I noticed an article in the Press today suggesting that the authorities were now considering creating a ‘bad bank’ (we already have more than one, but I know what they mean), into which could be placed up to £260 billion in toxic debts from the banks.  The expectation is that this would free the banks to lend more by replacing those debts with cash in their coffers.

I still think that we are looking exclusively at this from the wrong end.  Yes, we need to address the state of the banks, but an equally (if not bigger) problem is the plight of the indebted, and I see nothing much being done in that direction.

£260 billion of toxic debt sounds pretty big to me, and, assuming that it still has to be repaid by those owing it, that presumably represents loads of people and companies that are not capable of borrowing any more money – indeed, if the loans are ‘toxic’, the debtors are not even able to service what they already owe.

This being so, who are all these mythical people that would be available to borrow the large amount of money suddenly sitting in the bank vaults?  You can discount the (presumably numerous) clientele above.  Many of those not in this position presumably don’t want to borrow, either because a) they are already in debt and don’t want to incur still more or b) they wouldn’t normally be seen dead borrowing; still less so in this climate.

So, who is left?  If I'm right, this course of action won't be that much of a cure.

Would the Authorities take these loans without recourse to the bank from whom they purchased them?  If not, surely the bank is still liable and therefore how does this help them?  If so, does the taxpayer really want to take on all that risk?  What sort of discount to face value would they buy at?  If a deep discount, then presumably banks would see their capital significantly reduced as they crystallise their losses, which wouldn’t help.  If not, then the taxpayer is taking a massive gamble.

Who would the bad bank employ to collect these toxic loans?  What would that do to the collections departments in the banks (and therefore what knock-on for managing their remaining loans)?

How does transferring this debt into another entity help the many owing this money and struggling to service it?  If we don't help them get straight, how do we ever expect the economy to recover?

It still seems to me that those in charge are not thinking enough at the micro level – what is happening at the coal face.  The real issue to address is that too many people are too indebted and need to get those monkeys off their backs.  I notice that a few commentators in the press are becoming more vocal about this now.  Hopefully those in charge will get the message soon and start tackling the problem from that end.