So can someone please tell me where this £500 billion has come from?

[Callisto]

Because I don't understand. Has GB borrowed it from somewhere and if so where?

To attempt to answer the OP question: you can think of it as the govt "borrowing" 500BN to buy some bargin PREFERENCE shares from the banks.

The thing is, just the share scale of the buying makes the implied value of the PREF SHARES go up (altho' these haven't traded yet). Warren Buffet did the same will Goldman Sachs and he is well in the money. You can think of the banks as being distressed/hard up banks. So the public will probably make money on this!!

For those who have cash, they will be great long term bargins in the market for all assets over the next year or two. And guess what, the govt can "print money" to buy distress assets. It is just that this is not what govts are meant to do but in this case it has to be done to stabilise the market. It is a nice by product that the public sector can screw the private sector for a change!

Actually i think that 50BN is for buying prefernce shares;

100BN for liquidity/interbank lending, just shaort term loans to free up supply of cash and push down interbank lending rates

250BN is a facility set aside for the govt insuring debts for a fair fee.

So none of the money is being given away. The govt is basically acting as a big bank to free things up. Actually it is an explicit role of the bank of england to act as LENDER of LAST RESORT and to ensure market stability.

banks never "own" as much
money as they lend. Infact they mostly borrow to lend. Effectively
banks borrow money from savers and then lend this money out. They do
have to have a certain amount of net assets per solvency rules set by
regulators. Their "front door" customer borrowings and lendings
fluctuate but they have a system of overnight interbank lending to
make up daily short falls. The central bank is then the "LENDER OF
LAST RESORT" for any unresolved shortfalls. The recent uncertainty
means that banks are less willing to lend to each other and are hiking
the interbank lending rates to punitive levels, clogging up the supply
of credit.
So if you have a serious crisis in confidence then even sound banks
could get caught out/short of cash as people panic and move money
around- evidence European banks now failing.

Thank you ToughDaddy, I have a vague grasp of the problems, I just can't get a definitive answer about where the £500 billion is coming from.

If the govt prints money it devalues Sterling which surely exacerbates the current crisis.

If the govt borrows money (from Iceland's new best friend for eg) it will put a huge strain on the public finances which are already running on a vast overdraft.

There is certainly no money in the kitty for any of these measures. As I understand it the country is already in the red by nearly £500 billion and the annual interest payment is more than the entire yearly defence budget. Like Expat, I'm not convinced that guaranteeing all of this money is a good idea.

Plus, if the govt does have to pay out even £100 billion the coming recession will mean there is less money going in to the nation's coffers so it will be even harder to pay this off. I don't believe for a minute that British taxpayers will ever be paid a dividend, even if this really does 'fix' things.

(And can I just point out the gigantic ego of Gordon Brown that he thinks he can fix things?)

I think the problem is that businesses rely on investment and borrowing to do business now - to make sure that they can buy raw materials and fund their pay roll. Like councils, they have their money in banks, not in a big safe. If the banks can't trade people will not get paid next week. Everything - hospitals, schools, the police - relies on money being able to move around the system.

Yes, this strategy might not work. Yes, it will cost the UK money which it will not therefore be able to spend on other things. Yes, the government is firefighting. I just want to be in the position of being a taxpayer tomorrow - a taxpayer paying higher taxes maybe, but a taxpayer with a roof over her head and food in the cupboard. Thats what I'm hoping for.

Me too madame I am worrying more now about the bigger picture of what sort of country our kids are growing up into.We are all going to be a lot worse off financially and houses will be homes and not cash machines.But I am hoping for a warm home and food on the table i really believe its going to be dreadful

DP works for a manufacturing company - I'm not holding out much hope that he will still be working there this time next year.

Hmmm this seems to me to be borrowing!!

the uk.gov haven't got anything to spend

If they had this kind of money available then it would be available for public services!

I've always wondered "why not just print more money"

That WOULDN'T work, our economy would collapse (search Zimbaree) 1000%+ inflation

What is going to happen is....
Food will get much more expensive
Utilities will get more expensive
Council Tax will be alot higher

I'm waiting for the stock market to hit 3000
then I'll be buying as many shares as I can afford.

The stock market "shouldn't" be able to go below 3000 as MANY, MANY companys will fail.

I'll take my chances at LSE 3000 and risk the loss.

I've got 20 years to retire, 450K in the bank and a hope the stock market crashes Hard!!!

I'll let you know how I get on in the coming weeks.

BTW, Online Betting was offering 60:1 that the Stock Market wouldn't be below 5000 on the 1st oct 2008!!!!

Looking at it now the odds are 3:1 that it'll be below 3000 in December.

REALLY BAD ODDS

That should have read Zimbarwee

Smithy, hope it all works out for you.

I've just lost a massive amount of money. If it falls below 3000 even more. Agree if you buy at this level you may make a killing in the long run. I just hope it bounces back soon then I will draw out.

I'm very worried for the future economy, not just for myself. I've lost a job recently and need to replace it soon. All I care about is having enough to keep fed, warm and pay the outgoings atm.

Of course they cannot print more money. It doesn't work like that.

btw its Zimbabwee

Caliisto- as you you said normally printing the money should devalue sterling vs other currencies and we are seeing a little of that BUt don't forget other govts are having to/will have to do similiar. WOuldn't like to be an FX trader in these markets!

Yes it is borrowing and breaking the target level of borrowing. BUT don't forget some of the borrowing is VERY short term and so wouldn't show in the quarter end accounts. Also some of the borrowing is to invest (as opposed to consuming) so the (net) accounting entries would be
CR govt borrowing
DR Investments

or something like that. So it makes the govt balance sheet a bit riskier but I think that the share acquisition bit will end up in profit as the Govt will not be forced sellers of the shares and businesses such as Lloyds are fundamentally very profitable franchises .

This financial shock will have many casualties but we need to reflect a bit. If all asset prices fall then it means that in RELATIVE terms some of us have become richer and some poorer. For example those who had a larger proportion of their assets in cash have benefited in RELATIVE terms. Although it might seem that we are all NOMINALLY poorer surely it is the relative measure that matters?

The house price bubble also randomly made those with real estate inheritance randomly richer. We never complain about "upward shocks" to asset prices but downward shocks affect us psychologically a great deal more.

The employment impact at risk is perhaps the most important issue; as it arguably produces great wastage to the economy- suddenly we are all calling for Keynesian management of the economy!

Big losers are those of us who have shares in Banks and the wider finance sector as the market has now devalued these shares as the expect the govt to "jump in" as preference shareholders on the cheap and screw the existing shareholders. Perversely this, this adds downward pressure to the FTSE! Many of us have lost value in our pensions but c'est la vie.

In a way the success in creating very long period of stability (Western Central banks keeping inflation low etc)resulted in the market models reducing their expectations of risk and crashes. But perversely, a long period of stability and confidence means that there was a larger correction building up.

In future market valuations etc will account for more risk and look back further in time to pick up extreme crashes such as the last depression which was not taken into account. Central banks will ask lending banks to lend less vs the capital that they hold in reserve.

ALSO Central banks SHOULD INTERVENE TO MANAGE EXCESSIVE BOOMS. They have been too scared to this in the past. So instead of being narrow minded about their mandates a la our MPC they shouldn't just look at headline consumer inflation but also look at future inflationary pressures such as house price boom. Govt must also explicitly widen BoE mandate.

There are MANY POSITIVES to this evolutionary shock that we should reflect on.

ToughDaddy - bit difficult to see the positives when you are about 60K down in one day (yes I know long term view and all that but ouch).

Am glad the city doesn't work weekends.

Toughdaddy, I agree that is as clear as mud. You post as though you have vast knowledge. I'm not being sarcastic. What sector do you work in?

I think the whole economy has been based on a lie. The whole system on paper and nothing else. Property prices trebelled in the past 10 years. Lending based on this. Excessive bad debt. Go over 15K cannot pay back OK go bankrupt etc. No gold standard to back it up. bust.

All I know is that I tried to speculate to accumulate, only to put DD through Uni etc. and I've lost 15K bang gone! Also lost a job and am worried. Prices rising, had to buy bargains today. It's going to catch up with everyone soon, just normal people.

Whomoved, God though it was bad for me, guess the higher you rise the harder you fall. Its OK if you don't need it but I was just about to pull some out because I did, then this week happened.

WMMChoc- I understand. I thought that I had sold all my shares last year then I remembered that I haven't done anything about my pensions so you have company.

If I see a resonable bounce, I will cut my losses and sell, then buy back when FTSE drops back again. You see I think that the market is on a ride to nowhere for several months if not a couple of years so I will sell the highs if I see them.

Some positives:

-Oil prices and commodity prices are on the way down removing the inflation constraint for central banks
-Interest rates on the way down
-We reflect on the fact that we are too consumer oriented and cut bank on our wastage

Witcheseve - actually we are v lucky. We have no mortgage, and some safer investments (unless the govt goes tits up in which case we are all fucked anyway), plus an unfunded pension which hopefully will be safe - so that gives me some confidence.

Also I think we do need to go through this as a country and indeed as a world, to counter some of the stupid practices that have grown up over the last ten years. Hopefully in five years it will all be a horrible memory and in two years we will start a recovery. But I think a cold mean winter lies ahead for many.

I have a friend who is newly pregnant and who has a job and pension with BA - I'm frightened to talk to her about money because she is totally convinced everything is going to be okay.

Toughdaddy, you are wise, hey don't forget me. I've lost a bit too . Next time its on the up I'm selling, everything I need and for a caribbean cruise or two, then leave the rest for DD to worry about. Gawd I'm only 47!

witcheseve- I will own up to working in the City.

Whomoved. Even though I've lost for now I do agree with you. It was getting stupid. I've always tried to be frugal, got burnt now, but when I see how other so called working class people spend I'm . Some end up bankrupt but then its water of a ducks back. I think you know what I mean. New kitchens, expensive hols, designer clothes, botox Oh if only.

I knew it!. If you can offer any tips my email is [email protected]. lol