Perhaps it’s just me, but i reckon we’re going to see a banking collapse in the UK pretty soon. The banks are obviously insolvent, and having been partially nationalised should be sheltered from the storm… but that’s not happening.

The pound is getting hammered, which in the absence of any major action in the bond / gilts markets is surely a proxy for the country as a whole. If there is a huge run on the pound (how huge would huge have to be considering what has already happened?) the UK could easily find itself in the same place as those Icelandic terrorists. Ah, justice.

The impression from what i’ve seen of Messrs Brown & Darling is that they believe that they can borrow their way out of any problem. (Insert joke about trying to dig your way out of a hole…) Which might well be true… for as long as the debt markets think they are good for it. But there is a tension here; interest rates are not divorced from the bond market, and if the cost of government borrowing goes through the roof, interest rates will have to go up. So, they’re going print money, which will put even more pressure on the pound, and drive more people to sell… Unless you have a fiat currency, this is a dangerous game to be playing. 

All this leaves the banks with a guarantor that looks more like a liability than an asset.

As many people are now saying, the only way forward is to force the banks to bring their dirty laundry out into the light of day, declare them bankrupt (which they surely are…) and attempt to reboot the system. This would put an end to the uncertainty, and wipe out huge parts of the investor class – which is exactly what should happen.

As the investor class get the best government their money can buy, it will be the very last thing to be tried. Those that can, will be dumping their holdings as fast as possible at this point, hence the big declines in the bank stocks. With the abyss yawning beneath them it looks like they are running out of time…

Update: In my morning reading is this piece by Willem Buiter on the similarities between Iceland and UK. In it he notes that the Royal Bank of Scotland has a balance sheet of between 1.75 and 2 trillion pounds, and that the GDP of the UK is roughly 1.5 trillion pounds. The point being that potential scale of the losses at just one of the UKs banking giants exceeds the amount of money that the country turns over in a year. The similarity in scale between these two numbers makes it clear just how out of proportion the banking sector is with respect to the UK economy, and consequently why government guarantees don’t, or shouldn’t, really mean very much…

When you then look at the reserves that the banks are holding, compared to their liabilities (on the books liabilities, not the stuff that they can’t value (it’s worthless..) and therefore are allowed to keep as mysterious level 3 assets) you can see why it’s safe to consider them insolvent. The only thing that’s stopping them declaring bankruptcy tomorrow is an accounting trick.

Ah, data!

Wise words...

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