Busted: Bankers and The Global Economy

April 21, 2008

British Unroll Banking Solution Similar to U.S.

The Bank of England has decided to swap the risky mortgage assets of UK banks for at least 50 billion pounds of government debt. The UK doesn’t want to see lingering negativity in their market and are looking for a way to shortcut the process.

Central banks everywhere have fought valiantly to bring confidence levels up in the marketplace. Despite eight months passing and billions spent, banks remain afraid to lend money because they don’t know the exposure of fellow bankers to sub-prime securitized U.S. home loans.

New UK Prime Minister Gordon Brown has faced popularity problems as the British economy shows signs of impact from the United States securitized mortgage debacle. The Prime Minister has decided to act in a decisive manner, bolstered by the success of measures in the U.S. economy in a far more grave set of circumstances.

The government is preparing to meet with lenders tommorrow to reinforce the need to pass on interest rate cuts and help borrowers with problem mortgages. U.S. banks have been relunctant to pass on any savings to borrowers, instead using the difference to pad their bottom lines. U.S. banks have been slow in handling the mortgage situation.

Banks worldwide have become fearful of the interbank lending system in place because of the large numbers of securitized mortgages on hand. Instead of risking continued confidence problems, the UK government has decided to take on the bad bonds as debt.

The difference is that UK government is “holding the bad securities” for one year while exchanging high-rated government bonds in an effect to spur liquidity and bolster interbank lending. The central Bank of England has the option of extending any term to three years.

The Brits are being far more astute and savvy with the banking problem. Instead of involving themselves in a massive bailout or give-away, they are evaluating the actual value of the securities. The assistance that bankers receive will not necessarily be on a pound-to-pound basis.

The Bank of England has increased the money supply by 42% since August of 2007. Unfortunately, the heat of inflation could begin to show by continuing to pump credit into the national banking system. Instead, the Bank of England is exchanging the bad securities in an effort to promote interbank lending and to promote national liquidity.

It’s refreshing to see a little restraint and common sense being used by reasonable government officials.

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