When Gordon Brown 'Saved The World', as he modestly put it, he used taxpayers' money in an unprecedented way and volume to shore up a business sector that had used a flawed business model to go bust.
Make no bones about it - without Government putting up over £600bn in loans, guarantees and capital to banks, several would have failed fatally. Such decisive largess has been welcomed by the British Public who now view Gordon Brown as a saviour in hard times. But the question remains, what precisely was that vast sum of money meant to do? Was it ever going to be enough? And, having saved one vital industry from going belly up, which others will have to be saved? Have we just preserved the jobs and salaries of a few failed executives?
The Domino Effect
I have talked a lot about companies Hitting The Wall when in a comparatively short trading period, the recession bites so hard they quite literally fail. Starting with Northern Rock, we now have a whole spate of High St calamities from MFI to Woolies to Adams to Whittard to Savvis to Wedgewood. These are not just any old companies - these are household names. As the Car Industry struggles en masse against dropping sales and most companies see order books starting to dwindle, there is no doubt we are in for more bad news.
The problem is that as order books start to fail and revenues are impacted, companies need cash to survive. Meanwhile, banks are recovering from all that stupidity over the last 10 years and the last thing they want to do, Government urging or not, is to lend money just to pay salaries - that has never been their business model. And now that Government is meddling with their mortgage books and loans to give individuals more time to pay debts while the job situation worsens and house prices plummet, plus greater protection will be afforded to those who get into financial difficulty, it is highly likely that their lending policies will get even tighter to make sure their exposure to more debt failing is minimised.
Which all sort of flies in the face of what the Government's use of taxpayer money was meant to do.
Forces At Work
You see, banks have to get their books in order. They blew a lot of stupid money in the past and partied happily paying themselves and shareholders handsomely for their cleverness. Now it has all gone badly sour and so the priority is to get their balance sheets back in order, strengthen their policies and ensure their own credit ratings get back to normal so that they can start attracting new capital. And of course, we as taxpayers have a vested interest in that as a) we are now shareholders of several banks and b) we underwrite their balance sheets - totally. We WANT them to behave sensibly so that we can a) get our money back, b) hope we can actually have some benefit out of our 'investment' and c) the credit ratings of the banks will be a direct reflection on the UK plc's creditworthiness which reflects outsider confidence in our ability to repay our bills and so ensures the Government bonds used to raise all this cash are actually worth something.
The reality is that we, as 'shareholders' in the banks, do not want them to go out and starting blowing money the same was as before as effectively, as Robert Preston alludes to, WE are the banks for the foreseeable future.
So About that £800bn Bail Out
There are two diametrically opposed things at work, the way I see it. On the one hand we have protected the banks from collapsing and as we all are aware now, in many cases there were just matters of hours before banks could have gone bust. On the other, the Government want banks to behave in much the same way as before, albeit with a few constraints, and get lending levels back to August 2007 levels.
The two things are incongruous - you either save the banking system and get some sense into the business model so there is stability or you pump more and more cash into a system that is flawed with a potential of an even more spectacular failure in the future.
What if Hadn't bailed The Banks Out?
The resultant financial mayhem had the Government not stepped in would have been beyond imagination, I am sure. However, I also not sure that many really understood what might have happened if a number of banks had been allowed, as the USA did to Lehmans, to fail. It could be strongly argued that Northern Rock was a floating disaster with a ruptured business model and if it had to stand up to a Lord Mandelson Test of worthiness it would have failed dismally in terms of strategy. The mortgage book could have been saved as it was worth something and the deposits were largely guaranteed by the FSA schemes - all Government really had to do was to ensure all savings deposits were guaranteed.
Further, RBS has traded with a massive £161bn gap in funding as it had gone on a greedy spending spree that saw the CEO, Fred Goodwin, culminating in winning a bidding war for ABN AMRO that was probably more exposed to bad debt than most for massive £50bn+. If any other company had done the same, it would have been allowed to have sunk. But RBS is a flagship UK Bank now, gone are the days of sleepy backwater provincial bank. But isn't that the price you pay for monumental business cock ups? To save RBS firstly exposed us all to £1.3 trillion of liabilities (yes that's bigger than our GDP), and secondly exposed us all to the stupidity of a business that had failed.
Was the objective in all this just to stop collapse and sort out the mess or to preserve a status quo that either saved useless senior businessmen their jobs and continue their ludicrous lending activities?
The question is pertinent as the Government's Utopian view is that now they have saved the banks, they want them to lend more. The simple logic says that this cannot happen. There is a recession on for starters and secondly this is what got them into the mess in the first place.
You simply have to sort out the mess first before we can properly see how the system can progress again. And I think Mervyn King is right - ultimately, the £800bn bail out was a knee-jerk reaction without knowing if it was going to be enough, followed by a succession of costly nervous twitches to fiddle with taxes to try and stimulate a very alarmed population into behaving like before. There is no money out there for that to happen and with us all borrowed to our eyeballs already and fearful of our jobs, we want to hang on to our money for once - that makes sense.
The Cost of The Future
I ask this question because I am exercising my own 'Rational Expectations' as I face up to a business and personal future. I think the Government had little understanding of what it was doing in putting together the bail out package. By and large it has saved the skins of a number of executives who showed poor business acumen and were motivated by greed. I do not think the Government knew how much the whole thing would cost as applying old theory to modern times glosses over that the economy today is radically different from before and the financial system itself is far more complicated than ever. Globalisation has wrought a very complex structure into the world of business and finance and it is almost impossible to guess the real cost of saving the system as is.
I would argue, that by allowing some natural failures to have occurred, the Government and the rest of us could have got a better idea of how bad the situation was and I think that could have been done without hurting a single investor or borrower in the instance of Northern Rock. I think the merge of Lloyds TSB and HBOS was both stupid and downright uncompetitive as the Government intervened at the highest level to make it happen and then shored up Lloyds TSB's balance sheet to make it work - in other words they were in no financial position to have made an offer in the first place.
I also think that as a group of taxpayers we have had our future payments used as collaterals to fund vast loans for all this guesswork and we will all pay a very heavy price in the future. I think the path of huge Government borrowing is not right - you have to get some balance here. The British economy has changed drastically and only 15% of our GDP is from manufacturing and only a fraction of that from exports - so our weak currency does not help us despite the reverse bargain hunters from the continent buying our imports at a lower price.
I think the Government plan to kick start the economy is incongruous - you cannot save the banks and increase lending. The banks have to be far more prudent and no-one is going to lend against a falling economy and asset values. Spending on new industries and internal projects is all very well, but in a world where cheaper, imported labour has grown in the UK, will it actually provide jobs for British people or just cause another new influx from the EC countries of unskilled, lower cost workers?
Look At The Bottom Line
It would be sensible before we all get slap happy from patting Gordon Brown's back that we just stop and think. If a plan doesn't sound right it's probably because it isn't right - and half a plan implemented today rather than a full one tomorrow means we will always be stuck with the half plan. And rather than us sitting back and not really caring, we ought to ask these questions in earnest.
Why? Because we are the NEW BANKS that are providing the funding for it. The bill is right at our feet and we should ask about every penny spent and yet to be spent.
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