The Myth Of An Alternative To The Bank Bail Out

Last month I was particularly angered by a comment from Defence Secretary Dr. Liam Fox when he said that the main reason for the cuts in defence expenditure was no fault of the coalition government rather it was the consequence of the sustained damage Dr. Gordon Brown had inflicted on the economy as prime minister 2007-10.  Among leading Conservative politicians, Fox has been one of the most vocal in attributing the blame for the UK's economic problems on the previous Labour governments, more so even than Prime Minister David Cameron and Chancellor of the Exchequer, George Osbourne.  Cameron and Osborne use the large deficit created by bailing out the banks at the onset of the recession as the excuse for their harsh public spending cuts, which would have been imposed even if the UK was in a boom because the current batch of Conservatives believe that the state is too large and needs to be culled as abruptly as possible.  Fox, however, takes it a step further and peddles the idea that for some reason Brown and his government deliberately 'wrecked' the economy for some unknown motive.  Fox, in many ways, is a throwback to the 1970s and 1980s seeing some Communist conspiracy at the heart of British government trying to do the worst for the decent British public.  The reality was that whilst governments do and pursue a particular agenda, and Brown less vigorously than the prime ministers that bracketed him, a lot of their activity is responsive rather than proactive, particularly in the age of the globalised economy when the demand from copper in China leads to thieves in the UK disabling electricity sub-stations and sections of railway in order to get the scrap copper.

All governments say that they could have done things better than their rivals.  There is an implication in everything that Cameron, Osborne, Fox, et al say, that if, for example, rather than Tony Blair handing the premiership to Gordon Brown in June 2007, there had been an election and David Cameron had come to power, then the banking crisis and the recession which came the following year, would have been handled so differently, so much 'better', if Fox is to be believed, that, in fact, we would not now be facing such a large deficit and the consequent 'need' to slash so much of public service.  So let us look at what the Conservatives might have done differently.

The first thing to establish is what would have happened if the government had done nothing.  Even before the global recession had started, in the UK, the Northern Rock bank ran into problems.  It lent 18.9% of all of the mortgages in the UK and handled deposits of £24 billion compared to loans and assets of £113 billion.  In the summer of 2007 it found it difficult to borrow money to cover its lending.  As the US sub-prime market began to stagger, lenders became reluctant to lend on any mortgages even though British lending was generally on a far more restricted basis.  I was not surprised that Northern Rock was struggling having had much anecdotal evidence of its poor customer care combined with its aggressive marketing of products including very high percentage mortgages; this has raised its market share from 14.6% in 2006.  Rapidly fading faith led to a 'run' on the bank with £1 billion in deposits being withdrawn on 14th September 2007. This was the first run on a British bank for more than a century.  To stop the bank from collapsing, the British 'lender of last resort', the Bank of England lent the company £27 billion and in 2008 bought up £3 billion of effectively worthless shares in the company.  In February 2008 the bank was de facto nationalised. 

At least ten other offers to buy the bank were rejected because these potential owners were unable to repay the public money loaned to the company.  Interestingly, the US company Lehman Brothers which was soon to collapse in a spectacular way was one of the bidders.  Others were equity funds such as Terra Firma Capital Partners, J.C. Flowers and Ceberus, investment companies like Olivant and other banks like Bradford & Bingley and Lloyds-TSB.  If Terra Firma's bid is anything to go buy, some of the equity fund purchases would have been de facto asset stripping processes.  Interestingly, before Northern Rock was effectively taken over by the state 40% of its best business accounts was transferred to a company called Granite based in the Channel Islands which have different tax laws.  Though Granite does not receive new business, this effectively meant the cream of the bank's business (and profit potential) remained free of state control.

Now, if the state had not stepped in, then we would have seen the run on the bank continue, reducing the amount of deposits even further than before in relation to its loan commitments. There was one incident in which one bank manager was barricaded in their office because two customers were unable to withdraw their £1 million after the online banking facility of Northern Rock collapsed.  It is likely that violent scenes would have continued as the bank would have found it impossible to cover all the withdrawals with the relative low level of reserves it kept. At this stage the bank would be compelled to foreclose on its mortgages, i.e. insisting lenders immediately repay their loans or lose their homes to the bank.  This would not have helped the bank much as they would have had to dispose of the property quickly to recoup funds and in many towns the housing market would have been utterly disrupted as numerous properties were auctioned off.  As it was some borrowers, including charities, accused Northern Rock of pursuing aggressive repossession especially in 2007-8.

Some borrowers could have transferred their mortgages to other banks but this would have brought pressure on to them as they would increasingly have faced the challenges Northern Rock had already faced to raise loans to cover the mortgages they lent.  Thus, even before the main recession started, not bailing out Northern Rock could have become a crash in the UK economy. The issue for many was that the total support to Northern Rock came to £100 billion which was added to the National Debt meaning it was equivalent to 37.5% of the GDP (Gross Domestic Product) close to what is seen as the highest permitted level of debt by a state. 

I suppose that the difference that the Conservatives would have done, is being so averse to nationalisation, they would have allowed Northern Rock to have been sold to another bank, with no guarantee that the public funds put into the bank would ever be returned.  Under the de facto nationalisation, by August 2008, the bank had already paid back £9.5 billion of what it had been given, so reducing its part of the National Debt.  It seems unlikely, given that so much Conservative support comes from property owners that they would have allowed Northern Rock to collapse, it held too large a market share.  Thus, there would have been addition to the National Debt just in the way the Conservatives complain about.  In addition, there approach would have meant that the government would not have had a chance of ever seeing the money it had provided returned at some date in the future. 

The key difference would have had to have occurred back in the 1990s when regulation of banks and The City financial bodies was far too lax.  The Blair government like the Major and Thatcher ones that had preceded it, seemed beholden to the financial institutions and was happy for them to act recklessly and earn big profits.  The 'invisible' trade of financial products has been Britain's strongest industry since the 1980s and no prime minister seemed to have the will or the wish to temper the behaviour of not only merchant banks but also high street banks too.  The conversion of mutual building societies into banks after 1986 and their focus on shareholders rather than customers did not help the situation in the mortgage sector, because they were prone to take more risks.  A lot of this could be foreseen, the Bank of England had apparently been working through scenarios of such difficulties as early as 2004 and like many others saw Northern Rock and Halifax/Bank of Scotland (popularly referred to these days as HBOS) as likely candidates.

The ongoing sub-prime mortgage crisis in the USA and the subsequent tightening of loans to banks meant that many UK banks beyond Northern Rock began to experience crises.  The Bank of England offered £4.4 billion in relief in September 2007 and it was drained by banks within hours. In October 2008, the Bank of England offered £37 billion to Royal Bank of Scotland (RBS), Lloyds TSB and HBOS who were struggling to cover their loans and certainly to grant new ones.  Would the Conservatives have refused to offer such funds to the banks and so, having avoided the collapse with Northern Rock, have seen even greater problems as these banks collapsed?  RBS had assets of £2.5 trillion in December 2008 and Lloyds Banking Group £1.195 trillion, thus the scale of their demise would have made that of Northern Rock seem minor.

RBS had had difficulty in raising funds from April 2008 and in the end first 60%, in March 2009 70% and in November 2009, 84% of the bank was taken over by the state.  RBS has been shedding assets since early in 2008 but did not close its tax avoidance department until March 2009 and in December 2009 stood by plans to pay £1.5 billion in bonuses to staff in its investment arm.  Lloyds-TSB already an amalgam of an old bank and a building society turned bank, took over HBOS in September 2008.  Like these other banks, through 2008 HBOS itself an amalgam of a bank and building society turned bank, saw rapid falls in its shares.  The government approved of the combination of Lloyds-TSB with HBOS even though it was effectively counter to competition as the 'super-bank' has 38 million customers, compared to a UK population of 61.8 million people.  This buy-out effectively relieved the government of having to take over HBOS itself.  However, the continued difficulty in banks raising funds meant that in 2009 the government bought 43% of the Lloyds Banking Group.  EU rules means that by 2013, it will have divested itself of the TSB brand and hundreds of branches of the retail group.  Now, it seems unlikely that the Conservatives would have overseen the nationalisation of any bank.  They certainly would have backed the buy-out of Lloyds-TSB of HBOS, but then in 2009 what would they have done with this super-bank running into difficulty given that so many people and businesses were dependent on its stability?  The likely solution from their view would have been to sell it to a consortium of equity funds.  Given equity funds' desire for fast profit, it is very likely that we would have seen even faster shedding of staff than the 15,000 made redundant by the company in 2010, a fifth of the total workforce.  By November 2009, RBS has similarly shed over 19,000 jobs.  Again, if the state had not stepped in and the only remaining source of support had been equity funds or perhaps foreign banks, then this figure is likely to have been higher. 

The Bradford & Bingley bank's mortgage book in was bought by the government in December 2008 whilst the savings and bank network was bought by Abbey National, itself owned by Spanish bank, Santander. Without UK state intervention, the only way to have avoid collapse of banks, many far bigger than Northern Rock would have been to hawk them to equity funds or to institutions from other countries.  Spain with its insistence on higher reserves being held by its banks almost inadvertently put its banks in a stronger position to weather the financial crises of 2007-9.

Aside from the state taking over banks, the British government, following the US model, but leading the way in Europe also provided funds that could be used by other banks, 'quantitative easing' to stand in for the lack of available funds on the commercial market. In October 2008 the government made available £500 billion but only RBS and Lloyds-TSB took any of these funds.  Barclays (with £2.3 trillion assets at the end of 2008) refused assistance and turned instead to the Qatari government for funds.  So, even though it would not accepted one government's funds it was happy to take them from another government.  This may have been a model that a Cameron government coming into power in 2007 would have promoted more widely for UK banks in the place of the British government nationalising or providing funds.  HSBC (with £1.736 trillion assets), the other key bank in the UK, was able to weather the financial crisis in the UK through share issues and that unlike the other banks discussed it was a multi-national bank on an already large scale.  A second package of another £50 billion in January 2009 and an increase of state ownership of Lloyds-TSB shares to 65% was announced due to the bank suffering from having taken on HBOS's losses. 

Now, the Conservatives may argue that there was no need to come forward with these funds, especially by 2009 when things seemed to be settling.  To them, no doubt, it all appears far too Keynesian in approach, stimulating the economy through state intervention.  However, much of what happens in the financial world depends on confidence.  A key problem for British banks was not that they had so many bad loans (though some did have a sizeable number) more that international lenders lost confidence in lending to any business engaged in lending mortgages no matter the quality of them.  Thus, the extra funds put forward in the latter stages were important in rebuilding this confidence, not only of lenders, but vitally of savers.  Banks have moved far from when they were dependent on depositors to provide the funds for their businesses, but what is saved cannot be ignored.  In fact, banks that weathered the situation were those who tended to have more deposits and reserves.

In total, the government paid out £131 billion in funds to keep banks from collapsing; including £107 million in fees for financial advice from companies from December 2007 to December 2009.  Other potential expenses such as borrowing support, money put into increase liquidity and protection for savings, brought the total costs to £850 billion, though of course with the easing of the situation not all these funds were called upon.  In addition, through nationalising banks, the government to some extent ensured they would get some of their money back; having them sold to private companies especially foreign ones would have meant that the government's investment to bring stabiliy, and, vitally, to try to increase the amount of lending needed by businesses and house buyers, would have never come back and in fact would have left the UK economy.

To blame the Labour government for the size of the National Debt resulting from the support it gave banks 2007-9 is false.  No government would have been able to allow Northern Rock let alone RBS or HBOS to collapse.  Even the folding of Bradford & Bingley would have had severe consequences beyond just those who saved with or borrowed from that bank.  The Conservatives, many of whom come from banking backgrounds, would not have let their friends go to the wall.  Thus, billions of pounds was needed and this would have gone on the National Debt.  I accept that rather than nationalising, the Conservatives most likely would have encouraged buy-outs by private equity companies and foreign companies.  Whilst this would have saved funds in the short-term, it would have meant that any money paid to banks most likely would never have come back, and, particularly with the private equity companies, the stability would be short lived as the banks would be broken up for what assets they could release.  The UK since the 1950s if not longer has had a real focus on privately-owned housing as a core element of its economic life, much more than any other country.  Instability in the housing market impinges widely in the UK economy and society.  Thus, the closure of banks, the foreclosure of loans, even just a greater restriction on lending than we see now, would all have dented this important sector of the economy, having a knock-on effect on purchasing and in turn jobs and economic activity.  Perhaps the Conservatives could have save a few billions by now bailing out the banks to the extent they were, but the cost would have been more instability and in turn falling tax returns, so reducing any saving they may have made.

The increase in the National Debt was a responsive policy not a proactive one as Fox and other Conservatives pretend.  If they had been in power they would have been compelled to do very much the same.  The alternatives would have only saved some small sums and at a cost to longer-term stability that many would have baulked at.  If seeking blame, one focus has to be on the freedom which financial institutions have had since the years of the Thatcher governments, though, of course, this has been a global trend, especially in the USA from where so often the UK takes its lead.  The Conservative governments of Margaret Thatcher and John Major, in line with other Conservative governments throughout the 20th century but boosted by New Right attitudes that appeared in the 1970s, believed in deregulation and the state standing back in many sectors of the economy, not least in the banking world.  Allowing building societies to become banks was one element in this trend building towards the UK aspect of the crisis of 2007-9.  However, on coming to power in 1997 under Tony Blair, Labour was beholden to the Thatcherite attitude.  Blair was a Thatcherite, making the Bank of England independent was an element of this.  Gordon Brown as Chancellor of the Exchequer was prudent, but in many ways was simply lucky.  No-one during the Blair years tried to rein in the behaviour of the banks and it was only sheer good fortune that meant the crisis did not hit in 1999 or 2003 or some other time in that period. 

Of course, the current government is a clear advocate of deregulation, unsurprisingly as it has been an unchallenged political trend of the last 30 years.  However, it means that the banks remain as free as ever to behave irresponsibily.  It is right that protestors from UK Uncut go into banks and turn them into libraries or woodland.  We could not let the banks collapse, it would have led to a social and economic crisis in the UK unlike anything we had seen.  The taxpayer provided the funds to bail them out after their mistakes, driven by pure greed for massive profits.  We have paid twice because now to fund that the government says it has to be taken out of public services with huge cuts, not by getting the banks to pay back what they received and in this I mean not only funds but also the steps to boost confidence and stop runs.  They do not even have the grace to curtail their vast earnings, they just behave as they did before, uncowed by what happened.  There is nothing to stop a similar crisis manifesting itself this year, next year, sometime soon and then where will be the funds to save the banks this time? It is not a scare story to recognise that in the life of this parliament we could see the end of a banking system that we have become familiar with in the last 40 years and a return to something very dated and very out of step with the rest of the world. 

It seems that, next time, UK banks will, in large part, stop being owned by British companies but by European and probably Chinese institutions.  A number will be asset stripped by equity funds, the only ones who have the money to afford to intervene.  Say goodbye to your savings, say goodbye to getting a mortgage unless you are already wealthy, say goodbye to free banking, say goodbye to even having a bank account if you do not have a well-paid job (especially once the Post Office accounts are privatised).  The current government panders to its banking friends and uses the myth that somehow Brown deliberately wrecked the economy as the excuse for their reverse social engineering and smashing up of the state.  It is a myth.  In the same position they would have done minimally different and like Blair and Brown, have done nothing to stop the chance that it will happen again, this time with no safety net.

We All Cannot Be 'The Apprentice'

I am no fan of the television series 'The Apprentice' in which Lord Sugar is presented with a group of budding entrepreneurs who want to become his 'apprentice' but it has a cultural impact and is discussed on so many other television programmes and on radio that it is difficult to be oblivious to.  In the programme Sugar assigns the group various tasks, sometimes bizarre, involving running businesses and on the basis of their success he weeds them out over the weeks until he is left with one winner.  The job even the winner receives is often very mundane, but being on the programme can help win the contestants attention.  What is most alarming is the nature of the contestants who are all unreformed Thatcherites with a clear belief that they are God's gift to business, and yet ironically, that 'greed is good'.  The 'junior' version of the programme was very alarming, suggesting that it is right for children to be so obsessed with money that they have lost all individuality, awareness of others and, in fact, most of their personality: they have simply become their goal.

The programme reminds me of criticisms from a woman from Hong Kong who I met at university back at the end of the actual Thatcher regime.  She whined that the trouble with the British was that they saw someone in a luxury car and complained about it, whereas in Hong Kong people would be inspired by such a sight to get on in business and make themselves wealthy.  She was wrong both about Hong Kong as she was about Britain.  For a start there was no greater opportunity to succeed in Hong Kong than there was in the UK.  The privileged tend to remain privileged and so do their children.  Occasionally people make a successful business, but ironically in the UK the ones who succeed most are people who have come into the country from the outside, this is why being opposed to immigration is so contradictory with people wanting the UK to be an entrepreneurial state.  The people who succeed in that way are a tiny percentage.  This is why 80% of the UK working population earns less than the average salary and in fact 80% of entrepreneurs do not earn above £20,000 which is in fact less than the national average salary, currently around £31,000.

Thus, even a small percentage of those who have the drive and luck to become successful in their own businesses succeed; 50% of new restaurants in the UK close within 6 months of opening.  However, what seems to be forgotten is that the large bulk of us have minimal ability to be self-employed.  Since human civilisation started the majority of people have been employees, even if it has only been to the head of the family or clan or the local landowner.  Certainly since the rise of industrialisation in the mid-18th century the bulk of us have worked for other people.  You may say we are conditioned not to take the initiative.  Certainly this was the attitude in the 1980s that anyone who was unemployed should be setting up their own business and if they were not, then they had to be lazy.  I certainly had this charge laid at my door in the 1990s.  It seemed a bitter thing to say given the efforts I had made in terms of training and development in order to be an effective employee.  Why should I throw that all away and try and run a business in something which was statistically likely to fail?  It would be a waste of time, effort and education.  Such challenges to the unemployed are returning, though these days it is even harder to raise capital than it was twenty years ago.  The banks, the beloved of successive governments, have created this position through their own failed entrepreneurial efforts and ironically have created a banking market in which it is now harder than ever for new businesses to get funding and so to comply with the New Right agenda of people's business. 

I would imagine if you took 20 ordinary people in any British town 1-2 of them would be capable entrepreneurs.  When I take the boy in my house to school, out of the 60 parents/carers waiting for children to come out of the two classes that make up his year, I know that only two of the families run their own businesses and in one of these the woman only bought into a franchise when she found no-one would re-employ her having been out of work raising children for eight years.  The rest of us are either out of work or are employees.  This is in prosperous southern England too.  The woman who lives in my house, would count as the third if she ever collected her son, but in herself shows why so few, even if they have the skills, would want to run their own business.  She has been self-employed for six years and exports a third or more of her sales.  Yet, despite ploughing back around 80% of her profits into the business (a style of re-investment not common in the UK since the 19th century) she has yet to break the magic £20,000 (€23,600; US$29,800) per year mark and there is a good chance even another six years from now she will not have done.  She would be better off working in a supermarket.  The reasons why she persists is because she has a particular mental approach.  She, unlike the bulk of us, is no good as an employee and much prefers her own business.  However, on pure earnings basis she should chuck it in and head down to Asda to get a job.

Why am I getting so fussed about those who can and cannot be entrepreneurs?  Well, in fact my point goes further than just the divide between self-employed and employed.  We also need to consider the difference between public sector and private sector work.  Of course, the New Right attitude that Thatcher and now David Cameron and George Osbourne subscribe to, is that the state is 'too big'; that people are much better off doing things for themselves.  Sometimes this attitude is sold as we need to get back to small communities providing facilities and charity and that the faceless state trying to do this is unresponsive and bureaucratic.  In fact this is all just a facade.  What the New Right want is capitalism unfettered so that they can increase their profits through no safety regulations, low wages, bad conditions and a compliant workforce.  Cameron with his focus on the budget deficit has a good excuse for pursuing the New Right agenda vigorously and aiming for 25% cuts across the public sector.  Though the public sector is not as broad as, say, in France, it does encompass not only government departments but also elements such as health and education at all levels, and effectively things like transport and utilities though these are in private hands now; they still impinge on how society functions.  Around 6 million people work in the public sector; 530,000 of these are civil servants.  Ironically the greed of UK banks actually led to the increase of the public sector when the state had to take over Northern Rock, HBOS and Lloyds.  If they had been a bit less greedy these banks would still be in private hands, probably Spanish, US, Australian, Danish or Chinese hands, but still privately owned.

Having worked in the civil service, which is mainly what people think about when they refer to the public sector, I know that a lot of civil servants are perfect for the job.  They are polite and efficient but they are not sales people or marketeers.  They can run the administrative machine well, but are never going to get you to buy a used car.  With the haranguing of the civil service for the last thirty years, no-one dare be inefficient.  Often the staff work long hours and the pay is very low.  In 1994 I left a job in the civil service paying £8,600 per year; aside from me everyone in my office including all but one of the managers, had one other job, some had two others.  I was supposed to work 37.5 hours per week but regularly did 50 hours.  My next job was £9,500 per week for 15 hours.  In 2001 I applied for a job as a tax inspector and would have earned £13,000 per year at a time when the average salary had passed £20,000 per year.  I applied two weeks ago for a managerial post in the civil service overseeing a whole office of staff and yet paying £24,000 per year.  No-one works in the civil service to become rich and yet they keep being told they need to be cheaper.  In the 1980s under the Rayner reforms around 250,000 civil servants were laid off.  Since then the number has risen again.  However, David Cameron says he wants to see a reduction of 500,000 staff across the public sector.  This would mean the end of the civil service so implies heavy cuts in health and education too.  Local government, (2.256 million, including 42,000 social workers) education (there are around 460,000 teacher posts alone; some held by more than one person) and the National Health Service (1.431 million in hospitals, community health and general practice) employ 4.507 million people, 16% of the UK workforce.  As you can see taking 500,000 people from these sectors in the next 5 years is going to have huge impacts often on the most vulnerable people in society.  In addition, in times of high unemployment as we are now quickly experiencing, more civil servants are needed to administer the welfare system and employment in the civil service always rises as unemployment does.

Cameron has said there will be no rise in unemployment because the booming private sector will mop up all of these people.  For a start the private sector has shown no signs of booming in the past few years.  Second, there is an all too easy assumption that a former civil servant or nurse can simply become an effective call centre worker or sales person.  Setting aside all the education and training it has taken to get someone to be a decent nurse or civil servant, if these people had the desire or aptitude to work in the private sector they probably would have done long ago and so got higher salaries and not be abused by the public, the government and the media all the time.  One thing that the Conservatives overlooked since the 1980s is that their policy of encouraging home ownership and permitting landlords/ladies to have the upper hands over tenants, especially fixed-term rental contracts, is that it makes for a very immobile labour force.  When people will lose on their house sale or are tied into paying rent on a property they have vacated months ago, then they are going to be reluctant to move to where work is.  If they want the pool of terrified, fluid labour that they so desire, the Conservatives need to move beyond simple bullying to the structural factors which hamper that.

The New Right, in control of the Conservative Party now, has no sense of the Old Right support of public service.  This is ironic as Cameron's government is keen to laud it when it occurs in the military but no when it appears in civil society.  There will be no easy transition for many people from the public to the private sector.  Customer service in the UK is appalling, just ring up your utility company if you want to find that out and it will jar with the bulk of former public servants.  Of course, many will buckle under because they have to, but in turn they and their neighbours will suffer as the education, health and local amenities deteriorate as the nurses, teachers and civil servants are compelled to go and work for the exploitative elements of the private sector, happy to impose long hours and low pay on workers scared by unemployment.  The sense that there will be no sharp rise in unemployment as the public sector is culled, is an utter fantasy. Loss of the income for public sector workers will further dent consumption on the back of the VAT rise which will do an excellent job of slowing consumer-led recovery.  The rump public sector that will remain will be less efficient and so more ordinary people will suffer.  We cannot all be entrepreneurs and even if we were, many of us would fail or even if we succeed would be poorer.  The same applies to going into the hundreds of thousands of private sector jobs that are supposedly going to appear.  Even if they did, people are not interchangeable parts and the 'frictional' unemployment will rise sharply even if new vacancies do appear and no-one as yet is even guessing where these are supposed to be coming from.  We are heading back to 4 million unemployed as quickly as the Conservatives and their ultra-rich supporters can engineer it.  As a by-product the public services that the large majority of us depend upon will deteriorate, but of course, the true beneficiaries of Conservative policy have the money to buy their way away from that and damn the rest of us.