How to get credit flowing? Nationalise the banking sector, say Tories

(Only kidding about the Tories bit! The rest of it is true, but please, stay with me…)

Wonko, for one, is not happy. No wonder: Paul Mason noted that on Friday

Wrekin Construction – a business with £50m of orders reportedly on its books – went into administration. It told the press that RBS had refused to extend an overdraft: it needed £3m. Now 600 civil engineering and railway construction jobs are at risk – and we’re supposed to be in the middle of a government-driven civil engineering boom.

It was partly Paul Mason’s insightful post that made me pen the following comment atDuncan’s Economic blog

Arguably the best way to get credit flowing again is for the banks to be nationalised. I think this worked in Sweden quite well and here’s why:

Commercial decisions will still be made on who to lend to and at what cost to the lender – but public ownership will get around the one big obstacle, which is that the people running banks are looking to provide returns to the owners and so make decisions on lending in a different way. Instead of being cautious about lending because they are mindful that their job is to give a return to investors, they will be more eager to lend, but nonetheless mindful of risks, etc. We can see the government has reversed its previous policy with Northern Rock.

With public ownership it’s not about the sectional interest of shareholders (or even, the government as shareholder) but about the interest of the whole of our economy in the long term – ensuring that productive enterprises get the financing they need.

The big problem with all of this will be the EU’s rules on these matters. Sweden’s banking crisis and it’s recovery happened prior to the country becoming a member of the European Union. The political right likes to paint the EU as some kind of warmed-up Soviet Union, but in fact EU institutions would probably oppose nationalisation of the private banking sector on several grounds (competition rules, the rights of shareholders, etc.).

Now, it’s the kind of measure that might need EU approval, and might take a damaging length of time (look at the govt assistance to our car manufacturers – it was held up while the European Commission vetted it). But the government will have to be tough and say it will take the consequences from the Commission.

As to the future ownership in the banking sector, I think we would be wise to learn the lessons of this crisis: the shareholder-as-owner has proven dangerous.

Which financial institutions have been responsible and have not needed public money to bail them out? The building societies, owned by their customers: no one expects from building societies anything other than boring banking – no financial wizardry. Indeed, many of the failed institutions were once owned by their customers – Bradford and Bingley, Halifax, Northern Rock, etc.

As a customer and member of a building society, I don’t ask much more than a good service, either as a lender or saver; I certainly don’t demand of the people running it that they come up with more ways of making money. Now it might be argued that this kind of old-fashioned high-street banking doesn’t apply to the financing of bigger businesses – but my question would be, why not?

Vauxhall and I – take a paid break?

We need a new green deal for the productive economy. Without state-support, much of the manufacturing sector will go bust, even with a weak dollar helping exports. Think “managed decline” speeded-up.

The car industry must be rescued – if we can nationalise failing banks, why not failing companies? Without a solid manufacturing base, the whole country will go bankrupt.

The News Line reports:

General Motors, the owner of Vauxhall, has put forward a plan for its Merseyside workforce to ‘take a break’ from two to nine-months from work on 30 per cent pay from January to September 2009.

The ‘sabbatical’ scheme was put to unions at its Ellesmere Port plant, Cheshire, on Thursday.

A Vauxhall spokesman said the number of staff who choose to take up the option will not be known until the New Year.

Vauxhall employs more than 5,000 workers in its plants at Ellesmere Port and Luton.

Vauxhall is already shutting down for a month this Christmas.

Unite joint general secretary Tony Woodley has called for government assistance.

He said: ‘While it is clearly very disappointing that talks to secure financial assistance for the Big Three car manufacturers in the US have stalled, failure to reach a deal there must not mean a moment’s delay in this country.

‘The UK car industry is facing unprecedented tough times with the collapse of the financial market spreading vulnerability right through the supply chain and placing 40,000 jobs in jeopardy.

‘This must mean unprecedented intervention from government, just as it did with the banks.’

All Trade Unions Alliance national secretary Dave Wiltshire said: ‘The only way to save jobs and auto manufacturing is to nationalise the car industry.

‘Any factories threatened with closure must be occupied, until they are nationalised.’

For a democratic banking sector!

Gerry Bates writes on the national debt in the AWL’s Solidarity:

Sack the bank bosses! Bring finance under democratic social control

Bank of England and government support for the banks so far totals something like the equivalent of £18,000 for every child, woman, and man in the UK.

The Bank of England’s Financial Stability Report of 27 October 2008 gives the figures: a total of £1107 billion.

It can’t be right? After all, the average household in the UK is about 2.4 people. That average household doesn’t have £43,000 (£18,000 times 2.4) to give to the banks, even if it wanted to.

Indeed, the Government and the Bank of England have not been packing up £1107 billion in banknotes to hand over to the banks. The entire total of bank notes and coins in the UK is much less than that, about £50 billion.

The Government has been extending credit and guarantees to the banks. Across the system, a lot of the dodgy assets “cancel out”, so not all the £1107 billion in guarantees can be called in.

That is why the figures for Government guarantees to banks are so huge; yet still may be not enough. But there is more to it all than the huge notional figures.

As Anatole Kaletsky put it in The Times: “The provision of £100 billion of state guarantees to a grossly mismanaged and insolvent mortgage bank [is] a gross insult to the hundreds of thousands of workers in businesses from coal, steel and textiles to performance cars and advanced electronics whose jobs could have been saved with Government guarantees or ‘temporary’ nationalisations costing one-tenth or even one-hundredth of the £100 billion”.

Also, in real money the bail-out policies mean a much increased total debt from Government to the public, and therefore, as Marx put it in another context, “with it, pressure of taxes, the rise of the vilest financial aristocracy…”

£200 billion increase in the national debt looks likely. Assume the rate of interest the Government pays on that debt is about 5%. That is £10 billion a year extra in interest payments — equal, for example, to one-quarter of the Government’s total schools budget.

Meanwhile Government-supported or even Government-owned banks are run in just the same way, by the same people or the same sort of people, as the pre-crash privately-owned banks.

Ron Sandler, put in by the Government to run Northern Rock, gets £90,000 per month — £1,080,000 per year — more than the £690,000 basic salary of Northern Rock’s previous chief executive, Adam Applegarth.

Northern Rock workers are losing their jobs, and Northern Rock mortgage-holders are being evicted from their homes.

The Government does no more than plead and cajole with the banks to continue lending and to hold off on evictions.

The vast guarantees for the bank bosses, without anything in return, are indeed an insult; and, with jobs bleeding away and evictions mounting, an insult we can’t afford.

The labour movement should demand that the Government:

• nationalise all the big banks and high finance, without compensation for the big shareholders;

• sack the bank bosses;

• reorganise high finance as a public banking, mortgage, and pension service, under democratic and workers’ control;

• organise the allocation of credit, under democratic control, to safeguard jobs and homes, and to expand public services.

Ukania’s economic crisis

Ukania – the centralised British state – could come under increased pressure in coming years as the UK economy unravels. Alex Salmond, leader of the Scottish government has been complaining about the Bank of England’s handling of the credit crisis.

The WSWS’s Chris Marsden has an informative piece on recent reports issued by the International Monetary Fund and the Organization for Economic Cooperation and Development. Here’s the bit about Ukania:

Britain has long been recognised as the European country most exposed to the economic turmoil unleashed in the United States and most heavily dependent on world financial markets. The IMF downwardly revised UK growth figures from the Treasury’s estimate of 2 percent this year and 2.5 percent next to 1.6 percent for both 2008 and 2009, the worst performance since the last recession ended in 1992.

After nationalising Northern Rock and injecting £50 billion of liquidity into the markets, the Brown government and the Bank of England plan to risk billions more, emulating the US Federal Reserve by taking over bad mortgage debts from banks in return for secure government bonds.

House prices in Britain already fell by 2.5 percent last month and are expected to decline by as much as 10 percent this year. Britain’s Royal Institution of Chartered Surveyors reports that the number of residential property agents saying prices declined exceeded those reporting gains by 78.5 percentage points in March, the worst since records began in 1978.

Britain is also labouring under staggering levels of personal, unsecured debt.

Total UK unsecured debt is £1.3 trillion—more than the rest of the European Union put together. Lorna Bourke, writing in Citywire, rejects claims that the present housing crisis is not as bad as that in the 1990s, when there were 78,000 repossessions a year, because unemployment is lower. She notes that “In the early nineties high unemployment created by the collapse of the debt market in 1987 and rising inflation meant homebuyers could not meet their mortgage obligations. Does that sound familiar?”

Credit card debt is much greater than it was in 1990. Financial analysts Mintel have reported that mortgage costs in Britain trebled during the past 10 years and now account for 25 percent of consumer spending, compared to 14 percent a decade earlier. The debt management company TDX Group estimates that the number of people struggling with debt is set to double during 2008. Around one million people have unsecured debts totalling £25 billion, averaging a staggering £25,000 each. Some 60 percent is owed on credit cards, with the rest mainly in personal loans.

London’s role as a financial centre will translate into a massive and relatively immediate impact from a global economic downturn. JPMorgan Chase analysts estimate that 40,000 City of London jobs could be lost as a result of the credit crunch, doubling the forecast by the Centre for Economics and Business Research.

Amongst the cuts already announced are 900 jobs at UBS, the European bank worst hit by the credit crunch, representing 10 percent of its London workforce. Merrill Lynch has warned of 450 imminent job losses in London.

Initial signs have emerged of a rise in unemployment from its present 1.6 million. Although the claimant count rate fell by 1,200 in March, the previous month’s 2,800 decline was revised to show a 600 increase—the first since September 2006.

Sterling has hit repeated all-time lows against the euro, which is presently worth more than 80 pence. The Bank of England has cut interest rates to 5 percent in an attempt to stimulate the release of credit by banks and building societies.