Bailed Out Banks Not Lending, Sitting on Tax Payers Cash
Interest-Rates / Credit Crisis 2009 Sep 22, 2009 - 07:30 PM GMTBy: Nadeem_Walayat
The Bank of England has both pumped hundreds of billions of tax payer cash into the bankrupt banking sector and cut interest rates to near zero (0.5%) to enable the banks to have funds available to lend out to the wider economy. However the banks instead of lending this money out are in effect sitting on tax payer cash with a view to earning interest on the money at the Bank of England which is illustrated by a sharp drop in the interbank rate towards the base rate as the following graph illustrates.
The gap between the base rate and the interbank rate having fallen from credit crisis extreme of 1.4% now stands at just 0.07% on face value this suggests a very healthy interbank market, unfortunately it hides the truth that in effect the Banks instead of lending the money out as would normally happen are in effect depositing as much as £160 billion with the Bank of England as excess reserves to earn risk free interest from which negates the Bank of England's money printing / Quantitative Easing programme that now stands at £175 billion.
The Banks have no incentive to lend the money out under the current artificial banking system as a consequence of tax payer bailouts. The bankster abuse of tax payer funds is not just limited to sitting on cash as when they do lend money it is far in excess of the interbank rate of 0.57%. In reality the real interest rate should vary between interbank rate plus 0.5% to 1%, depending on the customers credit rating. However the actual amount being charged to customers on the standard variable rates ranges from interbank rate PLUS 3% to 5%, far beyond that of how a competitive banking system operates as the below graph illustrates.
The UK Government, Bank of England, FSA and UK Treasury have a lot to answer for they have created a market for credit that in effect lets the banks systemically rob the tax payers and borrowers by charging interest rates that have no bearing on any conceivable normal banking market when one compares the rates charged against the rates borrowed at. It would have been far better for the banks to have been allowed to go bankrupt, restructured and then refloated as retail banks with a mandate to service retail customers without access to the interbank market, instead relying on customer deposits for funds. Instead the banks are operating on a business as usual basis with a view to maximising profits at both tax payer and borrower expense so as to enable huge bonuses to be paid out.
The Governor of the Bank of England, Mervyn King stepped out of this ivory tower recently to announce that he is not happy with the Bankster's for sitting on tax payer cash, which is a case of confirming that the authorities continue to have rings run around them by the bankster's.
“It is certainly true that it would be useful to think about ways to encourage banks individually to try to convert some of their reserves which would then reinforce the transmission mechanism of the direct assets purchases that we make.”
What this means is to force the banks to lend money out i.e. to take risks, the Bank of England may implement NEGATIVE interest rates for monies deposited as excess reserves at the BOE. Make no mistake about it, negative nominal interest rates would be a PANIC measure and be immediately reflected in a sharp drop in sterling.
However, the only option available to the British people to respond is to punish the inept, incompetent Labour government at the next general election for creating such a condition that allows the Bankster's to continue to rob the tax payers whilst the regulatory institutions drift from one panic measure to the next, all the while the unemployment count continues to rise as businesses are forced by the banks to go bust due to withdrawal of credit facilities.
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By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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