The downgrade has both financial and political ramifications.  It is sure to increase the country’s cost of borrowing and may even boost the out-of-favor Conservative Party to victory in the next election, which may come as early as next year.

Even though the agency reaffirmed its ‘AAA’ long-term and ‘A-1+’ short-term credit ratings for the United Kingdom, the downgrade may be cause for alarm among its debt holders and citizens.

“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term,” Standard & Poor’s credit analyst David Beers said in a statement, according to Reuters.

S&P questions the government’s stance regarding “how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow,” Beers said in the statement.

Just minutes before S&P announced the ratings cut, the government released figures that revealed the budget deficit hit $13.4 billion (8.5 billion pounds) in April, the most for that month since records began.

Government bond futures, British share prices and the pound fell sharply after the S&P announcement.

Britain’s finance minister Alistair Darling said the economic future is still not clear and S&P could reverse itself if the United Kingdom is able to make significant progress towards reducing its budget deficit to its stated goal of $276 billion (175 billion pounds) this year.

The government has launched a program of quantitative easing to buy a record $340 billion (220 billion pounds) in government bonds, which has ballooned the deficit.  Some analysts have criticized the program and characterized government projections that deficits would shrink in the future and spark economic growth as unrealistic.

But the government is holding to its view.

“There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable ‘if fiscal outturns are more benign than (they) currently anticipate’,” a Treasury spokesman said, according to Reuters.

“The Budget set out a clear plan to halve the deficit in five years. That judgment was based on a deliberately cautious view of the public finances,” the Treasury added.

S&P said Britain’s high debt ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility, and relatively flexible product and labor markets, Reuters reported.

But in an ominous warning, S&P said that it would consider lowering the U.K.’s top-tier AAA debt rating if the next Government does not take radical measures to reduce the scale of public debt, according to the Daily Telegraph.

“The rating could be lowered if we conclude that, following the election, the next Government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory,” Beers said.

The specter of a divisive election – now likely in 2010 – is raising political uncertainty about how government policy may affect fiscal matters in the future.
Analysts were unsure if fallout from the economic crisis could convince voters to change parties in order to deal with the deteriorating debt situation.  But S&P’s downgrade is sure to bear on the minds of the victorious party.

“Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day – but today’s announcement by S&P puts that much more pressure on the next government to act quickly,” Colin Ellis of Daiwa Securities Group Inc. told Reuters.

Source: S&P Lowers U.K. Credit Outlook Putting Election in Flux

As we looked out over the absurd hallucinations, delusions and lies of the Bubble Years – oh, those happy days! – we warned that the coming correction “would be a doozy.”

And a doozy it is.

‘Doozy’ is a technical term we feral economists use. “Depression” is what most people call it.

“Slump worst for 50 years,” is the big headline in the Financial Times over the weekend.

“Data reveal recession worst than feared.”

And the full weight of it has yet to fall upon the economy. A correction takes times…especially when it is not merely a cyclical recession, but a structural depression. The whole structure of the world’s economy is being reshaped. The banking system is insolvent. Thousands of businesses are broke. Millions of households are upside down financially. Joblessness is rising into the tens of millions and may reach 100 million worldwide.

“One of the severest downturns in generations,” said U.K. Chancellor Alistair Darling.

The downturn is going to be tough for almost everyone, almost everywhere. The French have to learn to live with fewer tourists at home and fewer bottles of champagne exported abroad. The English have to learn to with less revenue from financial services. The Chinese – and Asians generally – have to figure out what to do with all those TV sets that junk Americans aren’t buying anymore. Arabs wonder what to do with their oil.

Americans, meanwhile, have to figure out how to get by in a world where strangers aren’t so kind. You’ll remember what made the world go round this last quarter century. Those nice strangers made things and shipped them to Americans. The Americans paid for them with I.O.Us. The foreigners were so accommodating, they never asked for payment. Instead, the I.O.U.s just piled up in their vaults.

All that has come to an end. Trade is collapsing. And now it’s every man for himself. Sauve qui peut. Americans aren’t buying. Chinese aren’t selling. So far, the strangers are still being nice about America’s I.O.U.s. They’re politely holding onto their Treasury bonds and not insisting on payment. But they’ve made it clear that they’re not exactly looking for a lot more of them…not when the value of America’s collateral is falling so sharply. And they’ve made it clear that if the United States lets these I.O.U.s go down anymore, they won’t be very happy about it.

But what we’re wondering is whether we should add a corollary to our dictum: Yes, the force of a correction is equal and opposite to the deception that preceded it. And the measures taken to stop the correction will be just as absurd as the crackpot ideas that got the economy into trouble in the first place.

We don’t know what particular good this insight does for us. But it just shows that the show isn’t over. One hallucination may have run its course, but there are plenty more. And they have consequences too.

What the world waits to see is how long it takes these consequences to reveal themselves. No one doubts, broadly, what the consequences will be. Governments are doing their level best to create inflation. Sooner or later, they’ll get the hang of it. But when? How?

That’s the thing…no one knows. The depression is taking the stuffing out of prices. Trillions in nominal purchasing power have disappeared. Workers have been laid off by the millions. There are too many Starbucks…too many malls…too many factories. All these things are dragging down prices…even while the feds inflate the money supply. Where will the turnaround come? When will prices stop going down and begin going up?

No one knows…

*** We have come back to Nicaragua – for the first time in three years. It’s the kids’ winter vacation. But now, we only have one kid with us – Edward, 15 years old. All the others aren’t kids anymore. They’re away at college…or working.

Even Elizabeth is away at college. She is studying at the Sorbonne and can’t join us until next week. Until next week, it is just us…the sea…the sun…the tropics…and all that goes with it.

Right now, we are sitting on the veranda of the Rancho Santana clubhouse. The sun is bright and hot over the ocean…a sea breeze cools the air…the palm trees sway…the waves crash onto the shore, spinning the surfer’s head over heels.

Eat your hearts out, dear readers…

“What’s this?” Edward was pointing at a strange animal that looked like a giant cockroach.

“It’s a bug,” his father, the naturalist, answered.

Darwin seemed to have no natural enemies last week. It was the 200th anniversary of Darwin’s birth. His theory was blessed in every account we saw. Everyone was on his side. As a result his ideas reproduced and multiplied until they were in practically every newspaper.

Commentators saw Darwinism at work everywhere. In the current worldwide financial meltdown, for example, they thought they saw not the beneficent ‘invisible hand’ of Adam Smith, but the bloody claw of natural selection. “It’s the survival of the fittest at work,” said one opinionist.

Ideas, like rats, need predators. Otherwise, they get out of hand. Seeing none to cull the weak parts of Darwin’s pensee, we will do it ourselves.

There are two parts to Darwinism as it is popularly understood. One part is based on observation – at which Darwin was a master. The other is extrapolation – not so much on Darwin’s part, but his followers. The problem is that the part that is probably correct is child-like and obvious. And the part that is more grown up is nothing more than empty guesswork. He notes that some animals are better suited to their environments than others. If a polar bear were suddenly born to a hog here in Nicaragua, it probably wouldn’t last long. On the other hand, if a mutation produced a naked polar bear at the North Pole, it wouldn’t stand much of a chance either. Both would probably perish, leaving no heirs or assigns…and thus removing from the gene pool whatever crazy aberration that created them. Some things survive and reproduce; some don’t. The essence of Darwinism is nothing more than that simple-minded observation, as near as we can tell.

But the application of this notion far and wide is a threat to the intellectual eco-system. Because of it, people think they know a lot more than they actually know. To the question, why is the polar bear white, rather than black, they have a ready answer: because evolution made him white. But this is no answer at all…it just postpones thinking until the next question: why did evolution make him that way?

Then, the guesses begin: because he can blend into the snowy background and sneak up on seals. Oh. They tell us, for example, that he covers his nose – which is black – with his paw, so he can get closer without being spotted.

Smart bear. But you’d think if evolution could turn his whole body black it could whitewash his nose too. And what about the seals? Are they morons? You’d think those that couldn’t tell the difference between a bear with his paw over his nose and an iceberg would have been weeded out by now. Besides, why aren’t seals white?

Of course, the biologists and know-it-alls have their answers, but they are just putting 2 and 2 together in the clumsiest way. They really don’t know why polar bears are white. All they know is that nature hasn’t exterminated the white polar bears – yet.

Many of these deep thinkers also believe that Darwin proved that God didn’t create man. Instead, man arose by the process of evolution, they say, one accidental step at a time. Man is the product of pure chance, they claim. As if God couldn’t make it look like an accident, if He wanted!

Source: A Doozy of a Depression

The biggest laugh I had all week was from Bloomberg.com reporting that “European consumers are ‘suffering as surging food and energy prices erode the value of their wages’, finance officials said” which is not itself funny, but the article immediately goes on that this is “urging governments to boost spending to help the poorest deal with the fastest inflation in 16 years.” Hahahaha!

Consumers are suffering because the stupid European governments boosted spending for a decade or more, the money financed by debt, and it is all of this spending that has made the purchasing power of the euro to fall. And now the governments are going to boost spending some more Hahaha!

But it’s okay, these guys are saying, because it’s “to help the poorest deal with the fastest inflation in 16 years.” Hahahaha! Idiots! As Strother Martin said of Butch Cassidy and the Sundance Kid in the movie of the same name as they went down the mountain to La Paz, “Idiots! I’ve got idiots on my team!”

For example, Jean-Claude Juncker of Luxembourg is quoted as saying, “The least well off in our societies are very seriously exposed to a loss of purchasing power due to the increase of oil prices, of commodity prices and food prices”, which is true.

Then, bizarrely, he says that this inflation-from-too-much-spending makes it imperative that “It’s up to public budgets to react to this loss in purchasing power by helping out the least well off”! Hahahaha!

And how does he suggest we do that? Naturally, anybody with an ounce of brains or education knows that the first thing you do is stop creating more money and credit, which is what causes a “loss in purchasing power” in the first damned place.

Naturally, I figure that since the solution is so simple that it was time to go out for something tasty to eat and something wet to drink, and then maybe take in a couple of XXX-rated movies, but I was wrong, as here comes European Central Bank President Jean-Claude Trichet saying that inflation will remain “high’’ for quite some time to come, and European Union Monetary Affairs Commissioner Joaquin Almunia saying “We need to do more,’’ because “Inflation is a socially negative tax on the poorest’’ people, which it is, and that is why it is so imperative to stop creating more money and credit nowm not create more, you idiots!

Participating in this Gang of Morons Idiocy (GOMI) is U.K. Chancellor of the Exchequer Alistair Darling, who “cut the tax bills of Britain’s poorest families by 2.7 billion pounds ($5.25 billion) in a bid to cushion the blow from higher prices”, which is a nice thing to do, especially if you don’t want to overlook the fact that they were taxing Britain’s poorest families to start with, which tells you all you need to know about the good intentions of the British government.

But the horror is that they are NOT proposing to stop creating more money and credit! They were proposing to create MORE money and credit, making everything worse, as we learn to our horror when Darling said he will “raise government borrowing to finance the decision as slower economic growth curbs tax revenue.”

John Stepek, writing in the Money Morning newsletter from MoneyWeek.com, writes “Gordon Brown’s response to the end of his economic ‘miracle’ is to rattle off yet another succession of bills. You’d think he’d realise that the British consumer is sick of bills by now. But no. The man once laughably described as the Iron Chancellor has thrown off all pretence of fiscal competence and is now flinging money he doesn’t have at problems he can’t solve.”

And speaking of inflationary things that people can’t solve, Christopher Laird of PrudentSquirrel.com writes that “There is a report that 25% of the world wheat crop is at serious risk of a new virulent wheat rust that chokes the wheat before it comes to head. The US has its own concerns over a wheat rust spreading through the Mid West. So, what are the chances of a record grain harvest in 08?”

Naturally, I have no idea about the chances of anything since I figure that neither my marriage nor my career will last until the weekend, and so Mr. Laird gives us a hint. “Just to give an idea of the concern about food,” he writes, “China just spent a $400 a ton premium on fertilizer that used to cost $170 a ton Jan 08. It was a huge order. Reason? They are afraid that if they don’t have great harvests this year, tens of millions may starve in 09.”

And in case you don’t care about Europeans but are concerned about the other hemisphere because that is where you live, SteveQuayle.com posted a news.bbc.so.uk story that “The price of tortillas, a staple food in Mexico, are set to rise 18% in the next few weeks, an industry group says”.

This is bad news because “Thousands of people protested against tortilla price rises in Mexico last year” when tortilla prices rose “by more than 10%.”

So, Mexicans rioted at 10% inflation, and now everyone is wondering what they will do about 18% inflation in tortillas? Hahahaha! Welcome to inflationary hell! Ugh.

The Mogambo Sez: Ahh, commodities! Verily I say unto thee; thy gold, thy silver and thy oil sustain me when all others wouldst betray me, as they now betray all those who were tempted by the charms and promises of “invest in the stock market, invest in the bond market, invest in the housing market, and invest in a larger government for the long-term!”

Until next time,

The Mogambo Guru
for The Daily Reckoning

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Source: Inflationary Tortillas

But Alistair Darling’s woes are on the other side of the account. He’s based his plans on how much money he thinks he’ll have coming in. Trouble is, he might end up with much less to play with than he thinks.

The National Institute of Economic and Social Research has calculated that the Government will need to borrow £16 billion more than they’ve planned to over the next two years. This is equivalent to what would be raised by adding 4p to the basic rate of income tax.

The institute is blaming (surprise surprise) the credit crunch. As consumers rein in their spending, they pay less in VAT. The squeeze on the mortgage market means fewer houses are bought and sold, meaning a reduction in stamp duty receipts.

One of the biggest problem areas is the City. In recent years, financial high-flyers have enjoyed multi-million pound bonuses. The Treasury taxed these bonuses. They also got the VAT from all the high-profile consumption these bonuses fuelled. And, of course, they enjoyed a flow of revenue from the banks’ profits, and from the duties imposed on their dealings.

But across the Thames from our office, things are slowing down. I recently visited the workplace of one City friend, where he gave me the Grand Tour. One floor in particular was eerily quiet.

“This is Debt,” explained my friend. “They’ve not got much to do at the moment!”

Activity levels are down across the Square Mile. And they could stay that way for a while. Except for the lucky few, the days of the megabonus are over.

All of which means less tax for the Government. And more borrowing. Inevitably the powers that be will blame the credit crunch, and will repeat those words like a mantra. But let’s not forget how we got into this mess.

What we’re seeing now is a straight-forward debt-hangover, but on a macroeconomic level. Blaming the credit crunch is a bit like maxing out your card and then, when you can’t afford to go on holiday, saying it’s the card company’s fault for not lending you any more money.

I’m not saying the Government should have forcibly prevented people borrowing beyond their means. Those consumers now belt-tightening are big boys and girls — they don’t need the state to hold their hand.

But where the Government is culpable is in allowing a credit bubble to get out of hand, because it suited their political ends. It was happy to crow about its economic credentials, especially when an election loomed.

But now the bubble’s burst. It could well have left Darling’s latest Budget in tatters. As a result, Labour is expected to sustain heavy losses in today’s local elections. They’ve only themselves to blame.

Bank of England hints worst is over for credit crunch

John Gieve, number two to Big Merv at the Bank of England, has dropped a hint that the worst of the credit crunch could be behind us.

He reckons the credit markets “overstate the losses that will ultimately be felt by the financial system and the economy as a whole”.

Gieve’s view is predicated on the idea that current market prices imply an “unprecedented” level of default in mortgage backed assets. Basically, 76% of risky mortgages sold in 2007 would have to default for today’s market prices to be accurate. That’s unlikely.

But is Gieve right? Is it time to just dive back into the market?

“Don’t bet on it!” says our research director Theo Casey. “Prices in this market are based on irrational fear, not reasoned historical data analysis. Gieve has a fair point. But with sentiment the way it is now, you could well lose money by being right.”

Theo also points out that the Bank is not totally unbiased in all this. “With their new Special Liquidity Scheme, they’ve just swapped around £50 billion of safe government bonds for mortgage-backed assets,” he says. “So they’ve a vested interest in talking these up”.

Fed cuts rates, but markets don’t like it

The US Federal Reserve cut interest rates last night, from 2.25% to 2%. However, the Fed gave a strong indication that this is the end (for now) of its aggressive rate-cutting policy.

This probably explains why the market responded negatively — the S&P 500 closed down 0.38%.

The dollar rose on the news. It reached its highest level for five weeks against the euro as investors opened new long positions.

Meanwhile US growth figures for the first quarter of the year were ahead of expectations. US GDP grew at 0.6% over the year.

“Not a huge figure — but it’s still growth,” says Garry White. But Manraaj Singh isn’t convinced.

“They always revise these things downwards after about three months,” he warns.

And this wasn’t the only time this morning when Manraaj and Garry’s views diverged…

The US — Iran showdown: good news for oil investors

Iran has stopped accepting dollars for its oil. It will now sell oil for a whole range of currencies — but not the US dollar.

“That’s hardly news,” says Garry White. “They’ve been talking about an Iranian Oil Bourse for years. The reason they’ve announced this again now is simple — propaganda.”

Manraaj agrees. Both he and Garry reckon there’ll be a lot more sabre-rattling from both sides over this. As Garry explains in his piece today, the very future of the dollar is at stake. America’s role as a global superpower hangs in the balance.

But Garry and Manraaj disagree on how best to play this. Garry’s a commodities man, so he’s going straight for the jugular.

Manraaj, on the other hand, is taking a backdoor route. His is a “special situations” approach, and right now he’s looking at an investment that will allow British investors to gatecrash the Arabs’ oil party!

Until tomorrow

Ben Traynor

Who stated last Sunday that Tony Blair is convinced that Brown can’t possibly beat David Cameron in a General Election.

Or maybe he’s put out by the fact that he’s having to promise concessions to all the people who are going to suffer from the abolition of the 10p tax.

Either way… as Brown staggers around the country putting all his efforts into convincing us he’s not a wounded animal… who’s looking into fixing the crippled economy?

Alistair Darling? He doesn’t operate without Brown standing right behind him… does he?

It’s all very well for Brown to come out and say he’s not going to concentrate on: “gossip and rumour.” But it seems to me that this is all he has been doing lately.

What is the point of all these publicity stunts and safe facing exercises when we have real problems to solve? A cynic might say it’s to detract attention from what you’re actually doing… i.e. NOTHING…

Well I think that fixing our problems is a better avenue to attempt to win a General Election on… as opposed to publicity and spin.

The finance sector makes up one third of our economic output, contributes £20 billion to the trade balance… and accounted for nearly HALF of UK GDP growth in 2007.

There are now more finance sector workers in Britain than there are construction workers, farmers and factory workers combined.

And they are in trouble!

What’s being done to fix our problems – other than our Leader touring the country to let people know he’s still got a job? Nothing that’s what!

And before anyone points to a £50 billion bail-out…

WE’RE THE ONE’S PAYING FOR THAT BAIL-OUT… YOU AND I… OUT OF OUR OWN POCKETS…

It’s not a bail-out… it’s us shoring up things that are failing – so they fail a bit more slowly…

Even the City is saying that this won’t solve a thing. One investment banker we know said:

“The terms of the Bank of England facility are pretty rubbish, I doubt many banks will use it, you can get better terms privately through the Repo market. I think it’s just a fig leaf to cover the Bank’s total inaction on the sub-prime crisis.”

But hey – slip a sly supposed bail-out in to the mix, whilst getting publicity with one of the world’s most beautiful people – AND MAYBE NOBODY WILL NOTICE THAT THIS £50 BILLION SOLUTION IS A LOAD OF RUBBISH.

WELL GUESS WHAT… WE’VE NOTICED… AND WE’RE PRETTY DARN RILED AT THE CHEEK OF IT ALL.

Let me ask you something dear reader…

What do you think’s going to happen to the domestic economy… and to YOUR savings and investments… if Britain’s ‘Miracle Money Machine’ has its output slashed by one tenth… one third… or even half?

Well – as the pound sinks to a record low against the Euro and investment banks brace themselves for further fallout… it’s time to batten down the hatches, because you’re about to find out.

Below you’ll find the link to a brand new Crisis Report published by The Fleet Street Letter. They’ve also identified three stocks poised to benefit from the finance sector-led recession they believe has to kick off in 2008.

Click here to find out more.

Not only is the most dramatic asset bubble of modern times clearly over… not only are the recent falls in real estate and equities just a taste of what’s to come… but a sector that accounts for nearly one third of Britain’s entire economy is about to get hammered!

If City activity dries up, so does growth, says Damian Reece in The Daily Telegraph. “The entire southeast, from house prices to employment, is a geared play on global financial markets.”

According to its analysts this could be one of the biggest challenges to face the British economy in The Fleet Street Letter’s entire 70-year history.

And it’s hurtling towards your savings and investments like a freight train even as you read this.

And if you’re not ready yet, you’ll want to be soon.

The Fleet Street Letter has been helping its readers prepare their portfolios for the coming crisis since October 2005.

With the situation deteriorating daily, they’ve decided to issue some advice to you today.

Specifically, the team have identified three “gloom loving” stocks they believe will thrive during the finance sector-led recession.

This could be the most important investment advice you read this year.

For the full briefing, click here.

Erin and Isabel
Editors
The Miner Diaries

PS: The Fleet Street Letter says: “If you want to keep your hand in the stock market, these are the simplest ways I know to position yourself to potentially grow wealthier from a likely recession in 2008 and 2009. One 5 minute call to your broker and you’re done.”

Go here for the full report.

Every photo of Darling in this morning’s papers showed him sporting a fierce expression that let the world know that brooking opposition was not one of the Chancellor’s agenda. I suspect, though, that in private he’ll get down on the carpet and simply beg for lower rates. Got to be worth a try…

The stakes are high on this one. It’s not just about propping up the over-inflated housing market. The longer rates stay significantly above the Bank of England base rate, the more impotent the Bank and the government look.

They tried a rate cut — that didn’t work. In fact, Halifax put their lending rates up the next day.

Yesterday they announced a measure which will allow banks to swap mortgage-backed assets for government bonds. Will that work?

“The terms of the Bank of England facility are pretty rubbish,” says an investment banker friend. “I doubt many banks will use it; you can get better terms privately through the Repo market. I think it’s just a fig leaf to cover the Bank’s total inaction on the sub-prime crisis.”

So it’s doubtful whether this latest stunt will cut the mustard. Now Darling’s been reduced to making snarling speeches in Parliament about how we taxpayers are “entitled to expect” lower rates in return for these government-backed loans.

Well, Abbey’s not listening. It’s withdrawn all its buy-to-let mortgages, and today announced a rise in the cost of fixed-rate deals by up to 0.61 percentage points.

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“Don’t count on it,” says Frank. “Other high street banks are likely to do the same thing. The whole sector could move lower before the end of the cycle.”

The banks are likely to heed King’s request. They’ve got little choice — they need the cash. But they’ll do so because it’s in their own interest, not for “the good of the economy”.

That’s why Darling’s pleas are a waste of breath. After all, when was the last time your bank did something for you out of the goodness of its heart?

“We need concerted action by governments, central banks and market participants to help stop this wave [of liquidations]…”
- Josef Ackerman, head of Deutsche Bank, speaking in Frankfurt on 17th March

“The government is prepared to do what it takes to maintain the stability of our financial system…”
- US Treasury secretary Hank Paulson to Fox News, March 16th

“In every country in 2008, every government has one aim – to maintain stability through the world economic slowdown. Britain with its central role in the world’s financial system is no exception…”
- UK finance minister Alistair Darling, in his Budget speech of 12th March

Not quite with it yet? Check these examples: it’s already done for you!

“The US tax-payer last week agreed to help J.P. Morgan acquire Bear Stearns after a run on Bear, once the second-biggest underwriter of US mortgage bonds. In an effort to shore up Wall Street’s other firms, you also agreed to become lender of last resort to all 20 primary dealers in Treasury notes…” (Bloomberg)

“US leveraged institutions, which include banks, brokers-dealers, hedge funds and tax-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday…” (Reuters)

“The [investment] banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And your money is rushing in to help, with hundreds of billions from the tax payer, and hundreds of billions more from tax-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks…” (Paul Krugman in the NY Times)

With it now? Great fun, isn’t it!

Just cut to the chase about bail-outs and financial aid by remembering what the state’s big generous hand-outs are made from – your tax payments, both current and future, plus the spending power of your savings, ripe for inflating away by elected officials and their unelected agents and staff.

This game beats playing “Spoof” any day, we reckon…which is funny again when you come to think about it.  Because Spoof – played in pubs and bars across the world to decide who buys the next round of drinks – is a game without winners, only a loser. Exactly like this game, then.

Let’s play again

“We need a continuing message from tax payers and cash savers around the world that they will do what it takes to support economic growth. That will not be easy. It may necessitate taking some risks with inflation. But the message has to be unambiguous…”

So said John Varley – or as near as damn it – in a long open letter to government, published by The Banker magazine at the start of this month.

Varley is group chief of Barclays bank here in London. According to the annual report released a couple of weeks ago, he took home £2.4 million last year ($4.8m), just down from his 2006 pay-out of £2.5m after annual group profits fell 1% to £7.08 billion “due to the global financial turmoil” as the BBC puts it.

“The privatization of profit and the socialization of loss”

Don’t get us wrong here; I have no problem – moral or otherwise – with the concept of multi-million-dollar salaries. Executive pay merely puts flesh on those inequities which life itself thrives upon. The profit motive in finance is precisely what created the joint-stock company, mortgage lending, the safety-net of insurance, credit cards, overdrafts and all the other monetary tools developed by homo economicus in the last five hundred years.

But what sticks in the craw, however, is the “privatization of profit [and] the socialization of loss” as Martin Wolf calls it in the Financial Times. Every time the bankers screw up, your money steps in to patch up the losses. Letting the crisis wear on is simply not possible, because no one has dared to try it before.

“The authorities feel compelled to intervene,” writes Charles Kindleberger in his history of Manias, Panics & Crashes. “The dominant argument against the view that panics can be cured by being left alone is that they almost never are left alone.” That’s why we get the pleading from Wall Street and Washington alike today.

Please sir, can I have some more?

“Tax-payers need to continue to supply liquidity,” Varley’s article in The Banker very nearly goes on, “and they can help the restarting of the residential mortgage-backed security and commercial mortgage-backed securities markets by being prepared to accept this paper as collateral.”  More than that, “it would have a significantly (and disproportionately) positive impact if your cash savings were to buy commercial paper.”

Ain’t you brave, gentle reader, stepping into the breach so gamely like this! And so modest, too. Thanks to you covering Wall Street’s losses with your tax-dollars, “we’re going to have maybe a mild recession, but we’re going to avoid anything worse,” reckons Jeremy Siegel, professor of economics at Wharton.

Yet the plaudits will go to somebody else, with nary a murmur from you, reckons Siegel. “[Ben] Bernanke may very well easily turn out to be a hero here,” he explains. Which I guess was precisely your aim in putting money aside to provide for your future.

No redemption without legislation

“Systemically important institutions must pay for any official protection they receive,” Martin Wolf continues for the Financial Times. “Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted.  “This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidized, casino will not allocate resources well.”

This quid pro quo – the “this for that” stated so bluntly by Varley at Barclays and Ackerman at Deutsche Bank – is fast-becoming the surest financial consensus in history. If we bail out the banks to stop their stupidity creating a second Great Depression, they must accept far tighter regulation by those governments and bureaucrats who step in to save the day. No redemption without legislation.

There’s always a new way to gear up

Thing is, of course, we’ve all been before. Across the world, hundreds of times. New regulations come in to stall the last crash…and a new complex system of finance sprouts up, thriving on excessive risk which ends up needing your money – your tax receipts and your savings – to mop up the mess when it explodes in turn.

From Barnard’s Act of 1734 – which sought “to prevent the infamous practice of stock-jobbing” that had already peaked and exploded with the South Sea Bubble 14 years earlier – through to Sarbannes-Oxley in 2002, which tried to stop Enron and Worldcom once they had crashed, new standards come in after it matters. Financial risk-taking, meantime, simply moves on to find new ways to gear up, using the latest regulations to pin-point those loopholes that will, in due course, be closed up when it no longer counts.

Just what were the FSA thinking? Or were they not thinking at all?

“After the collapse of Equitable Life in 2000,” notes a letter to The Times of London last week, “the Financial Services Authority [UK watchdog] set up a review team on the regulation of the assurance society. Among the important ‘lessons to be learnt’, identified in 2001 were – and I quote verbatim – that ‘the FSA management take steps to ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge…. “

[Yet] from the recent internal audit by the FSA on its regulation of Northern Rock [the top 5 mortgage lender which blew up in Sept. 2007] we learn that the bank ‘was monitored by supervisors with expertise in insurance, not banking’…”

More than that, the FSA failed to conduct a proper review of Northern Rock’s operations for the entire 18-month period leading up to its collapse. Even then, prior to that last full review of Feb. 2006 – and “contrary to standard practice” as this week’s official report into the scandal revealed – “formal records of key meetings were not prepared.”

Thus the quid pro quo of bail-outs for new rules becomes, in the end, a straight swap of excessive risk for incompetence. Underpinning this long-run historical fact you’ll find the assumption that “if one cannot control expansion of credit in boom, one should at least try to halt contraction of credit in crisis,” as Charles Kindleberger concludes.

For you, the tax-payer and saver, all that means is you get to pay twice – first in higher deductions and then through inflation.

Bet you’re glad Ben Bernanke will get all the thanks.