Sunday, January 18, 2009

UK and US Play Leapfrog in Making New Mistakes


U.K. to Announce Mortgage, Loan Guarantees to Encourage Lending

" . . . the government will offer to swap its preference shares for ordinary shares to give the banks more cash, according to the Sunday Telegraph. This may lead to the government increasing its holding to 70 percent in Royal Bank of Scotland Group Plc and 50 percent in Lloyds Banking Group, the newspaper said."

DoctoRx here: If you were a British financial institution, how would you like to depend on a fair playing field when you are competing with giant institutions in which your Government owned a controlling interest not just in preference stock but the common stock?

"The Treasury is offering to ditch its preference shares because it is concerned they are choking banks preventing them from lending. Royal Bank of Scotland Group, Lloyds and HBOS Plc agreed to pay a dividend of about 12 percent as part of the government bailout, eight times the Bank of England’s benchmark lending rate."

DoctoRx again. The banks can't lend because they are insolvent. Also, the economy is imploding. Those who are safe to lend to don't need to borrow, because they are also hoarding cash.

I would also note that unlike in the U.S., at least the Brits extracted a punitive lending rate for saving the banks (as prescribed many years ago by Mr. Bagehot).

The Brits appear to be leapfrogging the U.S. by going to common stock ownership. All this is for the wrong cause. The cause should be to discourage borrowing and encouraging true ownership.
An ownership society is a good thing. These Governmental contortions, extortions, and distortions are not only unseemly but miss the mark.

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