http://business.timesonline.co.uk/to...cle5734058.ece
The sunshine and balmy temperatures of Rome this weekend would have seemed like welcome respite for Alistair Darling from the wintry weather and grim economic tidings back home.
The chancellor had travelled to the Italian capital for a meeting of finance ministers from the Group of Seven leading economies, which was essentially a preparatory session for the larger Group of 20 gathering in London in April.
However, instead of looking forward to discussions about the G20 agenda, Darling found himself exposed to chill winds from Britain. Disaster had struck banking yet again.
On Friday the Lloyds Banking Group revealed that HBOS, which it acquired in an emergency takeover during last autumn’s banking panic, had lost more than £10 billion last year, twice the worst forecasts from City analysts and more than wiping out Lloyds’ £1.3 billion profit.
For Darling the embarrassment came in the government’s use of £17 billion to prop up the two banks and its ownership of 43% of the enlarged group. With the share price tumbling by about a third on Friday, that stake was now worth £8.3 billion less. Questions were already being asked about whether the shotgun merger, brokered by Gordon Brown himself, was really in the public interest.
The news came at a terrible time. The week had been dominated by the apologies of some leading bankers to a committee of MPs for their role in causing the meltdown and then by the suggestion from Mervyn King, governor of the Bank of England, that Britain is in a “deep” recession.
Only six months ago the Bank was saying the economy would have a mild downturn and no more. Now it expects a slide of 4% in gross domestic product between the middle of last year and this summer and warns that the fall could be even worse – to 6%.
If the Bank is right in its forecast, 2009 will be the worst year for the economy since the aftermath of the second world war. If its gloomiest predictions come true, this year’s downturn will resemble that of 1931 when Britain succumbed to the Great Depression.
Darling and King, who accompanied him to the meeting, were not the only people in Rome being assailed with bad news. Timothy Geithner, Barack Obama’s Treasury secretary, was supposed to be bringing cheer from the United States. Instead his banking rescue package, which he had announced on Tuesday, had fallen flat. The reaction had been one of huge disappointment.
Wall Street plunged 382 points, losing almost 5% of its value in response to what critics described as a “half-baked” set of proposals.
Not only that but the Obama administration’s $787 billion (£545 billion) fiscal stimulus of government spending and tax cuts intended to kick-start the economy, which was finally approved by Congress on Friday night, was derided in the United States as poorly targeted and too slow-acting to make a difference.
Even Giulio Tremonti, the Italian finance minister and host of yesterday’s meeting, added his voice to the criticism. “If the problem is an excess of debt, the cure is not adding more debt, whether that debt is private or public,” he said.
Tremonti, however, had problems closer to home. In a set of figures described by analysts as a “Friday the 13th horror”, the eurozone economy was shown to have shrunk by 1.5% in the final three months of last year, with Italy sliding by 1.8% and Germany by 2.1%.
King’s “deep” recession is engulfing the world. Bankers are in the dock and the blame game is in full swing. That is important. But a more relevant question for now is: how do we steer the economy out of the mess the banking crisis created? What options are there that have not already been tried?
Fundamental to recovery is the restoration of the banking system to health and getting money flowing to the wider economy again.
Questioned on Friday over what he was going to do about Lloyds, Darling was typically lawyerly. He said that to help banks rid themselves of the bad assets that have laid them low, there were a “range of options that we will be deploying, a range of levers that can be pulled to help all banks”. But he twice refused to rule out an option that is growing in popularity among economists: the nationalisation of banks.
Vince Cable, the Liberal Democrat shadow chancellor and an economist by profession, said that Lloyds, dragged down by the “financial disaster” of HBOS, was on a path that would lead “inevitably to nationalisation”.
Nouriel Roubini, the maverick economist who has made his name during the credit crunch, says the banking system’s losses are likely to reach $3.6 trillion, about half of them borne by American banks, a far cry from the initial estimates of $200 billion. Propping up failed banks would be ineffective and encouraging troubled banks to merge was “like having two drunks trying to help each other to stand up”.
“The nationalisation approach was successfully taken by Sweden [in the early 1990s] while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and the credit freeze,” said Roubini.
The United States and Britain faced the risk of years of depression, like Japan’s “lost decade” of the 1990s, he warned, which was caused by a refusal to act decisively to cure the banks of their problems.
Indeed, last year, before the banking crisis had emerged in full, a group of MPs met Japanese officials who told them that first Britain would have to nationalise some banks and then the entire banking system to fend off disaster.
Nationalisation has its problems, though. The public purse would have to take on all the debts of the banks and it is far easier eventually to privatise them if they are not wholly state-owned. In the United States, where most of the problems lie, there is also a visceral antipathy towards the idea. Not only are there huge numbers of regional banks that might need rescuing, making it a practical nightmare, but it is also seen by many as “creeping socialism”.
While bank nationalisation is probably the “nuclear option”, there are other ideas that could be an improvement on what governments are doing.
“A lot of the focus is on the ‘bad bank’ idea [where a government siphons off toxic assets], but another way would be for the government to stimulate new entry into the banking system,” said Martin Weale, director of Britain’s National Institute of Economic and Social Research.
“If Tesco wanted to come in and enter the banking system by setting up a new bank, it should be encouraged to do so.”
The “new bank” idea has plenty of supporters, particularly in the United States. Even with government guarantees, the old banks will be encumbered with toxic debt for years to come and unable to provide an adequate supply of credit for the economy.
Paul Romer, a professor at Stanford University and one of the world’s leading experts on economic growth, says that instead of propping up old banks, governments should instead put taxpayers’ money into new ones.
“If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish,” he said. “If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behaviour, the risks are large and grow.”
The sunshine and balmy temperatures of Rome this weekend would have seemed like welcome respite for Alistair Darling from the wintry weather and grim economic tidings back home.
The chancellor had travelled to the Italian capital for a meeting of finance ministers from the Group of Seven leading economies, which was essentially a preparatory session for the larger Group of 20 gathering in London in April.
However, instead of looking forward to discussions about the G20 agenda, Darling found himself exposed to chill winds from Britain. Disaster had struck banking yet again.
On Friday the Lloyds Banking Group revealed that HBOS, which it acquired in an emergency takeover during last autumn’s banking panic, had lost more than £10 billion last year, twice the worst forecasts from City analysts and more than wiping out Lloyds’ £1.3 billion profit.
For Darling the embarrassment came in the government’s use of £17 billion to prop up the two banks and its ownership of 43% of the enlarged group. With the share price tumbling by about a third on Friday, that stake was now worth £8.3 billion less. Questions were already being asked about whether the shotgun merger, brokered by Gordon Brown himself, was really in the public interest.
The news came at a terrible time. The week had been dominated by the apologies of some leading bankers to a committee of MPs for their role in causing the meltdown and then by the suggestion from Mervyn King, governor of the Bank of England, that Britain is in a “deep” recession.
Only six months ago the Bank was saying the economy would have a mild downturn and no more. Now it expects a slide of 4% in gross domestic product between the middle of last year and this summer and warns that the fall could be even worse – to 6%.
If the Bank is right in its forecast, 2009 will be the worst year for the economy since the aftermath of the second world war. If its gloomiest predictions come true, this year’s downturn will resemble that of 1931 when Britain succumbed to the Great Depression.
Darling and King, who accompanied him to the meeting, were not the only people in Rome being assailed with bad news. Timothy Geithner, Barack Obama’s Treasury secretary, was supposed to be bringing cheer from the United States. Instead his banking rescue package, which he had announced on Tuesday, had fallen flat. The reaction had been one of huge disappointment.
Wall Street plunged 382 points, losing almost 5% of its value in response to what critics described as a “half-baked” set of proposals.
Not only that but the Obama administration’s $787 billion (£545 billion) fiscal stimulus of government spending and tax cuts intended to kick-start the economy, which was finally approved by Congress on Friday night, was derided in the United States as poorly targeted and too slow-acting to make a difference.
Even Giulio Tremonti, the Italian finance minister and host of yesterday’s meeting, added his voice to the criticism. “If the problem is an excess of debt, the cure is not adding more debt, whether that debt is private or public,” he said.
Tremonti, however, had problems closer to home. In a set of figures described by analysts as a “Friday the 13th horror”, the eurozone economy was shown to have shrunk by 1.5% in the final three months of last year, with Italy sliding by 1.8% and Germany by 2.1%.
King’s “deep” recession is engulfing the world. Bankers are in the dock and the blame game is in full swing. That is important. But a more relevant question for now is: how do we steer the economy out of the mess the banking crisis created? What options are there that have not already been tried?
Fundamental to recovery is the restoration of the banking system to health and getting money flowing to the wider economy again.
Questioned on Friday over what he was going to do about Lloyds, Darling was typically lawyerly. He said that to help banks rid themselves of the bad assets that have laid them low, there were a “range of options that we will be deploying, a range of levers that can be pulled to help all banks”. But he twice refused to rule out an option that is growing in popularity among economists: the nationalisation of banks.
Vince Cable, the Liberal Democrat shadow chancellor and an economist by profession, said that Lloyds, dragged down by the “financial disaster” of HBOS, was on a path that would lead “inevitably to nationalisation”.
Nouriel Roubini, the maverick economist who has made his name during the credit crunch, says the banking system’s losses are likely to reach $3.6 trillion, about half of them borne by American banks, a far cry from the initial estimates of $200 billion. Propping up failed banks would be ineffective and encouraging troubled banks to merge was “like having two drunks trying to help each other to stand up”.
“The nationalisation approach was successfully taken by Sweden [in the early 1990s] while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and the credit freeze,” said Roubini.
The United States and Britain faced the risk of years of depression, like Japan’s “lost decade” of the 1990s, he warned, which was caused by a refusal to act decisively to cure the banks of their problems.
Indeed, last year, before the banking crisis had emerged in full, a group of MPs met Japanese officials who told them that first Britain would have to nationalise some banks and then the entire banking system to fend off disaster.
Nationalisation has its problems, though. The public purse would have to take on all the debts of the banks and it is far easier eventually to privatise them if they are not wholly state-owned. In the United States, where most of the problems lie, there is also a visceral antipathy towards the idea. Not only are there huge numbers of regional banks that might need rescuing, making it a practical nightmare, but it is also seen by many as “creeping socialism”.
While bank nationalisation is probably the “nuclear option”, there are other ideas that could be an improvement on what governments are doing.
“A lot of the focus is on the ‘bad bank’ idea [where a government siphons off toxic assets], but another way would be for the government to stimulate new entry into the banking system,” said Martin Weale, director of Britain’s National Institute of Economic and Social Research.
“If Tesco wanted to come in and enter the banking system by setting up a new bank, it should be encouraged to do so.”
The “new bank” idea has plenty of supporters, particularly in the United States. Even with government guarantees, the old banks will be encumbered with toxic debt for years to come and unable to provide an adequate supply of credit for the economy.
Paul Romer, a professor at Stanford University and one of the world’s leading experts on economic growth, says that instead of propping up old banks, governments should instead put taxpayers’ money into new ones.
“If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish,” he said. “If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behaviour, the risks are large and grow.”
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