Plenty of Pain - but in the End We May Gain ; Extraordinary Times Can Bring Extraordinary Opportunities. This Week's Nationalisation of the Banks Creates a Different New Economic Order, Says One City Analyst
Collins, Neil, The Evening Standard (London, England)
LOUIS MacNeice's rubric "The glass is falling hour by hour/ The glass will fall forever/ You can break the bloody glass/But you can't hold up the weather" now seems like a perfect fit for a financial meltdown.
Except that you hardly need to be a meteorologist to know that the barometer doesn't go on falling. It can plunge to hurricane levels and wreak terrible damage but it passes; painfully slowly, and however unlikely it seems while the wind is tearing the roof off, normal conditions eventually return.
The nationalisation of most of the British banking system shows how far we have to go. Royal Bank of Scotland alone is raising [pounds]20 billion, including preference shares which will pay 12 per cent. At [pounds]37 billion, the rescue cost of the four banks is far bigger than the biggest of Labour's post-war nationalisation programmes, covering coal, steel, and the railways.
But however shocking the sight of our money disappearing into the balance sheets of such arrogant, self-satisfied institutions, there's no point complaining now. When the house is burning, you have to put the fire out first.
Several times recently, it has looked as if the world's central banks and finance ministries had done enough to smother the flames, and each time they've burst into life afresh, with paralysed credit markets and plunging stock prices. Now it looks as though the authorities have finally got the message.
This is not only a matter of banks running out of cash to meet their commitments (a liquidity crisis) but also one where lenders fear that the borrowing banks don't have enough assets to cover their liabilities (a solvency crisis). All the old rules have been consumed in the blaze and the new ones require the twin fire hoses of unlimited liquidity and sufficient permanent capital to allow the markets to start functioning again..
Even the fabulous sums now being pledged by governments across the world may not be enough finally to quench the flames; the International Monetary Fund is muttering about a further 20 per cent plunge in share prices, and in the current state of panic their doomsters may turn out to be right. Investors have been selling shares for whatever they will fetch, and if they had invested in bank shares, they are fetching a tiny fraction of what they cost to buy.
All bank shareholders, especially those in RBS, face the choice between throwing good money after bad or of seeing their holdings diluted by the Government's capital injection. The departure of chief executive Sir Fred Goodwin is scant comfort. After what he's done, many of them would prefer to see his head paraded around St Andrew's Square on a pike.
These extraordinary times provide some extraordinary opportunities, as well as the prospect of widespread misery. People will cut back and start saving or rather, they will start to make inroads into the debt mountains that so many have accumulated.
The correct policy response from the Government is so strange that Gordon Brown will be rubbing his good eye in disbelief. To …
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Publication information: Article title: Plenty of Pain - but in the End We May Gain ; Extraordinary Times Can Bring Extraordinary Opportunities. This Week's Nationalisation of the Banks Creates a Different New Economic Order, Says One City Analyst. Contributors: Collins, Neil - Author. Newspaper title: The Evening Standard (London, England). Publication date: October 14, 2008. Page number: 13. © Not available. Provided by ProQuest LLC. All Rights Reserved.