The Hindu Business Line : Brown’s booster for banks

In an unprecedented move that turned politics and economics on their head, the British Prime Minister, Mr Gordon Brown, has ordered what tantamounts to part-nationalisation of banks. He is putting through a massive cash injection of £50 billion to rebuild the balance-sheets of what are euphemistically called high street banks but seem caught in narrow financial cul-de-sacs. In a supportive action, and as widely expected, the Monetary Policy Committee lowered the ban k rate by 50 basis points to 4.5 per cent.

The re-capitalisation move is to staunch the bleeding in the banking industry, and in expectation of confidence returning to the system that would encourage banks to begin lending again. In return for the capital injection, the government is expected to get preference shares, and Mr Brown is expected to insist the taxpayers receive generous dividends and profits if share prices recover.

The plan may also include government representatives joining bank boards, caps on remuneration for bank CEOs/chiefs, and a fund to ensure day-to-day operations.

The flip side

While the recapitalisation move has been welcomed, there is the other side to it too: A 50-billion pound infusion would throw out of skew the planned public borrowing this year, pushing public sector net borrowing close to £100 billion or over 6 per cent of national income, worse than any year since 1994-95. Together with the poor independent forecasts for public finances, the Chancellor of Exchequer, Mr Alistair Darling, will have heavy explaining to do on how the government will go against its own prohibition of borrowing at will. But possibly he has little choice as the British economy seemed headed for a recession.

Indeed, all indicators point to a rapidly worsening situation, with the latest British Chamber of Commerce survey claiming orders on hand with the manufacturing business at their lowest since 1998. The service sector’s domestic orders had declined “alarmingly” to levels not seen since the recession of the early-1990s. So had domestic sales.

This is merely a corroboration of the Office for National Statistics estimate that the economy had stagnated in the second quarter. After adjusting for inflation, the economy had expanded a mere £1 million between April and June than it was between January and March, the lowest quarterly rate of growth since 1992.

The widely-watched manufacturing Purchasing Managers’ Index tumbled to 41 in September, from 45.3 in August, signalling a sharp contraction. It marked the fifth successive month of fall, and the lowest level of activity recorded since the survey began in 1992, driven down by declines in new orders, employment levels, and output.

Rewriting the rules

The credit crisis seems set to rewrite all the rules of the finance game, signalling an end to laissez-faire, buccaneer banking. Perhaps, it is time for some good old regulation and the stronger hand of nation-states. Whoever could have believed nationalisation of banks in a modern capitalist society as that of the UK? Mr Brown’s is a desperate move and if this does not work, wonder what will.

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