The sorry history of bail outs

 

            UK governments have a weakness for bail outs which often  don’t work.

              Years ago the bail outs went to distressed nationalised industries. Regularly the great state owned companies found they could not live within the often generous totals of money the Treasury offered them. The managements became adept at working out how to force the hand of successive governments. They demanded more money and threatened unfortunate consequences if it was not forthcoming. It was usually granted. The performance of these big industries fell further and further behind the world’s best. The customers got a bad deal and the taxpayers got a bad deal. Many of the employees lost their jobs.

             In 2007-8 some of  the banks became state pensioners. Governments  in panic foolishly decided to prop up banks that were too large or which had failed business models. Instead of forcing them to sell assets, slim down, cut costs, and take other action appropriate to their errors, they were transferred in all their imperfections into taxpayer ownership. The UK government  should have protected UK depositors but not whole banks. We are still paying the price for this.

          Now in 2010-11 government is helping bail out whole countries that have made a mess of running their affairs. In some cases, like Ireland, the state needs a bail out so it in turn can afford to pay for the bail out of its banks. Governments which thought that transferring damaged assets from banks to governments would solve the problem, now find it is difficult even for the state in some cases to afford the losses. In other cases European states need bail outs because they are in the wrong currency at the wrong exchange rate. Greece cannot compete as an economy and provide all the jobs its citizens need because it is locked into the Euro at too high a rate. In  consequence it needs to pay much more out in unemployment benefit and the like. Now it wants others to lend it the money.

             The message is bail outs do not work. You need to solve the underlying problem. In the case of the nationalised industries they needed to concentrate on winning more business and raising their efficiency. They now do this in the private sector without recourse to public subsidy.  In the case of the banks they need to sell off businesses and assets they cannot afford and cut their costs. Public ownership has delayed this necessary process of adjustment, allowing them to continue with high salaries and ownership of too much. Now governments are in the queue to be let off having to make some sensible but tough decisions.

           If a country is in the Euro and is not competitive it needs to leave the Euro or cut its costs drastically. If a country is spending too much it needs to cut its spending. If a country cannot grow in the Euro it may have to leave. If a country is being placed at risk by supporting too many large banks, it needs to work on an accelerated programme of asset sales, cost cutting and reorganisation of the banks.

                  Always seek to resolve the udnerlying problem. Bails outs may buy you a few months. You end up with the same problem, and even more debt to pay off.

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37 Comments

  1. Kevin renaults
    Posted June 18, 2011 at 6:41 am | Permalink

    What if the United States had taken this attitude to Europe after the war? The fact Germany is in a position to save us now is testament to bail outs. And yes, Germany IS saving us. If the Euro collapses we’ll go down with it, and it’s only going to take one country defaulting for that to happen.

    • StevenL
      Posted June 18, 2011 at 1:07 pm | Permalink

      The underlying problems – Hitler and Nazism – had been solved!

  2. lifelogic
    Posted June 18, 2011 at 6:47 am | Permalink

    You are right as usual: “Always seek to resolve the underlying problem. Bails outs may buy you a few months. You end up with the same problem, and even more debt to pay off.” This is so blindingly obvious – so why does no one in government act on it?

    And all these bail out going at at time when UK industry is still starved of cash by the banks. What could 10% of this wasted money do if it were lent to UK industry where it would actually be repaid additional jobs and with interest not just lost down the drain.

    On MP’s pensions I understand you get 1/40 of salary per year as a pension if you pay the maximum option of 11.9% of salary (£65,738) as a contribution.

    So a personal contribution of £7822 gets you £1640 of pension index linked for life per year of service, Depending on one’s and one’s spouses ages perhaps worth as much as £50,000 in the pension pot for a contribution of just £1640 gross (or £657 net).

    Only a tiny % of the pension value is therefore actually a contribution from the MP. I am sure nearly every one would in the country like to join such a scheme but they will almost certainly not be offered one that is similarly generous. The also get substantial loss of office benefits I understand.

    This might not matter so much if they were actually representing the people but most are not – they are just collecting a salary and pension for doing as the party tells them.

    • lifelogic
      Posted June 18, 2011 at 9:58 am | Permalink

      Sorry I meant £984 net.

      • lifelogic
        Posted June 18, 2011 at 2:18 pm | Permalink

        Sorry yet again – must get an editor some of my figures have jumped out of position a bit.

        But this is now right – MP contributes £4,693 PA net after 40% tax relief to his pension and gets (depending on the couples ages) circa £50,000 of index linked pension value PA.

        So after just 20 years contributes £94,000 and get a pension worth £1M.

        Can I join the scheme please here is my cheque for £94,000.

        Reply: I have looked at a recent pay slip and confirm that my Pension contribution is 11.9% of gross pay.
        Over 20 years an MP would at this rate contribute £156,456 to the pension plan, plus all accumlated gains and income of that contribution.

        • lifelogic
          Posted June 18, 2011 at 5:59 pm | Permalink

          Yes £156,000 before tax relief.

    • lifelogic
      Posted June 18, 2011 at 10:25 am | Permalink

      I had though that after Major’s entirely predicable ERM farce government and bureaucrats might have learnt something but alas not.

    • HJBbradders
      Posted June 18, 2011 at 11:02 am | Permalink

      I make £1,640 gross equal to £986 nett.

    • Acorn
      Posted June 18, 2011 at 11:16 am | Permalink

      LL. A bit confused with your numbers in forth paragraph of your post. But,say, a personal contribution for one year of £7822 would buy an annuity of 4.8%; for joint life, index linked at 3%. That would be about £380 a year pension retiring this year at age 65.

      So to get forty fortieths, ie full pay as pension, I reckon an MP would need a pension pot at 65 of £1,300,000. I doubt any MP will ever get any where near forty years under their present scheme; and, forty years from today the cash salary will probably be at least three times todays £65k. Someone may know more about annuities than I do, so the above is not gospel.

      • lifelogic
        Posted June 18, 2011 at 6:07 pm | Permalink

        Yes sorry have corrected above but the annuity I assume includes a spouse’s pension and is inflation linked and government backed so would cost rather more. Certainly with current low interest rates and increased longevity. Yet more again for female MPs (though the EU have some mad new rules, trying to level these out in some bizarre way).

    • norman
      Posted June 18, 2011 at 12:50 pm | Permalink

      The Spectator’s editorial this week said that a public ‘servant’ (how the worm has turned) on £23k p.a. can expect to see early retirement with a £500k pot.

      How many private sector workers on £23k can retire early, let alone with half a million quid in the kitty? The article also said that the same worker earns 25% more on an hour to hour basis than his equivalent in the private sector.

      To be fair to the government they do recognise this is an outrage but I doubt they’ll actually achieve anything.

      • lifelogic
        Posted June 18, 2011 at 6:15 pm | Permalink

        Yes someone on 23K might only take home about £850K in their working life. Take away the cost of getting to work for a life time perhaps £80K. So they nearly have as much in their pension at retirement as they have had to live on for 45 years of working life.

  3. Mick Anderson
    Posted June 18, 2011 at 7:25 am | Permalink

    The Governmental answer to virtually every problem involves pouring more money in. It’s an easy decision when you don’t have to either earn the money or justify each individual decision. Throwing cash at anything is often a bad idea, especially when the cash is a loan, adding to any existing problem at least as much as alleviating it.

    However, if changing the management structure is required, I’m not sure that Government is the best organisation to arrange it. It the same way that I don’t believe that a high street bank “Business Manager” knows anything about running my business, I don’t believe that Government knows how to run industry. If they are to be judged by how they run the country, I wouldn’t trust them to open the proverbial whelk stall.

    Likewise, why would Greece (the people or the Government) trust the IMF, the EMF or any of the other European Governments to tell them how to reform their country? If I was a Greek, I wouldn’t!

    • Iain
      Posted June 18, 2011 at 10:15 am | Permalink

      “The Governmental answer to virtually every problem involves pouring more money in”

      A slight correction to your sentence,….

      The Governmental answer to virtually every foreign problem involves pouring more money in.

      We have a very odd Government who lavishes money abroad whilst insisting we wear hair shirts. It seems to be a perverse development of Blair’s new Labour agenda where he sought to ingratiate himself with the electorate by attacking his own party. Cameron has taken it to its extreme where he seeks to punish England.

  4. Alison Granger
    Posted June 18, 2011 at 8:10 am | Permalink

    “The message is bail outs do not work.”
    There’s another message that you’ve overlooked. Governments cannot EVER run anything efficiently. That is demonstrated every time I have any contact with any public sector agency. The only remedy to that is for governments to do the absolute minimum and refrain from interference in just about every aspect of our lives.

    • lifelogic
      Posted June 18, 2011 at 10:22 am | Permalink

      Certain this is true one often has the impression that government is all about thinking of new ways of milking taxpayers and diverting the revenues to state sector workers or friends/relatives of the powerful, or trying to buy votes (in a way that is just about legal or at least can be got away with politically).

  5. Alan
    Posted June 18, 2011 at 8:37 am | Permalink

    But in the case of Greece, who is bailing out whom? Only the Greeks are motivated by a desire to do the best for Greece. Others are concerned to protect their own banks and financial systems, or to protect the reputation or the value of the euro, or to use the crisis to further their beliefs in how the Eurozone should be run. The Greeks are being put under enormous pressure not to default, even though I would have thought that it is clearly in their best interest. It is the Eurozone’s equivalent of devaluation and ought to be accepted as a necessary part of belonging to a currency union.

    People providing bail-outs are not necessarily trying to rescue the organisation requesting the bail-out. They may have other motives. Those motives may be achieved even if the bail-out ‘fails’.

    Or they may of course just be unable to decide what to do.

  6. alan jutson
    Posted June 18, 2011 at 8:39 am | Permalink

    Think your post is clear enough.

    So why do our Political masters in a whole range of countries think they can buck the system and reality, would it be self preservation at all/any costs for a few more months or years of power.

    I cannot think of any other reason.

  7. Brian Tomkinson
    Posted June 18, 2011 at 8:40 am | Permalink

    Is the fact that the EU is incapable of following such eminently sensible advice a sign that politics is currently regarded as more important than financial prudence? As for our own government they seem to just be dragged along with whatever Brussels decides.

  8. oldtimer
    Posted June 18, 2011 at 8:57 am | Permalink

    I agree with this analysis. But you could well have added the initiatives of the politicians to this mix- such as the creation of the Industrial Reorganisation Council (IRC) which encouraged and facilitated one or two ill fated mergers/takeovers or the ill-conceived, ill-fated Ryder Report which prescribed the solution encouraged by the politicians in charge at the time (such as Wedgewood-Benn).

  9. Iain
    Posted June 18, 2011 at 9:02 am | Permalink

    ” UK governments have a weakness for bail outs which often don’t work.”

    A weakness which is going to personally cost the British political classes dear.

    The British political classes have NO legal cover for the bail outs, in fact it is made quite clear in their much beloved EU laws it is ILLEGAL.

    As such they have, when we lose billions on their EU largesse, they will be liable to the charge of malfeasance. Misfeasance in public office being that the office-holder acted illegally, knew he was doing so, and knew or should reasonably have known that third parties would suffer loss as a result.

    Here the British political classes have no defence, they will be guilty as charged, all we are waiting for are the losses, then we can get on suing them to the bankruptcy courts, and they will learn what being accountable for their EUphile deception is all about.

  10. forthurst
    Posted June 18, 2011 at 9:22 am | Permalink

    One of the major problems with our industries, nationalised or not, was the total failure to apply any form of legal discipline, whether civil or criminal, despite the ideliberate sabotage by Marxist infiltrators. Now that most of our engineering industry is either gone or in foreign hands, the trouble makers have transmuted themselves into Cultural Marxists and infiltrated the Labour Party, the BBC, the Education establishment etc. Until behaviour which is destructive of the well-being of the country is properly recognised by the legal system, we will continue to suffer from the sickness that destroyed our industries, despite Mrs Thatcher’s last ditch attempt to rescue what was still salvable, and pushed us into relying on businesses which operate abroad such as banking, mining, oil.

    As with our industry, so with the banks, there has been (some alleged-ed) criminal activity as well as behaviour of extreme irresponsibility amounting to criminal negligence. Yet when are the fraudsters selling toxic assets to be charged; when are there to be prosecutions of the thousands of falsified mortgage applications, prosecutions for trading whilst insolvent etc? If politicians are going to treat every issue as a financial problem to be solved by chucking taxpayers money at it, they may be surprised this time to find that the blowback will be against them and having a PR background will be of no avail. If the politicians think that we are going to tolerate years of pain with crippled but insatiable banks and banksters because of their failure to yet again deal with the underlying issues, the realisation will dawn that ‘democracy’ does not work and that we need a new form of government which does what is needed in part by (repressing-ed) vociferous special interest groups.

  11. oldtimer
    Posted June 18, 2011 at 9:33 am | Permalink

    A further thought and question on this issue. The EU and the UK government is spending, and plans, to spend considerable sums of money on subsidies for uneconomic renewable energy sources such as wind farms and solar panels. Even more spending is imposed on consumers and businesses via the renewables obligation, the carbon tax and other opaque means. It is clear that, on a level playing field, renewable energy is not competitive with its rivals. Do not these subsidies amount to bail outs too?

    • norman
      Posted June 18, 2011 at 8:43 pm | Permalink

      Whenever the government tries to pick a winner it amounts to a bailout / subsidy. Capitalism flourishes because failures fail, so we think long and hard about where to put our money and if we are involved in a failure we learn the lessons from that failure and improve (this is one reason why the bank bailouts were such a monumental error) but when governments pick winners they back that ‘winner’ even when it is obvious to everyone he is lagging well behind the field but politicians can’t admit they got it wrong so Joe Public is stuck picking up the bill until we have a paradigm shift.

      Or we can always print more money – if savers are so irresponsible as to not be spraying their money around on new 60″ plasma TV’s it’s up to politicians to do it for them.

  12. Javelin
    Posted June 18, 2011 at 9:55 am | Permalink

    I think as a general principle there will be contagion as the debt crisis unravells. The is so much focus on the Greek default because it will cause a “breakout” – that is a number of financial thresholds will be breached leading to “stepped” events rather than a continuous and smooth deleveraging of debt. The Eu has been trying to minimise the damage from the fall out from causing other stepped breakouts.

    I honestly don’t think politicians put enough efforts into understanding the consequences of their actions. The Eu leaders need to dissipate the energy. But I can’t see the total negative energy (ie debt) will need to be absorbed. The best way is to distribute it amongst the beneficiaries of the borrowing – such as bond holders, public sector workers etc.

    Unfortunately the debt needs to be wound down. Do we do it quickly or do we wind down for 10 years. I ve said this before but until house prices come back to an average lesson the economy will not approve.

  13. Gary
    Posted June 18, 2011 at 10:18 am | Permalink

    Bailout : issue a new credit card to pay off an earlier credit card.

    Even a child can understand that this cannot work, but the govt apparently cannot understand this.

    OR

    the govt are (word left out ed) beholden to the bailout recipients ?

  14. Mark
    Posted June 18, 2011 at 11:28 am | Permalink

    Banks have been profligate in three ways: they have inflated property bubbles, lent to governments for current spending that was never going to be covered by taxation, and leveraged industry and the economy at the expense of equity. They are now being required not to permit the property bubble to unwind in the UK; to lend yet more money to wastrel governments under the pretence of a bailout guarantee; and to force expensive loans onto enterprises that do not want them. All of this compounds the problems, rather than solving them.

  15. StevenL
    Posted June 18, 2011 at 1:12 pm | Permalink

    The thesis seems to be that Greece is cash flow insolvent, when it is probably balance sheet insolvent and needs large scale creditor forgiveness (not just from domestic creditors eho expect high welfare/pension/salary payments in euros).

  16. Mark J
    Posted June 18, 2011 at 2:08 pm | Permalink

    The whole EU is a shambles. The richer countries propping up the poorer badly managed ones. The only problem is we CANNOT afford it. David Cameron is not a Eurosceptic as previously claimed, if he was he would of put an end to us bailing out other countries (even more so considering we did not join the ill fated single currency) and told the EU where to go. Howver he has not done so, instead giving money from our own austerity measures to the EU and other nations.

    It has been stated that HALF the money saved in austerity measures in the UK has either been given away to other countries or has been committed to ballouts of other EU countries.

    Is it any wonder the people of the UK are becoming increasingly fed up with this Government?

  17. Denis Cooper
    Posted June 18, 2011 at 2:49 pm | Permalink

    When Woolworths ceased trading nobody suggested that the government should step in to ensure that its doors stayed open.

    And rightly so, because Woolworths suddenly shutting up shop only meant that its customers could no longer shop there, which was something of a nuisance for them but very limited in its impact.

    It didn’t lead to Woolworths customers finding that they could no longer receive their salaries and other income payments, and nor could they pay their regular bills through standing orders or direct debits, and nor could they pay by cheque or withdraw money from cash machines, and all their savings held by Woolworths were frozen and might never be released in full.

    And nor did Woolworths suddenly shutting up shop lead within days to other retailers also being forced to shut up shop.

    It would have been a very different matter if it had been Woolworths the High Street bank rather than Woolworths the High Street retailer; then the government would have had no choice but to take emergency action to keep it going, if necessary by nationalising it.

    The real questions revolve around what should happen after the immediate threat of severe dislocation has been averted, and in my view if the senior managers of a bank ever get it into the position where the state is obliged to seize it then the bank should be liquidated, and they should be held personally liable.

    By now there should no more be a “Northern Rock” trading as a bank than there is a “Woolworths” selling a variety of cheaper but sometimes rather tatty goods, and imposing heavy personal liability on the senior managers of the bank is the only effective way to avoid moral hazard and prevent the likes of Adam Applegarth recklessly driving their banks to the wall.

    Reply: You do not have to nationalise a bank in order to preserve settlement of transactions and guarantees for depositors. A bank in trouble can be split up, put into administration, put through a work out, destroying the shareholder and bondholder interests but preserving its useful work for the wider economy.

    • Denis Cooper
      Posted June 19, 2011 at 2:24 pm | Permalink

      Agreed, and as the Civil Contingencies Act covers “disruption of a supply of money, food, water, energy or fuel”, and also specifically “protecting or restoring the activities of banks or other financial institutions”, one might have thought that the necessary emergency action could be taken without the government automatically assuming all the liabilities of the bank.

    • Peter
      Posted June 20, 2011 at 5:44 am | Permalink

      “You do not have to nationalise a bank in order to preserve settlement of transactions and guarantees for depositors”

      I’m curious to know more. How could that be done?

      IF a cost free way exists I would have thought that the Bush government in the USA would have found it, even if a Labour government in the UK may not have bothered to look.

      Reply: You strip the bank of its clearing system – and guarantee the deposits whoever has the liability for them – forcing the rest of the babnk to be handled through administration. This is now the new policy, with so-called “living wills”

  18. Andrew Gately
    Posted June 18, 2011 at 4:41 pm | Permalink

    Unlike 99.9% of the UK population I do not think the banks were bailed out.

    I think that the normal trading conditions failed and so we had to move on to plan B to save the system.

    In the great depression we did not save the system and this was a major factor in causing world war 2.

    Banks borrowing money from the central banks due to lack of liquidity in the market place is a very sensible thing to do provided interest and security are given. IMO this is not a bailout.

  19. David Hearnshaw
    Posted June 18, 2011 at 5:02 pm | Permalink

    What a mess!

  20. Bazman
    Posted June 18, 2011 at 5:47 pm | Permalink

    Robert Riech puts forward the idea that the American economy has doubled since the 198o, but wages have remained the same. Who has got all the extra money? The rich who have used it to buy political influence to pay less tax this has led to huge deficits and doubling infrastructure with the middle classes divided and fighting for the scraps and less able to borrow leading to a slow recovery. The middle class needs to be strong to have a strong economy. Not as one contributor to this site put it. Neo feudalism.

  21. BobE
    Posted June 18, 2011 at 10:18 pm | Permalink

    This is the third attempt to create a single country called Europe. With luck this attempt will also fail.

  22. Vlad the Impaler
    Posted June 20, 2011 at 3:31 pm | Permalink

    Friends just back from a holiday in Greece reported that a gin and tonic at their hotel was Euro 11. Tells you all you need to know about Greece.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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