[Wolves] For all petrol heads like me :-) + on the subject of petrol

[Political Penguin]

Stuart Langridge wrote:
> On Jan 14, 2008 11:00 AM, ArchLinuxUser dick_turpin
> <dick_turpin at archlinux.us> wrote:
>   
>> What I want to know is how come the population didn't storm the winter
>> palace of number 10 when public money (Yours and mine) was used to
>> prop up a private venture Northern Rock and now I read that most, if
>> not all, of our lovely Tax money may never be paid back by them.
>>     
>
> I'm in two minds about this. The first mind says that, well, if caveat
> emptor means *anything* then it has to mean this; NR went bust, so
> they lose, game over. The second mind says that the public having the
> idea in their heads that "banks can go bust and lose all our money" is
> a Bad Idea from a public policy point of view, because it leads to
> people losing confidence in the banking system, hiding all their money
> under their beds rather than in the bank, and then the economy crashes
> and we turn into Argentina. I assume that the gummint are worried
> about that, so they think it's a worthwhile expenditure of money.
> Certainly it's not a completely clear-cut case, at least to me...
>
> sil
>
>   
I think you're under a misconception as to use of taxpayers money.  It's 
easy to think there's some pot of money of our money out there and it's 
been used in such a fashion but not correct.  This whole situation 
regarding NR arises not necessarily from it being a failing busy, more 
issues regarding international credit availability.  All economies run 
along the capitalist model are built on credit.  Actually all 
governmental budgets in such countries are run in exactly the same way.  
There is no pot of money used to pay for things, only projections of 
growth and presumed future incomes be that from profits or tax revenues 
to offset planned expenditure.

The origins of this concept date back to the original formation of the 
Bank of England where it held reserves and lent against them.  The bank 
notes we use are nothing more than a guarantee against the centrally 
held reserves of 'things' to the same value, things being the like of 
gold, to a lesser degree silver and and foreign currency reserves which 
are valued against their respective national banks individual 
gold/silver/foreign currency reserves.

Individual banks do exactly the same thing to raise capital, they lend 
against what they have in assets.  In the olden days this would be such 
things as individual investors savings so much the same as when you put 
money in a bank it doesn't go off somewhere and is stored, it is then 
lent to others who want to borrow it, banks lending presumably to good 
people who are going to pay it back.

What happens these days is that these credit flows are global so we have 
banks lending to banks across the world leading to them seeking out more 
and more risky ways of raising credit.  This they found in the US 
sub-prime but it was obviously abused, ie too much was lent against it 
and with a cooling US housing economy the bottom has dropped out because 
the actual assets borrowed against aren't worth what credit has been 
taken from them.  This has led to a credit crunch on a global scale 
affecting some more than others.  Here in the UK, it's been NR that has 
been hit hardest but all the banks have been affected to some degree.

This led to the Bank of England effectively underwriting the firm in the 
short term while it was either decided whether a private sector business 
could be found to buy them out or if it has to come to it, 
nationalisation.  The private sector option is preferable but the 
problem is that anyone wanting to purchase has to show either they have 
the assets to underwrite NR or enough cash in hand or availability to 
credit to the same value of the firm to take it over.  Problem being, 
there's a global credit crunch so no one can raise the credit required.

If it leads to nationalisation then it's not tax payers money because 
all the Government would do is underwrite the firm as in make guarantees 
that it can cover the cost of the firm.  Either way, this doesn't mean 
somehow that the taxpayer loses out or foots the bill because NR does 
actually have the assets, ie Billions of pounds of a portfolio of UK 
homes that it has people paying mortgages for.  The only real problem 
lies if property prices fall significantly devaluing the assets of the 
company.

Hope that helps clarify a few things.

Gareth