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Wednesday, December 17, 2008

Britain's stimulus plan examined PT2--"Ensuring Financial Stability"

Here is the second part of my four part series on the recent pre-budget report and stimulus plan, the Chancellor, Alistair Darling, prepared for the British House of Commons in November this year.

As you well know from the first article posted here on this subject, I laid out some critical concerns moving forward for this budget, in order for it to make any sense other than it being a free hand-out for political tricks and mileage. However, before we address this, we have to look at the second main pillar directed at the stimulus package in the report--Ensuring Financial Stability.
See budget chapter, here: http://www.hm-treasury.gov.uk/d/pbr08_chapter3_190.pdf

There are three main responses to the credit crisis, in regards to ensuring financial stability. While most of this chapter, is basically a history lesson--a subjective one at that-- it provided very little policy response and expected outputs and outcomes from their policy decisions.

The first policy response, was a Special Liquidity Scheme (SLS) for banks, looking to get rid of their risky debt obligations and in turn swap them with Government Treasury Bills.

The second response, was to address the issues of solvency with the banks. So, the BOE instituted a Recapitalisation fund, allowing banks to recapitalize from a government guaranteed fund, so that they can continue to fund their regular debt and credit obligations.

The third response, was to provide the banking system, with capital and resources in order for them to refinance their maturing loans. This was to allow banks to continue their lending practices as well as expand and, fund expansion of the private system, during this time of economic uncertainty and lack of trust between the inter-bank lending circuit.

To the first response, I don't know how the British Government got away with this. Perhaps because international finance is opaque and the officials at the treasury knew it, so, they had ample opportunity to pass this issue right above the heads of ordinary folks. In fact, the measures were taken as a swift response in April and the pre-budget report, was given in November. Goes to show you how they got it snuck into the system.

There is no way, when the British people find out, are they going to want to be saddled with the debt of banks, who traded and swapped people's mortgage related CD's, indefinitely. What they did was- the UK government- bought those debts and are buying those debts, while not fixing the regulation mechanisms of the system. This in turn, just throws money at the system, masking the systemic risk and putting the UK treasury deeper into the hole--hoping and praying everything, goes back to normal. Well, back to normal, is what got it to where it is, in the first place. Also, I can understand that the UK government, because it's financial services institution is globally connected and they had a responsibility to not let international companies and, in some cases, governments fail. They did too much to help, while putting the UK citizens at greater risk.

This gamble, once it hits the fan, will cost Brown his job.

The second and third responses, really are bottom line issues of the first response. In fact, it was probably not needed to be stated--let alone, overstaed as issues all to themselves. One would have to look at the bottom line of the loan guarantee contracts, to see if there is any delineation of the issues from the other, making it different from the first initial response of buying back bad debt. However, if it provides the psychological confidence of the market players, then it was more than worth the effort--in that regards, only.

Another major portion of the pre-budget and in conjunction with the international response mentioned, is the fact that they are going to pursue action that would mitigate fraud and the lack of oversight in the market. Pages 58-59 of the report, stated what was said at the recent G-20 meeting, but nothing more about how to go about doing some of these things, let alone what has been done specifically in relation to those issues. Most acutely, fraud, illegal trading activity and lack of transparency in the market.

The rest of the report, details nothing significant, other than what the government "plans" to allow its agencies to do to help ease the pain in this crisis. Basically, more government sponsored intervention at its fancy.

PM Gordon Brown has asked for allot, got allot and will be expected to be careful, with the lot he has been allowed. This may mean more debt for the Brits.

Other than that, this portion, while it sounded on target, delivered nothing on target.
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