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April - May 2009
Is the 'N' Word Making a Comeback?
by Satjit Singh
The banking crisis has seen tens of billions of taxpayers’ money being injected into the financial sector to bail banks out of situations they had created for themselves. Yet despite billions poured in and record low base rates, banks have resolutely refused to ease lending. This is having catastrophic effects on the economy with even viable business starved of funds and collapsing. Mortgage lending is only limited to those with large deposits. Even the limited lending is at significantly higher rates than is warranted, despite the convergence of LIBOR with the Bank of England’s base rate.
“Nationalise the banks”, is a cry increasingly being heard. The ‘N’ word had almost passed into history; not even Trade Unions were demanding it – Tony Blair’s famous tearing up of labour’s Clause 4 had put paid to that. Only Tony Benn and Arthur Scargill remained nostalgic about it. Now it is once more being freely talked about.
“Let the market find its own solution” is the other cry, although in the current situation it is being spoken more in hushed tones, than shouted from the rooftops; free market economists are suddenly short on confidence. Certainly, even the right-of-centre papers are not crowing about laissez faire economics - this doctrine espousing that an economic system functions best when there is no interference by government. It is based on the belief that the natural economic order tends, when undisturbed by artificial stimulus or regulation, to secure the maximum well-being for the individual and therefore for the community. No chance of that doctrine being given a free reign at this time.
Those arguing against nationalisation point out, that the public sector service delivery tend to be inefficient. They point to the examples of the NHS and the utility companies prior to nationalisation. The drop in prices in real terms is testimony to the power of markets to drive organisational efficiencies. Equally vociferously, those arguing against banks in the private sector say that these bankers are driven purely by avarice and that is what led to the excessive risk taking and the consequent losses. Obscene bonuses are a feature of this culture and the greed feeds a frenzy which has proved disastrous.
They are of course, both right and the ‘avarice versus inefficiency’ debate could run and run. I never thought that I would say this but, there is a ‘third way’. That nationalised utility industries were inefficient is accepted by all; however, what changed is not just ownership but the fact that these industries then operated in competition with each other. The same to a greater or lesser extent would have happened if only some companies had been privatised but they operated in competition with other nationalised ones. The heat of competition would have driven efficiency improvements in the public sector companies.
Let me paint a scenario. The government owns the Lloyds and RBS groups, whilst Barclays and HSBC remain in private hands. The government-owned banks have been instructed to lend to support industry in line with the government’s objectives. The private sector banks have not been shackled with any such requirements. “That’s not a level playing field”, I hear you say. “Lloyds and RBS are being held back”. No really, because the government’s deposit guarantee scheme should therefore only apply to nationalised banks. That is only fair; banks cannot expect to be the subject of taxpayers’ guarantees and largesse if they work against the government. Whilst these nationalised banks will have more onerous requirements on lending compared with private sector banks, they will benefit from receiving guarantees protecting deposits and therefore able to attract funds from potential savers. Private sector banks on the other hand, will not have the benefit of these guarantees but equally, will not be shackled by any ‘social’ objectives. These two sets of banks will then compete on service quality and price.
A country where this has worked well is India. For decades, its banking industry was in completely in government hands and was characterised by inefficiency and corruption. In addition to this, the government expected banks to lend for its social projects like helping farmers buy seeds and fertilizers, tide over difficult droughts etc, which often added to bad debts. Banks uniformly opened for the public between 10 am and 2 pm on weekdays. Cheques took a week to clear and customers felt that they were being done a favour rather than rightfully receiving a service. Once this ban on private ownership of banks was lifted, several new entrants came in and now private sector banks operate in competition with state-owned ones. The change in the level of service was amazing; suddenly banks began opening on weekends and in the evenings and working people are able to do their banking. Cash can be delivered at home for a small fee and most cheques are cleared within 48 hours. State-owned banks continue to have social objectives but strive to get business from all sources. This is because both the private and state-owned banks operate in competition within the free market. That is the third way! The government has targets on profitability which it expects its banks to achieve and consequently, despite the need to do social lending, these banks do not act irresponsibly. Of course, that does not mean that there are no bad debts; only that they are within normal banking norms.
The debate therefore, should not be framed in ideological terms. In recent times, the ghosts of so many different economists have been invoked; Keynes, Adam Smith and Hayek, to name a few. Whilst their theories are useful in understanding the underlying economics, circumstances in each case are different and therefore ideology needs to be tempered by pragmatism. Just as politics is the art of the possible, so is its first cousin, economics. Ideological purity is pure self indulgence if it does not move us forward.
Currently all banks in the UK are acting in concert; there is no edict from the government as there are no nationalised banks and all banks are in receipt of government guarantees. If some were nationalised and at the behest of the government, began the easing of lending, in order not to lose market share, the privately owned banks would have to follow suit. The current situation is allowing banks to behave in an anti-competitive manner which could be construed, as de facto collusion. Though technically not illegal, the behaviour of these banks is at best unethical. The government needs to inject a burning platform for these complacent financial institutions, so that they realise that ‘no change’ is not an option. Until that happens, we will slide further into recession and dare I say it, depression.
The ‘N’ word, if not the norm, is certainly not history. Not yet, anyway.