When even New Labour is talking about nationalisation of the banks, you know that the financial crisis really has become serious. The Labour chairman of the Treasury Select Committee, John McFall – no Marxist he – called last week for a State Bank, based on the Post Office network, to provide credit for industry. Some unlikely people are thinking along similar lines. The Financial Times columnist Sam Brittan, a veteran apostle of free markets, floored me recently by announcing at a Number 11 reception that he didn’t regard private banks as a necessary part of the market system. The Governor of the Bank of England, Mervyn King, said last month that further bank nationalisation may be necessary if the banks continue their lending strike.
This is a historic moment. The financiers have so discredited themselves, by their bonuses, predatory lending and sheer irresponsibility, that they are being disowned even by capitalism’s greatest defenders. Forget Socialist Worker, British industry is practically manning the barricades. Last week, Peter Hughes of Scottish Engineering called on the government to “get an arm lock on the banks”. Gordon Brown is doing his best not to listen to the clamour for state control, but he is going to find it difficult to defend throwing more billions at the banks only to see it disappear into the vaults.
Of course, we are some way down the road of nationalisation already since the government owns Northern Rock, Bradford and Bingley, 60% of Royal Bank of Scotland and a sizeable chunk of the Lloyds behemoth which swallowed TSB and HBOS. On top of this formal equity stake, the Bank of England has been funnelling £500 billion to the banks in swaps, loans and guarantees. People forget that the Bank of England was itself a private company until it was nationalised in 1946. The entire British banking system is already on life support from the public sector, so maybe we should carry this to the logical conclusion.
We cannot go on socialising bank losses just so that the same old bankers can privatise the profits in the upturn. The banks have lost any moral claim to be managers of our collective social capital.The only justification would be if private banking the most efficient way of providing finance for the economy, which it manifestly is not. The economy is now in the grip of a credit famine. The manufacturing figures are appalling, with output falling at its fastest rate for 27. It is a bitter irony for British industry which had been sidelined during the decade of the financial services bubble. Now that the falling pound has made manufacturing competitive again, firms are unable to take advantage of the opportunities because the banks won’t give them credit. Some £50bn in corporate loans have to be refinanced this year and the money just isn’t there. Cutting interest rates is futile when the banks have made clear they don’t intend to pass it on.
Why are the banks hoarding cash? Well, they insist they aren’t of course – but the real problem is that they are so massively in debt themselves, from all the crazy loans they made during the bubble, that they are using any cash they can get their hands on to shore up their balance sheets. They have a funding gap of around £700bn between what they’ve lent and the deposits they have to back it up. The banks can’t raise money by borrowing from other banks because none of them trust each other any more. The collapse of the UK housing market – down 20% already and with and expected 20% this year – is further undermining their balance sheets. So, there’s no point in just barking at the banks to lend: they just won’t.
The government is caught in a contradiction. It wants the banks ultimately to become private companies again, free from state control. But to restore their commercial viability, and shareholder appeal, the banks have to restrict their lending to businesses. It’s a vicious circle. The banks are cutting back their lending in the middle of a recession that the banks themslseves have created. This causes further write downs and losses for the banks. Something has to break the feedback loop.
The government is trying to play down the prospect of another bank bail out but there seems no realistic alternative another injection of billions of public funds into the banking system. Which raises the question: when is a bank not a bank? Is RBS still a private bank when we own 60% of it? Well, yes, for two reasons. One, the government doesn’t want to own it and has left the old management in control of lending policy. And two, because the liabilities of RBS – its £2 trillion balance sheet – are not on the government’s own books represented as public debt.
The big question now is whether the UK government could recapitalise the banks again and still maintain the fiction that the banks are private companies – that it owns the good bits of the banks but not the bad bits. As soon as that myth is exploded, then we find the £4 trillion or so of bank debt landing with a thud on the Treasury doormat. The Bank of You and Me suddenly becomes Bankrupt You and Me. If the government takes on the full liabilities of the British banks there might be a collapse of sterling and a phone call from the IMF. Interest rates might have to rise to Icelandic levels to ensure that the government could borrow. Taxes would have to rise to pay down a debt that is four times GDP.
But something like this is almost certainly going to happen anyway. There’s no easy way out of this crisis. The government is now threatening to resort to quantitative easing, the euphemism for printing money. This will lead to hyper inflation in a couple of years which will itself need high interest rates and higher taxes to quell. It would be better, surely, to move now to an orderly nationalisation of the banking system. At least then the government could direct credit to where it is needed – to the sunrise industries which have to be built up now to provide for our economic future. This is the McFall plan in essence. A giant finance bank – similar to the nationalised investment bank that featured in Labour’s 1983 election manifesto, which would finance the reconstruction of the British economy.
The prospect emerges, perhaps, of a new kind of democratised state capitalism, in which governments actively manage the flow of credit. It wouldn’t be socialism because most of the economy would remain in private hands. But the business of banking would become a function of the state, rather like education or health. Instead of leaving industry to the vagaries of a financial system which is only interested in its own short term bonuses, the government could ensure that vital areas of the economy are not starved of funds.
Critics say a state bank would be run by dull bureaucrats who don’t understand the way modern finance works. Well, having seen the way modern finance works, many people would opt for dull bureaucracy any day. Banking is not difficult when all you are doing is taking money for virtually nothing from the Bank of England and then handing it on at 5% to a select few companies and lenders. Anyone could do it. The non-profit mutual societies, like Nationwide, which have survived very well in this crisis, show that non-profit banking – relying solely on deposits for lending – is preferable to the crazy financial engineering of the City. Never again!