The Bank of England made an 'almost unlimited' offer to acquire the banking sector’s mortgage-backed securities for up to three years in return for Treasury bills – apparently, a massive strike at the liquidity problem.

Or at least it was claimed to be 'almost unlimited' - the initial £50bn facility opened on Monday is widely regarded in the City as relatively small beer in the context of the crisis as a whole.

Conservative Economic Management

The purpose of the exercise for the Bank of England (although the Chancellor is sending precisely the opposite signal for political reasons) was not to encourage a revival in house prices but simply to stabilize the system.

Privately, City figures have been critical of the slow motion approach of the Bank of England which appears not to have adopted the Federal Reserve's determination to break any rule that gets in the way of keeping the system afloat.

What now seems to be emerging is a clash between the politically independent Bank and the Government over emphasis and, until this is resolved, the City is likely to be disappointed by the Bank's caution.

The Bank of England is essentially pressuring the banking system to get its own house in order and will permit the necessary correction in the housing market in order to restore confidence. It is buying time for the market to work, that is all.

Where the City is nervous is that management decision-making that proved flawed in the past cannot be guaranteed to be any better in the future - and all the num-nuts who were in place before the crisis are making decisions during it. Not good!

The Government, under enormous political pressure, is desperate to see the Bank’s funds work through the system and reduce the financial pain on hard-pressed working class and middle class families.

And so the Government talked direct to the mortgage lenders who have minimal incentive to do anything other than follow the Bank’s lead and hope for more later. They gave him little reason for optimism. 

The Great Correction

Low income and buy-to-let lending were central to the Government's project to solve the housing crisis through 'market solutions' rather than raise taxes for direct social housing investment. This project is now in tatters.

Worse, high growth in the UK was largely led by public spending (but tax will fall with writedowns, falls in corporate profits, lower sales and possible job losses), property (and now housebuilding has shuddered to a halt and there is oversupply of dinky, dodgy flats) and financial services ('nuff said).

Property and finance may be around 25% or more of national employment and over 30% of corporate profits. In other words, the 'correction' that is coming is potentially equivalent in these sectors to what 1929 was to coal, iron and steel and shipbuilding.

Within Europe, the UK is peculiarly vulnerable - a services rust-belt, a 'wastepaper basket' belt - with only London as Global City looking to the East, the lean and mean specialist industrials sector and the creative industries offering something to look forward to as they globalise.

In this context, there will be no politically necessary passing of taxpayer-underwritten credit to the banks back to the taxpayers themselves and repossessions will rise. 

The financial services sector simply needs the cash to survive. Indeed, small lender mortgage rates actually increased on the day of the announcement of the Bank of England facility.

It looks as if the bankers, whose collective managerial incompetence is second only to that of the Government and regulators, are going to get away with it at the expense of not only taxpayers but possibly shareholders and certainly those who were inveigled into credit out of financial ignorance or desperation.

Crunch Time For Politicians

Having removed those levers of power that were once available to the strong social democratic state, all the politicians can do is be a redistributive mechanism from the poor to the arrogant and incompetent 'rich'. Or so it will seem. They are left with no alternative.

In the end, Chancellor Darling and Housing Minister Flint were reduced to 'urging' lenders to review initiatives to help homeowners in difficulty (which rather shows where power actually lies).

If there is one thing that New Labour Ministers are habituated to it is 'spin' and the attempt to seize the headlines after the meeting was no exception. 

BBC Online told us in headline terms that homeowners would get mortgage help - "Homeowners will have enough support to ensure that their homes are not repossessed, the government says."

Two paragraphs down the reliable Beeb reports "But ministers did not outline how they would stop people losing their homes." In other words, they haven't a clue!

Failure to support the banks means a 'crash' and it may take a generation to put in the regulatory controls to stop a repetition - assuming, that is, that the ideologist of market solutions to social problems who dominate the political class even have the will to do so.

So, given a thirty year project to detach the State from the economy and then distort the market for social engineering purposes as compensation to the electorate, the bottom line is that we are stuffed. The Government has not got the tools to help even if it had the will.

The words 'pear-shaped' and 'swanee' spring to mind.

What We Have To Look Forward To

The scale of the problem in the transatlantic banking sector beggars belief according to our sources who are too professional to get depressed. 

Our interpretation of a private briefing at City Private Bank (historically conservative) established the following to our satisfaction:-

• There are problems in Europe but they are localized and Europe itself looks set to weather the storm
• The crisis in the US and the UK is systemic based on ideological and political conditions that led to the unsustainable credit boom
• The UK economy is in an utter mess but no-one outside the City has noticed the full scale of it yet – things will get worse and the adjustment could take from eighteen to thirty six months
• The Government finances are in meltdown and one factor not widely appreciated is that bank write downs are pulling very significant corporate tax revenue out of the system which is then having to be clawed back by such politically contentious measures as the withdrawal of the 10p tax rate
• Eventually, this implies a fire sale of assets like British Energy and, assuming no spread of the crisis to the East, the best national assets will be ready-made for SWF and other non-Western takeover as the crisis hits its peak

The possibility that, despite intense political resistance in the US (less so in the UK), major national assets in the FTSE-100 are going to get taken over by foreigners now needs to be faced.  Does this matter?

Many leftwingers and nationalists, grasping at straws, are probably going to be stupid and try to stop or slow this process. The time is long past for trying to protect 'national champions' - those who lived by globalisation are now going to have to die by globalisation.

Truly global players will rise above the melee while companies that are still on the way up and those in innovation sectors will become the new economic leaders.

It is the companies that the British most identify as theirs by right of brand, mostly in the services sector, that are going to be cherry-picked in a bout of healthy creative destruction.

An End to Gloom - The Good News

In fact, for all the job losses and asset-stripping, this creative destruction is probably a good thing, part of the wider global correction in which the UK is enabled to move forward into new sectors through the input of new capital.

The new overseas centres of capital accumulation and those who can exploit the new EU single market will acquire our services sector brands and do what we cannot - globalise them. Some, a few, British brands will be at the top alongside them - Vodafone for example.

In the end, there will be a recovery although Britain's relative importance as an economy will probably never be the same again even as prosperity returns.

The world will have changed forever and the only time British troops will yomp across faraway deserts by then will be under UN or EU orders. Since yomping around the world is one of the reasons we have failed to attend to domestic problems, the less yomping the better.

So not all is gloom. This is going to get very nasty economically and politically and the current Government really does not deserve to survive but innovation continues, London remains a world city and the City of London itself continues to progress in other areas.

A Success Story

Just to take one success story for which Gordon Brown can justly take credit - Islamic finance. A licence has been awarded to a fifth Islamic Bank, Gatehouse Bank. London’s leading role in Islamic finance in the West seems to be developing regardless of the credit crisis elsewhere.

The other four licensed banks are Islamic Bank of Britain (2004), European Islamic Investment Bank (2005), Bank of London and the Middle East (2007) and European Finance House (2008). No other EU country has yet licensed an Islamic bank and New York is now way behind.

Similarly, those London investors, always adaptable, who are nervous of the Atlantic economy are likely to be offered new opportunities to invest in stable (Bush Administration permitting) plays in the Gulf.

The Financial Times reports today [23 April] that Global Investment House, listed in Kuwait, Bahrain and Dubai, is said to be planning to raise $1bn in London.

GIH operates in sixteen countries, precisely in those Middle Eastern, African and Asian markets that underpin the more favourable attitudes in the market to global giant HSBC and niche player Standard Chartered.

What Scares Us

The scariest thing we heard in the last few days was not our Wall Street friend's fears for meltdown or the horrible details of banking ineptitude, but Hilary Clinton threatening to 'obliterate' Iran if it attacked Israel with nuclear weapons (a needless threat at this time as anyone who knows the region will tell you).

It is scary not because we believe she intends to do any such thing but that she felt it politically useful to get herself a decisive victory in the Pennsylvania primary. Private-mails from America have also showed a growing xenophobia against China - not criticism, downright xenophobia. 

All in all, the country that could not cope with the aftermath of Katrina and which is about to see a wave of repossessions and bankruptcies and has never dared to point the finger inwardly at itself (this is called 'optimism') is ripe for populist excesses externally.

In many ways, the economy is not what we should be worried about at all, but the political consequences (as in 1929). Let this correction take its course and we will come out of the end of the tunnel with a changed but rebalanced world that may serve us for another thirty years.

But what if the 'losers' get really scared and try to claw back respect and power through superior force? And what if the rising powers get greedy and try to capture resources through subversion? 

Then we are in truly serious doo-doo hoping, at best, for full employment in wartime economies and trusting in our ability to dodge missiles.

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