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In the first three months of 2009, - where it's the clothing market leader - fell by 0.3% and its profit margin shrank by 1.75 percentage points.

Which is why the pre-tax profits for 's last financial year, which ended on 28 March, are thought to have been almost 50% lower than in the previous year.

And that, believe it or not, is the good news - because some City's analysts feared it could all have been a lot worse.

Compared with the last three months of 2008, the rate of decline in M&S's sales has slowed.

The best way of seeing this is in the drop in so-called like-for-like sales (or turnover excluding the impact of new selling space) for general merchandise, which includes clothing. These plunged 8.9% in the three months to 27 December 2008 and were "only" 4.8% lower so far this year.

Time to crack open the alcohol-free, champagne-substitute, perhaps.

In clothing, which is where it really matters for M&S, Stuart Rose - the executive chairman - is confident the business has maintained its market share.

What interests me, however, is whether he thinks that we're witnessing a structural change in the economy which will have profound implications for his industry.

I spoke to him this morning and he was rather non-committal. It's what the entire industry is thinking about, he said, and was work in progress.

Hmmm.

Well here's a statistic which, I think, all consumer-facing businesses need to ponder.

In 2000, which was eight years into the longest period of unbroken economic growth in the UK since at least the nineteenth century, the ratio of UK households' debt to their disposable income was 100%.

In other words, our borrowings were roughly equivalent to all the money we have available for spending after paying taxes.

And that rate of indebtedness had been rising and was not low by modern standards.

There then followed the years of supercharged lending to financial institutions, businesses and - of course - to households.

So by 2007, the ratio of consumer debt to household disposable income had risen to 154% - and probably rose even higher through most of last year.

The availability of a mountain of cheap debt pumped up the house-price bubble and gave added oomph to a retail-spending boom of unprecedented length and intensity.

So for the big retailers, expansion was the imperative: more stores, bigger stores.

We know how that's ended - in figures like those reported today by M&S, whose only virtue is that they could have been worse.

But here's what many would see as the important point: the Bank of England and the Treasury have together taken exceptional and unsustainable steps to maintain consumer spending in the past few months, to limit the severity of the recession, by slashing interest rates, creating new money and cutting the VAT rate for a limited period.

As a direct consequence, the cash available to households for spending or saving has been massively increased (even if banks aren't passing on all the interest-rate cuts to borrowers).

Not all of this extra cash is being spent. Towards the end of last year, the British - belatedly, many would say - started saving again.

However just think what would have happened to the high street if the Bank of England and Treasury hadn't taken evasive action.

Arguably, however, the authorities have simply given a breathing space to retailers like M&S to adjust to some harsh new realities.

If a sustainable ratio of household debt to disposable income is closer to 100% than to 154%, then consumers will for an extended period save more and spend less.

That means less profit available to retailers for an indeterminate period.

The magnitude of the increment in saving may well be increased, as and when millions of households also come to terms with the collapse in the value of their pension pots caused by the global rout in stock markets of the past year.

So, for the long term, retailers almost certainly have to significantly reduce their overheads.

In the shorter term, there are two other looming icebergs.

First, there is the strong probability that taxes will have to rise after the next election, as the new government tries to put some kind of brake on the rise and rise of public-sector debt - which will squeeze households' disposable income.

Second, and to state the obvious, interest rates will rise again, as and when the Bank of England is persuaded that inflation rather than deflation is the threat.

All of which is to say that the lean years for retailing may have only just begun - and that the new winners on the high street will be reconstructing their businesses imminently.

Isn't it striking, in that context, that the UK's consistently most success retailer, Tesco, is investing heavily in creating a banking and savings business?

Other retailers, and the banks too, should probably be a little bit scared.

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• - What's this?

Here are the important numbers that explain how lost its independence.

It has made £648m of commercial property loans in Scotland and the North of England. Of that, around £500m of these loans were made in the past three years - which means, in view of the collapse in commercial property prices, that losses on these later, top-of-the-market loans are likely to be very significant.

In addition, Dunfermline acquired £274m of buy-to-let and self-cert mortgages from the likes of defunct Lehman Bros and from GMAC.

All of these loans, or a bit more than £900m in total, have been hived off and put into what's called the Building Society Special Administration Process, where they'll be managed by KPMG as administrator.

Total losses on these impaired assets are expected to be in the range of £60m to £100m, according to an independent assessment for the that has been carried out by KPMG.

Now there are two big points to make about these unattractive loans.

First is that they destroyed Dunfermline as a going concern, because Dunfermline was not earning enough from its mainstream savings and mortgage business to absorb the losses - and it had no ability to raise additional capital from conventional, commercial sources.

Also, no private sector bank or building society wanted to touch these smelly loans with a barge poll. Which is why it was impossible to transfer the whole of Dunfermline as a going concern to another financial institution.

There was an attempt, under the auspices of the Building Societies Association, to come up with a collective industry solution, what's known as a lifeboat, to keep Dunfermline afloat as an independent entity.

But this flopped, because the societies in the putative consortium or lifeboat were not prepared to inject as much capital into Dunfermline as the FSA said was required.

In theory, the could have filled the gap, by putting in a few tens of millions of pounds of taxpayers' money, as happened on a much more substantial scale with the rescues of Royal Bank of Scotland and HBOS, for example.

The chancellor has not explained in detail why he considered Dunfermline to be so different from Royal Bank, but presumably it's to do with the alternatives that were actually available.

In the case of RBS, the choice was a stark one between a systemically important bank going bust - thus devastating our economy - and it being propped up by taxpayers.

In the case of much smaller Dunfermline, there was the opportunity to take advantage of the new Special Resolution Regime created by recent banking legislation to hive off the bad bits of Dunfermline and to the UK's biggest building society, .

It'll be controversial in Scotland that the chancellor took this route - because it means that a Scottish financial institution has lost its independence and there are bound to be significant job losses among the 289 people who work in Dunfermline's head office (though Nationwide would expect to retain the 245 who work in Dunfermline's branches).

But in a British context, the form of the rescue chosen for Dunfermline may be regarded as acceptable, since it probably minimises the potential losses for taxpayers.

Although the Treasury is transferring around £900m of taxpayers' funds to Nationwide to make good the difference between the assets and liabilities that Nationwide is acquiring from Dunfermline, very little of this money is a risk for taxpayers.

That money will be recouped from whatever can be realised over time from Dunfermline's lower quality loans that have been put into administration.

However, even if the losses on these loans turn out to be £100m, 90% of those losses will not fall on taxpayers.

They will fall principally on banks and building societies, under the Financial Services Compensation Scheme.

Probably only 10% of the losses would ultimately be carried by taxpayers, or up to £10m.

It may be a bit complicated, but this kind of private-sector solution may be seen by many as the best of some pretty dismal options.

There are three other important points to make.

1) The £500m of social housing loans that are being transferred temporarily to a "bridge bank" are good quality loans. Nationwide didn't want them because they don't fit with its other operations. But they are not to be confused with Dunfermline's imprudent loans - and they'll probably be picked up soonish by another building society or bank.
2) Dunfermline's collapse is no overnight affair. The FSA has been trying to find a solution to its woes for many months.
3) The rest of the building society sector is in pretty good shape. Barring an economic disaster, no other substantial building society is expected to need rescuing in this way. So it remains the case that the UK's building societies have weathered the recession better than our commercial banks.

And finally, for me perhaps the most shocking element of the Dunfermline debacle is what it has revealed about the uselessness of their 2007 annual accounts. It's impossible to identify in these the size or nature of its exposure to commercial property.

If Dunfermline's savers and borrowers were shareholders in this organisation, rather than members of a mutual, they would probably be incandescent about how little they were told about the risks being run by their society.

UPDATE, 11:10:

I made a little boo-boo in my calculation of how much cash the Treasury would put into Nationwide to cover the gap between the assets and liabilities of Dunfermline that are being transferred.

In fact, the Treasury is putting in £1.5bn.

What I stupidly ignored was the £500m of social-housing loans that are being put into a specially created "bridge" bank.

However my estimate of the potential losses for taxpayers remains in the right ballpark, I think - because there is supposed to be little risk of loss on these social-housing loans.

UPDATE, 16:15:

There's evidence that the authorities are confident that no other society is facing disaster - because there is only one significant building society whose new PIBs (capital issued by societies) the Treasury hasn't been prepared to guarantee through the credit guarantee scheme.

The sole society of any size categorised as too feeble to receive the guarantee was - you guessed - Dunfermline.

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• - What's this?

I have learned that Nationwide is likely to emerge as the buyer of Dunfermline's branches, good loans and deposits. And it will also take on Dunfermline's 530 staff.

The Treasury will take over £1bn of commercial property lending and acquired portfolios of self-cert and buy-to-let mortgages.

Announcement should be before branches open this morning.

Update 07:56: Nationwide is - in many ways - the natural buyer of the good parts of Dunfermline Building Society.

It is the biggest building society, by far.

And it has a strong track record of absorbing weaker societies.

What should reassure Dunfermline's members is that it also preserves the brand names of the societies it buys - so there are still Cheshire and Derbyshire branches, even though these two societies have recently been bought by Nationwide.

But Nationwide will not be taking on the bits of Dunfermline that are seriously loss-making.

These are commercial property loans and portfolios of buy-to-let and self-cert mortgages - with a gross value of £1bn.

These less attractive assets will be transferred to the public sector; they will become yet another banking burden on taxpayers.

And as the dust settles on a financial crisis that is relatively small but politically fraught, the big unanswered question is why Dunfermline took such risks that ultimately cost the society its independence.

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• - What's this?

You don't have to be a Barclays shareholder or customer to be relieved that the blue-badged bank has been told by the Financial Services Authority that there's no pressing need for it to raise substantial amounts of new capital.

The FSA, in collaboration with the Bank of England, devised a so-called stress test that looked at what would happen to Barclays on a series of not-quite-Armaggedon scenarios, including three consecutive years of recession.

Unless you believe that the FSA is run and staffed by reckless numpties, it's reassuring that the City watchdog believes that Barclays should be able to withstand more-or-less whatever the enfeebled global economy throws at it, without crumbling.

And, I suppose, if the economy were to perform even worse than the hypotheses for this financial war game, well we'd be worrying about a good deal more than just the health of Barclays.

Which means that Barclays has discretion over whether to participate in the Treasury's Asset Protection Scheme: whether to purchase insurance from us, taxpayers, against future losses on some of its less magnificent investments and loans.

The board of Barclays will make the decision in the coming 48 hours. But my sense is that it will turn down the offered insurance.

Here's why:

1) the financial price paid by Lloyds Banking Group and Royal Bank for the cover looks exceedingly high to Barclays;
2) there's a less tangible perceived cost of insuring with taxpayers, in that it would give the Treasury a further mandate to meddle in Barclays' affairs, which could be detrimental to the wider interests of its owners and customers.

If Barclays does take up the insurance - and, as I say, that looks unlikely - it would insist on paying for the cover in cash, rather than shares.

It would use the £4bn to £5bn of proceeds from the coming sale of its iShares investment business, to pay the fee - which would buy it protection on perhaps £30bn to £50bn of impaired assets.

In the context of Barclays £2006bn in total assets, that level of cover might be useful but it would not transform investors' perceptions of the strength of the bank.

A better use for the iShares proceeds might be to put it to work in some old-fashioned banking.

It may seem odd to say this, but in some ways there's not been a better time to be a bank than right now: banks are paying out almost nothing to those who lend to them (depositors like you and me, for example) and are charging anything between 4 per cent and 20 per cent for mortgages, personal loans, corporate loans, and so on.

Or to put it another way, margins for banks are at record levels; they are spectacular. So there's a strong argument for Barclays simply deploying the capital generated from the iShares disposal to make lots of lovely, highly profitable loans.

In fact once we're through the recession, once banks have incurred all the losses on their reckless and imprudent lending of the bubble years, they'll probably be vulnerable to the charge that they're making excessive profits.

But that's for tomorrow.

Right now, there's still a question about whether the banking system as a whole - in the UK and globally - has sufficient capital to withstand whatever future shocks may be generated, as the tidal wave of recessionary forces holes industries and national economies, from insurers through to Eastern Europe's over-borrowed nations.

As George Soros - the hedge-fund legend - points out in today's Times, the UK is peculiarly vulnerable to these potential shocks, because our banking system is so large relative to the size of our economy.

You'll recall that I've hitherto highlighted that the foreign currency liabilities of our banks quadrupled over the past decade or so to around £4,400bn, or a bit more than three times our GDP, the value of everything we produce.

It means that the credit-worthiness of the UK is inextricably linked to the credit-worthiness of our banks, especially since so many British banks have been wholly or partly nationalised.

If, for whatever reason, confidence in our banks evaporated again in the way that it did last October, that - as Soros says - could undermine the Government's ability to borrow (although he does say that he currently thinks it unlikely the UK will need to be bailed out by the International Monetary Fund).

Which, as I say, is why we should all be reassured that the FSA believes that one of our very biggest banks, Barclays, has the resources to cope with almost the worst economic conditions that we can conceive.

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• - What's this?

If anyone thought that investors don't want to lend to HMG at any price (not me guv), that idea has been well and truly exploded by the handsome success today of an auction of £1.1bn of index-linked gilts.

What that shows is that - on top of growing wariness about the sheer size of the government's borrowing needs - there were some special factors contributing to yesterday's flop (see my note on all this).

However there is evidence of investors wishing to take fewer risks when lending to the British state.

Yesterday the Debt Management Office was asking for a 40-year conventional loan. That's a long time to wait for your money back.

And the maturity of that loan means it can't be dumped straight away on the Bank of England - which is buying gilts with maturities between five and 25 years as part of its anti-deflationary, quantitative easing programme.

So for both reasons, yesterday's gilt was riskier than today's offering, a 13-year loan that provides protection against the effects of rising inflation (which is why it's called an index-linked gilt, for the uninitiated).

In fact you could argue that today's success shows that investors fear the Bank of England's crusade against deflation may - before too long - see the beast of inflation rise from the pit.

We're probably going to have to wait till we see auctions of more conventional gilts before we can gauge whether the government will have difficulty borrowing the colossal sums it'll need over the next couple of years.

But those who think that yesterday's flop is a sign of an imminent fund-raising crisis can't point too much in the way of market prices by way of evidence.

In fact as Laurence Mutkin of Morgan Stanley has pointed out, the measure of the market's perception of the probability of the UK defaulting on its debts - the credit-default-swap premium - barely moved yesterday.

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• - What's this?

Whoops.

This government has suffered its first setback in financing its eye-wateringly large borrowing needs.

And what gives resonance to the flop of a relatively modest sale of gilts or government bonds is that it comes a day after against further augmenting public-sector borrowing through an additional fiscal stimulus (via tax cuts or an increment in public spending).

What's happened is that the - an offshoot of the - had wanted to raise £1.75bn through the sale of a 40 year bond (this is the equivalent of the government borrowing for 40 years), but received acceptable bids for only £1.63bn.

There was a shortfall of just over £100m.

Now £100m may seem trivial in the context of the government's overall borrowing needs: the Debt Management Office reckons it will have to sell £147.9bn of gilts in 2009-10, to finance the public-sector's ballooning financing requirement; and some analysts fear that gilt sales may in the end have to be as much as £200bn next year, such is the deterioration in the public finances.

But it's because the government has to borrow so much, that any such flop is unnerving.

This auction is the first time that there has been less than 100% demand in a sale of gilts since 2002, and in that case the auction was of index-linked or inflation-proofed bonds. There hasn't been a flop of a conventional gilts auction since 1995.

So what's going on? And how alarming is the failure?

Well it would be wrong to read too much into one glitch of this sort. In the past 11 months, the Debt Management Office has successfully sold a colossal amount of new government bonds, well over £140bn, without encountering difficulties.

An accident was perhaps bound to happen at some point.

But it would be equally unwise to dismiss the flop as a non-event.

The important question is why investors' appetite for government bonds has been reduced.

The main reason appeared to be the uncertainty created yesterday by the governor of the Bank of England about the volume of gilts the Bank of England would buy through its Quantitative Easing programme.

He told MPs on the that the Bank would reduce its purchases of gilts if there was evidence that the threat of deflation was being lessened.

In that context, the disclosure yesterday that inflation had risen on the Bank of England's official target measure - the Consumer Price Index - prompted some analysts to conclude that deflationary risks may have been overstated just a bit and that the Bank may therefore be a little more modest in its purchases of gilts than had been expected.

To state the obvious, if the Bank were buying fewer gilts there would be more for ordinary investors to buy - and their appetite for UK sovereign debt isn't unlimited (though, as it happens, the Bank was never going to buy 40-year gilts).

Which, of course, is why the governor's publicly expressed anxiety about the magnitude of the government's prospective borrowing needs is so resonant.

It would probably be silly to argue that Mervyn King is to blame for the flop of the gilts auction.

The painful fiscal reality is to blame, or forecasts such as that of the International Monetary Fund that the budget deficit next year will be equal to 11% of GDP, a record-breaking funding gap.

That said if the prime minister had hopes of stimulating the economy further through spending and tax cuts, he may feel that investors (or what you might call Mr Market) are ganging up with the governor to dash those hopes.

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• - What's this?

Only yesterday, or the day before, financial globalisation was supposedly about making sure that capital was transferred to those parts of the world that could invest it most productively.

That so much of the exporting nations' surpluses in effect ended up going to ex-cons and former bankrupts in middle America, in the form of subprime loans, rather exploded the idea that only good could come from the unfettered flow of capital across borders, as channelled by brilliant investment bankers.

Today's iteration of financial globalisation is - in part - about clearing up the mess left behind by the bankers' extended party.

Here is a topical example of the detritus that still needs to be cleared up: the bill for Sir Fred Goodwin's £703,000-per-year pension.

Now the government is mad keen for Royal Bank to retrieve some of the cost of this pension through legal action - and, as I disclosed the other day, Royal Bank is taking advice from leading counsel on whether resorting to law could recoup a bob or three for the bank and its owners.

Let's just say there is some kind of case to answer - although that's thought unlikely by Royal Bank's lawyers, Linklaters.

If there were any potential liability and if it were to rest with Royal Bank's former directors or with Sir Fred himself, they would probably be protected under the specialist insurance policy taken out by all directors of big companies, what's known as "directors and officers insurance" (D&O).

This is insurance that protects directors against the financial consequences of their boo-boos.

Which insurance company was a global market leader in D&O cover?

You guessed it: AIG, the crumbling insurance giant, recipient of almost $173bn of financial support from US taxpayers, and 80% owned by the US state.

In this instance, Royal Bank's D&O cover came from a panel of insurers, of which AIG was one: AIG is liable for something less than 10% of any claims made against RBS's former directors.

There is a wonderful resonance bout even the possibility that AIG could find itself picking up some of the bill for Sir Fred's pension - because in a way it would mean that US taxpayers, as represented by President Obama, would be helping to finance the most controversial pension in British corporate history.

It's another illustration - not the most significant, by any means, but one of the more striking - of how financial globalisation took a wrong turn.

In theory, financial innovation coupled with borderless flows of capital was supposed to distribute risk to those with the knowledge to understand that risk and the capital to absorb it.

Somehow I don't think anyone told the US president, or the taxpayers of America, that they might one day be underwriting Sir Fred's £16.9m pension pot.

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• - What's this?

Timothy Geithner's is considerably less ambitious than Alistair Darling's .

That can be seen from the crude numbers.

The British chancellor is providing insurance against losses on more than £600bn of poor loans and imprudent investments held by just two banks.

Geithner, the US Treasury Secretary, is helping to fund the purchase by newly-created investment funds of £350bn of such assets held by all US banks - though the total could rise to double that.

Even allowing for important differences between the two schemes, such as how the assets are valued and what share of loss goes automatically to the private sector, there's little doubt that in this instance, US taxpayers are less at risk of loss than British taxpayers - which is another way of saying that it represents a more modest "bailout" (to use the emotive phrase).

Geithner seems to be hoping that the mere existence of buyers for these hard-to-sell assets will lead to a rise in their market price, thus strengthening US banks' balance sheets even if the banks retain the relevant assets.

In that sense, his scheme is smaller than the UK's and is more market-based (and see this morning's note for a broader evaluation of the US and UK initiatives to restart bank lending).

But it'll be a bit eggy for Geithner if it turns out that he can't persuade private-sector funds to stump up even the relatively modest amount of readies he wants from them.

As Stephanie Flanders says, the two governments are attempting to skin the same elusive feline with different techniques. Which is better?

My hero Harry Hill would say: "there's only one way to find out - FIGHT!"

If the contest is in the stock market's reaction, today's bounce in share prices looks good for Geithner.

But it will take months to determine whether either the US scheme or the UK one - or both - has at last brought a bit more vital certainty to the valuation of banks and their assets.

It's certainly worth noting that the British insurance scheme has had a very positive impact on Lloyds' share price, which has risen almost 50% over the past fortnight or so.

Unless there's a sudden and unexpected reversal in Lloyds' share price, the new shares it is selling may not after all end up being dumped on taxpayers: they may be bought by mainstream, private-sector investors and the state could yet remain with a stake in Lloyds of less than 50%.

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• - What's this?

Before the market in collateralised debt obligations () started to implode in 2007, many of these securities constructed out of low-quality subprime loans were sold as - the highest quality investments, up there with the sovereign debt of the richest nations - partly because some of these bonds were insured against default by so-called .

However, the insurance turned out to be more or less worthless, because these specialist insurers didn't have sufficient capital to absorb the mind-boggling losses on lending to US home owners with poor credit histories.

So the value of CDOs collapsed, generating about $1tn of losses for banks around the world - and hobbling the likes of Merrill Lynch, UBS, Citigroup, Royal Bank of Scotland, and so on.

This subprime/CDO debacle also led to the almost complete disappearance of important wholesale sources of funds for banks.

And the rest, as they say, is financial market meltdown, credit crunch and global recession.

The provision of credit by banks and other financial institutions was squeezed all over the world, prompting a collapse of consumer spending, business investment and trade from which no economy has been insulated.

Which is why so much of the effort of governments - especially ours and that of the US - has been directed towards shoring up the banks and reinvigorating the supply of credit.

There'll be another initiative with that aim today, when the US Treasury Secretary Timothy Geithner to purchase between $500bn and $1tn of impaired assets - toxic investments such as CDOs and loans - from America's battered banks.

The US authorities - the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation - will provide finance to hedge funds and pension funds for the purchase of these assets.

Some of the details can be found in , and the minutiae will be disclosed later today.

The aim is to remove as many of these bad assets as possible from banks' balance sheets, so that the banks become less anxious about future write-offs and become more confident that they have the capital resources to restart lending.

It's an alternative approach to that taken by the British Treasury, which has used the public sector's balance sheet to insure Royal Bank of Scotland and Lloyds Banking Group against future losses on some £600bn of poor loans and investments.

But both the UK and the US are trying to avoid more conventional, full nationalisation of the banks.

In the US case, taxpayers will be both providing some of the loan finance to buy the toxic assets and will sharing in the risks of owning them - both losses and profits.

As a public-private solution, it has a snake-eating-its-tail, paradoxical quality to it - since at least some of the finance for the purchase of the impaired assets will presumably come from the very banks that are supposed to be cleansed by the exercise.

It's also important to note - as I've been pointing out for more than a year - that both the US and the UK authorities are simultaneously providing the funds to banks that the banks can no longer obtain in a purely commercial way from wholesale markets.

In America, for example, the Term Asset-Backed Securities Loan Facility () will lend up to $1tn (£695bn) to private-sector investors to purchase securities manufactured out of new loans to consumers, car buyers, students and small businesses.

Here in the UK, our Treasury is providing hundreds of billions of pounds in guarantees for securities made out of bank debt, mortgage debt, consumer debt and corporate debt. It's providing separating guarantees for bank lending to small business. And, in partnership with the Bank of England, it's purchasing various forms of loans to companies.

The way to see all this is as the public sector - especially in the US and the UK - taking on the risks of lending to the private sector.

And it may have struck you that this is what the monoline insurers were doing on sub-prime lending to US homebuyers with poor credit histories, via their insurance of the securities created out of sub-prime.

Like the monolines, the US and UK authorities are exploiting their AAA ratings.

They are turning risky private-sector loans into the equivalent of sovereign debt, so that private-sector investors will buy these loans.

And the US and UK authorities are also raising money directly from private-sector investors by selling them government bonds which is then recycled into the banking system.

In a classic sense, the British and American governments are exploiting the perceived strength of the public sector to correct the failure of markets to channel finance to where it's needed.

As a strategy, it works for as long as there's a widespread confidence that we as taxpayers have the capacity to make good any potential losses on all this lending.

Or to put it another way, the productive potential of the British and American economies is being mortgaged to prop up the banking system. The banks are being kept alive by our promise to provide an indeterminate proportion of our future economic output to make good the banks' future losses.

How big could the banks' call on us as taxpayers turn out to be?

Support for the UK's banks and for private sector lending in the form of loans, guarantees, insurance and investments is equivalent to just under 100% of GDP, or a bit more than £1.3tn.

And based on out-of-date IMF figures, the equivalent figure for the US is more than 70% of GDP - or not far off $10tn (£6.95tn).

Those are not small numbers. Unfortunately, they don't tell us anything very useful about how much is at risk of being lost, how much could in theory be written off.

That said, even on worst-case projections of the impact of the recession on the ability of borrowers to repay, losses for taxpayers will only be a proportion of the gross sum.

And, everything else being equal, that sum would of course be affordable, even if paying it would be painful for us (in the form of higher taxes or fewer resources for public services).

But everything else is not equal.

The US and UK public finances are in a dreadful state, because of recession-induced collapses in tax revenues and the cost of measures to stimulate our economies.

Which is why there are some economists and analysts who fear that the AAA credit ratings of the US and the UK are not wholly unimpeachable.

It's probably worth remembering that three years ago, no regulator or central bank expressed serious concerns that the monolines could lose their AAA ratings.

What would happen if the AAA rating were lost?

Well, the virtuous interplay of bank bailouts and fiscal stimulus in limiting the severity of the recession could become a vicious simultaneous squeeze on the ability of both the public sector and private sector to obtain credit.

To state the obvious, the US and UK governments have a very delicate balance to strike between supporting the banks and overstretching the public-sector balance sheet.

There's another important implication of the extent to which we've mortgaged our futures to save the banks.

It rationalises the at any .

Their argument is that we're all in this together - and that if all taxpayers are making potentially serious financial risks and sacrifices to save the banks, the quid pro quo should probably be profound gratitude on the part of bankers and a joyful willingness to defer any incremental earnings until the foundations of the financial system and the economy have been rebuilt.

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• - What's this?

The into the events leading up to the nationalisation of Northern Rock can be captured in three simple points, none of which will surprise you:

1) In 2004 and subsequently, the Treasury - under the then Chancellor, Gordon Brown - didn't appreciate that banks were taking on dangerous risks by becoming dependent for funds on wholesale markets, and didn't see the urgency of making adequate preparations for the possible collapse of those banks (even though it recognised that it didn't have an adequate system for dealing with such crises);

2) In the autumn of 2007, the Treasury - under the current Chancellor, Alistair Darling - didn't expect house prices to fall by more than a few percentage points and didn't believe the UK would suffer a recession;

3) Until far too late, all the authorities - the Treasury and the Financial Services Authority in particular - had a hopelessly naïve view that Northern Rock was not taking excessive risks by providing 100% mortgages at the top of the housing market.

Of course it's embarrassing for Gordon Brown and Alistair Darling that a spotlight has been shone again on their misjudgements. But we've known for many months that they were wrong on these very big issues.

A mountain of evidence has been building and has been visible for more than a year that they, and the Bank of England, and the Financial Services Authority (and the US Federal Reserve, and so on) simply didn't appreciate that - since around 2000 - they were steering the Titanic into the mother-of-all economic icebergs.

Their misjudgements in the Northern Rock debacle were symptomatic of a much more serious economic myopia: they didn't see that the architecture of the financial system was fatally unstable and that the foundations of our economy were crumbling under the weight of excessive borrowing.

However, as I've said, I think we already knew that, didn't we?

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• - What's this?

As a young, eager and arrogant banking correspondent in the mid 1980s, I was underwhelmed by the calibre of those running our biggest banks.

They seemed too easily seduced into lending to crooks such as Robert Maxwell, or to spivs running over-extended property companies, or to Latin American economies too dependent on overseas credit.

And their capacity to damage the wealth of their shareholders, by generating meagre returns on their invested capital punctuated by periodic losses, was wholly uninspiring.

As I chomped on their over-cooked beef, in their cavernous dining rooms, waited on by liveried servants, I was convinced they were responsible for much of what was stifling the economic potential of the UK.

If only our bankers had the flair and imagination to direct their depositors' money to genuine creators of wealth, I would muse.

I now, of course, recognise that I couldn't have been more wrong.

Bankers with imagination are what has brought this country - and the global economy - to its knees.

Oh for the days when the chairmen of what were then called the clearing banks would have vetoed any suggestion that their executives should invest in something whose very names - "collateralised debt obligations" or "credit default swaps" - are an offence against the English language.

The banks of the 1980s were bumbling and mediocre, with collusive tendencies.

However under the stern gaze of a Bank of England - which was a bit-player in steering the economy but was a feared supervisor of banks - they fiercely protected their depositors' precious cash.

So it's something of a treat to hear from them once more - in a collection of essays called "Grumpy Old Bankers", published by the Centre for the Study of Financial Innovation.

This is a compendium of the thoughts of the (mostly) better-than-average bankers of yore, not the nits.

And arguably the most arresting contribution is from Sir Jeremy Morse. He was the cerebral former chairman of Lloyds Bank, who - with Sir Brian Pitman - steered Lloyds from being a virtually bust creditor of what were called the less developed countries into a retail bank which had an unusual and healthy respect for the interests of shareholders.

Morse fears that our banks' and our economy's increasing dependence on wholesale funding - credit from unreliable institutional sources - has taken us to a cross-roads. And the choice is between two fairly treacherous roads.

One way would be to shrink our banks so that they could be funded wholly by domestic deposits and savings - but that would lead to such a severe contraction in the availability of credit as to impoverish us for some years.

But "if the system is reconstructed largely as it was (in the past few years) but with the worst excesses removed " - and that seems to be where we are heading - then Morse fears that "the subsequent cyclical pattern would be likely to resemble that of the nineteenth century".

He means that there would be harsher downturns and periodic financial crashes (but, curiously, less inflation than in the last century).

There is a logic to this analysis, especially since neither the UK or the US has yet come up with any remotely credible plan either to reduce the record indebtedness of our public and private sectors or to reduce the dependence of our economies on borrowing.

In fact, all current policy measures are pumping up our debts, on the theory - which many regard as dangerous - that although too much debt got us into this mess, we're simply too weak right now to cast off our addiction to credit.

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• - What's this?

From about the mid-1990s to the autumn of 2008, the dominant model of how to run a bank was based on three very silly ideas:

1) there would never again be a severe economic recession;
2) markets were rational and perfect, so financial innovation was always benign;
3) greed could never cloud the judgement of bankers.

Then Lehman Brothers collapsed, most of the world's biggest banks found they couldn't survive without some form of help from taxpayers, and a global slump was caused by a collapse in the provision of credit on a scale we haven't witnessed for 80 years.

To state the bloomin' obvious, we mustn't ever be fooled again.

Today we have one blueprint of how for us to swim in again.

It's from the , the City watchdog, which didn't do a particularly sterling job in averting a meltdown of the financial system, but characterises itself as just one of the many victims of a failed ideology.

Here are the remarks of its newish chairman, Lord Turner, who doesn't feel personally implicated by the sins and omissions of the FSA's past (although he worked for one of the banking sinners, Merrill Lynch, for a few years):

"The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets. Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective."

Or to put in another way, big banks can make big boo-boos. Doh!

This morning the FSA has published a chunky programme of reform of how it behaves and how it regulates financial firms, and - as important - proposals to change the very important supra-national rules that constrain banks' activities.

Much of what it wants will be seen by many - especially those old enough to have lived through a few economic cycles - as simple common sense.

And some of its gleaming new rules would in fact represent a return to a framework for limiting risk-taking by banks that prevailed until comparatively recently.

For example, in the stuffy old days of the 1980s, banks would routinely tuck away capital for a rainy day - for a possible rise in defaults during an economic slowdown - by making "general provisions" during the good years.

Guess what? The FSA thinks that a return to something like that - what it calls an "economic cycle reserve" - might be a jolly good idea: bankers of a certain age will allow themselves a wry smile.

In general the FSA's plan can be summarised under a small number of headings:

1) it wants banks to hold a great deal more capital as protection against potential future losses;
2) it wants banks to hold a great deal more cash or liquid instruments as a protection against a drying up of finance;
3) there should be much better monitoring of credit conditions in the economy as a whole, to assess whether a dangerous boom is being stoked up - and the monitoring would be carried out by the FSA, the Bank of England and the International Monetary Fund;
4) there should be a new power to increase how much capital banks are obliged to hold relative to their loans when the economy is doing well, to put the brakes on lending before indebtedness increases to dangerous levels;
5) bankers' pay should be "designed to avoid incentives for undue risk taking";
6) banks should be deterred from taking excessive risks in the trading of securities and investments, by making it much less profitable for them to do so (this can be done by forcing them to hold more capital against their trading books);
7) a new European institution should be set up that would be "an independent authority with regulatory powers, a standard setter and an overseer in the area of supervision".

There is a good deal more. But those are the big points.

One of the FSA's more contentious conclusions is that it's not "feasible" to separate retail banking - or banking for individuals and small businesses - from what it calls "market making" activities.

Some have called for such a separation, because in theory it would protect the important payments system and the deposits of ordinary people from what the governor of the calls "the casino trading of an investment bank".

Strikingly, Mervyn King - the Governor - that "we need a public and informed debate on the merits of the arguments".

Presumably he won't be pleased that Lord Turner apparently regards such a debate as futile.

Lord Turner does however want there to be a debate on a number of other resonant questions.

Should the FSA regulate financial products in a much more explicit and detailed way?

Should it for example instruct banks that they shouldn't ever provide mortgages equal in value to more than a certain percentage of a relevant property's value or to more than a certain multiple of the borrower's income?

Should it prohibit investment banks from marketing products even to sophisticated professional investors that are regarded as too complicated or potentially dangerous?

And if it weren't to do either of those things, should it have a toolkit of "counter-cyclical" powers that would allow it - for example - to temporarily prohibit 100% mortgages, as and when the housing market is overheating (yes, that will happen again, one day).

There's a good deal to chew over.

But as Mervyn King said last night, there's probably no great rush: we have to get through the global slump first before it becomes a matter of urgency to protect ourselves from the dangers of the next boom.

UPDATE, 14:00: to make the financial economy safe again will have quite an impact on Britain.

They will lead to a permanent reduction in the amount of credit provided by banks to households and businesses - because banks will be able to lend a much smaller multiple of their capital resources than they have been doing over the past few years.

That will mean that the UK becomes less of a debt-fuelled economy.

Which many would see as a good thing. Because on most measures, households, businesses and the public sector have all borrowed too much over the past few years.

But we shouldn't pretend that this change in the structure of our economy will be free of costs.

For a good few years, and when the recession is over, our growth will almost certainly be lower than it has been.

And there'll be a second drag on growth.

The FSA is imposing big new burdens and expenses on financial innovation - because so much of the innovation of the past few years, especially the alchemy of turning subprime loans into gold, turned out to be toxic.

But, again, the City of London was a world leader in this innovation. So less of it - and there will be a lot less of - will mean a smaller City.

Which many would describe as a price worth paying. But we shouldn't pretend that there will be no price at all for sanitising global finance.

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• - What's this?

The is just one unseemly manifestation of a banking crisis that has brought the global economy to its knees.

How do we prevent a repetition of this crisis?

Tomorrow we'll have the blueprint of the City's watchdog, the , drawn up by its chairman, Lord Turner.

He will make proposals to put the brakes on banks lending too much during boom years, to restrict their ability to take excessive risks (for those who want the technical detail, there'll be an endorsement of the imposition of counter-cyclical capital adequacy rules).

There'll also be a thumbs-up for a so-called backstop restriction on what banks can lend relative to their assets at any point in the economic cycle (so-called leverage limits).

Also, Turner will say that banks should be forced to hold more cash or liquid investments, to make them less vulnerable to collapse when other sources of finance dry up.

None of this is terribly surprising. In a way the tragedy is that it's required financial calamity to bring about an outbreak of common sense.

Among other recommendations, Turner will recommend that banks publish more and clearer information in their accounts about the risks they're running.

And, to the possible alarm of eurosceptics, he will say that a new pan-European body may need to be created to set standards for national regulators to follow - and that national regulators will need to work more closely together in regulating the activities of international firms.

Perhaps most importantly he will repeat his pledge that the FSA will become less trusting that banks are usually doing the right thing; the FSA will abandon the prevailing dogma of the past 30 odd years that the market is always right.

So in theory, if the FSA had been operating along the lines set out by Turner, it wouldn't have allowed Northern Rock to become too dependent on unreliable wholesale sources of funding

It wouldn't have permitted Royal Bank of Scotland to buy the poisonous rump of ABN, the former pride of Dutch banking.

And it wouldn't have allowed HBOS to lend billions to property and building companies that analysts believe were always going to struggle to repay their debts.

Or at least that's the theory.

In practice we can't expect any regulator to be infallible.

But it won't be business as usual for any of us till we're confident that the financial economy is operating in a way that supports our prosperity, rather than undermining it.

And for that we need confidence that the FSA, and other regulators around the world, are doing their job properly.

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• - What's this?

The latest nugget about Sir Fred's oh-so-lovely pension arrangements are that from his pension pot.

This is worth £4.5m to him, because RBS is paying its former chief executive's £1.8m tax liability on it.

For the avoidance of doubt, however, the lump-sum payment reduces his annual pension income - from £703,000 a year to £555,000.

However Sir Fred's decision to take the lump sum forces yet another cost on a bank that is somewhat short of the readies.

So it has asked Sir Fred to pay back the lump sum and revert to taking his £703,000 a year.

Sir Fred has agreed to do this, so long as he can get an assurance from Her Majesty's Revenue and Customs that the tax man won't come after him for the £1.8m in tax that would - in theory - still be due on the £2.7m payment, even if the money has been handed back.

What a palaver.

If you were to find this to-ing and fro-ing rather unseemly, you would probably not be alone.

After all, Sir Fred took Royal Bank to the brink of collapse. It wouldn't be alive today if we as taxpayers hadn't propped it up.

So it's not surprising that the City Minister, Lord Myners, today told MPs that the Royal Bank of Scotland continues to explore whether the battered bank in some way broke the law in agreeing to pay the supercharged pension to Sir Fred Goodwin.

What Myners didn't say is that there's something of a punch-up over this between two of the City's biggest law firms, Linklaters and Slaughter & May.

Slaughter, which is advising Myners and the Treasury, believe there may be a legal route to reduce the pension.

Linklaters, which is RBS's solicitors, believe there isn't a cat's chance in hell of retrieving a penny.

So RBS is taking the advice of leading counsel on whether its board somehow failed to follow all the proper procedures in the way it agreed the generous terms of Sir Fred's departure (and see my note "Clawing back Sir Fred's pension" for more on all this).

RBS really can't do otherwise, given the outrage that Sir Fred's pension has generated among its customers and shareholders.

But some argue that Lord Myners' vigorous pursuit of Sir Fred is a case of stable doors and bolting horses.

I remain slightly puzzled by why Lord Myners - who's probably the least naïve business person I know and who was advised by Slaughter at the time - didn't investigate more deeply the terms of Sir Fred's departure, before it was too late to change them.

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• - What's this?

Are we in danger of cutting off our noses (in an economic sense) to spite our ugly mugs?

Or, to be more explicit, is there a risk that we could do irrevocable harm to one of the few industries - financial services, the City of London - which has a significant competitive and comparative advantage?

This matters.

Because if we are entering a sustained period of low global growth - if there was a bubble element to the prosperity of the past few years that won't return - then we're going to need the odd world-class industry more than ever, to generate overseas earnings, to pay our way in the world.

For the past couple of hundred years or so, we could point to our banks, insurers, lawyers, accountants and related business as among the best in the world.

And even where the firms based in London weren't British in a strict legal sense, they provided employment and tax revenues to the benefit of the UK.

However right now, it's fashionable - and many would say reasonable - to loathe banks and bankers.

The wholly plausible argument is that top bankers' greed and inability to control the risks they were running has brought the economy to its knees and is causing misery to millions.

The pricking of a credit bubble - which they pumped up - is now devastating manufacturing industry from South China, to Japan, Germany and the British East Midlands.

In fact, there's evidence that the financial services industry, whose excesses have caused (to a large extent) the first global recession for more than 60 years, will suffer less than businesses which make solid, real stuff for export.

It's an argument for another time whether most opproprium should fall on lenders who provided dangerously cheap credit or borrowers who used that credit to construct surplus manufacturing capacity - which is now being painfully written off.

But it does add insult to our injury that some of those bankers responsible for our woes are still receiving hefty bonuses (even if payment at Royal Bank of Scotland, for example, is being deferred) and others have retired with lavish nest eggs or on fat pensions.

It just doesn't seem fair, does it?

Can you blame - which wouldn't be alive today without almost $200bn of support from American taxpayers - for paying bonuses to bankers whose crazy deals almost killed the giant insurer?

Isn't it understandable that in Britain Sir Fred Goodwin's pension pot of more than £16m turned him into a lightning rod for public ire about the boom-to-bust journey of the banks?

But here's the terrible truth: we need banks and bankers, to secure our own future prosperity.

And though we might want to shame all decent people into choosing any career but one in the City, that would not be very smart.

We can perhaps all agree that the UK became too dependent on growth generated from the City.

During the past few years, when 10% of economic output, a third of growth and many tens of billions in tax revenues were generated by financial services, we did have far too many of our eggs in one basket.

Many would say our dependence on the City was the culmination of decades of failure to broaden the base of our economy: an indictment of the industrial policies of successive governments.

But to say that the City became relatively too big and important does not mean we should shrink it to nothing.

That would be a fast route, almost certainly, to penury.

The City, obviously, has to change.

Banks have to get better at measuring and containing financial risk.

They have to help us, in general, to borrow less and save more.

They have to vastly improve the services and products they provide to households and businesses for the generation of sustainable wealth.

Also - and importantly - they will probably have to do all this for less remuneration and rewards that are more closely aligned to the interests of their customers and owners.

But if the City can change its spots, then the onus would probably be on us to forge a new entente, a new compact, with banks and bankers - for their good and ours.

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• - What's this?

- the monstrously reckless US insurance and financial group - last night published a list of the "counterparties" that benefited from the $85bn emergency loan it received in September from the US central bank, the .

This disclosure of which banks were on the other end of its complicated financial deals came after weeks of pressure from Congress. And it's a remarkable event: such information is typically cloaked in secrecy.

What it shows is why the US authorities felt they had to rescue AIG, while almost simultaneously (and some would say mistakenly) allowing Lehman to collapse.

If AIG had collapsed into bankruptcy, the losses for some of the world's biggest and most important banks would have been life-threatening for them and arguably lethal for the financial system as a whole.

Now, the name that leaps out for me as a leading beneficiary of the AIG bailout is .

Between 16 September and 31 December last year, Goldman received $2.6bn in collateral from AIG Financial Products - which in turn had been provided by the Federal Reserve - on credit default swaps (these are a kind of insurance against borrowers defaulting on loans, which are frequently used as a way of speculating on the health of businesses or other creditors).

There were subsequent payments to Goldman of $5.6bn, to purchase from it the securities underlying certain credit default swap contracts.

And there was a transfer to Goldman of $4.8bn to fulfil commitments under securities lending agreements.

So the gross sum received by Goldman from the US Federal Reserve, via AIG, was $13bn.

What that shows is Goldman would have been in the deepest, darkest doo-doo, if AIG hadn't been put on life support.

Which - some would say - rather explodes Goldman's fearsome reputation for controlling risk better than its rivals.

Goldman allowed itself to become deeply dependent on the health and fortunes of a business, AIG, which we now see to have been an unstable house of cards of a scale that boggles all comprehension

As it turned out, AIG was far too big to be allowed to fail by the US authorities. But few would argue that was a sound reason for Goldman - or anyone else - doing business with AIG.

If Goldman's senior executives don't wake up every morning and whisper "there but for the grace of...", well they wouldn't be quite human if they didn't.

That said, there are other fascinating conclusions to be drawn from the list of banks which received succour from the Fed, as intermediated by battered AIG.

The first is that the disclosures are something of a counterweight to the notion that French and German banks were more prudent than their US or UK rivals.

For example, the gross sum that Societe Generale of France received from the Fed via AIG was $11.9bn; and there was a gross transfer of Fed money to Deutsche Bank of $11.8bn.

It's also striking that in respect of this particularly debacle, neither Royal Bank of Scotland or HBOS - the UK's more accident-prone banks - were particularly exposed.

Of the British banks, Barclays benefited most from the lifeline given to AIG, receiving some $8.5bn (gross) of the unprecedented support given by the US central bank.

Anyway, the big point is that the losses and disruption for Goldman, Soc Gen, Deutsche and Barclays would have been hideous if AIG had imploded.

And if you were an investor in them, or a creditor to them, you'd be grateful for their luck - that they hitched their fortunes to a business, AIG, that was so enormous and complex that the US government had no other option but to put it on life support.

But if Goldman, Soc Gen, Deutsche and Barclays were to claim that they managed themselves more prudently than competitors, you might raise a querying eyebrow.

UPDATE, 17:30: Goldman Sachs has pointed out to me that it had taken out insurance against its AIG exposure - in the form of yet more credit default swaps - with other substantial financial institutions.

So in the event that AIG had collapsed, in theory its net losses would have been zero, because it would have been able to claim on these contracts.

In that sense, Goldman can probably still claim to be smarter than your average bank - except for one great imponderable.

If AIG had gone down, there would have been massive collateral damage to other financial institutions, including the insurers that had provided cover to Goldman on its AIG exposure.

Would they have been in a position to make Goldman "whole", to compensate it for its AIG losses?

We should probably be grateful that their ability to do so was never actually put to the test.

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• - What's this?

Hector Sants, the chief executive of the Financial Services Authority, has delivered two thoughtful speeches in the past couple of days, in advance of the City watchdog's publication next week of its initial proposals on reforming the "structural regulatory architecture".

For me, the most striking assertion by Sants was this: "Markets have shown not to be rational; excesses have not been corrected by market discipline".

This represents quite an ideological shift by the regulator. It's a recognition (which many would describe as long overdue) that the disciplines of the market place are no guarantee that the management of businesses - and Sants is particularly concerned about banks and other financial firms - won't routinely make calamitously stupid decisions.

Sants elaborates: "The managers of the future must acknowledge and fight against 'the herd mentality'... The recognition that financial markets are not rational, but rather that they are a behavioural system built around personal aspirations, is critical to us effectively changing this time round".

As I pointed out in a recent note ("FSA admits huge mistakes"), the implications of this abandonment of free-market dogma are profound in respect of how the FSA will henceforth be doing its job.

In particular, it will not trust that the strategic decisions made by those running our biggest financial institutions are in the interest either of their own respective organisations or of the financial system.

So here's the question: if the FSA had been operating under the presumption that the private sector can routinely go bananas, would it have prevented banks like HBOS and Royal Bank of Scotland from expanding too fast and lending too freely?

Hmmm.

That seems pretty far-fetched.

Would the regulator really have had the backbone to go against the grain of the prevailing market orthodoxy that only fuddy-duddy, boring, second-rate banks grew slowly and maintained a substantial protective cushion of capital?

Would it really have risked being chastised by shareholders, the business establishment, politicians and media for being Neanderthal opponents of entrepreneurism and wealth-creation?

To put it another way, we probably can't rely on the regulator alone - even a regulator with its eyes wide open - to protect us from a repetition of the current debacle.

Reform has to extend to the attitude of executive directors, non-executive directors and owners.

Sants, for example, says that the non-executives of banks and other systemically important financial institutions can no longer be part-time, well-meaning, business generalists.

They will have to become experts in banking, or insurance or other aspects of finance. And they may have to become full-time independent directors, rather than part-time, semi-detached coves.

However, recruiting such highly-skilled individuals, with relevant experience and no competing commitments, is easier said than done.

It is, for example, almost impossible to find a senior banker right now who hasn't been tainted by the current crisis - as is demonstrated by the torrid time the Bank of England is having in trying to find a brainy, tough individual to chair its soon-to-be reformed court (what it calls its board).

Goodness alone knows who has the relevant wisdom and character to act as a proper counterweight to the Governor.

But I digress.

For me, the most interesting challenge of the current crisis is for institutional shareholders, or the pension funds and insurance companies who hold shares on behalf of millions of people saving for retirement.

Since time immemorial (well, for the past 30 odd years), the presumption of many of these shareholders is that when they don't like what a company is doing, they'll sell the shares.

That seemed less bothersome than the alternative, which would be to act as owners and tell the company to mend its ways.

But the near total collapse of the financial system over the past 20 months, and the associated rout in global stock markets, may well have demonstrated that it's a massively sub-optimal approach to cut-and-run rather than to intervene and instruct the managers of businesses to change their behaviour.

The big point is that if the owners of banks, the institutional shareholders, had taken the time to understand the crazy risks the banks were running and had then done something about it, they would have avoided not only the losses they've incurred on their holdings in banks themselves but the far bigger losses they've suffered from the consequential meltdown in global markets.

Of course, when I say "they've suffered", what I mean is "we've suffered" - since these institutions are looking after our money, if we're saving for a pension.

And as millions of people are finding out as their pension statements land on their doormats, there's been a devastating collapse in the value of pension pots.

So perhaps the onus is on us to instruct those who look after our money that they are to become responsible owners, rather than neglectful absentee landlords.

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• - What's this?

Is the Bank of England buying the wrong stuff, if it wants to reflate the economy and put the private sector on a sounder footing?

This is something I am increasingly hearing, both in the City and in political circles (notably from leading Tories).

As you doubtless know, the Bank's programme of quantitative easing involves it purchasing up to £150bn of UK government bonds and corporate debt, to increase the stock of money in circulation, encourage lending and stimulate economic activity.

But arguably it is purchasing a sub-optimal mix of assets, if it wants to maximise the stimulus to the economy.

In theory, it would derive much greater bang for its quids if it bought shares in British companies.

How so?

Well, if it bought equities from pension funds and other British financial institutions, it would still be increasing the stock of money.

But there could be a series of spin-off benefits.

Or at least that is the plausible argument of bankers, including one who helped the Hong Kong authorities to do just this - to considerable beneficial effect - in the late 1990s.

One advantage of buying shares is that it would address directly one of the causes of our economic woes, namely the over-indebtedness of companies.

In general, the British economy is struggling under the burden of excessive borrowing by companies, financial institutions, households and government.

Many of our biggest companies and banks need to strengthen themselves - to re-capitalise themselves - by issuing new shares.

The massive share sales announced in the past few weeks - from the likes of HSBC, assorted property giants and Centrica - won't have escaped your notice.

But investment institutions and retail investors have only a finite capacity and a limited appetite to buy these news shares.

With the FTSE 100 index malingering at well below 4000, companies' ability to sell new shares - to raise cash from investors to replace debt - could well disappear before too long.

However if the Bank of England were to wade into the stock market and buy existing shares, that would significantly improve the tone and liquidity of the market - and make it easier for businesses to raise new equity capital in rights issues and in share placings.

It could, in that sense, relieve some of the financial stress on companies that lies behind our recession.

Surely, as a matter of public policy, that would be preferable to the Bank of England's stated aim of helping companies to raise new debt.

If too much debt got us into this mess, surely it would be better to pay down the debt than accumulate more of it.

Funnily enough, this seems to be the view of the shadow chancellor, George Osborne. In a little noticed section of a recent speech, he said:

"We don't just need to recapitalise our banks. We need to recapitalise the whole of British business....Given the scale of the debt problems, I believe there is role for government in encouraging this recapitalisation of British business to take place more quickly than it otherwise would."

Which rather implies that he could be in favour of the Bank of England buying equities.

There could be a further attractive consequence of state-funded purchases of equities.

As I've been boring on about for months, there is unlikely to be a significant increase in bank lending until asset prices in general find a floor - because all lending is either directly or indirectly linked to the price of assets (from shares, through to property, and so on).

A credible equity-purchase programme by the Bank of England could - in theory - provide such a floor. And if the value of equities stabilised, there should be helpful knock-ons to other assets.

Which is turn could reinforce banks' confidence to do more lending.

Now the notion of the Bank of England buying shares is pretty unorthodox - but then our economic crisis is of a different complexion from anything we've suffered since (possibly) 1913.

That said, the technical difficulties would not be trivial.

Deciding which shares to buy and from whom would not be easy. Probably the sensible thing to do would be to acquire a stake in every company in either the FTSE 100 index of the biggest companies or the FTSE 350 (which includes middling size businesses).

Also, there's an interesting question about what to do with the acquired shares: one possibility would be to use them to endow public-sector pensions or provide a stock of assets for the soon-to-be-launched national pension savings schemes (the government-sponsored scheme for the millions who aren't saving enough for retirement).

One of the strongest arguments for buying equities now is that - on most analyses - they are cheap. Of course, they may yet become cheaper still.

However if the shares were acquired and held with the intention of holding them for a couple of decades - which the public sector can do - well if we didn't make a substantial capital gain on that kind of time horizon, then we'd be in doo-doo of a depth and toxicity that doesn't bear thinking about.

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• - What's this?

The Great British Experiment begins today, when the Bank of England's wades into the market to buy £2bn of British government bonds for ready money.

Note it down in big red letters: it's Day, QE Day, when the Bank of England attempts to stimulate economic activity by its new initiative to reduce the interest rates we actually pay and to increase the amount of money in circulation.

Actually, the Bank of England's announcement that it was proposing to spend up to £150bn - and £75bn initially - on public-sector and corporate debt has already had a substantial market impact.

The price of medium and long term gilts (British government bonds) has risen between 17% and 20% over the week since the size of the operation was disclosed.

The corollary of that is a to levels we've not seen since the 1950s.

If you'd bought gilts yesterday, the yield was around 2% for a five year loan to our government, 3% for ten years and 4% for 20 years.

For the Treasury, this looks like a triumph.

The Treasury has to pump out over £100bn a year of new government bonds over the next two or three years, to finance the ballooning gap between what the public-sector spends and what it receives in tax revenues.

And the device of authorising the Bank of England to buy up a huge proportion of these IOUs has apparently reduced the cost of all that borrowing to an astonishing degree.

Which seems a bit bananas, since surely all we're talking about here is one arm of the state buying debt issued by another arm of the state.

Surely if markets were rational and efficient, there would be no impact on gilt prices, or yields or interest rates at all.

Isn't there a kind of Ricardian equivalence going on here, where nothing of economic substance has actually changed?

It seems to me that this policy only works on the basis that markets are irrational and short-termist.

All investors apparently see is the volume of Bank of England money going into the market that's increasing demand for gilts and driving up their price.

In a way, investors are not wrong. These are real purchases.

But what I find slightly odd is that investors don't think through what the Bank of England and Treasury are trying to achieve by doing this - what a successful outcome might look like.

The point of the Bank of England's exercise is to increase money in circulation, to ward off the threat of deflation and to stimulate economic activity.

In slightly simplified terms, if the Bank of England today buys a load of gilts from pension funds, those pension funds will put the money on deposit with our banks (the reason I mention pension funds is that the Bank of England tells me it wants the bulk of its purchases to come from non-bank financial institutions, such as pension funds and insurers).

Two things should then follow. The liquidity of our banks should improve - and with any luck they would then lend some of that cash to businesses or households, who would then do a bit of useful spending or investing.

And the pension funds should use some or all of that cash to buy other assets, anything from more gilts, to shares or property - which should have a beneficial downward effect on yields and interest rates and also a helpful upward effect on asset prices.

Now it's very uncertain how much of that good stuff will actually happen.

In an extreme case, where banks and pension funds are terrified of taking risks, the money could simply sit in the banks, doing nothing.

And one important reason why it may be naïve to anticipate any significant impact on real lending to the real economy is that banks are still engaged in the vicious process of reducing their excessive exposure to other banks and financial institutions - and the new money injected by the Bank of England may be totally absorbed by that so-called "deleveraging".

But let's look on the bright side and assume that at some point the new money starts to do its job: lending increases, spending increases, prices rise, investors' appetite for risk returns.

Now guess what one inescapable consequence of that kind of economic recovery would be?

Well, interest rates would rise and the price of gilts would fall.

Here's the funny thing, therefore.

If quantitative easing is a success, the Bank of England will inevitably make a loss on the gilts it buys.

How big could that loss be?

Well the Bank of England may buy £100bn of government bonds in the coming weeks and months, or possibly even more. And if there were then a bit of a rise in inflation, coupled with investors becoming keener on purchasing riskier assets (such as equities, property and lower-grade corporate debt), well a 30% fall in the price of government bonds would not be out of the question.

And that would generate an eye-watering loss for the Bank of £30bn.

Not nice.

There's also a worse case scenario - which is that inflation could take off with a vengeance. And in those circumstances, the Bank would probably have to dump a load of bonds on the market to drain surplus money from the system as quickly as possible.

In those circumstances, goodness knows how substantial the losses could turn out to be.

That said, many would see that as a price worth paying, however chunky, if it helped to deliver an economic recovery.

But there is a paradox here - which I have already alluded to.

If investors have confidence in what the Bank of England is trying to achieve, the price of gilts would not have been rising over the past few days - because if Quantitative Easing were to work, demand for gilts and the price of gilts would both fall very substantially.

So in a curious way, markets seem to be voting that QE won't work (unless you believe that markets are wholly irrational, which may well be the correct explanation).

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• - What's this?

Many would say it's the thin end of a peculiarly ugly wedge.

I'm talking about a report in that Bank of America has withdrawn job offers from foreign graduates of US business schools.

What's the cause?

A Bank of America spokesman cites a stipulation by Congress on banks and businesses rescued with taxpayers' money that - if they're laying off US workers - they mustn't employ highly skilled immigrants.

Fair dos, you might say. What's wrong with "US jobs for US workers", to re-work an aphorism coined by our Prime Minister, at a time when jobs are scarce?

Well, financial globalisation was associated with a nation-blind and race-blind, meritocratic approach to recruitment that many would have described as making the world a more tolerant place, and therefore a more stable place.

Say what you will about the way that some big global banks, hedge funds and private equity firms have blown up our prosperity by their blind pursuit of short-term rewards.

But they were more culturally and racially eclectic than most other businesses.

What mattered to get to the top of one of these firms was brains and ruthless determination (oh, and it helped to be motivated by the prospect of making money beyond anyone's wildest dreams).

So their upper ranks were and still are filled with Indians, Chinese, African-Americans and a perhaps surprising number of French men (surprising because much of France's establishment took a rather sneering attitude to the Anglo-American approach to finance).

But for how much longer?

The global recession has prompted a rise in nationalism and protectionism.

For example, a Congressional committee is also this week expected to criticise US banks in receipt of state support for continuing to invest or lend in Asia and the Middle East.

This is dangerous stuff - because the less capital that flows across borders, the less money there will ultimately be for all of us.

The point is that when loans are withdrawn in a systematic way, there's a domino effect and a feedback effect, which ultimately cause the total contraction of credit to be much greater.

And although it was perhaps understandable that politicians were unaware of the poisonous impact of financial chauvinism in the 1930s, there's little excuse today (which is not to argue that protectionism caused the Great Depression - but simply to say that it didn't help).

Which brings me back to China - and the role that many would want it to play in reducing the severity of the global recession and in making the world a permanently safer place.

Our government, the US government and most of the developed world would like to see China consuming more of what it earns from exports.

In the short term, this should helpfully increase demand for our goods and services.

And in the longer term it would gradually reduce China's $2 trillion stockpile of foreign exchange - which many see as one of the main sources of the cheap capital that pumped up the credit bubble, whose bursting has done us so much harm.

But China, understandably, wants a tit for its tat.

China's Commerce Minister, Chen Deming, recently said this to me: "Our hope is that we can gradually reduce our financial surplus...The right way to do so is to consume our surplus abroad through our tourists or through our outbound investment activities".

This desire by China to own more of our productive capacity raises great alarm, especially in the US.

But if China is to consume more and save less, is it unreasonable for it to want to safeguard its future prosperity by acquiring businesses and real assets overseas, which will remit valuable dividends to it over the longer term?

Isn't this what the "imperialist" UK and US did at comparable periods of their economic development?

And is there a cost to us or a benefit if China were to provide our capital-starved businesses with the financial resources they need?

There's an argument that if we're to get through this recession in reasonable shape, we've got to become more relaxed - not less - about who owns what.

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• - What's this?

The question of whether and Eric Daniels should remain at the helm of Lloyds Banking Group has become ferociously complicated.

Here's why.

, the takeover of HBOS has been an almost unmitigated disaster.

The slight mitigation is that in three or four years, the cleaned up, enlarged group just might be a formidable force in retail banking, able to exploit to its profitable advantage an unrivalled share of the market.

But that's a way off. Right now, the salient fact about the deal is that it hobbled Lloyds - because of HBOS's massive losses on loans to companies and potentially big losses on its massive exposure to the mortgage market.

And to prevent HBOS destroying Lloyds, the battered bank has had to pay a substantial price to us - to taxpayers - for insurance against future losses.

And it has also had to raise additional capital from us, which means that - barring an extraordinary turn of events - the state will end up owning somewhere between 65% and 77% of the bank (up from 43% now).

So many would say that Lloyds is effectively now under state control. And Lloyds has had to give away a vast amount of future profit to its new public-sector owners (that's us) to secure a rescue from us.

If you are a long-standing Lloyds shareholder and you're feeling a little miffed, then I wouldn't be at all surprised.

You wouldn't weep, probably, if Blank and Daniels were defenestrated. In fact, you might give them a little nudge through the vitrine.

But just under half of Lloyds' private sector shareholders were HBOS owners. And - quite frankly - they should be enormous fans of Blank and Daniels.

Because it's quite clear from the details that have been released this weekend on the assets insured by taxpayers - with 83% of these loans coming from the "HBOS legacy book" - that HBOS would have been 100% nationalised were it not for the Lloyds takeover.

Or, to put it another way, HBOS shareholders would have suffered the same ghastly fate as investors in Northern Rock and in Bradford & Bingley: they would have got nothing, not a bean, instead of the bits of Lloyds paper which are worth a few pennies each and are an option on future recovery.

It would therefore be a bit churlish of HBOS's erstwhile owners to call for Blank and Daniels to be guillotined - unless, that is, they have no confidence in their management ability.

But the lesson of recent history is that Daniels and Blank ran Lloyds significantly better than HBOS was managed (until, that is, they made what appears to have been the calamitous decision to buy HBOS).

In a way, of course, this examination of what private-sector shareholders think is irrelevant - because Lloyds is controlled by the state.

And since the prime minister has signalled that he wants Blank and Daniels to stay, that should be a done deal.

Except for one thing.

Daniels and Blank, as a point of principle, did not want state ownership to go over 50%.

And they fought hard to prevent that.

So, some would say, it would be a bit rich - the height of hypocrisy, perhaps - for them to protect themselves from the boot by falling back on the support of the prime minister.

Which is why, some might say, they should take a leaf our of Barclays' book and offer themselves up for re-election - while asking HMG to abstain.

Such a gesture would be an impressive - and unusual - manifestation of bank chiefs putting principle before personal advantage.

I guess it might happen, but why are you looking at me as though I've taken leave of my senses?

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• - What's this?

The view from the window of Chinalco's 30th floor explains why this Chinese state-owned enterprise is the world's third largest aluminium producer, an employer of 200,000 and one of China's 10 biggest businesses.

Beijing is stretched out in the haze to the horizon and beyond: mile after mile of car-packed highways circumnavigating a forest of new residential and commercial buildings.

Or to put it another way, China is the world's number one consumer of aluminium because of the way it has been splurging on aluminium-hungry construction and automobiles.

I'm here to interview the new boss of Chinalco, Xiong Weiping, its president.

He's been in the job since 17 February and has been thrown in at the deep end - because he is having to steer to a successful conclusion Chinalco's controversial investment of $19.5bn (£13.6bn) in Rio Tinto, the Anglo-Australian mining giant.

Let's dispense with the news first. Mr Xiong - who is 53 but looks 33 - gives a strong hint that Rio will shortly make a gesture to allay the concerns of some Rio shareholders that they should have been allowed to invest in their company on the same terms as Chinalco.

He says that he's sure that Rio's board will shortly find "a suitable solution". This can only mean, I think, that Rio will offer £1bn or more of its subordinated convertible bonds to existing investors.

Given that Chinalco is paying a very significant premium over the market value of Rio's assets, it will be fascinating to see whether Rio's investors put their money where their mouth has been, when given the right to buy these securities.

Mr Xiong also acknowledged that there is a potential conflict of interest between Chinalco's desire to buy minerals as cheaply as possible and the natural preference of Rio's other owners for the price of its stuff to be as high as possible - but he says that "governance" arrangements have been put in place to ensure that Rio doesn't feel constrained in the pursuit of profits.

So why is Chinalco making what is China's biggest ever investment in an overseas company?

In fact, including earlier purchases of Rio stock, Chinalco will end up putting just under $35bn into Rio - very big potatoes.

For Mr Xiong, it was all about making Chinalco "world class" and a global company. Quite apart from the putative benefits for Chinalco of taking stategic stakes in some of Rio's mines, Mr Xiong wants his team to learn from Rio about managing a multinational business.

Now here's a funny thing.

Although Chinalco is not directly managed by the state, what Mr Xiong said was consistent with the address made yesterday to the Eleventh National People's Congress by Wen Jiabao, China's premier (see my post "Super China").

Wen Jiabao said:

"We will continue to implement the 'go global' strategy, support all kinds of competent Chinese enterprises in investing overseas and undertaking international mergers and acquisitions, and encourage large enterprises to play a leading role in implementing the 'go global' strategy".

In that context, the sheer number of recent investments by Chinese interests in non-domestic commodities and energy businesses has been striking - including a massive $15bn loan-for-oil deal with Rosneft, the cash-strapped Russian oil company, and a $10bn injection into Petrobras, the Brazilian state-owned oil company.

Mr Xiong didn't answer directly when I asked whether the rest of the world should fear this Chinese buying spree, this opportunity for China to buy some great companies on the cheap thanks to its relative financial strength and the collapse of stock markets and commodity prices.

What he did say was that Chinalco had no plans to buy all of Rio. Apart from anything else, Chinalco has hardly been immune to the global economic slump: the price of aluminium has fallen by 60%, which has dragged down Chinalco's profits - so Mr Xiong will have his hands full turning his business around.

Even so, one of the big messages I've taken away from my short Chinese tour is that China is still moving towards the top of the premier league of economies.

Yes, it is suffering quite badly from the impact of the global recession.

But its pain is less than Japan's, or the UK's, or Germany's or that of the US.

And, as deflation takes hold across the world, as China's currency strengthens, as commodity prices decline, and as stock markets sag, China's spending power has been significantly increased.

Also, many businesses in developed countries - like Rio Tinto - feel the need to reduce excessive debts that were incurred during the boom years. And if such companies are looking for a partner with the cash to pay off those borrowings, deep-pocketed Chinese companies are among the few that are available.

Unless China loses its nerve, in a year or two's time it'll probably own significantly more of the world's more important assets than it does today.

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• - What's this?

Much of what the Chinese premier, Wen Jiabao, described this morning to the 11th National People's Congress as his country's programme to combat the evils of global recession would have sounded very familiar to a European or American audience.

What have become the new orthodox policy prescriptions for this time of crisis were all there: tax cuts; big increases in public spending; massive jumps in public-sector borrowing; more lending to business; anti-protectionist rhetoric; calls for improved regulation of banking and financial services.

It could almost have been Gordon Brown addressing the 3000 members of the National People's Congress in the Great Hall of the People under the giant red star.

Except for one glaring and important difference.

The Chinese economy remains - by the standards of the US or the UK - exceptionally strong.

It's true, as I've been pointing out over the past few days, that growth in China has been slowing down - and regions particularly dependent on exports, especially the south, have suffered mass closures of factories and painful rises in unemployment.

But many economists believe that the Chinese economy is still growing, even if they also say that the official statistics overstate that growth.

Thus Stephen Green at Standard Chartered reckons there was 1% growth between the third and fourth quarters of last year, and that there'll be a similar expansion in the first three months of this year.

For 2009 as a whole, he's forecasting GDP growth of between 6 and 7% - which is only a little less than China's official forecast of 8% (which Wen Jiabao repeated today).

That may be a long way from the low teens growth of last year. But it looks pretty amazing compared with the very painful recessions in Japan, the UK, Germany and the US.

And here's another frightening comparison between China on the one hand and the UK and US on the other.

Wen Jiabao announced that China's budget deficit this year will be 950bn yuan. That sounds like a big number - and it is an all-time record for China.

But, in relative terms, it's a flea bite compared with public-sector borrowing in the UK.

Converted to sterling, that 950bn yuan is equivalent to roughly £100bn.

Which is almost 20% less than what the UK government expects to borrow in 2009/10.

When those numbers are expressed as a percentage of GDP, there's an even starker picture of Chinese prudence versus what many would describe as British profligacy.

China's deficit is less than 3% of GDP, compared with 8% in the UK.

And, of course, the US public sector is arguably mortgaged up to an even higher hilt than Britain's.

When you add in the near-crippling indebtedness of businesses, banks and consumers in the UK and the US, well at that point China's financial strength looks almost awesome.

Also, as I've been emphasising, China's giant state-controlled banks have been much more cautiously managed than our commercial banks - and have neither the capital or funding constraints of ours.

None of which is to retreat from what I've been highlighting, which is that China faces formidable problems - in particular the challenge of maintaining social stability at a time when wages are being squeezed and millions are losing their jobs.

It's just that - in a way - we'd be fortunate to have their economic problems (if not their social ones).

So what are the big messages I took away from Wen Jiabao's two-hour address (perhaps we should, at the least, be grateful that Gordon Brown shows no sign of adopting Chinese speechmaking habits)?

Well he said some very striking things about allowing inefficient businesses to fail, about reducing the country's reliance on low-cost manufacturing of the basics, and about wanting to stimulate consumer spending.

All of that is both a threat and an opportunity for developed economies like ours.

There should be scope to increase our exports to China. But the competitive threat to the companies of developed economies will - if anything - intensify.

And over time (but it will take years) China's massive financial surplus - which was in part responsible for the glut of cheap money in the US and UK that fed our dangerous addiction to debt - should diminish.

For what it's worth, however, every Chinese person I've met over the past few days - from the lowliest factory work up to the Chinese Commerce Minister, Chen Deming - lays the blame for the global economic crisis on crazy risk-taking by American banks (Britain's aren't famous enough to register with them) and excessive borrowing in the US.

In that context, here's my favourite quote from my interview with Chen Deming, which pokes gentle fun at those who say China was at fault for saving too much and then lending that surplus to spend-spend-spend consumers in the west:

"Personally I can't agree with some people on their point that they [US households and businesses] borrow money from others, they overly spend this money and they make trouble for the rest of the world, but finally they blame those who lend them money for making these troubles. According to Chinese philosophy this kind of accusation is totally ridiculous and unreasonable."

I suspect that many of you would agree with China's equivalent of Peter Mandelson.

That said, China's leaders recognise that the country's prosperity is wholly dependent on ours.

So even if they believe that our mess is our own fault, they see that they have a powerful interest in helping us to clear it up.

In that context, it was striking that Chen Deming strongly disagreed with me when I described China as an economic superpower, perhaps because of a fear that as such China would have to take on the heavy burden of new responsibilities to the global community.

By contrast, today's rhetoric from Wen Jiabao's was all about a more open, outward looking China.

Wen Jiabao's China seems to want to play an important role in making the global economy safe for all of us - and is not revelling in our economic humiliation.

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• - What's this?

It's just after 8 and I am standing in the middle of a jobs market in Dongguan in Southern China.

It's mobbed. There are thousands of unemployed young people milling around in a car park in front of a commercially run jobs market.

The employment exchange - plays Chinese pop music at deafening volume, perhaps to give a lift to the idle young people.

Wearing (mostly) dark blue jackets and jeans, they pick up a flimsy newspaper which lists what's available today in the basic industries that characterise the vast local economy.

Its six pages contain just 300 vacancies, not remotely enough to meet the needs of those who are surging in from all sides.

And round the corner, there are hundreds more men - and they are mostly men - at similar recruitment markets (I am told that companies regard women as less bolshy so exercise gender discrimination by sacking fewer of them).

The men come in by bus, by bike, but mostly on foot. And their numbers keep swelling.

When I speak to them, they are grim about prospects: jobs are few; and vacancies so scarce that employers are ruthlessly cutting wages.

A salary of £4 ($5.60) a day is not untypical, even for a position requiring some skills. That's barely a subsistence wage, even here.

The crowd is a troubling manifestation of South China's jobs crisis. Thousands of factories have closed in the region, millions of workers - mostly migrants from impoverished rural China - have been made redundant.

And unlike last year, the global recession means that very few new job opportunities are being created.

South China is one of the great manufacturing areas in the world. And just as thousands of factories sprouted over the past few years, covering every inch of hundreds of miles along the southern coast, now they are being vacated and abandoned at alarming speed.

In manufacturing - from Germany, to Japan, to this vast coastal strip that sucked in millions of migrant workers from China's impoverished countryside - what's going on is a fully-fledged crisis.

In Japan, there's what increasingly looks like a manufacturing depression, a fall in annual output of a tenth or more.

Here in China the official statistics don't speak of quite such a severe output squeeze, but the armies of unemployed going home to their birthplaces - or thronging the job exchanges - suggest that the data understate what's been going on.

This matters to the whole of China, because exports - mostly of manufactured goods - represent almost 40% of China"s economic output.

Of the bigger nations only the German economy is more dependent on overseas sales.

That said, Japan and Germany are more vulnerable than China to the collapse in global demand for goods, because over the past few years their growth has been much more driven by a surge in exports than China's.

For China, this isn't just an economic problem: it may be a social disaster in the making.

Today, the mob was good-humoured. But those I spoke with were pessimistic that things would soon improve.

And they were doubtful that the government's £420bn stimulus package - focused on infrastructure spending rather than direct help for manufacturers - would do much for them (however, the premier, Wen Jiabao, is expected to double this package on Thursday).

For years now millions of Chinese migrants to cities have been working all hours, seven days a week, for the slimmest of wages. They've slept in basic dormitories attached to factories and have enjoyed little leisure and only the most meagre of luxuries.

However the work allowed them to dream of a better life.

If that dream has now been snatched from them, at some point they may manifest their displeasure - which, in a one-party state lacking the conventional western safety valve of protest via the ballot box, could turn this economic debacle into social and political tumult.

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• - What's this?

Senior directors of big British companies are almost never sacked, no matter how badly they perform.

Typically, they "leave at the request of the company", which is not the same thing as being dismissed.

Which is what happened to Sir Fred Goodwin, the chief executive of Royal Bank of Scotland in the fraught days between 10 and 12 October, when Royal Bank was being rescued by HM Treasury.

As a letter from Royal Bank's General Counsel to MPs on the Treasury Select Committee makes plain, Sir Fred's departure was formalised in what's known as a "compromise agreement" - which was signed at an indeterminate point between midnight and 3am on 13 October.

Also, the letter from Royal Bank indicates that the assorted relevant board approvals were obtained for Sir Fred's severance package.

What's the significance of all this?

Well, it's that the defence of Sir Tom McKillop, RBS's chairman - and of the group's senior non-executive, Bob Scott - for allowing Sir Fred to receive an enhanced pension of around £700,000 a year payable immediately may well simply be that they were following custom-and-practice in British boardrooms.

Some may think that such custom-and-practice is obscenely favourable to incompetent chief executives, but that's just how it is.

If we don't like it, maybe it's time we instructed those who manage our pensions - and are therefore stewards of our stakes in big companies - to instruct boards to be less fearful of dismissing executives who fail.

The point is that McKillop's and Scott's behaviour was predictable, conventional and understandable, if - in the view of many - appalling.

What the letter fails to do, however, is properly explain why the City Minister, Paul Myners, wasn't more aggressive in probing the terms of Goodwin's departure before they were too late to reverse.

Lord Myners has explained that he feels he was given the misleading impression by the company that there was no discretion over the pension payable to Sir Fred Goodwin. Which turns out not to be the case - in that had Goodwin been dismissed his pension would not have been payable until he was 60.

So the big question for Lord Myners - which has not been properly answered - is why he simply went along with the boardroom convention that corporate grandees are never humiliated by being given the boot.

If ever there was a case where dismissal was warranted, this was surely it. And Myners, who has long been a critic of complacent City convention, could surely have argued that point strongly to Royal Bank's board (although Myners had been in the job for just a few days and there was a lot else going on at the time).

Having failed to do so, there is probably no respectable way for the Government to reduce Goodwin's pension.

Because Goodwin signed a compromise agreement and because the Royal Bank board apparently dotted the "i's" when formalising the agreement, there appear to be almost no legal steps the Government can take to reduce the payment to Sir Fred.

And presumably the Chancellor and the Prime Minister wouldn't want to encourage Royal Bank to break the law and withhold payment. That could perhaps set an unwise precedent for those who feel their tax demands are unfair.

There is only one possible basis for clawing back some or all of the pension - and that would be to prove that in some fundamental sense Sir Fred Goodwin misled fellow directors and investors about the true health of the company at the time his severance was negotiated.

But if that were demonstrated - and frankly it seems highly unlikely to be the case - the repercussions would go much wider than just obtaining a bit of natural justice over what Goodwin receives in his years of leisure.

Given that shortly afterwards Royal Bank published a prospectus in relation to a £20bn sale of new shares, all shareholders in Royal Bank of Scotland could presumably claim to have been grievously misled about the value of the bank.

The ensuing litigation would probably last for years - and the distraction for Royal Bank's new management might well put paid to all our hopes (now that taxpayers own 70% of the bank) that Royal Bank may ever thrive again.

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• - What's this?

A small, grubby, windowless room up a flight of stairs in central Shanghai demonstrated the reach and limits of financial globalisation.

The walls were studded with old-fashioned, cathode-ray screens showing share prices of Chinese companies.

And the dank airless space was mobbed with men and women in later middle age, most of them retired, who were speculating frantically.

This was the electronic market in its least sanitised form.

Greed, fear, hope, despair - they were all on display as ladies with dyed hair of an indeterminate colour whooped and shrieked over the ups and downs of their nest eggs.

The basic requirement for trading here is savings of at least £10,000 - though some have ten times that. Even so, these are not flashy, well-groomed speculators.

In their jumpers and slacks, they'd look more at home in a bus shelter than on a trading floor.

One shouted "I've lost everything". However, by the time I left - and before the announcement of and - the market was edging up.

Although Chinese shares have lost 60% of their value over the past year and a bit, in recent weeks the trend has been sharply up.

How has China bucked the falls in share prices that have infected most stock markets since the start of the year?

Part of the explanation, according to economists, is the £250bn surge in lending by the state-controlled banks in December and January - because some of these loans have been used to buy shares.

Does this represent an explicit state-sponsored operation to support the stock market?

Like so much of what happens here in a form of capitalism whose tooth-and-claw redness is the colour of the Communist Party, it's hard to be sure.

If this is two fingers in the face of global market declines, it'll probably only work for a while: as I mentioned yesterday, the outlook for many Chinese companies, especially exporters, isn't great.

So the thought I couldn't shake off when watching the oldies' stock-market enthusiasm is that this was an addiction.

And it was probably the nearest I will ever witness to the market mania of ordinary Americans crowded round ticker tapes in the 1920s - before the Great Crash and Great Depression.

Which is not to overstate the similarities between America of 80 years ago and China today.

Because - just like Britain, America and much of the developed world - China is trying to refuel its economy with a potent mixture of public spending, cheap money and new bank loans for businesses.

In one respect, China has a significant advantage over the rich West: its banks are strong and well-capitalised, with significant capacity to provide the credit that's vital to an economic recovery.

But bank loans are useless for companies when demand for their products and services has collapsed.

To state the obvious, lending to businesses that aren't viable is throwing good money after bad.

And propping up the share prices of companies that are under pressure by buying their shares with borrowed money would probably be worse.

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A year ago, the leaders of the developed and developing world were optimistic that the momentum behind the Chinese, Indian and Brazilian economies - plus the other faster growing younger economies - would prevent the credit crunch from precipitating a global slump.

That was also the naive consensus of the business and political grandees at .

More or less the opposite has transpired.

China and the rest by problems that started thousands of miles away, on Wall Street and in the City of London (although the most severe impact has been on the more mature exporting nations, such as Japan and Germany).

The recession in the great consuming countries of North America and Europe has savaged demand for the goods made by exporters, who've also been squeezed by the drying up of trade finance.

So, far from sanitising the credit crunch, the new economic powerhouses such as China, Singapore and India have been infected.

I am in China for a week to assess the implications - both short-term and long-term - of what is now a global recession for the nation that was well on its way to becoming an economic superpower.

I'll look at what it means for Chinese living standards - will they continue to rise, and at what kind of pace?

What's the risk that rising unemployment will lead to serious social unrest?

What of the longer term? Will China reduce its reliance on low-cost, low-skills industry and will the government put in place a social security and tax system that delivers a less unequal distribution of the fruits of growth?

Will there be meaningful changes to China's unique combination of a one-party state and market economy (albeit an economy still characterised by massive public-sector ownership and influence)?

In the global distribution of economic and political power, will China emerge from the current crisis higher or lower in the rankings?

And in respect of the challenges we all face, will China turn inward and concentrate on fixing its own problems - or as the summit looms in London of the leading 20 nations on how to solve this worldwide mess, will China play a more confident, leading role on the global stage.

For me, the biggest question is whether China will emerge stronger or weaker from the downturn?

None of these questions is simple.

Even assessing the state of the Chinese economy right now is tricky, partly because official statistics are notoriously unreliable and far from comprehensive - but also because China can no more be described as a homogeneous economy than can Europe.

It's a vast country, with a population well over 1.3bn (again the official numbers aren't robust). And there are huge regional variations between the structure and health of the economy in different parts of China.

The official statistics tell of a fall of a few percentage points in the annualised growth rate.

The Chinese government's 2009 "target" is 8%, although its Commerce Minister, , said to me that there could be a downward revision later this year (the IMF recently forecast 6.9%).

By western standards, that looks like an unsustainable boom. But it's well down on the double-digit growth of the past few years - and well below the growth rate that's needed to prevent a rise in unemployment.

What's been most disturbing has been the precipitous fall in China's overseas trade over the past few months (there was a 17.5% year-on-year fall in exports in January).

This has already caused the closure of many thousands of factories and millions of redundancies, notably in Guangdong and the manufacturing centres of southern China.

Migrants from rural areas who peopled these factories in the boom years have gone home - and .

Tomorrow, I'll be in Guandong to evaluate the damage for myself.

But I've started my all-too-short tour in Shanghai.

As I write, I'm standing in the middle of the eighteenth annual East China Trade Fair - which looks mobbed by London standards but is in fact fairly sparsely attended by Chinese.

So far, I've had my back electronically massaged in a truly horrible way by a gizmo that sells for just over $100. And I've been run over by a robotic lawn-mower that goes for $400.

Believe it or not, these gizmos may well represent China's economic future - because they contain a bit of Chinese intellectual property. They are therefore a little less vulnerable to the intense price competition from other ever-lower-cost economies that's an unavoidable challenge for many of the other 3500 exhibitors.

But for most of the companies here - which make stuffed cuddly tigers, glittery fairy stickers for little girls, non-stick pans and hand-made cuckoo clocks - the big fact of life right now is the shrinkage of the US and European markets.

The exhibition's organiser, Wang Qing Jiang, tells me that orders so far are about 20% down.

The cannier exhibitors are trying to find new buyers in South America, and Africa and the Middle East.

But China is now too big a part of the global economy to avoid pain when the world's richest economies contract.

For hundreds of years, China ran itself as though divorced from the planet, both economically and intellectually. No longer.

Today, it's learning the costs of becoming so dependent on the health of the rich developed world, following the years of profit.

How it responds to these lean times matters to all of us.

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