and in particular, the US to get their act together. The UK alone is almost certainly too small to stop the rot.

    Reply

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