Monday, 13 October 2008

Gordon the bank manager?

If, at the heart of the banking crisis we are currently witnessing, there lies a correctional mechanism whereby ‘sound money’ is reasserting its primacy as against the illusive nature of credit, then how far should the government intervene to prevent that mechanism? This dilemma lies at the heart of two posts, carried by the Telegraph politics blogs, which are gravely concerned how the government’s input in the running of banks which it has taken a stake in, might effect their function.

Christopher Hope quotes Derek Simpson, joint general secretary of the union Unite, a major provider of Labour Party funds,

“The measures announced today must be bound to undertakings by the banks of no job losses, no repossessions and an end to the bonus culture.”

Simpson’s demand for no repossessions is extraordinary. No-one supports callous treatment of those who find themselves unable to pay because of unforeseen circumstances, but to provide a carte blanche for mortgage holders to default without allowing banks access to their collateral, would be irresponsible and unsustainable. Although it is not in government’s interests to see thousands of people evicted from their homes, neither should this be combated by permitting unlimited bounced payments at the expense of the tax payer.

Of course it is not a government source suggesting that such a thing should happen, but rather a union leader. Although Unite may have donated a large proportion of Labour’s funds over the past few months, scaremongering over the influence of union bosses has rarely had much firm basis in fact during new Labour’s tenure in government.

It is doubtful that banks in which the government has a controlling, or significant, stake, will unconditionally refrain from repossessions, or indeed guarantee every current employee the security of their jobs. There will be political pressure, however, to steer banks in a direction which is not necessarily good for them or good for the economy. There will be temptation to absolve HBOS, RBS, Bradford & Bingley or Northern Rock from the responsibility of making difficult decisions or taking unpleasant action, lest it should reflect badly on Gordon Brown.

Alex Singleton posits the hypothetical scenario whereby HBOS or RBS must pull the plug on a large Scottish business and speculates that a political storm would attend such an event. You can be sure that the shrill and populist shriek of Scots’ nationalism is foremost in his mind, when he suggests such a scenario.

Although the government denies its intention is to actually run the banks, Singleton points out that it is nevertheless seeking seats on their boards. In a situation, such as he outlines, intense pressure would be felt by the government and it would be in a position to control the relevant bank’s response.

“The political impulse will be to prevent businesses going to the wall during this recession (including those which were unprofitable in the boom years and relied on mushrooming overdrafts). Likewise, Westminster pressure to issue large numbers of mortgages, during a recession in which house prices are falling, is likely to encourage irresponsible lending.”

Although I don’t have a difficulty, as Singleton does, with reining in top bankers’ excessive pay and bonuses, I can certainly see the larger paradox which he is raising. If an excess of credit caused the problems we are now in, why should a renewed expansion of credit alleviate them? He quotes Hayek, writing about the 30s depression,

“Because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.”

It would be both callous and wrong to rely on the market to correct, unfettered, the current economic crisis. It is right for the government to intervene. However, Iain Dale is right to point out that the particular severity with which the credit crunch has struck the UK and its banks can be ascribed to policies formulated by Gordon Brown and his government,

“With Brown as chancellor Britain let its finances get out of control and encouraged a debt boom, the like of which we had never seen before.”

Gordon Brown built his economic edifice on debt and runaway spending and it is from that position of indebtedness that he must spend more in order to alleviate the worst excesses of the crisis which threatens to engulf us. Had he based his policies on sounder principles from the beginning, although the global situation would still have meant difficulties, Britain would be better placed to weather the financial storm. If Gordon Brown inflicts his particular reading of ‘prudence’ on major banks, where will that take them, or indeed the tax payer?

The banks, in which the government is taking large stakes, should be required to operate within a strict framework, but they must also be independent of the political imperatives of a failing Labour government. That government must take substantial responsibility for the economic turmoil in which Britain now finds itself, and if Gordon Brown is allowed to exacerbate his past mismanagement, then he can only inflict more damage on the country.


IanPJ said...

You should also note that Derek Simpson of Unite is having his own troubles.

Firstly he is up for re-election as his age limit is up for review.

Secondly, he is having trouble with the partner union in unite the TG&W, who are seeking legal action.

I would therefore say that Simpson's statement today was being more to do with saving his own neck rather than the welfare of his members.

Chekov said...

Some timely bluster then. Interesting Ian.