On Wed, Nov 5, 2008 at 1:53 PM, Michael Pollak <mpollak at panix.com> wrote:
>
> http://www.ft.com/cms/s/0/0efb092e-a6bb-11dd-95be-000077b07658.html
>
> October 30 2008
> Financial Times
>
> Editorial
>
> Persuading banks to lend again
>
> Memo to bankers everywhere: Taxpayers did not rescue you because they love
> you. They rescued you because they need you. The rescues were intended to
> ensure the flow of credit to creditworthy businesses; yet that flow of
> credit seems to be slowing to a trickle. How should governments respond?
>
> Let there be no mistake: government support for the banking sector was
> necessary. Without it, several large banks looked at risk of collapse, and
> the panic among banks and their creditors could have brought down the entire
> financial system. Yet just because the rescue was necessary, it was never
> guaranteed to be sufficient.
>
> It is hard to be sure quite how serious the credit squeeze is for small and
> medium-sized businesses, but the signs are not good. The UK growth rate
> collapsed in the third quarter, which is ominous, given that the most acute
> phase of the credit crunch -- following the failure of Lehman Brothers --
> began just days before that quarter ended. The Bank of England revealed on
> Wednesday that corporate deposits of cash with UK banks are at their lowest
> since 1980. Anecdotal evidence also paints a bleak picture.
>
> Naturally, many people are wondering why the UK Treasury -- and the US
> Treasury, which faces a similar situation -- is not doing more to force the
> banks to lend after their expensive rescue. It is easy to tell a tale of
> greedy banks and complaisant governments; but the true story is less of a
> pantomime and, sadly, more intractable.
>
> The fundamental question is why banks are reluctant to lend. One
> possibility is pure fear: the banks lent too much before, destroying their
> reputations and tens of billions of pounds of their shareholders' wealth,
> and now are erring on the side of caution.
>
> A second possibility is that banks face a co-ordination problem. No bank
> wants to be the only one extending overdrafts and rolling over loans, but
> each might be emboldened if others did likewise.
>
> If these are the only reasons why banks are not lending, then wheedling,
> cajoling and arm-twisting from the Treasury is not only justified, it might
> also do some good. Banks might get over their collective paralysis. Solvent
> businesses would not fail for lack of funding and the worst consequences of
> the credit crunch would be contained.
>
> The trouble is that, while fear and lack of co-ordination are partial
> explanations for the drying up of credit to businesses, they are not the
> whole story. It seems likely that many of the loans banks unwisely made in
> the good times are now intrinsically unprofitable. They were predicated on
> cheap credit, ample risk appetite and a growing economy. Now that banks
> cannot borrow cheaply or raise capital, those loans cannot be rolled over
> without losing money.
>
> If that is the problem -- and to some extent, it must be -- then there are
> no easy options for the government. Bullying will make little difference.
> Targets can be sidestepped easily: a demand to lend more money to small
> businesses might well simply mean less lending to medium-sized businesses.
>
> The UK government could step in directly and order the banks to lend to
> small and medium-sized businesses, effectively nationalising the whole
> sector and taking both the credit decisions and the credit risk. That may
> yet be necessary -- but only a hopeless optimist would expect that story to
> end happily. Loans would become political, the government taking
> responsibility for who survived and who went under. This remains the last
> resort.
>
> The government could also encourage banks to lend by lowering the price of
> the capital and credit insurance offered to them. Taxpayers would be paying
> to subsidise loans to businesses. Some of those businesses would be saved,
> and so too might other businesses that depend on them. Yet much of the
> money would go to businesses that need no subsidy, or businesses that are
> beyond saving. There is no simple answer and the problem is made yet worse
> by the fact that one bankruptcy can cause an avalanche of others with little
> warning.
>
> This is the tragedy of the great deleveraging. Since credit was
> unsustainably loose, it must inevitably tighten. Policymakers cannot
> prevent that; they must aim instead to prevent chaos and overshooting.
>
> For now, the focus shifts instead to the Bank of England, whose next
> decision on interest rates is due on Thursday. With inflation worries soon
> to become a distant memory, a dramatic cut in rates is needed. Two per cent
> would not be too much.
>
> Meanwhile, the government should stick to persuasion and leave more drastic
> plans on the shelf. It might be worth reminding the banks that, should
> persuasion fail, public outrage will ensure that those drastic plans gather
> no dust.
>
> Copyright The Financial Times Limited 2008
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