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.
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