Bill Gleeson: Concerted action needed to resolve the banking crisis

Oct 8 2008 by Bill Gleeson, Liverpool Daily Post

PERHAPS Shakespeare’s Polonius had it right when, in Hamlet, he advises Ophelia: “Neither a borrower nor lender be.”

The current daily round of bad economic and financial news has the potential to drive people to despair.

It feels like we are chained to a timebomb without any knowledge of when it is set to explode or how to defuse it.

The most frequent question I am asked these days is about moving savings between bank accounts. I have no way of telling which banks, if any, may go bust. If any big bank goes pop, it would take the rest of the system with it, and then life would get so hard worries about our savings would be the least of our problems. In any case, it’s questionable that there is any such thing as a safe bank at the moment. There would be no way any government could, if push came to shove, afford to underwrite all deposits. Such guarantees wouldn’t be worth the paper they are written on.

That is why governments won’t let any major deposit-taking institution go bust. The civil and economic chaos that would follow a systemic banking collapse would be unmanageable. Nor would less extreme consequences, such as a big rise in unemployment, be good for winning elections, in the event we would still have a democratic system of government in a year’s time. At the very least, 2009 will bring dark days for some people.

So, instead of permitting widespread financial disaster, the larger banks would be supported, as Europe’s finance ministers restated after their meeting in Luxembourg.

The duration of the banking crisis and the depth of its economic impact on business and employment will depend on how decisively government moves to address the problem. This week’s dreadful car sales figures are all the evidence you need that the City’s financial crisis has started to hurt the real economy.

The really radical solution would be to follow the Chinese banking model. China’s state-controlled banks are sitting on tons of cash and have no solvency or liquidity problems. At one stroke, they could solve the West’s problems by pumping their spare dollars into our banks. But they won’t, and who can blame them?

Last night’s news means the UK government will now take stakes in our banks in return for injecting billions of pounds of fresh capital that should keep them going. These partial stakes will have the immediate effect of stabilising Britain’s system, but – let’s not delude ourselves – this benefit will be temporary. The initial capital injection will be the thin end of the wedge. More and more money will be required, until the Government ends up with 100% of the banks’ shares.

And even then it won’t work because this is an international problem. So, to be worth doing, what is needed is concerted action by governments across the world. All major economies would have to nationalise, or offer to nationalise, all their major banks. In theory, since governments can’t go bust, that should be the end of the problem.

And then back in the real world . . . . well, I guess we’ll just continue to cross our fingers and muddle through.

As for tomorrow’s interest rate decision, the Bank of England should stick to its original target of reducing inflation to 2% or less. Deviating from this task would only prolong the problem. Calls for deep cuts like 1% in a single month are not going to resolve the problems, nor will it necessarily make borrowing cheaper. In current conditions, with the supply of money to the system extremely tight, the chances are a base rate cut would not feed through to cheaper borrowing.