In the last 24 hours the Governor of the Bank of England has declared that the government does need to do more to fix and sell the assets of RBS – reinforcing a view expressed here ever since the crisis first hit.
Dr Cable has wrritten a long and thoughtful article in the New Statesman. I agree with much of it. He too accepts that the commercial banking system is not operating in the way we need. He also accepts that his approach of developing state banks cannot do nearly enough quickly enough. There is no substitute for fixing RBS, and that should entail a transfer of as many of its risks as possible to the private sector.
The press have lasered in on Dr Cable’s question whether the UK state should borrow more long term to finance infrastructure. I agree we need more infrastructure investment, starting with energy, broadband and roads. However, I think given the state’s balance sheet it is vital this should be wholly or largely fiannced by the private sector. Fix the banks, and use the markets. At current interest rates it could be made to work. Offering longer term infrastructure bonds to private investors could also help them, by delivering a reasonable quality covenant with a higher income than is currently available on government or high grade corporate b onds.
Indeed, I would save the money being spent on the state banks which will remain too tiny to have much impact, fix RBS, selling as much as possible to the private sector, and let the government lead a move to launch substantial bond issues for infrastructure to private sector buyers. That way we cut public spending a little, cut public sector liabilities massively, and have more capital spending.