Wednesday, 8 October 2008

Praying for a hard 6

. Rolling a hard 6 is my way of saying that something is a massive gamble. The government and taxpayers will have to pray for a hard 6 after the statement this morning.

It is to be welcomed that according to the Treasury statement;
Check Spelling
"In reaching agreement on capital investment the Government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers."

However, there should be full transparency in these deals and the terms and conditions should be a matter of public record. Obviously the headline figure of £50bn is slightly misleading as the actual cost is likely to run into 100s of billions. It seems to me that the purchase of preference shares is not an adequate return for this outlay since these shares do not give holders any voting rights but only receive preference in event of a liquidation. In other words what the taxpayer is getting for their money in terms of actual control over their investment is precisely nothing.

The theory runs that increasing liquidity will in and of itself guarantee savings but this is of course not necessarily true. Rather it is a desperate hope that waving a magic wand will make things ok; but as we have already seen in the US this is simply not the case. The Guardian reports that;

"retirement savings have lost more than 10% of their value as investors sell their shares to avoid the worst effects of the credit crunch.

Financial adviser Hargreaves Lansdown said the dependence of most UK personal pensions on stock market investments meant further falls in share values would drag retirement funds even lower."

Recapitilisation provides no protection for these people as even today the stock market is continuing to fall like a stone. Furthermore there is no guarantee that the banks will in fact start lending to each other again in fact, if the continuing drop in bank shares is an accurate measure of confidence, then they won't. Vince Cable has called for 'other measures'; presumably he means a cut in interest rates and/or the tax cuts Nick Clegg has called for presumably in the hope that people will start spending money in large volumes and not do what they probably will which is use the extra to cover existing debt and/or simply horde it. This package is unlikely to work; it's self-confessed aim is to try and return things to 'business as normal' which is precisely what got us in this situation in the first place; the only solution is to change the way business is done.

No comments: