As I posted before Xmas "each party promises something more generous than whatever it was that the other party just promised, at the moment, government guarantees for such lending [to small businesses] are top of the agenda.". We appear to be 'going live' with this now, Labour has promised to underwrite £20bn of loans to small business.
Righty-ho, here's a quick list:
1. Let's rule out the Tories' proposals first. The "Conservatives are calling for a similar plan offering a £50 billion commitment". According to the FT "Defaults on loans covered by similar schemes since 1981 have run at 28 per cent...", so 28% of the extra £30 billion = £9 billion of taxpayers' finest lost, which makes a mockery of the Tories' promise to increase government spending by £5 billion less than Labour. That puts the Tories £4 billion in the red.
2. Market interest rates are incredibly difficult to pin down, being a mix of inflation expectations + risk free rate of return + risk premium. What is the risk premium that the Blandford Forum branch of the NatWest should charge Aunt Betty's Teashop for a £10,000 overdraft that she dipped into and out of for decades? How does that compare with the risk premium that the Laisterdyke branch of the Yorkshire Bank should be charging young Arthur Simmonds who has recently taken over his retired father's car-repair workshop and wants to invest in a new spray booth?
3. A proper bank has to make an estimate in each individual case - if they ask too much, Aunt Betty or Arthur Simmonds will either take their business elsewhere; not make a profitable investment or go out of business. If the bank charges too little, then the defaults will outweigh the average risk and the bank managers concerned will be in trouble. It is only if the bank gets this right that the economy can blossom.
4. It is said that the government will charge for the guarantee. Yeah right. Unless they intend to duplicate all the paperwork, due diligence and local knowledge that the banks have already carried out, I guess they will charge a flat rate, maybe 1%. In the case of Aunt Betty's Tea Shop, the bank concerned won't bother (or will charge her the correct risk premium of 0.5% anyway), but with young Arthur Simmonds the bank might say, go for it, what can we lose? Does this sound like a recipe for yet more 'reckless lending'?
5. Once The Quangocracy and The Righteous realise all this, they will ask "Why should the banks lend money to young Arthur Simmonds with his climate-change-causing-car repair workshop? We think that the banks should lend to The Malcolm and Cressida Ethical Living Awareness Project." That way lies chaos.
6. The government assumes that banks want to lend in the first place. Why should they? This is a recession, a time for deleveraging, safety first and all that. UK banks have a cushy risk-free (or at least, they incur no extra risks) cash income of £136 billion per annum from routine residential mortgage repayments and redemptions, which has to cover £40 billion-odd in mortgage write-offs. Further, banks have their own creditors snapping at their heels - bond holders and the original government bail out of £37 billion (on which they are paying much higher interest rates than the 1% they are paying to normal account holders), so they'd rather hoard cash to be able to keep these wolves from their door than do any new lending.
7. Because of the way the UK economy works, banks prefer secured lending against property values - whether the property is owned by the company or the directors. With property prices sliding, that's a bit of a no-no. New mortgage lending has slumped by over 90 per cent, and seeing as property values underpin business lending, who's to say that the same doesn't apply to business lending?
8. As ever, there is the problem with definitions. On Planet Wadsworth, we accept that there are economies and diseconomies of scale, some types of businesses are small, some are big. That does not make small businesses more worthy; neither does it imply that the bigger the better. But in terms of vote-buying, small businesses are more important. So they've decided that the cut off point for the scheme is 50 employees. Is that 50 employees, or 50 full time equivalents? What if the business is doing well, and had 40 last year and has now reached 53? Does that rule them out? Should that business sack three workers, or more likely, have them leave and re-appear as 'consultants' or self-employed. And why 50? Why not 10, or 100 or 273.9? What if a business with 50 employees takes out the government backed loan and opens a new branch and now has 57 employees? Does it then have to repay or re-negotiate the loan?
Answers on a postcard, as ever.
Tuesday, 13 January 2009
Why the government loan guarantee scheme won't work
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7 comments:
As you know Mr W, I'm just a big fat softy and I can see a potential benefit in this scheme.
In principle there is no reason why it cannot work like any other credit insurance, giving additional security to the banks and allowing some marginal loans to be made which would otherwise be refused.
Of course it requires the government to act like a professional insurer ... ho hum.
Don't even need a postcard - "It's bollocks".
where else to go though?
as you point out very well, this seems to be full of complexities, and perhaps open to a touch of fraud?
i hear many commentators saying we "need to take the pain". mainly from captains of industry who presumably wont have to eat own brand porridge morning, noon, and night whilst sitting in three layers of clothes.
The number of employees is immaterial. It has generated the required headlines and taken the wind out of the Tory's sails.
Like all NuLab's proposals it will die a death of a 1000 cuts aka pages of bureacracy, and only those with the stoutest of hearts will eventually get something.
TFB, the banks do 'self-insurance' or 'risk pooling'. They make thousands of loans, a few dozen go bad. The premium that they charge the others should cover the losses. There is no need for anybody else to bear these losses.
I believe 50 employees is the point at which a lot of government regulations kick in. Consequently competently run businesse make great efforts to ensure they don't have 53 employees.
Like you say, a waste of time + money likely to make things worse. All we need know is that it is another attempt to create a supposedly vote-winning impression of action and (don't laugh) competence. If Brown and Mandy were capable of actually trying to work out how to buy votes it might look different - but this shit is just nonsense, like classic Brown claims and boasts and lies.
What none of the economists (a title which should be stripped from most of them) attempt to do is say how this (or any other daft idea) will interact with all the other ineffective rubbish they have been doing for months now. How is any one scheme related to (falling BoE) interest rates, recapitalisation, employment subsidies etc etc. It's like town planning - by the time 20 different traffic schemes have been created (each one separately and spuriously justified on different grounds, and then changed because they don't work) the town has been reduced to complete gridlock and a whole new round of schemes to "solve" it is "required".
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