We are stuck in slumpflation. It is time for some commonsense amidst all this bank nationalisation madness. We need some hard truths for hard times.
This crisis began because the UK had borrowed far too much. You do not get out of a debt crisis by borrowing more. You get out of it by paying some off and taking your losses.
If you have a set of banks that have too many bad and doubtful debts, you do not get rid of them by transferring them to the taxpayer. If you transfer too many to the taxpayer, you bankrupt the state.
It is said that some banks are too big to go bust. Fine. Shrink them. If they want public assistance, make them sell assets, close down unruly books of trading positions, cut costs, weed out poor business. Lend them enough short term to keep them going, but leave them under pressure to cut costs and bring themselves down to a sensible size. Giving them access to limitless share capital just gives them the money to pay bonuses they do not deserve, to pay too many people too much money, to take unacceptable trading risks and to avoid hard choices which sometime they have to make.
Understand that the UK Parliament now has to supervise a large bank with a medium sized government attached. If they nationalise LLoyds as well as RBS the banks balance sheets will be more than twice the national income and more than five times the annual tax revenue. That’s taking a crazy risk.
The governing class now all tell us the banks took too much risk at the peak – though they as regulators allowed that and even encouraged it at the time. Why then is it now acceptable for the state to take so much risk, accepting the very instruments and loans which went wrong before? Have they learnt nothing? Remember we should not be discussing whether we set up a bad bank, when the state already owns three bad banks with plenty of bad and doubtful debts. How many more bad banks do they want?
Meanwhile even with all the taxpayer money going into the banks we have a deep recession. If at the same time as shrinking the bad banks we already own we have a sensible monetary policy we could turn the recession. Sorting the banks out instead of subsidising them would help restore confidence in the UK.
On current policy sterling is taking the strain, as the currency and international bond markets do now understand that the financial health of our banks is the same thing as the financial health of the state itself. This policy can best be called Slumpflation. Prices will go up thanks to sterling, despite very low levels of demand.
I’m fed up with slumpflation, and the banking and monetary madness which has brought it on us. Please don’t nationalise another bank. Please start to sort out the bad banks, and please run a monetary policy that finds the right balance between too much and too little.
The monetary authorities have been in the shower, tugging the control from cold to hot to cold to hot again. Set it for comfortable and stop fiddling with it. Let’s hope they haven’t broken it with their violent moves.