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Spend & Save

Joia Shillingford: It will take more than a bashing to get the banks lending again

This was a good week for bank bashing.

In a new book, former chancellor Alistair Darling has branded bankers "arrogant and stupid". And, in the US, the biggest banks are bracing themselves for lawsuits from a federal regulator claiming they exaggerated the value of the sub-prime mortgage portfolios they sold to Fannie Mae and Freddie Mac. Bank shares have also been hit hard in the eurozone crisis.

It is always convenient for politicians to have someone to blame for their woes, but they should be focusing on their number one objective. And this should be getting the economy back on its feet.

To do this politicians need to encourage banks to lend to businesses so they can expand, and lend to consumers so they can buy homes and kick-start a recovery in the property market. Instead, what we are getting is cheap rhetoric. Much of it may be true, but is it constructive?

The US legal action will take up resources at the top of banks and could lead to large fines; Fannie Mae and Freddie Mac are mortgage giants majority-backed by the US government. The lawsuits will make it harder for banks to recover from the financial crisis, which in turn will make it harder for them to back business growth.

For the consumer, this means living in a lacklustre economy with rising prices and stalling wages.

Prime Minister David Cameron is therefore right to be nervous about sweeping bank reforms. Banks do need to be split into commercial and retail entities but, as he rightly says, not at a rate "which puts jobs at risk".

Banks are still rather fragile as many own shaky debt from troubled eurozone countries, and few have been willing to write down the value of their commercial property portfolios, which are worth considerably less than a few years ago.

Cut your spending, please

UK Asset Resolution, the holding company for state-rescued Bradford & Bingley and Northern Rock's mortgage books, is worried about the value of the banks' residential property portfolios. It's contacting 2,000 customers a week, who it feels could risk defaulting on their mortgages if they don't cut their spending (see page 90) before the next interest-rate rise. It targets those who have missed a payment on, say, a mobile phone bill, or who have cancelled a direct debit.

Banks were damned for lending huge sums to people who would never be able to pay them back, so I suppose it is churlish to complain when they start advising prudence.

So, the initiative – if handled in a sensitive way – is to be welcomed. One thought, though. I am not sure that cancelling direct debits is a sign of lack of prudence. Going through your direct debits regularly and cancelling any that aren't completely necessary is a good way of keeping costs down.

It is all too easy, with direct debits, to go on paying for something you no longer need. I found this out to my cost after paying for my brother's car bill once, and not realising the AA kept debiting me in subsequent years.

Worklessness is no fun

This week also saw the good news of a small drop in the number of workless households, down 38,000, or 0.3 percentage points, in the quarter to June compared with a year ago.

This brought the total of households with no adult working down to 3.88m, representing 18.8 per cent of all households, according to the Office for National Statistics.

Not working is not the same as being on a perpetual holiday, and essentially excludes the workless from the mainstream of society. It is also more difficult to structure your day if you having nothing to get out of bed for.

Giving people enough money to get by simply brushes the problem under the carpet. It seems kind but it is actually saying, "here's some money, now go away and don't bother us".

It also robs people of the sense of achievement and companionship that many would get from work.

But what about people from workless households who want to work and are turned down for jobs in favour of hardworking eastern Europeans?

Employers are usually quite tribal in their hiring policies, so the fact that many now favour workers from overseas shows they feel they can get a definite gain in productivity by hiring foreign workers.

What's the solution? The Government needs to tell people the unpalatable truth, that in a global market, if they don't work as hard as their neighbours from the EU, they won't get hired.

They may also need to improve their skills. Perhaps some canny Polish builders can get some funding from the Government to run a Polish building academy, so Brits can get a certificate saying "Polish-builder trained" and get a foot in the employment door.

But all too often politicians save their boldness for when they are out of office. Faster action by Alistair Darling in guaranteeing customers' savings could have prevented the run on Northern Rock. So it is no wonder he wants to deflect attention by calling bankers "arrogant and stupid".

Julian Knight is away