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Bank of England Takes First Step to Nationalizing Consumer Credit

posted on 2010-07-26

By Dan Cofall 

Credit in the UK is so broken that the idea of banks being able to submit almost all forms of consumer credit as collateral for liquidity loans actually seems like a good idea to the BOE. Really bad ideas somehow seem visionary when there are no alternatives.

In this case, my last article for Minyanville --Feeling Rich vs. Being Rich -- took what I thought was dead, sarcastic aim at the desperation decision-making process in vogue at central banks and treasuries around the world. The really, really bad idea I proposed was nationalizing consumer credit. Logically -- or illogically, if you prefer -- if you endorse the concept of “Keynesian, good; Austrian, bad” then you will love the fact that the UK has just adopted my really bad proposal as official Bank of England policy, effective January 1, 2011. Or at least they’ve made a huge first step.

On and after this day, banks will be able to submit virtually all forms of consumer credit (and bank to non-bank commercial credit) -- except credit cards -- as collateral for liquidity loans. Now here's the really cool part for you central-bank groupies: Individual loans may be pledged. There's no reason for the BOE to insist on bundles or securitized assets. If you make a single
mortgage loan, you may immediately pledge it as collateral. It’s the same with car loans and virtually all other forms of credit. UK banks will become nothing more than the same mortgagebrokers that participated in the collapse of 2008.

I knew the inmates were running the asylum but even I thought they knew enough not to smoke and pump gas at the same time. Credit has become so broken in the UK that this idea somehow seems like a good idea to the good folks who run the BOE and who, most probable, have never held a job in nor comprehend the private sector. This is apparently their homage to Ben Bernanke’s postulation that the Hell spawn of rotorcraft pilotage and 
currency circulation is the final solution. The only arrow left in their quiver, barring a complete re-write of the laws of banking and economics, is for the Treasury and central bank to make credit directly available to citizens with no recourse.

Policy making such as this really makes my work much easier. As a radio show host,
financial-service business owner, columnist, and economist, my job is to identify the most likely future financial scenarios and dissect them. If I’m right, my partners can figure out how to capitalize on it. In normal times, I'd be bound by accounting, economic, financial, and banking conventions. Now, however, I'm a free-range thinker, similar, I think, to a fiction writer. There's nothing that's out of bounds. Think of the final game in Rollerball -- no rules. 

This is very liberating. Radical economic thinking is a lot of fun -- much like a high-wire act with no net -- but it does have its downsides. One I can think of right off of the bat is cause and effect -- absent the historical-effects part.

It does seem as if central banks and treasuries are playing very fast and loose. From this, I can only conclude that they know we're nowhere near a sustainable recovery. Last week, Bernanke even said that the recovery is “unusually uncertain…without further stimulus.” During his first day of testimony, it was as if someone slipped something into his water. He testified like a dying man confessing but with just enough arrogance as if to say, “Look, just for today, I’m telling the truth in relatively plain English. You just can’t or won’t hear the truth. I have absolutely no idea what will work and what won’t work. Virtually at the same time, I just said that we need to dramatically reduce our deficits, stimulate the economy, increase employment, and keep the Bush tax cuts? Do you really think I have any idea how to do all of these things at the same time other than to 'print, baby print?' Right now, all I care about is how to make the very rich bankers richer. I haven’t the foggiest idea how to save either your sorry behinds or those of the taxpayers.” I know this is what he meant. I speak Bernanke.

Therefore, I'll continue my search for the most outrageous potential central-bank tactics and I'll present them in an entirely sarcastic manner. This assures that they'll be immediately implemented and it will make me look really smart…really. Next up: Do you think there's any correlation between the fact that Congress, via recent financial reforms, just completely abdicated responsibility and authority for the management of our economy to just two men -- Bernanke and Tim Geithner, and their crew of 10 -- and the fact that there are really just Hobson’s choices other than complete monetization and hyper stagflation? We'll see…