From the BBC:
The government should consider lending directly to businesses and mortgages as banks fail to live up to promises to lend more, Nick Clegg has suggested.
The Lib Dem leader says the government has been “supine” and “weak” in not forcing banks to act, despite giving them billions of taxpayers’ pounds.
Mr Clegg said these were “not normal times” and solvent businesses were being put at risk by lack of funding.
There was “growing public anger” and urgent action was needed, he added.
Mr Clegg says the government should lend directly to companies through the Post Office, local authorities or even by creating an entirely new bank.
You can read the full story here.
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27 Comments
Clegg, I am beginning to despair of your messages.
Yours faithfully,
J
So one minute we want £20bn of net public spending cuts and the next we want the Soviet model of local enterprise ?
Is it any wonder the media aren’t taking us seriously? A classic example of tactics ( a cheap one day head line) over comming strategy ( fixing our credibility problem.
Let’s call it Girobank.
I wouldn’t have a problem capitalising a kind of federation of credit unions accessed via the post office to provide small loans for the poor and/or micro credit for community enterprise.
But there we have clear market failure as that ector is dominated by loan sharks or not at all.It would also be effectively mutually owned rather than state owned if set up properly.
But a government bank to make different lending decisions because we don’t like the ones the free market is making ?
What next? A government supermarket because some people can’t shop at Ocado any more and have had to down grade to Sainsbury’s.
I thought we agreed that the credit boom and excessive lending were a part of the cause of this problem. Why then are we also so determined that lending should be available at the same levels when that was at its height?
Really, its all more opportunism than coherent anaylsis, which is a shame when we know we have people capable of better.
I find myself wading in to support Clegg (there’s a first time for anything, I suppose!) Granted that excessive lending caused the problem, what we have now is the very opposite. Businesses are suffering because routine loan requests, which would normally have been approved as a formality, are now being turned down. As Clegg says, these are not normal times, and the banks are not simply applying normal commercial judgment.
I don’t know what the answer is, but I don’t fault Clegg for calling for one.
The proposal is in response to the situation where the Government is giving public money to the banks, who are then putting it under the mattress. If the banks won’t put the public money to work as intended, then perhaps we should find or found an institution that will.
It’s an exceptional solution for exceptional times – and with a failing government failing to make existing institutions work.
Girobank v 2.0. That’s OK by me 😉
People want solutions not some adherence to Liberal ideological purity.
I don’t agree with Clegg often, but depending on the detail, this idea could have merit.
Que abuse for being a ‘social democrat’ no doubt 😉 Tin hat at the ready !
“The proposal is in response to the situation where the Government is giving public money to the banks, who are then putting it under the mattress.”
But haven’t the banks been told they have to recapitalise themselves? That means “putting money under the mattress”.
It’s an interesting idea from Nick but I wonder if it can be done quickly enough to make a difference – particularly if it needed primary legislation.
If we need to use state power to get credit flowing then there are a 101 ways of doing it rather than setting up another government appratus. ( and how long will that take? how much will it costs? )
We part or totally own several banks now who will all go under within days if the government withdraws support. it shouldn’t be tha hard.
“The proposal is in response to the situation where the Government is giving public money to the banks, who are then putting it under the mattress.”
Yuh, so don’t give them “public” money in the first place.
Perhaps people want solutions, unfortunately we don’t seem to be proposing any.
All that’s happening is some sound bite, populist policies are being announced, with no coherence behind them.
Its opportunism of the sort we like to criticise other parties of…
Girobank in itself worked reasonably well. Set up to break into the banking monopoly; made moderate profits; established reasonably well paid jobs in a relatively deprived area (almost a community enterprise). Then given away by the Conservatives to the A&L, privatised itself, lost it in a series of bad decisions, now part of Santander.
Mind you it took a good few years to really work.
Much like David, I find myself awkwardly in sympathy with Clegg on this one. Nobody is saying things should be returned to how they were and the height of the credit boom. Rathermore what Clegg is saying is that action needs to be taken to correct the swing of the pendulam (which has now gone too far the other way)…that is all…
In the 1980s the French socialist president Francois Mitterand nationalised the banks. As a policy it failed, and socialism as an economic system declined around the world.
Now we are witnessing the failure of banks that operate in a free market. Free market fundamentalism is now in decline. The problem is where do we go now? The highly regulated Spanish system has proved to be more resilient and probably that is the direction of travel we should go. However UK banking is facing short term problems that can only be fixed by imperfect solutions that may or may not work.
The libertarian solution that some on this thread favour of letting banks fail has no doubt been looked at. But no politician in power, not even GW Bush who rhetorically at least has signed up to free market fundamentalism, can countenance the consequences of allowing substantial banks to fail. Admittedly Lehman Brothers was allowed to fail, but according to Joseph Stiglitz (an economist who has been right all along in his analysis), the consequences of that alone has been dire.
Ideally we should have small banks that compete with each other, but are not “too big to fail” and holding the state to ransom. As we have seen, markets do not deliver on that, and like it or not only state regulation of private banks can.
As an aside, I hope “Clegg’s Ardent Admirer” doesn’t get too upperty…
“Now we are witnessing the failure of banks that operate in a free market.”
Please, please stop saying this. The financial markets are not and never have been free – they are absolutely riddled with regulation and government control. Mae and Mac have been virtually government entities for decades.
If you want to argue that this is more a market than a government problem, then fine – but stop pretending this is a “free market” when it is not.
It seems only a few months ago that Nick Clegg was telling us that his approach to public services was to minimise state involvement and allow everything to be solved by the “alchemy” of competition and “grass roots genius” (or some such facile soundbites).
Now he wants to set up a state-run bank to lend to those not deemed credit-worthy by the commercial banks. The lending decisions to be made by whom? Civil servants? The staff of Northern Rock and Bradford and Bingley? People who have been sacked by other banks?
I think Clegg should thank his luck stars that Gordon Brown didn’t have the fleetness of foot to give this half-baked rubbish the response it deserved at PMQs.
As an initiative (rather than a policy) I think this sounds very interesting and though the criticism that ideas such as this are “half-baked” is probably correct, this is nevertheless still a good idea.
With the continuing rise of local credit unions, it is only a logical progression to have a national credit union a la girobank to add greater balance to the market.
Expect Darling to make some announcement on this within the PBR.
I don’t think the comments really reflect the debate.
Brown is attacked for failing to keep his promise to get the banks to return lending to 2007 (height of the credit boom) levels. In response to this faliure to act, Clegg calls for a government bank.
It pretty clear that this is part of pressure to return lending to credit boom levels.
This is being defended on the basis that we must offer this during a recession but not normally. So we are talking about returning to 2007 lending levels.
I do not think this is an efficent economic stimulus. While we may want to offer some support to people finding themselves in negative equity, theres no reason we should be making it easier for people to purchase property- this is a necessary correction in this area.
As to small businesses, indiscriminate lending is not the right approach. The simple fact is that in the credit boom many non-viable businesses were able to surivive, especially with the high levels of consumer spending. If we are going to move to an era of lower borrowing and consumer spending, which we must, then we have to accept that a number of small businesses built on that will cease to be solvent.
Any economic stimulus package needs to reflect that. A government bank with a remit to give out loans to what is basically the new, wider sub-prime market is certainly not going to do that- rather than supporting succesful businesses and idea, it will prop up faliure.
Note that I don’t have a problem with assistance expanding credit unions. But if it lent the way Clegg is surviving it wouldn’t be a mutual because it would make losses, which credit unions do not in general.
“talking about returning to 2007 lending levels”
You might be, but I don’t think Clegg is.
To me it has looked and sounded for some time like Clegg has identified the deflationary risks of the situation as the greatest concern we should be worried about (and yet he has managed to avoid mentioning this directly to avoid the accusation that he is talking the ecoomy down ie he is more statesmanlike than George Osborne – whodathunkit!).
I don’t think the credit markets should be offered the choice by government between functioning at 2007 levels and not functioning at all – that way disaster leads.
The Christmas trading figures will be hugely significant as to how the economy will fare over the next cycle – if trade is down by less than 2% then unemployment rises will be less drastic and the decline will be shorter, but if we overreact and start paying-off debt to the exclusion if keeping the economy ticking over and begin hoarding cash for the collapse then more jobs will be lost and that rainy day will be upon us sooner than we thought possible.
There are a number of separate issues here. First, banks need to be recapitalised to prevent runs on the bank. That is what the various rights issues are for. Those are not designed primarily to support higher bank lending.
What is odd, and thus prompts calls for less orthodox ideas such as this, is that inter-bank spreads are very high, and that banks are refusing to lend to well-run businesses to whom they have lent for years, even when they have finance available (from depositors, and from the Bank of England as loans), available at very low rates.
As everyone who knows me knows, I am an orthodox economist. But when aspects of a market don’t work (and nb LIBOR is not a market rate, which is one of the problems), it is for govt to step in and think through what can be done. Sometimes that is breaking up monopolies (hence we oppose Lloyds-Halifax), sometimes it is unbunding (holidays and insurance) and sometimes it is stepping in directly.
The proposed bank would not be Giro 2, however. That was designed as a low cost bank for savers more than borrowers (and Giro was never that successful – Wilson’s predictions were out by orders of magnitude). This would be direct competition, and the aim would be to lend, above all.
The obvious vehicle to use would be the Bank of England. If the Bank offered loans to businesses will collateral, at base rate plus a margin, that would be an interesting offer. They could also offer mortgages to people with a deposit of 25%+ at BR +1.5%, with no collar. Again, that could be appealing to many borrowers. For deposits below 25% you would want a pretty big risk premium now unless the person has a very secure job, but even so, base rate plus 2.5% might find some takers.
Having read the web page that has now materialised on this, I think I was being generous in describing this as “half baked”:
http://www.libdems.org.uk/home/lib-dems-getting-banks-lending-64218695;show
The state has already pumped huge amounts of money into the banks, with Lib Dem support. Now that all seems almost to be written off as a bad job, and we have two more huge cash injections suggested on top of that:
(1) The government is to take bad debts off the hands of the banks. To be sold when market conditions are favourable “if possible”.
(2) The government is going to “lend” money directly to those that the commercial banks won’t touch. The mechanism of off-loading all this cash hasn’t been decided. Maybe it will be done through the Post Office, “making use of its considerable branch network” – perhaps that means Mrs Williams or Mr Patel will be empowered to hand over a few hundred thousand to local businessmen over the counter? Or else local councils will disburse the sponduliks – though even Cowley Street admits here that “issues of expertise would have to be addressed”. Or else we’ll allow the expert bankers who ran Northern Rock to dispense the largesse – they certainly have a track record in screwing things up royally.
And if an “entirely new bank” is set up, it “should only be seen as a temporary measure”. Let’s hope they don’t put that bit in the job adverts!
The Government already owns a couple of banks, which they could use to drive down interest if they wished.
However, as too much cheap money is what created this mess in the first place, creating more cheap money is simply going to add fuel to the fire. We’ll cough and splutter our way out of this recession only to have another one a few years down the line.
BTW: “banks that operate in a free market”? There is nothing free about a system whereby there is a central bank that allows commercial banks to lend money they have not got, a Financial Services Authority that stifles competition by restricting entry into the market, and a Treasury that bails commercial banks out as soon as they get into trouble.
Consider a motor industry that was allowed by law to sell cars it had no intention of building; where the Government regulator made it almost impossible to set up a new car firm; and the Government gave huge subsidies to the existing firms when they got into financial difficulty. That wouldn’t be a free market. It would be interventionist Industrial Policy qua Wilson and Heath.
Tim is spot on with his analysis. As an accountant who is seeing the current bank lending on a daily basis the proposal by Nick Clegg is a perfectly reasonable solution. Banks are acting like rabbits in headlights at the moment. They are doing nothing. Managers are more scared of losing their jobs than bothered about helping businesses.
Instead of creating a new bank however we should just stop the mad Lloyds/HBOS merger and take full control of HBOS until the situation stabilises and we can get rid of it for a big profit
“Instead of creating a new bank however we should just stop the mad Lloyds/HBOS merger and take full control of HBOS until the situation stabilises and we can get rid of it for a big profit”
I always used to think of myself as someone on the left of the party, and was dismayed by the lurch to the right under Clegg.
But in the last few days some people (including Nick Clegg on occasion) are making me look like Milton Friedman! What’s happening?
you believed the propaganda of our opponents?