It's been suggested to me that my suggestion that RBS be nationalised is wrong. The counter argument is that if nationalised the debts of RBS would belong to the state and have to be settled.
I disagree, profoundly, with this logic, and in each case because the logic used may seem just that i.e. logical, but it's also fundamentally wrong.
First, RBS is already nationalised. We own 84%of it. But havign 16% in the private sector means we cannot take the steps necessary to exploit the assets of this bank for the public good. So we get all the down side and none of the up side. Taking it over would release the potential in it for good including utilisation of its existing platform as a means for ensuring stability in the supply of funding to business and as means for ensuring that the means of exchange continues to exist in a time of crisis.
Second, the idea that banks go bust without consequence is absurd. In the event of insolvency of a bank assets are much harder to recover; losses increase. Liabilities on the other hand are not so easy to write off. The state would have its interest as equity holder wiped out but would pick up the bill for deposit guarantees. So it would be worse off. In the meantime the loss to other banks on inter-bank lending would tip other's over: the state would pick up moe liability as a consequence. And the business interruption of having a major bank fail would result in untold numbers of businesses failing (just the disruption, I stress, would be enough to do this when cash flow is very often very tight indeed). That would again add considerably to government cost. So the idea that such a bank could fail without cost to the government is just wrong.
And third, assets aren't just those on the balance sheet. They are intangible ones too. They are networks of people (most importantly), organisation and procedures in place, being present in places, having relationships that work, and so much more. There is no doubt many banks will look like failing soon. Despite what was said yesterday in response to bank downgrades that's a reality. But we have at this moment a choice: rebuilding from where we are or throwing out decades of investment that could with the right direction from the top of the political hierarchy be used as for the foundation for development.
We need banks. Banking is a good thing. I'm a big fan of it, I just have reservations about how it has been done. We need to ensure that all the positives of banking stay in place. If we let most banks that could go bust actually go bust modern western democratic society would fail. Let me as blunt as that. And I am a big fan overall of modern western democratic society - flawed again as I know some parts of it have become. I know of no better way of organising a way to live. It needs to jumpt to the next paradigm in its development so that it recognises the need to grow sustainably. But I want it to survie.
We can let banks go and watch society collapse with them. Or we can take them over and rebuild in the fashion we want. The second route is painful. The first is a disaster, or worse. And it so happens that in the lng run I don't think we are all dead, and some of us will have to live through the transition anyway so I want the easiest route to the best possible outcome from the mess we're in.
That means managing the process. Watching the world collapse around you may be the neoliberal way. The policy got us into this mess. We have a duty to manage our way out of it.
That means we nationalise banks.
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Actually Richard the problem is that we saved the banks in the first place. We should have let RBS and Northern Rock go bankrupt. Assets could have been bought up by the stronger banks be they British, German, Chinese or other. Putting good money into a rubbish business was the mistake. NO bank would have lent money to any business ran as badly as they were run so why should tax payers do it?
Would there be repercussions? You bet there will but at least we could deal with the fall out some 2 years ago instead we are prolonging the death of a terminal business and now we will live with the corpse for the next 3 to 5 years then the outcome will be the same, it will die. To big to fail rubbish, close them down and get the market to rebuild good banks, this may be an oxymoron but we have to start somewhere instead of dragging these rotting businesses around with us.
I have to say your view is too simplistic
I am sorry to enter this discussion a day late.
But the reason we find ourselves in the position we are, is because at the start of this crisis a simplistic approach was not taken, Harsh though it may be bad business should be allowed to fail.
As long as we keep bailing out the banking system (a second bout Q E being the latest weeez!) in the forlorn HOPE that this will create a miraculous trickle down effect we will be forever returning to this position.
Put it another way 3 years ago we the public (and how long before that the regulators) knew we had rats in the larder and when discovered nothing was done to rid us of the problem instead those in charge decided to feed them.
I can tell you in that situation getting things back normal is not complicated
it is SIMPLY bloody and messy but the vermin cannot be allowed to prevail.
We should perhaps remind ourselves that this is actually a faux democracy. A genuine democracy is one in which informed citizens vote for the honest candidate of their choice on the basis of their real policies. What we have instead is a hugely misinformed population, ignorant of just about everything except the need to keep up in the rat race, thanks mainly to a hugely dishonest corporate-owned media feeding them propaganda dressed up as truth. These people can’t vote for what they want, they don’t know the issues, and besides anyone you can vote for these days is invariably dishonest and will releatedly renege on any promises they make once in office. Democracy’s a nice idea, but this isn’t one. I doubt it ever has been.
BB
Witness, for instance, the rather telling example of the NHS. Who voted to have it dismantled, made unnacountable to government and have it taken over by private interests? Democracy indeed!
BB
why not introduce a form, of Glass Steagall, the banks got in to trouble because bad banks like Northern Rock wrote bad business meaning good banks could go out of business of follow suit. If governments allow the bond holders to take losses, imagine the clowns who bought the no doc mortgages, or fund managers who bought the northern rock 125% mortgages, let the fool and his money be parted.
Clearly required for the future
But we have to be cogniscant of the present
It seems as though, whatever is or isn’t done now to retrieve the situation, we are facing a good few years paying for the lunacy that has brought us to this position.
Is it not the case that repeating the same measures while expeccting a different outcome is the first sign of madness?
If you can agree with both those notions, would it not be both sensible and sane to use the hard times ahead of us to build a new order rather than prop up the rotten neo-liberal, pretence of choice, gross inequality promoting edifice that has led us into this disaster?
If RBS was nationalised it would be to ensure it was a ready made platform for transformation into something very very different
If you have one bank backed by government wont the other banks complain about unfair competition? The banks have worked hard to keep the post office from becoming a strong competitor.
Haven’t you noticed that whole system of faux competition is failing?
That game of regulation to protect bank profits has to be swept away
Banking and finance is now as important for society as health, education and defense, and should be nationalized for that reason. The government should wait until the shares tank again and then nationalise the businesses. I’m sure some judicious remarks from policy makers on both sides of the Atlantic would send shares prices in the right direction. That way, society will get the business without having to pay for the assets; actually a fair bargain given all that has gone on over the last 10 years. It will then be possible for society to use banking and finance to do useful things and stop it doing harmful things.
Actually, it is a rather interesting & absurdly complex question, what are banks worth ?
Peston’ s article on BBC re Unprincipled Brutes of Switzerland was amusing. As I understood it, they lost about £1.8b due to bad trading. The result was that not only did UBS shares tank but even their paper went under.
So, their paper is trading well below par & could be bought back for, like, 50p in the £. Therefore, under new IAS they “mark to market” their liabilities &, lo & behold, their liability to pay this debt is massively less than what is was ,giving them an extraordinary gain of about, as it happens, £1.8bn.
This is required even though, in reality, they had no facility to buy out their debentures. It was purely “Alice in Wonderland” finance.
Richard, not being funny but, as an accountant, how do you feel about this ?
This is voodoo accounting
And it has been a major contributor to the crisis
It was designed to achieve this type of bizarre accounting from losses and the result has been gross misstatement of the accounts of banks and other companies
Blame PWC, KPMG et al
It’s why they need breaking up too
Surely, you are criticising a straw man here. You present the choice as between nationalisation (of a going concern) and bankruptcy (of a going concern). However, I believe neither are sensible options.
Firstly, I believe we must recognise that the central banking system (including the global and state treasuries and regulators from the IMF downwards) ALREADY in effect act as IMPLICIT guarantors for every non-Equity Owed-Wealth liability of every ‘approved’ financial institution, and that that role should be made EXPLICIT. The central banking system (including the global and state treasuries and regulators from the IMF downwards) should act as borrower/lender of first or default recourse for banks. This would eliminate (the need for) inter-bank Owed-Wealth, and would eliminate bank liquidity as a macro-economic factor. In order to moderate the risk implicit in such a facility, the central banking system (including the global and state treasuries and regulators from the IMF downwards) should itself commission all valuation and auditing standards and processes conservatively on behalf of creditors (rather than allowing politicians and financial professionals free reign in their own self-serving interests. In doing so, they should follow the precautionary principle in regulating financial innovation (i.e. financial innovation should be prohibited unless specifically approved, as opposed to permitted unless specifically prohibited). Indeed, the vast majority of financial innovation should be outlawed in favour of simple inflation-linked current-accounting.
Secondly, I believe the key question to ask before considering options for a specific financial institution (bank, or bank processor such as a clearing system) is ‘Is this bank a going concern (after allowing for a realistic discount on toxic assets such as debts owed by Greece etc)?’.
If it is, leave it be.
If not, let it go bankrupt, have the state buy it for £1 as a going concern (unless there is a better bid) with the following restructuring:
1. The central banking system will (continue to) guarantee all deposits.
2. The central banking system will continue to) guarantee that all of the banks will survive as going concerns (the central banking system will buy them up for £1 each if they face bancruptcy and there are no better bids).
3. The central banking system will guarantee that all of the bank processors (such as a clearing systems) will survive as going concerns (the central banking system will buy them up for £1 each if they face bancruptcy and there are no better bids).
4. If the central banking system has to buy up a given financial institution as above:
a. The equity shareholders will get wiped out.
b. Most senior bankers will get wiped out (sacked without compensation or bonuses, and prosecuted for return of bank losses out of earlier pay and bonuses for reckless trading).
From then on, you’ve got a nationalised bank. Think of Rolls Royce in 1971. However, with the above, you will already have ‘enclosed’ the benefits of 4. above. You can’t do 4. above if you simply nationalise without formal bankruptcy.
Why do speculators/gamblers require the backing of retail deposits and indirectly the backing of the tax payers? let the gamblers gamble as much and as often as they like and leave the innocent citizens unscathed. Glass Steagall kept US banks in good shape for many years before the political elite repealed it using the commodity’s modernisation act. Glass Steagall answers all the problems. Also a secondary issue, why does the government give the power to issue limitless credit to a private corporation? Bank of England and also the Federal reserve(which isn’t federal and has no reserves)
How the banks come to have the power to issue credit is an historical issue. It has much to do with George Dowling, who went to the Hague first as Cromwell’s man and again later, after an abrupt switch in loyalties, as Charles the 2nd’s man. The Dutch were much more informed about how debt worked than we were here. Downing seems to have made connections over there with the family Orange who later came over and conquered the place in what’s known as the bloodless revolution. Downing managed to set up the National Debt, no doubt fully understanding what he was doing, and helped pave the way for William to come over as King. William’s armies were funded for in their entirety by a Dutch banker who no doubt saw England as virgin territory ripe for the plucking. King William, in return for his Monarchy, handed over the royal privilege of money creation to the banks. That’s how they got it.
BB
Downing, not Dowling!
Embarrassed BB
That does not sound correct, “money creation” I am talking about “credit creation” you cannot create money when it was backed by silver/gold, credit creation is the problem. I am pretty sure that UK sterling got its name because it was until recently connected/backed by silver. only when the silver/backing did we run in to problems,
Sorry – please go and do some reading, I do not have time
UK has not had metal backed currency since 1930s and 97% of all money is credit
Larry, start reading here to get a better grasp of it all http://www.economania.co.uk/links-resources.htm
BB
Sorry Richard, I do believe on nationalising the banks but, as is likely, if this government won’t implement the nationalisation option, then the banks should be allowed to fail.
We cannot keep the moral hazard going where banks do pretty much what they like, knowing that, if they screw up again, the government will ride to the rescue again with trillion pound bailouts. And if they are bailed out again, who will have to pay the consequences of that again? That’s right! The people who are on the bottom rung of society, that’s what.
Nationalisation of the banks needs to happen, but if this government won’t do it and the banks fail, I say let them!
The consequences will be great either way, but keep letting the banks get away with murder is just going to keep making matters worse. A line has to be drawn in the sand somewhere!