economic situation is dire

[Awol]

Since the debts cannot be absorbed the new plan is that some will be turned into losses, with a negotiation between the banks that unwisely took on Greek bonds and the Greek government that cannot repay them

The irony being that during the market flight from risk in 2008 banks were encouraged to buy up national bonds!!

The other side of the plan is more interesting: a larger bailout pot, now tastefully renamed the European Fiscal Stability Facility. This will be available to support governments whose national debt is so large as to undermine market confidence.

Zee Germans have said that the EFSF will not be expanded beyond the 400 billion euro pot they have just agreed to and with Italy alone in the hole for a staggering 2 trillion euros it's not enough to stabilise the situation. In short it's not going to work.

[LondonLax]

This is the most interesting question of all. We know that the Bank of England is under pressure to quease more money into the economy at any time. Some of that money has previously been spent buying back our own debt; a similar process has been undertaken by the European Central Bank to buy Italian debt. So why not go the whole hog? Could it be that this would make it clear that there really is no need to create money as debt in the first place? That money could be directly spent into the economy as needed. The reason for resisting this is the power of those who live by lending money: without debt they would have to go to work like the rest of us.

It is telling that no country anywhere has ever been able to make this work in pratice. You'd think that if it was a viable option for running a country then some government somewhere on this planet would have made it work and taken the glory.

[JulieB]

The best bit of news to come out this week IMHO that might stimulate some activity is that the UK government are going to start

buying corporate debt for SMEs.

That's a pretty big step that the government are going to start lending effectively directly to businesses and not leaving it to

the B of E and by-passing the banks altogether.

Not sure how this is going to work in practive but it looks like SMEs are going to be able to issue corporate bonds, perhaps loan notes etc although the regulatory burdens, may be horrendous for a small businesses, so surely there would need to be some simplification?

Alistair Darling tried to twist Mervyn King's arm to buy corporate debt but he shyed away from this because he didn't see the B of E

being able to assess risk... ie which companies were a good bet.... which weren't.

How it will all pan out, we'll just have to wait and see, but this does go on in other European states.

It will interesting to see some hard information about this, but I doubt the banks will be bypassed. I imagine SMEs won't be able to issue their own bonds, and government won't be able to assess their plans and the associated risk. There will be intermediary roles for others to group a lot of SME loans into some sort of package, get it assessed and risk-rated, with the loan coming from the banks. The government is guaranteeing the loan rather than making the loan, from the very little we've heard. Securitisation with the government underwriting the risk?

From what I understand this is not going to involve the banks. Government has been underwriting loans and grants for SMEs for years through the banks... but this appears to be a bit of a sea change iinvolving the Treasury directly buying corporate debt as apparently goes on elsewhere in Europe.

There's more on this in the Guardian article on Osbourne's speech involving plans for "credit easing" instead of concentrating solely on "quantitive easing"

The credit will be provided by the Treasury through an arm's-length operation direct to companies, with the Bank of England acting as the Treasury's agent. Under the scheme, the Treasury will buy small firms' corporate bonds, providing cash direct to struggling firms unable to gain funds from the banks.

However that was only the announcement... how this pans out we shall just have to wait and see.

[LondonLax]

The BOE have announced they are printing another £75b of extra money. The pound has dropped again on the news, which should mean inflation goes up again as a result

[snowychap]

The best bit of news to come out this week IMHO that might stimulate some activity is that the UK government are going to start

buying corporate debt for SMEs.

I think we'll have to wait until the detail comes out at the end of November (I think it's then).

Some of this piece (for example), whilst broadly supportive, does express some caution; most is about the potential for misallocated capital and if the funding comes from short term borrowing.

[JulieB]

The best bit of news to come out this week IMHO that might stimulate some activity is that the UK government are going to start

buying corporate debt for SMEs.

I think we'll have to wait until the detail comes out at the end of November (I think it's then).

Some of this piece (for example), whilst broadly supportive, does express some caution; most is about the potential for misallocated capital and if the funding comes from short term borrowing.

Well no doubt some quango sub committee of the Treasury will be set up with consultants charging £2K per day to advise on the process of all this and analysing how the risk of SMEs can be measured in the interim......which will of course spend oodless of the budget set aside for lending to the actual SMEs....

Still I suppose that stimulates the economy in one way by lining the pockets of consultancy firms, whose staff can then afford to upgrade their flatscreen TVs and satellite systems.

Heck I sound so cynical these days...

[CarewsEyebrowDesigner]

Bah, quantitative easing, another sure fire way to do arse all for those in need, but a jolly good way to ensure there will be caviar at the christmas do's.

[JulieB]

Con't get me started on quangos, quantitive easing and Xmas do's.......

I'm treasurer for a local Charity that assists in local projects for the community around Appleby and I couldn't beleive it when

the Chairman told me they were not allowed to apply for funding for projects themselves from a regional development fund but the monies

could only be used for consultancies and feasibility studies...which are often unnecessary anyway and in come cases a huge percentage of

the budget for the actual projects themselves!

No wonder UK PLC is going to pot!

[peterms]

This is the most interesting question of all. We know that the Bank of England is under pressure to quease more money into the economy at any time. Some of that money has previously been spent buying back our own debt; a similar process has been undertaken by the European Central Bank to buy Italian debt. So why not go the whole hog? Could it be that this would make it clear that there really is no need to create money as debt in the first place? That money could be directly spent into the economy as needed. The reason for resisting this is the power of those who live by lending money: without debt they would have to go to work like the rest of us.

It is telling that no country anywhere has ever been able to make this work in pratice. You'd think that if it was a viable option for running a country then some government somewhere on this planet would have made it work and taken the glory.

Governments did used to create money (most people think they still do), but gradually gave that power away, us in 1694, the US and Canada in 1913, others at various times.

Why? I think most likely because our rulers were and are members of the very group who benefit most from this arrangement, and also many politicians don't seem to understand how it works, with their fretting about the deficit, their concern about "the government printing money", their endless comparisons of the economy with a household, their line about "we've run out of money" and the rest. Some of them represent financial interests, some are controlled by financial interests, others are hoodwinked by those interests.

Rather than think of creating debt-free money as unworkable, perhaps we should think of the current system as unworkable. If money is created as debt, then the repayment terms require more money to be repaid than exists - so more must be created, but that in turn creates a greater debt, greater than there is money available to pay it back...

Mr Cameron tells us that when you're in debt, it's no answer to borrow more, because that makes things worse. I suppose he doesn't recognise that this is the foundation of the entire economic system we struggle under, and the root of its periodic crises. Perhaps he really believes, despite his first in PPE, that a big boy called Gordon done it and ran away.

[JulieB]

Interesting video of Fox News interview with two US Congressman about shady quantative easing in the US (First bit is about illegality of US Libyan war interference)

Apparently Fox Business and Bloomberg have filed a lawsuit against Ben Bernanke's Federal Reserve for creating no less than $3.3 Trillion dollars, which was never disclosed publically - and was lent to a few US banks, global businesses and foreign banks. So far the Fed has been forced to release documents they at first tried to deny existed and hide.

[CI]

How does an extra £75 billion get introduced into the system ?

Who gets the money ? Where does it go ?

[peterms]

How does an extra £75 billion get introduced into the system ?

Who gets the money ? Where does it go ?

Brief explanation here. The Bank of England creates new money, electronically, out of nothing, and with that new money

...Basically, the central bank buys assets, and those purchases in effect put money into the markets. So, out of the £199.4bn it has bought so far, nearly all – £198.3bn – have been government bonds, also known as gilts. The bank makes all this data available on its website.

Banks are the biggest sellers of gilts because the increased demand from a new mega-buyer (the Bank of England) increases their market value. Banks sell their gilts to the central bank because the higher price lowers the yield, which is a measure of the effective interest rate they receive. Instead of owning gilts, high street banks are supposed to seek higher yields by lending the money to first-time buyers to buy homes and other higher yielding assets...

But where it ends up, who gains and who loses, is not straightforward.

There is concern that instead of banks lending the money they get by selling these gilts to the BoE, eg lending to SMEs and the housebuyers mentioned in the quote, it ends up partly or largely in commodity speculation, pushing up prices for essential goods and transferring money from the poor to the rich. Discussed here.

Quantitative easing (QE) – the Bank of England's recession-busting policy of buying up billions of pounds of bonds – may have contributed to social unrest by exacerbating inequality, according to one City economist.

As the Bank of England considers unleashing a fresh round of QE, Dhaval Joshi, of BCA Research, argues the approach of creating electronic money pushes up share prices and profits without feeding through to wages.

"The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it," Joshi says in a new report...

It's a roundabout way of trying to tackle the problems the economy is facing. Since the biggest problem is the slump in demand coupled with unused spare capacity, the better course of action would be to act via fiscal policy not monetary policy, and put into reverse the policies being followed by Osborne. It is these policies which are making a bad situation much worse, by taking demand out of the economy at the exact time when stimulus is called for. But Mervyn King only has control of monetary policies, and can't change the course of action that Osborne has chosen to lock himself in to.

[Eames]

Its virtual money - a promise to pay that amount plus interest over a fixed period of time.

[CI]

In other words it forces/encourages more debt onto the poor to make the banks more money

[Eames]

No because its BoE money - not the Governments. They are two different entities.

[mjmooney]

OK, the BoE can make more money out of nothing (I thought that this is what causes rampant inflation, but we'll let that pass).

As I understand it, the idea is to boost the economy - Cameron had to change his speech about paying off the credit cards, because business wants us all to keep spending.

So, here's an idea - instead of giving all this new money to the banks, give everybody in the country a thousand quid, and instruct them to spend it.

I'm up for it.

[Genie]

I'm up for it.

I'd vote for that too.

[CI]

Must admit I am starting to worry about inflation and just the general cost of surviving spiralling up

Council tax, fuel, utility bills, food, rail fares all rocketing up

Feels very uncomfortable

[peterms]

In other words it forces/encourages more debt onto the poor to make the banks more money

In theory the banks aren't making more money. The BoE action of buying gilts reduces the yield on them, so banks switch to another sort of lending to maintain the interest level they were getting before - lending to housebuyers and SMEs, for example. They were supposed to be doing more of this sort of lending anyway, under Project Merlin, but that's not happened.

But yes, if more mortgages are offered, then people have more debt, and if some of the money flows into commodity speculation, the poor have less money and the rich have more.

[peterms]

OK, the BoE can make more money out of nothing (I thought that this is what causes rampant inflation, but we'll let that pass).

As I understand it, the idea is to boost the economy - Cameron had to change his speech about paying off the credit cards, because business wants us all to keep spending.

So, here's an idea - instead of giving all this new money to the banks, give everybody in the country a thousand quid, and instruct them to spend it.

I'm up for it.

Creating more money will be inflationary if there's no spare capacity in the economy, but we are very far from being in that position at the moment.

It would be far more sensible to spend the money through the government investing in things like repairing and insulating the housing stock, investing in renewable energy, promoting local and sustainable food production, any number of things that will reduce energy dependence and help to cope with the next energy crisis as well as creating useful employment. But that would require a bit of common sense, so that's out, then.