In The Guardian Matthew Oakeshott writes:
Britain’s economy after this week’s grim GDP figures looks like an old steam train struggling up Shap Fell. George Osborne, the driver, is doing his best but there’s just not enough coal in the firebox, the train’s lost momentum, and it’s slipping back down the hill. We need two massive growth locomotives, called housing and banking, with a new team on the footplate to stop the slide.
That’s why I’ve been saying we need a bold plan A+, making banks lend, especially RBS, the bank we own but disgracefully don’t control, and a firm government commitment to create 500,000 new jobs in construction by doing whatever it takes to build 100,000 more homes a year.
He concludes:
We weren’t latter-day Che Guevaras when we called on Labour to nationalise Northern Rock, George. And it’s not Marxism, just common sense, if we have to go from 82% to 100% ownership of RBS to make it a bank for business and growth. We poured more than £70bn of taxpayers’ money into RBS and Lloyds, with further exposure to ever more toxic property in the asset protection scheme. But the problem’s still not fixed. The Treasury has been the blockage under both governments. Now we must do whatever it takes to get the finance flowing again to British business.
You can read the full article here.
* Mary Reid is a contributing editor on Lib Dem Voice. She was a councillor in Kingston upon Thames, where she is still very active with the local party, and is the Hon President of Kingston Lib Dems.
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14 Comments
I’d really like a banker to make the case against this state owned bank proposal.
I always feel that the murky links between the Tory Party and City interests result in wrong decisions being taken for the wrong reasons. Can we bring this debate out into the open?
I agree with Matthew Oakeshott – we urgently need a public investment bank. We have for some years, but the current financial situation shows it up in stark relief.
My bank is very keen to lend my business money, but I don’t want it because I don’t yet see the increase in demand that would be needed to pay the bank back.
Forcing banks to lend money is crazy, if it is in opposition to the risk assessments they make of potential borrowers, and in opposition to the demand assessments made by potential borrowers. All it would do is create debt which will eventually be unpaid … kicking the crisis down the road where it can fester for a while and grow worse than it would otherwise have been.
I see the attraction of home building -it may satisify a need and it may have a short payback period – but that is what Spain did a few years ago, Spain now has 25% unemployment, 50% youth unemployment, every fourth or fifth house for sale with no buyers, and at least one regional government has run out of money and will not be paying some public sector salaries this month.
Would it be better to build other kinds of infrastructure – HS trains, water pipelines, windfarms, nuclear plants, roads, airports? Would it be even better to tackle the large gap between what the rich earn and what the poor earn, by taking from the rich?
The relationship between banks and state is a peculiar one. In normal times they are not nationalised, but are not fully independent either. They exist in a half-way house that avoids on the one hand allowing them to be predators on the real economy (because of tight regulation) or on the other hand to be tools of ambitious politicians who can use them as vast and unaccountable slush funds for their pet projects (think banana republics).
This broke down after the ‘Big Bang’ of City reguation and too much of finance has been going to the dark side ever since becoming more and more predatory and criminal. The Libor scandal is only the tip of the iceberg.
The problem with RBS and LLoyds now is that they are basically ‘bad banks’ kept alive though taxpayer life support. Vickers ++ is the answer however much the Conservative’s paymasters hate it. We need to excavate the ‘good bank’ bits including the high street branches, money transmission systems etc and let the bad bank bits go. And we should not shy away from regulations that forbid them from engaging in casino finance or ponzi schemes. If those easy options are barred they will have to turn to the trickier business of making proper loans to businesses and home buyers or they will have no income.
Directing them as wholly or majority-owned arms of the state to make loans of certain classes is not the answer. The current crop of politicians not doubt has the purest of intentions but the next generation may not.
Reckless lending is the problem, not the solution, Reckless lending was what caused the sub-prine mortgage crisis in the US, which our banks including RBS are still trying to recover from.
Richard is right. The problem is aggregate demand. Or more accurately the lack of it.
Lord Oakshott says, “As for banks, they are the water companies of our economy.”
If that is the analogy to use, and it has its advantages, then, the Bank of England is Ofwat.
It may help to have a change of team at the Treasury because it is the Treasury (actually the Chancellor the Exchequer, or I imagine in this Coalition, the Quad) that each spring sets the target for the Bank of England.
This spring the Quad will have renewed the target for the banbk of England as ‘close to’ 2% inflation, which the Bank interprets as 2% in the medium term – it targets the forecast and not the current figure.
Did Clegg or Alexander support that decision? For that matter did Cable and Oakshott?
As it is, the Bank of England is setting interest rates and its programme of QE to achieve that 2% figure. It is the Bank also that is making it more difficult for commercial banks to lend.
To borrow from Lord Oakshott’s analogy, it is like Ofwat telling the water companies not to mend broken pipes and to limiting their investment in new infrastructure. Before blaming the banks you have to blame the Bank of England and you have to blame those who refuse to change the Bank’s target.
We could, for instance, have a massive house building programme tomorrow if we used an open ended programme of QE to buy housing assets and mortgage backed securities to reduce mortgage interest rates and get construction workers back to work.
The resulting boost to aggregate demand (and national income) will get even people like Richard 😉 investing in new projects!
But all this starts from changing the policy *we* set the Bank of England.
Many good comments from Liberal Eye and Richard Dean.
eg Split the banks, infrastructure, not housing.
We also have to tackle the enormous disparities in employee earnings. It is a market failure which is distorting our economy and corroding our society.
This is best done by introducing a special form of Employers’ National Insurance Contributions payable on the gross remuneration of employees that are paid more than £500K at a rate designed to make an impact.
Yes, we could use massive inflation to pay for almost anything. For a few months.
That wouldn’t solve any problems.
What inflation Andrew?
You inflation hawks have been going on about inflation ever since the markets first predicted QE, was that four years ago! It is fear of inflation in a time of disinflation leading to deflation that is stopping recovery.
See Bank of England paper 442.
People (not necessarily you) have been saying that the ‘markets’ would turn on us for a similar period. It was said when 10 year rates were 3.5% that they would soon rise. They fell, again and again … even at 1.5% today, that means that no one putting their money at stake are betting against it continuing to fall.
When people in the markets are willing to buy bonds with that kind of return they are telling the policy makers that there is nothing to fear from inflation, but there is everything to fear from deflation. They are willing to buy bonds at 1.5% nominal, because with deflation that means more than 1.5% real.
I find it amazing that those who believe so much in the wisdom of markets refuse in reality to take any notice of them.
THis country (and most other western countries) have to use the spare capacity in their economies before there is any danger of inflation.
These were the same voices that led to the stagnation of the ‘30s and they are doing it again.
Richard Dean, Bill le Breton, you may well be right in your assertions but not your solutions. We don’t need more airports, we just need to administer better those we have, transferring the surplus military capacity to civil, and taxing the flights not the individual passengers to encourage better use of seats.
Equally, we don’t need more greenfield development of new homes or anything else. We currently have a surplus of houses, with many properties standing empty being a pension investment ‘second home’ (or third or fourth).. – if you don’t believe me, next time you deliver your Focus count how many houses are empty, cobwebs round the door and junk mail in the porch. The removal of exemptions from Council tax will help there, as will the charge of business rates on all commercial buildings, whether they are in use or not(Land Value Taxation anyone?) We have vast amounts of commercial property standing empty, so helping business to recover and expand will bring some of that property back into use, and that will turn into jobs in building and construction as older buildings are replaced or refurbished. The answer is not to ‘build our way out’ but to free up the property that the selfish are sitting on and to create a demand for what we already have in abundance.
– and if Vince could just remove the VAT on refurbishments (to bring into line with new-build) that would make the refurb of older properties more viable and stimulate investment in existing assets.
Peter you are not wrong and infrastructure projects do take a lot of time (which we don’t have). I was merely pointing out that there is nothing to stop us having an openened programme of QE that does not confine itself to the types of assets it has so far been used to purchase.
Here is an article by Ambrose E-P. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9401574/Fed-fiddles-as-America-slides-back-into-recession.html that repays reading.
There is however demand for housing and house builders are siting on land banks.
How can the solution to a crisis caused by banks lending money to people who can’t pay it back be to force them to lend more money to people they don’t think can pay it back?
There is something that there is an immediate, large and unsatisfied demand for – at least £10 billion per year in the UK alone, if not much more. This thing consists of all the extra things that unemployed people would buy if they were employed at a decent wage. Why can we not employ those people to make and distribute and account for all those things? Employing them would also sae the government something like £10 billion per year in benefit payments (or do I double-count here?), so it looks like a win-win situation all round.
Doubtless, there are things the government could do better. Unfortunately, just as so many economists are absolutely certain that other other are completely wrong, so too with those adding comments to LibDemVoice.
For myself, I am certain about two things:
(a) No one knows for certain. Every action carries risks. And the benefits to the country of any improvements will be modest, and will take a while to show their benefits.
(b) There is no magic bullet to quickly solve a problem that has been building for a decade and more. Ecnonomic growth has, for many years, had the short term benefit of increasing consumer debt, unsustainable tax revenues from financial services, and a number of other factors. When you benefit for many years from factors that put the pain off till tomorrow, when the pain finally catches up with you, there’s no quick and simple solution.