Government puts its money where its mouth is.
Posted on October 13th 2008
Government puts its money where its mouth is.
Mortgage Strategy: Alan Cleary’s column.
At last the Government has backed up all the talk with some decisive action. The
announcement of a substantial rescue plan for the UK banking system is something
that is to be welcomed. This could be the start of a series of actions that could
cause the banking crisis to subside and stop a prolonged recession in the wider
economy.
The Government is absolutely right in taking equity in return for its capital as
this gives us, the taxpayers a decent chance of getting some upside when confidence
returns to the banking sector and their share prices start to rise. I for one was
getting fed up of seeing Sovereign Wealth Funds from oil rich nations snapping up
the banking sector at knock down prices. The massive rise in oil prices in the first
half of the year was one of the factors that has caused panic and whilst oil producing
nations have been sucking us dry they have generated so much cash they almost don’t
know what to do with it. So in effect they have been using our own cash to buy huge
stakes in our banking systems. You almost couldn’t make it up.
The £50bn capital investment into the banks (and one building society) is also followed
by a further £200bn in extra funding to the BofE to use as short term liquidity.
There is also the creation of a company that will give banks up to £250bn in loan
guarantees. In effect the whole package should in theory unbung the capital markets.
LIBOR should start to come back in line with long term historical rates and banks
should start to lend to each other again. The other major benefit and possibly the
most important is that this could bring back confidence which eventually will allow
banks to start lending again. Don’t expect to see an instant result, this will take
time to filter through. There won’t be a return to the type of lending we were used
to either, caution will be the watchword for all banks for many years to come.
This also won’t be the last in Government intervention into the banking system,
there is likely to be a series of events over the next 12 months and hopefully we
will see the BofE making significant interest rate cuts in the short term. If Mervyn
King digs in his heels and refuses to lower interest rates Alistair Darling can
invoke special powers that are written into the Bank’s articles that allow him in
extreme circumstances to force rate cuts in the interests of the nation. If ever
there were extreme circumstances it is right now.
