Christopher King argues that while Gordon Brown is expending British taxpayers’ money on murder for Israel and the US, his latest scheme to rescue failed banks by making the government act as insurer of last resort amounts to ceding control of taxpayers’ money to greedy and irresponsible bankers.
Gordon Brown’s latest idea to save the UK economy is for the government to act as insurer of last resort. To have the Bank of England (BOE) as lender of last resort is not enough. Our politicians are too stupid, our bankers too greedy and the BOE and Financial Services Authority (FSA) are too incompetent to make that arrangement work. So Brown and the banks want direct access to public funds on a systematic basis. The taxpayer is to automatically accept the risks taken by commercial banks. Well, what else would we expect? After following his American friends into two wars and the support of the terrorist state of Israel, he’s following them in this insane idea. This is the worst idea possible but the problem is that Brown is so stupid and ignorant that he probably thinks that it’s genuinely a good idea.
We have seen how the bankers behaved with their own money, or should I say, with depositors’ and investors’ money, since we should not forget that these clever men that earned millions per year in bonuses for false profits were taking risks with other people’s money. Having lost untold billions in shareholders’ and customers’ funds, since customers will have to make up these losses in one way or another for the banks to be solvent again, can you imagine how they will behave once bankers can gain automatic access to taxpayers funds? We are now being taxed to support private sector banks. We’re working not only for schools, the NHS, road works, etc, but for the City banks as well. It’s outrageous.
I understand that the government has put £38 billion into the banks to date but no effect has been seen except for bankers to heave a sigh of relief that their jobs are secure and proceed to gouge borrowers in their interest rates. The government’s purpose in putting all this money into the banks was to have them start lending – it was lending money. But they didn’t start lending. The government urged, pleaded with them to start lending. No effect. So the story changed: it was money to “recapitalize” the banks. Really? Well if I put any capital into a business I expect to own a part of it. In our capitalistic system that’s the way it works. So does the government own shares in the banks in which it has put public capital? It’s hard to find out. Under what conditions was this money made available? We don’t know. Amazing.
I wrote to the Treasury before Christmas asking how much has been made available to the banks, which banks have taxpayers’ money, how much and under what conditions. No reply yet and I suppose that if I ever get one it won’t tell me anything. For over 10 years Brown told the country that there would be “no more boom and bust”. His present claim, as we enter an unprecedented economic crash, that his government is “the rock on which the economy is safe” is breathtaking hypocricy. Half the country actually believes this rubbish, enough to make one despair of one’s fellow citizens.
Let’s be clear. The credit and house price inflation bubble was brought about by Brown abolishing the need for banks to hold reserve assets, which restrain their ability to create credit. The failure of the BOE and FSA to restrain the bubble was partly their incompetence and partly that Brown split the regulatory/lending functions between them. The final collapse was caused by greedy bankers over-borrowing of short-term money market funds and buying Brown’s American friends’ worthless securities. Because the banks would not admit their full losses, which are still coming out, no-one would lend to them. Hence they ran out of money.
So the bankers want the government to be insurer of last resort. Of course they do. If they deal with the BOE as lender of last resort they have to pay interest and pay the money back. With an insurer, particularly the government, which knows nothing whatever about banking, any number of scams are possible. Now that their jobs are safe the bankers are gaining confidence. They have already seen that the government won’t press them to start lending with the taxpayers’ funds they already have so they are pushing further, not only to have the public take their worthless collateralized securities off their hands but to set up a lucrative tap on public funds for the future. Brown knows nothing about economics, banking or management so he’s a dream prime minister for bankers.
Let’s look closely at this scam. I first noticed it on 10 October in the Financial Times (FT) here as a proposal by two genius US professors (in the UK they would be lecturers). I couldn’t resist writing an off-the-cuff comment that there is no liquidity problem since the BOE is willing to make funds available. The inter-bank lending problem lies in evaluating the banks’ credit worthiness (because no-one knows what their true financial position is). I suggested old-fashioned regulation (dismantled by Brown) as the cure for irresponsible lending and prison as a cure for issuing worthless securities. It was such a stupid idea I didn’t take it seriously.
“Mr King repeats a common misconception,” carps another genius who believes that the problem is lack of collateral. This idiotic carping is typical of the debate. Contributors to this section are supposed to know what they’re talking about. It’s worse than lack of capital. Everyone knows that the toxic securities have wiped out the banks’ assets. As I said, it’s inability to measure the depth of the black hole into which taxpayers’ funds are being poured. That is inability to judge credit-worthiness. The FT’s editorial today [18 January] suggests that one approach is for governments to buy up these toxic securities, as “This would force participating banks to declare large losses, but by removing these illiquid assets from the balance sheet, create certainty about their solvency.” In other words, to this day, we do not know the extent of the banks’ worthless securities and therefore losses. If that is the case, Brown has already tipped lorry-loads of taxpayers’ money into a black hole, apparently without conditions, since the banks are using it to make money for themselves rather than lending as he timidly begs them to do. It’s beginning to look as if the banks’ losses are not merely very serious but absolutely catastrophic. We don’t have to buy their worthless securities to get them to declare their losses. Just wait for them to beg for help and don’t give it unless they come clean. Harsh? Not at all. This is taxpayers’ money we’re talking about.
There’s a lot of talk about “market failure”. There’s no failure of the financial markets. They are working perfectly well. Our banks are failing because of bad management and incompetent government oversight and policies and criminally worthless American securities as everyone knows. What would you expect? The banks are fine in France, Spain and many other countries. In the UK and USA, the government regulatory systems and the banks management have failed. The markets are behaving entirely appropriately in shunning failed organizations. Here’s the position according to the rules of the free market. Many of our banks are technically bankrupt because they have no cash or near-cash securities. They are over-loaned and their assets are wiped out. Left to themselves they would collapse and other countries’ banks would buy up their assets and continue operating. That’s how the market works. The inefficient go to the wall and the efficient take them over. What’s the problem?
The problem is that our government and bankers between them are so inept that the City of London as a world financial centre would be wiped out. It might never recover as it is since world trust in Anglo-American economic theory and practice has been shaken, no matter what Brown says. What to do?
The remedies must be kept simple and free market rules should be adhered to as closely as possible. We must have objectives rather clearer than Brown’s timid entreaties:
The banks must lend. Since they have not done so to date, they must be made to. If taxpayers’ funds have been taken by the banks, they must issue corresponding shares, repay the funds and go it alone or re-lend the BOE funds as directed by the government.
The banks must lend to manufacturing businesses and industries that will assist the balance of payments. Such businesses must be developed as a high priority. As matters stand, indiscriminate lending will go to buy products and help businesses in China, Korea, India, etc.
If banks’ existing customers who have depended on loans to date are viable businesses, continue lending to them.
The housing market must take care of itself and will do so when the economy recovers, if it ever does completely after this appalling debacle. Watch financial services move to other countries.
There is a lot more that needs to be done in getting public services fit for purpose. And Brown should get our troops out of Iraq and Afghanistan, stop his posing and posturing and concentrate his mind on the UK economy. That’s what he’s being paid to manage. Not to murder for Israel and the Americans.
These suggestions mean that the British government will explicitly become the country’s principal banker and it will be the government’s credit-worthiness that will underwrite bank borrowing and lending. The banks’ and government’s proposals for the government to buy their worthless debt and insure their losses mean precisely the same thing, except that the government and taxpayers lose control of their money and policy while permitting bankers to loot the treasury. If the government directs lending policy (assuming some economic competence) it will be possible to target lending and in due course to return the banks to full private sector control by having them buy out the public interest in their shareholdings.
There will be implications for share prices and the knock-on effects of these, e.g. for pension funds. It is not the taxpayers’ responsibility to maintain banks’ share prices nor the value of pension funds, whose managers should have taken a greater interest in what the banks were doing. That is their responsibility as shareholders. Only the discipline of the market can keep businesses efficient and expose bad management – which it has assuredly done.
The country’s standard of living is going to fall by a considerable margin. It is going to be long term, until a sound economic base can be reconstructed – if that is possible. The choice is whether the government smooths the fall, makes it equitable and positions the economy for recovery or lays the foundation for a much greater disaster at the hands of greedy bankers. They are indeed greedy. You might be interested to hear of my recent contacts with the banking sector and FSA which supposedly regulates banking.
You will recall that in September the Nationwide Building Society was seeking FSA approval to take over the failed Derbyshire and Cheshire building societies without the courtesy of asking their members. I’m a member so I objected and exchanged letters with the chief executive and financial director who claimed that this was in the best interests of Nationwide members and some other nonsense. It’s really a favour to the government, maybe paid off in honours while Nationwide members are being conned.
Oh, yes – and the notes in the accounts showed that the chief executive had just raised his pay from £784,000 to £1.7 million and his chairman from £50,000 to £187,000. For some reason Chief Executive Graham Beale couldn’t live on £784,000 per year and is enriching himself while Nationwide is repossessing homes and the rest of the country is worrying about keeping jobs and their houses. Was this suggested by the FSA?
So I wrote to Hector Sants, Chief Exectutive of the FSA, objecting to both the Nationwide takeovers and payment of the Derbyshire and Chelsea’s losses from members’ funds without members’ approval. I also objected to Mr Beale’s amazing pay increase. Given the opportunity to vote on it, members would never have approved either the takovers or Mr Beale’s pay increase. I suggested a mandatory system for member empowerment and approval of major transactions that have an impact on the viability of building societies. As matters stand, they are managed by cliques who dispose of members’ funds as they please.
Hector Sants didn’t reply to me but someone else did with a load of bureaucratic nonsense. The takovers were approved of course as if the government had nothing to do with it and Nationwide members paid the price of £1.4 billion. Those of us who work, save and are careful are being robbed everywhere and Gordon Brown is allegedly a safe pair of hands? In finding my way around the FSA I came across two people who were seconded from a prominent firm of accountants. The fact is that FSA staff don’t have a clue what do do. They’re just bureaucrats who shuffle paper as they did for years while the lending bubble was building.
The economy is collapsing because Gordon Brown understands nothing of economics and gave free rein to his city friends to carry out criminally irresponsible management practices for their own enrichment. This is where political contributions come from. It costs very little to bribe our government. Then there are the board payoff jobs for ministers after they lose their seats too, of course. What would you expect of someone who sucks up to the Americans by risking our soldiers’ lives in Afghanistan, killing some of the poorest people in the world in their own country? Someone who’s a supporter of Israel and voted for the Iraq war? He’s running true to form. The tragedy is that this loser is taking the country down with him.
Christopher King is a retired consultant and lecturer in management and marketing. He lives in London, UK.
