Sunday, March 8, 2009

Mr Clegg banks on nationalisation

Harrogate - I have been astonished over the course of the weekend to hear both Mr Vincent Cable and Mr Nick Clegg, the present leader of the Liberal Democrats - as the party is now known, advocate that the government should take over the banks, taking what I understand to be 100 per cent of the stock.

These were astounding statements but Mr Clegg moved to reassure me that these are indeed astonishing times, unimaginable and unthinkable were words that he used. I was delighted to hear him expound these proposals for the reform of the banking system in detail. I may not yet be fully convinced that it is wise for the state to own the banking system but I am impressed by the argument.

Indeed Mr Clegg argued that the devastation to the present economy would be akin to warfare or the Great Fire of London. This, he said, would give a Liberal government an opportunity to build from the ashes a new economy and a new Britain.

I recall that in September I mentioned my experience of Overend & Gurney. These distinguished gentlemen sought aid from the Government to sustain their bank; they did not receive it but the financial system received the necessary sustenance. This lesson was ignored by the present British government which has put capital into banks whilst taking very little in return. Had my advice been heeded at the time, many scandals would have been avoided; those who were responsible for mismanaging the banks would not have reaped ill-gained rewards. Does this mean I think Mr Clegg and Mr Cable are wrong? Not of necessity. For what should happen in the United Kingdom is that banks that cease to be viable businesses should be placed in administration; the process of administration does not mean that all trading ceases; it does mean that those departments of the bank that have gambled recklessly can be closed down. It also means that the directors of the bank can be held accountable in law. If they issue unwarranted awards to themselves, they may face prosecution.

Indeed this was what Mr Clegg urged today; that directors face scrutiny and penalties if they have failed to act in the interests of their shareholders and customers.

It would certainly be astonishing if banks as large as those that operate in this age were to be placed in administration; it could, as a possibility, mean hardship for those who hold substantial shareholdings to support their pension arrangements. But administration is not the end; for the job of the administrator is to find a new owner and to recover that which can be recovered for all creditors. In such a situation Mr Clegg and Mr Cable would be justified in putting their plan into force; their government would then be well-placed to implement those further reforms proposed today by Mr Clegg.

For Mr Clegg then proposes that two different kinds of banks should be established; indeed until quite recently banks operated in such a fashion. The bank on the High Street served businesses and individuals while the banks in the City of London sought to invest capital and trade on the exchanges. Mr Clegg proposes a stark and legally enforced division of the banks: the one kind would serve the public and be subject to strict rules of procedure and conduct; the other kind would be allowed to raise capital and take risks - but would be prevented from seeking government aid in any circumstance.

Dimidium facti qui coepit habet; sapere aude; incipe!


1 comment:

Geoffrey Kruse-Safford said...

It seems to me that you are urging what is being called here in the US a socialization of the benefits, while privatizing the costs of rescuing the banking sector. Of course, we have a few dolts in government here - Sen. Richard Shelby from Alabama and Sen. John McCain from Arizona - who are advocating simple bankruptcy of failed banks (which they do not seem to understand is actually happening as our Federal Deposit Insurance Corporation takes over about two to three banks a week, which is tantamount to bankruptcy and nationalization).