CITY AND SUBURBAN
Sterling and the banks go down with a fever of discredit
CHRISTOPHER FILDES
The man who got it right is Nicholas Luard, the only Chelsea Nationalist candi- date for whom I have ever voted at a general election, and author of Refer to Drawer. In this handbook of financial illusion he explains what credit is. 'Credit,' he says, 'is no more than the Latin for he believes it.'
The dangers of belief are always with us, and can be learned for the price of an IOU. Disbelief is more dangerous for being less familiar. It is with us now. The Govern- ment's credit can be no stronger than the Government itself, and the downward track of the pound sterling traces its own story. The Thatcher Government took us Into the Exchange Rate Mechanism six weeks ago — six weeks in politics can be an era — saying that we had accepted this value for sterling, and would stand by it and live with the consequences. The mar- kets were not sure that they believed it. They may well have been wrong to doubt her resolve, but they now need to ask; whose Government will take the decision? Or which governments, and when? So sterling has caught the infection which has been spreading through the financial system. There is a lot of it about. Think of it as a fever, worsening in Britain, endemic in America, transmitted by word of mouth, usually in whispers, and threat- ening to become general around the world. It is a disease of credit, and it has two phases, one acutely unpleasant — like chickenpox — and one just acute. The first phase brings the borrowers out in spots. Look at all these over mortgaged households. Look at the failing companies, more and bigger all the time. Who is safe, Who is next? Lenders think twice, borrow- ers scramble back towards cash. Credit begins to contract. We are well into this Phase now.
In the second phase, anxiety switches and becomes more sharply focused. Never mind all the bad debtors — what about their creditors? What about the institutions Which lent all this money and will never see it back? How solid are they? Who is safe, who is next?
These whispers now attach themselves to some of the biggest and best-known banks in the world. The banks feel the consequ- ences. They find it difficult or expensive to renew their capital. They find other banks cutting back their mutual lines of credit. Such anxious moments remind us what our forebears knew without having to be told — that banks,and the whole financial system in which they are central, depend on other people's belief. The banks knew that, too, until the other day. That was their culture, and was expressed in their architecture. Ogden Nash said it: Most bankers dwell in marble halls.
Which they do to encourage deposits and discourage withdralls.
Barclays' head office in Lombard Street was designed to resemble a great big stone money-box. It is a sign of the times that Barclays is knocking it down.
The National Westminster has an enor- mous country house which serves it as a staff college. There it shows its aspirants a set of accounts and asks if they would lend to the company. The brighter sparks tear it apart — in business with too much of its creditors' money and not enough of its own, marrying long term commitments with obligations which mature tomorrow. The brightest sparks spot that, give or take a nought or two, these are the accounts of the National Westminster Bank. They know that, in practice, all their millions of depositors will not simultaneously call their money out; not so long as they take its safety for granted.
They themselves can be taken for granted, when the banks' business is grow- ing fast. The textbooks say that banks first gather deposits and then lend them out, but at such times the textbooks gather dust. Then the aspirants rush round the country or the world, shiny briefcases at the ready, signing up borrowers. After- wards they call the back office and order up some more money. Any clerk, they tell themselves, can look after that.
So he can, until times grow more com- petitive — as when the high street banks, after a decade of golden margins, found themselves vying with each other to pay interest on current accounts. What can then happen, what is now happening, is that their capital cannot earn enough. Capital is their limiting factor, setting bounds to the deposits they can take and the loans they can make — but when they cannot earn it, they cannot raise it in the markets. The banks in their turn find that the umbrella-shops shut when it starts to rain.
Instead, they manage their balance- sheets — which is their euphemism for paring their lending to fit their capital. So their customers, with the rain now pelting down, have to get wet as well. They catch credit-fever in its first, or spotty, phase. In the second phase, the depositors catch it. They realise that their bank's capital is all that stands between them and losing their own money. Immediately, they wonder whether the bank can call its advances and ivestments in fast enough to pay them cash on the nail.
It is frightening how fast that secondary fever can spread. In America last month I could sense it spreading, from the failed `thrift' savings banks to big banks in New York and New England, and from the banks to the life assurance companies were they, too, stuffed with overpriced property and junk bonds?
What caused it, and what will cure it? The conventional answer blames a decade of deregulation, when, across the world, banks were given commercial freedom — to enter new businesses and new markets. Their supervisors retort that the banks were no stronger when locked into bad markets and out of good ones, against their better judgment. They say that their new internationally agreed rules, based on the banks' capital strength, are a better guarantee of safety. Certainly these rules, which originated in the Bank of England, have now forced the most eager players, the Japanese banks, to pick up their bats and go home. That may in the end be healthy, but now it makes credit even scarcer.
Walter Bagehot's cure for credit fever has stood the test of time: 'A panic is a species of neuralgia, and according to the rules of science you must not starve it.' Central bankers, he says, must treat it by making their own credit plentiful. That does not have to mean making it cheap but, now that dear money has brought on a recession, it must be counted as part of the problem. I wonder, though, if the next Government could accommodate a Chelsea Nationalist? We could use some- one who understands credit.
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