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UK bank bail outs, money pumps and governments guaranteeing toxic waste

Posted by Adrian on January 19, 2009

Most investors know by now that bank bail outs from their Central Banks and Treasury’s don’t do much, except a slight rally (on announcement) in bank stocks then down again. UK banks are a mess, with UK government reportable offering to underwrite UK mortgages from various banks, which essentially will shove more waste onto the Bank of England’s balance sheet and their treasury. US president Barack Obama has said recently that he wants the banks that receive huge chunks of what is left from the TARP monies to “not sit on it”, to start “credit flowing again”. Of course bank they will sit on the money, as they are business wanting to remain solvent and hopefully at some point profitable. In damaged and confidence smashed markets, money flows don’t move much at all. With governments kindly giving nice huge amounts to banks that should have been decimated off the face of the economic map – they are now just sitting tight, although with very little profit to show the markets. They (banks) can essentially sit this out when market returns to normality and that may be 5-8 years from now. Regardless in the meantime the country loaning or giving them money may have gone bankrupt.

Say for argument sake a bank/or banks start giving out credit again, via taxpayer reassurance and guarantees from their county’s central bank. The taxpayer (if inclined) could make the assumption (correctly) that the credit being pushed bank into the system is basically taxpayer funded. The possibility of consumers then taking on huge amounts of debt again (unlikely though) could be done in such a way where the consumer may feel vindicated if they default on that debt. In other words whilst credit is still being offered and I am paying for it via taxpayer funded schemes through central banks, who cares. Give me more!  I joked about this with a friend and envisioned (jokingly) taxpayers running up huge credit card payments then throwing the cards in bin and applying for more, since the governments are now underwriting bank debt, a continued cycle of credit busts.

Of course this is not going to happen, banks most likely will continue hording and as mentioned high risk consumers who are not credit worthy (that is pretty much everyone) won’t get loans.

Make no mistake this is government policy interference in the markets, which is short sited and dangerous. Account deficit’s, downgraded of government debt and eventual bust on US Treasuries and the US dollar. It is frightening what governments are doing to the economies. They are destroying their accounts and currencies; note Ireland recently threatening to pull out of the EU, unless the EU bailout Ireland’s economy (an indication that Ireland is potential ready to default on it’s debt). Government funding is going to be extraordinarily hard to obtain and since they are all going to run into huge account deficits, expect big hikes in taxes including savage cuts to essential public spending. Inflation no doubt will arrive again, even against a collapsing economy – with currency destruction now widespread, the USD could lead the charge into a currency collapse with the EURO hot on it’s heels. If the EU breaks up and the USD collapses further into 2009 – that will send a shock wave into the markets that would make Lehman collapse look like an entree.


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