Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: King proposes splitting RBS, Cable calls for plan A-Z, Bank of England prepares doves for Carney, Inflation is not the danger, Debt Jubilee.
King proposes splitting RBS
It’s ‘nonsense’ said Meryn King yesterday as he spoke to the Banking Standards Commission. He was talking about how the government owns 82 per cent of a certain bank, but very much runs it at arm’s length.
So the priority at RBS is to get the bank back on its feet, so it can be sold back to the public or another bank, netting the UK government a profit. But will that day ever occur? It is looking increasingly unlikely. Yet still the banks are not lending enough to business. Why oh why, goes the argument, can’t the government force the banks that it more or less owns to lend more to business?
So here is the idea suggested by the Bank of England’s soon to be retiring governor: split the bank up into a good bank and a bad bank. That means the government has to take a deep breath and swallow some losses, but at least that way, it will have slain a zombie. Then the good RBS – the Dr Jekyll RBS if you like – can afford to start lending to business, and may one day be sold.
There is an historical problem here. When Gordon and Alistair conducted their banking bail-out, they were terrified of being seen as old labour. They feared that the markets and electorate would say that the Labour party’s Mr Hyde persona was back. So, (jumping from 19th century literature to 20th century television) they did a kind of Mr Spock, and said: “It’s nationalised Jim, but not as we know it.”
Half a decade on, it is still like that.
On the question of returning RBS to the private sector Dr King said: “I think it would be much better to accept that it should have been a temporary period of ownership only, to restructure the bank and put it back. The longer this has gone on the more difficult that’s become.” He added: “This has dragged on unnecessarily long. I don’t want to blame anyone for this but I think the lesson of history is we should face up to it.”
He also said: “RBS is worth less than we thought and we should accept that… It’s four-and-a-half years on (since RBS’s rescue) and there is no immediate sign of it going back to the private sector. So I think that means that we have not been sufficiently decisive in either recapitalising the banks or restructuring them.”
Well he is not wrong.
But there is more than one way to skin a cat, and others have been looking at other approaches, or maybe they are additional approaches. So, after sparing a thought for the cat, and hoping it does not end up in the food chain, what are these other skinning methods?
Cable calls for plan A-Z
“So there I was, on the road to Damascus,” said Vince Cable, “and I thought, maybe I was wrong.”
Wouldn’t it be good, if a politician said something like that? What Mr Cable actually said was the “balance of risk” has changed. So it is not so much Mr Cable who had been converted, but an economy that has been fed to the lions of Osborne’s austerity, and now needs some forgiveness.
Our Vince has written for the ‘New Statesman’ and he said: “There is a body of opinion arguing that the risks to the economy of sticking to existing plans are greater than the risks stemming from significantly increased and sustained public investment targeted at those areas of the economy where there are severe impediments to growth – housing, skills, infrastructure, innovation.”
He added: “The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for house building.” He then continued: “Such a programme would inject demand into the weakest sector of our economy – construction – and, at one remove, the manufacturing supply chain (cement, steel).”
So there you have it, borrow in order to promote growth in order to make it possible to reduce debt.
Of course the Eds (Balls and Milliband) have hailed this as a triumph; as if Vince was the prodigal son himself. But then again, the Eds want to see cuts in VAT too, and that is quite a different idea.
But there is another idea afoot.
Bank of England prepares doves for Carney
It is as if Mervyn King woke up one morning and said: “Cripes! I won’t be in this job much longer. I’d better get a move on.” Or maybe he said: “Carney is moving in, I’d better start being more proactive, or the new governor may make me look like an old fuddy duddy.”
Whatever he really thought – and to be frank his thought process may have been a tad different from the one postulated above –what is clear is that the governor at the UK central bank is becoming more ambitious in his ideas.
He was one of three MPC members to vote for QE last month. And by the time you read this, it may well turn out that under King’s leadership the Bank of England has voted for more.
But the ‘FT’ has speculated that whatever Mervyn does, Carney will have something going for him that poor old Mervyn could only dream of, because the pink-un reckons George Osborne is set to give Carney’s bank of England more powers.
Ideas up for consideration include giving the Bank of England more time to bring inflation under control and giving it a US-style dual mandate of targeting unemployment and inflation.
Of course the debate has now begun: inflation or less unemployment?
But is that really the choice we must face?
Inflation is not the danger
They used to say there was a trade-off between inflation and unemployment. That we could have less unemployment, but the price we paid for that was rising prices. Then that idea was pretty much discredited, and the view formed that the real trade off was actually between jobs and rising inflation. Furthermore, under this system inflation eventually rose so high that it started to destroy jobs. That was the story that unfolded during the 1960s and 1970s.
But is it really like that now? What the UK needs is more demand, and that can come via one of two ways – from foreigners buying more British goods and services, or the Brits themselves spending more. For the latter we don’t need more inflation, rather we need less, so that wage increases are greater than high street price increases.
As the Bank of E presses the QE accelerator, sterling come under pressure, inflation rises a bit, and the gap between wage increases and inflation grows. Paradoxically, QE may be making unemployment worse. At least it is making us worse off, and because we need more demand, it is also leading to less employment.
Except that may not be the problem at all. According to the ONS, in 2011 output per hour in the UK was 16 per cent less than the average across the major countries in the developed world. Output per hour was 21 per cent less than the G7 average.
The key to getting wages to rise, and unemployment to fall, and exports up, is to improve productivity. And we can improve productivity via more business investment; more investment into infrastructure; and better support for entrepreneurs, including perhaps a student loans type scheme for entrepreneurs.
So far QE has been worth £375 billion. Capital Economics has predicted that by the end of next year it will have topped £500 billion.
But without more creativity it won’t work.
An army from the Middle Ages or from Tolkien’s Middle Earth could not destroy a castle with bows and arrows. It needed battering rams, and catapults, tunnels and cannons. QE, as it is currently being used, is akin to the bows and arrows approach.
But beyond all that, beyond splitting banks, and investment from a mutated form of QE, debt remains the problem. Too many households, banks, and businesses are being held back by massive debt, and being propped up by record low interest rates.
We can carry on and refuse to face reality, and not accept the difficult decisions. Or we can accept the need for write-downs. In the US, if you hand your property back to the bank and it has negative equity, the job of funding that deficit in value is the bank’s, not yours. In the US, companies such as GM filed chapter 11 and came out stronger.
The US is seeing a faster recovery because Uncle Sam went on a zombie hunt.
In the UK, it is a bit like that film ‘Warm Bodies’. We are trying to appease zombies. To carry on as we are is – to borrow a word from Dr King – “nonsense.”
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.