Banks to lend to the government

Under new “liquidity” rules the main banks are going to have to lend loads of money to the government. Convenient that, for the government, at a time when it is short of a pound or three.

Does it make any sense for the banks? Does it help strengthen them and get them closer to be able to lend to others? No, of course not.

I realise banks are very unpopular. I understand that the idea that they need to make more profit is anathema to many bank haters. However, the simple truth is that if we want stronger banks that can lend money to individuals and companies that need it, we need more profitable banks.

Indeed, even bank haters would agree that where the state owns large banks, we could do without collosal losses on the scale we are growing used to. Most surely agree RBS and HBOS need to be more profitable. If they do not become profitable and build up their reserves, they will remain as public sector zombie banks, unable to play their proper role in the private sector economy and lend to those with good prospects.

If the banks were allowed to lend more at current lending rates, they could make good money. Their antennae are much better attuned to risk, and the shortage of bank lending means they can charge more for less risky loans. So far so good. It’s a necessary evil to get things going again.

However, the banks are being told that instead of lending their money they need to put a lot more into “liquidity” which means lending it to the government. They will be forced to do this on a large scale. They will have to lend at low rates of interest, making it unprofitable business bearing in mind the high costs of their capital these days. The banks, strapped for profit, will have to lend to the government at a loss if you take into account their cost of raising and servicing new capital.

That is not the way to strengthen the banks, or return them to health. That is a cheap way to finance the government deficit, at the expense of a dear way for the taxpayers to be running their banks. In the end taxpayers pay both lots of bills. So who do the government think they are fooling?

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19 Comments

  1. Lola
    Posted May 2, 2009 at 8:29 am | Permalink

    Yes, we need strong; well financially well resourced, banks. But, what we do not need is a cartelised banking sector insulated from the forces of competition and the rule of law. The banks are too big. There is not a shred of service or price differentiation between their high street offerings. With their statist bureaucratic quangoistic mates they have engineerd a stay on the successful legal challenge to their deceitful charges regime. Until the state owned banks are broken up and returned to private ownership and the stay is removed and regulation reduced in favour of sensible rules on capital and solvency I will remain a vehement bank hater.

    (Mr R – if you care to investigate amongst your lower paid constituents and those on benefits struggling to meet their regular obligations you will unearth endless examples as to how the bank charges system confiscates money from people on marginal incomes.)

  2. oldrightie
    Posted May 2, 2009 at 8:32 am | Permalink

    Presumably the tax payer bailout is at a higher interest than the money returned to Government, ergo Government make a profit at our expense? Still it’s only paper anyway. No gold to back it up.

  3. Mark Wadsworth
    Posted May 2, 2009 at 8:56 am | Permalink

    Agreed, it is nuts.

    The government is lending money to the banks and also forcing the banks to lend money back to the government. I am sure that somebody somewhere is making a handsome profit on this, but it sure ain’t the taxpayer.

  4. oldtimer
    Posted May 2, 2009 at 9:06 am | Permalink

    Back in October08 I posted here the opinion that “The more you find out about it the more the “bank rescue” looks like a “bank swindle”. It is thoroughly bad for both tax payers and bank shareholders.”

    Elsewhere, I posted “The financial and political engineering behind this bank “rescue” looks sinister to me.”

    Everything we have seen and heard since then confirms me in the views I expressed then. Brown controls the levers that made this possible from the FSA liquidity rules to QE by the Bank of England to enforcing banks and pension funds to hold excessive government stock on iniquitous terms. It did not happen by accident. It was, and remains, a deliberate attempt to screw the banks and pesnion funds to solve the government`s debt problem.

    Please keep up the good work of identifying the dots, and lines that join them, in this scandalous work of national financial engineering. Perhaps one day you, or some enterprising financial journalist, will layout the whole picture for the world and the electorate to see what has been done by Brown and co.

  5. Cliff.
    Posted May 2, 2009 at 10:07 am | Permalink

    This crazy sceme seems similar in many respects to the unions modernisation grants, in as much as public money ends up propping up Labour.
    I am not an economist or banker but, even I can see the flaw in the banks being loaned money by government at 12%, only to have to lend it back to that same government at 2%.
    Then again, I am not a prudent financial genius that saved the world:-))

    • alan jutson
      Posted May 3, 2009 at 7:40 am | Permalink

      Cliff
      Yes 12% not a bad return given that you are using someone elses money, (ours) and someone elses money (ours again) to insure the debts so that it (our investment) will not fail.
      I wonder when we will get our share of the profits from this investment, or will we just have to feel good about saving the banking system, so that the money can be paid out in some other form of benefit, probably yet to be devised.
      You are correct (mentioned this months ago as well) borrow at 12% lend out at 2%.
      Only if you want to go bust.
      Unless you print some more money of course.
      This way it takes a little longer.

  6. Ian Jones
    Posted May 2, 2009 at 10:20 am | Permalink

    Does it say they have to lend to the British Govt or could they perhaps invest it in much safer German debt?

    The UK will soon be a centrally planned economy and the state will tell everyone how to live their lives. Its already happening sadly….

  7. StevenL
    Posted May 2, 2009 at 10:46 am | Permalink

    So if gilt prices fall will this mean more ‘write downs’ on the horizon?

    If the pundits predicting inflation are correct (and personally I think it will depend mainly on US monetary policy, over which we have no control) and interest rates start to rise, then surely there will be a dash from government bonds to other assets people perceive as inflation resistant.

    What is the worst case scenario the FSA should be stress testing at? US base rates of 4%? Gilt prices fall 10%? How much will this then cost the taxpayer in the event of more write-downs making the zombie banks insolvent again?

    Or do think they can control gilt prices indefinately with QE? Who is behind these mapcap schemes? Brown? King? Business Ministers? Treasury Mandarins?

  8. Demetrius
    Posted May 2, 2009 at 10:53 am | Permalink

    Yet again, Enron, Enron, Enron, it was not a way to run an energy company, it is not the way to run a government.

  9. chris southern
    Posted May 2, 2009 at 12:19 pm | Permalink

    And they claim not to be communist, nor thieves. This is so far past being a joke it is ridiculous. On top of them trying to force car companies to subsidise their grand electric scheme.

    So when are they going force people into work building “social projects” as that’s the next stage in socialist lunacy isn’t it (they already started two wars!)

  10. Brian Tomkinson
    Posted May 2, 2009 at 12:20 pm | Permalink

    This farce is too serious to be allowed to continue one day longer.

  11. Denis Cooper
    Posted May 2, 2009 at 1:20 pm | Permalink

    Is this following the counter-intuitive approach recommended by Professor Congden?

    http://www.telegraph.co.uk/finance/economics/4140601/How-to-stop-the-recession.html

    “This credit-determines-spending doctrine is false and dangerous. The correct answer is for the government to replace the private sector in the credit process, and so to create new deposits by itself borrowing from the banks and increasing the quantity of money. Since the government has the power of taxation, its own credit-worthiness is not in doubt and it can borrow almost without limit from the banks.

    In the first instance the proceeds of the banks’ loans to the government would be credited to the government’s deposit. But civil servants can then write cheques to the government’s suppliers and add to the quantity of money. These suppliers may include some financially hard-pressed small companies, giving them immediate help. But the favourable effects of extra money should soon spread widely. Payments between different companies and individuals are on such a scale that all cash-strained companies ought to find it easier to improve their financial position.”

    Which, of course, would also provide the government with an alternative means of funding its budget deficit, once either gilts investors or (more likely) the Bank of England was no longer prepared to play on the money-go-round.

    Just during the past week, the Debt Management Office has raised £4.3 billion by selling new gilts – without any problems – while the Bank has used £6.5 billion of newly created money, conjured out of the air, to buy up previously issued gilts.

    So this week, once again, the Bank actually bought back more gilts than the Treasury sold, by about £2.2 billion.

    Bringing the total purchases to £45.5 billion, gilts which have removed from the market and taken out of circulation as part of the Bank’s programme of “quantitative easing”, aka “rigging the gilts market”.

    Officially this is being done as part of “monetary policy”, to ward off deflation. But if this month’s Inflation Report suggests that deflation is no longer a danger, then the brown stuff could start to impact the rotating vanes.

  12. Brian
    Posted May 2, 2009 at 2:17 pm | Permalink

    This is turning into a disaster, the government shouldn’t be touching ownership of the banks.

    We need independent banks allowed to make their own decisions.

    We need to continue with the normal rules of capitalism or we are going to end up like a Communist country.

  13. TomTom
    Posted May 2, 2009 at 5:42 pm | Permalink

    Just voted against the entire slate at Lloyds – I do hope every shareholder votes Blank off the board so he depends on UKFI to keep him in place thus underlining his role as a Government Agent to destroy the 6th safest bank in the world……now HSBC ranks 19th in the list and only Nationwide figures otherwise.

    Brown destroyed the foundations of our economy and anyone hoping to start a serious business needs to escape this North Atlantic Cuba. The way Victor Blank went about destroying Lloyds shareholders is textbook and should be taught in every business school for as Warren Buffett said: buy into companies any foool can run because one day a fool will…..but Blank delivered Lloyds to the Government at a discount and the City fund managers showed why they cannot be trusted with long-term savings by falling into line

    • Citizen Responsible
      Posted May 3, 2009 at 3:28 pm | Permalink

      I have also voted to dump Blank off the board. I read Lord Leitch is being lined up to replace him as chairman. However he is one of the directors who I assume also fell into line with Blank’s destruction of Lloyds. If heads roll, I take it as read that there will be no Fred Goodwin style compensation payments. As our leader says, there should be no reward for failure. But then again, does the Prime Minister think Blank failed?

  14. mikestallard
    Posted May 2, 2009 at 8:08 pm | Permalink

    Let me see:
    As Labour hit the ground running in 1997, the Bank of England lost its power to control other banks.
    Then, first the pensions and gold reserves were taken. Then the taxes went up to very nearly 50%. State expenditure, by this time had almost doubled.
    Then the banks were nationalised. Then a lot more money was secretly printed. Then huge losses and ridiculous loans were announced. Now the nationalised and state controlled banks are being pillaged.
    For what?
    And isn’t there the little matter of a lot of toxic debt in there still? What has happened to that?
    Messing with the banks is much more serious than messing with the economy of our little country.
    Allow me to quote that mantra:
    GOVERNMENTS DEAL IN BILLIONS: BANKS DEAL IN TRILLIONS.
    It seems as if the boat is deliberately being rocked by lunatics.
    The Titanic hit an iceberg: the banks may well hit an Iceland.

  15. Steve Tierney
    Posted May 2, 2009 at 8:19 pm | Permalink

    Although this is striking, I think you’re missing (or not saying) the most shocking part of this.

    The banks are being made to lend money to the government.
    But where did they get that money from?

    The government is using its puppet banks to filter its printed money back to itself. It’s funding its own “activities” with quantitative easing on an enormous scale and using the banks as cover to hide that (not very well.)

    Hyper inflation is the obvious outcome. The government claims it will avoid this by removing the printed money from system down the line. How? With what? At what point? It’s madness.

    • Denis Cooper
      Posted May 3, 2009 at 8:03 am | Permalink

      Well, the Bank of England now owns about £45 billion of gilts issued by the Treasury’s Debt Management Office, and provided the Bank is prepared to go along with the government’s need to prop up the gilts market then that could rise to £100 billion, or more, if Darling sent King another letter of authorisation. Eventually the gillts owned by the Bank might be sold back into the market, gradually, returning the gilts to circulation and withdrawing the “Central Bank money” that was used to buy them from circulation. But as this is debt owed by one branch of government – the Treasury – to another branch of government – the Bank – it may turn out that in the end the government – of whichever party – decides that they should not be returned to the market, but instead they should be quietly transferred, free of charge, back to the issuer, the Debt Management Office, where they could be cancelled.

  16. Javelin
    Posted May 2, 2009 at 8:49 pm | Permalink

    Sureal indeed – Dali economics.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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