Solution? Business secretary Vince Cable has said he wants to nationalise the 18pc of RBS that isn’t already owned by the taxpayer

Vince Cable wants to nationalise RBS. You can see his logic. The taxpayer owns 82% of the firm already. Nationalisation is hardly such a radical idea; it’s more the logical completion of a process.

It’s true that full nationalisation was never the advertised outcome. We were promised that these part-nationalised banks would be rapidly strengthened and restored to full private ownership.There were even muttered suggestions that the government could end up making a profit on its stake.

But it would be daft to make policy on the basis on what bankers and governments choose to tell us. In 2007, the US Treasury Secretary, Hank Paulson, told the world that he didn’t see the subprime mortgage market as ‘imposing a serious problem. I think it’s going to it’s going to be largely contained.’ Sure, Hank. We know how that prediction worked out.

That same year, the head of financial insurance giant AIG’s financial products division said ‘it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.’ He was almost right – he was off target by just $183 billion, the amount the US government ended up spending on AIG’s bailout.

It’s the same in Europe. Greece has missed 210 of 300 economic targets given it during the course of its extended bailout misery. More recently, the Spanish government of Mariano Rajoy promised financial markets that it would meet its deficit targets and that a bailout was out of the question… until of course it missed those targets and the only bailout question remaining is how many hundreds of billions of euros are required. It was much the same thing in Ireland and Portugal. It will be much the same in Italy too.

So let’s set intentions and promises to one side and look at the facts. First of all, it’s clear that RBS is not about to return to the private sector. The company has just made a six-monthly loss of £1.5 billion. Its computer systems are clearly dysfunctional. It seems certain to get hit with major fines for its role in the LIBOR fixing scandal. The bank’s core business of lending to British companies is gummed up and directionless. The bank’s size makes proper management difficult and restricts competition both on the high street and in business lending.

Struggling: RBS has been dogged by technical problems and poor management, running up a £1.5bn first half loss

And if private ownership remains a pipe-dream, the current arrangement seems like the worst of all worlds. The principal shareholders (you and me) can’t take effective operating decisions because of the private minority. Meanwhile the entire country suffers from a failing banking system. So nationalisation is the first part of the answer – and Vince Cable is brave and right to suggest it.

But nationalisation is only the first step of a long and difficult journey. The next step – the tough one – involves utter honesty about the balance sheet. European sovereign bonds need to be valued at their actual market value. That’ll imply huge losses. Loans backed by British real estate also need to be fiercely written down. Outside a developing property bubble in London and surrounding areas, UK property prices are nosing down. That’s not surprising. In a world where real wages are decreasing, and after a decade long property bubble, prices have nowhere to go but down. That means RBS’s property book is softer than a baby’s bottom.

So government auditors need to bring reality to these accounts. No soft-soaping for the stockmarket. No desperate excuses about ‘trading out of trouble’. (You can’t trade out of trouble if you make losses of £1.5 billion in half a year. That’s trading into trouble, right?)

My own suspicion is that if RBS’s assets were properly valued, it would not be solvent. (I don’t think RBS is alone there, by the way. I think most European banks are insolvent: a belief that others, including the head of Deutsche Bank, share with me.) The traditional government response to financial distress is to pour your money into the stricken institution. It’s what Gordon Brown did like crazy in 2008-09. It’s what countless other governments did too.

And it’s the wrong way. Funnily enough, capitalism already has a solution to insolvency, and it’s called bankruptcy. Bankruptcy is a wonderful thing. In most cases, bankruptcy doesn’t mean the death of a company. If a company is a going concern – that is, if its core business is fundamentally OK, just encumbered by too much debt and too much bad management – bankruptcy is the place to clean it up. Shareholders lose their money (but it’s already lost anyway). Creditors lose a slice of theirs (and it’s already gone too, just slowly and painfully.)

But that’s good. Those losses are good. They’re good for two reasons. One, if creditors make bad loans, they need a reminder to do their due diligence. That’s the only way to avoid the same mistakes in the future. Secondly, as creditors take their losses, RBS can emerge from the ashes with a strong balance sheet, and a sense of confidence. It can start to invest again: in computer systems, in business lending, in all that bread and butter stuff that the firm has neglected so long.

Bankruptcy would help for a third reason too. RBS is too big, too bloated. It needs to be broken up into smaller, nimbler firms that can reintroduce competition to our dysfunctional industry. That can’t be done with a firm that’s already struggling for financial solvency. It needs to be done on the back of a new, strong balance sheet. And it needs to be done without taxpayers contributing a single penny more to the process. We’ve done enough already. It’s time for a new start. It’s over to you, Vince.

Mitch Feierstein is CEO of Glacier Environmental Fund and author of Planet Ponzi: How Politicians and Bankers Stole Your Future

The United Kingdom has too much debt. Reports normally focus on government debt: currently around 80% of national income, unless you take into account (as you should) the debts of the bailed-out banks and their toxic portfolios, which would pretty much double that figure.

But what about consumer debt? Mortgage debt? Business debt? The huge slabs of debt incurred by our banking system? The truth is, if you want to know how much the United Kingdom owes, you need to add up everything.

And the answer is terrifying. We owe about 500% of GDP. So for every pound you earn in a year, someone, somewhere owes £5.  Add it all up and you get to a total just shy of £8 trillion.

Burden: Including bank bailouts, the UK’s national debt is already around 160% of GDP

You don’t have to be a rocket-scientist to figure out that this is a problem. Indeed, you’d have to be living under a stone not to have noticed that our economy has plunged into a depression because of this weight of debt. The banks started it, but we’re all in it together. And it’s not just Britain, it’s Europe too. And the US economy is way more fragile than is sometimes reported.

The dictionary definition of a depression is ‘a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.’ That’s us. That’s where we are. The Great Depression of the 1930s did not destroy output to the same degree and recovery was faster. This is the worst depression in British economic history.

And what is the solution to this crisis, as cooked up between George Osborne and Mervyn King, the Bank of England chief? 

I love Wimbledon, it's Smashing!

George Osborne and Mervyn King have announced their intention to make around £100bn of cheap loans available to banks, allowing them to lend to businesses

Answer: more debt! Clearly, these wise souls believe that the whole problem with the British economy is that we don’t have enough debt. So let’s have more. In fact – and how’s this for a plan? – let’s make soft loans at cheap rates to the same klutzy British banks that created this mess in the first place and hope that somehow that sparks off a spiral of investment and innovation. You might as well plan for world peace by selling arms to the Middle East. (Or, come to think of it, making Tony Blair a peace envoy.) It’s the same crazed logic.

Fortunately, though, businesses aren’t stupid. The main barrier to investment isn’t the availability of credit; it’s the dire economy. Businesses are, quite rightly, looking at the devastation and lack of governance around them and thinking this might not be the best possible time to launch new ventures or expand old ones.

And the solution?  Well, there isn’t one short of de-leveraging. The only way to a problem of excessive debt is to have less debt. You can’t achieve that by waving a magic wand, you achieve it by working hard, paying down your loans, and remembering that, next time, you better keep your credit card in your pocket when you pass those nice, inviting stores.

But meantime, the plan does reveal something important about the decision-makers in charge of the economy. George Osborne I have some time for: at least he realises he needs to get the government to borrow less; at least he knows that the banks have to be tamed. But Mervyn King: what is he for? We are currently paying him to print money and shovel cheap loans at dodgy banks fueling a property bubble of epic proportion. 

Athens burns: Does this look like the creation of aggregate demand, Mr King?

Creating asset bubbles and money printing are terrible policies that King has become addicted to. He’s past his sell by date and has to go.
 

I published this in the Daily Mail

The trouble is you probably thought the same about the sub prime mortgage market in 2007. It’s unlikely, in fact, that you even heard anything about that market at all, unless you happen to involved in finance. And if you did hear anything, you’d assume that the idiocies of Wall Street bankers lending to trailer-park types in Oakland was never, ever going to affect your life. And then 2008 happened. A global crisis. A massive recession. A wave of job losses. Pensions slashed, taxes raised, spending cut. 

So technicalities matter. And here are a couple you really need to know about.

The idea you can trust the banks and the British Bankers Association is laughable

Number one, there is currently a storm brewing over the way LIBOR is calculated. That sentence, most likely, means nothing at all to you. What the heck is LIBOR and why would you care? Well, LIBOR stands for ‘London InterBank Offer Rate’ and is the interest rate at which banks lend to each other (plus or minus certain adjustments depending on the credit quality of different banks). That interest rate is the cornerstone of the entire financial system – more important, by far, than the Base Rate set by the Bank of England. If you don’t believe me, consider that $360 trillion worth of financial securities are priced off LIBOR interest rates. That’s about six times the GDP of the entire planet.

So LIBOR matters. And it’s being manipulated like crazy. Basically banks currently ‘estimate’ their cost of funds and an amalgam of those estimates is used to compute the overall measure. But because there are huge amounts of money atstake, banks have powerful incentives to provide ‘estimates’ that are strongly biased towards their own financial interests. And those interests are quiteunlikely to be the same as yours. Or, more candidly, they’re pretty much the opposite of yours.

Maybe this sounds to you like a cranky conspiracy theory. But just hear what others have to say. The US Justice Department is conducting a criminal investigation into the suspected manipulation of benchmark rates, of which LIBOR is by far the most prominent example. Regulators from Canada to Japan are also probing to see if banks have lied about their cost of borrowing. One fund manager, Tim Price at PFP Group, comments that ‘The idea you can trust the banks and [the British Bankers Association] with this is laughable.’

In dispute: LIBOR stands for ‘London InterBank Offer Rate’ and is the interest rate at which banks lend to each other

He’s right. It is laughable. And at the heart of this manipulation is a simple fact: huge, powerful, rich firms who pay their top earners enormous amounts of money are willing to lie to suit their own ends. Not once. Not as a one-off response to some extreme pressure. But day after day after day. For their interests, not yours.

The surge of interest by regulators is something that I profoundly welcome. Youjust have to wonder why it’s come so late. Almost ten years ago now, I developed a financial index for the energy trading industry which has never once beenmanipulated. Which can’t bemanipulated, because it’s got anti-cheat measures built into it. That same technology could be adapted for the LIBOR measure. Something like it could have been put in place ten years ago. Or now. It could be compulsory by the end of the year. So why isn’t it?

And here’s where you get to the really sad part of the story, which is that regulators are on the banks’ side more than they’re on yours. Take the famous ‘stress tests’ imposed on the banking system by regulators in Britain, Europe and (now) in the US. They sound like such a great idea in theory and in practice … oh dear.

Banks will go on manipulating things, regulators will go on regulating with all the force and aggression of a wet sponge

Belgian bank Dexia sailed through its European stress tests. No problems. All tickety-boo. Everything shipshape and Bristol fashion. Unfortunately, far from being one of the safest banks in Europe, as those stress tests claimed, Dexia was in terrible shape. It is currently in the midst of an (incredibly expensive) government backed reorganisation.

The moral? Well, two morals really. The first is that technicalities matter, even when they can seem arcane. The second, that truth matters. And because we can’t rely on banks to be truthful, or regulators to regulate, we also need totaltransparency. Truth we can trust.

Until we have that truth, banks will go on manipulating things, regulators will go omn regulating with all the force and aggression of a wet sponge. And you will go on losing out in ways you can hardly even understand.
 

The price of strawberries is up this year.

‘Inflation falls.’ That’s the headline countless British consumers have been longing to see. And inflation isn’t just falling: the Bank of England predicts that prices rises will be down as low as 1.7% some time later this year. If that’s true, it’ll be a blessed relief for countless consumers.

Personally, though, I’m just about able to contain my excitement. Yes, inflation is falling, but it’s still very high. Prices are still rising way above the Bank’s 2% target. What’s more, the Bank of England has consistently failed to achieve its target. Since the start of 2007, inflation has been almost permanently above 2%, twice nudging above the frightening level of 5%. Given that the Bank has been permanently wrong about inflation for years, I’m not placing too much faith in Sir Mervyn King’s latest boosterish prognostications.

What’s more, I don’t believe the inflation figures anyway. There’s too much massaging going on. Why, for example, does news attention tend to focus on the consumer price index (where price increases are currently running at 3.6%) instead of the retail price index (where price increases are growing  at 3.9% down from a stonking 4.8%)? After all, the retail price index includes house prices. Since, I assume, many of my readers live in houses, it seems reasonable to study an inflation index that includes the associated costs.

What’s more, back of the envelope type calculations focusing on what ordinary people actually spend have consistently suggested that inflation has been running way above published rates. Last December, for example, the Mail reported that the price of basic purchases, including food and fuel, had soared by 43% over ten years, far ahead of the published 27% increase in the CPI. These days, with wages stagnant and prices soaring, those essentials occupy a far larger and more important share of our shopping baskets than they ever used to. It’s probably the thing you personally think about when you think of inflation. Indeed, oil prices were $100 a barrel as recently as October; they’re touching $118 now. Petrol and utility bills are soaring.

Indeed, I’d like to take these thoughts further. I’d like the Bank of England to publish a regular Essential Goods Index. Rather than exclude items like food and fuel because they’re ‘volatile’, it would include them because they’re critical to most household budgets. When Sir Mervyn King writes to the Chancellor to explain why, yet again, he’s failed to meet targets, he might want to include a paragraph or two on what that failure means for ordinary households.

Indeed, while we’re on the subject of total transparency, I’d like the Bank to include data on asset price inflation. House prices, for example, have barely fallen in this recession, despite the fact that the number of houses being traded are at 27-year lows and unemployment hit a 16 year high toady. The FTSE 100 stockmarket index is nudging 6000, despite the fact that the outlook for the British economy is more precarious than it has been for decades.

These things are hardly hidden from view. The ratings agency, Moody’s, has placed the UK on credit watch for a likely downgrade of its AAA debt rating. That assessment simply mirrors the stark reality of our current predicament. Indeed, the extraordinarily low interest rates at which the British government is currently able to borrow – and of which George Osborne so frequently boasts – are simply the flipside of a crazy run-up in government bond prices.

Those things might sound remote from your ordinary life, but what we’re witnessing is the creation of yet another asset bubble – and a bubble in which the Bank of England is, once again, utterly complicit in creating. When that bubble bursts, as bubbles always do, the destruction inflicted on normal households and taxpayers will be prodigious. It’s that potential destruction which makes Moody’s – quite rightly – so anxious.

And, I’m sorry to say, I agree with Moody’s. I have no faith in the Bank of England. I don’t believe its headline inflation numbers. I don’t remotely trust its record on controlling asset price bubbles. And I’m willing to put my money where my mouth is. Back in 1999, Gordon Brown sold 400 tonnes of gold at around $377 an ounce. I bought some of it – and I’m pleased that I did because the gold price is now around $1730.

Posen promised to resign if UK inflation is not 1.7 by August

So here’s the bet. I’ll bet Sir Mervyn King one ounce of gold that inflation does not come down to 1.7% within the course of 2012. If I’m wrong, I’ll be happy to pay up, because that’ll be a sign that Britain – finally – might be returning to the path of financial probity. Somehow, though, I don’t think he’s going to take my bet. In the meantime, he shall keep writing monthly form letters explaining his failures to the Chancellor of the Exchequer.

Swervyn Mervyn Loving the Serving

Nice to be so secure in your job that you can reject any idea of checks and balances on your all-but-supreme power. Nice that ex-Chancellors of the Exchequer view you as some Sun King beyond any check. Nice to have a £400,000 salary and plenty of time to enjoy Wimbledon in the middle of an economic crisis.

But does Merv the Swerv actually know what he’s doing?

Let’s see. His job, his main one, is to make sure that inflation is at 2%, give or take 1%. Inflation has recently fallen to 4.2%, having been 4.8%. That’s a lot more than 2%.

And it’s also not the real inflation rate. The new headline stat they like to throw at you is CPI – the Consumer Price Index – which ignored mortgage interest payments. But mortgages need to be paid. You can exclude anything you like from a price index, but that doesn’t make it a sober record of changing values.

And if you look at the RPI – Retail Price Index – you find that inflation is a stunning 4.8%, down from an even worse 5.2%. What’s more, this awful record is no blip: it’s been running this way for years.

What’s more, these terrible statistics ignore strong suspicions that the official index vastly understates the inflation which most ordinary people face in their lives. A study by the Resolution Foundation suggested that, over the decade to 2010, the cost of essentials soared by some 43% – way more than the 27% reported in the official stats. A recent study for the Mail found that the elderly faced inflation rates of 10% or more – rates that they simply have to pay if they want to heat their homes and put food on the table. Electricity prices are up on average around 17%.

If you have a front row seat on Centre Court and have that nice £400,000 salary to take care of things, you probably don’t care too much about these facts – but millions of ordinary Britons are in no position to be so complacent. (The same, of course, is true of US citizens under the kindly rule of Helicopter Ben Bernanke. – We’ll deal with those issues another day.)

Meantime, speculation is growing that Swervyn Mervyn is keen to indulge in yet another round of Quantitative Easing – a polite way to say printing money. And what does printing money do? It creates inflation. That’s what happened in Weimar Germany, what happened in Zimbabwe. What always happens everywhere, when the printing presses create too much currency.

Inflation won’t bother the Sun King. If you’ve got a nice job and don’t have to worry about food, fuel and transport prices, maybe it won’t bother you. But it bothers ordinary people a lot. They’re hurting now and will hurt much worse if the country sees more QE. The Sun King should stick to tennis. Inflation fighting is clearly not his game.