Why the latest bank loan plan could do real damage
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Associate Editor
David Stevenson Feb 26, 2009
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First it was Northern Rock, now it's RBS and Lloyds.
Gordon Brown & Co are pumping the banks full of our money in the hope that they'll lend it back out to us and somehow save the economy.
If you think that sounds daft, that's because it is. The latest scheme is likely to do more harm than good. The housing market needs to correct – prices had gone too high. The current slump is a healthy reaction to an extremely unhealthy bubble.
As for businesses, there's a much better way of shifting money to them – just cut out the middlemen altogether...
The government's dangerous new bank loan plan
Northern Rock was the first British bank to go bust. But in these crazy days of government policy being made up on the hoof, that's not stopped a Lazarene recovery. As we heard on Monday, it can now kick-start its mortgage lending again to the tune of £14bn over the next two years.
Now, as many people (including us – Northern Rock's revival won't kickstart the property market) pointed out, that probably isn't going to make much difference. The problem is, it seems the government thinks so too.
Now we hear that the rest of its (ie our), banking portfolio is joining in the fun. Mr Darling is doing a cosy little deal with those other takers of vast sums of public cash, Lloyds and RBS - just as the latter reports the biggest-ever gross loss, £40bn, in UK corporate history.
This dynamic duo "have agreed to increase loans to home owners and small businesses by more than £40bn in return for about £600bn of taxpayer's assistance" with their dodgy assets, says The Telegraph. RBS alone is putting £325bn into the toxic debt pot.
Smart dealing, yet again, by the bankers. They saddle the public purse with most of their most gruesome mistakes – though exactly what percentage of their festering loans these represent, we'll not know for years - in return for promising to plough back just a fraction of that amount in extra money.
This time, the extra lending will do some damage
So chances are, we taxpayers will take another big hit. And the bankers will almost certainly behave like they've always done. When the current flak's died down, they'll celebrate by paying themselves the biggest bonuses they can get away with.
But the risk is that this time, the extra lending will be extensive enough to do some damage.
It won't do much to steady the economy, because that's going to get a lot worse regardless. Yesterday's official GDP release confirmed that 2008's fourth quarter drop was the biggest since 1980, and this year will be even worse. "The first half of 2009 is likely to be particularly painful – the sharpest contraction since the immediate aftermath of WWII", says Howard Archer at HIS Global Insight. He's now predicting the economy will shrivel by 3.3% over the whole year with more shrinkage in 2010.
And the banks' balance sheet are so riddled with rubbish, they don't want to lend much more to business, anyway.
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No, the danger is that this move will sucker a few first-time buyers, who've already been sweet-talked by sharp-suited estate agents that "there's a recovery on the way in housing", into losing their deposits. Which would be a great shame. Because whatever "green shoots" may seem to be sprouting, like a rise in homebuyer enquiries, they're about to get trampled on.
UK house prices still have a long way to fall. The 'fair value' level, based on a mix of long-term trends, the price/earnings ratio and rental comparisons, is 17% below January's Nationwide figure of £150,501, says Ed Stansfield at Capital Economics. But alarmingly for potential purchasers, he reckons house prices will decline by a further 10-15% below fair value.
With job cuts and repossessions soaring, and home rents dropping - as fast as 16% annually in prime parts of London – it's hard to disagree. And with the banks' track records, they're bound to end up writing even more bad loans.
How cutting out the middle men - the banks - would help
So rather than witness another toxic cocktail of government and bank-inspired foul-ups, is there a better answer?
Well, what if all these guys were kept out of the frame altogether?
Not for mapcap mortgages – we could do without any of those for the next few years. But viable medium-sized to small businesses really could use some extra working capital to tide them over while things are so rough.
As The Times' Carl Mortished points out, British insurers and pension funds have kept out of business lending for decades. There was no point while banks were throwing money around. But now the company cashpoint's almost closed, "British institutions such as Prudential/M&G are taking the first steps to build corporate lending books - and others with long-dated pension-type liabilities will doubtless follow in their footsteps. Corporate treasurers are beginning to get calls from investing institutions that want to lend to the right sort of companies."
In short, it's about cutting out the middlemen. And there's another plus point too. It could provide a good home for pension fund money fed up with losing so much in stock markets.
As Mortished says, loans don't have to come from established lenders. "The Prime Minister should stop asking broken banks why they won't lend. Instead he should ask if anyone else would like to do the job. The space will be filled by someone".
It's a simple matter of supply and demand. If the demand is out there, the free market will find a way to meet it. And if the Government would just get out of the way and let the market work, then we could all get out of this mess that bit more quickly.
Many investors see gold as a defence against inflation, but the reality is different, says Adrian Ash. The real function of gold in times like these is the preservation of wealth.
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