Wednesday, November 12, 2008

Is This A New Stealth Tax ?

Let's get this right. Tell me if I've got it base over apex.

HMG give the banks big wodges of dosh in exchange for preference shares (with a high rate of interest) or lend the dosh and get interest.

The BoE then slash interest rates.

But the banks don't slash their rates to borrowers by anywhere near as much. Some haven't cut rates at all. "We are not charities" they say.

The money the banks are making by not cutting rates is being used to pay back HMG as quickly as possible, so that the banks can get back with all haste to the traditional dodgy asset valuation, inflated profits (due to dodgy asset valuation) and related bonuses.

In the meantime the banks nail the punters and pass the cash on to Gordo, who needs all the income he can get. Competition is long forgotten (the head of the 'independent' Competition Commission is the dog that doesn't bark), and by some osmotic agreement the few well-capitalised banks graciously refrain from lowering rates to lure customers from their weaker brethren - don't want another Northern Rock, do we now ?

The beauty is that the banks get nearly all the blame and Gordo gets nearly all the money.

OK, what's wrong with this picture ?


Revolution Harry said...

The one problem I can see with this scenario is that the Government doesn't have any spare cash. We already have a large deficit. The money 'given' to the banks must also have been borrowed, at interest. I can't pretend to fully understand the greater complexities of what is going on but I suspect it's the tax payer who'll come off worse, as usual.

This article might shed some light on your question.

Anonymous said...

Doesn't this always happen, the banks charge more for the money than it costs them.
The problem now is there there are too few banks, too few supermarkets, etc etc to provide proper competition to try to keep prices down without bankrupting suppliers.

The Fed does the same thing.
Fed Holds Interest Rates Low To Help Banks rebuild capital

The government doesn't have to borrow the money tho, they just print more, the biggest stealth tax is inflation.

TDK said...

The government haven't exactly taken the money from us so much as used deficit spending/borrowing to pay the banks. Therefore in paying it back early are merely reducing the size of the deficit/loan. Of course that's assuming the government would try to avoid a deficit in normal circumstances.

Certainly they have created a potential war chest.

Incidentally, the "dodgy assets" needs some qualifications. It seems that the initial credit crunch last autumn (2007) was caused by sub prime loans. Thereafter we have had a vicious circle of asset revaluation caused by the "mark to market" rules contained within Basel II.
EU Referendum has been very good on this. It is notable that Deutsche Bank recently declared a profit. This isn't because they avoided dodgy asset valuation but because the EU has suspended mark to market rules

TDK said...

Incidentally, I think Laban (of all people) should note the cultural aspects that have contributed to this crisis.

Let me start by noting a Dalrymple article from yesterday concerning Baby P. Whilst this superficially has no connection it does show that the culture today has a habit of dealing with potential problems by moving away from professional judgement and towards systems, procedures and form filling. That change has happened in banking too. When you take out a loan now, you are bombarded with paperwork which certainly wasn't the case thirty years ago. You are given a bit of paper that shows how your investment will grow if it achieves 4%, 6%, 8% growth per annum and you have to sign a form showing that the advisor has told you that investments might shrink. This is box checking and form filling.

Bank do this because the government told them they must do it to protect the customer. So yet another area exists where the government enfeebles the populace by taking responsibility away from the participants and replacing it with a spurious security.

Anonymous said...

Why not just let the British banks die and let vastly superior foreign banks like Santander take over?

Considering banks are supposed to look after other people's money, if they can't manage that money then the nation is better off if they go out of business.

Having forced everyone into having a bank account, everyone is now getting screwed by the banks.

Squander Two said...


If you haven't already, read Tim Worstall's piece here. The BoE base rate is not what determines the banks' lending rates.

When risk increases, spreads increase. Risk has increased somewhat. Spreads have increased. This is what you learn in the first week of a financial basics course. Quite why our supposed financial genius of a PM doesn't appear to know it, I couldn't say.

Anonymous said...

We live in a country where you are fined for not having a bank account (kiss a chunk of your wages goodbye if you don't have one).

So, therefore the government and the banks, have effectively enslaved us...we have no choice but to serve the banks.