Simon Jenkins has attracted a great deal of attention with his article published in the Guardian last Thursday (11th March, ‘The bankers lied.  And Darling, a mere puppet on their string, knows it’) in which he lambasts the government for its failure to ensure that the banks were accountable to it for the trillions (a million million millions) of pounds poured into them in October 2008.

A week or so ago I heard Michael Sandel, televisual law professor from Harvard, speaking in a Guardian debate at the British Museum, point the same finger at the American government, denigrating the lack of accountability that had accompanied the US bank bailout.  He, though, invited a comparison with the UK, where board seats and shares had, at least, been the price for the security offered.

Simon Jenkins does not mince his criticisms.  He demands to know whether the money was necessary and where it has all gone, and why banks have felt the generosity of the government when businesses have not:

“The nearest to an explanation came from the man responsible, Alistair Darling, on Michael Cockerell’s recent BBC documentary on the Treasury. If he had not acted in October 2008 as he did, Darling asserted, “the bank doors couldn’t have opened, cash machines wouldn’t have functioned. All over the world people wouldn’t have got money”. Who says?”

Hindsight is a wonderful thing.  Rewind to early October 2008, when the banking crisis was burning with greatest intensity.  Then Simon Jenkins had the Chancellor in his sights – not for sending too much money the way of the banks, but for not doing enough and for not doing it quickly enough.  Jenkins had no doubt, then, that the banking system was in meltdown and only the government could save the day.  He did not care what the government did.  The government had to do whatever was necessary: “Absolute financial security must be underwritten”.

“Darling’s statement to parliament on Monday beggared belief. The financial equivalent of al-Qaida had penetrated the nation’s defences and placed explosive devices in every financial institution in the land. The threat to the economy was unprecedented and immediate. Yet all Darling could offer was to do “whatever is necessary to maintain stability” and say that it would be “irresponsible to speculate on specifics”.

He mentioned no new cash to the money markets, no guarantees for personal or corporate deposits, no Europe-wide action and no bail-out for the banks. Indeed he said nothing, except to imply distaste for the emergency measures already being taken by foreign governments. He thus indicated that he would not join them.

Nothing could have been more damaging to confidence than this non-statement. Darling wiped a mind-boggling £100bn off the value of the top 100 British companies, the biggest one-day fall in history, offering every economics student a vignette of regulatory ineptitude. If Darling’s resignation were not the last thing Britain needs just now, he should offer it.

The only source of new credit is the government, backed by the future flow of taxes. Her Majesty’s Government must become, for however brief a time, a bank. The need for that outcome is now glaringly obvious.

Yet by nationalising only two banks, Northern Rock and Bradford & Bingley, Darling has effectively undermined the others. If he now buys their shares cheap, he must be guilty of “shorting” them.

For the government to become a bank it must not merely muse on the idea and discuss “doing whatevers” and “pondering options”. It must get on with it. Whether this takes the form of indemnifying bank deposits, insuring interbank lending or buying bank shares – or all of these – does not matter. Absolute financial security must be underwritten.

What makes Darling’s dithering all the more extraordinary is that he and the Bank of England must have prepared for this for weeks. Yet their staff apparently told bemused emissaries of the big banks on Monday night that they were “still working on a plan”.

Darling has implied, over and again, that he will do the same as his Irish and German counterparts when they faced a bank collapse. He has parroted that he will do “whatever is necessary to ensure stability”. Yet he will not say what this is, and indeed he objects to the actions of the Irish and Germans. The impression is of a man who simply does not know what to do, like Lord Lamont in the sterling crisis of 1993.

The longer that deposit security is delayed, the more markets will withdraw cash and speculate against bank shares. It is not irresponsibility or panic that has led tens of thousands of Britons to move their balances out of the domestic system. They may be overreacting, but the chancellor has encouraged them to do so. Would you gamble your savings on Darling’s decisiveness, or on that of the present governor of the Bank or England?

The stupefying sums of money allegedly required to restore market confidence are not real. The indebtedness of banks is underpinned by real, albeit postponed, value in the economy. Assets “recapitalised”, or nationalised, by the Treasury are sellable as the economy improves – as was British oil in the 1980s – and taxpayers should be able to benefit from the risks they have been expected to take. This will happen quicker when the Bank finally lowers rates and company liquidity is eased.”

Simon Jenkins is a polemecist and his strident views help to sell the newspaper he inhabits.  His recent article hangs on to the coat tails of the recently published “Too Big to Fail” (Andrew Ross Sorkin) – dubbed the “definitive history” of the banking crisis in America – and an unanswered question: were British banks also too big to (be allowed to) fail?

The crisis came about when confidence, primarily in the US and UK banking systems, collapsed.  Banks had been developing ever more complicated instruments to increase profits, speculating more widely through rarely understood market derivatives, and lending recklessly in the American ‘sub prime’ mortgage market.  The pus built up until, inevitably, the volcano threatened to erupt and drown civilisation in its seedy lava.

“The recession came about for many reasons, but mostly because of worries about the banking system. UK and American banks took huge risks with their lending and investments in the noughties, and when things started to go sour towards the end of the decade, debts couldn’t be repaid. Much of the blame was laid on sub-prime mortgages where banks lend to people who are considered less likely to be able to pay them back.

When large numbers of mortgage-payers miss their repayments, the banks lose money. With less money available, they can’t lend to businesses, meaning less investment and reducing the potential to make a profit. With less chance to make money, fewer people want to invest in companies, and this caused the value of the stock market to fall, or ‘crash’.

Banks also stopped lending to each other and to consumers, resulting in what has become known as the ‘credit crunch’.”

(http://www.thesite.org/homelawandmoney/money/cashflow/therecession)

On the 13th October the British government announced that it would be rescuing three banks – The Royal Bank of Scotland, Lloyds TSB, and HBOS – with a package worth £37 billion.  In return for the injection of taxpayers’ money, the government would end up owning 60% of the first bank, and 40% of the other two, with vetoes on bonuses.  The state investment was intended to be realised in brighter times, realising (it was hoped) a substantial profit for the British people.  In other words, this was the equivalent of the failed entrepreneur staring into the abyss of bankruptcy and clutching at the expensive but life-saving deal offered by the only person willing to lend.  The UK government became the heart and the lungs of those banks, without which they would have failed.  In response to the news of the bailout, the FTSE 100 index surged 8.2%.  Hope was not dead.

Proportionate circles showing bank values and cash injections

The UK taxpayers now own 68% of RBS and 43% of the merged Lloyds/HBOS banks and their debts (but not their assets) of an estimated £1.5 trillion could be added to the national balance sheet, even though the Lloyds/HBOS holding is still a minority one.  New statistics from the Office for National Statistics (ONS) already puts the public debt at a deficit of £848.5billion, equal to 59.9% of GDP (compared to 83.4% in the US for the 2009 year) and the worst deficit since 1978. Public borrowing in February stood at £122 billion for the year, and, for the first time since records began in 1993, the UK had had to borrowed money (£4.3 billion) in January.  Adding the banks’s debts to the balance sheet would leave the public debt equal to or exceeding GDP, according to the ONS.  January is usually a good month for government receipts, but income from corporation tax and income tax has dropped dramatically, hence the need to borrow.

Government critics point to the fact that UK public borrowing continued to rise under the Labour administration even when government receipts were rising prior to the recent recession – due to the government’s increased spending on health and education.  The Conservatives promise that they would cut the deficit as their first priority – no details provided.  But as the UK heads towards a hung parliament, the Liberal Democrats hold the balance of power and have pledged not to support budgetary cuts.  This is in line with the Labour Chancellor’s preference for ensuring solid economic growth before embarking on cuts to public spending, a preference which has gained considerable support amongst economists (http://www.thisismoney.co.uk/news/article.html?in_article_id=499929&in_page_id=2) who hark back to the ignored warnings of Keynes in 1932:

‘The voices which, in such a conjuncture, tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilising the world’s potential production, are the voices of fools and madmen.”

Simon Jenkins, too, wants us to follow Keynes.  Perhaps, after all, he is not out of step with the Chancellor.  He is, however, in a happier position.  He is merely a commentator, writing about decisions others have to take.  He has the luxury of nothing hanging on his words or actions except the sale of a few more newspapers.

http://www.statistics.gov.uk/downloads/theme_economy/psf0210.pdf

See also comparison of national debt with other countries: http://www.economicshelp.org/blog/economics/list-of-national-debt-by-country/

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