Where has all the money gone?

A year or so ago we only had to utter the words "new car" for a hundred financial institutions to be fighting for the right to lend us the money to buy an internal combustion engine in a shiny shell. They all had lots of money available for us to use, now they have none. Today I ask: where has all the money gone?

If we scan the various prophecies of doom about the financial world we learn that banks are no longer lending to each other and this contributes to them no longer being able to lend to us. If Bank A no longer lends to Bank Z and, therefore, Bank Z cannot lend to me, it is reasonable to infer that Bank Z does not have any spare money. It is also reasonable to infer that Bank A still has the money it might otherwise have lent to Bank Z. Problem solved, one might think, Bank A can lend me the money. Not necessarily so. The example I have given assumes both that Bank A has a big bag of bank notes in its vaults and sends them on the back of a bike to Bank Z which then gives a few handfuls of £20 notes to me. In fact the amount advanced by banks is not limited by the amount of physical money in circulation. I can illustrate what happens using an example based around the sale of a car.

Mr P owns an old Mercedes. He advertises it for sale in the local paper, someone comes round with £1,000 in cash and buy the car. Mr P now has physical possession of £1,000 worth of paper tokens. He takes them to Bank A and deposits £1,000 in his account. Bank A now has physical possession of £1,000 worth of paper tokens. Bank A knows that Mr P might want his money back at any time and when he calls for it he must be given paper tokens. It also knows that on average only 10% to 15% of the cash it receives will need to be handed out over the counter at any one time, the rest is left in the bank to earn interest. So Bank A decides to be cautious and keep 20% of sums deposited in its safe, the other 80% is put to use.

Mr Q goes into Bank A and asks for a cash loan because his car needs repairs. Bank A has received £1,000 from Mr P so it lends £800 to Mr Q and hands over forty £20 notes. Mr Q pays £800 to Mr R, the mechanic, who deposits the money in Bank B. Bank B also knows it only needs to keep a maximum of 20% in cash so it lends £600 to Mr S who needs to pay to have his leaking roof fixed. Mr S employs Mr T who is paid £600 which he puts into Bank C. Bank C is happy to keep smaller reserves so it lends £500 to Mr U who wants a new computer, which he buys from Mr V who puts the money in Bank A (yes, the same Bank A into which Mr P deposited £1,000). Bank A then lends £400 to Mr W who pays it to Mr X for services rendered and he pays it into Bank B which lends £300 to Mr Y who fancies an expensive evening of fleshy pleasure at Madame Fifi's Sauna and Hanky-Panky Parlour.

The result is that a single deposit of £1,000 has resulted in an additional £2,600 sloshing around the system (Mr P has £1,000 in the bank, Mr R has £800, Mr T has £600, Mr V has £500, Mr X has £400 in the bank and Mr Y has £300 in his pocket until the bill for "extras" arrives) and all of it has been created from a single deposit of £1,000.

Assuming all loans are repaid over one year with 10% interest the spiral unwinds perfectly: Mr Y pays £330 to Bank B, Mr W pays £440 to Bank A, Mr U repays £500 to Bank C together with £50 interest, Mr S provides Bank B with £660, finally Mr Q repays the loan of £800 from Bank A and gives a further £80 for the privilege of having borrowed the money. And all along Mr P still has £1,000 in Bank A. The single deposit of £1,000 has allowed three banks to make a total of £260 in interest despite each only charging 10%. They have to pay the depositors a little interest but on current accounts it is a tiny amount, the net result is that the banks have not only "created" £2,600 for their customers to use they have also made a return of about 25% on the only real money in the whole cycle. It is not just in the musical Cabaret that money makes the world go around.

This illustration is a microcosm (with very conservative levels of lending) of what happened before the banking world stopped turning. In the same way that Bank A borrowed £1,000 from Mr P and turned it into £2,600 of spendable cash for the other people in the chain, so when banks borrow millions they turn it into many millions more of lending. Any snapshot of the amount of money in the world economy reflects not just the real money but also the additional money "created" by commercial lending.

Now that lending has seized-up it is the "created" money which no longer exists. One might be tempted to think this causes no problem because it was all pretend anyway, however the reality is that it was not entirely pretend, it existed on a balance sheet and when things unwind someone will lose. Let me return to the example I gave and illustrate what I mean.

In that example we have a series of loans and a consequential series of deposits in banks. Assume that the first of the loans (£800 to Mr Q) is not repaid because he goes bankrupt. Two consequences ensue. Although the later loans in the chain are unaffected, the total amount of interest earned by the banks falls to £180 from £260, a drop of more than 30%. That is a big chunk of profit to remove from any line of business. Perhaps more importantly, when Mr P goes into Bank A and asks for his £1,000 they are forced to say: "Sorry old chum, we've only got £200, the other £800 went down the pan, lent it to Mr Q who turned out to be a donkey when we thought he was a thoroughbred. We did make £40 from Mr W but that went on the Chairman's Christmas bonus. Terribly sorry, c'est la vie, come back next week and we'll see if we can get some more for you."

The same applies if the problem occurs at any other link in the chain. Take Mr U who borrowed £500 from Bank C. Bank C only made the advance because Mr T had deposited £600. Instead of having £600 to repay Mr T when he wants his money back they only have £100. Although Mr T's £600 was "created" money is was real enough for him and the obligation to repay him is real. Bank C has to find that money from somewhere.

There is, of course, much more to it than just what I have described here, but this simple example shows not only how money is "created" it also shows that the pretend money gives rise to real obligations. When banks fear they might not be able to meet real obligations because their borrowers might not be able to repay loans, the consequence is a reluctance to lend which, in turn, reduces the amount of money they "create".

The answer to "where has all the money gone?" is that it never really existed in the first place.

A first crack in the EU edifice?

First Ireland, then Greece, now Germany. Unlimited government guarantees of bank deposits have become all the rage. What is so interesting about the announcement from Germany today is that it came as heads of government of the EU member states are meeting to agree a one-size-fits-all policy for dealing with collapsing banks. As we know, the French had a hissy fit at Ireland's decision to protect its people's savings. Anti competitive, they said; a fundamental attack on the truth that is EU supremacy, they hinted; unacceptable placing of the national interest first, is what they really meant.

Germany was relatively quiet about the Irish decision, perhaps they knew what was coming. The imminent collapse of a massive German bank, undermined by bad lending (yes, I'm on about that again), required the German government to follow the Irish example. Refusal to do so would have been interpreted as a lack of faith in the ability of the Hypo bank to cover its liabilities and a run on the bank could well have followed. They could not wait for the talking shop of Prime Ministers to issue a half-baked plan which would have suited no one, they had to act because they perceived it to be necessary in the national interest.

We can debate whether such guarantees are a good or bad idea in principle, but that debate will not prevent queues forming when people fear their savings might be lost. The German government did what it judged to be appropriate in the circumstances and cast a cheery two-fingered wave in the direction of EU laws in the process. Over the next few days we will see other countries doing exactly the same even if they have no real fear of runs on their banks; politically they cannot afford to be seen to be protecting their citizens less than the Irish, Greek and German governments are protecting theirs.

Because EU law is not really a system of law at all but a system of power politics we might see all complaints about anti-competitiveness sent to the great back burner in the sky, after all no one can sensibly complain about another country being anti competitive if everyone is doing the same. The EU law will not change but the political climate might. No longer can it be said that EU law takes precedence over narrow national interests. For the first time in half a century the relentless march towards centralised power and the kneeling of national governments before their supra-national master will have been reversed. Not just halted, reversed. A precedent will be set that at times of crisis national governments have the right to look after their country's national interest whether or not it suits the EU plan and whether or not it complies with established EU edicts.

This is an extraordinary opportunity to question the suitability of EU governance, extraordinary because it has nothing to do with the endemic corruption in the EU machinery or the meddling of the EU in the minutiae of everyday life. It is about something much more important, responsibility. For all their faults (and they are legion) only national governments are held responsible by their people. When a national government says "there is nothing we can do, it's EU law" the answer of the people is not "we blame the EU" it is "we blame you for handing power to the EU". The prosecution of greengrocers for selling bananas by the pound rather than the kilo generates a degree of ire, but nothing compared to what would happen if the government said "we cannot protect your savings, the EU won't let us". They know any such statement would run the risk of the Prime Minister being strung up by the neck. They have no option but to defy the EU and take steps to reassure the people that their money is safe.

At long last an issue of sufficient seriousness to the public has led to a direct conflict between national interests and the interests of the EU Superstate, and national interests have prevailed. Time will tell whether it will lead to a wholesale re-think of the EU's one-size-fits-all philosophy, but it is a start. The first crack has appeared in the castle wall.

Oh good, the government is changing the climate

One of the most extraordinary political phenomena of the last year or so has been the emergence of "climate change" as a political issue. My regular reader might ask why I say "the last year or so" when climate issues have been prominent for more than a decade. My reason is simple, until very recently the problem was identified as "man-made global warming". Nothing else, just man-made global warming. It is only in very recent times that this has morphed into "climate change". Yesterday we learned that we are to have a new government department, the Department for Climate Change and Energy. I wonder whether it will really be concerned with climate change.

Governments in modern times have always had to act in response to changes in the weather. 1976 was an unusually hot year in the UK. Starting at Easter and going all through the summer months we experienced high temperatures and lack of rain many had not witnessed before. Steps were taken to control water use because the unusual weather was causing a problem. It was weather, not climate. We have had storms, floods, water shortages and all sorts since 1976 and they have all been caused by weather not climate change.

Weather and climate are different things. Weather is what happens today, tomorrow, next month; climate is about trends, it is about long-term shifts in the overall pattern of weather. Experiencing one hot summer tells us nothing about the likelihood of next summer being hot and one unusually cold winter tells us nothing about the prospects of being able to skate on the Thames next Christmas.

Thirty years is the generally accepted minimum period over which changes in climate should be assessed. There is nothing magic in the period thirty years rather than twenty-nine or thirty-one, but measuring trends can only be useful if done over a reasonably long period and thirty years is roughly a generation so it is a handy period to use. Within a thirty-year period we can see huge differences between the weather in one year and another, so we must ask whether there have been significant changes in averages over the period. More hot summers matched by more cool summers and more cold winters matched by more mild winters indicate a more unsettled pattern but they do not tell us that things are getting generally hotter or colder.

This aspect of climate is relevant to government because changes in average temperatures can affect many apparently banal aspects of policy. If temperatures are on a steady upward trend anything sensitive to increased heat will be affected. Take roads as an example. Resurfacing of motorways is a very expensive business and two factors dictate how long the tarmac surface of a road will last - volume of traffic and temperature. Tarmac suffers from being driven over by more cars, it also suffers if it is colder in winter (frost causes cracking which weakens the surface) or hotter in summer (melting causes thinning of the surface because more material is taken onto car tyres and transported elsewhere, it also causes ruts to develop). Very small changes in average temperatures can have a surprisingly large effect on the damage done to roads, so it is sensible for government to be aware of prospective changes in order to be able to plan its resurfacing budget for the decades ahead.

One might, therefore, be tempted to welcome the creation of a government department concerning itself with climate change because of the practical impact the climate can have on future expenditure. The problem, of course, is that there is precious little chance of the new department being concerned with anything so mundane. No government plans expenditure on the basis of anticipated minuscule annual changes of temperature, still less does it save now for fear that it might have to spend more in the future. If the roads start breaking up a bit more than normal they either increase the budget or let us little people drive on damaged roads for a few more months before the scheduled resurfacing occurs.

So, what is the new department for? This is unclear, so it is perhaps worthwhile looking at a little history.

We have had a Department for Energy before. In the 1970s the Secretary of State for Energy was Anthony Neil Wedgwood Benn, second Viscount Stansgate, the Marxist man of principle who likes to be called Tony Benn. Being a Marxist man of principle he is adamantly opposed to nuclear weapons and has spoken widely about nuclear power being a front for the creation of depleted uranium for use in nuclear weapons. As Secretary of State for Energy he stood by his principles as every good Marxist does by commissioning more nuclear power stations than any other minister before or since. The old Department for Energy existed to deal with deficiencies in energy supply infrastructure. We have deficiencies today, so maybe that part of the new Department will be a good thing. Ah, but there is a problem. The government has already committed itself to spend £100billion on windmills. With any luck the absurdity of this measure will be noticed by the new Secretary of State and he will make proper provision for nuclear and coal power stations instead, time will tell.

But what of the climate change bit? Is it just window dressing to keep the greenies happy or is it a real element of the new Department? After eleven years of Labour government in which nothing has been what they have said it is, I can only hazard a wild guess as to its purpose. We know his party claims to be in thrall to the greenies but I have a funny feeling Gordon doesn't believe the greeny stuff. He has slipped buzzwords into speeches but that is as far as he has gone. In ten hapless years as Chancellor and fourteen disastrous months as Prime Minister he has not made a speech dedicating himself to the warmist cause. Perhaps he has not looked into it, after all we know he did not know what "short selling" was when he banned part of it because he referred to it as "short term selling", a phrase that would never be used by anyone who has spent more than a minute looking into the practice.

Perhaps there is hope. Perhaps it is just window dressing. My fear is that adding "Climate Change" to the name of a government department is just another excuse to raise taxes now that he has run out of money and the financial faeces has hit the fan. What I would prefer is a government that had the courage to look carefully at the evidence for human activity making a detrimental change to climate, look at the things the greenies tell us we have to do to change our ways, assess the effect such a change in behaviour will have on the people of this country and have the courage to say it will not happen on their watch. Gordon is not noted for courage, but you can't stop a fat man dreaming.

They just don't understand corruption

In the run-up to the 1997 general election the Labour Party made innumerable references to "sleaze" and "Tory sleaze". Led by the cerebrally challenged John Prescott the Conservatives were branded unfit to govern. There was never very much behind it. A couple of MPs had accepted money for asking questions in Parliament on behalf of their donors (something done all the time by union-sponsored Labour MPs), one senior minister (Leon Brittan) had resigned after misleading Parliament and another (Jonathan Aitken) accepted expensive hospitality from an arms dealer while minister with responsibility for arms procurement. Apart from that it was the usual stuff of extra-marital affairs and MPs springing from the closet. Not a lot of sleaze over eighteen years in government, but Labour attacked and attacked on the point and the BBC compliantly repeated the line at every opportunity.

After winning the 1997 election Tony Blair famously remarked that his new government would be "whiter-than-white". This was always going to be tricky on the personal sleaze issue because one member of his cabinet had already run off with the wife of another (Lord Irving and Donald Dewar, respectively), another was having an affair (Robin Cook), one was exposed as homosexual (Nick Brown), within a short period John Prescott had an affair with his diary secretary and Peter Mandelson was outed. So it was fifteen-all on the personal sleazeometer, new balls please. Actually, there was one difference between Labour and the Conservatives. Labour said that Conservative ministers who erred in their bedroom activities were unfit to govern, yet none of them resigned when their habits were mad known. Sleaze + hypocrisy = advantage Blues.

The real problem for whiter-then-white Labour was the degree of political sleaze and corruption that engulfed them shortly after taking office. First came the Ecclestone affair, this was a most extraordinary event in which an entirely non-corrupt payment was treated as a bribe by the Labour government. Bernie Ecclestone is a hugely successful businessman and has made substantial donations for many years to whichever political party was in office. There has never been any evidence that he has asked for anything in return and he has explained the payments as being intended to help the party in government run its party affairs separately from its public duties. It seems unlikely that a donation of any size would give the boss of the commercial arm of Formula 1 motor racing access to ministers which he would not otherwise have had - if he ever needed to see them he only needed to pick up the phone regardless of which party he supported. So what did Labour do? They introduced a ban on tobacco sponsorship of sport but exempted Formula 1 motor racing. In other words, they treated the payment from Mr Ecclestone as a bribe even though it was nothing of the sort.

That was a real eye-opener into just how little regard Mr Blair and his government had for normal principles of fair dealing. The following year, 1998, saw the first resignation from the Blair government for sleaze. In 1996 Peter Mandelson, then a Labour MP and close friend and adviser to Tony Blair, borrowed £373,000 from a fellow Labour MP to buy a house in London. After borrowing that money he applied to a building society for a loan to help him buy a property in his constituency in the north of England but did not tell the building society that he already owed someone £373,000. One might think the honest and honourable thing to do when asking for a loan from a commercial lender is to disclose all one's liabilities, only in that way can you be seen to be acting in good faith, but this did not seem important to Mr Mandelson. When the details came out he was forced to resign from the cabinet.

Being keen to show just how "whiter-than-white" he was, one might have expected Mr Blair to decry his colleague's lack of candour, perhaps saying something along the lines: "this is not the standard of behaviour I expect from anyone in my government so I have required Mr Mandelson to resign". But no. Mr Blair said Mandelson had done nothing illegal and left it at that. The idea that ministers should not just squeeze themselves within the law but should act with absolute candour in their financial affairs did not come into the equation.

Within the year Mr Mandelson was back in the cabinet. In his previous job in government he had been responsible for a calamatous waste of taxpayers' money called the Millennium Dome. The Dome was an exhibition centre with an extraordinary capacity for eating cash. Various companies and individuals put up money to sponsor exhibits, much to the relief of Mr Mandelson and the government as a whole. Included among the donations was a substantial one from an Indian businessman who was seeking British citizenship. Mr Mandelson telephoned a Home Office minister with responsibility for immigration and discussed the application for citizenship. It was exactly the same approach the Labour Party had taken to Mr Ecclestone - a non-corrupt payment was treated as a bribe. To make things worse, when a newspaper learned of the telephone call Mr Mandelson's office said it was an official rather than Mr Mandelson who had spoken to the Home Office minister and Mr Mandelson himself said he had had nothing to do with the citizenship application. These were blatant lies. Mandelson was forced out again, just two years and one month after his first resignation.

Did Tony Blair condemn the corruption and dishonesty this time? Of course not. He did not see that Mr Mandelson had done anything wrong. To show just how little concern he had about this man, who had been forced out of government twice by his own shabby behaviour, Mr Blair gave him a plum job in the European Commission. While at the Commission Mr Mandelson again showed his disregard for propriety by asking that he be given a Maserati costing £80,000 as his official car. Even the French baulked at this.

There is an ignoble history of discredited and, even, dishonest politicians being rewarded with highly paid European positions - Leon Brittan went there after his forced resignation, Neil Kinnock was given huge power in Europe after proving himself unfit to be Prime Minister and then there was Peter Mandelson. As a high-ranking member of the most corrupt political organisation outside Africa he was at last in a position to which he was ideally suited. And there we expected him to stay. He could not possibly return to front-line politics in Britain having twice proved himself insufficiently honest to be a member even of a Labour cabinet.

But no. Poor Gordon has hauled Peter Mandelson back from Europe in a vain attempt to add some weight to his failing (and flailing) cabinet. The world is chasing its tail trying to unravel the mess caused by shady dealings in the financial markets. Truth and transparency need to return to banking and trade and Gordon thinks that can best be done by someone who can't deal straight with a building society and tells lies when his misbehaviour is exposed.

You see, they just don't understand corruption.

The pitiful Home Secretary

When I started this blog in June my first offering was a rather limp piece of waffle about the inadequacies of those in senior positions in our government. As the months have passed not a single cabinet member has done anything to make me think well of them. This is a rather sorry state of affairs. Admittedly Parliament has been in recess for a couple of months but events have been moving swiftly in the real world and there has not been a single glimmer of original thought from the twenty three most senior government ministers whose combined ministerial salaries approach £2million. Tonight Jacqui Smith, the Home Secretary, was exposed on Question Time and produced a quite pitiful performance.

She had the perfect opportunity to show authority today. As Home Secretary she was the recipient of Sir Ian Blair's tender of resignation, it was for her to accept or reject his offer to go. She accepted his resignation, read a prepared statement in which her praise of him was unqualified and then criticised Boris Johnson for saying he did not have confidence in Sir Ian. I am just a simple fellow, but if she had confidence in Blair she should not have accepted his tender of resignation, she should have met or phoned Boris Johnson and made her position clear. There would have been nothing Boris could have done other than argue his case; he might have persuaded her, he might not, but as it was she capitulated to Boris's view and then had the effrontery to criticise him for taking that position.

I am not quite sure what to make of Jacqui Smith's decision to accept Sir Ian Blair's resignation. Did she agree he had to go? If so her praise of Blair and criticism of Boris do not fit. Did she think he should stay? If so, why not fight the case? The inference I draw is that she wanted Blair to remain in place but felt his position was so compromised that she could not win an argument to keep him in place, so she tried to turn it into an opportunity to score a political point.

If I am right in that, it tells us a lot about our Home Secretary. The holder of one of the great offices of state places political point-scoring above principle. More than that she puts political point-scoring above giving leadership. That links into her whole performance on Question Time tonight. Whatever the issue debated, her answers were defensive and shallow. Maybe there is more to her than I have seen, but all I have seen is a party functionary completely out of her depth in an office which requires vision, leadership and authority. Perhaps that is what Gordon wants so that he has control of everything, but that is no excuse.

All change at the cop shop

So, Sir Ian Blair has finally announced his resignation as Britain's Top Cop, having been told he did not have the confidence of the new Mayor of London (who is also the head of the supervisory body of London's police force). Within minutes of his announcement the lefties were lining up to praise him and the moderates were lining up to list his failings. Given great prominence was perhaps the most absurd political figure Britain has known in my lifetime, Ken Livingstone. As I understood his slurred rant on BBC radio he was arguing that the new Mayor of London had sought to politicise the police by undermining their leader. How wrong poor Ken is, in every possible way. One might have thought he would know better after thirty years in London and national politics, but no; I am not in the least surprised. For Ken's benefit let us look at the fundamentals.

The primary role of the police is to keep the peace. Stepping in to stop a fight or acting to prevent a fight is essentially non-political. In all other areas the work of the police is political, not necessarily party-political but political nonetheless. This is an inevitable consequence of the fact that the police must exercise discretions every day. How do they choose between targetting burglaries and targetting muggings? They can't target both because they don't have sufficient manpower, a balance must be struck. The decision of policy is taken not by PC Plod on the ground but by senior officers, of whom Top Cop is the most senior.

Politicians of all parties seek to influence such policy decisions by calling for their latest hobby horse to be given greater priority. The job of Top Cop is to listen to representations and decide, he is not obliged to follow edicts from the Home Secretary but will often do so. The government's suggestions on such matters have special weight because they are elected to office, yet Top Cop has the power to say he cannot comply with the Home Secretary's wishes because he has insufficient manpower. His final decision is a political decision.

On the ground PC Plod often has to choose which law to enforce and how to do so. This is not just a matter of choosing between arresting an offender or giving him a talking to, it can be a choice between attending one reported crime or another or between enforcing one law where to do so might cause another to be breached. These are value judgments of a political nature and can be influenced by PC Plod's own political views. PC Plod sees someone trying to break into a car and at the same time another car zooms past in excess of the legal speed limit, he cannot nab both so he has to choose, will it be car thief or car driver who ends up in the book? Which does he consider the more serious offence? This is a political decision. Lefty Plod is pleased to see an expensive car being broken into so he chooses to pursue the speeder, Righty Plod considers property more important than fast driving which has harmed no one, Wishy-Washy Plod can't decide and calls for back-up.

In everyday policing innumerable decisions must be taken which have a political element to them. In that respect politics and policing cannot be separated. Top Cop who always follows the line advocated by the Home Secretary of the day is unlikely to be at risk of losing his job simply because of a change in local or national government because he has not shown himself to be partisan, merely to be willing to take the path of least resistance.

It is different when Top Cop engages in public debate about the policies the police should follow. One would hope Top Cop always leaves the Home Secretary in no doubt where he stands on a particular issue, but he must do that in private so that his representations are part of the Home Secretary's decision making process. He must not do it in public because to do so is to descend into the political arena in too direct a way. His role is not to make the law but to enforce it in the way he sees best, arguing in public for a particular course of action brings him too close to the law-making function and hampers his ability to be seen to be exercise his operational discretion impartially.

Ken Livingstone is, of course, an extremist fanatic. He has no ability to see beyond his blinkered dream of State Socialism. Anything and everything that furthers his cause is acceptable to him, hence his failure to condemn the use of violence by those supporting his position. Anything he disagrees with is condemned as a plot by fascist reactionaries. That is his simple minded world. He cannot help it, it is just the way he is, just as Peter Sutcliffe could not help himself when he came across a prostitute. Having Top Cop come out in public saying all the things Ken holds dear was not, in poor Ken's mind, a political act, it was another step on the way to the joyous freedom only the lucky people of Cuba and North Korea enjoy. And so it is when the new Mayor says he does not have confidence in Sir Ian Blair because he has descended into the political arena, Ken must open his mouth and accuse his successor of playing politics with the police.

The next Top Cop must keep his mouth shut in public save for issuing standard assurances that his force is doing everything it can to fight crime. Anything more specific and he runs the risk of allying himself with one party, as Sir Ian Blair did, which inevitably risks alienating the other party and making it impossible for him to be trusted when government changes.

The EU and the Irish Bail Out

Sometimes it has to be said that things have gone completely bonkers.

The Irish government has guaranteed deposits in six banks without limit, as opposed to the £35,000 limit to the UK guarantee. There are different levels of guarantee all over Europe and the Irish decided not to ponce around, no debate, no nonsense, they just did what they thought was best for their citizens and their banks.

Now they are under attack from the EU on the somewhat flimsy ground that it is anti-competitive. The argument seems to be that banks all over Europe compete for deposits and an unlimited guarantee might encourage people to move their money from other countries and slip it into an Irish bank. There is a degree of logic to the criticism but it seems so far removed from reality as to be completely nuts.

Lets take the UK. Apparently only two percent of the population have savings in excess of £35,000 deposited in banks. So 98% are completely protected by the current state guarantee and the remaining 2% can split their deposits between a number of banks so as to enjoy the £35,000 guarantee over and again. Some might have unprotected money because the amount they have on deposit is so large that there are insufficient banks to allow them to be fully covered. How many such people exist? No one knows, but the number is so small as to be insignificant. What is significant is that anyone with so much spare cash flopping about is likely to need ready access to it, if it is an investment fund they would not be keeping it on deposit. Might they be tempted to transfer it to an Irish bank? It is always possible although the chance must be pretty remote.

And then there is Northern Rock. Northern Rock has the benefit of an unlimited guarantee from the UK government. Anyone scared that Barclays, HSBC and the rest might fold can just shove his cash into Northern Rock and it will be as safe as houses (we'd better put that old saying on ice for the moment, let's say as safe as an MP's pension). Why place your money in a bank based in Ireland when you can place it in a bank based in the UK? The only reason would be if the Irish bank gave a better return, in which case Northern Rock would not deserve the account. So there is no foundation for saying that the competitiveness of British banks is compromised in anything other than the most peripheral and insignificant way.

I know far too little about the world across the Channel to be able to say whether the same analysis applies. If it does not, the intervention of the EU is even more bizarre. Let's assume Monsieur Escargot has 100,000 of those Euro things and that French banks enjoy no state guarantee of depositors' money. He could stick it in the Grenouillle Bank S.A. and find it at risk or he could move it to Ireland. What, I wonder, is wrong with him protecting himself and his family by placing his money somewhere safe? Why does the EU think it more important for M. Escargot to be at risk of losing everything than for a French bank to be at risk of losing a customer? In any event, M. Escargot could open an account at Northern Rock.

It is a repugnant concept that it could be contrary to EU competition law for the little man to be given protection against the collapse of a badly run bank. And the whole thing is a complete farce when there is at least one bank in the EU backed by an unlimited state guarantee - a guarantee which is only in place because the EU gave its blessing.

My ghast is well and truly flabbered at this one.