Originally published 14 October, after banking bailout agreed
As Gordon Brown and the members of his politburo sat and cogitated this weekend, they hit on a formula to do the impossible. They introduced a socialist programme to the world, the likes of which had not been seen since the years after the Tsar was toppled from Russia; yet in the process had the arch proponents of capitalism gushing their approval like best-behaved school children.
“The French state will not let a single bank fail,” said comrade Sarkozy. “We have placed the first foundation stone of a new financial order,” said comrade Angela Merkel. Meanwhile, from across the pond, comrade Paulson is said to be planning to re-channel some of his $700bn into a Chairman Brown type scheme, with the US treasury picking up equity in US banks it rescues.
The proletariats are of course chomping at the bit. Brown’s legions of supporters, the likes of the Daily Mail, with their anti-spiv agenda, want to see the greedy bourgeois bankers carted off to the mines, or, better still, forced to take up proper jobs like teaching maths.
And the suitably humbled former aristocracy who value their jobs, join the revolution. “Future profitability and capital generation will be optimised by placing a greater emphasis on risk-adjusted returns,” said a RBS statement.
“Reward for Board Members will take into account internal relative compensation packages and perceived fairness in the current economic climate,” said a Lloyds HBOS statement.
The Cossacks are not all taking it lying down. At Barclays, John Varley said: “We want to protect the right of self-determination,” and warned that banks that are nationalised will be “… constrained in their strategic and operational flexibility.”
But there is no stopping comrade Brown. At last he can ensure banks are run his way. Less risk, of course, but more loans for small businesses. No bonuses for senior management at the banks in year one. Future rewards will be in the form of shares – thus ensuring bankers are rewarded for the long-term benefits they bring in.
There’s nothing wrong with those aims. They are all perfectly laudable. Well done, Gordon, you have managed to ensure bankers behave like responsible brothers in future.
Then there’s the housing market. As you know, British house prices never were over-valued. Of course in Spain and in America it was different. Sure, average house prices to average income hit a much higher ratio in Britain than in the other two countries. Sure, debt to GDP was much higher in Britain too. But that isn’t the point. The US and Spain witnessed extraordinary house building booms, creating too much supply. That’s why house prices are falling there. In Britain, there was no debt bubble, because rising debt was covered by rising property values. Comrade Brown pointed it out to his foolish family of British citizens yesterday. “I think the housing market in Britain therefore has a better chance of starting more quickly again than the housing market in the States.” Not only does he want to see government-owned banks lend more to business, but he wants to see them provide more loans to home-owners too.
But consider this. What happens when a major employer, especially a major employer in a region where there is a marginal labour seat, runs into financial difficulty and its state-owned banks refuse to give it a loan?
Do you think the government will start imposing limits on top salaries at the banks? If they do, does this mean they will no longer be able to attract the top talent? Well, the legions of bank critics already have their answer to that question. “So what, it was this talent that created the mess in the first place.” But then, as was told here yesterday, the true cause of the credit crunch was a lot more complex than a few crazy bankers getting greedy. And it was those same crazy bankers who provided the funds to fuel Britain’s longest-ever economic boom.
And what about risk? Has anyone spotted the contradiction? Brown wants banks to lend more to home-owners at a time of a housing crash. Does that strike anyone as being a tad risky?
And supposing the £37bn of taxpayers’ money is channelled into providing more mortgages, and somehow the great house price crash is stopped in it tracks. Do you really believe the danger will have gone away? For as long as the ratio of house prices to average income is so high, there will always be a danger of a crash, and if somehow government action can stop house prices from falling now, they will merely be creating the roots for the next crash – which will be even more dangerous.
And who is to say lending to business is not risky? Isn’t reducing risk the whole point of derivative trading and credit swaps? Surely it came unstuck because house prices stopped rising. It was actually Chancellor Brown who encouraged the development of a UK housing bubble.
The future must be bright for those banks that managed to stay free of government clutches. The likes of HSBC, Barclays and Santander must be laughing all the way to the …, well, to the bank.
Look, the government plan revealed yesterday was the right plan; the action announced yesterday around the world to take similar action was the right move.
But it is only the right move if it is seen as an emergency and temporary effort to stop a catastrophic banking collapse. If instead it is used as an opportunity to recast banks in Gordon’s image – or worse, ensure they are run in the way Daily Mail readers would expect, then the result will be disaster. Gordon is famous for his micro-management style. He is famous for wielding the weapon of complexity to enact his policies. Will it be like that with the banks too?
Yesterday he kind of compared himself with “far-sighted leaders like Roosevelt and Churchill”. But he undersold himself in putting himself up there in the pantheon of the world’s great leaders; he forgot to mention Lenin.
© Investment & Business News 2013