So Alistair Darling is going to “get tough” with the banks over their lending rates. Don’t make me laugh! The fact is that the banks have simply stuck two fingers up to the government and let New Labour know that when it comes to real power, they are in charge.
After all, the banks have called the government’s bluff once and they know they can do it again. Since the autumn of 2007, when Northern Rock collapsed, the government has propped up the banks to the tune of £1.3 trillion– more than half the value of a whole year’s output of the entire economy.
The outcome? Closures and government-enforced mergers have left the banking sector dominated by just a few operators, who are using their monopoly position to charge exorbitant interest rates while rationing the scale of their loans to those in need like homeowners and small businesses.
The official bank rate is 0.5% yet according to a recent survey, the banks are often lending at between 4-5% in a desperate bid to rebuild their balance sheets at the expense of customers. Mortgage rates have seen the sharpest rise. Three months ago, the price of a typical two-year fixed mortgage was 4.65%. Now it's 5.17%.
Michelle Slade, of the financial information website Moneyfacts, said potential profit margins – the difference between what it costs a bank to borrow the money itself and what it charges its customers –are the highest ever on record. "Typically we would have seen a 0.8% margin on top of their product. Now we are seeing a 3.1% margin," said Ms Slade.
Behind the scenes, the banks are still not lending to each other for the simple reason that the real extent of toxic debt in the system is still a secret – especially from the government! What this clearly indicates is that another stage of the global financial meltdown is on the cards.
This could centre on credit card defaults, which has already hit major American banks. The International Monetary Fund estimates that 7% consumer debt in Europe will be lost, with much of that falling in the UK, the continent’s biggest nation of credit card borrowers. A UK national debtline says calls about debt arrears reached 41,000 in May – double the number it received in May 2008.
With millions of homeowners in negative equity, for example, the previous practice of remortgaging to pay off credit cards has disappeared. Banking analyst Sandy Chen says that the poorer sections of society are being hit hardest, with roughly half of UK households “facing negative cash flows, an inflationary environment and the combined threats of negative equity, difficulties in refinancing or remortgaging, and unemployment” while top earners are seeing their real incomes actually rise.
The bank bail-outs (which have signally failed to revive the financial system) and falling revenues from the economic recession have led to the spectre of state bankruptcy itself. Add in the political bankruptcy gripping Britain and you could see what a dangerous moment this is. It could conceivably produce a national coalition government to “save the nation” by imposing massive spending cuts and tax rises.
The price to try and save a failed capitalist economy and banking system is not worth paying. Far too much hard-earned taxpayers’ money has been wasted already. A more practical solution would be to bring the banks under public ownership and control without further compensation or bail-out payments. Then we could strip out the toxic debts and bury them somewhere deep in the ocean. Mortgage and credit card debts would be renegotiated or written off so that ordinary people did not suffer. In other words, we need to relaunch the entire banking system on a new footing, a task patently beyond the capacity of the bankers’ government, New Labour. Drastic? Too revolutionary? Got any other suggestions?