RLAM’s CIO, Robert Talbut, calls for urgent policy action to stabilise the UK economy
It is increasingly clear that the unravelling of previous excesses in all aspects of the economy is accelerating. However, action in the UK still appears to be happening on a case by case basis. At some stage we will have to see both more dynamic and more significant policy moves. Without this we are in grave danger of entering an extremely grim and painful period for the overall economy.
We are currently suffering from the rapid removal of credit from the economy as the banks fight to survive by trying to preserve cash and capital within their businesses. While the US authority's proposed 'buy up of bad stuff' initiative can be seen as part of the necessary overall solution to this episode, on its own it falls very short.
Therefore I propose that two further measures need to be enacted within the UK in order to restore confidence in financial institutions and to assist the wider economy in getting access to funds at a reasonable price.
Step one is a major exercise to recapitalise the banking sector. While UK institutions may be sitting on significant cash piles, they require the confidence of knowing which banks will survive prior to supporting their necessary recapitalisations. The mechanism that I'd suggest would be for the government to lead substantial rights issues, where they would subscribe to new capital alongside institutional investors. This scheme may not apply to all banks, but I believe we've gone past that point. Instead we need to ensure that there will be some strong banks which will be able to survive and in turn can finance an economic recovery.
Secondly we need to implement significant cuts in short rates. Whereas previously I thought that we should look to 100-150bp of rate cuts over the next twelve months, I now think we need around 250bp. While this may appear dramatic I'd suggest that it would only be through such action that any easing would actually be felt by consumers and companies, given the degree of credit restriction which is currently in place.
Overall the policy of 'tough-love', which the authorities have been following for the last twelve months, must urgently be changed to one of ensuring that the economy does not experience a very severe economic slowdown combined with further financial dislocations as more banks fall into distressed situations.
Hopefully these actions, together with the Paulson Plan in the US, can start to re-build confidence in a number of financial institutions. While it is correct that the financial sector endures a good degree of pain as a consequence of past mistakes, I'd suggest that we are increasingly close to the medicine killing the patient. Therefore we need bold, imaginative and significant action.
- ENDS -
For further information please contact:
RLAM
Stephen Watchorn
Tel: 020 7506 6582
Stephen.watchorn@rlam.co.uk
Quill Communications
Jo Stonier
Tel: 020 7758 2230
Jo.s@quillcommunicate.com
Editor's notes
Royal London Asset Management (RLAM)
was established in 1988 and specialises in providing investment management solutions for both the Royal London Group and a range of external institutions. These include FTSE 250 companies, local authorities, universities, charities, wealth managers, financial advisers and private clients. RLAM manages over £30bn of assets, employing more than 50 experienced investment professionals in our London based office.
Royal London Group
, is a specialist financial service provider. Its businesses focus on those sectors of the market which value quality propositions, operating through a number of brands:
-
Scottish Life – UK pensions market
-
Bright Grey – UK protection market
-
Scottish Provident – UK protection market
-
Phoenix Life Assurance Limited – provides life and pensions products to
-
Abbey's national branch network
-
Scottish Life International – offshore investment markets
-
Scottish Provident International – offshore investment markets
-
RLAM – fund management
-
RLAS – life and pensions administration
-
Fundsdirect / Ascentric – funds supermarket; Wrap platform
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £32.4 billion. Group businesses serve around three million customers and employ 2,750 people. Figures quoted are as at 30 June 2008, prior to the acquisition of Scottish Provident's new business capabilities (in respect of individual life protection business) and of Phoenix Life Assurance Limited.