Leading article: Toxic debts and the need for more liquidity

Share
Related Topics

Today's breakfast meeting between Gordon Brown and executives from the financial sector will not be the first such get-together since Mr Brown became Prime Minister; but it will certainly be the most sombre. The global credit crunch shows no signs of abating and the threat of recession seems to grow larger by the week.

We are told the focus of this meeting will not be the cost of mortgages. But that was certainly the topic uppermost in the mind of the Prime Minister and the Chancellor, Alistair Darling, at the weekend. And it would be remarkable if mortgage rates are not discussed today given that the higher cost of servicing a home loan is how most British people are experiencing the effects of the credit squeeze.

The Government's complaint is that three interest rate cuts by the Bank of England since last December have not been passed on in full by lenders. Ministers fear that thousands of homeowners due to come off fixed-rate mortgage deals, arranged two years ago when credit was cheap, are going to be pole-axed by today's higher rates.

We need a little perspective here. Credit was too cheap, for too long in Britain. It is actually welcome that the banks are now insisting on proper deposits and tightening their lending criteria. The housing boom needed to end. Yet there is still a danger that a rapid drop in house prices could destroy consumer confidence and plunge us into a recession. British retailers are already issuing profit warnings. A housing collapse could send our economy over the brink.

What we need is a soft landing. To this extent, Mr Brown and Mr Darling are justified in demanding that the banks try harder to pass on the rate cuts, rather than using the liquidity to shore up their ravaged balance sheets. Yet the Government's critics in the City are correct that this pressure to pass on interest rates rather misses the point. The core reason banks are unwilling to lend to each other is that, despite billions in bad loan write-downs over the past six months, there is still considerable uncertainty over which institutions are holding the most toxic mortgage debt. The failure to pass on rate cuts is a symptom of this fear in financial markets. Banks are hoarding cash, rather than lending it, because they are terrified they will either not get it back, or will need it themselves in the near future.

After last week's rate cut, the inter-bank lending rate actually increased. That shows just how little effect the Bank of England can have on this crisis through the traditional lever of monetary policy. It is increasingly clear that cutting interest rates alone cannot break this deadlock. Retail banks are pushing for the Bank of England to lend them funds for longer and accept, in return, a claim on some of their more questionable mortgage assets. Another solution to the liquidity crisis that has been floated is a Government "Kitemark" scheme for debt instruments to inject some confidence into the mortgage-backed securities market.

It may be that, in the end, such a course of action will be the only way out of this mess. But there will need to be a quid pro quo for such unprecedented assistance from the state for the financial sector. There will need to be regulatory compulsion on the banks to come clean over just how exposed they are to the toxic debt in the global financial system.

There can be no more hoarding of cash and hoping that the situation will improve. If public money is to be put into action to rescue the banks and avert a looming economic disaster, it needs to be made clear to the financial sector that the days of irresponsible lending are over and must never return.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Web Developer - Junior / Mid Weight

£15000 - £25000 per annum: Recruitment Genius: To support their continued grow...

Recruitment Genius: Marketing Data Specialist

£22000 - £25000 per annum: Recruitment Genius: They are the go-to company for ...

Recruitment Genius: Search Marketing Specialist - PPC / SEO

Negotiable: Recruitment Genius: This is an opportunity to join the UK's leadin...

Recruitment Genius: Sales Administrator

Negotiable: Recruitment Genius: This caravan dealership are currently recruiti...

Day In a Page

Read Next
 

Errors & Omissions: Hang on – that’s not how it’s supposed to be written

Guy Keleny
Rafael Nadal is down and out, beaten by Dustin Brown at Wimbledon – but an era is not thereby ended  

Sad as it is, Rafael Nadal's decline does not mark the end of tennis's golden era

Tom Peck
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test