# Why should the government pressure the banks into extending credit?



## darag (19 Nov 2008)

I'd like to throw a controversial idea out there.

I don't even find it at all self-evident that the government should force banks to lend or extend credit to Irish businesses.

To make an analogy, consider oil.  Ignoring the arguments about peak oil just to make this point, assume that the price starts to rise as oil finally starts to  run out.  Many businesses depend on cheap oil.  In such a scenario should the government subsidize oil?  I would argue that they should not.  The businesses should either pass on the costs to their customers (if they can) or need to adopt their business model in the new high-cost oil environment.  You do not want government funds going into defunct business models which would not be viable without direct or indirect government money being poured into subsidising the cost of one of their inputs.

The cost of credit (and everything is cost; pay enough and someone WILL lend you money) is an input cost for business too.  The era of cheap and easy credit may well have been a historical blip and businesses should not depend on it's existence for their viability.  Businesses which depend on cheap credit need to adopt to the current environment by passing the cost onto their customers or else, if they cannot function without cheap credit,  they should simply cease trading.  At the other end of the scale to most Irish SMEs we saw that Northern Rock's mortgage business model was dependent on cheap and easy credit but there was no call for the British government to subsidise it's business model.


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## Brendan Burgess (19 Nov 2008)

Most businesses depend on credit and so the economy and the jobs of the citizens depend on credit. 

Credit has dried up and so the government must take action to provide credit again. 

I don't see why the banks should have to provide it. As a shareholder in AIB I don't want to see the bank losing money by providing credit due to government instruction. However, the banks are supported by the government guarantee, so maybe this is the price.

I think that the government should just buy Bank of Ireland for 1 billion euro and then use it as the vehicle for providing credit. 

Brendan


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## PM1234 (19 Nov 2008)

> I think that the government should just buy Bank of Ireland for 1 billion euro and then use it as the vehicle for providing credit.


Why BOI and not AIB or Anglo? I didn't realise all debts from all banks have already been exposed?


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## roro123 (19 Nov 2008)

Sorry was trying to quote but messed it up.




> To make an analogy, consider oil. Ignoring the arguments about peak oil just to make this point, assume that the price starts to rise as oil finally starts to run out. Many businesses depend on cheap oil. In such a scenario should the government subsidize oil? I would argue that they should not. The businesses should either pass on the costs to their customers (if they can) or need to adopt their business model in the new high-cost oil environment.




The one difference between Oil -(tangible finite resource) and Credit - (fictional confidence based pyramid scheme) is that Credit is entirely invented from fractional reserve capital. 
The money that is lent to you over 30-40years is the future extraction of your labour,manufactured goods and services. The interest you pay is what keeps the scheme going. The credit is manufactured from the deposit you give the bank. The bank is allowed by the system/governments to create credit to the value of 1000% of what you already put into the scheme. This works nicely when lending rules are rock solid. The minute credit is created from nothing (100%+ mortgages) and given to folks who can never payback the plan, then it all starts. The banks have to use their real capital to cover these bad debts, and its amplified by the rules being stretched in the first place.
This is where the deck of cards comes down. Low interest rates amplified the effect, public pressure and special interests, also allows rules to bend, ( First mortgage application I made was turned down - It was 2.5 times my salary + 1), six months later I went to another institution, (got 6.8 combined salaries). I remember one of the questions on the application was " Have you ever been turned down for a mortgage" -to which I answered yes, but that didn't seem to be a problem.
In that six month period there was consternation amongst the public that demand on house prices was pushing them up to levels where all ordinary workers would not be able to buy houses. All of a sudden the rules were relaxed and competition kicked off and apexed with the 100% mortgage. That is why the banks are in the doldrums, although I remember they were all being criticised then for being too strict with the 2.5+1 10% deposit rules. Looks like they are damned if they do and damned if they don't.

BOI for €1 Billion - I don't think so. NIB which had 2% market share at the time was bought by a Danish bank along with Northern Bank for just short of GBP£1 Billion.

Both BOI & AIB called the top of the market when they sold and leased back the banks branches & head offices, anyone looking to buy them will have to buyout or buy-in to those leases, some which are 20years long. If any private equity comes in to these banks, the stock will be diluted and the new majority shareholders will demand layoffs and branch closures. Another alterative is to allow both AIB & BOI to merge but that will result in greater layoffs and branch closures.
As far as this goes , who knows, but one thing for sure is its Fianna Fails baby- credit where credits due!

Roro


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## NorthDrum (19 Nov 2008)

roro, what is your idea exactly?

that we let money or credit facilities vanish at the expense of EVERYBODY?

You do realise that that our whole economy was built around the banks (rightly or WRONGLY) and that everybody (rich brandy swiggers aside) benefit from money circling the economy.

I know what you are saying in principle about oil but its not really the same thing. Money isnt just tight for businesses, its tight for us all. We cant get mortgages, credit cards or overdrafts. When something is in the interest of the whole country, then I think under the exceptional circumstances its acceptable to take evasive action.

And you are right (just read your second post), its fianna fails baby, but its the nations burden to bare ! !


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## z109 (19 Nov 2008)

They shouldn't. They should set up a new lending facility direct to businesses. Operate it through the revenue so businesses can claim back taxes on profits and payroll for way previous years. If they didn't ever make any profits, then sorry, they are probably not going to survive the downturn.


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## Brendan Burgess (20 Nov 2008)

PM 1234 asked



> Why BOI and not AIB or Anglo?



All of the banks are different. 

AIB can survive by battening down the hatches. It can also sell two valuable assets - its Polish and its American subsidiaries. 

Anglo may not be solvent. It's just impossible to tell. There is no point in putting any more money into it. 

Bank of Ireland is by far the cheapest. It's probably solvent and has the structures in place to act as a conduit for the government's increased supply of credit.

Brendan


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## z109 (20 Nov 2008)

Brendan said:


> AIB can survive by battening down the hatches. It can also sell two valuable assets - its Polish and its American subsidiaries.


I don't see that they are valuable. They will both need capital as the unwind continues. The Polish operation had a sort of downgrade by Moody's yesterday (from positive to stable http://www.istockanalyst.com/article/viewiStockNews+articleid_2814872.html). This reflects the downturn in the Polish economy. As the downturn deepens there, the Polish operation will be worth less. If the zloty comes under pressure (like the forint has), the operation may be worth very little. The time to sell both stakes and realise a return has passed. There are now too many 'good quality' distressed assets for sale and too little capital willing to take a risk on them. I would guess that the current booked value of the stakes already way exceeds the market value.


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## darag (20 Nov 2008)

*Re: Why should the government attempt to maintain access to credit?*

The title is misleading and probably distracts from the point I wanted to make which was to ask why the government should be expected to subsidise cheap and easy credit at all?

One view of what's happening is that "credit has dried up" and that the government "should do something" about it.

An alternative is that offering credit at the rate at which it has been available for the last 5 or 10 years is no longer commercially viable.  The economic situation is shakier and thus it is riskier to extend credit to small businesses.  In addition the wholesale cost of credit has risen considerably.  Why should individual businesses be shielded from this new economic reality?  In particular why should government money be spent on providing subsidies attempting to maintain a historically unprecedented low "retail price" of credit?

For example, let's play with Brendan's opening line:


> Most businesses depend on oil and so the economy and the jobs of the citizens depend on oil.


Which is true but it doesn't inexorably follow that the government should buy an oil distribution business and sell oil at below market rates.

Only roro has attempted to argue that money is not a commodity but I'm afraid I don't find their arguments convincing to be honest.

I also think that some are somewhat confusing two very separate separate retail banking functions.  It goes without saying that economic activity without the payments and clearing system provided by the retail banks would be effectively impossible.  However, bank's lending departments are completely separate to payments/clearing.  Neither is dependent on the other.

I also question whether a critical  dependence on cheap credit is a general feature of Irish businesses.  In fact I would imagine that most healthy businesses have some sort of positive equity (i.e. cash in the bank).  Of course there are sectors which depend heavily on borrowing - much of the construction/property industry for example - but I'd rather they adopt to the new reality rather than have the government get involved attempting to "help".  There is little convincing evidence that ALL businesses are suffering because of a lack of credit.  It seemed to me that the shop-owner who was used as a typical example of the small businessman who is suffering from a lack of access to credit in the segment on the news was actually suffering a cash-flow problem.  It may be anecdotal but the few small business people I know are complaining of a downturn of turnover; none have - to me anyway - blamed the lack of an ability to borrow.

The increased price of wholesale credit has already been passed on in the  retail cost of mortgage credit and in fact mortgage lending has tightened.  I personally don't see this as a disaster despite the fundamental importance of having a roof over your head.  And I don't see why other forms of credit should not also become more expensive and subject to more conditions.


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