Tuesday, 20 January 2009

RBS financial catastrophe shows why Socialist Economic Bulletin was right to argue against government bank shares purchase plan

Socialist Economic Bulletin has on numerous occasions warned against the potential huge losses for the taxpayer and the public finances constituted by the government scheme announced last autumn to purchase shares in RBS, HBOS, and Lloyds TSB. The financial dimensions of that disaster were made quite evident yesterday with the announcement of RBS's likely loss of £28 billion. This led to a collapse of RBS's share price to 11.6p at the close of trading compared to the 65.5p at which the government purchased them – a loss of over 82 per cent.

It gives absolutely no pleasure to recount that record. The aim of SEB was to persuade the government not to carry out such a proposal, not to be able to criticise it afterwards.

The losses for the tax payer of this financial disaster will be many billions of pounds – money that could have been spent on hospitals, schools, improving Britain's creaking infrastructure or developing the productive economy. A preliminary estimate indicates that losses to the taxpayer could be up to £9 billion.

SEB is outlining here its clear record of opposition to the RBS and other bank share purchase schemes for simply one reason. This financial crisis is far from over. The government has not been listening seriously to those, such as SEB, which understood more accurately the depth of the present financial crisis and therefore warned the government of the potential huge losses to the taxpayer in the path it proposed.

The assessment of SEB of the financial situation, in short, was and is more accurate than the advice given to the government. SEB wants the government to succeed, and the financial crisis to be overcome, and therefore the government should in future listen to more accurate assessments of the financial situation - as those which it is currently acting on significantly underestimate the depth of what is occurring with consequent huge losses for the taxpayer. It is that reason that SEB notes here some, far from all, of the analyses it has published of the likely huge financial losses flowing from the bank share purchase scheme – other articles may be found by looking under the relevant section of 'Articles by Topic' on the sidebar of this blog. Losses from the new proposed bank debt 'insurance' scheme are likely to be still higher and this issue is therefore ongoing.

The moment that RBS and other banks formally approached the government to purchase shares on 7 October last year SEB warned that this plan should be rejected as it would open up the government and taxpayer to huge losses. The same day Ken Livingstone published an alternative plan for dealing with the banking crisis based on full nationalisation of failing banks rather than purchasing shares at inflated prices in them. Vince Cable put forward the same position yesterday saying : 'The government must bite the bullet on the public ownership and control of the banks to ensure that lending is maintained to sound companies who can keep the economy ticking over in these turbulent times.'

On, 8 October, SEB repeated its warning of evident financial disaster in RBS. This warning was stepped up on 9 October as SEB noted that it was the riskiest banks that were specifically asking for the government to purchase shares in them. On 11 October Ken Livingstone again argued that the government should nationalise the failing banks rather than buying shares at over inflated prices. On 12 October John Ross argued that the government was vastly underestimating the potential for a collapse in the price of bank shares and there was no evidence that, as was claimed, these were being bought 'at the bottom of the market'.

When the bank share purchase scheme began to be implemented on 15 October SEB pointed out that in first two days of operation the losses to the taxpayer were £2.8 billion. On 17 October Ken Livingstone again argued why the bank share purchase plan was deeply financially flawed for the taxpayer.

On 27 October SEB published a comparative analysis of the fall in prices on Japan's Nikkei share index to show why the government plan was dangerously underestimating the potential for losses to the taxpayer on the bank share purchase scheme. On 11 November
SEB again warned on rising cost – and repeated this on 17 November. On 22 November SEB carried a detailed analysis, from a theoretical economic point of view, of the flaws in the government scheme. On 28 November SEB reported that RBS's share rights issue had been the most unsuccessful in history. On 16 January SEB analysed how Britain's nationalised banks should be being used by the government as a core part of anti-cyclical economic plan instead of further private bank bailout schemes - with their huge losses for the taxpayer and consequent unpopularity for the government.

SEB, in short, has not been playing 'wise after the event'. It warned of the dangerous financial consequences of the bank share purchase scheme at the time and that analysis has been vindicated. This is because SEB's analysis of the overall financial crisis is more accurate than the advice that has been received by the government.

1 comment:

Bemused Economist said...

I think this shows the superiority of a socialist analysis.

Socialists learnt from Marx that theory must be based upon the objective facts of the material world. This allows a much more scientific approach than the bourgeoisie's, which has to obscure the facts.

If the bourgeoisie were honest about the economy, they would have to admit that the most dynamic economy in the world is socialist (i.e. China), and that state ownership of assets allows much more effective responses to recession.

Can't imagine that in the FT...