Nationalising A Banking Problem

Tom Bulford - Wed 23 Apr, 2008

The £50bn bank bailout sets an appalling precedent

The other day I had a momentary feeling of sympathy for Gordon Brown. I cannot think why, but there it was, fleeting but real. I guess it is only human nature to feel a twinge of compassion for somebody who has suddenly become so unpopular.

But after this lapse into humanity I soon pulled myself together and allowed a sterner judgement to prevail. After all when somebody has been more than happy to take credit for the good things in life whether or not he has been in any way responsible, he can hardly abrogate responsibility when things turn sour. So it is very interesting to see how Brown is dealing with this deep-rooted crisis.

One thing that Brown cannot do is change the agenda. Trips to the USA or speeches about Mugabe will not demote the economic situation from the top of the political agenda, where it will remain until the next election.

The average voter does not understand the niceties of global trade, of public sector budget deficits or of sub-prime mortgage debt. He or she simply expects the Government to deliver good economic times, regardless. After all, that is what we are used to.

Brown is the man in charge. He is the man who boasted year after year of engendering prosperity. He prided himself on economic growth, on full employment and on the general sense of wellbeing that resulted in the optimistic appetite for personal debt. Either he did not see the warning signs in this, or else he did nothing about them. Or else he chose to prevaricate until a general election would give him five years to deliver some necessary corrective medicine.

There are no longer warning signs. There is no chance of putting the matter off until a later date. We are in the middle of a serious economic reversal and Brown is the man holding the baby. I am much enjoying the spectacle of his response.

The elements are these. First of all, have you noticed that we do not have the threat of a recession or even a serious financial crisis? What we have, according to Brown, Darling and the whole chorus of government ministers is 'a-financial-crisis-emanating-in-America.'

So rule one is that old stand-by, blame the foreigners. In fact, though, most voters either don't understand the complex world of international finance (who really does?), and if they do they recognise that both the USA and the UK have been attending the same debt-fuelled binge for the last decade and just because the USA may have got its hang-over a few weeks earlier that does not mean that this country has been partying any less hard.

But the spin doctors are advising government ministers to try to pin the blame on the USA, and they are also advising ministers to 'show concern.' So we now hear that Gordon Brown wakes up each morning worrying about indebted home-owners and, perversely, what he can do to help first-time buyers.

What he means by the latter of course is how he can help first time buyers borrow money to buy expensive houses. The other solution for first time buyers and one that in fact would be to their much greater advantage would be to let house prices collapse so that they can buy them cheaply.

Brown's third tactic is to present the crisis as a financial crisis, but not a real economic crisis. So we are supposed to believe that it is all due to the machinations of international finance, while in fact there is nothing whatever wrong with the non-financial sectors of the economy.

Firstly it is simply not true. Many businesses in the real world of manufacturing, retailing, etc. are starting to struggle along with their cash-strapped customers. Secondly it was too free and too easy money that fuelled the boom. There was a connection between the financial and non-financial sectors then, and so there certainly is now. Thirdly the financial industry itself is a big employer and insofar as the job market is concerned at least is very much part of the real economy.

Now Brown has come up with a solution, and I hardly know whether to laugh or cry. The idea is that the banks swap all their bad and dodgy property-backed debts for government bonds. Or to put it another way you and I, the taxpayer, relieve the banks of these liabilities.

This is no more or less than nationalisation of the problem. I watched the Ten O'Clock news with amazement as we were told that Alastair Darling will only agree to the plan 'if it involves no risk to the taxpayer.'

If these mortgage loans were not fraught with risk there would be no problem in the first place. If the Bank of England i.e. you and I, hold these repayment promises from home owners who find that they simply cannot pay, then who will take the loss?

Frankly I think this sets the most appalling precedent, although I probably should not be surprised. After all this government has already run up debts of tens of billions that future generations will have to repay, so why not add a few more to the pile?

But what really bothers me is this. We all know that a huge pension problem is looming. Far too few people are saving adequately for their old age. What will be done when they are no longer earning but have insufficient retirement income? What message does this latest outrageous government manoeuvre send out?

It is this. Spend away. Don't bother to save. Live beyond your means. Do not bother to budget for a rainy day. Because if you come unstuck the government will always make sure that your children and your grandchildren pick up the bill.

Regards,

Tom Bulford
For The Daily Reckoning