Monday, 19 January 2009

UK bank 'insurance' scheme will become even more unpopular because it is economically wrong

Unsurprisingly it was the Tories who proposed the new scheme whereby UK bank loans will be insured by the state - a method whereby losses made by the private banks are 'nationalised', that is underwritten by the tax payer, while bank shareholders have share prices propped up by taxpayer guarantees. It is, in short, a system whereby bank shareholders siphon money from the tax payer.

This scheme is wrong from the point of view of economic policy - what is required from an economic point of view, as Socialist Economic Bulletin has pointed out, is bank nationalisation in order to ensure lending to the economy restarts. Under the present scheme bank shareholders will continue to take tax payers money as profits instead of all money being used for counter-cyclical bank lending.

Precisely for that reason the scheme will be deeply damaging politically - people will understand their money as taxpayers is being siphoned off to the bank shareholders and bank managements who took the decisions which are responsible for the present deep economic crisis. The scheme is therefore already unpopular for that reason and it will become more so as the taxpayer begins to pick up the bill.

That the Tories should propose the public is robbed by companies is natural -that is why they proposed the scheme. But Labour should not be supporting it. Nationalisation of the core of the UK banking system is what has been required since last autumn and it should be proceeded to before even more billions of taxpayers money is lost.


Mr Banks said...

Why are the banks complaining?

There should be no confusion sown by the reports that many of the banks are baulking at the latest taxpayer bailout.
The article above is entirely correct that there is both a moral and economic imperative to nationalise the banks and remove the bank shareholders who leech capital from a stricken economy.
Yet it is reported that Barclays, Lloyds-HBOS and others are reluctant to accept the terms offered.
This should not mislead anyone into believing that the government is 'getting tough' with the banks or imposing any conditions which might ultimately benefit taxpayers.
Instead, it should be clear that the objections of the bank executives is to ANY government stake in the banks. Why would they? It's as if you saw a burglar walking out of your home with your tv and pc, and offered to lease him your watch, he might say no thanks too, I'm having it anyway.
The economic consequences of all this could also be compounded by helping Cameron to an election victory.

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Mr Banks said...

Bank Shares Collapse

The folly of using taxpayers' capital to prop up the main banks is shown by the collapse in their share price yesterday. Barclays closed at 88p, a loss of 83% in the last 12 motnhs, Lloyds is down 88% and RBS closed 11.5p, down 97.5%, and is effectively now worthless despite the government's prior £37bn bailout and interbank lending guarantee of £250bn.
This blog repeatedly warned that taxpayers could lose all of that capital and now the government is emulating the policy of the RBS management; like a gambler refusing to accept losses, the stakes have just been increased.
But RBS alone has a balance sheet of approximately £2 trillion. So it is inevitable that even an ordinary recession will produce eye-watering losses. Moody's credit rating agency forecast this month that default rates on some corporate debt this year alone would be between 10% and 12%, which is simply the average of the last two recessions.
Therefore the financial operators in the stock market simply do not believe this is the last of RBS's losses (and place no credence in Barclays claims to have made a profit) - so the share prices have collapsed.
This business-friendly government should take the hint; the banks' likely losses are almost limitless. Their shareholders and bondholders should take the pain, not taxpayers. The bailouts are disappearing down a blackhole of overvalued assets and the capital should instead be used by government-owned institutions to support economic activity.