Monday, January 19, 2009

Today was a big day

Today was an historic moment. The RBS and its barely comprehensible loss signaled the end of an era. The days when finance was the engine of the UK economy are definitively over. The UK banking sector has become the 21st century equivalent of coal mining; over-staffed, over-paid, and profoundly unproductive.

When the RBS announced that loss, it shot a fatal arrow straight into the heart of the UK banking sector. This loss is equivalent to 2 percent of GDP. Think about that; one bank in just one year lost 2 percent of national income. Moreover, the bank's balance sheet is almost as large as the UK GDP. This is a bloated and obese behemoth. It can not survive in its present distorted condition. Everyone knows it and that is why the share price collapsed.

What is true of the RBS is also true of all UK banks. They are too big; they employ too many people and their funding model is unsustainable. No amount of government intervention can negate that reality. The government may have access to our collective handbag, but we as a nation simply don't have enough money to cover up the losses of our banks.

So what happens next? The government will continue to prop the banking system with liquidity. Whatever Brown and Darling might say in public, they now have the minimalist objective of preventing total collapse. It is simply inconceivable that lending could return to the 2007 levels. The heady days of near limitless credit growth have gone. The government would be doing well if it simply avoids another financial sector meltdown.

The UK banking system is going to have to shrink. The only question is whether this will be an orderly process. As the system goes into terminal decline, asset prices are going to adjust to a new and much lower equilibrium. Houses, commercial property, art, and football teams are all about to get a lot cheaper. This adjustment will be very unpleasant.

What about the real economy? This too will adjust, and it will be painful. The bulk of the adjustment will be in financial services, which has just begun to shake out all that value-reducing labour that created this appalling banking crisis. Currently, the sector employs about 6 million people. Don't be surprised if that number falls by half.

Over time, these people will find new and productive forms of employment. Wage rates will adjust downwards, and the UK manufacturing sector will slowly revive after years of neglect. The UK economy will again start to make things. Eventually, the economy will start to grow and we will recover from the terrible wounds inflicted upon us by our banks.


  1. Over time, these people will find new and productive forms of employment.

    Where are they going to go? McDonalds?

  2. It's unusual for you to be so optimistic, Alice.

  3. Problem is the government will not get out of the way and let things adjust.

    Thus problems will drag on and we will lurch from disaster to disaster. Deflation to inflation then hyper inflation then deflation again. It will take a minimum of 10 years to sort the economy out!

    Where is Mrs Thatcher and her handbag when you need her ???

  4. "Whatever Brown and Darling might say in public, they now have the minimalist objective of preventing total collapse"

    I disagree- the concern all the long has been to protect their own careers. That's the reason for their spectactular mismanagement of each mini-crisis, pumping in cash or gerrymandering crappy deals to avoid screeching headlines and in particular the venom of their estwhile high-level "partners" in the banking business.

    The result- a protracted crisis of valuation of all banking assets.

  5. Oh, and by the way Alice- you're fabulous, did you know?

  6. I too am having an optimistic day.

    Despite the joys of the far left I think a smaller state, lower taxes will be a necessity, we will have no alternative, as the good lady Margret said "rejoice"

  7. I look forward to all those tasty ladies who I see power walking and keeping fit for their high-stress bank jobs, turning to porn, escort services, extreme gold digging, and come hither job interviews: good times coming as Dick Cheney says.

  8. The Bank of England the root cause of a 300 year old debt based system, which spawned every other central bank in the world must be abolished. The scam where it can write a cheque from nothing and then lend to the government at interest, shafting the saver by inflation is ended temporarily because we have deflation or a debt implosion. Abolish the monster while it is down and never let it rise again. The state can issue its own currency backed by gold not by debt. Gold is settlement, was and always will be.
    Then you can start again from scratch. Otherwise this thing will linger on.
    The Keynesian measures already taken have been a total disaster. The country is now knee deep in debt, with hardly any productive capacity left.
    Where we are now was inevitable and forseeable years ago by anyone capable of using a pocket calculator.
    The nanny state is just about in ruins, and good riddance. The welfare state cannot be sustained any longer. Let's get back to people being responsible for themselves, and families looking after their own. The only job for government is to hold the balance points

  9. Over time, these people will find new and productive forms of employment.

    Actually it's a lot worse than you imagine. In order to stabilize the economy these people would need to find employment in either exporting or import-substituting industries. Let's assume they have skills which make them potentially competitive (doubtful in many cases - *cough* media studies *cough*), and that we can look past the immediate crisis to some sort of global recovery; even then they can't actually be internationally competitive because of the crushing costs piled on by tens of millions of unproductive government employees.

    Gordon Brown hasn't even got to square one in terms of addressing this problem, in fact he's still rowing in the opposite direction as fast as he can. Just consider how far the UK is politically from a dramatic reduction in the cost of the public sector to understand how far a real upturn is.

  10. "The only job for government is to hold the balance points": during the transition, though, it would be handy to have am army, a police force, a health service, an old age pension and some way of feeding, clothing and sheltering the poor. It's going to be very grim, and it's madness to risk bankrupting the state, which seems to be the risk that Brown is taking. I've known for a few years that we'd face calamity, but it's still mighty unsettling to see it all happening before my very eyes.
    P.S. Top stuff, Alice.)

  11. Of course, if we had a competent government, they could force our insolvent banks through some complete and rapid bankruptcy, float off some solvent successor banks, and - if done well - we'd have a head start over the Yanks and Continentals and might be left with a smaller but thriving banking industry.

  12. Gold is settlement(22.14)

    Gold is a falsehood in itself a contrived measure and an artificial standard defined by taste. I find it gawdy and I don't wear it - it has few practical purposes. I'm far more concerned about how we feed 60 million people from our own natural resources when there is a just-in-time method of importation going on. (Churchill was worried about 38 million mouths at the time of U boats.)

    These are some of the things which need to be faced down before recovery can even be contemplated:

    -Cutting back on government jobs
    -reneging on government pensions
    -halting immigration
    -curtailing benefits
    -withdrawing from Iraq/Afghanistan
    -cancelling the 2012 Olympics
    -cutting red tape on businesses

    Can we compete with the Chinese in manufacturing as Alice suggests ? Well, only once our living standards have fallen to meet theirs.

    Dare any comtemporary, mainstream politician tell you these things ?

    Oh well.

    Tough times ahead.

  13. We will need such a change in our country as we haven't seen for 200 years to revive a manufacturing based economy here. We have trained few people in engineering or sciences for over a generation. We are regulated to hell and back, and taxed and fined ( for such trivia as not sending in a form once a year for instance ) to high heaven.

    We have to compete with people who work for peanuts abroad, in unregulated factories, in Victorian conditions. We cannot even get workers here who will turn up on a monday morning ( often cited to me for the local firms' Polish preference - they may be pissed, but they are here at 8AM monday morning).

    We need a severe reality check. The standard of living here is about to plummet. And I too wonder how a country that imports 2/3 of its food is going to pay for those imports.

    Still, at least our MP's will survive. Well most of them. The handful of Labour ones who keep their seats despite what they have done, and their successors who in all fairness probably won't make much difference anyway.

    I knew, indeed predicted that this was coming, but I didn't imagine that I'd be made to paying for the mistakes of others who stole a good deal more than I earned in that boom.

  14. Coo, well done, Alice... you almost sound like a deflationist today. I knew you would eventually see the light. :)

    The question we should be asking is this, however: Is the write-down large enough for this year, and will next years' write-down be substantially larger?

  15. I am not sure about your confident predictions of recovery Alice, although I would like to believe in them. However, as other commentators here have rightly pointed out, Britain needs a reality check, for too long we have gone along thinking the world would pay us for saving them (1939-45).

    For my part I feel until the State is forced to rein in its profligate ways it is unlikely to happen. Default on our debts would do it, but it is a shameful line of thought to consider.

  16. From anonymous above..."I knew, indeed predicted that this was coming, but I didn't imagine that I'd be made to paying for the mistakes of others who stole a good deal more than I earned in that boom."
    That sums up my feelings too - I feel very bitter and angry that this government continues to shaft the prudent and keep feeding us pure lies every single day - getting tired of hearing that idiot Brown droning on how he was doing the job and would guide us through these turbulent times and he was taking extraordinary measures.
    I wish someone WOULD take extraordinary measures and shoot the bastard !!!

  17. Over time, these people will find new and productive forms of employment. Wage rates will adjust downwards,

    Nope, the opposite must happen:

    Salaries must go UP so people can afford to pay for locally-produced goods. To achieve that there must be barriers for non-local goods; i.e. globalization will die (or the government will die in the next revolution).

    There is no way whatsoever that Westerners within the time span less than one generation be made to compete on the level of Chinese salaries and working conditions!

  18. Anonymous 00:22: Absolutely correct. Somewhere we collectively got the idea that we all deserve to live in infinitely better conditions than the vast majority of the world's population.

    The only way you get to do so is to earn it - to sell stuff and services to the rest of the world that they need/want and produce real wealth here in the UK. We used to do so once, but have been living off our past wealth for too long now, since WW2 really. The cupboards are bare.

    We now need to earn our keep in the world economy, or cut our spending to suit our level of income. We cannot continue to borrow to maintain our living standards. Simple as that.

    Government spending must fall, wages also (either in actual terms quickly, or slowly via erosion by inflation). Bureaucracy must be removed from business, especially business that export. If that means lower "elf'n'safety" and environmental standards, so be it. We cannot expect to live and work in a pristine, safe, environment while Indian or Chinese workers die from pollution and factory accidents to provide our cheap goods.

    Bottom line - the future will be significantly harder for us all, financially, and physically.

  19. @ Nomenklatura - no need to over egg the pudding. the UK public sector employs around 5.5 million

    all these others desperate for us to compete with low cost manufacturing in no regs china/india, would you be happy seeing your freinds or family in such working conditions?

    lets leave them to make the low value tat. we need a sea change in attitude whereby people stop going to westfield on a saturday to buy low value tat and sticking it on plastic just because they are bored.

    moreover, we need real investment in engineering and science that will enable innovation and manufacturing of high value exportable goods.

    anon 22:13. what a pr@t. why is that comment still here

  20. @Roym

    Sorry. I live in the US where we actually do have tens of millions (emigrated here from the UK 20 years ago, best decision I ever made).

    The point stands though that GB does not understand that 5.5 million is a burden which slashes everyone else's chance of being competitive.

    I agree that the UK should be headed towards a focus on high value added manufacturing. The point is that it is not, and that if that continues then low wages all around will be the result until some new government tackles the toxic national cost structure (i.e. the cost of doing business in the UK).