Political banking


Back in October, the UK government bailed out the banks to the tune of £37 billion, taking equity stakes in exchange. But they were desperate to distance themselves from their 'Old Labour' reputation. This wasn't an old-style nationalization, they said. Politicians shouldn't be trying to run banks, even if they owned large chunks of them.

I said at the time that this self-restraint would last about three months, and I wasn't far out. Originally it instructed Northern Rock, the first bank it bailed out, to scale down its lending and get its books back into balance. Now it's forcing it to surge back into the lending market by offering loans up to 90% of the value of properties. The rest of the market has pulled back from such generosity, having found that when things turned nasty, a lot of people with 90% mortgages couldn't repay them. These days, you're lucky to get a loan of 75% of your home's value, and 60% is much more common.

But that makes it harder for people, particularly first-time buyers, to get into the property market, and inevitably it pushes down the price of houses – which in turn makes homeowners feel poorer, which in turn depresses the economy.

So having told the banks to strengthen their books, the government is now telling them to lend again at the levels which caused the mess in the first place. And it's doing that simply for immediate political reasons, not long-term commercial or economic sense. It's a stark reminder that politicians are not the best people to run businesses.

The Rotten State of Britain by Eamonn Butler (Gibson Square Books) is published in March.