At last the authorities have woken up to the scale of the problems in the money and banking markets. Any sensible person this morning wishes the government’s plan well and hopes it will succeed. Let me begin with some supportive points.
It is good that more money will be made available to try to make money markets more liquid. The Bank of England can accept a range of assets as collateral or security for the loans, valuing them in a way which ensures no taxpayer loss. It is also sensible to try a government guranantee, with suitable reward for the taxpayer for offering one, to trigger interbank lending again. The sums involved are large, as they need to be. It is still better that any bank needing more share capital should seek to raise it from the private sector. At least we are not going the route of more bank nationalisation. Nationalising Northern Rock has just meant a more frozen mortgage market and P and L account losses for the taxpayer.
It is time now for those operating in the money and interbank markets to make their contribution to recovery.What more are they waiting for? Will they now start to resume more normal lending and borrowing to each other? Will the great banks now set about sensitive and sensible banking of all the businesses and individuals in the country, at a time of downturn and difficulty? That means making facilities available where a business has a potentially viable future. Given the extent of state support, the public will be expecting helpful and mature banking on the high street.
I am critical of the way the proposals to offer new capital to the banks was leaked. It led to a wave of selling of bank shares yesterday based on rumours of what might happen to existing shareholders. I had recommened some time ago that the regulators behind the scenes with no public announcement should have required any bank where they thought the capital inadequate to raise it from the market as quickly as possible. These things must not be done in public – they must be done promptly, in private, and once the decision is taken that must be communicated immediately to the Stock Exchange. Leaking discussion will undermine share prices, and make it more difficult for any given bank affected to raise money from it own or new shareholders in the market, the opposite of what the authorities should be seeking to achieve.
This site has declined to name any global bank that might need new capital or be in cash difficulties, until such a bank is being nationalised or put into Administration. I have taken the view that it is irresponsible to join in circulating rumours about individual world banks, at a time when there is a desperate need to rebuild confidence.
The Stock Exchange is still falling as I write this. That is no surprise. People are having to adjust their expectations to a very different economic prospect. Events in the banking sector do mean difficult days ahead for most other businesses. It does mean a bigger downturn than many forecasters were predicting. Readers of this site will know I have been pressing the government for some transparency on the UK’s economic prospects. The totally out of date forecasts the Treasury is using are not helpful. We need to know the government’s latest and best estimate of how bad it will be in 2008 and 2009, so businesses can plan accordingly. Quoted Companies are under a duty to report to the Stock Exchange any material change in their circumstances and forecasts. We now need similar transparency about the overall condition of business and the prospects for the next year or so ahead.
The economy still needs a fall in interest rates. Now the authorities are fully engaged in fighting the banking crisis, they also need to be fully engaged in fighting recession.