On this historic day, Manuscripts Don't Burn would like to present Guardian commentator GolemXIV's excellent summary of the UK government's latest bailout plan. Thank you GolemXIV! The lunatics are indeed running the asylum; we see dark days of protest and bloodshed ahead.
This could be the most expensive suicide note in history!
This plan is exchanging a possible run on the banks with a possible run on the whole country, its tax base, and its currency.
Let's be clear about what we are insuring. We are going to insure stuff that the insurance world refuses to insure. How great is that. Insurers such as AIG did insure this stuff. Only problem is AIG itself is bankrupt. Bailed out three times already for over $100B and still dropping like a stone.
We are going to insure securities and derivatives based on Mortgage and corporate debts. Very many, if not most, originated in the US. By definition all these debts are close to worthless. And yet we are going to guarantee to pay the morons who bought the assets - or derivatives based on the value of those assets - either the full price tey paid or something near to it.
Which raises the question - To what level are we insuring them? If it's up to the full face value then as a nation this is a suicide note. I can only hope the insurance is based on a much lower valuation of but shares. But my guess is that even if there is a lower valuation it will still be suicidally high. Only the higher value will please the 'markets'. AKA the people who created the mess in the first place.
Why are they doing this? The reasoning is that the banks are going to continue to take massive losses. They all know this. The governments don't want to have to pay huge lumps of cash to cover these losses before they have to. Cash injections are large lumps. Insurance is only paid as and when each 'asset' has to come to the market and be declare formally dead. So insuring means we don't have to make one vast lump payment.
The down side however, is that our potential losses are potentially unlimited.
I know Darling says they will look at the assets and declare a limit. Yeah fine. But in practical terms the insurance plan will only 'restore confidence' if it is seen to work over the long term going forward. Which means even if they declare a limit, when we reach that limit they will be force do t extend it. For if they don't then all the money spent up to that point will have been wasted. SO the government will tell us we can't waste all the money spent so far, we must 'see it through'.
I know they banks will 'pay' us a premium. But that premium will be paid with the cash we gave them 6 months ago. So they won't be paying anything.
We don't have any of the money we are pledging. And what is more we are not going to be able to borrow it. So we are going to print.