I'm on the Jeremy Vine show at 12 today. (UPDATE AT 11.15: No I'm not - I've been replaced by Paul Krugman - I guess I can't complain)
The question is a simple one - should Europe bail out Spain?
The answer is equally simply - yes, of course it should.
The 'why not' position is Spanish banks and the Spanish people must pay the price for their folly. I am sure someone will be putting that point forward.
And, of course, they're wrong. Spain took part in a collective deceit that engulfed Europe and the OECD economies. Germany gained from it: the biggest foreign participants in Spain were probably people from the UK.
Banks everywhere, without exception, in the Eurozone, the UK, the US and beyond fuelled a property boom, over-leveraged, under capitalised, and have now collapsed. It had happened before - in the US Savings & Loan crisis, for example. Without change it will happen again.
The issue now is making a particular group pay for the collective failure of the system - which is what it was - is akin to the treatment of Germany at Versailles after the First World War. It so happened Germany lost that war: they price imposed was huge, irresponsible, and ultimately led to September 1939, almost inevitably.
We could impose an economic Armageddon now on Spain. But think what we'd be doing.
Spanish banks would fail.
The Euro would fail.
With Euro failure there would be a risk that quite literally the European economy would stall, completely. Cash would not flow. And within days food would not either. The we'd have complete social breakdown.
If that could be averted by the massive printing of money in other states - something Germany would have to agree to - the cost would be bigger than bailing out failed banks in Spain, and Italy which will surely follow.
And if that could be averted on a pan European basis we'd still see social meltdown in Spain, fuelled by hunger, fear and hopelessness. That way leads totalitarianism in a state I can recall, all too readily, being a dictatorship.
And would we win anyway? No, of course not: Santander would collapse in the UK. The supposed saviour of UK High Street banks would need bailing out here. We'd be in Northern Rock territory very soon.
And that would tip us into depression.
So of course we bail out.
But equally we do so with conditions. Wipe out the shareholders this time: let's not pretend these are private banks anymore. And since this is being done to save other banks from contagion, let's be vigorous in our approach to banking regulation. The pretence that baking exists without state support is now over. Banks create money under licence from the state. The reality is that the state has to take control of that process back, now and for good.
There is only one answer for the future, and that is state controlled banks. They may be regional; we'd need more than one to encourage development. But let's stop pretending that banking can now be a private sector activity anymore. That's not possible.
If we are to save democracy, the nation state, people from starvation, chaos, despair and worse let's say it as it is: in the 21st century banking can only be a state run activity simply because only the state has the capital needed to support it.
That's what must come out of Spain. But we must support Spain to achieve that goal.
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This is a convincing argument, Richard.
Is there any place for private investment banks in your view? To get this change through the political system, might this concession be necessary?
2 would the state banks be able to issue some money into the economy free of debt? In the way-or similar to the methods suggested by positive money.com? Part of their argument being that the taxpayer would be paying less to pay for the interest on the loans.
a) Investment banking could exist – but tightly regulated and with high capital requirements
b) Shadow banking would need to be tackled – a massive issue
c) The crack down on tax havens has to be hard, sharp and determined
d) Yes, money would be issued free of debt.
Sounds a good workable solution. The tragedy of the 1930s was that it could have
fixed more quickly and possibly the Second World War could have been averted.
Einstein said “physicists had known sin” for their work in developing nuclear weapons. I sometimes think economists of that era also sinned (in the Hebrew sense of ‘missing the mark’ rather than the usual interpretation of deliberately doing evil-though this is debatable).
Apart from Caroline Lucas, the Green MP, are there any people in Parliament who would support this agenda?
I think some on the Labour Left would – John McDonnell et al
I agree with your definition of sin by the way – it is obviously theologically correct
Shame many dont get that either!
Kelvin Hopkins MP seems also to be on the same side as John Mc.
There is no reason why private investment banking cannot continue in parallel with a state controlled system which most individuals and small businesses, local government etc would use.
Speculators could use the private system if they wish but these banks would stand or fall on their own merits. If they want to pay themselves £10 million bonuses, that would be up to them but there would no longer be a subsidy or insurance cover from the taxpayers.
Currently our benefits payments are processed via J P Morgan. Why is this, I wonder?
Some Krugman blogs on Spain, often with a graph in each post:
April 15, 2012, Insane in Spain,
March 7 2012, Finally, Spain
September 11 2011, The Spanish Prisoner
May 4 2011, The Pain in Spain
July 12 2010, One Size Fits One
April 29 2010, A Catastrophe Delayed
March 14 2009, Spanish doldrums
Many of the Spanish Cajas were, and are, effectively state banks. Their boards are dominated by political representatives from the regions, and their activities, including their disastrous property and construction investments, were (and are) not only approved but directed by regional government.
The Spanish government created Bankia in December 2010 by merging seven bankrupt politically-dominated savings banks into one large bank which, incredibly, they claimed was solvent. They put this monstrosity through an IPO in 2011. Foreign investors refused to touch it so they coerced Spanish investors into buying the shares. It now transpires that several of the savings banks merged into Bankia overvalued their property assets, inflating their balance sheets and giving a false impression of solvency. I reckon the investors have grounds for legal action.
Given the existing incestuous relationship between the Spanish savings banks and regional (and, now, national) government, how exactly would nationalising them improve things?
There wouldn’t have been an IPO to force misrepresentation of the truth
No, there would have been an institution that was insolvent from the time it was created owned and supported by a highly indebted national government. Not a particularly stable state of affairs. I suppose since Bankia was created by the government that would at least have been an honest position for government to take, rather than foisting it on investors who didn’t realise they were being sold a pup. But nationalising the components of Bankia wouldn’t have solved the underlying problem of corrupt political control of semi-public regional savings banks, any more than creating a private institution did. Nationalisation can’t solve problems of regional governance, which is what this boils down to.
But that would have been an honest statement of the truth
So much better
But I agree – nothing stops corruption in institutions – and people are fallible
Couldn’t agree more Richard. Isn’t it comforting to know that we’ve been run by the “clever people” for the last 3 decades. Ironically, these are the very same clever people who got us into this mess through greed, incompetence and criminal negligence. Their solution? Austerity which will impose poverty and despair on millions – and actually make the situation much much worse. I think the clock’s been slow – it’s 1984 and the inner party are the faceless European bureaucrats.
James Burnham, believed to have influenced Orwell, forecast a new kind of centralised society where “leaders will be those people that in effect control the means of production, i.e. business executives, technicians, bureaucrats….These managers will wipe out the old capitalist class, crush the working class and organise society in such a way that all power and economic privileges remain in their own hands.”
Scary
“…leaders will be those people that in effect control the means of production, i.e. business executives, technicians, bureaucrats….These managers will wipe out the old capitalist class” Er, the ‘capitalist class’ are the owners of the means of production. How can controllers override owners?
Point taken but I would argue that there’s a very fine line between control and ownership. The capitalist owners of small & medium sized businesses, who make up a major chunk of our economy, are controlled by the banks whose reckless actions (lending, don’t like the sector, calling in the receivers etc.) have been pivotal in getting us where we are today.
To me this post articulates the dangers of the “single solution”, austerity, and logically sets out the consequences. Albeit at national level, the same situation is confronting many businesses starved of demand for their goods and services which reinforces a vicious circle of further contraction.
Given it’s taken 30 years to get into this mess I’m fearful that the very people who got us here are now providing the “solutions” aided by the same tinkering political and bureaucratic “experts”; and, as usual, they need to fix things now.
Krugman was very eloquent on Newsnight – there’s no right way to do the wrong thing.
Krugman on Newsnight last night was fantastic! A real Keynesian masterclass which showed the Tories for what they really are – shallow, conceited idealogues.
You’re right Neil
A triumph of practical evidence over recitation of ideas held with evangelical fervour.