A commentator on this blog has said today in response to my suggestion that RBS be nationalised that:
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.
May I reiterate a simple point? This may be true in the case of corner shops. It might even be true of retailers like Woolworth's. And even much of the manufacturing Thatcher set out so callously to destroy. But if you let a major bank fail you ensure the following will result:
1) Massive cost to government to pay off depositors, certainly much higher than the cost of nationalising;
2) A domino effect of bank failure since banking is a system, not a series of unconnected companies, so one failure leads inevitably to other failures unless stopped by government support;
3) The failure of the bank payment system for individuals and companies that would be so disruptive that the entire retail system could fail for weeks leading to the collapse of the food supply chain and much, much more besides;
4) The breakdown of normal constraints in society resulting in social chaos.
Of course it can be argued that banks should not be so big and integrated that this might happen. The reality is that they are. And no one, least of all the current government that is taking no steps to address these issues, seems to have appreciated the risks that inaction creates even though this government, in particular, could be taking action now to address it.
So the comment made is, regrettably, naive and simplistic and would result in national disaster. Which is why it has to be ignored and like it or not any bank failing right now would have to be rescued.
Which does not mean for a moment that I then suggest that the rescue mean they be allowed to continue as now. That's the last thing I suggest. Radical reform is needed - but nationalisation is simply the cheapest and most effective way to achieve that. Which is why I endorse it.
So, respectfully, to all those who say 'let the banks fail' - please either realise what you are asking for or be explicit that you are seeking to bring down the entire economy and in all likelihood democracy with it. Because that is what would happen if you had your way.
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I do not fully subscribe to your logic here, Richard. I still believe there were alternative solutions available to the UK government in Sept and Oct 2008. For example, a carve-up solution along Swedish lines might have been possible, and it might also have been possible for the government to have guaranteed UK depositors up to a certain level, but to have forced haircuts on some of the bank’s overseas counterparties. See what Jim Rogers and Joseph Stiglitz had to say about these alternative options back in 2009:-
http://www.ianfraser.org/rogers-governments-should-have-let-banks-go-bust/
http://www.ianfraser.org/755/
In theory and retrospect those options existed
Exactly three years ago and over one weekend I very very much doubt those options were realistic in the ace of serious bank opposition
But let’s agree to differ
Doesn’t this presuppose that the economy isn’t going to tumble doiwn anyhow?
It needn’t
I and others have explained the entirely viable alternatives
Richard
you ought to try & publicise your arguments more widely. Labour are really suffering, in part because of the debt incurred by the banking bail-out. While many economists may praise the role played by Gordon Brown in 2008 it is almost universally unpopular with the people “on the street”.
I must say I shared the popular view but I’m persuaded by the arguments that people like you & the great Martin Wolfe put forward. When Dubya, in a way to his credit, let Lehman Bros fail it almost lead to disaster “this sucker could go down”, & the USA has perhaps 100 fairly substantial banks. We’ve got 4.
If we don’t end the banks the banks will end us, albeit by degrees. If there is to be a crash let it be now while we still have the strength we do. Leave it, as we have done already for several years as this action should have been taken in 2008, and the banks and financiers, having bled the rest of us dry, will be the only ones prepared for the crash when it comes.
And on the subject, why do we not hear about the depression of 1920? Because the banks were allowed to fail. Society went on…
BB
Banks did not fail in the 1920s – not here at least.
and let’s still be clear – I want massive banking reform, but a bank crash is the worst way to get it as all effort will go into the short term and not the long term mess
Large banks failed in America. We don’t hear about it because others promptly stepped in to pick up the slack. Life went on, just as it would have done (with a brief intermission!) in 2008 if we’d let the banks go then. Now they’re that much stronger, we’re that much weaker, and it’ll be worse when it happens. So much of this is down to weak ineffective individuals and plain traitors in government. If we had a Kirk or as Picard in charge, the auto destruct sequence would have been started long ago and we’d be eyeball to eyeball with the big banks, waiting to see who blinked first. As we should be.
BB
I think that a simplistic view of what happened
The saviour was state cash injected through other banks: the wrong solution. Nationalisation would have been the answer
However, I sympathise with Phil’s comment. In the decade to about 2007 4 major economies had appalling & lunatic house price rises: USA, UK, Eire & Spain. 3 of them have now had massive house price slumps as they returned to sensible, affordable, levels. One hasn’t.
If UK house prices were at a sensible level, which is about 1/2 what they are now, almost every bank, certainly all the major ones, will have a massive amount of unsecured, probably uncollectable debt.
How will they survive then ?
If all land rent were collected for public benefit the price of landed property would tend towards the cost of buildings; with the main loan collateral evaporated the banks would have to learn proper risk assessment; credit would be directed to real investment; wealth inequality would be slashed; we’d be able to get rid of Council Tax and Stamp Duty Land Tax and raise the income tax threshold; we’d never have another boom/bust cycle because the only asset price bubble which matters is the one involving land because it is part of the real productive economy.
Even if the domino effect is blocked by the government (by stepping it to replace the loans the failed bank makes to other banks), there is another problem.
If a company goes bust the creditors want their money. The people who have the money in this case are the mortgage holders – all that banks customers would have to remortgage to pay off their debts to the failed bank. 1,000,000 borrowers (9% of all mortgages) trying to raise £150,000 each requires 150bn in liquidity somewhere. (There are 11.3 million mortgages in the UK, with loans worth over £1.2 trillion – [Council for Mortgage lenders]). Add on all the personal loans, overdrafts, credit cards the biggest banks have, and that would be a lot of people trying to get finance.
Richard,
Can banks at least be allowed to fail to the extent that the shareholders and bond holders get nothing?
Could the government stop insuring the counterparty risk on derivatives that a bank enters into after a given date? (Surely if one government did this all governments would have to. If banks fled to a more tolerant government, it couldn’t afford to take on the risk)
Could nationalisation get past competition law? There must be a lot of highly paid lawyers who will argue that a nationalised bank would have a competitive advantage over the indirectly subsidised banks.
It has always seemed to me that the best approach is to start now, before the next collapse and for the government to begin to define in advance the amount it is prepared to insure each bank for, to define what it expects from each bank in return for the guarantee, and to progressively reduce the amount of insured activity till it matches the amount of activity that the government considers useful. If a bank chooses to leave, it is up to its creditors to decide whether another government offers a credible guarantee.
On competition law I think it time for its suspension due to economic crisis.
It is time to say that the cause of the crisis cannot prevent its cure
Re giving bond holders a hair cut – yes that could easily be a condition of a nationalisation
But remember, pensioners will suffer
And re CDS etc – an immediate split into two would be essential – indeed, payment of the consideration for the debt of nationalisation of the useful bank could come from giving back the investment bank no one wants – including the state
If we want to nationalise RBS or any bank and give it special authority which does create an unfair advantage for it over the other banks… let’s get round it by not calling it a bank. Let’s call it a Fred, or a Mandy, or an Alison. Whatever. After all, how did the banks get round legislation concerning insurance policies? They renamed them credit defaults, and carried on. We should take a leaf from their books here.
BB
Why not separate mortgage/deposit banks from the speculator banks like Glass Steagall in the US,
Agreed
It would be the first thing I would et in place if a bank nationalised
And it should be done now – not by 2019 but by 2013