Why is Gordon Brown offering banks extra liquidity, with no conditions? He should be forcing them to help families in negative equity
April 16, 2008 3:00 PM
These are dark days for the economy. House prices on the turn, banks in crisis, and the ministers who ought to be leading us flapping about like confused chickens.
After his cosy breakfast with Britain's bankers yesterday, the prime minister probably ate more austerely this morning. As he contemplated his cornflakes, he should have been regretting a missed opportunity. The banks seem to have been promised what they wanted: more cash. But the prime minister doesn't seem to have even asked for anything in return for this taxpayer-funded generosity.
This is no surprise. Brown has been cosying up to the banks for more than a decade. Together they have conspired to create an unstable economy that is now struggling to cope with the consequences of the global credit crunch. But it is a one-sided friendship. Brown has given the banks all they want. He buried the 2000 Cruickshank report - the only report that dared to pose questions on why an industry that receives unparalleled state guarantees should be making such extreme levels of profit. He ignored warnings about the housing market and unsecured debt.
What is bizarre is that when the going gets tough, instead of taking the banks to task, Brown has asked for almost nothing, and got even less. Yes, the severity of the credit crunch was not generally anticipated, but many banks are in trouble because they were happy to make vast profits investing in high-risk products based on unaffordable mortgages. Banks are not the innocent victims of the credit crunch they often pretend to be.
That is why there must be a quid pro quo for supporting them at this time of crisis. It is right to maintain the flow of credit by providing liquidity to the market. But this should be in order to bump-start inter-bank lending, not to act as a vehicle for banks to offload their bad loans onto the taxpayer by way of the Bank of England. Extra liquidity should be conditional on banks dealing with their losses in full. And in the future, the Bank of England must be able to exercise real oversight over the lending practices of banks and take rising house prices into account when setting interest rates.
And big questions must now be asked about the governance within banks and their tendency to place the interests of shareholders so far above the interests of millions of depositors.
Now is the time for decisive action to protect consumers too. The government must demand more from the banks to halt repossessions. As house prices drop and mortgage costs increase, large numbers of families will find themselves in negative equity and simply unable to afford their bills. This could create a downward spiral of repossessions and fire sales.
The only way to stop this is for the government to force mortgage lenders to moderate the process by offering shared ownership, loan renegotiations and early, comprehensive financial advice to keep people in their homes. Some already do this but too many - particularly sub-prime lenders - still take a cavalier approach.
By supporting borrowers, we can help families to cope with this crisis. And by regulating banks more intelligently, we can stop ourselves from getting into this mess ever again.
Source :
http://commentisfree.guardian.co.uk
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