Dominic Lawson: You can accuse the banks. But politicians should also be in the dock

You can't dismiss this kind of pork-barrel banking as something peculiar to Spain

Share

If it were possible for bankers to become even more the social pariahs of the age, it might have been achieved by the decision to spend €100bn of the eurozone bailout fund to prop up a selection of submerged Spanish banks. Once again, two popular sentiments are given full expression. First: why should we pay to rescue these well-remunerated idiots from the consequences of their own foolishness? Second: isn't it time for the banks, especially if we have part-nationalised them, to lend more to socially useful schemes rather than continue to feather their own corporate nests?

The first sentiment is entirely appropriate. It has been bizarre the way most European countries have put vast sums into keeping zombie banks going, rather than winding them down in an orderly fashion. At the heart of a properly functioning market economy is the principle that very badly run firms go to the wall. In the case of banks, that should be allowed to happen, too, with only the depositors being protected. The Danes and the Swedes have operated in this way, in stark contrast with Spain, where political imperatives have kept monstrously managed banks alive – or, in the case of Bankia, created an agglomeration of many failing regional banks, presumably on the grounds that the bigger the entity becomes, the less likely it is to be "allowed to fail".

Yet the argument that banks must now be made to operate as instruments of society's wishes is to make the mistake of supposing that they weren't doing so all along. This was certainly true in Spain. At the heart of the crisis were the financial institutions known as cajas, regional banks whose boards were stuffed with political appointees and which were expected to fund construction projects to bring lustre and kudos (and jobs) to the communities they served.

As Alvaro Anchuelo, an MP for the small Popular and Democratic Union party, remarked, "The use of cajas as the banks of regional governments is part of the origin of the problem. They used them to finance airports with no flights and theme parks that failed." Naturally, the big political parties, both on the left and the right, involved in using the money of unwitting bank depositors to buy votes are desperate to stop the full story from emerging. Attempts to set up a formal investigation into Bankia have been blocked in the national parliament.

Quite cleverly, these politicised banks would put "ordinary members of the public" on their boards, to reinforce the impression of democratic accountability. One member of the Caja de Ahorros del Mediterráneo, which collapsed last year, claimed that among his board colleagues representing the local community were a supermarket checkout worker, a dance teacher and an artist. None of them, we can safely assume, would even have known how to read a balance sheet, let alone work out the true risks of the loans offered by the head honchos to local vested interests.

It would be easy to dismiss this kind of pork-barrel banking as a phenomenon peculiar to Spain. Yet the whole sub-prime fiasco, from which the credit crunch and recession derived, was to an extraordinary extent the consequence of American banks and financial institutions lending according to the dictates of politicians, who themselves justified this by the claim that they were making the banks act in the general good.

 

Back in the 1970s, President Jimmy Carter introduced the Community Reinvestment Act, which compelled banks to lend more to low-income neighbourhoods, if they wanted to retain their banking licence. This was based on a noble ideal – to root out racism in the mortgage market. Next, procedures were introduced which instructed banks that an applicant's "lack of credit history should not be seen as a negative factor in obtaining a mortgage". The resultant vast increase in home loans was underwritten by Fannie Mae and Freddie Mac, two so-called Government Sponsored Enterprises, which by the time of the credit crunch were guaranteeing $12 trillion of mortgages. When these social utilities were left holding the bulk of the sub-prime mess, they were, of course, nationalised.

The Democrat Chairman of the House Financial Services Committee, Congressman Barney Frank, had fought successfully against the Bush administration's attempts to rein in improvident lending, precisely on the grounds that to do so would make the financial markets less responsive to the general public good. Frank told Congress back in 2003: "I do not want the same kind of focus on safety and soundness [in the regulation of Fannie Mae and Freddie Mac] that we have in the Office of Thrift Supervision. I want to roll the dice a little bit more in this situation towards subsidised housing." And so the dice were rolled once more, all for the public's good (until, of course, the whole house fell in).

This is not to excuse the bankers for their sins: the bonus culture encouraged ever thinner slivers of core capital supporting ever more loans, which meant there was completely inadequate cover when the housing market collapsed. The point, however, is that the banks' riskiest lending was precisely to the project – wider home ownership – that the politicians wanted them to fund. Ostensibly, this was only for the social good, but not coincidentally it was thought by the politicians that the more the property market boomed, the happier the voters would be, at least if they had a good slice of the action.

By the way, they never learn. In March, our Government launched a scheme under which taxpayers will guarantee deposits for new-build houses up to £500,000: this enables buyers to secure such properties with a personal deposit of no more than 5 per cent, when lenders are otherwise refusing to fund such transactions unless the deposit amounts to 20 per cent of the value of the property.

The reason for this caution on the part of lenders is clear enough: such houses tend to command a premium for being completely new and, therefore, will lose value in a flat market. In other words, the taxpayer is now underwriting home loans which may well be greater than the resale value of the properties concerned. Once again, this will buy votes both from the buyers and the property developers: but to distort the housing market in this way is simply to encourage the over-pricing of property – which is of no social utility at all.

So the next time you hear any politician or pundit routinely attacking the banks for their neglect of the wider social good, ask him if he's prepared to put his own savings into the pot first.

d.lawson@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Year 5 Teacher

£80 - £140 per day: Randstad Education Leeds: Year 5 Teacher KS2 teaching job...

Software Developer

£35000 - £45000 Per Annum Pensions Scheme After 6 Months: Clearwater People So...

Systems Analyst / Business Analyst - Central London

£35000 - £37000 per annum + Benefits: Ashdown Group: Systems Analyst / Busines...

Senior Change Engineer (Network, Cisco, Juniper) £30k

£30000 - £35000 per annum + Benefits: Ampersand Consulting LLP: Senior Change ...

Day In a Page

Read Next
David Cameron has painted a scary picture of what life would be like under a Labour government  

You want constitutional change? Fixed-term parliaments have already done the job

Steve Richards
Nigel Farage has backed DJ Mike Read's new Ukip song  

Ukip Calypso by Mike Read? The horror! The horror!

Patrick Strudwick
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past