Iain Macwhirter
When bankers and politicians start talking about applying laxatives to the financial system, you just know it is time to rush for the exits. Last week, the Bank of England formally began "quantitative easing", or printing money, to get the nation's blocked financial bowels moving again. QE is supposed to conjure a cosy image of a banking system on the loo gaining gentle relief from Dr King's patent remedy. But printing money is more like an explosive enema - an act of desperation. It is financial quackery.
The effect is to stuff the equivalent of 10% of GDP directly into the zombie banks in the hope that some of it will be forced out the other end and into small business and mortgages. But there is no particular reason to think the banks will be any more likely to lend this than the rest of the £1.3 trillion in public money that the BBC's Robert Peston says has been put at the disposal of our delinquent financial institutions in the past year.
The British banks like RBS aren't lending, first of all, because they are insolvent, meaning that their liabilities exceed their assets. They have to hoard cash to pay down debt - just like a home owner in negative equity. This isn't going to change soon. The second reason banks aren't lending is the recession and the collapse of consumer demand. It would be irresponsible for banks to lend to companies which are likely to go bust - which many are - so they don't. The banks are insisting on large deposits from first time home buyers because they expect house prices to fall by a further 20% Yes, the banks are making matters worse by not lending, and they were largely responsible for the recession in the first place. But, hey, that's capitalism. I'm not trying to excuse the banks; they have behaved atrociously and are still paying themselves bonuses even as they become dead men walking. Last week we learned that even the state-owned Northern Rock, which has recorded another £1.4bn loss and a quarter of whose loans are in negative equity, has found enough cash to award itself bonuses.
The government should not be handing public money to banks which have shown themselves to be criminally irresponsible. It should have nationalised the lot of them, ring-fenced the dud loans and toxic assets, and then either run the banks as a publicly-owned utility, or sought to set up a network of small, competitive, regional retail banks which would finance mortgage lending from old-fashioned deposits. The losses should have been left with shareholders and creditors to sort through in the normal process of bankruptcy protection. Sure, it would have been messy, like Lehmans. But to have handed hundreds of billions of public money to insolvent private banks without any control over how it is used will go down as one of the greatest acts of financial irresponsibility by any government in history.
Either the banks are part of the capitalist system, in which case they should go bust, or they are not, in which case they should be fully nationalised. Even Martin Wolf, the distinguished columnist of the Financial Times, has now accepted that state ownership is the only answer.
The government says that it doesn't want to go into the banking business, that financial expertise lies in the City, and that politicians lack the skills to run banks. But this is a spurious argument. The government could simply hire the people needed to run the banks - and at low cost since they would all be unemployed otherwise. Bankers would simply become public servants. It wouldn't be easy, but it is surely preferable to allowing irresponsible and bankrupt private companies to plunder public resources without limit.
But the madness doesn't stop there. The government and the Bank of England have created a whole raft of perverse incentives and moral hazards as a result of ZIRP - the zero interest rate policy. The bank lending rate is down to 0.5% which is as near zero as makes no difference. This has slaughtered savers, destroyed pensions and left people who avoided going into debt looking like fools. ZIRP hands a huge windfall to people who don't deserve it, like buy-to-let speculators who have seen their mortgage costs drop dramatically. It has benefited well-off home owners with small mortgages who don't need help, and penalised first time buyers who are prevented from saving up a deposit because interest rates are so low. At current rates of interest, anyone saving is actually losing money because inflation is eroding the value of the money sitting in the bank.
The ultimate insanity of ZIRP is that it actually perpetuates the credit famine by preventing banks and building societies from attracting the very deposits that they desperately need if they are to lend again in future. The Monetary Policy Committee of the Bank of England even recognises this in its latest report. Zero interest rates choke off the only secure source of future credit, which is savings. The government seems to believe that, somehow, if interest rates are low enough, we will all start borrowing and spending like it's 2007. But people will simply use this once-in-a-lifetime windfall to pay down their mortgage debt. Just like the banks.
If the government had wanted money to be spent, it should have given it to people on low wages and not to insolvent banks and well-off home owners. When will ministers learn that handing public money, effectively, to the better off, is not only morally offensive but economically illiterate? The vast amounts being handed to the banks should be used for infrastructure, green energy, hospitals - anything that will employ real people and give a tangible return.
The government should be saying that quantitative easing can only be a short term policy. That interest rates will have to rise in future so that government can attract sufficient funds from the markets to service the huge public sector debt left by the bank bailouts. It should be warning the country that debts have to be paid, that people have to learn to save and that we can't spend our way out of recession.
Harriet Harman says there should be no rewards for failure. Well, if this applies to government, I can think of a couple of cabinet ministers who won't be getting their pensions.
