REPUBLICAN PARTY NEWSLETTER
For a Civic and Constitutional Republic
Issue No 29 Friday 27 March 2009
· Why Are We Ruining Ourselves Bailing Out The Banks? Might Not It Be Better To Have Bankrupt Banks Than A Bankrupt Country?
Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.
· Why Are We Ruining Ourselves Bailing Out The Banks? Might Not It Be Better To Have Bankrupt Banks Than A Bankrupt Country?
Britain’s banks are bust.
The Government and all the commentators tell us that we cannot do without a banking system for the economy to keep running. There cannot be any argument about that. But the key word here is the indefinite article “a”. We certainly need a banking system but do we need the banking system that we have? Can we even afford the banking system that we have given its massive but unquantified debts?
Gordon Brown and his government answer that we have to run with the banking system we have, but this policy may be starting to unravel as the shear scale of the borrowing that the government is going to have to find in order to save the existing banking system may be beyond its capacity.
The banks of our country have, for the most part, both of the classic problems that companies can run into:
· the problem of day-to-day expenditure exceeding day-to-day income - Macawber’s definition of “misery”- (a liquidity problem) and
· the problem of capital assets not being sufficient to cover liabilities (a balance sheet problem).
It is possible to have one of these problems without the other and still manage as can be easily imagined by reference to your own individual domestic finances.
If you have negative equity in your house, for instance, and that is your main asset then you have a balance sheet problem. On the other hand your monthly expenditure (including the mortgage payments) may be less than your income. In this case you can survive for the balance sheet problem does not affect you as long (as you don’t want to sell the house or remortgage).
Similarly, if your monthly income does not cover your monthly expenditure, but the value of your house far exceeds the size of your mortgage, you can cope by realising some money from your house value. This practice was common in the Brown Boom whereby people practised “equity withdrawal” from their house values. In other words, assets were sold in order to fund day-to-day expenditure.
The trouble with our great banking institutions is that they mostly have both liquidity and balance sheet problems. But it is worst than that – much worse. For the balance sheet cannot be quantified. The banks have through injudicious practices acquired “assets” of dubious value – “toxic” assets - and no one knows the true value of them-if indeed they have any value.
In order to save or “bail out” a stricken bank like the Royal Bank of Scotland, there are normally said to be three alternatives.
1. Monetary support. The government provides monetary support to the bank. This may be in the form of a loan, a gift or guarantees to back up transactions. The idea is that this help will allow the bank to continue trading without running into liquidity problems
2. Nationalisation. The bank is nationalised by the government taking a majority stake. This means the entire bank is (effectively) acquired as a unit. Because of the dodgy balance sheet, the business the government has bought into is a business with unknown risks – hardly something that any financial advisor would recommend
3. Bad bank. The bank’s business is carved into two parts. In one all the good business is put and in the other all the bad business. Under this scenario the government acquires only the part with the bad business and in the process creates a “bad bank”.
All of these three possibilities have desperate problems associated with them.
The first possibility has effectively been discounted for the majority of the banks, as their difficulties are too great to be solved by a mere “helping hand”.
The second solution has been the Brown solution and the government (you and me) is now the proud majority owner of the Royal Bank of Scotland, Northern Rock and Lloyds TBS.
Owning such bankrupt companies with unknown debts is not an easy ride. The commitment that the tax payer will have to pay in the future to support these companies is unknown. Because the companies are still treated as viable entities they have to honour contractual obligations to the incompetent, unscrupulous chiefs who ran these companies and so the British people have to suffer the indignity of dishing out millions to the likes of Sir Fred the Shred while simultaneously loosing billions as a result of the actions of such shameless individuals.
The third option of creating “bad banks” has received a lot of support from many financial experts. The virtue is said to be that by taking out all the bad business we will be left with nice fit and healthy banks that will be able to carry on as they were before all the trouble started (albeit with a “heavier touch” regulatory framework). One of the biggest problems with this is that the tax payer is certain to make a thumping great loss. But perhaps an even bigger problem is that the culture of the company that got us into the problem with be preserved intact, the only difference being that they have now learned that, when they screw up big time again, the government will be there to bail them out by removing all the bad business from their books.
Whatever the argument put for or against these last two strategies, the possibility of the government actually being able to afford either of them is looking increasingly doubtful. To fund either one of them means that the government has to borrow the money and this it does by issuing bonds which are then sold into the world markets. Individuals, companies and above all countries (like China) that have lots of cash buy the bonds as an interest-bearing investment. But for the government bonds to be sellable they have to look attractive and this means above all, in the present dangerous financial environment, that the investment has to be safe. The Chinese and others will want to know they are going to get their money back. It has been said that in the current situation, investors are not so much worried about the return on their money but about the return of their money.
Even the Bank of England which recently vowed to buy back existing government bonds (as part of its “quantitive easing” policy) has said it is having second thoughts about how many it will acquire.
“Now it looks as though the number of investors willing to lend to the government is already drying right up. After all, if the Bank of England won't buy this rubbish, why should they? On Wednesday, Britain suffered its first gilt [government bonds] auction failure since 2002. The government tried to flog off £1.75bn of 40-year gilts. Investors only put in bids worth £1.63bn. That doesn't bode well, given that the government is planning to sell a record £146.4bn of debt between now and next April. What happens if Britain can't attract enough investors to fund its spending plans? Well, as one commentator told newswire Bloomberg, Brown's "whole strategy is based on borrowing". If no one's in the market for gilts, then "the prospect of going cap in hand to the International Monetary Fund hovers increasingly into view". That won't be much fun, given that we'll be in the queue behind half of Eastern Europe.
The title of John Stepek’s piece was “Britain Heads For Bankruptcy”. Bankruptcy for the nation is now a real possibility as government borrowing mounts beyond any previous peace time levels. And the desperate plight we are in results directly from Gordon Brown strategy of “rescuing” our failed financial institutions. Even if the state survives the present depression financially the best that can be hoped for is a long period of austerity and suffering while the nation struggles to improve its balance sheet.
It is sometimes said that with the coming of the Bust Brown has changed his economic approach from what it was during the Boom, but really what we are seeing is the same old Brown, the same old New Labour. Brown has always adopted opportunist policies to exploit temporary conditions without any regard to the long term effects. And when things go wrong he does his Macavity trick whereby he seems somehow to disappear from the firing line of those responsible for his actions. This is how the Brown Boom was handled. It is how the Brown Bust is being handled.
The nation has now been committed to the Brown/Darling strategy and so any discussion of alternatives is perhaps a little academic. None of the major parties have considered the alternative. Even the respected LibDem economic spokesman, Vince Cable MP, will not consider it. But nevertheless let us now do so, just to give a new view of the banking crisis.
The fourth strategy that was never considered was to let the banks go bust. The reason why this was not an option, it was said, is that we have to preserve the banks as we need a banking system. Well, yes, we do need a banking system. But do we need the banking system that we have - or had?
It is said that to let the banks go bust would be to endanger the savings of individuals and companies and that it would result in liquidity problems for the whole economy. Well, it would have if we had simply stood by and watched the car crash of the banking sector. But we could have done something else at the same time – we could have set up one or several government banks to take on the essential roles that banks perform. Savers could have been offered the option of shifting their money to the government banks – and how many would have refused the offer? Money could have been made available to ensure a liquidity crisis did not occur.
Would all this not have been expensive? Damn right it would have been. But all the money put up would have almost certainly been recovered at some time in the future. And the country would not have risked going bust as it is now. Losses would have been incurred but these would have been incurred principally by the private bank shareholders, creditor banks, bank bosses and bank employees. Only the latter could be considered innocent parties in the malign practices of the banks. But, without wanting to sound too callous, pain is going to felt by someone somewhere before we are through all this.
One of the major problems we now face is not economic but moral. Civic Republicanism has always placed great stress on the importance of maintaining a just, moral and a virtuous society but we are now seeing great injustices in our society as those most responsible for the financial crisis walk away with handsome rewards for their greed and incompetence. We have to ask how this is going to affect the overall moral climate in which we live. The bricks recently hurled through Sir Fred the Shred’s windows may be only the first conspicuous eruption of anger against the injustices we are being asked to accept.
Banks used to be respectable and respected institutions. No more. If you bank with say NatWest and it starts to pressurise you about your overdraft it is very difficult to not reflect on whether they have any right to do this in view of the irresponsible misconduct of their affairs for the last twenty years. They have squandered billions which the taxpayer has then paid out. How can they have the nerve to pressure you for a few pounds. This is trust breaking down. It is the mores, that are necessary for society to function, breaking down. If we had new state banks they would not carry with them the stigma of existing banks.
Furthermore, as trading brands and logos the existing failed banks are shot. They will no doubt spend more and more sums on advertising (using our money) in an attempt to airbrush out their shameful past but it won’t work. It is difficult to see how we will ever have a good banking industry again
The present strategy of bailing out these wounded shabby institutions we call the banks has many motives behind it but there is one key piece of ideology that is necessary to underpin it. This is the simple belief that private companies are good and state companies are bad. Thus we cannot create state banks to replace the private banks. It is believed that we need the private commercial element operating in the banking industry just as we need it in any other industry and that without this motivation all sorts of corruption and bad-judgement will be made. The sorry story of the French state bank, Credit Lyonnais, is cited as a salutary example.
There is truth in this argument. And we should not contemplate state banks in normal conditions. The constraints and opportunities that exist by virtue of operating in the private sector need to be harnessed to motivate and restrain the banking sector just as they do in any competitive industry. But as we know, we are not in “normal” conditions. We need emergency measures for an emergency situation. We need to take actions that we would not take under normal conditions.
It is this perspective that means that the new state banks would be sold off at some time in the future. Before that happened a whole new banking regime would have to be put in place, but that is another story …
Replacing the existing banks would have created turmoil. But we could have got through it and we would have a brand spanking new banking system with the tarnished names of RBS and the rest confined to the history books. And there is the not small matter that we would have definitely survived.
As it is we are left with these lumbering putrid leviathans who will be poisoning our futures with their corrupt cultures and toxicity for years to come, at the same time draining the nation of its solvency and cheating the people of their right to prosperity.
The consequences of the artificial credit boom began by the Conservative and then matured and brought to its catastrophic denouement by New Labour is something that we are all going to have to live with for years.
Now added to that we will have the New Labour solution to the crash to deal with. The hangover after the binge would have been bad enough. The side effects of the treatment for the hangover now have to be added in.
If the country goes bankrupt, as many believe it will, then people are going to look back and say it would have been better to have bankrupt banks that a bankrupt country. With the Brown government in charge we may end up with both.
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……. …….until next week