Bring back bonds

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This by me on Comment is Free:

The government has acquired a major stake in the Royal Bank of Scotland. There is something extraordinarily perverse about this. RBS Isa supplier to the Public Finance Initiative (PFI). This is also true of other banks that have been offered support by the government. We are now in the absurd position that the government, local authorities and health trusts are paying a hefty premium on their financing costs to transfer risks to banks that are under public control.

What is more absurd is that PFI exactly mirrors the model of finance that has brought the banking system to its knees. PFI structures are a loan by any other name. All that really happens is that the person who contracts to build a project for the public sector also agrees to finance it, and in exchange charges a higher price than the government would pay if it borrowed the funds directly. This excess is supposed to be a "risk premium" but it is clear that is not true. First, in the case of Metronet, the risk returned to the public sector when the contractors failed. The premium had been paid without benefit being provided. Second, in very many cases the premium has been pure profit, which the contractors have been able to exploit by re-financing projects and realising considerable short-term profit soon after the construction phase of the project has been completed.

As informed commentators have shown, the result is that the government pays what it claims to be a rent in exchange for an asset to which a few services of relatively limited value have been attached (often worse than those previously provided within the state sector) and all this to disguise the fact that this is financial engineering simply designed to let the government move the PFI loan off its own books and so meet Gordon Brown's "golden rule" on borrowing. The result is that government accounts have been misstated, it has borrowed more than it could really afford according to that rule, and now it faces the ignominious prospect of overpaying banks it owns for the privilege of using inferior assets it should have financed itself at lower cost in the first place.

Quite obviously this cannot continue. Soon, new accounting rules will bring all liabilities, including PFI, on the government's balance sheet and will reveal just how expensive these arrangements are. And the myth that they are not a government liability, always known but never acknowledged, will be shattered.

More significantly though, if it can be shown that the government can produce cash, literally out of thin air, to fund the banks that so nearly failed while providing PFI finance, then it is obvious that the scheme makes no sense. Wouldn't it have been more sensible to have simply borrowed sensibly in the first place, at low rates, for projects subject to proper due diligence and contractual oversight, and pay for them using that age-old government financing mechanism called bonds?

There was a golden era of bonds. It was from the late 19th century through to the end of the era of the postwar consensus. Bonds paid for local housing, trams and then buses, local waterworks, power stations and the entire infrastructure used to transform the quality of life for ordinary people in the first half of the 20th century. They were finance designed to suit a social purpose and provided a safe, secure, comprehensible medium for investment that paid unspectacular, but guaranteed, returns to the person who wanted to save for the long term in a medium they understood.

They could do the same thing again. This is exactly the sort of product that needs to back deposit accounts saved in the new mutual or state-owned savings banks that must also form part of the post crash financial architecture, based on Post Offices in all probability.

And it is vital that we now have the infrastructure that these bonds can finance just as much as it is vital that the usurious PFI arrangements already in force be ended wherever possible.

It is vital that we know how our governments are funded and it is vital that the government provides the mechanisms people so clearly want to enable them to invest in the future of their own communities. Bonds do that.

PFI never did and never will. It is time to sweep them away and create a new, transparent investments and savings medium in which people can secure their own and their community's future.

There is a certain novelty for me in the piece: as far as I can see no one is berating me for writing it. This is almost unknown on the Guardian blog.