Osborne’s next trick: sub-prime companies?
Fraser Nelson 3:20pm
About 15 years ago, Bill Clinton wanted to promote home ownership among the low-paid,
but was annoyed that banks wouldn’t lend freely or cheaply to that group. So, the federal government intervened with Freddie Mac and Fannie Mae selling government-backed mortgages at
knockdown rates. Nothing showed up on the national debt, because the loan would — in theory — be repaid. The seeds for the sub-prime crisis were sewn.
Today, George Osborne wants to promote recovery and is annoyed than banks won’t lend freely or cheaply enough to small businesses. So, the Treasury will intervene by lending money indirectly
by backing a new bond market that lends cash to small companies. The loan won’t show up on the nation’s books, because the assumption is that the companies will repay. This will not
mean sub-prime companies, says the Treasury. This is not interfering with the market, it’s just incubating a new market. The British government-backed loans — which will be in billions,
we’re told, even tens of billions — will be completely different to the American government-backed loans. There is no risk of this all backfiring.
We do not have many details about his scheme: the Chinese government seems to be the only one overseeing SME bond
placements, and the fuller picture may make more sense. But the last crash taught us to be nervous when government decides to enter the banking business; more when new wheezes involving
securitized debt are announced; and even more nervous when the Treasury comes out with a scheme to funnel borrowed cash into the economy without it showing up on the books.
I take an old-fashioned view on this: if banks are not lending, it’s probably for a reason. If Britain does not have a developed system where smaller companies issue bonds, then that, too, is
probably for a reason. The Treasury believes that the banks have missed a trick, and should have been more innovative in lending to small companies. In 1995, the Clinton Administration said the same about the US mortgage industry. The Treasury’s view is that Britain’s banking system is
“impaired”; that perfectly creditworthy companies are being denied funding due to liquidity problems which the AAA-rated UK government is in a position to fix. My colleague Bounderby
points to charts 1.1-1.3 here, which indicate a problem with bank funding relative to other sources of
funding.
I agree with what Osborne says: that we can’t borrow our way out of a debt crisis. I’m more sceptical about what he’s actually doing: borrowing a greater amount in five years
than Labour did in 13, and discovering a debt-concealment trick that eluded even Gordon Brown. The Bank of England wants nothing to do with it. They bought about £2 billion of corporate bonds
in the first round of QE, but Mervyn King thinks it’s an inappropriate risk for the Bank to hold. Fine, says Osborne, the Treasury will happily step in. And it’s able to borrow at 2.5
per cent: why not spread this good fortune?
Again, I may be being horribly unfair to Osborne and he has yet to provide proper details of his attempts to — as the Treasury put it — stimulate a deeper and more liquid SME bond
market. My concern is that this is just another mutation of what Allister Heath described as the ‘bond
bubble’: a freak situation which can end at any time. If we learned anything from the last crisis it’s that when politicians start to decide who is creditworthy and who is not,
it’s usually time to head for the air raid shelter. Perhaps there is a good reason why the logic which gave us sub-prime mortgages will not now give us sub-prime companies. It was Sam Gyimah,
a new Tory MP, who suggested this scheme to George Osborne in July —
we’ll try track him down, and ask him to explain some more.
PS: The definitive piece on the Democrats and the sub-prime crisis was written by our contributing editor, Dennis Sewell, in a Spectator cover piece three years ago.
Previous
Matthew Oliver
October 3rd, 2011 3:36pm Report this commentYou are not being unfair - the Chancellor is stupid to announce something that he has no details for. As a Conservative it gets rather hard to defend them when they keep announcing policy with little or no details...
Bob Dixon
October 3rd, 2011 3:42pm Report this commentUnless you have a product or service that will walk off the shelf, some monies of your own and collataral,the banks will not help.
No one is setting up new busines's as the climate is not right.
faust
October 3rd, 2011 3:43pm Report this commentIf the City thought this was a brilliant idea they would have done it years ago.
jheath
October 3rd, 2011 3:44pm Report this commentOh dear, oh dear, oh dear.
Just another elitist politican deciding that he has to intervene at the taxpayers' risk and cost because he thinks that the market does not work. If it does not work, then fix it so that it is a market! Don't meddle with such wilful ignorance. Gordon Brown lives on as Chancellor.
Heartless Perry
October 3rd, 2011 3:59pm Report this comment"It started in America . . . . "
(but of course like the idi*ts we are, - or reckoned to be by the Great Economic Pretender - the UK obediently followed, - safe in the hands of the likes of Freddy Shredder!)
And folk thought they were on a roll!!
LOL - as some say!
damck
October 3rd, 2011 4:09pm Report this commentIf I recall correctly, it was actually Mrs Clinton that used her social engineering (vote buying) agenda to twist Mr Clinton's arm up his back.
In2minds
October 3rd, 2011 4:18pm Report this commentSo with Cameron as H2B and Osborne as H2C, heir to Clinton, what hope is there?
Stuart Seacole Smith
October 3rd, 2011 4:18pm Report this commentI suppose the real test of whether or not there is a dangerous parallel with US Freddie Mac and Fannie Mae sub-prime mortgage lending will be what credit-worthiness tests are put in place for small companies wishing to benefit, and to what extent this is independently administered.
It seems to me small companies are not automatically high risk in the way that sub-prime mortgage lending was; though they are far more complex to assess. Having said this, banks' reluctance to lend to small businesses is a clear warning sign, after all, for all their faults they've been in the business for quite some time.
rebuplican tory
October 3rd, 2011 4:20pm Report this comment"I take an old-fashioned view on this: if banks are not lending, it’s probably for a reason"
Which probably why you are a journalist and commentator rather than a businessman.
se1man
October 3rd, 2011 4:29pm Report this comment@Bob Dixon
"No one is setting up new busines's as the climate is not right."
Really? I must be "no one" then because I started a new business in the teeth of the recession in early 2009, and am also about to launch a new venture.
I'm not sure that the climate is ever completely right to start a new business, but it's never completely wrong either, and in my experience people who claim that the timing isn't quite right will never take the terrifying start-up plunge.
In fact, a recession can be a damn good time to start something up: competitors are falling out of the market, office space and staff are both plentiful and cheap. Most start-ups won't make any money in year 1 or year 2 anyway, so use that time to make some mistakes, learn some lessons, and be fighting fit for when the good times return.
Of course it's tricky to get cash out of the banks, and if they won't lend to me then I don't expect the Treasury will (or should) either.
But there's lots of VC/Business Angel money out there. And there's always Dragons' Den (although they wouldn't give me any money last year. Fools. But hey, it was great PR!).
PuppetMaster
October 3rd, 2011 4:29pm Report this commentThis is called socialism. And we're going to get it good and hard, to paraphrase Mencken.
nonny mouse
October 3rd, 2011 4:34pm Report this commentFraser: have you ever run a small business?
Do you remember the old days where you had a local bank manager at a local branch who understood your business and wanted to help you?
Do you understand the difference today, where many of those local branches have been closed down and bank managers are more interested in implementing centeral office dictats so that they can earn their bonuses?
I know the addage goes 'those who can do, those who can't become journalists', but please can the Speccie get someone with a little business experience to talk about business issues and leave Fraser to his political campaigning.
DavidDP
October 3rd, 2011 4:36pm Report this commentSorry, is Fraser really, after the last couple of years, arguing that the banking market knows all?
Gawain
October 3rd, 2011 4:45pm Report this commentWait a minute, you told us at the weekend that Osborne is "smart" ! There is a difference between being "smart" and being "sharp". Interesting that Andrew Tyrie is praising the speech. It seems to me that we are all hostages to the Euro collapse and until that is sorted all our politicians will be clutching at straws.
Where I do agree with Osborne is on the banks. They are incapable of assessing or taking risks. Easing credit will help but it has to be a sound scheme that doesn't leave the country with a huge unfunded liability five or ten years from now.
Dave B
October 3rd, 2011 4:58pm Report this commentI think in opposition Cameron argued for small businesses to have a longer grace period between collecting VAT and passing it on to the Revenue. (Good for cash flow).
Andy H
October 3rd, 2011 4:59pm Report this commentThe point of Government is not to actively participate in the market. The role is to regulate the market.
The Chancellor would be better placed to encourage business by removing barriers to entry, not to try and finance businesses.
How about
1. Removing all the daft employment laws and steeping away from contacts between employed and employers. Not all companies can afford to keep a position available for 1 year to cover maternity leave.
2. Remove the National Minimum Wage. If a job is economically viable, then someone will do it, even for a low amount of money.
3. Get rid of Employers NI contributions. Companies should pay tax on their profits, but not on the number of staff they have.
4. Reduce the rules and regulations on Childcare, so that it is cheaper to run a nursery and more mums can afford to return to the workforce.
5. Reduce the top rate of tax to 35% to encourage more entrepreneurship.
6. Get someone in Government that has actually had real experience in running a company, not a socialist ex economist.
mongoose
October 3rd, 2011 5:11pm Report this commentNothing new under the sun.
This is the "Macmillan gap", from the report of the Macmillan Committee of 1929 (not Harold btw). Keynes was on the committee. The "gap" in finance it identified is precisely that which Osborne is addressing, i.e. the difficulty sme's have in getting finance for their investments in a financial downturn.
But ... you never step in the same river twice ...
Salopian
October 3rd, 2011 5:21pm Report this commentThere's a fundamental difference between Osoborne's and Clinton's proposal. It'll be the banks which will decide whether or not a an SME's application is viable.
Frazer implies that the reason banks don't lend is because the projects are unsafe. Perhaps... in some cases: but more often then not they're cherry picking the risks bevause they lack the liquidity to take notmal commercial risks.
This proposal could bring a more even playing field for risk. It's worth trying or at leas piloting.
Ian Walker
October 3rd, 2011 5:29pm Report this commentFraser, the problem is that the reason that banks are not lending to small businesses is that they are (in that area at least) acting as a de facto cartel.
If it were possible for small outfits to lend money to each other there would indeed be a very lively market for it, but the current regulations around that are so onerous, it's virtually impossible to set up even a new mutual building society (for starters, there is a minimum starting capital of a million quid)
The big banks have pulled up the drawbridge so that no-one can move in on their turf, and like all such organisations have turned to extortion to get them through the tough times.
The simple fact is that you can have the best business plan and the most most solid accounts and you will be offered NOTHING from a current business bank except for a businesss credit card with a 30% interest rate. That's painful but acceptable for dealing with a cashflow issue, but for tactical or strategic investment it's a total non-starter.
So I expect that Osborne, rather than going down the painful and politically tricky route of loosening bank regulation (so that new, agile, small banks could be formed), this is a way to force the hand of the cartel by extending an alternate credit line to the SMEs out there - effectively these bonds will set a cap on the rate that banks can charge.
Kevin
October 3rd, 2011 7:26pm Report this commentIt would be helfpul if SMEs could open up National Savings accounts, as the interest rates offered on business bank accounts can be lower than those on personal accounts with the same bank.
I would also question faith in the banks' social ethics. I understand they have received tax and QE money with the direct intention that this should have been used to help their fellow countrymen weather the storm. It does not appear that they have passed on the good will, though I would be happy to stand corrected on this.
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