The UK Banks and the Wider Economy

Banks With No Money

The UK government’s £200 Billion package, announced 20 January 2009, follows worries about the banks. Their shares appear to be in freefall. However, the Prime Minister, and the Chancellor, insist that the purpose of the package is not to bale out the banks, but to support the wider economy - by increasing lending to companies and individuals who need mortgages.

Is this convincing? Companies and people who need mortgages have been pleading for help for months, yet the action was not taken until it became clear that the banks were in difficulty. Even more important, will the £ Billions made available end the recession?

There will obviously be some easing in the lending market as a result of the terms which accompany the £ Billions provided for the banks. This will apply especially to the government controlled Northern Rock (which is nationalised), and the Royal Bank of Scotland (where the government has a majority shareholding).

It remains to be seen how far the other banks will keep their promises. Although they have an incentive to increase lending, because they need new profitable business, they will weigh this against other considerations (such as how to maintain their dividends).

A More Radical Approach

The fundamental problem is that the government fails to recognise that the old free market system has collapsed. This would have been more obvious if the banks had collapsed, which would have happened in November if taxpayers’ money had not saved them.

Using our money in this way is justified only if it is seen as an interim measure while a new system is created. There is, sadly, no sign of the intention to build a new system. The government appears to believe that, given Billions of £s, the old system will be restored to health.

Yet, every day, it becomes increasingly evident that this will not occur. The obvious message from the past 18 months is that economies cannot be left at the mercy of the financial markets. If governments had not stepped in, especially in the USA and the UK, unemployment would be even higher than the dreadful figures reported almost daily.


Obama and the World Economy

The most promising development is the election of Barack Obama as American President, with his commitment to take urgent action to save the economy. Unlike his predecessor, he is not reluctant about government intervention. He has promised over $800 Billion to create jobs, support householders, and move towards a more equal society.

Although economic recovery in the USA is the most important single factor, the challenges are global. Ending the recession requires other countries, especially in Western Europe, to follow the new President’s lead. And the importance of the involvement of Russia, China and India in economic recovery action must also be recognised.

Where Next For The UK?

For the UK, it is essential to match (in comparative terms) Obama’s job creation and householder support measures. As I have argued in an earlier Blog, there is no danger that too many jobs would be saved, or created.

However, fundamental to success is a co-ordinated approach to the government’s involvement in the economy. It will not be possible to end the recession unless the availability of finance (for companies and mortgages) is ensured.

This will occur only if the government determines that relevant financial support is available: this cannot be left to market forces. The obvious solution is to co-ordinate the state controlled entities so that they function as a state bank. A co-ordinated operation through the Royal Bank of Scotland, Northern Rock, Bradford and Bingley, The Post Office should lead the way.

With the prospect of competition from state controlled lenders, the other banks would be more likely to co-operate. To do business, and make profits, they would have to focus on consumer need, rather than dividends and bonuses.

A New Financial World

The reality is that financial systems are now inevitably global. The UK and other West European countries must work with the new USA President to restore order and lead economic recovery.

Policy must be determined by governments working together, not by market forces. Stability is essential for greater prosperity in developing countries, as well as for the wealthier nations.

WHO RUNS THE COUNTRY?

We must address this question because the message from the media is that control of events is with the Bank of England, the City of London, the High Street Banks and, a poor fourth, the government.

The Brown government must assert itself and take urgent action to address the challenges we face. This must include, if necessary, taking control of institutions to ensure that government policies are implemented.

For months it has been recognised that the crucial issue is lending - to householders and companies. Despite the £ Billions of support from the government, the banks are not lending at the rate anticipated when they received the £37 Billion for re-financing.

There are genuine reasons for the drying up of lending - for example, that the Bank of Ireland has retreated from the market, and that Northern Rock is reducing its mortgage loan book as part of its recovery plan. The other banks are either unable, or because of their strategy, unwilling, to fill this gap.

The government acted with commendable speed when the banks were in danger of collapse.
But they have not shown the same urgency in addressing the dearth of credit which is resulting in loss of jobs and difficulties in the housing market.

The Bank of England's .5% reduction of interest rates will have only a very marginal effect, and this is likely to be true of any further reductions. There are rumours that the government is likely to announce measures to address the credit crisis 'in weeks'.

However, the action will be effective only if the requirements of the banks are supported by legislation, which could include nationalisation - a step which, it is noted, was not ruled out by the Governor of the Bank of England when questioned last year.

As an alternative to further nationalisation, the government could arrange the necessary lending through the institutions it already controls - Northern Rock, Bradford and Bingley, the Royal Bank of Scotland, the Post Office.

There is a proposal to use the Post Office as a State Bank in John McFall's article in the Guardian today (9/1/09). It must be clear to all (with the exception of the Conservative leadership) that current problems cannot be solved without a great deal more state involvement.

The government must overcome its reluctance about this.

Urgent Action to End Recession

A continuing recession throughout 2009 is inevitable only if the government fails to act decisively NOW.

The predictions of the majority of experts for 2008 were wildly wrong. For at least half the year they failed to grasp what was happening - apart from the honourable exception, David Blanchflower, a lone voice on the Bank of England's Monetary Policy Committee.

The government was slow to act (it took over four months to deal with Northern Rock), and the Bank of England even slower. The failures of the high street banks, and the tardiness of the government and the Bank of England, are the reasons there are now predictions of up to another million unemployed in 2009.

This must not be allowed to happen. All three owe it to us to act, urgently and decisively, in January 2009.

(i) Banks The banks must move to a reasonable level of lending to businesses and individuals - if necessary as a result of nationalisation. In any case, the government already controls (and, therefore, can act directly with) Northern Rock, Bradly and Bingley, Royal Bank of Scotland, the Post Office.

The freeing up of credit is urgent to keep people in jobs and in their houses.

(ii) The Bank of England Apart from further cuts in interest rates, which are expected, the Bank of England must also make significant funds available to support lending by the the high street banks.

(iii) The Government The government must ensure that (i) and (ii) happen quickly. Gordon Brown and Alastair Darling must show the same urgency when people's jobs are collapsing as they did when the banks were in danger of collapse.

The new USA President is, we understand, poised to introduce an economic recovery package of around £700 Billion (perhaps more). The UK must act at the same time, with at least £50 Billion - to reduce taxes for the lower paid, and to increase benefits for families and pensioners.

Obviously, this will mean additional borrowing in the short term but it is sensible to show the means of repayment. The repayment strategy should include:

(a) closing tax loopholes used by companies and the rich £20 Billion
(the trade union UNITE estimates £30 Billion could be acquired);

(b) a higher percentage tax on higher income earners £5 Billion
(over £100,000 a year);

(c) expenditure cuts, mainly defence £25 Billion

Without prompt action along these lines, no significant number of jobs will be saved.