The UK Government today announced that it would make £50bn available to take stakes in UK banks. It also committed a further £350 in support of liquidity and lending in the money markets to free up the “plumbing of the banking system”.
Total cost £400bn.
I am very supportive of a wholesale nationalisation of the banking system however only as a last resort and for all banks.
By “a last resort” this means only when the ability for consumers and businesses to use their accounts and agreed loan facilities is imminently threatened for this is the basic function of banks. By “all banks”, I mean that every bank in the UK, which is not in administration at the time, would be nationalised completely.
Any other solution gives existing shareholders a benefit that the tax payers funding the solution do not receive.
I have come across numerous people over the last few days who agree with the idea of giving support to the banking system, however distasteful, for fear that the “blocked plumbing in the banking system” will impact us.
A lot are worried about their deposits. The Government has been remiss in not stating clearly what is guaranteed. Only now that it is forced to do so is the Government giving the deposit guarantee more airtime. Even still we are not told clearly what this means – does an individual get their money back immediately? What is the process?
Others are worried about the lack of lending impacting the real economy. The simple answer is that consumers don’t want to borrow and companies don’t need to except to survive in the teeth of a recession. I am afraid that companies (and individuals) would always prefer to borrow their way through a recession but this never happens. They are always forced to cut costs and those that react quickly and do so in anticipation of a 20% to 30% drop in turnover in 2009 and will survive.
My advice for individuals and businesses is to take this opportunity to reduce costs – significantly!