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Boost confidence now by nationalising the banks
• YOUR Comment, January 8, advocates a Keynesian solution to the financial crisis.
The problem is that those who are advocating it are only giving us half of Keynes, for there are two parts to his theory: the prudence of government in reducing public debt in good economic times and the use of public money to boost aggregate consumption in bad economic times.
In fact, even that does not do Keynes justice, because he advocated public spending to boost demand only as a very last resort after time had shown that the self-righting corrective of the market had failed.
Gordon Brown as chancellor neglected the prudent part of Keynes. He grossly inflated public spending with the consequence that we arrived at the credit crunch with a national debt which was already high as a percentage of GDP, viz: “The total amount of net debt owed by the government rose to 37.9 per cent [of GDP] in September, excluding the cost of nationalising Northern Rock, up from 37.3 per cent in August 2008, according to the Office for National Statistics…
“The figure including the nationalisation of Northern Rock is 43.4 per cent.” (Daily Telegraph October 20).
In fact, the debt was worse than the official figure because Enron-style accounting has kept the true cost of PPP and PFI off the books, most of the ongoing debt not being included in the national debt.
Brown’s recklessness means that we arrived at the credit crisis unprepared to carry out the second part of Keynes. Our national debt is now anticipated by the Treasury to rise to over 50 per cent of GDP in the next few years and that assumes there will be no further banking disasters requiring rescue and that the banks already wholly or part-nationalised turn out to be self-funding in the medium term and result in no net loss to the taxpayer, an increasingly unlikely scenario.
What can we do to get out of this mess? The single act which would do most is to nationalise the banks, for that would immediately solve, as far as it can be solved, the problem of confidence both at home and abroad and free up credit.
Nationalisation would cost the taxpayer little if anything by way of compensation to shareholders, because every bank is, in truth, insolvent for they cannot trade without access to government money to maintain their liquidity. (The banks are giving the Treasury the toxic sub-prime debt in return for cash so, in practice, the taxpayer is subsidising them because the toxic debt has little or no value in the market).
Once nationalised, the banks should extend credit to business – especially small- and medium-size businesses – in a reasonably liberal way. This would keep employment up, thus reducing public spending on benefits and maintaining consumption by those in work.
But the banks should continue a cautious lending regime with private borrowers, who in the main will tend to hoard the money or use it to pay off debts, both of which will reduce the amount of money in circulation which is not what is wanted.
The most efficient way to get public money into the economy would be to increase the incomes of the poorest because they will need to spend simply to achieve a reasonable or even a basic standard of living. That could be done by increasing working tax credits and pensioner credits and benefit payments for the unemployed.
For the longer term, the government should aim to remove the prime poison in the social system, the outlandish cost of housing.
In 1955 the average house cost (at 2008 prices) £36,000: today it is in excess of £160,000.
Today those on average earnings in most parts of country have no chance of buying a property because of prices which require multiples of income of six or more.
Until the price of housing comes within reach of the average earner sanity will not return.
Hence, the government should restrict mortgages to multiples of three times income with a minimum deposit of 10 per cent. That will cause a great deal of pain to those with mortgages, but it is a necessary step.
Eventually, the market will reach a point where first-time buyers return in numbers and the market generally unfreezes.
Unless that happens the housing market will remain moribund for it relies on first-time buyers to drive it.
Finally, to ease the pain of the housing price contraction and the inability of many to get on the housing ladder, the government should do as your leader suggested, and engage in a massive programme of social housing building.
Robert Henderson
Chalton Street
NW1
New hope
• GLAD to see you quoting Vince Cable’s plea for government to fund councils to build new social housing (Comment, January 8).
Hundreds of Camden’s families struggle with overcrowding for years, and thousands suffer in temporary accommodation, so government – and we – should do everything possible to get more housing.
Vince Cable is absolutely right, and government really must act fast, while there are still builders to pick up the challenge.
Camden has relatively few new sites, to be sure, but each new home is new hope for one of these families. We are therefore currently researching small sites for new housing, so building can get started when we have a way to fund it.
But sadly such pleas seem to fall on deaf ears.
Cllr Chris Naylor
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