SO that’s it, then. George Osborne will remain chancellor after the September reshuffle, and will keep his job until the election. David Cameron was emphatic yesterday. It means his fortunes are now inextricably linked to his chancellor’s; critics of Osborne’s policies will now also become critics of Cameron’s; and anybody who wants to replace the chancellor will also have to replace the Prime Minister. This is a key moment.
It is also Cameron’s last chance. He and Osborne must come up with a radical supply-side agenda for growth over the next few months, while retaining the planned public spending cuts. They need to show that they get it. If they don’t budge, and the economy continues to shrink, and the deficit to rise, the clamour for a change of leadership at the top of the Conservative party – still a minority view among MPs – will become unstoppable.
SUB PRIME II
IT is astonishing that some in the cabinet are calling for the full nationalisation of RBS. They want to make it lend more, regardless of risk; they want it to shower credit on all and sundry, including, presumably, to every chancer with a “great idea” and every wannabe property magnate with insufficient cash for a deposit. I exaggerate, of course, but some have learnt absolutely nothing from what happened over the past few years.
We are still nursing a bubble caused by excessive liquidity, the practical manifestation of which was that too many banks lent too much money too cheaply to too many economically unviable projects and to too many people who couldn’t pay the money back. Yet instead of insisting we all behave more appropriately, some now want to relive the errors of the past. It’s maddening.
Fully nationalising RBS is the kind of policy that those who backed sub prime lending in the US would have been proud of. It demonstrates an utter lack of ideas about what to do to boost growth. Its advocates worry that RBS, because it owes its remaining private shareholders a legal duty to maximise profits, rather than act as a loss-making lender to doomed causes, cannot be bullied any further into compromising credit quality. Hence the silly proposal.
There are many reasons why banks are not lending more: capital requirements imposed by the authorities have deliberately made it less profitable to lend, especially to small businesses; the authorities have discouraged mortgages with high loan to value ratios and have forced banks to use far more expensive deposits to finance lending, rather than cheaper wholesale funds, pushing up costs; banks are more aware of default risks; the economy is in recession, which makes all projects riskier; and the demand for credit is falling, as sensible folk repay debts. Some of the issues can be tackled – capital and liquidity requirements, which have been hiked too quickly at the wrong time in the economic cycle, should be relaxed. Others cannot. The UK eventually needs to move towards greater equity and less debt financing for small businesses.
It never works to nationalise any kind of company. It is naive and deluded to think that the government can run a bank (or anything else) in a hands-off way, nursing it back to health prior to privatisation. It can’t. When a bank goes bust, it should be dismantled and wound down. Politicians always use the firms they “rescue” to pursue political objectives and buy votes, and wreck them even further. That was true of British Leyland cars in the 1970s – and it risks being true today of RBS.