Cameron advocates taxpayer-underwriting of commercial lending to business

Last week in my analysis of the positioning of the parties in the economic crisis I suggested that the Tories were strongest on most issues but that Labour were in danger of 'owning' 'policy activism'.  Monday's poorly-received PBR illustrates the dangers of the wrong kind of activism but conscious of not appearing to "walk on by" during the recession, David Cameron today advocated "monetary activism" to help Britain escape recession.  Key sections of his speech to Policy Exchange are highlighted below.

Bank mistreatment of small businesses: "In recent months, I have been inundated with letters and emails from business owners. I want to read you just one. It’s from a married couple, in their sixties, who run a small computer consultancy business... They should have been looking forward to a well-earned retirement.  But at the end of September, because of a combination of holidays and sickness, there was a delay in processing their monthly invoice.  So they telephoned and wrote to RBS/NatWest to extend their overdraft temporarily – but nothing happened.  Not even a reply at first.  More calls were made, more letters written, visits to the local branch undertaken but still nothing.  In the meantime, their direct debits – which they asked to be stopped – were rejected, incurring charges.  They say: “As I write the overdraft is … well over £4,000; we continue to incur additional fees and interest rates on a daily basis, both by NatWest and by those whose payments we have missed”.  To top it all off, their “winter fuel payments have been consumed by the ongoing fees and charges”.  Their story is not unique.  Talk to virtually any business owner right now and they all say the same: We can’t get credit or the loans to tie us over. Rates are going up. We’re incurring charge after charge and being effectively strangled into submission. It has to be said. What a disgraceful way to treat good, honest, hard working people who are simply trying to provide for themselves and their family. What a shameful way for banks to act towards the very same people – the taxpayer - who have supported them in their hour of need."

Today's economic difficulties stem from monetary problems: "As I have consistently argued, it’s in monetary policy, not fiscal policy, where we have most to learn… and monetary activism, not fiscal stimulus, where politicians and economists must aim their firepower. And it’s not just me. Last week, the CBI said: ‘Getting the credit markets working properly is much more important than the fiscal boost.’ And on Tuesday, the Governor of the Bank of England, Mervyn King, agreed when he argued: ‘I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system to get lending in any normal sense. That is more important than anything else at present.’"

What does monetary activism mean? "First and foremost, it means lower interest rates. Last week, the Bank of England themselves said that they had considered cutting interest rates by more but – in anticipation of a fiscal stimulus in the Pre Budget Report – had decided not to. I have made it clear that fiscal policy must support, not replace, monetary policy, and that government must not do anything that could make it more difficult for the Bank of England to deliver a sustained reduction in interest rates."

We advocate underwriting lending to British business: "We propose establishing a temporary new Government body – the National Loan Guarantee Scheme – to directly underwrite lending from the banks to British businesses. The focus would be on short term credit lines, overdrafts and trade credit – the lifelines that all businesses need to keep afloat. Our National Loan Guarantee Scheme would guarantee billions of new loans to any UK businesses, and it would do so for a commercial insurance fee, passed on by the banks, that would properly protect the taxpayer. Banks will be able to use the National Loan Guarantee Scheme guarantees to underwrite a significant percent of any new loans to business. And a similar approach should be taken with trade credit insurance, which has dried up dramatically over the last few weeks with worrying consequences for the day to day workings of our economy. The French Government has just announced a very similar scheme to tackle this problem – and we must act too. Our scheme is on a different scale to the Government’s much smaller and more bureaucratic Small Firms Loan Guarantee Scheme. But it has one important similarity. The guarantee will not cover 100 percent of the loan. Why not?  Because it’s important that banks take a share of the risk to prevent reckless lending.  And because they will have the right incentives, it will be the banks – not government – making the decisions about who to lend to."

> George Osborne on the case for government underwriting business loans

Tim Montgomerie

Comments

[Ken Stevens]

Didn't there used to be an Export Credit Guarantee Department?

Maybe this proposal amounts to a Domestic CGD!

[GB£.com]

" Our National Loan Guarantee Scheme would guarantee billions of new loans to any UK businesses, and it would do so for a commercial insurance fee"

What happens if the insurance company considers the risk too high to offer insurance for a certain business, or imposes a premium that is too high to make it affordable?

First the nationalisation/recapitcalisation plan, then when that fails, this new plan.

What is so wrong with taking the simple approach that will guarantee that the benefit hits the target, i.e. large corp tax cuts?

[Malcolm Dunn]

It would be Ken.I have to say I'm not sure whether this is a good idea or not. The tax payer takes on huge risks and would have to act without the expertise of people who assess risk professionally. Having said that, if it worked it would go a long way to curing the credit crunch aspect of this crisis.

[Bexie]

I would have thought the solution is fairly straightforward in that if NatLloydsHSHaliScotbank writes to you as a business owner saying they are withdrawing credit, then transfer over to either RBS (State Owned and underwritted) Northern Crock or B&B (equally owned) the mechanisms are there to transfer all banking instruments smoothly from one bank to another so why not use them.

[pp]

Fantastic policy.

Simple, self-financing etc - particularly the fact that it is temporary - every quango should have a 'expires on' date...

[Mark Williams]

Who is going to make the decisions? This is foolhardy in the extreme. If the lender's motives are not simply to lend where there is on a verage a likelihood of recovering the money lent together with a profit, then such a scheme would be a vast money pit.

The options are:
(a) lending decisions made by banks but guaranteed by government, in which case the banks have every incentive to lend without worrying about the outcome or
(b) lending decisions are made by civil servants, without training and probably ith political motives to support the economy, in which case either the volumes will be too small because of lack of capacity or the volume of cash disbursed will be so great and so poorly judged that the losses will be stupendous.

I could tell stories about dealings with the DTI and the indiscriminate doling out of grants, but these days I would probably end up with 9 anti-terrorist police officers on my front door step.

[pp]

ps. Worth contrasting this guarnetee scheme with the governments scheme to guarentee bank share issues.

http://news.bbc.co.uk/1/hi/business/7753845.stm

Made us an instant £2.3bn loss...

If this carries on we'll start talking real money.

[David Belchamber]

I am very glad to hear Cameron (and Osborne last night on QT) make this positive suggestion that bears down on the real problem.

Previously I had suggested empowering Northern Rock (our mortgage lender) to buy up toxic debts from Lloyds and RBS at commercial rates on the firm understanding that the banks then use the receipts solely to lend to businesses and for home loans.

That might start the state aided banks working properly again which should also encourage the others to do likewise.

[rugfish]

I have advocated a National Loan Guarantee Scheme or direct loans to strategic businesses through the DTI for MONTHS.

Russian Federation president Dmitry Medvedev invoked one in October and France put one in place last week. Obama wants one.

The guarantee isn't to stop inefficient businesses closing it is to provide them with liquidity and cash-flow to meet 'existing obligations' not to carry our growth but to 'stabilise' themselves.

Backed up by insurance it can be put in place without detrimental loss to Joe Public or even a stake being held in those businesses, but 'conditions' would be attached to the loans and those conditions should manifestly realise a return to prudent business measures such as reducing levels of director's salaries, levels of dividends, restructuring of management and their salaries, and a delay, reduction or cessation of bonuses and other benefits.
They should make conditions to pay suppliers on time and should also encompass a rigorous risk assessment.

The object of this well meaning activity should be to stabilise our economy as a whole at far less cost than a pointless and unnecessarily wasteful reduction in VAT.

Interest rates should be higher but still be affordable and the profit from the exercise should go back into government coffers to help meet the bill of another stimulus in the housing market and tax thresholds, with a temporary removal of Stamp Duty or a switch to the seller, coupled with the re-introduction of MIRAS and the complete removal of tax for people under £12,000 p.a.

Unless this is done, we, the UK and everyone in it is DOOMED to a depression, the likes of which has not been seen since World War One and many millions of people will be thrown into poverty.

It will also have a knock on effect to Europe unless Britain revives its economy NOW.

[GB£.com]

"Backed up by insurance it can be put in place without detrimental loss to Joe Public"

Only if the risk of the loan is professionally assessed and the premium is set to match that calculated risk.

Which of course would mean that many applying for loans should be rejected outright, and others will find the premium too high to make it affordable.

Otherwise, if loans are extended to any business as Cameron wants, and premiums are kept artificially low to make them affordable, the humble taxpayer will be shouldering a large risk.

If Cameron had used the word 'creditworthy' instead of 'any' it would have made sense based on the hole they have already dug for themselves with the recap/nationalisation, but 'any' business?

Lunacy. It could only be achieved by ignoring risk calculations that underpin the whole point of insurance!

[RichardJ]

Disturbingly interventionist.

"First and foremost, it means lower interest rates."

Savers to be clobbered again.

Deregulate the economy, cut taxes and spending, institute a sound currency. This will not be done by manipulating interest rates below their market level.

[pp]

GB£ did you read all the blog?

Near the end it says that (like the small firm loan guarentee scheme) it will not cover 100% of the loan - precisely to ensure that the bank apply sensible lending criteria.

The government get the benefit of private sector expertise for free -- no expense for the skills of unsuitable civil servants nor expenisve banker recruited for the purpose.

Not every one will get a loan - because not every one has a viable business !!

Compared to a full blown 'government bank' it shows how you can have lower costs and better service Tories 'work smarter'.

[rugfish]

"Only if the risk of the loan is professionally assessed and the premium is set to match that calculated risk. Which of course would mean that many applying for loans should be rejected outright, and others will find the premium too high to make it affordable".

Not necessarily GB£.
Firstly, you can't write the idea off before a risk assessment has been done so to do that is plainly unreasonable.
Secondly, it is banks and merchant bankers which are failing to lend and in some cases calling in loans too early ( GMAC for one ), which in Woolworths case has prevented their ability to meet suppliers costs which in turn knocks on to the ability of suplliers to carry on trading too if a form of guarantee is not put in place.

The goods have value so the risk is in part covered.

If a guarantee was worked on the basis of taking the cost of goods and the value of existing assets into consideration, then my guess is that a loan on that basis would be adequately covered and would not therefore fall to a taxpayer liablity ( except if the assets disappeared ).

Banks cannot be forced to lend either so its like knocking your head against a wall by Darling trying. They will secure themselves FIRST in this situation and they obviously are doing that, so unless banks are nationalised which would be a complete farce and lead to ruin of the economy all together, then nothing Darling can do will make them fritter away their own assets on businesses which they think might not be trading in future.

If you consider now that the reduction of VAT has already cost us £12 billion, then anything less than that is a plus.

Also, there is no justification to keep Stamp Duty as the buyers responsibility either, and moving it to the seller with a reasonable increased level to 5% would a ) not harm the market, b ) promote sales and c ) get the economy working again.

I would also look at removing low paid earners from tax and stop paying benefits which costs more in bureaucracy to deliver the same. No added cost but a real reduction in tax. In fact it would probably SAVE money.

Now we have MIRAS to consider and I would put that back immediately for first time buyers but with a term limitation of 10 years. Make a threshold of £80,000 and give those buying houses the ability to afford them so the market kick starts again. ( The alternative is to NOT gain any revenue from house sales with all the spin offs that implies to our overall economy in the shops ).

If Brown wanted to save jobs and kick the economy back into the black then these measures could be done with little of no investment and if there is a case to acually inject money ( which I think there is ), then that could be met from spending cuts and future spending plans which are many and totally unaffordable without an economy to pay for them.

[The Bishop Swine]

As a short term measure this makes some sense, just to get the system working again.
In the longer term it’s a very bad policy indeed and one that could potentially bankrupt the nation. It would have some nasty side effects though. I can’t see the gnomes liking it much, as it smacks of foolhardy intervention.