Are we in the UK about to suffer from another credit crunch with the whole financial system once again gumming up due to lack of liquidity?Well the New Economics Foundation seems to think we will be in just that position next year (http://www.neweconomics.org/press-releases/banks-set-to-demand-fresh-bail-out-in-2011-warns-think-tank).
They argue that, despite what amounts to £1.2 trillion being pumped into the whole banking system, the banks will be coming cap in hand to the taxpayer again because if a £25 billion a month funding gap.
This is based on their report 'Where did our money go?'
In the report they point out that there has been:
- shocking lack of information in the public domain about where the money has gone, how it has been used and what has been the ‘quid pro quo’ for the support.
- higher interest rates than before the crisis for firms and households, including on mortgages, despite the Bank of England cutting interest rates to historic lows.
- A stagnation in lending to households and firms despite the bail-outs.
This all comes as no surprise to most people who have been keeping abreast of these matters since it all started. But the report goes on to say that there now appears to be a 'funding cliff' over which the banks will tumble in 2011 unless they are bailed out. The report further asserts that, if the government are aware of this it would explain the severity of the upcoming cuts. i.e. they are preparing government (taxpayer) funds for a further round of bail-outs. But exactly how they derived this monthly funding hole is unclear to this reader.
One thing they do point out is that nowadays with the scale of numbers being bandied about £25 billion sounds like small change. But as they say it is equal to half the education budget or a quarter of the health budget, more than the total value of our utility providers and three times what we spend on agriculture, hunting, forestry and fishing. Not a small sum by any means! So a funding black hole of this size would have serious repercussions.
A lot of what they say in the report makes sense to me, except for the funding hole. For example they ask why are we concentrating on half a billion quid's worth of annual fraud and admin errors in social security, when every year there's £25 billion lost on tax avoidance and £70 billion in tax evasion?
One thing to bear in mind about lack of public information on the economic bail outs, governments and banks rely on secrecy to maintain our economic stability. If we threw open the doors completely I suspect the speculators would have a field day.
The trouble is though, to maintain the effectiveness of this secrecy the public and the people who invest in this country need to have confidence in us and therefore must trust the government of the day to do the right things. This trust has been severely tested and in some place broken because of the actions of the previous government.
Are we on the verge of another breakdown? I'm not sure we ever really left the one we were so recently told we were recovering from. But the public are now in no mood to throw more money into the banking money pit. Look around the vast majority of comments made by readers of related articles in the on this subject and you see a common theme – 'Don't Bail Them Out This Time, Let Them Fail'.