Nationalising the Banks

When the Labour party came to government there were calls for them to renationalise the railways, as the system clearly was not working but, we were told that it would be to expensive. To nationalise the railways would require vast sums of borrowing that as a country Britain could not afford.

When Northern Rock was nationalised the bill to each tax payer was and is £1,600. Funded by extra government borrowing. In fact it nearly doubled the British governments borrowing requirement.

While yesterdays announcement regarding the package of measures to support the banks has long been trailed the details had been kept secret until then. Then the details were rather slow to emerge, in fact the coverage on the radio made me more confused as there was little of the details but the media reports were full of comment. It was clear that the media experts really did not know what was happen, so why report when you don't know or understand what is actually happening?

As I had some important work to do, all I could do was keep listening to the news in the hope of some clarity when it was announced that there had been a cut in the Banks Base Rate. Latter I heard that this was a coordinated cut in interest rates across the globe.

Finally I was able to look at the details of the banking rescue plan and the sums are enough to make my eyes water. When all the parts are added together, the package is five hundred billion pounds (About a trillion dollars). That is about a third of our total Gross Domestic Product GDP. And this whole package would cost each tax payer over sixteen and half thousand pounds if the plan fails.

However, on the whole the plan fulfils all the economic needs for the banks and the wider economy.

As the banks across the globe have been reluctant to lend to each other, the British banks needed extra capital to shore up their portfolios of assets, that combined with the loans being made to the banks, the banks should still be able to make loans to businesses and individuals.

All this is based on conventional economic thinking. Yet equally conventional economics also dictates that within any economy excessive borrowing is bad. And as this really is why this happened in the first place, people and businesses over borrowing, then this rescue plan needs to help keep the banking system lubricated but as a managed means of reducing indebtedness.

However none of this would have been needed if the banks had “Come Clean” about their exposure to this so called toxic debt. It is this unknown factor that is preventing the banks lending to each other. It could be done by act of Parliament if needed, that way all the banks, the governments, the regulators and the public could see where their money was safe. The problem is that the banks don't want to disclose this and while that situation continues, no bank is safe. As the lower a banks share price is, the more capital the bank needs under the international banking rules. It all gets very complicated.

So while I have reservations I do think this rescue plan is likely to work.

The aspect that I did not like was the cut in Interest Rates, bank base rates. The only economic factor that could have justified a cut was a slowing down of economic activity. Yet the economic factors are mounting for Increasing Base Rates. First is inflation; with the rate of inflation rising slowing down demand by making borrowing more expensive would bare down on this. While I know that hits the poor harder, they will always suffer more in the long term from higher prices, so keeping inflation under control is vital. This has been something that has happened over the last ten years, in all areas but the cost of housing. I will return to this latter. Also as the banks were having difficulty borrowing monies from overseas banks, raising Interest Rates would have encouraged the inflow of capital into the UK, and hence strengthen the economy and particularly the financial services sector.

Now while it is not yet time for apportioning blame, the factor that is at the root of this problem has been the property market. In Spain where there is an over supply of homes, in Spain it has a more than a million houses than there are buyers. In the US a boom in property values drove borrowing there and while there are other factors, had there not been that housing boom there, many of the problems they face would not have happened. In Iceland the banks leant vast sums into the property market with the whole of the banking system now being nationalised. In Britain the housing, property and building sectors have driven the expansion of the UK economy for the last ten years. Thus, when the value of property started to fall, the whole of the British economy became sluggish. The biggest error made by the banks, not just here but across the world, was that they were all betting on house prices continuing to rise. Even though, they had gone well beyond anything rational.

With this rescue package in place, then via the now nationalised Northern Rock the government needs to enable people to remortgage and restructure their home loans so that people don't become homeless and loose their homes. This will lessen the pain in the short term. In the long term, then everyone needs to reduce and repay their borrowings, be that Credit Cards or other loans, it is that indebtedness that will hurt people in the long run.

This will be painful for some, but we need to learn to save for the things we want rather than borrowing for the items we desire. In the long term this really could benefit the planet as the reduced demand for environmentally damaging items will reduce.

As one of the aspects of this problem is the financial structure of the system, where a business has to be seen to extracting every last cent in profit out of the business, there is a tacit requirement to take great risks. Yet often any business that remains steady and sure is seen as not performing well, when in reality they are the businesses that will weather any financial storm. Thus, we need to see an economy emergence that is steady and stable. Some will call that boring but having banks and any other business remain in a good solid shape is better than the situation now.

Further, I can see that what will emerge will be a system that is less focused on large business but on the smaller and more localised business. In Britain so much of the retail boom was based upon using the cheap labour costs in China and other areas of the developing world. While that system helps retailers, it exports jobs. In turn it reduces the manufacturing and exporting capacity of a country. While service industries are important in the mix, when any country is to reliant upon these then it will always cause problems in the long run.

Because of the mistrust in and of big businesses, there will be an emergence of smaller businesses. They will be far more ethical and transparent about the way they do business.

In the currant situation though all we can all do now is sit back and watch the Free Market fall around us.