The following post is from June 2010. In October 2012, I see no reason at all to change any of the conclusions. Interestingly, this piece evoked not one single comment.
ANALYSIS: BRITISH BANK DEBT IS A QUARTER OF GLOBAL TOTAL.
For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings due to be repaid to Threadneedle Street amount to about $1.2 trillion by the end of 2012.
The global total owed by banks to their Central counterparts last night stood at a fraction over $5 trillion.
You may ask why a small offshore island is in this position, and the answer is the same one as to my 2008 question, why did the UK banking-system bailout cost more than the US one? It is that we are so hopelessly overdependent on financial services here – or so amazingly good at being mad, whichever way you prefer to see it – that while others will get flu over the next few years, the UK could very quickly succumb to double pneumonia.
Once again this week, the Government (because civil servants do spin as well) has been rattling on about how our banks are ‘far more robust’ than they were 18 months ago. It’s true of course – but they’re still broke. If they weren’t, they’d be lending.
Richard Barwell, an economist at the Royal Bank of Scotland in London, yesterday told Reuters, “If rates rise and banks are unwilling or unable to roll over funds, that would trigger forced deleveraging, there would be a sharp contraction in credit conditions for those within and outside financial markets, putting considerable downward pressure on activity and asset prices.”
This is moneyspeak for ‘Bank lending will stop totally and there’ll be a property crash….and by the way, we’re going to keep interest rates down for another year’. But it has (perhaps rather late in the day) made The Slog wonder if this was the reason for interest rate barminess all along.
Back in early 2009, Slog mother-site nby was virtually alone in suggesting that we should put interest rates up, not down – to get people saving again, and banks into the black via deposits, and lending to business in trouble on the move under government direction.
Oh hahaha, dear me, what a silly idea oohoohooohohohahaha they all went. How would business then afford higher rates, they asked? To which I replied, “95% of business doesn’t want credit at any price, because they know what’s coming”. (Hence the tendency of corporate entities in the West to store up cash-piles over the last 18 months).
As we saw, business didn’t want or get any money….and that 27% of the population partly or wholly dependent on investment income went through the biggest salary cut in UK history. Now there’s more than my own moaning self-interest at stake here: over 55s are the biggest credit-free spenders on durables, gifts, electrical goods and entertainment. To keep them spending would’ve made the VAT cut look like a drop in the ocean.
But there’s more: not only would the banks have much healthier balance sheets today had this policy been followed, the Government’s tax income would’ve increased hugely.
So why did we do it? And the answer, as always, is political.
Cast your mind back to late 2007. At that point, Mervyn King told the banking system in general – as the disaster at Northern Rock became more obvious – that the BoE was “not in the business of bailing out people with imprudent business strategies and lending policies”. This was precisely at the moment when Gordon Brown was planning a snap election, the thought of which had later never occurred to him at all. The collapse of a bank in Labour-held territory could not be tolerated. The Treasury was ordered to do whatever it took.
Secondly, rising interest rates would’ve stopped Brown’s everlasting boom in its tracks – and caused unemployment to rise rapidly.
And third – a self-fulfilling reality – once having rescued lots of banks (and loaned them vast amounts of money) any rise in interest rates became unthinkable – otherwise the banks would go bust trying to manage the debt. Vicious circle now closed, Ithangyoo.
This case history contains all of the three great lessons of our time: put off pain, and it’ll be much more painful later on; at the bottom line, everything comes down to banks; and above all, vote-centric politicians will themselves vote for anything that wins them votes.
The US fiscal deficit is down to saving Wall St banks. The eurozone crisis is down to saving Franco-German banks. Britain’s debt is down to bailing out banks. Britain’s unwillingness to go further into EU federalism is about not wanting to bail out Eurobanks. And idiotically low interest rates became a trap from which nobody could escape – to save indebted banks. ‘They must be saved’ was a cry that first came (natch) from bankers…but it was the political class that did their bidding – virtually without a whimper of opposition.
‘Naive’ is the insult normally thrown out by highly educated but blinkered economists and fiscal ‘experts’ towards any observer suggesting such contrarian ideas. Far from being naive, they represent a practical reality. There was absolutely no need in 2008 to save the institution Northern Rock, any more than we needed to save Icelandic Banks to recompense UK savers. It was done to make a collapsing financial mirage constructed by New Labour look safe.
To compound the crime however, the Rock’s perfectly sound deposits book was sold to….JPMorgan, a US company. And the intermediary employee who facilitated this was Anthony Charles Lynton Blair.
In my view, even in the case of HBoS, the savings book could’ve been acquired by other banks (HSBC and Barclays would’ve leapt at it) and the corporate entity quietly closed. The result in all these cases would’ve been a short-term steep rise in unemployment…in one sector where just 47,500 are employed in the UK. Hardly the stuff of which Jarrow Marches are made.
I am on the record as saying in 2006 that, had Greenspan called a halt to the US boom in 2004 – including a good old-fashioned credit squeeze – the withdrawal from retail therapy would’ve been unpleasant, but the bloodbath of 2007-08 avoided. But that didn’t play well with the Republicans’ Noo Paradigm, and so instead Big G printed a bit more money and allowed credit to become insane. This was in turn encouraged by pc lunatics desperate to ensure that no ethnic, gender or class ‘isms’ were involved in the lending. Thus was Sub-Prime created.
The human desire to avoid painful reality, banks and politicians: they explain almost every snafu in history: and their influence will never be reduced until a new culture of material life arises to render it as anti-social as smoking is today.
The conclusion of this piece, however, is more immediate: the next time someone tells you Britain’s plight is being exaggerated, tell them about bank debt.