Massive bailout for banks: Get ready for inflation.

harryhound

Does this mean that the banks have sort of gone to the pawn shop, sort of controlled by Chief Accountant Darling, to pledge some of their better mortgages and credit card accounts, mainly for a 12 month loan?

I'm not quite sure how much they appear to be paying as interest?
(as against the discount to the perceived value of their pledge, with a call option from the pawnbroker if he discovers the pledged item is 9 carat not 22).

Now what will they do, feeling a bit more flush? Try to keep up appearances hoping to for a union with other distressed gentle folk?

Benefits_Blagger

"The risk of losses on their loans remains with the banks. "

this is the bit i am having trouble getting my head around, if the risk still remains with the bank, then what differnce does it make ?

the only way this can work is the transferrence of risk, that is the whole point of it. if the risk still remains with the bank, then the status quo remains, i.e. no-one will lend to another bank because of the risk!

harryhound

!!!!!!? wrote: »

Ever made a bet that you didn't win?

So did you think to take your betting slip to the government and have them pay out anyway?

That's crazy talk surely - why on earth would the taxpayer bail out someone who had been so stupid and reckless with their money?! No government would do that....

... unless of course, you are the UK banking system and your bad bets totalled tens of billions of pounds putting you on the brink of insolvency:

http://www.reuters.com/article/marketsNews/idUSL169544420080416

LONDON (Reuters) - The Bank of England is close to finalising the terms for an intervention in the mortgage market, the Financial Times reported, after leading bankers warned the government on Tuesday over the growing strain on small lenders. Citing people familiar with the proposal -- which still needs government approval -- the paper said on Wednesday that the plan would see the Bank would swap UK mortgage-backed securities for government loans for a period of one to three years.
The newspaper said the Bank would not accept mortgages agreeed after the end of December 2007.


Essentially this is as near as dammit to monetizing bad debt. It is going to be massively inflationary meaning that your savings and salaries will be buying you a lot less in years to come. On the other hand, it might halt the slide in the housing market. Maybe - but only by making everything else so expensive that houses look vaguely good value.

And never mind what that does to the monetary system as a whole.

Originally thought to be 50 billion of our money, it looks like it will now be 100 billion that you and I are underwriting.

Perhaps they have discovered that the the situation is twice as bad as thought a month ago?

WTF?_2

harryhound wrote: »

Originally thought to be 50 billion of our money, it looks like it will now be 100 billion that you and I are underwriting.

Perhaps they have discovered that the the situation is twice as bad as thought a month ago?

Nah - it was said at the start that the 50 billion was only the initial amount and that the final bill could be in excess of 150 billion pounds although that wasn't widely reported by the popular media.

You have to wonder how, after years and years of absolutely massive profits and only months after paying out tens of billions of pounds of bonuses, the banks can be in such a bad way.

Still, that just about sums up our society of recent times. A prolonged period of apparent plenty which was really just a stupid debt fuelled blow-out by people who should have known better.

dopester

You only have to look at the USA news.

Finally... finally the sheeple are coming to realise the problem is not inflation.... but full-on deflation.

You ought to look at the US to see what direction we are heading in.

msnbc shows their news online, in video clip after clip, and you can see it playing out.

msnbc.com video: Bailout or wipeout?
http://www.msnbc.msn.com/id/21134540/vp/26978411#26972677

Gets interesting a few minutes in with studio discussion. Even Cramer, the fool - having not long ago told ppl to pile in to Wachovia shares just before they went under - now recognises it as "a vicious deflationary spiral." Same for the studio panel seeing it. Business can't meet payrolls, CEOs cutting back on staff levels - next year "your show will be all about layoffs".

And clip after clip, showing the problems people are having in obtaining credit, and its consequences to the backbone of America, small businesses, but also major businesses who don't have strong cash balance sheets and rely on borrowing... hitting all parts of the consumer economy.

Local government budgets in crisis from lack of revenues, roads needing repairing but no money, police forces and fire-stations under threat from lack of funding.

All those problems are coming here, no matter any number of bailouts. Bailouts don't create capital. Only the market can create capital by valuing assets above liabilities.

Bailouts wont bring back easy lending to people or companies that have negative prospects, as the banks still need to write loans which are repaid and are profitable.

They've already learned the consequences of not doing that.

The bubble needs to deflate. Even with new money to lend, banks won't lend to poor credit risks, or any sector they fear has a difficult trading future, and loathe to lend to buying assets which are falling in price.

dopester

Benefits_Blagger wrote: »

"The risk of losses on their loans remains with the banks. "

this is the bit i am having trouble getting my head around, if the risk still remains with the bank, then what differnce does it make ?

the only way this can work is the transferrence of risk, that is the whole point of it. if the risk still remains with the bank, then the status quo remains, i.e. no-one will lend to another bank because of the risk!

Agreed. To other banks, to shaky credit-risks, and to companies/businesses/sectors with negative trading prospects.

WTF?_2

dopester wrote: »

You only have to look at the USA news.

Finally... finally the sheeple are coming to realise the problem is not inflation.... but full-on deflation.

Deflation is inevitable after a decade of inflation.

But: The problem is what the Fed and other Central Banks will do to fight it.

There's no way that they will want to allow a deflationary spiral to develop - it would be disastrous for the Western govts which are heavily in debt. Therefore they're likely to try all manner of disastrous and misconceived inflationary schemes to try to stop it.

(Watch out for the Chinooks overhead dropping bundles of cash..or certainly the financial market equivalent)

My guess is we'll end up with stagflation as a result of all this. Watch those essentials shoot up in price and see how quickly our Western countries slip from 'top dog' to 'impoverished'.

GDB2222

“FOR these ten marks I sold my virtue,” were the words a Berliner noticed written on a banknote in 1923. He was buying a box of matches, all the note was worth by then. That was in the early days. By November 5th, a loaf of bread cost 140 billion marks. Workers were paid twice a day, and given half-hour breaks to rush to the shops with their satchels, suitcases or wheelbarrow, to buy something, anything, before their paper money halved in value yet again.

The above is from the Economist website. My father lived through this period and told me how his father (a doctor) would finish his surgery in the morning and immediately rush out to buy things with the fees he had received. The term used was Wertsachen 'articles of worth'. Apart from food, it didn't matter too much what was bought. The idea was not to hang onto the currency for more than a few minutes.

The trouble now is that, because of the cheap loans that have been around, the prices of a lot of Wertsachen have been bid up to silly levels. The trick in the coming recession and inflation will be to spot when these items have stopped going down in price and have started to appreciate.

dopester

!!!!!!? wrote: »

(Watch out for the Chinooks overhead dropping bundles of cash..or certainly the financial market equivalent)

It is a multi-trillion deflationary vortex.

I think the helicopters will remain grounded. :rotfl:

Were they to fly, for the holders of trillions in bonds, the threat of inflation devaluing their wealth/holdings would be real. The market would adjust by demanding higher rates. Bond prices fall. Economy slips in to a worse stall.

Wealth would be driven in to gold bullion and similar which are more difficult for political authorities to exercise control of . In all, deflation is very painful to a sick economy, but helicopter money just outright kills the patient.

harryhound

Plus ça change (plus c'est la même chose).

https://forums.moneysavingexpert.com/discussion/3531621