Banks nationalised, an opposition politician arrested for dissent – you might be forgiven for thinking you’d gone to sleep and woken up in Venezuela.
But no, this is indeed Britain at the tail end of 2008. The Royal Bank of Scotland now has a place in every taxpayer’s portfolio (the Government owns 58% of the bank), and the Government is getting increasingly ratty with the rest of the banking sector.
It now looks as though banks will be forced to abide by a new code of conduct over provision of credit facilities. They’ll apparently be unable to withdraw credit without “good reason,” reports The Telegraph.
The problem for the Government is that, with the recession in full swing, finding good reasons for banks to withdraw credit won’t be difficult…
‘Boom and bust’ were never scrapped – but the Government can’t admit it
A full 1,087 non-food retail businesses have gone to the wall in the past 12 months, according to credit group Experian. That’s a 17% advance on last year.
And the numbers continue to be grim. Last week, department store chain John Lewis saw sales fall 13% year-on-year, the second week in a row of at least 13% falls. Tomorrow, Tesco is expected by many analysts to post its weakest sales growth since the early 1990s when it updates on its third quarter.
The Government’s 2.5% VAT cut is unlikely to have much impact. According to The Telegraph, accountants Ernst & Young reckon that the average product in the shops is being discounted by 20.13%. So an extra 2.1% off isn’t going to make much difference to consumer demand (though it may help cushion margins to a small extent if shops don’t pass it on).
So the recession is motoring on, and it only looks set to get worse. This could never be seen as good news, but it’s very bad indeed for this particular Government. The current regime built its reputation on Gordon Brown’s claim to have scrapped ‘boom and bust’. So it can’t bring itself to acknowledge that, despite what Mr Brown said, we have in fact had a boom, which is now inevitably being followed by a bust.
Forcing banks to lend now will mean we’ll pay more in the future
So the Government is relying on misinformation and propaganda to pretend that none of this is Labour’s fault. Poor old Britain has been whacked in the face by US subprime. No one could have seen it coming. And it’s all down to those dreadful bankers. They were sticking lots of money into new-fangled mortgage derivatives that they shouldn’t have been touching with a ten-foot bargepole.
If it hadn’t been for American stupidity and bankers’ greed, then Britain would be doing just fine. Never mind that the Government was more than content to cheerlead the boom, and that it was responsible for the regulatory regime that allowed banks to go wild in the good times.
The trouble is, if you believe that Britain had the right recipe for economic success before the bust came (lots of lending, lots of spending), then the solution looks simple. You just have to get the banks to get back to doing what they did best. Write more 125% mortgages, and give money to anyone who comes in the door with a half-baked business plan to set up an eco-deli in Dagenham or whatever.
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That’s why we’ve got the likes of John McFall and Alistair Darling and Peter Mandelson swaggering around with their big sticks, looking to pick a fight with those mean old lenders. “Give more money to small businesses,” they say. “Give more money to householders. Give more money to credit card borrowers.”
But there’s a small problem with all of this. The reason we need to prop the banks up with taxpayers’ money in the first place is that they made too many bad loans. For example, the Treasury has already admitted that the reason that Northern Rock’s loans are going bad more quickly than anyone else’s is simply because it was one of the most irresponsible lenders.
So if the Government forces banks to make more money available, certainly to 2007 levels, then all it means is that they’ll be back for more of our money in the future. As Britain’s gripped by a downturn, banks are rightly being pickier about who they’ll lend to. As a spokesman for the British Banking Association put it, trying to defend the banks: “Not all business models that were established in the good times will survive the recession. Some tough decisions have got to be taken.”
We need to save more
The reality is that what needs to happen now is that banks and consumers mend their balance sheets. In other words, we need to save more. Sure, that means the economy will shrink – but that’s what happens when you borrow too much growth from the future. You have to pay it back at some point.
The sooner that consumers can build up a savings cushion that makes them feel secure about the future, the more quickly they’ll get back out to the shops. And the banks really need to do the same.
So what about the businesses going to the wall for a simple lack of cash flow? On Friday, James Ferguson told readers of his Model Investor newsletter (see here for more details about Model Investor) that he expects the Government to start lending direct to small businesses and perhaps even homebuyers in due course. That might mean government debt rising even further – but he still reckons you should buy gilts. You can find out why in the latest issue of MoneyWeek (if you’re not a subscriber, subscribe to MoneyWeek magazine).
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