It's time to bully the banks
I have three friends whose politics I would describe as Tory Anarchist. They are all self-employed and, in their own ways, somewhat unconventional. They are broadly libertarian and anti-establishment while, at the same time, holding some quite traditional views.
I was with one of them a couple of weeks ago and, as we were discussing the financial crisis, he made this observation:
When people say we haven't got a command economy in this country, that's absolute rubbish. We've had a command economy for years. It's commanded by the banks.
He's right, of course. Bankers have been courted by politicians and allowed to do pretty much as they please for the last twenty five years. The result has been that they have called the economic and political tune.
They have got so used to being in command that, even as they go to the government to ask for money to bail out their debt ridden banks, they still think they can carry as they have always done.
In the past week, two of my friends who deal with a lot of senior bankers in the course of their work made similar comments; the banking industry, they said, is in denial. Bankers don't think they have done anything wrong, they don't see how their behaviors got us into this mess and they assume that things will return to normal eventually, at which point they will be able to start gambling with other people's money to make huge profits again. Above all, they don't think the government should tell them what to do or that they should forgo their massive bonuses. Even as they go cap in hand to the state for a bail-out, they somehow still think everything else will go on just as before.
Yet the current economic crisis is very much a banking crisis. The real economy is only suffering because the banks are calling in business loans or whacking up the interests rates because they are short of cash. Therefore, businesses collapse, workers are laid off, people stop spending and down goes the economy.
According to the Telegraph, Tory MP Michael Fallon is blaming the state bail out for the banks' unwillingness to lend. Because the government has taken large preferential shareholdings and has started telling the banks what to do, he argues, they have stopped lending because they are anxious to keep their cash.
The Government's liquidity and recapitalisation scheme – which injected £37bn into Royal Bank of Scotland, Lloyds TSB and HBOS and will see the taxpayer take major stakes in the banks – stipulated that banks lend at 2007 levels.
Mr Fallon said, however, that the expense of the Government money via preference shares, restrictions on dividends and remuneration, and the demand to maintain Tier One capital of at least 8pc means banks are more focused on conserving cash so they can repay the Government as quickly as possible.
"The package was put together in a rush over a weekend and some of the terms look counter-productive," he said. "They are making them do the wrong things – making them store up cash and then repay the Government – when what you want them to be doing is lending out to businesses because the whole credit market is shrinking.
"They have every incentive to accelerate repayments to the Government and the preference shares are, of course, very expensive. The Government money is distorting mainstream banking activity."
Now I'm no expert on banking but this is surely complete bollocks. The banks stopped lending way before they even asked for government help. They shut up shop because they had all lied about their bad loans, the extent to which they had over-borrowed to lend money in high risk markets and the amount of dodgy debt instruments they had. They all knew that all the other banks were covering up too, so no one was prepared to lend to anyone because they didn't know who was likely to go down next.
If anything, state bailouts make the banks less likely to fail and so make them a better risk.
But, at long last, there is some evidence that the government is getting tough with the banks. Now all that rhetoric about the benefits of light regulation and free markets in the banking sector has been shown up as the rubbish it always was, the state sponsored banks are being pressured to do what is good for the economy, rather than what is good for their executives.
It's still not enough though. The withdrawal of loans by the banks is threatening to send thousands of businesses into receivership and to destroy what is left of the UK's manufacturing sector.
Forget the tinkering with VAT and the yo-yo income tax rates announced in last week's budget. The best way to get the economy moving again is for banks to start lending and, more importantly, to stop calling in loans and hiking up interest rates for perfectly sound companies.
That won't happen unless the government plays hard-ball with those who run the banks. They have always worked primarily in their own interests, with even their shareholders coming a poor second. Alistair Darling needs to look across the table and explain to the bankers that, if they don't do as they are told, he will use emergency powers to nationalise their banks and all of them will be dismissed without compensation. Furthermore, he will the launch investigations into their personal roles in the bringing about the banking crash, with a view to confiscating some of their property as compensation for the taxpayers.
A couple of years ago this would have been unthinkable but the world has changed now. The public is in a vindictive mood and draconian measures against the banks would be popular with voters. Nationalising the banks would be a last resort and even a Labour government would be reluctant to do it. It should not be ruled out though. Now that they have been bailed out by the taxpayers, the bankers must be forced to act in the public interest.
For years, the bankers effectively ran the economy and assumed they could bully everyone else. Well now the balance of power in the playground has changed. It's time to take the bankers behind the bike sheds, give them a good kicking and steal their dinner money.











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