UK Banks get more bailout £;Japan exports fall 35%

Jan.22, 1:00 am Montréal Québec

The good news is that President Barack Obama is now president and has already begun to act. Much maligned former President Bush is now safely back in Texas. He deserves some credit for his access to AIDS drug program in Africa and for his willingness despite being a conservative to introduce and promote Keynes style stimulus even if the size of the stimulus turned out to be too small and too much went to tax reductions for wealthy individuals.

The facts are that Bush adopted a substantial deficit stimulus strategy when virtually no one else did or was even willing to publicly embrace the wisdom of the idea or think that it was necessary to do so including almost all of the Democratic party leadership who were opposed to deficits.In Canada , of course , the fiscal conservatism was even more dogmatic and unthinking, even at the heart of the Liberal party.
So I thank him for that intelligent far sighted   policy decision which has historic significance and wish him and his family a good period of post Presidential R. and R. even as I disagree with some of his other policies, particularly his foreign policy.

President Obama has made it clear that he believes in Keynesian stimulus on a much bolder scale than President Bush
,particularly now that it is very clear that the circumstances demand it. I welcome his commitment to spending what is necessary to put the economy back on a growth track.

In the United Kingdom Prime Minister Gordon Brown and Chancellor of the Exchequer Darling have announced a second bailout package for the banks after it was revealed that RBS which will now be 70% government owned
racked up 28 billion £ of losses during the past year. The PM blasted the bank for its irresponsible decision taking, including an excessively risky 2.5 billion £ loan to a Russian, London based billionaire Leonid Blavatnic who is the owner of a troubled chemical company, LyndellBasell.

The British Government nevertheless announced a new programme of £50 billion worth of new loan guarantees and the possibility of the government buying up toxic assets for a fee. Each loan would be considered on a case by case basis and the banks would be responsible for a portion of the losses.

The Obama administration is now considering what to do about their banking system and the toxic assets which litter their balance sheets. The issue of how to purchase them to unlock the banking system and yet prevent all of the losses falling to to the taxpayers is at the heart of the problem.

Analysts like Nouriel Roubini are arguing gloomily that there may be as much as 3.5 trillion $ (US) in bad assets which is a lot larger than the TARP funds that remain. But if these were bought up at 10- cents on the dollar on average with a proviso that further down the path as confidence returns and the value of the assets inevitably rises back closer to the normal fair market value some of this recovery would be shared with the banks in exchange for preferred shares and other taxpayer rights. In the end on average it is possible that one might get 30-40 % of the original market price or more on some of the assets.

In any case the news from Asia is also not positive. Japan has experienced a 35 % decline in the value of its December 2008 exports in comparison with December 2007 and manufacturing sentiment is at a new low.

The Bank of Japan has cut it interest rate to 0.10 % from 0.30 % and has confirmed that it will be buying short term commercial paper in an effort to stimulate liquidity.The strong Yen is also causing problems for Japanese exports. China is also experiencing a slow down in growth.

So President Obama has plenty on his plate.It is probably a good time to begin thinking about an international brain storming conference of leading economic powers to co-ordinate stimulus and monetary policies and to ensure that damaging protectionist trade practices do not exacerbate the situation.

This kind of international co-operation is also helpful in figuring out the appropriate strategy with respect to reverse auctions and the most effective way of releasing the banks from their toxic debt so that they will begin the process of lending. Certainly if they have received government bailout money this should be a fundamental obligation that if necessary they should be ordered to fulfill.