Monday 10 March 2014

Why bailing out RBS was a catastrophic mistake

As the banks were bailed out to save them from the consequences of their reckless gambling in 2008-09, the UK government repeatedly injected £billions into the Royal Bank of Scotland to stave of bankruptcy and liquidation. These vast cash injections left the taxpayer with an 82% share in the company, and potential liabilities of over £300 billion.

At the time, some economics commentators and politicians even dared dress up these unimaginably vast bailouts as some kind of good deal for the taxpayer, that could "make a profit" when the shares increase in value and are sold back onto the market.

Even at the time, these claims were spectacularly dubious. If state investment was so potentially profitable, where were the queues of private sector interests vying to get in on this "good deal" too? There weren't any because it was absolutely clear to everyone, that like vast swathes of the deregulated global financial sector, RBS was technically insolvent.

Unfortunately, the deal was negotiated so badly by the government, on the taxpayers' behalf, that the cash was given to RBS virtually without condition, and the shares the public ended up paying out £billions for were useless non-voting shares. This meant that despite saving the bank from certain bankruptcy, and assuming liability for a potential £300 billion worth of RBS debts, the state gave itself virtually no control over the actions of the board of directors. Hence their continuation of the ludicrous bonus culture at the bank, their engagement in various frauds and their operation of their Global Restructuring Group (which is little more than a meat grinder to turn struggling UK businesses into huge profits, by shutting them down, ripping off the creditors and asset stripping them).

The total amount handed out in bailouts to save the UK financial sector (from the bankruptcies they so richly deserved) absolutely dwarfed the total national debt at the time. The estimated £1.5 trillion in bailouts has been hidden off the official national debt balance sheet ever since (using the PSNB ex calculation), so whenever you hear politicians or economics commentators talking about the national debt, you need to remember that they are using misleading figures that artificially exclude the vast cost of the bankers' bailouts.

So lets have a look at how the Royal Bank of Scotland has fared since it was 82% nationalised in 2008-2009.

These desperate figures illustrate exactly how much of an economic catastrophe the RBS bailout has been. They show how right those who stated that the bank should have been declared bankrupt were.

RBS should have been allowed to fail. This would have come at some cost as the government would have had to have compensated lost savings and to intervene in the financial markets to provide short-term liquidity. However, the tactic of propping up an insolvent institution to prevent these short term costs is a classic example of throwing good money after bad.

I'm not normally one to agree with the right-wing free market brigade, but back in 2008-09 they were absolutely right to say that the government shouldn't have poured over a £trillion into the financial sector to save the insolvent banks. They were absolutely right that "creative destruction" should have been allowed to happen (new, better, players enter the market to take over the market position of the insolvent entities), and absolutely right that the near unconditional bailouts would create "moral hazard" (the banks would continue with their risky speculative profiteering, safe in the knowledge that the taxpayer will bail them out the next time it goes wrong too).

Where I disagree with the right-wing free market brigade is on their opposition to all subsidies, and to all public sector institutions. I believe that subsidies are justifiable if the industry in question provides social utility, and that using democratically accountable public sector organisations to provide vital services (education, health, public services ...) is a vastly superior model to allowing private sector profiteers to use such vital services to extract vast profits, and pay themselves ludicrous executive salaries.

What the government should have done was to let the insolvent banks go bankrupt, then collected the remaining infrastructure to build a National Investment Bank, through which the government could disburse loans and subsidies to the "real economy", something which the private banks have abjectly failed to do since they were bailed out by the taxpayer.

The policy of bailing out insolvent banks has been an absolute disaster, but sometimes it is difficult to get our heads around exactly how bad a disaster it has been because the numbers are so big, so I'll leave you with a comparison to put it into better perspective.

In January 2014 the Tories shut down 10 London firestations, and laid off 552 staff. Their cited justification for these closures was a projected saving of £45 million. 

The cost of nationalising RBS was £46 billion, every penny of which has now been written off in losses.

This means that for every single pound the government dubiously* claim they have saved by shutting these firestations, they have thrown £1,022 into the RBS black hole of debt. And whilst these 522 firefighters and other skilled professionals have been forced onto the dole, the 11 executives that run RBS, gleefully carved up £23.5 million between them in bonuses for 2013, despite losing another £8.2 billion (which would have been more than enough to keep those 10 London fire stations operating for the next 364 years).

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* = The cited savings don't stack up because they haven't factored in stuff like the loss in tax contributions from the 522 staff, the cost of providing those that don't find replacement work with unemployment benefits, the social & economic costs of increased risk of fire (due to the loss of 14 fire engines and so many staff) ...

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