When you are in as big a mess as the UK is in, it is vital those in authority begin with an honest review of where we are, and honest analysis of what is possible. Instead every day I read in the media half truths and lies about the financial position. We need to start from an accurate base to get the diagnosis and prescription right.
1. The government will borrow £78 bn this year and 8% of GNP next year.
The government’s own figures (PBR) show it will borrow £157 bn this year, more than 10% of GDP. Why will no-one write that in the newspapers?
2. The Bank will consider “quantitative easing” after lowering interest rates more, if they do not work.
The Bank’s own figures show that it is massively into quantitative easing already, with a ballooned balance sheet that makes most hedge funds and investment banks look very restrained.
3. The problems came from the USA, and this is a global problem.
Most of the UK’s problems were home grown. UK Regulators and the Bank made the same type of mistakes the US authorities made, but they did not import them. Northern Rock was a British bank lending British money to British customers under a British Regulator. It was not brought down by sub prime US mortgages.
4. We will do whatever it takes to get the banks working again and to abate the recession.
Why then did the authorities demand the banks have more capital to sustain their lending at this point in the cycle? Couldn’t they see that would make the lending crunch worse? Why did someone brief the press that our banks were weak and needed more capital, at a time when confidence was low? No bank at that point faced a run.
5. Regulators are the answer.
Why then did the Regulators set capital requirements that allowed the excess? Why were Northern Rock Directors discussing how they could increase lending and cut capital on the eve of their disaster, in order to get down to regulatory requirements? (N Rock Report 2007)
6. Regulators cannot be expected to detect fraud and scams.
What then is the point of them? Why can’t they do some detective work based on the usual warning signs of companies likely to overtrade or worse? The signs are well known to people with experience in financial markets, but it takes the Regulator’s powers to go in and find out for sure. Not all those who show the signs are bad.
The plain truth is you cannot solve a crisis of over borrowing by borrowing more. The state is not big enough and rich enough to take over all the bad risks of banking and industry at the same time. The state has to avoid borrowing so much and printing so much that it too loses the confidence of people and markets. When is this nightmare going to stop? When are the authorities going to realise they are pouring petrol onto a fire that has gone out. Instead of pouring more petrol, they need to find a match and ignite a controlled fire again.
When you look at the massive amounts of money and liquidity they are pumping into the system , when you look at the growing government bond bubble, you must feel “Here we go again”. The authorities have forgotten – if they ever knew – that there are big lags in the system. It takes time for lower interest rates to work through, just as it took time for their high interest rates to work through a couple of years ago. Nothing will work without mending the banks, but once they have found a way of mending the banks they need to reverse the ballooning of cash and liquidity rapidly before they create a big inflation. As someone who pleaded for them to halve interest rates a year ago to stave off recession, I say to them, do not cut interest rates any more until you have worked how to get on top of the government debt problem and have done more to create a sensible and competitive banking system. Zero interest rates could make the poblems worse, not better. You need to think of savers as well as borrowers when we are trying to get the country out of debt, not more into it.
So what does it take to mend the banks? A sensible way forward would be to invite them in for private talks. The Regulator shouod be prepared to amend the capital requirements temporarily to get things started again. The government should be prepared to change the terms of its short term loans and guarantees to help markets. No more capital should be offered by taxpayers, and a route to getting the taxpayer out of share ownership, and certainly out of majority share ownership should be agreed.