Wednesday, 26 January 2011

We should have let the banks fall

Every shade of opinion now seems to be coming around to the view often expressed on this blog, that we should have allowed Northern Rock to fall, and after it HBOS and any others. The scramble to bail out these bankrupt shibboleths is just so much wasted opportunity. As Simon Jenkins writes in the Guardian today:
If half the money showered on banks over the past 18 months had been showered on the high street, I cannot believe the economy would be in such terrible shape. Indeed, if banks had been left to default on their casinos and public money spent instead on nationalising and guaranteeing their retail activities, there would have been traumas, as in Argentina and Iceland. But I bet the economy would now be recovering faster than it is. At very least the bank bailout policy deserves a Chilcot-style inquiry. The trouble is that this would need bankers to be honest, economists decisive and politicians humble. Forget it.

18 comments:

Scrobs... said...

But there is a thriving industry, making huge profits from this, and avoided by the politicians like there's no tomorrow.

It's the insolvency practitioners, the lawyers, the accountants, the collection agencies, the financial 'sdvisors' etc etc.

Can you imagine the spineless politicariat we have in Whitehall ever making life difficult for them?

Barnacle Bill said...

Not avoided by former MPs, look at dinner lady Jacqui Smith going to KPMG for example.
They have a vested interest in not making life difficult for some.

Weekend Yachtsman said...

I too have been saying this from the very start of the trouble.

Quite apart from the purely economic aspects, we would not have created such a gigantic moral hazard. What's the incentive now for the banks to behave themselves in future? Little or none, I would suggest.

BrianSJ said...

They should have listened to John Redwood at the time. Do they listen to him now? Has anybody learned anything?

English Pensioner said...

Most taxpayers have been saying this, hence the hatred of bankers reported in the media. The government would have done far better to have let the banks go bust and used the money to compensate "ordinary" investors and help the unemployed staff, instead of handing the banks large sums of money, which have simply gone into their reserves to meet the latest EU requirements. Someone would have bought the remains of the defunct banks, there are several prospective banks in the making and I'm sure they would have seen this as an opportunity.
Now that people in Ireland have realised that almost all of the Irish debt is that of the banks, and a General Election is due, there is pressure on their politicians to let the banks go to the wall. Lets hope that the new government pulls out of its agreement to take money from the EU to fund them and simply lets them go!

Blue Eyes said...

The Labour government avoided doing the right thing because it knew that the temporary upheaval would lose it the election. The coalition will avoid doing the right thing because the temporary upheaval would lose it the next election.

We can't have proper reform until the government can take a political risk to solve an economic problem. We only had that in the 1980s because there was no opposition. These days we have opposition within the government benches.

Barnacle Bill said...

I think NuLabor's response was slightly affected by the Scottish element involved.

Guthrum said...

Libertarian Party Policy from day 1

Bill Quango MP said...

It was C@W policy from day 1. Let Northern go. A bank with a very high % of 125% mortgages in a falling housing market had no business being in operation.

Trouble is, it could have gone either way. An early Lehman's might have taken the whole lot down..

Richard said...

Barnacle Bill: "I think NuLabor's response was slightly affected by the Scottish element involved."

Yes, if it had been East Anglian Rock or Cornish Rock, you can bet it would have been allowed to slide.

Vote-buying again.

John said...

It's easy to say now that NR, HBOS and RBS should have been allowed to go to the wall.

But the fact is that it would never have happened then, and it won't now. The political fallout from perhaps 8-12 million people suddenly sitting on screwed bank and savings accounts is more than any Government would ever risk.

Easy to say. Not easy to do.

Bill Sticker said...

Raedwald, still think it's because the Bankers and Politicians form a cosy clique of financial clout and influence that certain banks weren't allowed to fail.

Especially the 'investment' banks who traded the poor risks as investments. Funny how certain institutions were so quick to 'recover', too.

Weekend Yachtsman said...

@Richard: it's not clear to me what Northern Rock has to do with Scotland. I think you will find it is a Newcastle-based and largely Newcastle-operating business. Last I looked, Newcastle was in England.

Richard said...

@WY: Labour heartlands. Sorry if I wasn't specific enough for you.

Ian R Thorpe said...

We should have let the Banks fail except the government (and it would have ben the same under any party) needed the banks to help them engineer a bout of inflation and thus reduce the burden of debt.

People tend to go over the top when the word conspiracy is used so let's say there is a confluence of interests.

Weekend Yachtsman said...

@John - that's not what we're suggesting. The banks should been left to fail, and the money we've wasted propping up their failed managements could have been used to guarantee the retail investors. The rest could go hang.

I'll bore you all by saying it again: if banker top-knobs knew, for certain, than in the event of a bank failure they, themselves, personally, would become the guy sitting on the pavement hugging his dog to keep warm, while asking passers-by to spare a bit of change, then banks would not fail.

But we have created the exact opposite incentive.

Richard said...

Totally agree with that. If actions lead to consequences, most people tend to behave cautiously and things run relatively well. Take away the consequences, and the actions are risk-free: people behave stupidly and selfishly. There are many examples, from far wider fields than just finance. It goes to the core of human nature.

Anonymous said...

All of the government’s power leaders are best mates with the chiefs in the banks. They let them loose(misuse) 10.7 trillion and then take it from the tax payers and give it all back so they can lose it all again and make some MP's very rich. Then they tell us we must pay hard for this over the next 25 years as if it is our entire fault.

It's like being robbed and then the robber has you convicted because he could not steal enough.

Makes me sick