Jeremy Warner: Ministers all over the shop on banks

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The Independent Online

Outlook Bankers are everyone's favourite Aunt Sally right now, but Michael Coogan, director general of the Council of Mortgage Lenders, makes a legitimate point when he says the banks are being pulled every which way by the apparently conflicting demands Government ministers are putting on them.

At one and the same time, the banks are being asked to recapitalise against possible future losses, service the Government's preference shares at 12 per cent (which is well in excess of what any other country has charged their banking systems for taxpayers' capital), pay a premium to access the Bank of England's Special Liquidity Scheme, spare those in default from foreclosure, hand on all bank rate changes to borrowers while keeping savings rates high so as to support depositors, deleverage, lend more and, while they are about it, cure the world of all known diseases.

Oh, and by the way, if bankers don't do all these things, they may get nationalised outright, never mind that the one bank which has so far been fully nationalised, Northern Rock, is deleveraging at the speed of light, is failing to pass on bank base rate changes, and is foreclosing more aggressively than any other lender.

Current policy objectives are conflicting and incoherent, Mr Coogan says, and he is right. The Government doesn't seem to know what it wants beyond votes. Lord help us if the political mood, which as far as I can see is already completely out of control in regard to the banks with lynch-mob rule running riot, settles on full-scale nationalisation as the solution to all our problems.

The greed-fuelled lending binge of recent years hardly reflects well on the judgement of bankers, but nothing could be more undesirable or dangerous than putting the politicians fully in control of credit allocation. For the time being, governments are the only organisations in any position to borrow, so we are already perilously close to that position. Inefficiency, corruption, pork-barrel projects and support for unviable industries and jobs would become the order of the day if we were to go the whole hog.

All kinds of lunatic thinking is being justified on the basis of today's apparent market failure. Yet precisely what is it that is meant to have failed here? In fact the market is doing what it is supposed to, and correcting violently after an unsustainable boom created on the back of borrowed money.

The idea that all these problems can somehow be magicked away if only the banks were under full ministerial control with the politicians back in charge of the commanding heights of the economy is naive and completely ignores the myriad lessons of history.

Nobody, when they think about it for more than a few moments, wants the state-controlled capitalism of China, which is enforced down the barrel of a gun. It is most unlikely that a kinder, more decent form of Government-ruled capitalism will be born out of the present chaos.

Much more likely if we follow this route is a system that fails to function at all, stunts innovation, starves enterprise of capital, protects unviable jobs while failing to create new ones for the young and condemns the nation to stagnation.

It is also most unlikely that a crisis caused by an over-expansion of credit will be cured by attempting to create even more of the stuff, and even less likely that the international money markets – perhaps unfortunately, they still exist – will continue to sanction such a reckless approach to the public finances for very much longer.

Admittedly, something has to be done to prevent a deflationary mentality taking hold in the wider economy. Yet this is better achieved through a well-targeted programme of public works of the type envisaged by President-elect Barack Obama in the United States than nationalising the banks wholesale and forcing them to lend to whatever tin-pot scheme happens to be flavour of the month.

The problem is no longer primarily one of an absence of credit as a lack of demand. A classic inventory recession is developing, which won't be cured by controlling the banks. To the contrary, it is not until the debt workout is complete that the recovery can begin.