You will no doubt have seen the recent reports regarding home repossessions by Northern Rock. This has led to a wider debate on the repossessions all banks are making, especially those that have received substantial amounts of public money in the form of extra capital, and extra loans from the Bank of England. We can all see the heartache losing your home brings, and can imagine the sorrow and difficulties it would bring to us if it ever happened. Less easy to see is what it costs all of us, as taxpayers, when it happens. Families made newly homeless need to be housed and supported, while our neighbourhoods are blighted by empty homes, forlorn "For Sale" signs waiting for an answer.
In the first 6 months of this year, 19,000 homes were repossessed. In the second six months, 26,000 more are expected to be repossessed. The government tells us that they, and us, expect banks to be more lenient because of the support we, as taxpayers, have given them. But if the response of the bankers and shareholders (here and here also) to our help has shown us anything, it is that we cannot expect them to behave in anything but their own crass material self-interests. And their self-interest does not match the interests of society and taxpayers.
However, Labour ministers have repeatedly stressed that they will not be dictating policy to the banks we now own large stakes in. They are running scared from any possible accusation that this is anything but a part-nationalisation, anything other than support, silent support, for the banks and the economy. All they are willing to do is exhort from the sidelines, despite the legitimate interests of all of us, as taxpayers.
Meanwhile, the chancellor is talking about bringing forward massive investments in infrastructure, following the Keynesian route out of a recession. This is something that should be applauded, as injecting that money into the economy is the best hope we have of making the recession short and shallow.
So perhaps a way to put money into the economy at the same time as helping banks and mortgage payers is needed.
The idea is simple: Allow everyone who is paying a mortgage on their primary residence to apply for a two year mortgage holiday. This would involve them only paying the interest on their mortgage for those two years. However, because we don't want to be giving those who have taken on too much a free ride, this will involve a charge on the mortgage holder of a percentage of their mortgage cost. To ensure the banks aren't hit by this, the government will loan an amount equal to the expected repayments to the banks, which will be repaid, with interest, over the next 5 to 10 years.
This plan would ensure those who need help with their mortgage in the economic downturn get it, while the charge will discourage those who don't need it. The banks will, instead of having an uncertain revenue stream from struggling mortgage holders, have a guaranteed income from the government to support them. And the money freed up from mortgage payments will be put into the economy, either through direct spending, or by being deposited in the banks, encouraging them to begin lending to small businesses again.
Note, however, this is only for mortgages on primary residences - on people's homes. It does not cover commercial mortgages, or those houses bought as buy-to-let. Commercial property is a commercial venture, and must stand or fall on its own. The same is true for buy-to-let houses. However, in this case, we must also ensure we support the tenants.
To this end, I also propose that all banks must give first refusal on houses that are being repossessed to the local council. They will be supported with government money to purchase these homes as social housing, giving continuity to tenants. Of course, the price paid must be a fair one, found with reference to the local market.
Finally, when the two years are up, it is hoped that the economy will be moving out of recession. Wages should be rising, enabling those who were previously struggling to meet their repayments. And for those who still cannot afford to meet their commitments, they, or the banks, will face an economy better able to provide buyers for houses.
Originally, I thought this scheme could easily be introduced into the banks that have either been taken over or have received large injections of capital from the government. However, to prevent this from distorting the entire market, and to ensure assistance is provided for the mortgage holders in other banks, I now believe it would be best to ensure this is available across the industry. All banks should be able to benefit from a little more security, and all mortgage-payers in their own homes should be able to benefit from a little more breathing space. And all of us should be able to benefit from more money going into the economy.
This plan is essentially an extension of the mortgage rescue scheme announced at the start of September. Under that scheme, councils or housing associations could buy the home and rent back, buy part of the home, or simply loan money to the owner to allow them to keep up repayments. The version I have set out here, however, can be extended to help more people, forces a real charge on them to ensure reckless borrowing does not go unpunished, and has the benefit of giving a secure income stream to banks. The repayments from the bank to the government will make sure the taxpayer is not out of pocket. And finally, and most importantly, more money will be put into the economy through the spending of mortgage holders assisted, meaning this policy can help us come out of recession, as opposed to only alleviating repossessions. That truly helps every one of us.
Monday 20 October 2008
Sunday 12 October 2008
Bank Nationalisation
"No longer is state ownership the unpalatable solution for wayward individuals like Northern Rock and Bradford & Bingley, but a logical fix for the whole industry."
So says Philip Aldrick in the Sunday Telegraph.
If even the Telegraph start saying things like this, why are the Labour government still running so scared from the prospect? Why not bite the bullet and nationalise, even if only for the medium-term? This level of control would allow the government greater tools to support the rest of the economy, and once stabilised, you could even privatise the banks again, should you want to.
Instead we have a bailout which is already beginning to look like it may not be enough, and could turn into a death by a thousand cuts, as the government slowly takes a bigger and bigger slice of each institution, all while the lack of confidence in the banks causes chaos in the real economy. Let's just nationalise them, and give ourselves a firm foundation to fight the rest of this crisis from.
So says Philip Aldrick in the Sunday Telegraph.
If even the Telegraph start saying things like this, why are the Labour government still running so scared from the prospect? Why not bite the bullet and nationalise, even if only for the medium-term? This level of control would allow the government greater tools to support the rest of the economy, and once stabilised, you could even privatise the banks again, should you want to.
Instead we have a bailout which is already beginning to look like it may not be enough, and could turn into a death by a thousand cuts, as the government slowly takes a bigger and bigger slice of each institution, all while the lack of confidence in the banks causes chaos in the real economy. Let's just nationalise them, and give ourselves a firm foundation to fight the rest of this crisis from.
Thursday 9 October 2008
May you live in interesting times
We are living through momentous times. In the US, $700bn of taxpayer's money has been made available to buy bank assets no-one wants. In the UK, £500bn is being made available to provide short term loans to banks, to guarantee loans between banks, and even to buy into banks. The ideas of Thatcherism and Reaganomics that arose on either side of the Atlantic in the 1980s have reached their inevitable conclusion, with the era of individual greed collapsing into the era of shared debts. The profits were privatised, and the debts are being nationalised.
And yet despite this spectacular collapse of the economic system that we have been stuck with for the past 30 years or so, we are being told that now is not the time for recriminations, now is not the time for an investigation. The usual suspects, those who made the most, or those who represent them, are appearing on TV, on the radio, in newspapers, to tell us not to forget how wonderful the last few decades have been for them, that we mustn't over-react and risk their future profits.
We've just had our pockets picked, and the thief is trying to tell us not to call the police.
Don't forget the good years, we're told. Don't forget how good you've had it. They must think we're stupid. If you're on a roller-coaster, having a great time as it soars and dips, you're going to be hurt when it suddenly runs out of track. It doesn't make sense to pick yourself up, wait for your bones to heal, and then go and get on the ride again because it was fun at the beginning. If you get pushed off a cliff, you may be fine all the way down, but it's the landing which is important. You don't go back to the top to be shoved off again.
Besides, was it really that good? In the UK, the percentage of people in poverty (getting under 60% of the median income) was 13.7% in 1979, when Thatcher came to power. By the end of the Conservative government in 1996/97, it was up to 25.3%. A quarter of our population was living in poverty. By 2006/07, the Labour government had managed to bring that down from its high – to 22.2%.
Let's put that in context – the change from 1979 levels of poverty has put about 5.1 million more people into poverty. That is the same as the population of Scotland. We've increased the number of our fellow citizens in poverty by the size of a country. This is the result of the 'good' years.
Now is the time for recriminations. Now is the time to investigate.
Now is the time to do this, because this appalling behaviour will effect not only us, but our children. The money being used for bailouts on both sides of the Atlantic is new debt for the governments. New debt that will have to be paid off at some point, by us, by our children, by our grandchildren.
Next time you are out at night, look up at the stars. Look at the glittering magnitude of the sky. See the sweep of the Milky Way, our galaxy. In our galaxy, there are between 200 and 400 billion stars (it's hard to get an exact figure, as we're in the middle of it).
If each star was worth one pound, you couldn't cover the UK bailout.
Now look for that little smudge that is the Andromeda Galaxy, the largest galaxy in our local group, and the closest spiral galaxy to our own. If you look at it through a telescope, you get some idea of its size. Unfortunately, it's tilted such that you can't really see its spiral nature clearly, but it is still an amazing sight. In that galaxy, 220,000 light-years across, there are 1 trillion stars.
If each were worth a dollar (less than in our own galaxy, because there's bound to be a transport costs...) you would need 10 Andromeda Galaxies to pay off the US national debt.
The figures involved here truly are astronomical.
Now is the time for recriminations. Now is the time to investigate.
We are shoring up our banking system because banks provide a vital function in our economy. They hold the money we have, they move it around between us, they make payments possible, they loan our money out, to businesses, to home-buyers. This, if you like, is the banking system as a utility that we all need, like electricity, or water. Then we have the other side, which is involved in the trading of complex financial instruments, passing debt around in parcels, and other games on the financial markets. This part is, frankly, more akin to a casino. And the casino is where the banks have been making their massive losses.
So there we are, with a utility, and a casino. And we're having to make good their losses in the casino, because otherwise they'll shut the utility. This isn't right. We shouldn't be held to ransom over their failures.
Here's a little comparison for you: once upon a time, there was a utility company, providing electricity, natural gas, water and the like. Then they decided what they really wanted to do was start trading these items as commodities and related derivatives. And, amazingly enough, they started making massive losses, while paying their executives handsomely. Eventually, the losses couldn't be hidden, and the company collapsed. Ladies and gentlemen, I give you Enron.
Our banks have behaved just like Enron. There are some differences, of course, not least that Enron had to hide losses to give executives massive payouts. This is mainly because they were trading in something much more tangible than our banks have been, and it had to be delivered. Our banks, however, all had the same collective delusion that what they were doing made sense, and kept trading ever higher – right up until it became clear that the things they were trading, the money they expected to get from mortgage payments, wasn't actually going to arrive.
It is now clear that Enron was a case of deliberate criminal acts by executives. Our bank executives, however, are claiming that in their case it is all due to stupidity, not criminality. And we're being told now is not the time for recriminations, now is not the time to investigate.
Now is the time for recriminations. Now is the time to investigate.
But most importantly, now is the time to make sure this can't happen again.
Here in the UK, we may soon end up with substantial government investments in most, if not all, of our high street banks. Now, these high street banks (usually) perform the functions of the utility side of banking. Why, then, if we are putting such large amounts of money into these banks, can we not impose stringent new conditions on them, or even (whisper it) take them over completely? We have been bombarded from all sides recently with how important this utility function is, how it cannot be allowed to stop without bringing the whole economy down. OK. Then make sure they can never again take our money to the casino. Limit them only to the activities of the utility. Prevent them, by law, or by ownership, from gambling not only with our deposits, but with the whole economy.
There will be those who say that this is crazy, that if we stop banks raising money in the casino we will prevent credit being available so easily. And yes, it would stop credit being so easily available. But one of the causes of this present chaos was the eagerness of banks to provide credit too easily, because they could parcel it up and pass it on, hoping they wouldn't be left holding it when the music stopped. It is time for all of us to take a bit of pain, to gain a bit of responsibility. Credit has to be harder to get hold of, because we, and the banks, have been too irresponsible with it. The banks were the ones pushing this particular drug, but we were happy to take it. The only difference is that the financial experts should have known better.
We managed to get along for years without these bizarre financial products that have led to disaster. We can get by without them again. We must get by without them again. And we should look at the pushers, and find out how much they knew, if they knew the chaos they were brewing up for the future.
Now is the time for recriminations. Now is the time to investigate.
In the past few decades, our actions seem to have guaranteed we will saddle our children, our grandchildren, and beyond, not only with massive debt, but with an unhealthy, heating, damaged world to live in. Our greed has effected their balance sheets, and their world.
It's about time we grew up. Because our kids are sure as hell going to have to grow up fast.
But the first step to growing up is admitting what we have done. It's looking at how we have behaved, and how we were wrong. It's facing up to the greed endemic throughout our system, self-destructive greed that is going to make us all poorer for years, if not generations, to come. And part of showing we have grown up is making sure that those who have behaved badly, those who have behaved stupidly, or criminally, or negligently, are held to account for what they have done. We need to take a good long look at our banks.
Now is the time for recriminations. Now is the time to investigate.
And yet despite this spectacular collapse of the economic system that we have been stuck with for the past 30 years or so, we are being told that now is not the time for recriminations, now is not the time for an investigation. The usual suspects, those who made the most, or those who represent them, are appearing on TV, on the radio, in newspapers, to tell us not to forget how wonderful the last few decades have been for them, that we mustn't over-react and risk their future profits.
We've just had our pockets picked, and the thief is trying to tell us not to call the police.
Don't forget the good years, we're told. Don't forget how good you've had it. They must think we're stupid. If you're on a roller-coaster, having a great time as it soars and dips, you're going to be hurt when it suddenly runs out of track. It doesn't make sense to pick yourself up, wait for your bones to heal, and then go and get on the ride again because it was fun at the beginning. If you get pushed off a cliff, you may be fine all the way down, but it's the landing which is important. You don't go back to the top to be shoved off again.
Besides, was it really that good? In the UK, the percentage of people in poverty (getting under 60% of the median income) was 13.7% in 1979, when Thatcher came to power. By the end of the Conservative government in 1996/97, it was up to 25.3%. A quarter of our population was living in poverty. By 2006/07, the Labour government had managed to bring that down from its high – to 22.2%.
Let's put that in context – the change from 1979 levels of poverty has put about 5.1 million more people into poverty. That is the same as the population of Scotland. We've increased the number of our fellow citizens in poverty by the size of a country. This is the result of the 'good' years.
Now is the time for recriminations. Now is the time to investigate.
Now is the time to do this, because this appalling behaviour will effect not only us, but our children. The money being used for bailouts on both sides of the Atlantic is new debt for the governments. New debt that will have to be paid off at some point, by us, by our children, by our grandchildren.
Next time you are out at night, look up at the stars. Look at the glittering magnitude of the sky. See the sweep of the Milky Way, our galaxy. In our galaxy, there are between 200 and 400 billion stars (it's hard to get an exact figure, as we're in the middle of it).
If each star was worth one pound, you couldn't cover the UK bailout.
Now look for that little smudge that is the Andromeda Galaxy, the largest galaxy in our local group, and the closest spiral galaxy to our own. If you look at it through a telescope, you get some idea of its size. Unfortunately, it's tilted such that you can't really see its spiral nature clearly, but it is still an amazing sight. In that galaxy, 220,000 light-years across, there are 1 trillion stars.
If each were worth a dollar (less than in our own galaxy, because there's bound to be a transport costs...) you would need 10 Andromeda Galaxies to pay off the US national debt.
The figures involved here truly are astronomical.
Now is the time for recriminations. Now is the time to investigate.
We are shoring up our banking system because banks provide a vital function in our economy. They hold the money we have, they move it around between us, they make payments possible, they loan our money out, to businesses, to home-buyers. This, if you like, is the banking system as a utility that we all need, like electricity, or water. Then we have the other side, which is involved in the trading of complex financial instruments, passing debt around in parcels, and other games on the financial markets. This part is, frankly, more akin to a casino. And the casino is where the banks have been making their massive losses.
So there we are, with a utility, and a casino. And we're having to make good their losses in the casino, because otherwise they'll shut the utility. This isn't right. We shouldn't be held to ransom over their failures.
Here's a little comparison for you: once upon a time, there was a utility company, providing electricity, natural gas, water and the like. Then they decided what they really wanted to do was start trading these items as commodities and related derivatives. And, amazingly enough, they started making massive losses, while paying their executives handsomely. Eventually, the losses couldn't be hidden, and the company collapsed. Ladies and gentlemen, I give you Enron.
Our banks have behaved just like Enron. There are some differences, of course, not least that Enron had to hide losses to give executives massive payouts. This is mainly because they were trading in something much more tangible than our banks have been, and it had to be delivered. Our banks, however, all had the same collective delusion that what they were doing made sense, and kept trading ever higher – right up until it became clear that the things they were trading, the money they expected to get from mortgage payments, wasn't actually going to arrive.
It is now clear that Enron was a case of deliberate criminal acts by executives. Our bank executives, however, are claiming that in their case it is all due to stupidity, not criminality. And we're being told now is not the time for recriminations, now is not the time to investigate.
Now is the time for recriminations. Now is the time to investigate.
But most importantly, now is the time to make sure this can't happen again.
Here in the UK, we may soon end up with substantial government investments in most, if not all, of our high street banks. Now, these high street banks (usually) perform the functions of the utility side of banking. Why, then, if we are putting such large amounts of money into these banks, can we not impose stringent new conditions on them, or even (whisper it) take them over completely? We have been bombarded from all sides recently with how important this utility function is, how it cannot be allowed to stop without bringing the whole economy down. OK. Then make sure they can never again take our money to the casino. Limit them only to the activities of the utility. Prevent them, by law, or by ownership, from gambling not only with our deposits, but with the whole economy.
There will be those who say that this is crazy, that if we stop banks raising money in the casino we will prevent credit being available so easily. And yes, it would stop credit being so easily available. But one of the causes of this present chaos was the eagerness of banks to provide credit too easily, because they could parcel it up and pass it on, hoping they wouldn't be left holding it when the music stopped. It is time for all of us to take a bit of pain, to gain a bit of responsibility. Credit has to be harder to get hold of, because we, and the banks, have been too irresponsible with it. The banks were the ones pushing this particular drug, but we were happy to take it. The only difference is that the financial experts should have known better.
We managed to get along for years without these bizarre financial products that have led to disaster. We can get by without them again. We must get by without them again. And we should look at the pushers, and find out how much they knew, if they knew the chaos they were brewing up for the future.
Now is the time for recriminations. Now is the time to investigate.
In the past few decades, our actions seem to have guaranteed we will saddle our children, our grandchildren, and beyond, not only with massive debt, but with an unhealthy, heating, damaged world to live in. Our greed has effected their balance sheets, and their world.
It's about time we grew up. Because our kids are sure as hell going to have to grow up fast.
But the first step to growing up is admitting what we have done. It's looking at how we have behaved, and how we were wrong. It's facing up to the greed endemic throughout our system, self-destructive greed that is going to make us all poorer for years, if not generations, to come. And part of showing we have grown up is making sure that those who have behaved badly, those who have behaved stupidly, or criminally, or negligently, are held to account for what they have done. We need to take a good long look at our banks.
Now is the time for recriminations. Now is the time to investigate.
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