Friday, November 7, 2008

Taxpayers’ greed will retard growth. Music started!

The UK and US Treasuries succumbed to taxpayer populism and set too demanding conditions on the preference shares acquired in the partially or wholly socialized banks so that the banks would concentrate on purchasing the stakes held by the governments and that the taxpayers’ funds would be reimbursed without losses.

A 10 percent dividend yield on such shares is well above any long-term real rate of return on equities. Therefore the banks will maintain the present high margins on their lending to businesses and households to safeguard that the governments receive their dividends and that no additional socialization (nationalization) will occur. But, high margins on lending rates of interest will also prevent the economies from a quick recovery. That is, the taxpayers’ ultimate investment losses will only convert into a slower rise of their living standards.

Of course, there is the other route. The contracts are in nominal terms. Therefore by setting on a higher rate of inflation over the next five years or so, the governments can erode the real value of their claims in the banks but to secure a nominal capital gain on the taxpayers’ investments. That is why music started again – the recent aggressive cuts of the steering rates all over the world.

However this route causes additional losses in the financial system by melting the bubble in the government bond prices which further retards world growth, because the losses can only be covered from operating cash flows of the basic lending business; see trough of the US debt crisis.

Farewell inflation targets! Goodbye independence of central banks!

PS. Alternatively, the governments could have advanced amicable cannibalism within the banking sector by granting access to the government loans on equal terms for every regulated bank, but with less government money at risk.

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