Who will rid us of these turbulent banks? The government has landed taxpayers in a dreadful and expensive mess.
First they blundered by allowing banks to lend too much and balloon their balance sheets in the good times. The Regulators fell down on the job. The government encouraged them for political reasons, wanting to keep interest rates too low and credit plentiful. Few were to be denied a mortgage, regardless of whether they could pay it back.
Next, they made the crisis worse by hiking interest rates too high for too long and starving the money markets of cash, leading to the crash in 2007 and 2008.
Then they panicked, buying shares in RBS, Lloyds, and Northern Rock without valuing all the dodgy loans properly. They didn’t ask for a discount or protect the taxpayers interests. Vince Cable became the apostle of nationalisation, given large amounts of airtime to help the government dig us deeper into the mire of owning too many risky banks on bad terms.
Messrs Darling and Cable tell you they had to intervene to buy all these nasty bank shares at high prices and then watch them fall once in public ownership. They claim it was the only way. They want you to think they saved the world.
Their actions were damaging and costly. Far from saving us, they have lumbered us with huge debts for years to come. So what should they have done?
In the good times they should have raised interest rates earlier and told the banks they needed to be more careful. When the bad times started they should have slashed interest rates much more quickly, and lent money to the banks in trouble on tough terms to see them through. There was no need to buy shares in RBS or Lloyds. Northern Rock need not have gone under if they had seen the obvious warning signs in August 2007 and done then what some of us recommended.
We are now being mugged by these bad banks. The government makes us stand behind them as their owners. On top of that the government is offering to take all their worst loans off them and give them to – yes you’ve guessed it – us the taxpayers. What ever did we do to deserve that?
So what should they do? How could we get out of this catastrophe?
The first thing to understand is that RBS and Lloyds/HBOS are simply too big and too risky. They should be split up. Their profitable foreign banks should be sold off as quickly as possible. There are buyers out there now for good overseas banks.
Investment banks in the private sector are coining it in again. The investment banking arms of RBS and Lloyds should be put quickly on a commercial footing and sold as well. The taxpayer should not be expected to stand behind casino banks. RBS had ÂŁ500 billion at risk playing the markets at its last year end. That is far too much for taxpayers to have to underwrite. They are playing with almost as much as the government spends in total in a year.
The loss makers, including the UK banking arms, should be told to cut costs and get back into profit quickly. There should be no bonuses for senior executives in nationalised loss makers. If they want top drawer remuneration they should produce top drawer results – or do it with someone else’s money, not the taxpayers.
Meanwhile, the government and its regulators need to get their act together. Mr Darling has recently lectured the banks on the need to lend more. He has told them he did not make all this public money available for them to sit on their hands.
Oh yes he did. For at the same time as grandstanding and lecturing them, the FSA, his regulator, is telling the banks they need to keep more of the money they have in liquid form. That means they are not allowed to lend it to you or me or to companies. The rules stop them.
The authorities have created a self serving money go round. Taxpayers put money into the bad banks. The banks are then told they need to keep more of the money handy and lend it back to the government!
The government was wrong to allow all the mega mergers that created a bank on the scale of RBS. They could have blocked some of them. They were even more foolish to urge Lloyds and HBOS to get together. Merging a bad bank with a good bank does not create a good bank, as we have seen in the latest figures showing huge HBOS and Lloyds losses.
We the taxpayers now support banks that risk more than twice our total national income, what we all earn. I warned when they embarked on this crazy course that they could easily lose us the equivalent of the defence budget. It is going to be more than that. HBOS alone lost ÂŁ13,400 million in the first half of the year, which was close to what we spend on our armed forces. What benefit are we getting for that?
It is time to try a different approach. This government can no more suspend the rules of sound finance and the laws of arithmetic than the rest of us. If our nationalised banks go on losing us money on this scale, it means much less available to spend on other things. It is high time they were put under some pressure, to shape up and sell off their businesses. And in the meantime, don’t insult us by sending us the bill for large bonuses. Can’t Mr. Darling at least sort that out?
August 26, 2009
I don’t disagree with your essay John and certainly don’t argue that something needs to change – starting with remuneration in the nationalized banks.
I don’t argue that the money the banks are being given is stuck in a loop that prevents it getting out to business or for private loans.
However I do disagree that this is to be blamed on the banks or regulation entirely. People need to take responsibility for how they helped get this country into this mess. Anyone who is currently in debt having mewed away the notional gain in the value of their property or have covered their lifestyle using copious amounts of plastic without thinking about the consequences of loosing a job or some other shock event, is equally responsible. As a tax payer with savings and investments my money is being used to prop-up the banks, the gov’t and cover over everyone who enjoyed a lifestyle beyond their means. The words bankruptcy and IVA no longer have a stigma that they represent and this needs to change back.
reply: Were there bad bankers? Yes there were. Should they be rewarded?No they shouldn’t.
August 26, 2009
This article sets out what you have been consistently saying now since the crisis started.
And it is, above all, sound commonsense too.
Quite apart from all the money matters, we are actually at war in Afghanistan and the paltry sum of just under ÂŁ40 billion, which seems to be the amount of money being spent there at the moment per annum, is dwarfed by the ÂŁ500 billion we currently have on the gaming table in just one game.
It is so like the story of the 18th century young rip, who gambles all his family fortunes away in one throw of the dice.
But this time it is our nation who loses its inheritance.
I looked up the Express, and the article is nowhere to be found! I suppose it will be published tomorrow?
Reply: It was sometime ago they printed it
August 26, 2009
The fact is that the highly paid FSA staff have been protected. The government set up the current system and it instantly bgained a reputation as the cushy place where old civil servants and bankers go to die. The FSA owes its existence to the fact that Gordon Brown did not like Eddie George, and wanted to clip the BoE’s wings. Our Heath Robinson regulatory system needs urgent reform and a reversion to the status quo.
The politicians are vulnerable to the truth coming out if they attack the FSA – exactly as John says, everyone looked the other way as cheap credit kept the party going, and the government used bankers’ bonuses to fund its spending binge, and as a way to build up a highly paid cadre of placemen who will be difficult to shift if the Tories get power. Blaming the banks is much easier and our public-sector-biased BBC rarely criticizes the regulators.