It's time for us to make the rules

Published 22 January 2009

Forget the blame game; we have to get the system working

It is clear that the actual and potential losses of the banks are much bigger than hitherto assumed and that some leading banks can survive only on government life support. The recession is also shaping up to be deeper, longer and nastier than any in my lifetime.

Certainly, the crisis is global. But the UK is particularly exposed because of the size and recklessness of the UK-based banks and because the British economy has become horribly unbalanced through the extreme overvaluation of the housing market and an overdependence on financial services. The Cameron-Brown "debate", to dignify it - "it's all your fault"; "no it isn't" - has stalled in its futility as both are obliged to recognise that the causes of the crisis have their roots both in Tory deregulation and in subsequent Labour complacency. This week's events also helpfully remind everyone that while governments can reasonably be criticised for failures of policy and regulatory design, the real villains are greedy incompetents who brought their banks to their knees, from Adam Applegarth of Northern Rock to Fred Goodwin of NatWest.

Whitehall long ago lost the capacity for competent state capitalism. But we must think about it

There is relief in dreaming up ingenious punishments for the bankers. But the real challenge is twofold: what to do with the big global banks that are virtually but not quite nationalised? And what is our vision for the banking system after the current rescue and repair operations?

The government's attempts to shore up the banking sector through lending guarantees or insuring bad debts are a desperate last throw of the dice to keep bank lending alive in the face of collapsing confidence and over-rapid deleveraging. The measures may or may not succeed, at very high cost to the taxpayer whose patience is at breaking point. The government oversold its "we have fixed the banks" story in October and is finding it hard to explain why, like Oliver Twist, the banks have come back for more.

But the technical arguments around these measures conceal the big drama ahead: government now owns 70 per cent of a giant global bank and may soon be forced to own more and own others. Forget about Northern Rock and Bradford & Bingley; we are talking about a bank (RBS) with a balance sheet substantially bigger than Britain's GDP (as has Barclays). RBS long since outgrew its origins in British high streets with big loans overseas, disastrous acquisitions such as the Dutch ABN Amro (responsible for the calamitous £2.5bn loan to the Russian chemical oligarch, Leonid Blavatnik) and, most important, an investment banking arm dealing with hundreds of billions of derivatives, some in the form of toxic paper. Barclays has a similar structure and an investment banking arm whose bonus-driven culture has dominated the group. Barclays' determination to keep its independence (and bonuses) has made it reliant on expensive Arab money, a factor behind its alleged contraction of lending to sound businesses.

No one with any sense would view the state takeover of a vast, stricken, bank with relish. Whitehall long ago lost the capacity for competent state capitalism. But it may happen, and we must think now about the managerial and legal implications. At the outset, there would be horrendous losses for the state to absorb; the hope is that an eventual sell-off would make a return for the taxpayer. We also need a clear view of what UK banking will look like at the end of this upheaval. The main, viable, option will be carefully regulated, safe, retail banks, operating like utilities, with private or mutual ownership. The investment banking, casino-type, activities should be hived off and covered by a new set of international rules governing capital and transparency. One or more of the big global banks might survive unscathed; but only HSBC, along with fully international banks such as Standard Chartered, look safe. There may be other, better, systems. But instead of lurching unprepared into unwanted nationalisation, we need a serious debate about what it could mean.

Vincent Cable is the Liberal Democrat shadow chancellor

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3 comments from readers

ulyanov
22 January 2009 at 15:18

''Whitehall long ago lost the capacity for competent state capitalism. ''

ulyanov
22 January 2009 at 15:21

''Whitehall long ago lost the capacity for competent state capitalism. ''

Whereas the private banking system has it sussed right?

gnuneo
28 January 2009 at 16:36

vince: what we need is a clean slate. The toxic debt is quietly being dumped onto the British Taxpayer - this is intolerable.

the Govt should have created and financially secured *new* banks and mortgage societies, and pushed the housing market down as quickly as possible, to enable the inevitable market correction to take place as quickly as possible, so the new institutions are secure, stable and can lend freely.

the reason NuLabour have done what they have, is to secure the wealth of the ultra-wealthy, at the vast - incomprehensible - loss to the general tax-payer. Most people are aware that NuLabour has lost most of its mass membership, and has deliberately attempted to copy the Tory attitude of sucking up to the wealthy for large private donations - it would require a level of naivete far beyond me to imagine these people do not have strings attached to their donations, and now we can see the way they will get their monies worth.

the pain is just beginning i am afraid, and largely because of NuLabour's gross incompetence, and corruption.

the UK's 'growth' has been built upon massively over-valued housing (as you say), and debt compiled upon that. The crash is due to a market correction. Until that market correction is completed - until housing prices fall to the proper value, and the debt based upon it ditched (and here the choice is upon whom - the tax-payer/general public, or the people who have been soaking upon this deliberate policy - the bank owners etc), then this crisis will continue.

the banks are simply NOT going to continue to lend when they are fully aware that virtually every loan is now toxic, as the guarantees upon them are over-valued.

now the media is BSing about having to cut "wages" - this means even less household income, which will make the crisis longer as well. What is required to cut is *profits for the owners*, but NuLabour is hamstrung by their previous lies, and ties to the ultra-wealthy.

and the Tories will be no better.