‘Bold’ Bank of England? Don’t credit it

Now we can finally see the UK government’s promised master plan to resolve the financial crisis and stave off an economic recession: try to ensure that the big banks get lots more money in loans. What do you give a banker who has everything but has lost billions in dubious investments? Billions of pounds worth of government guarantees. Brilliant.

Under orders from Gordon Brown’s desperate New Labour government, the Bank of England has abandoned its stated aversion to banking bailouts and announced a special liquidity scheme. The big banks will now be able to swap their mortgage and credit card assets for Treasury bills. The idea is that this will restore confidence in the finance markets.

In the fallout from the sub-prime mortgage collapse in the USA, international financiers have become reluctant to lend the banks more money against mortgage assets and other debts. This lack of inter-bank credit has contributed to the credit crunch and the drying up of the UK mortgage market. Under the Bank of England scheme, however, such loans will now be secured against cast-iron government bonds rather than potentially flimsy paper assets. The initial plan is for the Bank to extend £50 billion in such swap deals, although some expect it to exceed £100 billion. No wonder the Bank of England is being called the world’s biggest pawn-broker.

The announcement of the Bank’s special scheme has been greeted as breathtaking, unprecedented, historic; the BBC business editor, Robert Peston, suggests that it might be seen as ‘the world’s most ambitious and generous plan to pump money into the banking system’, and ‘one of the greatest u-turns in [the Bank’s] 300-year history’.

Perhaps. But it also looks unprecedented in its unimaginativeness. Faced with a crisis, the best idea that the Treasury and the Bank can come up with is to try to keep the economy afloat by effectively pumping billions of pounds into it. Not to restructure anything or make any fundamental changes, but to extend the credit to grease the palms to keep the racket going.

They hope that this financial inducement might persuade the banks to start acting like bankers, instead of like a cross between misers and frightened rabbits. The scheme certainly confirms that, despite all the free market rhetoric of recent decades, Western capitalism is still dependent upon state support for its stability. But it also reveals the impoverished vision and absence of clear purpose behind such interventions today.

The Bank’s apparently ‘bold’ policy u-turn only makes the authorities look even more lost and indecisive. What is this dramatic initiative designed to achieve? Just to keep the British economy bumping along while we all cross our fingers and hope for the best in the global markets. There have been a lot of wild-sounding comparisons between the current problems and the economic depression of the 1930s. More serious students of that period might note the major financial and industrial restructuring programmes that Western states initiated in response, from Hitler’s Germany to Roosevelt’s America. By comparison, the current scheme, though huge in scale, looks small-minded in ambition. All of those billions of government bonds are to be issued to restore a little ethereal ‘confidence’ in the psyche of the financial markets.

This lack of imagination is not really surprising, given the state of both the New Labour government and the British economy. There have been a lot of declarations that ‘the party’s over’, and that the credit-fuelled house/share price and consumer boom of recent years must end. The trouble is, however, that the mature Western economies – and notably Britain’s – have little else to fall back on. The modern UK economy depends on international credit and the global finance system. All that the Treasury and Bank hope to do is to keep things afloat for now and pray that the world economy comes to save us. Thus, even as the property price bubble starts to deflate, especially in the urban flats sector, the government is trying to drum up more mortgage business among first-time buyers.

What difference their historically-unprecedented-yet-unimaginably-unimaginative scheme will make remains to be seen. There are already grumbles from bankers who threaten not to get involved in the rescue package if the charges are too high. Even at best, it seems likely to mean only more of the same old finance system.

Outside the rarefied atmosphere of high finance, meanwhile, many are outraged by the state’s apparent extension of such largesse to the big banks at the same time as the government’s abolition of the 10p rate of income tax is leaving hard-up people worse off. The impression given is that the party might be over for most of us (many of whom never realised we were invited in the first place), but the private lock-in continues in the City. Anti-banker feelings are running high, made worse by the feeling that the authorities are rewarding the big banks for their past excesses. Even the governor of the Bank of England himself has tried to play the populist card, announcing that the object of the bailout scheme ‘is not to protect the banks, but to protect the public from the banks’.

We at spiked certainly have no wish to take up cudgels on behalf of the banks, who are big enough and ugly enough to look after themselves. But it is worth questioning some widespread assumptions, to make sure that we criticise them for the right things.

For example, it is too easy to accuse the banks of simply being too reckless and wild with their lending policies over recent years. A large part of the problem has actually been that they are far too cautious and risk-averse. The system has preferred the easy option of short-term loans to longer-term investments in the economy. Then, having taken on big mortgage, credit card and other loans, the banks sought to escape their responsibility for the risk by parcelling up the debt and selling it on to one another. Thus they made more money for next-to-nothing, but stored up complex problems for the future. These global risk-dodging policies help explain why problems in one sector of the US mortgage business have reverberated so loudly around the world financial system. In response, the cautious and insecure banks and authorities have helped make matters worse by retreating further into their financial shells.

Neither is it right to land all the blame on the banks. There is a long history of critics of capitalism focusing their fire on financiers and bankers, since these always look like the more parasitic parts of the economy – moneymen growing rich on the labour of others. In fact, the modern capitalist economy has been characterised by the merging of the financial and other sectors of the economy – and never more so than in recent years. All manner of big Western companies now operate increasingly as a combination of investment bank, credit outlet and property investor, often making more profit from these operations than their ostensible ‘core’ business. The disgraced US energy company, Enron, was described as being basically ‘a hedge fund with a gas pipe attached’, and it was far from the only one. The big banks and their dubious deals have been only the more obvious manifestation of speculative, credit-sponging Western capitalism.

And government is guilty, too, its interventions and regulations more often seeming to stifle than encourage development and progress. The record of uncertainty approaching cowardice in the Treasury and the Bank of England has helped to bring this situation about. Their supposedly ‘brave’ bailout scheme (an unusual way to describe a retreat) is unlikely to make the problems disappear.

Whatever its immediate impact might be, the fundamental failure of political and economic imagination behind the plan confirms that, even if they do manage to keep the credit flowing, the authorities have already run out of intellectual capital with which to invest in the future.

Mick Hume is editor-at-large of spiked.