Nice to see that someone’s making good a business out of the downturn.
The Financial Services Authority (FSA) is jacking up the amount it’ll levy on the banking sector for next year by more than a third. The extra money is to fund more “intrusive and directive” regulation, which sounds a bit painful. It’ll take on another 280 staff to do so.
I can’t be the only one thinking – isn’t this a little bit on the late side?
More debt isn’t the answer to the financial crisis
The news that the FSA is increasing the amount that it levies on the financial industry to expand its regulation isn’t great for taxpayers. So even more of the money that we poured into the banks will now be poured out of them again. The amount is peanuts (£438m) compared to the sums we’ve seen, but every little helps.
It illustrates the central problem we have right now with the whole approach to the financial crisis. The authorities are trying to do two incompatible things.
On the one hand, everyone realises at some level that, as a country we need to save more and rebalance. We’ve spent too much on the wrong things, and that has to unwind. On the other hand, there’s this frenetic, panicked desire to “fix the financial system”, by which, when you dig down, people basically mean winding the clock back to 2006 and early 2007, when lending was carefree and house prices could never fall.
But you can’t have both. You can’t have banks lending profligately with one hand, but repairing their balance sheets with the other. It doesn’t work. The two goals are incompatible.
I’ve lost count of the number of times that people have said in the past year, that we shouldn’t worry about the root causes of this crisis. “When a building’s on fire, you put the fire out, and worry about the foundations afterwards.” But this is the wrong way to look at things. Because if we don’t understand why the crisis happened, any ‘solution’ could well make things worse.
Boom cheerleaders versus bubble sceptics
The confusion arises because of the different views about why this crisis happened. The people who say “we must kick-start lending again”, are the ones who believe this came out of nowhere. The ones who cheer-led the boom all the way up, denying all the while that house prices were in any sort of unsustainable bubble, or that interest rates were too low.
If that’s your take on the “good times” of the past decade, then it’s understandable that you see this crisis as an entirely unpredictable economic car crash, and thus try to pin the blame all on one event, such as the collapse of Lehman Brothers. According to this view, if we can only pump enough juice into the economy to get it going again, then that should get us back on the path we were on before the system blew up. Therefore, whatever it costs to get us over this hurdle is worth paying, because it’ll lead to a rapid recovery.
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Then there’s the other view. This is the one that says our economic path was unsustainable. The booms in property, and several other asset classes, were bubbles inflated by borrowed money. More borrowed money chased after this apparent wealth creation, leading to ‘malinvestments’, as Austrian economists would put it (see mises.org for more on the Austrian school).
These ‘malinvestments’ now need to be unwound. And that’s exactly what’s happening. For example, plenty of mortgage lenders won’t lend against new-build city-centre flats, which explains partly (along with a lack of demand and rising repossessions) why prices in those areas have bombed so badly.
If this is the line you take, then the economy needs to rebalance, with investment and resources focused on more profitable and sustainable areas. And in this case, the best thing to do is to let the market get on with it.
In fact, there’s not much else you can do. It doesn’t matter how much money you give the banks, they won’t lend it to fund investments and businesses that no longer have a future. And more to the point, people won’t ask for it. You might be able to force banks to lend if you really want to get tough, but there’s no way short of outright dictatorship to make people accept those loans if they don’t want them.
This bust will be hard but it needs to happen
The danger is that in the effort to prevent this slump, the people in charge of the economy – who unfortunately, were all cheerleaders of the boom on the way up and so are of the first school of thought – are pouring huge amounts of future taxpayers’ money into the black hole that is the banking sector, without any real apparent plan of action.
This isn’t doing anything but pouring good money after bad, and storing up debt problems for the future. Yes, we don’t want the banking system to collapse, in the same way that we don’t want the electricity grid to stop working. But the idea that we should just spend ‘whatever it takes’ to get lending going again is dangerous. And that’s the risk we’re running just now.
The sad truth is, is that most people who’ve ever seen their company go bust could argue that it would have been viable, if they’d only had that little bit more money, or that little bit more support from their bankers. But that’s the risk that entrepreneurs run. This bust will be harder than ones in the recent past, because the boom was bigger. But it needs to happen.
Of course, every cloud has a silver lining – it’s not just the FSA that’s seeing its business expand due to the financial crisis. Other companies should do well too. In this week’s issue of MoneyWeek, my colleague David Stevenson looks at seven stocks that should benefit from tighter credit conditions. If you’re not already a subscriber, get subscribe to MoneyWeek magazine.
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