10 ways out of the credit crisis

Slash? Spend? Guarantee? Co-ordinate? We analyse the options for Gordon Brown as he heads for US talks on the credit crunch
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1. Call urgent summit of banks

FOR: So easy it's already been done – twice. Yesterday's meeting between the big banks and the Prime Minister followed a similar gathering three weeks ago, when the financiers met for talks with the Governor of the Bank of England, also supposedly routine. No one was fooled then, either, it must be said. As well as the money markets, one of the things that seems to have frozen up during the credit crisis is the relationship between the City, financial regulators and the Government. Maybe the summit aided some mutual understanding.

AGAINST: We're waiting for the "wide range" of initiatives promised by Mr Brown, but sceptics wonder if any amount of chatting in Downing Street drawing rooms or the Governor's parlour will restore the credit markets to order.

VERDICT: Gives the impression of activity and could help if it does indeed prompt action. Sir James Crosby, former chief executive of HBOS, has been asked for some more ideas.

2. Cut interest rates again... and again

FOR: The Fed has been notably more aggressive than the Bank of England in this regard, lopping rates six times since last September. The key federal funds rate now stands at 2.25 per cent. The Bank of England could do more.

AGAINST: It hasn't been working, so far. The trouble is that the structure of the mortgage market, with so many people on fixed rate deals, and the continuing high level of market interest rates have seen relatively little of the Bank or the Fed's rate cuts feed through to home buyers and businesses. Rate cuts might also be storing up inflation. There's also the problem that, as you cut rates you have less and less ammo "in the locker" as they approach the natural floor of zero – what Keynes called "pushing on a string".

VERDICT: Keep cutting, or just print the money and drop it out of helicopters (Ben Bernanke, chairman of the Fed, has written about this possible act of economic desperation, albeit in academic terms).

3. Slash stamp duty for first-time buyers

FOR: Would help those clearly most in need of a hand, give the estate agents something positive to chat about during the viewings and might just boost the housing market, which is danger of going into meltdown. The boom in property values has left stamp duty verging on the punitive (though lucrative for the Treasury). It is a very crude tax.

AGAINST: A cut in stamp duty is usually thought of as helping sellers rather than buyers, which may not be the desired aim. It did not have a huge impact when Norman Lamont, then Chancellor, tried a similar ploy in the recession of the early 1990s. Such a change is also unlikely to revolutionise the credit markets.

VERDICT: Worth a try, but more about politics than economics.

4. Force the Bank of England to lend more to banks

FOR: It's the obvious thing to do, and is already in effect happening. Yesterday's £15bn "injection of liquidity" by the Bank brings its total intervention since the credit crunch began to £50bn. There will need to be more of the same. This may be the only way to avoid the outcome predicted by the head of the Council of Mortgage Lender recently, of mortgage advances this year running at only half of the level seen in 2007. That would spell doom for the housing market and the wider economy. The banks need to "securitise", ie, sell on their bundles of mortgages to raise money to lend to house buyers. Without that conduit they cannot lend.

AGAINST: "Not the first thing we should do," says Mr Brown, and you can see why. It would mean allowing the banks to swap government bonds for dodgy mortgage-backed securities, with no easily determined worth if the property market nosedives. Then again, it will surely nosedive anyhow if the Bank of England does nothing. A potential cost to taxpayers.

VERDICT: The Bank of England will have to lend sooner or later, so they might as well get on with it and smile.

5. Co-ordinate a global fightback

FOR: The credit crunch is an international phenomenon of vast proportions. This so-called "trillion-dollar meltdown" (that's $1,000,000,000,000) has affected every financial centre and institution. So it is a probably good idea for the world's central banks and governments to act together. For example, when the US Federal Reserve, the European Central Bank, the bank of Japan and the Bank of England all intervened simultaneously recently, it made much more impact than when they acted alone.

AGAINST: Much of the international activity – through bodies such as the IMF, the Financial Stability Forum and the Senior Supervisors Group – tends to be backward-looking.

VERDICT: When it happens, it makes headlines and boosts confidence.

6. Guarantee or buy surplus mortgage-backed bonds

FOR: Seriously considered in some Fed circles. It would get things moving, because the banks could easily find a market for their mortgage-backed securities and get on with lending cash and lubricating the economy. Bold, decisive and virtually guaranteed success. The Government floated "kite-marking" securities issued by banks to restore confidence. In America, quasi-federal bodies known as Freddie Mac and Fannie Mae perform a roughly similar function.

AGAINST: Again, the price could be unacceptably high if things go wrong. Even the US Treasury and the British Government could find the strains of dealing with write-offs of hundreds of billions difficult to manage in a worst-case scenario. The "kite-mark" is more realistic but less effective; markets aren't stupid and they don't need the Government to tell them the risks they're running.

VERDICT: Wasn't Northern Rock enough?

7. Relax all the rules on lending

FOR: It would allow more enthusiastic property buyers into the market.

AGAINST: Isn't this how we got into this mess in the first place?

VERDICT: It raises a wider question about whether the job of the authorities should be to "save" markets, if it means just going back to bubble conditions. Immoral too, when so many homeowners were sold loans they couldn't afford to repay by banks that sold the risk on to unwitting investors. Moreover, cuts in interest rates seem geared to appease angry stock or property markets, surely a fairly primitive and ultimately self-defeating way of running an economy.

8. Bail out, don't repossess

FOR: Not such a strange idea. Until 1996 the Government paid housing benefit on mortgage interest payments to the unemployed, which tended to mitigate the impact on individuals and the economy as a whole of a catastrophic drop in values. The Council of Mortgage lenders has floated the idea of something like this again to prevent a rash of repossessions and misery.

AGAINST: We found out in the last recession how expensive this can be, partly because the average mortgage, even 15 years ago, had mushroomed. Thus when the cost of this social security benefit rocketed from £31m in 1978 to £1bn in 1995, it was dropped for all future mortgage holders.

VERDICT: You might wonder why the taxpayer should pay anyone's home loan off, but it could be a pragmatic way to prevent an even more gruesome calamity.

9. Order banks to reveal losses

FOR: The idea of such "transparency" is now commonplace and rarely far from the lips of any politician or regulator. The banks' collective reluctance to say how much they had lost and where did contribute to a climate of uncertainty and a feeling that no one could quite trust anyone, and a further twist in the cycle of mistrust that gave us the credit crunch. Even some of the most august names in banking were caught up in a welter of malicious rumours, and their integrity questioned.

AGAINST: Nothing, except to note that the credit crunch is a process rather than an event. Even if the banks owned up to their losses and with casualties such as Northern Rock and Bear Stearns that is not the end of the tale. But no one knows how or when the US property market will bottom out.

VERDICT: They can tell us more, but not everything, not until it's all over.

10. Spend, spend, spend!

FOR: A splendidly traditional way to get a struggling economy moving, as recommended by the great John Maynard Keynes in the 1930s. Even the fiscally conservative George Bush has approved a $156bn (£80bn)fiscal stimulus for the US economy, mainly through tax rebates, to get the US consumer buying again and avoiding the worst of a recession.

AGAINST: Britain's public finances are not in a state to withstand that sort of pressure. Even as things stand the Chancellor, Alistair Darling, will probably break one or other of the Government's self-imposed fiscal rules over the next year or two. Bodies such as the Institute for Fiscal Studies and the National Institute for Economic and Social Research point out that the rule setting net debt at 40 per cent is arbitrary.

VERDICT: Gordon Brown may just regret not saving a little for a rainy day.

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