Commercial Finance

16 October 2009

Managing Director, Worldwide Financial Planning writes:

I was speaking to someone a moment ago who asked me what I did. ‘I am an independent financial adviser’. I said. ‘Ah, you are the cause of the problems in the economy then!’ He blubbered. I responded with ‘yep, every last bit of it, every last bit’.

Disarmed, he began to ask me about banks. Bored, I responded. Boy I hate it when the seating on trains is this way. So I am now typing so I don’t have to talk. He’s reading a three-letter newspaper, harmony.

And I thought about banks and about how they have treated, and how they are treating people, the quite indescribable and incomprehensible mistakes they have made, and how they provide us with pretty TV adverts now aimed at customer apathy. You need to trust banks! Really. How is it that they have been allowed to do this and get away with it?

Then I thought about how the banks' might have tried to save themselves in this current market and I laughed. Follow this bit from start to finish. Can you imagine what it was like when it was disclosed how bad the banks' situation was? Worse still they didn’t know. They couldn’t even articulate how bad the situation was because they were unaware of the bad debts due to the complex instruments they were invested into.

So their share prices collapsed and the financial system was on the brink of explosion. So can that happen? Well consider how much the UK tax authorities make from the financial system and you will realise they cannot be allowed to go pop. So what might a good strategy be to sort the situation out?

The government could have stepped in and bailed them out in full with tax payers’ money (which would have crippled them) or imagine another cuter, indiscreet method of achieving the same thing:

Firstly you ascertain exactly what the banks' scenario is; otherwise you are throwing good money after bad. Then you don’t tell anyone about that.

Then you put a block on anyone shorting bank shares (basically betting they will be going down and creating financial stress on the system).

You inject cash into banks to take a temporary control over lending practices and set the thermostat for others to follow, but effectively making the banks suitably solvent.

Then you plummet base interest rates to record lows. When you have done this you infer you will be putting pressure on banks to continue to lend and to open up doors and say you have appointed a body to ensure it happens but in practice you don’t and who can check anyway.

You apply a quantitative easing process that buys assets which become constipated in banks coffers and don’t move along like they are supposed to.

In the meantime, lending is still too slow so banks can now charge a premium for initial and exit fees along with extortionate review fees.

Finally with the base rate at 0.5% you charge money out at 4.5% to 5.5%. Easy money. And so the banks’ reserves begin to fill back up again so they are suitably solvent. Eventually they use that cash to repay the government and the government take the credit.

But who has paid for that glory?

The cycle above is simply an indirect taxation straight into the heart of the business community and the man on the street who are relining the banks coffers. Instead of the tax payer paying directly, they do so indirectly with no credit for it.

Now this theory could explode if the relevant authorities decided to apply negative interest rates on banks’ reserves. That would show they really meant business. But no. Sure it will come eventually and it will probably come at a time when the banks’ coffers are suitably relined and could take that stress.

I would suggest a good time for that might be a few months before the election, one would have thought. Interesting strategy don’t you think? I wonder if anyone else has thought of it.

If you have a financial query call Peter on 0845 230 9876, e-mail info@wwfp.net 

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.