In his comments to the Treasury Select Committee's enquiry into the crisis yesterday, the Governor of the Bank of England, Mervyn King, said that banks should avoid lending and weakening their capital base individually but that, collectively, this could seriously damage the economy:
"Individually, it makes sense ... to behave defensively and reduce the size of their balance sheet. Collectively, it makes no sense at all because if all banks behave in that way not only will the economy go into a steep recession but the banks themselves will see even bigger losses on their pre-existing loans. The challenge we have to confront in dealing with the banks is to find a way in which their individual incentives do not lead to a collective outcome that is clearly adverse."
This is the heart of the herd mentality and the lemming culture.
Banks all do the same thing and run in the same direction.
This is the issue the government has to deal with today, and Mr. King appears to be proposing nationalisation.
Nothing wrong with nationalisation, except for the shareholders who lost all or most of their investments.
I also wonder which banks Mr. King is thinking of nationalising.
All of the sector?
A bit of the sector?
Banks and Building Societies?
Only the big banks who have zero capital?
This isn't easy.
Meanwhile, Mr. King's sidekick said: "It may well turn out that further capital injections are required."
How much?
Paid for by whom?
For how long?
Is this cheque book unlimited?
It's time to think of shareholder guarantees and re-injecting shareholder confidence to avoid this panic situation of tactical reactions to each time the banks lament their balance sheet losses, lack of liquidity and inability to lend.
Oh yes. Mr. King's sidekick is Mr. Bean, the new Deputy Governor and replacement for Sir John Gieve.
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