Comments on: A question of confidence http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/ Conservative Party Member of Parliament for Wokingham Wed, 15 Oct 2008 23:59:54 +0000 http://wordpress.org/?v=2.6.2 By: Mortgage Regulation Isn't Working at Mike Rouse http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6179 Mortgage Regulation Isn't Working at Mike Rouse Mon, 17 Sep 2007 12:03:51 +0000 http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6179 [...] Redwood has his usual intelligent analysis here: http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/ Bookmark:           0 [...] [...] Redwood has his usual intelligent analysis here: http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/ Bookmark:           0 [...]

]]> By: Richard http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6083 Richard Sat, 15 Sep 2007 16:38:55 +0000 http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6083 "All banks to some extent borrow short and lend long. They can do so only because people do not all want their money back from any given bank on the same day." Have they not seen It's A Wonderful Life? "The money's not here. Your money's in Joe's house..." “All banks to some extent borrow short and lend long. They can do so only because people do not all want their money back from any given bank on the same day.”

Have they not seen It’s A Wonderful Life? “The money’s not here. Your money’s in Joe’s house…”

]]> By: Stephen Tolkinghorne http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6076 Stephen Tolkinghorne Sat, 15 Sep 2007 13:47:10 +0000 http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6076 "It was helpful for the Bank to remind us it is the lender of last resort and it is prepared to make money available to banks that need it." I begin to wonder whatever happened to the mantra that is pushed to beginners in economics and accounting: "Cash is King". Without sufficient or with badly managed cash-flow, a company, e.g. engineering components manufacturer, can be declared insolvent, even with a very healthy order book - resulting in loss of jobs due to an unfortunate muddle with the books. Why is it that banks are such a special case, that they can simply be bailed out by the tax-payer ? Clearly the banks are shielded by governments from the failure to adhere to basic accounting and economic principles. Surely such a practice should be condemned ? Reply: To be safe a business both has to be solvent - assets greater than liabilities - and liquid - short term assets greater than short term liabilities. In other words, yes to be sure of day to day survival a business has to have cash to pay the immediate bills that fall due, as well as having a solvent position for the future. You should not trade when insolvent. The difference between main commercial banks and an engineering company is the engineering company banks with commercial banks, whilst a large commercial bank banks with the Bank of England. A solvent engineering company which is short of cash should be able to borrow it from a bank. A solvent bank can borrow for emergency cash needs from its bank, the Bank of England, if it cannot get its cash needs directly from the market.If either a bank or an engineering company is insolvent it should stop trading to prevent that company entering new contracts it cannot honour, and to pay out as much as possible against the money it does owe from what assets it does hold. No bank is shielded from adhering to proper accounting practises. Banking is a different kind of business model, because it always has an element of borrowing short to lend long, and is therefore dependent on confidence. “It was helpful for the Bank to remind us it is the lender of last resort and it is prepared to make money available to banks that need it.”

I begin to wonder whatever happened to the mantra that is pushed to beginners in economics and accounting: “Cash is King”.

Without sufficient or with badly managed cash-flow, a company, e.g. engineering components manufacturer, can be declared insolvent, even with a very healthy order book - resulting in loss of jobs due to an unfortunate muddle with the books. Why is it that banks are such a special case, that they can simply be bailed out by the tax-payer ?

Clearly the banks are shielded by governments from the failure to adhere to basic accounting and economic principles. Surely such a practice should be condemned ?

Reply: To be safe a business both has to be solvent - assets greater than liabilities - and liquid - short term assets greater than short term liabilities. In other words, yes to be sure of day to day survival a business has to have cash to pay the immediate bills that fall due, as well as having a solvent position for the future. You should not trade when insolvent.
The difference between main commercial banks and an engineering company is the engineering company banks with commercial banks, whilst a large commercial bank banks with the Bank of England. A solvent engineering company which is short of cash should be able to borrow it from a bank. A solvent bank can borrow for emergency cash needs from its bank, the Bank of England, if it cannot get its cash needs directly from the market.If either a bank or an engineering company is insolvent it should stop trading to prevent that company entering new contracts it cannot honour, and to pay out as much as possible against the money it does owe from what assets it does hold.
No bank is shielded from adhering to proper accounting practises. Banking is a different kind of business model, because it always has an element of borrowing short to lend long, and is therefore dependent on confidence.

]]> By: Sue Doughty http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6074 Sue Doughty Sat, 15 Sep 2007 12:25:39 +0000 http://www.johnredwoodsdiary.com/2007/09/15/a-question-of-confidence/#comment-6074 The Northern Rock bank went to the Bank of England, actually the Treasury, to ask for credit. It could do this because it is a British bank, but what will happen on mainland Europe if a bank that is, say French, or Greek, gets into the same state? Who do they go to for a credit extension? The European Central Bank doesn't have the wherewithall or the instruments to back banks they are supposed to be serving. Will the banks with whom we have our overseas mortgages on our overseas homes just close and hand the deeds of our holiday homes over to their debtors, likely the local tax collection agency? Does HM Treasury have enough money to cover the requirements of Northern Rock? Reply: The Bank of England does have enough money to cover Northern Rock's requirements. Northern Rock will need to pledge its assets to the Bank if it does take out some of the credit on offer. The European Central Bank has substantial resources, and has been making money available in Euro markets when needed. The German bank which got into difficulties was absorbed by another bank. The Northern Rock bank went to the Bank of England, actually the Treasury, to ask for credit. It could do this because it is a British bank, but what will happen on mainland Europe if a bank that is, say French, or Greek, gets into the same state? Who do they go to for a credit extension? The European Central Bank doesn’t have the wherewithall or the instruments to back banks they are supposed to be serving.
Will the banks with whom we have our overseas mortgages on our overseas homes just close and hand the deeds of our holiday homes over to their debtors, likely the local tax collection agency?

Does HM Treasury have enough money to cover the requirements of Northern Rock?

Reply: The Bank of England does have enough money to cover Northern Rock’s requirements. Northern Rock will need to pledge its assets to the Bank if it does take out some of the credit on offer.
The European Central Bank has substantial resources, and has been making money available in Euro markets when needed. The German bank which got into difficulties was absorbed by another bank.

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