Banks need cash more than they need a house

You might have missed it, but you will have woken up on Thursday with a great big present sat at the end of your bed. Well, it wasn’t visible because the present was this. Thanks to swift Government action, we, the taxpayer are now majority shareholders in Royal Band of Scotland. Oh Mr Darling, you shouldn’t have. No, really. You shouldn’t.

RBS announced yesterday that it will give families struggling to make mortgage repayments (and there are a lot of them) a slither of respite, allowing every one six months of breathing space. And a roof over their heads, presumably.

Economists are speculating there could be a total of 100,000 repossessions by the end of next year, way eclipsing the level of house losses in 1991.

Here comes the problem:

• You are a homeowner who cannot keep up with the mortgage. You want mercy from your bank.

• You are a shareholder in said bank. You want your money back, pretty darn quick.

Despite politicians suggesting the contrary, you can’t have both. You can’t make back the £15bn of taxpayer’s money laid out in preference shares while people aren’t giving any money to the bank.

What’s to be done? Peter Mandelson will likely continue to pester banks into lending more, (which they say they are) while being nicer to customers who are struggling.

But this won’t make RBS (or Northern Rock) any more liquid. Banks need cash at the moment more than they need a house so getting payments from customers, in cash, should be a priority. If nobody pays their mortgage, and no repossessions occur, where the dickens are banks meant to find money to repay us?

It’s a pickle, whichever way you wrap it up.

Short of cash? Have some more cheap debt

Do the banks have any moral obligation to hand on the Bank of England’s base rate cut?

The Nationwide, HBOS, the RBS/NatWest group and our own Northern Rock have announced that they will pass on the full cut of 1.5% to its lenders in December. It seems Darling’s enticements of “coffee and bacon rolls” sufficiently appeased/threatened bank chairmen to help out borrowers and small business owners.

Admittedly, this will help many homeowners struggling to meet their mortgage repayments. It will also help businessmen borrow at more competitive rates. But a cut in the Bank of England’s base rate wont help the banks themselves.

Because banks don’t tend to borrow from the Bank of England, they borrow from other banks. The Libor, although on the way down, is still far higher than 3%. Any liquidity that the Treasury had hoped the Bank of England’s violent rate slashing would produce will not materialise until the rate of lending between banks dips further.

Governmental and retail pressure has seen banks capitulate in their refusal to alter rates offered to customers. Such political posturing epitomises the mess that part nationalisation has produced for all concerned parties. As preference shareholders in the big commercial banks, the Government (and, by extension, us) should like them to make a quick profit and pay us back. But they won’t make a quick profit by lending at unrealistically low rates.

Furthermore, if the easy availability of debt and mortgages the public couldn’t afford were what got us into this pickle, does anyone really expect more cheap lending to help? People on the high street – the same people who will struggle to make their repayments, who may have to close their businesses – need get used to spending and borrowing less.

The banks are trying to save themselves. But in doing so, they just might be teaching us all a valuable fiscal lesson.

In the Brown stuff

Some of you may have noticed a change in the demeanour of our Prime Minister. Although he’s not quite started entertaining at childrens’ parties under the alter-ego Gordo the Clown – he’s still as dour as a Nairn’s oatcake – he has started to look more comfortable in himself.

He now has a purpose; a tangible situation at which he can throw himself. He has a reason for those masochistic 20-hour days. The global financial crisis has been a blessing for Brown.

Now he has the opportunity to call upon all his finance experience and City acumen. As chancellor for a decade, Brown presided over a period of almost unprecedented growth, with low interest rates and controllable inflation. It was the new jazz age in London. Many, many people got obscenely rich, facilitated by a Brown led, risk-fuelled system of lending. Many more people had their pension’s dissolved or lost. More still borrowed beyond their means.

That was the boom and – let’s be clear here – it was a boom during which Brown was at the helm. His actions led to a wild, risky and ultimately rotten financial system. Not that any of us were complaining at the time.

Now comes bust, and the prime minister is leaning on his ‘experience’ to steer us through. The problem is, Brown has no experience whatsoever of presiding over bust. In that sense, he’s as qualified to run the economy as I am to chair the City University Quantum Mechanics Club.