Secret Loans

It was revealed this week that during the banking crisis when the banks were collapsing that the Bank of England, the British central bank, secretly loaned two of the worse banks sixty two billion pounds. This was all done in secret and this is what most disturbs me.

At the time, I was reluctantly agreeing and accepting that this had to be done not to save the banks but to save the economy. However, as more details and facts have become disclosed the less in favour of the actions that governments and the central banks took.

As Lloyd's bank took over one of these banks, in what was effectively a shotgun wedding with the government holding the shotgun, if I had been a shareholder (owner) of Lloyd's then I would be very peeved to discover this as HBOS (Halifax Bank of Scotland) was in such a poor state and the shareholders were being asked to buy a “Pig and a Poke”

Taking just an economic prospective, asking shareholders to buy an asset or a business when there has not been full disclosure of the poor financial state of that business is unethical to say the least and may well be unlawful. However, it was the rational behind the governments actions that really needs to be questioned.

In Britain before the collapse of the banking system house prices were on steep upward trajectory. I know that in the US house prices had already started to fall, as was happening in other parts of the world, but here property prices were still rising, even though it was clear that they were already overvalued. Further as the government here in Britain were reaping substantial tax revenues from property sales. As were the estate agents garnering greater and greater fees from sales, plus this over heated housing market was supporting a major part of the retail sector as well as all the builders that were re-refurbishing these homes. Finally it was in the banks interest to keep the illusion that property prices would never fall. As simply all the loans provided would have looked stupid if house prices fell.

It was this rather cosy system that governments were trying to save. The illusion that the economy was doing well was only made possible by everyone pretending that property prices were reasonable and justified. Even before the recession started, I was pointing out that house prices were extremely overvalued, so I am not jumping on some band wagon here. But while high property values may appear to be a good thing, especially for those that already own their home, but any form of inflation damages the economy.

However, the real problem was and is that the British government via the central bank made massive loans to support two failing and bankrupt banks with the aim of maintaining the over inflated property market. For more than ten years government ministers have made statements that there is a shortage of housing stock. In most cases this has been untrue as there are more than one million empty homes in Britain. So we now have the situation where via government loans to the banks and equity stakes in some banks, the state is now extremely over borrowed.

Had the banks and the government been honest about the true state of the banks and the banking system the global economy would by now have been in a much better condition. This matters as there needs to be a massive investment into de-carbonising the global economy. But the worlds governments have bailed out the very institutions and businesses that created the banking crisis and the recession and whose unethical business practices are destroying the bio-dome of plant earth.

The future needed to change and we have allowed governments to maintain the status quo of allowing and encouraging greed, when we could have used the situation to genuinely save the world and not just save the bankers.

I just wonder what else the government has done in our name without telling us?