3 Oct 2012

Business Debt, the Media, and the need for a debt jubilee.

One of my personal aphorisms is that media is all about entertainment. Forget about their pretensions to educate and inform, because they'll always be secondary to titillation and diversion. I got a smile out of page one of the Business section of the 30.09.12 Sunday Times. (no links because of the pay wall).

Centre left, with a large bold heading

FSA calls banks' bluff on lending 
- byline Dominic O'Connell.

The Financial Services Authority and the government are desperate to get banks lending more to the real economy. At present banks mainly lend for gambling on financial instruments, and just 10% of loans go to the real economy. And one of the obvious consequences is that business investment is well below what's required for GDP growth. And everything in mainstream economics is predicated on growth. Government, including LibDem Business Secretary, Vince Cable, are using carrot and stick to get the banks to lend. But banks have sobered up now.

Below this, at bottom left is another story:

HSBC forced to rescue rubbish collector Biffa from scrapheap 
- byline Ben Marlow.

In this story we learn that Biffa, like Travelodge, was subject to massive debts. Biffa was bought outright and taken off the stock market in 2008 in a deal financed by £1.1 billion of borrowing. Note that this is after the Credit Crunch began. And note that it was Biffa itself that was left paying the interest on the loans that the buyers took out. The interest burden has, as in the case of Travelodge, driven the company into insolvency. The Times reports this thus:
"Like many private equity deals during the credit boom, Biffa took on more debt than it could bear. Profits were wiped out by large interest payments while debts stayed the same."
After, Ben, it was after the Credit Crunch began. And Biffa did not "take on debt" the idiots who bought the company took on the debt and somehow (no one has yet been able to explain this to me), somehow the company itself ending up paying off the debts of these idiots.  The total value of stock was £1.7 and they borrowed 65% of this. Another going concern wrecked.

The Sunday Times mentions my favourite example Travelodge, and adds Fitness First and EMI as victims of this bizarre practice.

As I pointed out in my last post, the level of debt in the UK is massive. Various measures are hard to put in context. Collectively we owe 4.5 time the total output of the UK. Collectively we owe 135% of the total net worth of the country. Collective we each owe about £120,000. A lot of it is down to these 'private equity deals'. The word equity seems strangely misplaced in that sentence, doesn't it?

And the government and the FSA see the only way forward as being to squeeze even more debt into UK plc? Even the greedy banks who, stripped of any over-sight and rules, created this problem by blithely creating such massive amounts of debt in the first place, even these fat cats can see that it's a problem. The UK is massively over-indebted and the interest payments are killing demand.

Meanwhile the banks are happy to use interest rates of 0.5% to refinance all their loans and improve their own situation viz interest payments. But they must be worried as these insolvency cases increase - the number of business insolvencies is on the rise, because banks' cashflow is dependent on solvent debtors.

The last little tidbit in the first story is this:
"Regulators have made several, but largely unreported, changes to the rules on capital reserves and liquidity buffers."
At first sight this looks like good news. But then as you read on you realise that for every measure to force the banks to behave more responsibility, the panic induced by the prolonged recession, has led the FSA to build in loopholes that banks can easily exploit to get around any restrictions. It's business as usual but with spin to make it look like things are changing.

The quandary is this. In a prolonged recession caused by too much debt, we need the banks to be restrained in creating more debt. Even the FSA seem to dimly understand this. But they also fervently believe that the only way to produce growth is for the banks to lend even more money (hopefully to different people and businesses). But more debt will only make the problem worse because the burden of interest payments will magnify the problems we have.

Vince Cable wants to get around this by creating a large Bank of Dave - that lends to business. But instead of using savings, he's going to borrow the money to do it. So he's not going to be paying 5% on savings, even if the government can borrow at almost zero interest at the moment.

I'm obviously in favour of a debt jubilee. However it's never made more sense than it does right now. In the Modern Debt Jubilee the government uses quantitative easing to give money to people, with the proviso that the money must be used to pay off debt before spending (this helps to ensure that the money goes to the right place, and makes it fairer on the prudent who have saved money). Their are 50 million adults in the UK. I think the government should every adult  £10,000. That's £500 billion or a little more than QE to date.

Personal indebtedness drops dramatically. This means people spend more. A lot of those 50 million spend everything they earn, and they're likely to spend all of the £10k. Business picks up because demand picks up, and interest payments become affordable again. Government tax revenue picks up, which is the only way they're going to deal with the deficit.

The downside is that banks experience a precipitous drop in income. Maybe some would become insolvent. This time we let them and distribute their assets into smaller banks. This helps to break up the monopoly of the big banks. The first thing that creditors have to do when a company goes bust and they take control of it, is to forgive a big chunk of debt (40% for Travelodge).

However this is a relatively short-term solution. It solves out immediate problem. But it's going to happen again. We need to think about the longer term. We need to have a wider discussion of concepts like steady state economics in which growth is not the imperative. We have to ask ourselves whether endless consumption of shit we don't need is really what life is all about.

1 comment:

  1. UK MSM starting to get the need for a Debt Jubilee http://www.telegraph.co.uk/finance/comment/9591511/Subtle-shift-signals-profound-change-in-bank-regulation.html

    Lets hope so. And I am speaking as someone who doesn't have a single penny of mortgage or consumer debt.

    Need to read the whole article.


Keep is seemly & on-topic. Thanks.