I told you so! There is only one path to solving this mess.

Partial bank privatisation did nothing for confidence as we now see. Banks holed below the waterline stuggling along are no use to anyone. I have consistently called for the Government to let the banks go and then step in a save the bits necessary to the economy notably retail banking and UK commercial lending. Any liabilities of these banks that are not specifically related to these activities can be dealt with by the liquidator.

I would warn against a nationalisation of the banks prior to them going into administration:

1) It is an illusion that you can somehow smooth and manage the downturn by lending to companies whose business has collapsed. Doing so will lead to ever increasing bad loans and will be much more expensive than dealing with the unemployment through massive re-skilling efforts.

2) It is immoral to push banks to lend to consumers that aleady have on average a huge level of indebtedness, little or negative equity in their homes and abysmally low levels of savings. Don’t offer the diabetic more sweeties!

3) Banks have balance sheets are at least 10 times the size that they need to be to deliver on their key tasks – managing deposits and lending to consumers and corporates. A Government should not take on these bloated balance sheets.

My suggestion is that the Government should clearly state that these banks will receive no more support. That if they cannot survive then the Government will let them go and pick up the core from the liquidators. This will precipitate a collapse in the banks and a wholesale nationalisation of the parts of the banks that are worth saving.

Only in this way can the Government avoid taking on liabilities that will haunt it for years to come and in the medium-term risk national bankruptcy. If the banks are nationalised and these toxic balance sheets are taken on then the UK will be forced within 6 months into the Euro and/or run to the IMF for support.

The problem when things are going bad is that noone believes how bad they are until they are catastrophic.  Because of this in extremis actions are always taken too late. Take them now! Things really are catastrophic.

For information RBS’s balance sheet is around £2 trillion. Only 15% relates to UK corporate and consumer lending.

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