The banking sector is beset by bad loans -- as we're told by the central bank in a recent white paper. Now, quite whether it's people who have borrowed money and then run away, or people who have borrowed and invested it so badly they cannot repay, isn't something we have been told. However, we can still analyze the problem and even suggest a solution.
In the short-to-medium term there is only that one solution. Loans that cannot be repaid will not be repaid. For things that cannot happen will not happen. Therefore, the banks will have to write them off, take the hit to their profits and capital and regroup. We can hope that the legal system will chase those who do not want to repay, but that's a different issue. A zombie banking system is, in itself, a bad idea. Thus it must be sorted.
In the longer term though, we, of course, want to make sure this does not happen again. Which means getting to grips with why it did happen.
We should be delicate here because of course the full facts are, as yet unknown. But under the last government there was considerable political management of the economy. Who got an import quota, access to foreign currency, and, possibly, even who got a loan from a state bank -- and upon what terms, what security -- could, possibly, be politically determined. This is the purpose of having political control of the economy, of course, that only the right people -- doing the right things -- gain access to economic privileges.
We can also see that who did manage to gain access would be defined by politics. “Politics” in the sense of what supports continued political power. Or even, the friends of those with it. Rather than what we'd hope, that the two -- politics and the economy -- could be divorced, so that economic privileges went to those best for the economy, not those best for politicians.
Being that delicate we don’t have a great deal of evidence that this did not happen. But we can see that the temptation would have been there. We can also see that the banks gave considerable loans to people who seem not to be servicing or repaying them. We might even think that the two ideas are, in some way, related.
Now, of course, everything has changed and in this bright new dawn, nothing like that will ever happen again. Except that's not the way to bet. Of course current politicians are wholly incorruptible in this sense -- no favours for friends or to buy support, no siree. But are we sure this will be true of all future politicians? Well …
Which is what gives us our solution. Of course those non-performing loans are concentrated in the state-owned banks. For that's where politics will have the most power over who gains access to loans and upon what terms. Our answer therefore becomes obvious.
We should sell off all the state-owned banks. If no one wants to buy one or more of them, then just close them down. Quite simply we want to remove politics from the provision of funding.
This is something this column has been suggesting for many years now. Partly because it just seems like a good idea that who is a friend of the minister for this or that is not a justification for a loan. Partly because politics, taking decisions on the basis of politics, isn't a good way to run an economy.
But the real selling point is to remove the temptation from future politicians. It will be good for their souls that they cannot be tempted by political power over the economy. And we all do know, don't we, that politicians need that aid for their souls so we should offer it to them. Reduce their power to sin with our money and we're all better off -- us in this life, them in the next.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
