Thursday, 9 October 2008

on your bank may be repossessed if you do not keep up repayments on your bailout

Or, the taxpayer will be screwed if you collapse - now more than ever.

Economic theory has it, that as a firm increases its output it approaches a critical point. Before this point average costs decline, after this point they increase with each new unit of output. The reasons for this are usually due to the managerial and administration problems of controlling large scale operations. UK plc. was already past this point. Diseconomies of scale existed in financial regulators such as the FSA, leading to, among other things, the lack of foresight in seeing that Northern Rock was about to collapse, or that the financial system would get clogged due to a decline in interbank lending as a result of overgenerous mortgage deals etc.

Gordon Brown and Alistair Darling have answered by part nationalising the banks. Forget passing that critical point, diseconomies will now be so prevalent that maintaining a watchful eye over the £500bn, the total package reported as being on offer to the banks, will become more difficult at such a critical time. Of course they had to do it, they have elections to win. Public Sector Debt will now stand at approximately 50% of GDP and this doesn't include debt hidden away in PFI schemes, or the interest payments that will have to be made to all bonds and treasury bills issued.

Alistair Darling has also falsely been promising us that the government will get its money from this part nationalisation back. No loan is guaranteed, all 8 banks could collapse tomorrow losing us everything. Just as UK plc. could default on its loans and go bust.

In a period of recession, the government should pursue an expansionary fiscal policy, namely tax cuts. This would stimulate aggregate demand. The market is more efficient at restarting the economy than a government ever could be - what Gordon Brown and chums should be doing is tightening up regulation (not necessarily creating new regulation) and keeping politics out of private enterprise. Nick Clegg is right to call for tax cuts now, as they are needed, what isn't needed is an increase in the level of national debt, which will have to be paid for by tax rises in the future to cover interest payments.

Whatever happened to the principle of high risk = high return? This country has gone through a period of bad parenting, where no one has had the cojones to say "you cant get something for nothing". Which rational person, in their right mind, would sign up to a 120% mortgage (read death tax)? Short selling worked for some, but short buying is even riskier.

Similarly, if you want the best return on your savings then don't invest with someone offering the standard rate of interest, if you want to be guaranteed your money will still be there in a year's time then do. Don't then run crying to nanny when you invested in turning helium into gold and it didn't quite work out that way...

For months we have been told about house prices being unsustainably high, now we have a fall in house prices and everyone appears to be scrambling for the life boats to get across the proverbial moats surrounding an Englishman's castle. There is nothing wrong with negative equity unless you are planning to move house and as the chances are you won't be able to get a mortgage at the moment anyway, lets all just sit back and allow the economy to readjust.

Bankers seem to think the world owes them something, when it is they who owe the world everything, literally. They know this, but governments continue to remain in awe at Leviathans bigger than they.

Now that we own the banks, can we have our overdraft charges back please?


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