It is becoming increasingly obvious that a new, and potentially devastating, round of bank writedowns is just starting. This will increase the dramatic holes in the banks' balance sheets. Inevitably, it will also renew the calls for more government intervention to save the banks.
The main focus for rescue attempts this time round is based on the so-called 'toxic assets' the banks hold - essentially, the overly complicated derivatives of various loans that started the whole credit crunch. People stopped repaying the loans, and banks suddenly realised that, thanks to the way the derivatives were structured, they didn't know who was going to be effected. With no idea of who was losing out, it became impossible to exchange these derivatives, leading to a freezing up of the financial markets, and a drying up of credit. Now the call is for the government, the tax-payer, to buy up these assets. This would mean the banks lose the potential black hole on their balance sheet, and get the security of cash instead.
The reason we are told we need to do this is to get the banks lending again, to return to the 'normal' level of lending of the past few years. But is this really something we want? It is widely acknowledged that the problem we are facing was caused by too much easy credit being available, that we had all become accustomed to the magically increasing feeling of affluence that rising house prices gave us, house prices propelled ever upwards through a combination of lack of supply and ever greater credit given to those seeking mortgages. If we did return to that world, it is inevitable that all we would be doing is putting off the economic distress to a later date, and in fact perhaps making sure it will be much worse.
That is not to say that the lack of lending is a good thing. No, credit is a vital part of business for many perfectly sensible and staid companies. But they are being dragged down by the poor decisions made by banks to lend to people based solely on the assumption that house prices would magically rise forever, with nary a blip to worry us.
So what is to be done? Banks, not surprisingly, are calling for the tax-payer to take the toxic assets off their hands, to transfer the potentially massive liabilities from them to us. But if we did, how much should we pay for these assets, given that the reason the market in them froze up was that no-one could value them? It's a difficult question, and has many different aspects to it. On the one hand, if you take too negative a view, banks will not gain enough money to resume lending. If you are too generous, the tax-payer hands over too much money, and loses on the value of the assets.
There is an argument that the second case is, essentially, irrelevant. Tax-payers are already suffering from an economy that is dead in the water. Being overly generous to the banks may just help alleviate that situation, and they are more likely to start lending again.
This is not an argument I am totally convinced by. Anything which deliberately moves our tax money into private hands, and is, almost by deliberate design, overly generous doesn't exactly sit well with me.
So what is to be done? Bailing out the banks, and buying their toxic assets, and doing nothing else would serve only to reward them for their poor decisions (I've blogged about this before). The role of government in this banking crisis is not to act in the best interests of the banks. It is to act in the best interests of us, the voters and tax-payers who are going to have to fix all of this mess. Our needs and best interests are complex, and will not be served by simple solutions, by throwing money at the banks in the hope they will deign to start lending in the same reckless way they have in the past.
How about this for a way forward?
Use government money to invest in a large-scale and rapid expansion of social housing. This has the benefit of getting money directly into the economy, supporting an industry particularly badly hit by the downturn, and reducing the pressure on the housing market that caused it to overheat so dramatically.
Completely nationalise RBS (the bank we currently have a large and absolute majority shareholding in), and use it as a development bank. This bank, as well as continuing as a retail bank (though this arm could subsequently be sold off) will have as its aim to support British industry through providing loans to small and medium businesses with a long repayment time at low interest rates - in essence, allowing businesses to invest in themselves without risking the uncertainty of short term bank loans or braving a flotation or other form of external investment. One of the ways this could help is by enabling manufacturing businesses to invest in new machinery without being punished by shareholders.
However, while we need a strong and vibrant manufacturing sector (particularly considering the positive impact, now removed, that the financial markets in London had on our trade deficit), we cannot compete as simple metal-bashers - if we try to compete on cheapest cost only, we are doomed to failure. No, we must also target loans at supporting other industries, industries that use the wealth of graduates we are now producing in productive ways. Knowledge based businesses could receive loans to develop new technologies, new devices, new methods. Even intellectual properties need to be developed.
This is the type of lending that the economy needs, that society needs. This will enable Britain to rebuild its economy, and refocus it from being excessively biased towards the financial markets, and to become much more balanced. And happily, we already have some of the infrastructure in place to make the judgements on what lending is appropriate thanks to the various departments of Regional Development Agencies around the country, which already make judgements on grants on criteria including value to the wider economy and support for innovation.
Lending for larger companies would have to be looked at on a case by case basis. Large companies are, of course, important to the economy, not least through the web of companies they order from. But lending to these businesses would have to be done on much more stringent commercial lines.
As for the toxic assets, well, that's a tough one. It is appropriate for the government to intervene to assist home-owners (or rather, mortgage payers) in difficulty, and to try and reduce the over-inflation of the market through building. Is it appropriate to bail out those whose greed blinded them to the problems, who sought only to profit? I don't know.
What I do know, though, is that with one bank nationalised, the pressure from the stock market on the others over their toxic assets will be immense. Because of this, and to prevent their collapse and the situation of all banking in the UK being through state-owned banks, I can only suggest that the assets are indeed bought, but at a conservative price - paying too much would encourage reckless lending again, and important business lending will already be in place via the nationalised RBS. If the banks feel the need to batten down the hatches, then so be it.
Yes, this is likely to cause pain and hardship for some. But we have to face the fact that there is going to be pain and hardship. We got ourselves into an appalling position, and there is no magic wand to wave to make it all go away. We pay now, or we pay later, and perhaps pay more. All we can do is make sure support is there so that no-one suffers too much or for too long. And rebalancing the economy might just mean this kind of pain is avoided in the future.
(Thanks to Matthew Stratford for his help.)
No comments:
Post a Comment