What goes up must come down. But must everything that gets privatised eventually be renationalised?
In the 1980s, Margaret Thatcher undertook the great privatisation of Britain by selling off everything from British Gas to British Telecom and even British Airways.
The move was accompanied by some simply inspired public promotion.
Most memorable was the FOMO effect created by the “Don’t forget to tell Sid” promotion to flog British Gas shares. Ads in the series featured excitable communities furiously circulating a tip to not forget to get in on the action by registering for shares. Modern crypto shills, and even Kim Kardashian, could only dream of generating a pump of equal effect.
Even for the 80s — an era when Blue Horseshoe was still getting away with loving all sorts of stonks — it was a campaign that sailed pretty close to the wind of what might be considered fair promotion.
But hey, that’s what happens when a government can (by the standards of the day) throw an extortionate sum on promoting its own stonks.
With hindsight, few would argue the British pump and HODL strategy wasn’t effective. It was certainly superior to what the Russian government did with the 1990s privatisations of the post-Soviet era (a fiasco that arguably qualifies as the patient zero of our modern-day Russian woes). The then-Russian president Boris Yeltsin, under the auspices of Harvard economist Jeffrey Sachs, decided on a supposedly more egalitarian path. This focused on the distribution of privatisation vouchers to all of the citizenry. The lack of a heartfelt public campaign, however, ensured few ordinary Russians understood the value of the vouchers or why they should keep hold of them. Instead, professional black marketeers – the only experienced capitalists in the system – swept up the shareholdings using insider information based on their close relations with the corrupt public intelligence officials they had already become close to during the Soviet days. In so doing they became the oligarch class.
What followed next is a well-known tragedy. Some might even say the circumstances forged the political climate that allowed a man like Putin to come on the scene and dominate from then on. The dictatorial concord between Putin and the Russian people largely dates back to this episode.
The Right to Acquire
But back in Britain, it wasn’t just corporations being swept up in Thatcher’s great privatisation drive. Social housing stock built and funded by the taxpayer in the postwar period came on the selling block too. This unprecedented Conservative programme, launched in 1980, offered occupiers the right to acquire their properties at large discounts to their fair market values.
According to Wikipedia, the calculations valuing up to 6mn homes went something like this:
The sale price of a council house was based on its market valuation, discounted initially by between 33% and 50% (up to 70% for council flats), which was said to reflect the rents paid by tenants and also to encourage take-up; the maximum discount was raised to 60% in 1984 and 70% in 1986. By 1988, the average discount that had by then actually been given was 44%.[14] The local authority was obliged to offer a mortgage with no deposit.[15] The discount depended on how long tenants had been living in the house, with the proviso that if they subsequently sold their house within a minimum period they would have to pay back a proportion of the discount. The policy became one of the major points of Thatcherism.[16]
This is of relevance today because of what it might reveal about the mechanics of future government intervention in the sector.
In the 80s, government action in the property sector has come part and parcel of a wider privatisation force sweeping through the entire European system on the back of decades of post-war government custodianship. As the 2020s face up to the prospect of a new global war, accentuated nuclear threats and the pressures of post-Covid recovery — not to mention the challenges of combatting climate change and an investor body increasingly focused on mission rather than profit — it shouldn’t be a shock that this mega privatisation trend of the last few decades could be reversed.
If that is the case, the mechanics of how that reversal might be undertaken will matter to investors. And suffice it to say, clues have finally begun to emerge about how this sort of thing may come about.
Stranded Bank Assets
What we’ve learned this past week thanks to the Credit Suisse confidence crisis is that banks no longer die with a bang but with a whimper.
This should not be a surprise. Anyone following post-2008 banking regulation will know the process constrained the banking sector’s capacity to ever make hyper profits again by design. In so doing it transformed the entire sector into a highly boring but safe utility business.
In risk markets, there are always repercussions for being boring.
It seems inevitable that an inability to generate outsized return on equity will eventually pose an existential threat to many publicly-listed banking institutions. Who in their right mind wants to take the risk of transferring capital to an underperforming bank whose regulatorily-directed bad practices might clip your principal regardless without the carrot of an outsized windfall from capital gains? It’s far more logical to take a punt on crypto.
But we are where we are. And we can’t do much about it at this point. What’s far more important is figuring out where the slow unravelling of those banks that can’t cope with purely vanilla services could take us in the longer run.
There’s a good chance the entire industry will slip into the realms of other ESG-targeted sectors (like fossil fuels) that can no longer easily raise private financing. It pays to think about how the provision of basic investment products like mortgages, current accounts, savings products and payment systems will continue when many of the banks are gone.
On the payments and current accounts side, you don’t have to be Sherlock Holmes to figure out that central bank digital currencies (CBDCs) will soon take the place of conventional payment-oriented banking services. Central bankers are already waiting in the wings to launch the products as substitute public goods. The blunder I’ve made until now is thinking that a CBDC rollout will be the thing to trigger broad-brush banking disintermediation as the government crowds out funding from the private sector. I now wonder if the causation might in fact be the other way around. It may be the lack of private sector investment in utility banking that forces governments to launch CBDCs as a standby mechanism for providing basic payments and banking services.
As for what might happen to the mortgage market, the biggest clue emerged on Friday when the Guardian reported that mortgage lenders were asking UK chancellor Kwasi Kwarteng for an extension beyond December of the Covid-era government mortgage guarantee. As the paper noted:
The scheme gives banks and building societies the chance to buy a guarantee from the government on the slice of the mortgage between 80% and 95% of the property’s value. It means that if a borrower gets into financial difficulty and their property is repossessed, the government will cover that portion of the lender’s losses.
With mortgage rates resetting at 6 per cent levels, energy prices still elevated despite the government guarantee and inflation far from eliminated, the risk of mass delinquencies is growing by the minute.
Over in Poland similar conditions have already seen the government pass laws that make it illegal for banks not to offer mortgage holidays to the distressed. This has upset the banks in terms of their profitability. As the FT noted in August when the law was announced:
Polish banks were on track to report strong earnings, but they are now estimating a combined cost of about 20bn zlotys ($4bn) if all eligible mortgage holders skip monthly payments. The moratorium applies only to mortgages contracted in zlotys. Poland’s two largest banks, PKO and Pekao, which account for 40 per cent of the domestic mortgage market, will be hardest hit by the change. But the Polish arms of foreign lenders Santander, ING, Commerzbank and BNP Paribas will also suffer.
The chance that any ruling party favours banks over homeowners is negligible. Mass mortgage delinquencies will never be seen as tolerable to the electorate. That means where Poland has gone the UK and other Western nations will follow. Already constrained bank profitability will only be repressed further.
The pathway from thereon is obvious.
Bar a mass change to the outlook for the rate market, mortgage holidays won’t evolve into repossessions or defaults. To maintain market order, the government will have no choice but to intervene. It will become the buyer of last resort of the nation’s distressed housing stock. And since it has no interest in repossessing or kicking out occupants, it will see to it that the same stock is leased back to the original occupiers on more affordable monthly terms. The overly indebted, however, won’t get off entirely scot-free. Some sort of additional conditionality regarding energy footprints, insulation, spare rooms and goodness knows what else will likely be added to most agreements. The government will at this point become your landlord.
Those not defaulting but struggling might instead be offered a “right to sell” their properties to the government so as to lease them back on more favourable terms. They will be rewarded for their forward-thinking with potentially less onerous conditional terms than those who have defaulted.
To be clear, I have no advance insider knowledge this is going to happen. This is just me extrapolating from where we are today. I don’t see any other option.
As for what happens to the banking sector, see my original gosbankification piece in the FT from October 2020.
I suspect nationalisation will be a slow-running but continuous phenomenon.
One Response
really good piece. thank you