Saturday, 6 December 2008

Deja Vu ?

"Money managers apparently don't want to buy into the UK housing market, even when the risk is covered by HMG. And they may have the same qualms about buying any kind of asset-backed security, even when it's gilt-edge or underwritten by taxpayers.

So there are two alternatives. One would be O'Neill's* state-owned, state-funded bank.

The other would be a longer-term, broader more ambitious version of what's already happening here and in the US. Which is that banks could package up loans to businesses and households and then exchange them for cash from the Bank of England.

In effect, we as taxpayers would be funding the bulk of the real economy.

It sounds extreme. There are big and serious issues about whether such an initiative would be perceived by international investors as seriously weakening the strength of the public-sector balance sheet, such that there would be a damaging run on the pound.

And it would probably only persuade our banks to lend more if there was a commitment from the Treasury and the Bank of England that this funding from taxpayers would be available for many years (certainly much more than three years) - which would represent a radical re-making of how capitalism operates.

However, such a substantial increase in the provision of credit by taxpayers has to be a serious option, because the sunny economic uplands won't be visible again until a solution is found to the vicious, inexorable contraction of lending."

Or so says Robert Peston, anyway. I've heard about this kind of thing before, in another context. Or something which sounds very like it, anyway. But surely this is not possible in our bright shiny new globalised world where states aren't supposed to have a monopoly on anything?

(*Jim O'Neill, the chief global economist of Goldman Sachs has called for a state bank that will provide the vital credit that our commercial banks cannot or will not provide )

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