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Expert Comment: Four years since the bail-out

Money Tuesday 9 October 2012

In a specially extended Expert Comment, Tony Bradley, Director of The SEED Centre, part of Liverpool Hope Business School, marks a significant anniversary.

It’s precisely four years since the British Government – in the form of former Prime Minister Gordon Brown and the then-Chancellor, Alistair Darling – part nationalised the UK banking sector and “saved the world”, as the Premier famously mis-spoke. On October 8th, 2008, in the face of a catastrophic failure of confidence in global financial institutions, Darling announced the availability of £50 billion of liquidity, which was accepted by RBS (owners of NatWest) and Lloyds Banking Group. The latter had recklessly bought the UK’s largest mortgage provider (Halifax Bank of Scotland, HBOS) a month earlier, itself a risky merger and acquisition from 2001.

The urgent necessity for the state to bail-out banks represented the most spectacular explosion under late capitalism. The financial sector was revealed to be inept and unable to manage its own affairs. It had plunged the entire economy into a near glaciation, in terms of the flow of money, goods and services. So, what hope could there be for the millions of businesses, families and smaller institutions that relied on the banks to turn capital into money?

What had gone wrong? It is worth remembering that, despite all the talk of casino institutions and the Wild West of investment trading in the City of London, the crisis had been fuelled by the failure of retail banking. All those ‘sub-prime’ loans in the Southern USA had exposed a globally-integrated financial sector to enormous , eye-watering, levels of potential vulnerability and losses. As Paul Moore, the well-known ‘HBOS Whistleblower’ has frequently commented: “The entire system of risk and regulation was shown to have been built on little more than an edifice of greed and incompetence”.

But that greed – with its baroque and incomprehensible structure of derivatives trading, CDSs and re-purchasing agreements – had, itself, been borne-out of the understandable desire of low-income households to acquire relatively cheap private housing. Understandable, but insane, in the belief that property inflation could continue unabated for decades or several lifetimes. Something had to give. And it was the taxpayer giving to the banks that struck most people as an Alice-in-Wonderland, topsy-turvy state of affairs. Personal debt had turned into corporate debt – as businesses failed (and continue to, viz JJB Sports, Peacock, Clinton Cards, Aquascutum, and many more in 2012) – which drove institutional debt and back-washed onto other households, who were already struggling with rising levels of personal debt. It was a classic vicious circle. 

Of course, hindsight is a wonderful thing. So, what has changed and where are we headed? The catalogue of ethical mis-carriages by the banking sector has lengthened. We have seen scandals over the mis-selling of PPI (personal protection insurance on loans); excessive dividends and bonuses paid to CEOs who’ve presided over failure (Fred ‘the shred’ Goodwin, RBS), casuistry (Bob Diamond, Barclays) and poor judgment (Andy Hornby/ Eric Daniels, HBOS/Lloyds BG); new rogue traders (David Higgs, Credit Suisse, Kweku Adeboli, UBS); illegal money-laundering (HSBC, Mexico) and the fixing of the all-important LIBOR (London Inter-Bank Offer Rate, which controls interest rates between banks and even high street mortgages, fixed by Barclays and others, as yet un-named). And there will be more issues emerging down-stream, concerning the selling of dodgy products, cartel operations, anti-trust trading, excessive risk-taking and immoral earnings. The City sewer is yet to be flushed-out, as Vince Cable (Coalition Business Minister) recently commented.

But all of this is as a mouse to the elephant-in-the-room. That is, the extent of the Euro-zone crisis. We have moved beyond even sovereign debt to the credible collapse or withdrawal from offering safety-nets by international monetary instruments, such as the ECB (European Central Bank) and IMF (International Monetary Fund). At a sovereign level the patient is in some cases close to being declared ‘not for resusc’. Greece is already on the cusp of civil social collapse, with both hard right and left politics in the ascendency. Portugal and Ireland are bravely seeking to manage punitive levels of austerity-inducing public sector cut-backs. Spain needs a significant injection of liquidity – topping 55% youth unemployment – despite the best efforts of Mariano Rajoy to avoid transmuting into Oliver Twist. And what of Italy? If that economy – the Eurozone’s third largest – begins to tank, well, there aren’t enough electronic printing presses or Germans with political will and deep pockets to save it, even with a big bazooka of 500 billion Euros EFSF (European Financial Stability Facility) ready by 2014.

At this week’s Tory Party Conference, George Osborne (Chancellor of the Exchequer) and David Cameron (Prime Minister) will continue to propose welfare cuts, urge pay freezes, repeat the need for deficit-reduction measures and defend only limited taxation increases on the wealthiest. And by the end of the year, the Parliament, the decade, levels of UK sovereign debt may still be on the rise. It may just be that we have already reached the terminus of economic growth in the West.  In the US they will be chanting ‘four more years’ for Barack Obama, as next month’s election looms.  But in Britain, at least, the next four years will probably herald the first UK austerity-promising Government since the end of WW2. And where to after that is anybody’s guess.


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