Wednesday, December 10, 2008

Banking left

Gordon Brown is having a good crisis.  Polls are moving and public perception seems to have moved with them.  To an extent this is inevitable – storms are not considered to be good times to change the skipper – but Brown (and Mandelson, whose appointment will look better and better until the day he is forced to resign in scandal) have managed crucially to manage the news cycle, and to control the message.  Brown is the great helmsman, steering the ship of state through treacherous waters (caused, naturally, by America); the Tories are do-nothing layabouts, who believe that the people should suffer through a recession they would do nothing to prevent.

Clear, simple messages put forward continuously: that’s the way to structure a narrative.  And it doesn’t seem to matter that the message is essentially dishonest.  This recession has been triggered by a collapse in bank lending.  This collapse has happened because the banks have lent too widely, on too little capital, for too long, trusting that the risk of default had been so widely dispersed by structured financial products that it no longer mattered.

That theory now having been tested to destruction, the banks have been told that they need to return to old-fashioned prudent lending.  Which they are doing, rather desperately trying to prop up their balance sheets and restore some capital adequacy.  And the price of that is that there is less money to be lent out.  Another factor – the Government, as part of their bail-out conditions, has insisted that the banks invest heavily in treasury bonds, gilts.  This has crowded out private sector lending.  A third factor – the money lent to the banks by the taxpayer has been lent at a rate of 12-13%.  This is why complaining that they are not passing on the benefit of the interest-rate cuts is fatuous.  Borrowing at 12 and lending at 2 is a short route to bankruptcy – again.  The old bankers dictum: ‘borrow at 2, lend at 3, go home at 4’.

So in fact the Government’s message contains a glaring contradiction: this crisis happened because of lax lending policies by the banks; the banks need to return to those policies as soon as possible.  Got it?

There is another problem here.  The reasons that the banks were encouraged to loosen their lending practices was to allow the poorer in society access to credit on better terms than loan sharks.  Those calling for a return to the bank manager and interviews before mortgages are effectively calling for a return to lending money only to ‘the right sort of chap’.  Being ‘the right sort of chap’ myself, I wouldn’t be particularly affected by this, but I’m not sure that this is really in line with Labour policy.

So there is a lack of internal consistency with the Government’s plans to deal with the recession.  Do they want a reform in bank lending?  If so they must be prepared to accept that lending will dramatically diminish.  Alternatively, do they just want to bail out the ship’s bad-debt bilges, allowing the good times to keep on rolling?  If so, they’re going to need a bigger bucket.

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