What is to be done if the survival of the real economy – the jobs, homes and incomes of millions of people and the viability of countless businesses – depends on getting the flow of lending going again, yet the banks resolutely refuse to lend on anywhere near the scale required, and have just announced that they are now proposiing to cut credit still further in the first quarter of this new year?
For a year or more now the US and UK Governments have been fighting the financial meltdown by trying to get the banks to perform their proper function of lending credit to businesses and households and thus boosting demand across the economy. In the October bail-out of the banks a staggering £500bn (more than one-third of UK GDP) was made available to the banks to kick-start lending.
A special liquidity scheme provided £200bn to allow the banks to swap illiquid mortgage bonds for more attractive government paper, subject to a fee (or haircut). A credit guarantee scheme provided guarantees for £250bn of debt issued by banks so that the banks could afford more funding to pass on to customers. In addition, £50bn was made available to recapitalise bank balance sheets, of which £37bn has so far been utilised. However, none of these measures succeeded in getting bank lending going again.
Further measures are now therefore being considered. The special liquidity scheme could be expanded to include bonds which package up other loans such as credit cards. The Crosby report from the former HBOS chief executive proposes that a £100bn guarantee should be provided over two years to try to get bank lending operating again between banks. Or the national loans guarantee plan put forward by the Tories could be adapted to underwrite loans for small businesses, which would ease pressure on banks which are unwilling to lend because of a regulatory demand that they hold more capital.
The problem with all these measures remains enforceability. The three banks which accepted taxpayer funds – RBS and Lloyds TSB plus HBOS – were told by the Government as a quid pro quo to maintain lending to businesses and homeowners at 2007 levels. That has certainly not happened. But the Treasury cannot even, in the midst of a devastating credit crunch, get access from the banks to what the credit flows actually are. The Government is therefore considering guaranteeing a range of new loans on condition that the banks are set strict targets for lending this year as the recession deepens. But how again will this be enforced?
Quantitative easing is yet another measure under consideration. Under this proposal the central bank would buy up long-dated Treasury bonds and gilts in order to drive down long-term interest rates, since these have not come down anywhere near as fast as official short-term rates. The risk with this however is that if the authorities calculate the deflation-inflation pressures wrongly, the bubble created in the bond market replacing the bubble in the housing market could burst, leading to a sharp fall in bond prices and thus a highly damaging rise in long-term interest rates.
So what should be done? The real joker in the pack is that every conceivable incentive is being offered to the banks to them to expand lending, at stupefying cost to the taxpayer, yet the banks still won’t oblige, and have even today announced that they expect to reduce lending in the first quarter of 2009. The reason simply is that the banks are determined to hoover up all this Treasury largesse, grace of the taxpayer, and use it to prop up their balance sheets and not incur any further bad debts after their disastrous experience of being caught with billions of toxic nmortgage-backed securities in 2007-8. The banks, despite the crash they have now visited on the real economy and despite the eye-watering mountains of taxpayers’ aid they have absorbed without recompense, are still determined to save themselves, not the businesses and individuals they exist to serve.
In these circumstances the only certain way to ensure that lending is resumed on the scale now desperately required is to take public control of the banks, temporarily at least, to avert the worst crash since the Great Depression. Now that neo-liberalism is wholly discredited, is that still a taboo too far? I think not.
First published in the Guardian in Commentisfree on 5 January 2009.