Banks are living in a fairyland of magic money

HOW WOULD YOU FEEL, RUNNING A MODEST business, if the money fairy came along and promised you would never, ever go bust? How much of a spring would it put in your step if the nice imp then said she had cast a spell guaranteeing all your lending, all your borrowing, and 98% of your customers’ cash? “Yes,” you might just say, clapping your sticky little hands, “I do believe in fairies!”

This hard-to-swallow tale has more than one happy ending. While your godmother hopes you will become a good little banker one day, she doesn’t want to be too stern. It’s not her place. So if she sprinkles some of her magic dust and shrinks the cost of money, she won’t force you to share your good luck with anyone. She’ll “urge” you instead. But only a very naughty banker would ignore that, surely?

After all, you owe the good fairy something. In fact, you owe her billions of things. They are the reasons why you are still able to frolic as a happy little banker. They also explain why you are still looking forward to big Christmas presents and the chance, some time very soon, to tell fairy godmother where to stick her advice and all those tiresome homilies on the need to be nice to poor folk.

Whatever Alistair Darling was waving at the bankers during a breakfast meeting on Friday morning, it was not a magic wand. He can urge to his heart’s content, but they intend to go on treating the Bank of England, its base rate and its monetary policy committee (MPC) as fictions only children would believe. Most may have buckled, belatedly, under an avalanche of bad publicity, but the chancellor doesn’t frighten them.

True, they told him to “get his finger out” and save them from themselves. True, it was they who demanded dollops of other people’s money or it would be the worse for the chancellor (and all those other people). True, they asked for public trust when the facts indicate that they do not trust one another to lend to one another, even though Darling has guaranteed all transactions. But they know that he knows that they know: once the chancellor was forced to promise the survival of every bank in every circumstance, happy days were here again.

They had him over a barrel. The first rule of the capitalist purist had been breached. An enterprise that believes it cannot fail cannot be governed, brought to heel or obliged to do anything it does not wish to do. The bonus culture can resume and the government can be sent packing as soon as the banks have screwed the public for the money to repay the government.

That, though economists might quibble over the language, would seem to be the game. The government ensures the stability of the banks; the Bank of England carves 1.5% from the base rate; and the banking community attempts to say: “Nice windfall, we’ll keep it.” At first, only a couple agreed to pass on the fruits of public largesse to the public. All scrambled to withdraw tracker mortgages to avoid the remote possibility that customers might get their hands on a half-decent deal. Even when the banks “backed down”, only a minority of punters stood to benefit.

Some will tell you that the Glenrothes by-election result was a turning point for Labour and the prime minister. It was certainly unexpectedly good news for them. But even as the votes were being cast, Brown’s horizon had begun to darken again. Two questions were already beginning to form in the public mind. First, what do the banks think they are playing at? Secondly, why can’t, or won’t, the government do something about it?

The banks would argue, no doubt, that despite actual and potential billions flowing from the state they simply cannot afford to be fair, far less generous, to customers. Some, HBOS in particular, are still in a parlous state, and desperately writing off much of the noxious stuff on their books acquired when they were – you must remember – the cleverest people in the world. They also have a problem, they say, with Libor, the London interbank offered rate by which they lend money to one another.

It’s still too high, despite all those government guarantees. On Friday it fell from 5.56% to 4.49%, but that is still vastly above the new 3% base rate. The real question is: why? What more could the banks require to pep up their confidence? Might it be that the gap between Libor and the Bank of England rate actually suits banks just at the moment? If the game is to raise cash, deter borrowers, pay off the taxpayer and resume the payment of dividends, Libor begins to look like a very handy excuse.

All the transactions it reflects are now underwritten by the state. The rate itself reflects nothing more, effectively, than the attitudes of the banks themselves. But the excuse it provides, together with their own piratical behaviour, grants the banks a premium. Revive the housing market, save small businesses, even show a bit of gratitude? Not just at the moment, thanks.

Friends of the bankers – a few remain – will tell you that depositors cannot be attracted if the rates offered to borrowers are “too generous”. In other words, despite close to £500 billion of public money being at stake in the government’s rescue plan, the public is still being required to foot the bill for emergency repairs on bank balance sheets. What do we get for our cash? More expensive banking.

There was supposed to be a deal, after all. It involved restrictions on the pay bankers would award themselves. It promised a suspension, among the worst-affected banks, of dividends. It “guaranteed” that lending would return – though the government was hazy on the details – to 2007 levels. The general idea was that vast amounts of public money would on no account disappear into the pockets of shareholders and bank executives. The bankers smiled sweetly and instantly reneged.

Last week, they were at their most flagrant. The Bank of England’s Monetary Policy Committee made a historic emergency gesture with its rate cut. Officially, in what used to be the real world, the cost of money fell to its lowest level in half a century. Yet, to begin with, the banks all but ignored the event. They tightened credit still further while harrying borrowers and prepared to pay bonuses among themselves using – you have to love the cheek – taxpayer-backed shares.

So you reach the second question troubling the public: what is the government doing about all this? Don’t we own a clutch of these banks and prop up most of the rest? Doesn’t ownership confer power? So why the pathetic pleading to individuals who are, in effect, our employees?

The government, it is said, cannot be involved in individual lending or management decisions. Why not, exactly? Because, according to the dogma, state control is a very bad thing? Is that “bad” as in “worse than anything the bankers have managed”? Besides, it no longer matters whether the government is comfortable with its unsought role: it is responsible to the public for public money. It is stuck with the job.

In such a situation it is no longer good enough to say that banking, essential to the economy and all that, is a special case. Capitalists must contradict themselves utterly to advance such an argument. Failing, mismanaged businesses, even iconic Scottish enterprises, are supposed to go to the wall. But if it is not in the public interest to allow market forces to do their work, then the public interest must be represented. Henceforth the banks must be given a very polite, gentlemanly kicking. If not, more recklessly stupid stunts will follow.

Darling and Brown should understand another thing. If they fail to curb the banks, there will be a political price. Anger is mounting fast, and the anger is justified. Labour’s good news from Glenrothes could be forgotten before the week is out. Voters don’t believe in fairytales.

Ian Bell on the capital crisis
Nov. 11, 08

Source: Sunday Herald

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