Bailouts and the Future of Banking

Long piece today by the Guardian’s economics leader writer, Aditya Chakrabortty, on the cost of the banking crisis, bank misconduct and what should be done about it. I agree wholeheartedly with the thrust of this piece, and indeed said much the same two and half years ago in my piece on the Guardian Cif site. Aditya’s piece concludes that

any investigation needs to understand how to reform the finance sector so that crises like these don’t recur; and so that banks actually work in the public interest rather than hire propagandists to pretend they do. Because in the end, financial reform is not about technicalities, but about politics: deciding what role banks should play in an economy, and what kind of economy we want.

However, he says also that:

According to the IMF, the British stuck £1.2 trillion behind the finance sector. Read that again: well over a trillion pounds in bailouts, and loans and state guarantees on bankers’ trading. In just a few months, and with barely any public debate, every household subbed £46,774 to the City. A sliver of that money eventually went unused; as for the remaining hundreds of billions, we have no idea just how much we’ll get back – or when.

I have some concern with these numbers. And, as I suggested in response to David Malone also, I think this is important.

It’s not exactly transparent how the IMF figures (from July 2009) he sources are compiled. I strongly suspect they are aggregating several different measures with different implications in terms of their ultimate costs for the taxpayer. The ONS ‘Public Sector Interventions in the Financial Crisis’ document from November 2009 provides a much more detailed guide.

The bulk of the ‘£1.2 trillion’ represents one side (the liability side) of a balance sheet that formerly belonged in the private sector and now belongs in the public sector. This ‘reclassification’ occurred as a result of the whole or partial nationalisation of Northern Rock, Bradford and Bingley, RBS and Lloyds/HBOS. Since the balance sheets were transferred wholesale, as well as the huge liabilities we also got the huge assets in the form of their loans, securities, other assets and ongoing business. Most  of the rest of the injection, in the form of various guarantees, much of which have now been discharged, attracted fees for the government. They were essentially insurance policies – taking on risk for a premium. And thankfully we didn’t have to pay out.

Taking all this into account the overall negative impact on UK government finances of direct support to the banks was estimated by the ONS to be around £10 billion by the third quarter of 2009 – big enough, but over 100 times less than Aditya’s number! We can add to this the subsequent £400 million loss on the sale of Northern Rock to Virgin.

Of course the final cost of all this will ultimately depend on any losses/profits made on the government’s shares of RBS and Lloyds. This is probably more significant than inflated claims of past costs of bailouts, because it plays a part in the approach now adopted. I think there is an overwhelming case for some form of ‘socialisation’ (albeit protected from day-to-day political intervention) of RBS at least, to act as a public interest benchmark, but we will have to permanently swallow any cash losses this entails.

It’s also important important to get the numbers right so as to emphasise that the costs to the overall economy of our banking sector are not one-off costs due to a particular set of bankers or their behaviour, but to the ongoing relationship between finance and the real economy. That is what has to be investigated, and what must change.

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