In the Cousins Business Law ezine back in May 2008, commercial property solicitor Steve Petty wrote a piece entitled Sprinkling Sugar on the Credit Crunch. Fifteen months on, has the situation improved? Here’s Steve’s view.
At the time of that article, we were being told that the worst was over. I felt then that wasn’t the case and, unfortunately, I remain convinced that the worst in terms of the health of the banking sector is still ahead rather than behind us.
The cause of the near collapse of the banking sector was the lending of billions of pounds to people who had no prospect of being able to make the repayments. Those loans are still on the banks’ books and their value still hasn’t been adequately written down on their balance sheets. The problem, of course, is, if this ‘toxic waste’ as it has come to be known was correctly valued, then it would be apparent to everyone that most of the world’s large financial institutions are insolvent. The crisis of confidence that this would cause is something Governments around the world are desperate to avoid.
They plan to achieve this by pumping in sufficient funds to keep banks afloat. In the US, there is an alphabet soup of schemes to channel ever increasing billions of dollars into the hands of the banks. In the UK, there has been the much publicised ‘Quantitative Easing (QE)’ but has any of it worked?
At last week’s Inflation Report briefing, Mervyn King acknowledged that many of the banks were simply leaving the extra cash they had been given through QE on deposit with the Bank of England rather than lending it out into the wider economy. He at least acknowledges the fact (unlike Alistair Darling) that if banks make billions of pounds of losses from reckless lending, they are hardly likely to increase the amount they lend. In fact, as the amount of bailout cash has spiralled ever higher, the amount banks are lending to businesses has actually fallen.
Karl Denninger on the Market Ticker blog likens this (trying to solve the problem of a debt fuelled asset bubble with increased lending) to trying to cure an alcoholic by giving him a bottle of vodka. The reality is that the only sensible way to solve the current problems is for bad debts to be flushed out of the system; for banks to recapitalise; and for those financial institutions which are insolvent to be wound up.
When you start to see those things actually happen, you will know that we are on the road to recovery. Until then, the world’s governments’ efforts to restore growth through ever increasing amounts of debt are doomed to failure.
In such an environment, what can we do to protect ourselves? We have a number of articles on our website giving practical advice on how to survive in a recession from keeping your business going when the going gets tough to negotiating or re-negotiating a lease. It is now more important than ever to follow best business practice.
‘A hero is no braver than an ordinary man, but he is brave five minutes longer.’
In the business context you might say that the businesses that survive a recession keep going for five months longer. At Cousins Business Law we hope that our advice can help you be one of the survivors.