Tuesday, 5 November 2013
Financial Times Watch No.2: Nigel Lawson and Islamic Finance.
Nigel Lawson, the UK’s former finance minister has an article which starts by praising the present government’s “fiscal consolidation”. For an explanation as to why fiscal consolidation is a nonsensical idea, see here.
He then argues that the recovery would have been helped by splitting RBS into a good bank and bad bank. Well obviously private banks, RBS, in particular would have lent more if the state had taken over their dodgy loans. But that’s a subsidy, isn't it? And what’s Nigel Lawson, staunch free marketer, doing advocating a subsidy?
Moreover, there are (apparently unbeknown to Nigel Lawson) quite a few banks in the UK other than RBS. Having RBS lend more wouldn’t have made a HUGE difference to the pace of recovery: if there a viable lending opportunities out there, other banks would be jumping at the opportunity to lend, wouldn’t they?
And finally, since banks are demonstrably incompetent, if not actually criminal, why implement stimulus via banks at all? I.e. why not just increase public spending or feed money into consumers’ pockets (depending on your political preferences). The latter two sources of spending will place orders, and there’s nothing bank managers like to see more than full order books: that induces them to lend (where lending is an appropriate way of helping meet orders, which it isn't necessarily).
There is a letter from Andreas Jobst, Chief Economist of the Bermuda Monetary Authority pointing out that Islamic Finance reduces leverage and would have helped during the crisis. That is, under Islamic finance, lenders have to take an equity stake in the entity they lend to. In effect, lenders become shareholders or quasi-shareholders.
While not going along with every aspect of Islamic finance, others have come to the conclusion that the above arrangement greatly improves bank stability and are arguing for making banks abide by that sort of arrangement: e.g. Laurance Kotlikoff , Richard Werner and Positive Money.