Nationalize the banks

The case for a fuller nationalization of UK banks looks a little stronger this morning.
 The government is using Northern Rock to expand mortgage lending. This demonstrates the old saying, that when your tool is a hammer, everything looks like a nail.
The thing is, the slump in mortgage lending is not the cause of our recession; we know this because falling house prices have not led to a drop in retail sales, volumes of which have risen 3.6% in the last 12 months. It’s not even obvious that a lack of supply of loans is the major reason for falling house prices; over-valuations a year ago and now job insecurity might be bigger reasons.
Instead, our big problem is a lack of supply of loans to companies. This is behind the lack of job creation which is a big reason for rising unemployment, and the destocking that’s caused a collapse in manufacturing output.
So, why doesn’t the government increase the supply of corporate lending, as it has mortgage lending?
Because it’s got no tool. Yes, it’s got loads of policies aimed at boosting corporate lending. But these work - if they will at all - only indirectly, by restimulating credit markets or the banking system.
And they’re not working yet.
The result is that demand for loans - as we see with LDV’s call for state aid - is becoming politicized. Which is a recipe for a horrible misallocation of capital, as tax-payer money will go to larger, more powerful firms who are best able to wave their festering stumps like Indian beggars - “we need to save hundreds of jobs.”
Yes, this misallocation is a second-order problem - it takes lots of Harberger triangles to fill an Okun gap. But whilst corporate lending depends upon the ad hoc decisions of ministers, we’ll have the worst of both worlds - Harberger triangles and an Okun gap.
The solution here is obvious. We need a state-owned corporate lender which can increase loans to companies, as Northern Rock has to home-buyers. But this requires (some) banks to be fully nationalized.
As I said, nationalization, far from being the enemy of a free market, might be a precondition for it.

Comments

[dearieme]

I suspect that your analysis is wildly wrong. We are in an unfolding catastrophe; the Government's main job isn't to avert it, that being impossible, but to try to stop it being any worse than it need be, subject to the overriding constraint of protecting the creditworthiness of the Sovereign state. If it pisses money away until the state is effectively bankrupt, in a vain attempt to prop up insolvent banks, doomed car manufacturers and whatnot, it will deserve severe punishment. If we do end up with murderous mobs, I hope that they at least spare our soon-to-be-former rulers' wives and children. The Jacobins didn't, a couple of centuries ago, nor did the Bolsheviks more recently. But then, as a Marxist, you perhaps approve of those guys?

[Kit]

"Instead, our big problem is a lack of supply of loans to companies."

Is this true? Anecdotally, speaking to tame bank managers they say that loans are available but businesses have stopped borrowing.

[Recusant]

Kit

You're right. Partially.

UK banks are lending to corporates at pretty much the same level as they were in 2007. The trouble stems from the departure of foreign banks from the UK corporate sector: all those friendly Irish, Dutch and Icelandic bankers for a start.

When Gordon keeps wittering on at the banks to lend to UK businesses it is easy to forget that other governments are saying the same to their own banks. The net result is that we have financial protectionism, which in the end will bugger us all.

[Bob B]

What chances are there of transparently obvious conspiracy theories being correct?

Bankers wanting to preserve their bonus culture have powerful incentives to delay abatement of the recession in Britain in the hope and expectation that the general election due next year will bring a Conservative government, which will be much softer on (necessary) regulatory reforms of financial services than the GB government is likely to be, notwithstanding support for tougher regulation between leading Eurozone countries and the Obama administration.

The worse the recession in Britain gets, the more blame can be heaped on GB and the bigger a Conservative majority at the election. Earlier talk of a hung parliament at the election has evaporated. Even the LibDems are now also promising income tax cuts to judge by the stuff dropping through my letter box: at the last election, it was 1p extra on income tax to fund more spending on education.

Compare and contrast:

"David Cameron has used his monthly news conference to attack the Government for failling to curb big bonuses in banks in which it has a substantial share." [9 February]
http://news.sky.com/skynews/Home/video/Banker-bonuses-in-recession-criticised-by-Conservative-leader-David-Cameron/Video/200902215219467?lpos=video_Article_Related_Content_Region_4&lid=VIDEO_15219467_Banker_bonuses_in_recession_criticised_by_Conservative_leader_David_Cameron

"Hugh Osmond, who has given more than £80,000 to the Tories, said Mr Cameron's opposition to some bankers' bonuses was a sign the Conservative leader does not understand the current financial crisis." [19 February]
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4698260/Tory-donor-Hugh-Osmond-criticises-David-Cameron-on-bank-bonuses.html

On current bank lending to business in Britain:

"Small firms are being starved of money pledged by ministers to save them from collapse.

"Labour set up a £1billion loan guarantee scheme last month to encourage banks to lend more to small businesses.

"But so far, banks have lent only around £12 million to firms through the scheme."
[Daily Mail, 16 February]

But then the recession does increase the risk of lending to business.

[Bob B]

For signposts on possible prospective changes in financial services regulations, try this speech in January by Lord Turner, chairman of the Financial Services Authority (FSA):
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0121_at.shtml

The FSA is due to release an extended review of financial services regulations on the (?) 18th of March.

[chris]

@Kit - a recent CBI survey found that most firms are reporting a reduced availability of finance:
http://www.cbi.org.uk/ndbs/press.nsf/38e2a44440c22db6802567300067301b/0ceee97d7c30e6ed8025755400521bc8?OpenDocument
Remember, it's possible for the credit crunch to hit firms, even if lending continues to flow, say if firms fear a reduction in their overdraft limits and cut spending as a precaution.

[Andrew Duffin]

A state-owned corporate lender which can increase loans to companies?

Hmm.

So all the money will go to loss-making metal-bashers in marginal Labour constituencies?

I can't see that being a great recipe for economic recovery, personally, but I suppose you never know.

[Matthew credits]

I'm a bit confused. How is making more loans available to companies going to help, if companies aren't taking out any loans?

[Bob B]

On bonuses for bankers, readers may have missed this latest gem:

"Senior City bankers are demanding pay rises of up to 10 per cent this year to make up for the clampdown on the bonus culture, a senior City head-hunter has told The Independent."
http://www.independent.co.uk/news/business/news/8216we-need--a-pay-rise8217-bankers-demand-1630307.html

[runescape gold]

Great site and I am really pleased to see you have what I am actually looking for here and this post is exactly what I am interested in. I shall be pleased to become a regular visitor

[jordan shoes]

For more information please keep an eye on cheap jordan shoes .

[runescape items]

If you want to play well in RS game,you can buy runescape items and runescape powerleveling in our website.

[discount furniture stores]

I agree, the worse the recession in Britain gets, the more blame can be heaped on GB and the bigger a Conservative majority at the election. Earlier talk of a hung parliament at the election has evaporated. Even the LibDems are now also promising income tax cuts to judge by the stuff dropping through my letter box: at the last election, it was 1p extra on income tax to fund more spending on education.

[nike shox sale]

Nike Shox|Nike Shox Sale is special for you with a very pretty design.

[mlb jerseys]

The worst way to miss someone is to be sitting right beside them knowing you can‘t have them.

[wholesale]

e are the wholesaler from china. Our products all in a very low price ,because We get all the Products directly from manufacturers.
price is very low.We don't have minimum quantity, you can buy any quantities what you want.

We get all the Products directly from manufacturers and all the products are in good condition.You can just do business with us one time or two and you will find what we give you are not only the best quality products but also the best price.We also can make goods as you demand. Please be assured that we always do business with honesty and sincerity.We look forward to working with customers to establish a mutual trust,win-win,long-term cooperative relationship.Hope to cooperate with you in the near future.

Please go to our website: www.topbulksite.com to choose any what you want.Welcome to our homeweb,Do not hesitate to contact!