Sunday, 26 July 2009

A cup of tea with Mr Darling

Nothing incenses an old Trotskyite like profit. It has been observed that banks are charging higher margins than they did before the financial crisis hit. All the usual special interest groups are rallying round to condemn this wicked greed, shouting from the rooftops that Bank of England base rate is only 0.5%. Today the hapless Chancellor of the Exchequer, the inaptly named Mr Darling, joined in the shouting and said he was going to drag the High Street banks' big cheeses in for a chat. He didn't say he was planning to force them to reduce their margins but that threat was lurking in the background. This impending meeting was first disclosed to the government's official leakee-in-chief and reported by him last Thursday. According to Thursday's leak it is not just the banks that received injections of money from public funds who will attend but also the four largest lenders who had the sense not to tie themselves intimately into the State machine.

It is entirely understandable that both businesses and individuals would like a return to the days of cheap credit but there is no escaping the fact that credit was too cheap and backed by too little security, resulting in significant losses when the borrowers could not repay. You can't have it both ways. Either you lend to decent or good risks and cover your arse with security (in which case the risk of an overall loss from this business is kept low) or you lend willy-nilly and take only partial security (in which case you can hardly be surprised when it all goes pear-shaped). And, of course, the people who are hit hardest are those who over-stretched themselves, the little people for whom Mr Darling has so much compassion that he wants more of them to enter the lion's den.

Having spend a good three or four years moulding a massive pear the banks have woken up to the error of their ways. They don't really have any choice. Not only do existing losses have to be covered but they know that in a deep recession more losses will be incurred as businesses close and individuals lose their jobs. None of this is any excuse for usury but we are not talking usury we are merely talking rates that are a higher than in the mad days.

In his interview with Labour's favourite BBC Poodle, Andrew Marr, this morning Mr Darling said he wants banks to rebuild their balance sheets and that he wants them to lend more. In all of this there is a curious twist. As everyone knows only RBS and Lloyds took the Chancellor's twenty pieces of silver, Barclays, Santander, Nationwide and HSBC kept well away from him. The terms on which RBS and Lloyds were rescued seem to include requirements about lending policies (according to the Pre-Budget Report and today's interview). No doubt these are vague to the point of being useless, nonetheless the Chancellor can say that they made promises about lending and hint that they have broken their word. The other lenders are operating in the real world in which all the usual forces - supply, demand, costs, human error and all the rest - combine to determine the amount they can borrow, the amount they can lend, the margin they apply and the security they require. Absent a cartel operating there is no reason why HSBC or Santander could not undercut the "nationalised" banks and steal a lot of business yet it hasn't happened. Why not?

I am not privy to the workings of the big banks' boffins but the most obvious answer is that they know they have to charge substantially more than they did a year or two ago because they cannot raise cheap wholesale money and they need to cover existing loss-making loans and those anticipated to creep out from under a stone in the next year or so. They do not have a magic money tree of the kind so beloved of socialist politicians, they have a real business to run and just as the prudent individual tries to put a little aside for a rainy day so do well run banks.

One thing said by Mr Darling really made me chuckle. He said "... because of the fact that we've got into this recession, we ... need them to lend money ... that's why we recapitalised them ... and that's why they've got to live up to the promises they made". If we look back to the time of the recapitalisation, we find that he announced the recapitalisation scheme on the 18th of November. There is reference in paragraph three of his statement to the House of Commons to the government imposing terms as to "lending policy and wider public policy issues". Perhaps these wider public policy issues included something about the recession, I know not. Even if they did, just six days later he told us how damaging the recession would be in his Pre-Budget Report, he predicted a contraction in GDP of between 0.75% and 1.25% in 2009. Presumably any obligation to help fight recession is limited to a recession of that magnitude rather than the 3.2% we seem to have experienced so far.

I would love to know why he can't be brave for once and tell people the truth rather than just peddle soundbites to make him look busy. Why can't he say "the days of cheap credit are over, the days of 100% mortgages are over; it's a different game now and you just have to adjust your lifestyles accordingly"? Could it be because he thinks there are more votes in leading the charge to blame the banks? How very cynical I have become, it must be the horse-suppositories.


Mark Wadsworth said...

OT1H, I welcome higher bank margins, because it means they'll be able to repay taxpayer backed loans all the sooner.

OTOH, that isn't the point, is it? The whole point is to force the banks to continued making reckless loans to keep house prices as high as possible at all costs. The Tories may whine about this, but they know perfectly well that their core vote cares most of all about one thing - high house prices.

Which runs completely counter to the whole MW manifesto of keeping house prices low and stable, of course, but I appear to be in a minority here.

Mark Wadsworth said...

And shouldn't the post title be "Tea with Mr Dar-jee-ling"?

james c said...


It isn't just Eyebrows who is complaining-the City and industry are furious. Market forces may come to the rescue, as the Bank of China is entering the UK mortgage market and other foreign players may be tempted by the high margins
available for UK lending.