For the gloom merchants widespread rumours of capital-raising initiatives by the allegedly weaker elements in the British banking system and the job losses announced by Citigroup are proof that we are on the slide.

However, these are all special cases and it is not yet proven that things will turn out as badly  as some of our more depressive Marxists might like to think – although each bit of news is certainly a blow to confidence in the economy.

Job Losses in the Financial Sector

If any major financial group was going to slash jobs, it was always going to be Citigroup. It is only surprising that a cost-cutting survival plan with over 1,000 or more jobs going in London (probably 10,000, perhaps very much more, worldwide) has taken nearly four months to put together after the arrival of Chief Executive Vikram Pandit.

A mini-fire sale by the bank also includes the sell-off of non-core businesses like Diners Club. Meanwhile, Merrill Lynch is slashing 4,000 jobs worldwide and most of Bear Stearns 14,000 jobs are likely to go under its new owners JP Morgan Chase.

The City is undoubtedly nervous. A JP Morgan survey suggests that there might be up to 40,000 job losses in the capital, affecting the suburban areas and surrounding small commuter towns, with 28,000 of these in the financial sector – a higher estimate than any to date.

Rumours about the need to raise capital in the UK have also tended to float around some very specific institutions with some very specific recent histories.

Royal Bank of Scotland has been stretched by its (with hindsight) probably ill-advised bid for ABN-Amro, while Bradford & Bingley, which has vigorously denied rumours in the Sunday papers, was on the list because it probably excessively (again, with hindsight) involved itself in the buy-to-let market.

The buy-to-let market will one day be a a case study in a type of Government social engineering through the market and on the cheap that now looks thoroughly inappropriate. Government just does not get it - housing provision requires direct government investment.

Undoubtedly, there are serious capital issues in the sector. These must eventually lead to restructuring and significant job losses, but there is no reason for panic at this stage by any means – unless, of course, you are employed in the sector and you have mortgaged yourself up to the hilt on cheap credit.

Serious For Some - Especially Politicians

Decades of ‘fat cat’ comfort for some of the top slice of the City are going to end soon. Many former bankers will be living off past bonuses to survive and a plethora of ‘boutiques’ will emerge as unemployed bankers try to reinvent themselves as ‘consultants’ and work their contact base.

But most of the job losses in the sector are ordinary Joes and Janets struggling to survive as does all the English middle class. They will already be stretched to the limit, with the prospect of pulling kids out of private school and hoping that a two-income family does not become a none income one if they are ‘overweight’ in the sector.

So the matter is serious, very serious, but not yet terminal. Gordon Brown has insisted that the economy remains his ‘sole focus’ – albeit just before he is off to the United States to discuss foreign policy!

Confidence has not been enhanced by the news that Minister of Trade Digby Jones – not a Party member and former head of the CBI – has indicated that he will step down before the next election.

Whatever the actual motives, it does appear (probably unfairly) like a rodent planning on his leap to safety as a floating vessel starts to take on water.

Brown has also jumped on the Western band wagon by blaming the oil producers for inflation and so (by implication) the inability of the Bank of England to cut interest rates and ease the lending crisis. Producer inflation has now hit a 17-year high.

Is It A Sectoral Correction - Or The Quiet Before The Perfect Storm?

It should be said that there is no sign of problems in employment, although the economy was probably overheating as the credit crisis struck, sucking in migrants who may now return home without affecting the employment figures.

In a services economy, so long as the recession is shallow and no increases in wages are demanded, there may be a phenomenon called ‘talent hoarding’ in which companies squeeze elsewhere to keep good people. If so, the bulk of the English may just get by.

Yet, there are all sorts of odd effects of the global crisis that create doubts about even this sanguine model. 

High rice prices are already forcing the closure of small restaurants in the immigrant East End and those unemployed are unlikely to leave the country, given its welfare system.

Regardless of the optimists' view that recent high levels of growth has created some fat to live off, other indicators (retail sales and the housing market, as well as possible credit effects on small business and on the marketing sector) can be taken together to give a very different picture. 

What The Banks Want

The banks are lobbying Government at the very highest levels to take more vigorous action to unblock the money markets. Gordon Brown met with leading bankers on 15 April and it was reported that he was persuaded of the seriousness of the situation.

The smaller building societies have been saying that they were close to abandoning the provision of new mortgages.

This would mean (so say the banks) that the 47% of the market provided by the specialized lenders and the societies would be eaten into by the banks (and this would be a very bad thing say the banks). Beware of bankers bringing gifts!

We suspect that, if market principles apply, all that would happen would be that the building society sector would rationalize for scale and that overseas banks would enter the market to fill any gaps that might appear (and perhaps this is the banking sector’s real bugaboo).

The bankers want the Bank of England to follow other Central Banks in accepting mortgage-backed securities as collateral in exchange for government backed bonds. There have been signs that the Bank of England agreed with the banks and now just needs Government backing.

Housing Sector Fears

Indeed, some of the ‘nightmare’ coverage on the housing situation might (just might) be down to cynical scare PR from those who want action – there is 'spin' that the housing outlook is slumping towards 1970s levels. In fact, it is not yet as bad as the early 1990s.

The problem in Britain is essentially two-fold (placing the separate concern about commodity-fuelled inflation to one side): lack of demand for mortgage-backed securities; and very high inter-bank lending rates.

Apart from general nervousness about the future in the country, the political problem is that the system seems broke and the public do not want to see good taxpayer money go after bad while the banks are unable or unwilling to pass on mortgage rate cuts, designed to deal with the interbank problem, to consumers.

The Government is also taking the blame for the crisis amongst the public, giving the banks far more leeway than they deserve. Brown’s first response has been to follow the standard New Labour path of trying to twist a government concession into a bit of social engineering. 

He says that the Government might well intervene in the market but that banks would have to respond by giving preference to first time buyers and those having difficulty getting mortgages. This is so typically New Labour.

The intention is redistributive or rather preferential to the poorer (though not the poor as such), but it is in danger of compounding the original problem by diverting credit into the hands of the less creditworthy (by ‘capitalist’ standards) and then underwriting the risk with middle class taxpayers’ funds.

Political Position-Taking

This legerdemain might get past the public if the crisis subsides but it will need some arguing through and might be thrown back in the face of the Government if it fails to turn the tide.

The Tories appear to want the Government to intervene and appear to be falling into the trap of supporting this redistribution (lest they look like the bankers’ friend).

The Liberal Democrats, on the other hand, are in danger of appearing as if they do not understand how the system works and will deprive the ‘respectable’ working classes of a ‘break’ simply because they want to go for the jugular of the bankers as root cause of the crisis.

Once again, Gordon Brown is showing that, as much as he is strategically flawed, he still remains tactically clever.

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