Leader: Tough love needed

[Legal Beagles]

Leader: For banks, as for the unemployed, rights to state support must come with responsibilities

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[Amethyst]

Re: Leader: Tough love needed

"The right to assistance matched by new responsibilities." Slogans such as these are well worn in debates over welfare. Now they apply to high finance, too. If the unemployed must seek work in return for benefit then big banks should also earn their state support. This week the Bank of England will explain plans allowing them to trade mortgages for £50bn in government bonds. To use another welfare cliche, the scheme must provide a hand-up, not a handout.
For anyone trying to remortgage, it must be galling to see banks being handed assistance. "What about my recapitalisation needs?" the smarting homebuyer might ask. But if the banks are not bailed out, it is mortgage holders who will suffer. Their continued reluctance to lend to each other leaves them so strapped for cash they are starting to cut off credit to the wider economy. If that credit dries up then so will investment. House prices, meanwhile, would go into freefall. A full-blown recession could follow, with all that means for living standards and jobs. An aggressive interest rate cut would seem the most obvious response, but with inflation resurgent the Bank's chief economist argued last week that this would not be responsible.
The Bank of England thinks that direct support is required, a conclusion already reached by its European and American counterparts. The trick is figuring out how this can be given without cheating the taxpayer or rewarding the miserable risk management that brought the current crisis about. Any lingering doubts about how badly the banks were behaving have been seen off by new reports from the IMF and the Financial Stability Forum. The Bank must agree to swap bonds for creditworthy mortgages only, and it must trade them for bonds with a significantly lower face value. And where feasible, before giving help it should require banks' shareholders to build up their reserves. This week the cash-strapped Royal Bank of Scotland is set to ask unhappy investors to cough up, an encouraging sign that it understands there will be no official help until it has made this demand.
But whatever the safeguards, and whatever is claimed, the taxpayer could still end up being stung. Making loans secured on mortgage debt could be costly in a scenario of housing market meltdown and mass repossessions. That may not happen, of course, but the chance that it might is an excellent argument for strengthening bank regulation. An industry that expects to be handed a costly cure whenever disease strikes must accept a dose of preventive medicine. For banks, just as for the unemployed, rights come with responsibilities.