It wasn’t exactly a JFK moment, but I still remember where I was when I first heard that the British government had decided to blow tens of billions of pounds bailing out our investment banks.
It was October 2008, and I was in a Scottish hotel room for a conference for the ‘project finance community’. The morning television bulletins were plastered with footage of Gordon Brown looking terribly serious as he took the grave decision to splurge other people’s money to save RBS and HBOS.
Oddly, I was just about to join a horde of bankers to listen to them talk about, well, banking. The attending bankers weren’t of the casino kind – project finance being about as risk-averse as banking gets – so I lacked any great impulse to throttle them.
But I was in a fog of outrage. How could this be right? Why bail out the banks’ investment arms, rather than just their high street operations? And yet a consensus had congealed within hours of the announcement that the bailout was the right thing to do. Practically all the talking heads and newspaper columnists (Simon Jenkins aside), all the ‘serious people’ and ‘experts’, supported the bailout. It is educative to look back at the BBC report from the day of the announcement and find that the only critical voice complained that the bailout was too harsh on the banks – Professor Tim Congdon (a ‘serious person’) whining that the bailout was “stealing from the shareholders”, as opposed to stealing from the rest of us.
What was going on?
I only recall one MP in the entire Commons publicly criticised the bailout at the time – in fact, a few days before it had been confirmed. For this, John McDonnell deserves eternal credit. To read his words now is to read the story of 2011, told in 2008:
“Taxpayers will end up paying doubly, once through loose subsidies to dodgy banks and the second time as the recession bites and they risk losing their jobs, homes and going further into debt … At that point they will rightly be asking the government: ‘Where is the bailout for the British public?’”
I recount this to illustrate a question. The bank bailouts of 2008/9 were illogical on a basic level – throwing good money after bad. So how did the government get away with it?
Thanks to the political ‘mainstream’. Go back to October 2008, and the political, media and economic establishment was broadly united in backing the government response to the crisis. So regularly were we assured that this was the right thing to do that any sceptic could have been forgiven for growing sceptical at their own scepticism.
The problems with the bailouts were obvious at the time. By funnelling public money onto bank balance sheets, they wrecked public finances and took away money that could have been used for a genuine economic stimulus. By not actually taking control of the banks, the government was unable to either rein in bonuses or stimulate lending. And by paying for bank shares that were essentially worthless, the government subjugated itself to the banking sector in order to one day sell its shares at a profit.
This latter point is key. One reason the government has tiptoed around the banking sector since the bailout is that in order to make up the money it spent on the share purchases, it needs to protect the profitability of the banks and their attractiveness to investors. A bank that loses its ‘star’ performers because it cuts bonus payments, a bank that withdraws from the hyper-profits and massive risks of the casino sector, a bank that is forced to lend in the national economic interest rather than driving cash towards speculation, is a bank whose shares will be less attractive to investors down the line.
Look how the modest Vickers proposals to ringfence banks’ high street operations from their riskier activities have been kicked back to 2019 – long after the present government hopes to sell its bank stakes. This September, RBS shares were trading at less than half their bailout value. Without a sharp recovery in share price, the taxpayer will make a hefty loss.
The bailout has tied the nation’s finances to the continued deregulation of investment banking. The government is at the mercy of the City.
Three years on, and the bailouts are increasingly seen for the utter shambles they always were. One of the unifying themes of the Occupy movement has been hostility towards the bank bailouts. What was once heralded as a medicine to save the world is now rightly understood as simply more of the poison.
Against this backdrop, October 2008 can be seen as the moment the political mainstream finally cut itself loose from the public mainstream. Three years ago, the political mainstream, which had for years encouraged the growth of an enormous debt mountain to hide the public’s stagnating incomes, was given a choice – either govern in the interests of the public, or govern in the interests of the super-rich. By bailing out the investment banking sector, the political mainstream chose the latter.
Having made that choice, the subsequent cuts and austerity and inequality were written in stone – they were the inevitable next steps under the shock doctrine to make the public pay the price for the bankers’ crisis. Cue mass disillusionment and disenfranchisement. Cue protests.
But most remarkably of all, three years later, we are being lined up for more of the same. The global financial aristocracy has spent months banging the drum for a Eurozone mega-bailout, combined with eye-watering public spending cuts. US Treasury Secretary Tim Geithner has been desperately urging European finance chiefs to expand its bailout and bond-buying fund from its current €440 billion – that’s around £385 billion.
So, that’s £385 billion to be spent on bailing out banks and buying up sovereign debt. No-one seems to think it’ll be enough to rescue the Eurozone, Britain’s major trading partners.
Perhaps the most damning indictment of the political mainstream is how they keep attacking the political ‘stalemate’ and ‘stand-off’ in Europe. ‘Why don’t they stop twiddling their thumbs and do something?’ they wail.
The reason Europe’s leaders won’t just ‘do something’ – to be precise, massively expand the bailout package and implement even more severe public funding cuts – is not because they will not, but because they cannot. The political mainstream, hidebound as it is to financial elites, regard an expanded bailout as a no-brainer. But there is something in the way, and that something is democracy.
The people of Europe have had enough. The first round of bailouts and austerity solved nothing – rather, they made things worse. The people of Europe will not tolerate their democratically elected governments trying to force any more of this down their throats, and nor should they.
Europe’s financial elite are ready to tear up democratic mandates in order to get their bailout. This is a coup d’état without guns.
The radical Left and Euro-sceptic Right have both nailed this for what it is – a crisis of democracy, where governments are frozen with fear. The markets want one thing, the voters another. They can side with the voters, and the investment banks might collapse. Or they can bail out the banks, and crush the will of their own voters. The German government only won parliamentary approval for the most recent rescue package after promising it wouldn’t grow any larger than advertised; but their government is under huge pressure from banks and institutions to do just that, lest stricken Eurozone governments default, plunging lenders into crisis.
Gallons of ink have been spilt explaining the minutiae of what has caused the latest crisis, but it’s really quite simple – though utterly absurd…
- Banks got themselves into huge debt
- Governments bailed them out – and thus put themselves heavily into debt (although Greece’s woes are more deeply rooted than the bailouts)
- Austerity economics made these debts worse
- As the governments had guaranteed repayment of the banks’ debts, this added to the governments’ debts
- Because government debt is held by many of the same banks those governments had bailed out, richer economies like Germany are being told to bail out poorer Eurozone economies to ensure that as far as possible, no matter what happens and who suffers, the banks don’t lose the money the governments owe them
- Because if that happens, those banks might need yet another bailout themselves – and some of them already need one now
Ok, so it’s not exactly simple, and the picture can vary slightly between countries. But it’s clearly absurd; Joseph Heller couldn’t have made up this level of lunacy. The banks that needed a bailout the first time are now demanding bailouts for governments purely so those governments can pay back those banks the debts that were partly racked up in the first bank bailout. And the austerity economics demanded by the financial elites have made the situation worse. Well done everybody.
What’s worse, with European governments hastily buying up stricken governments’ debt, those governments themselves will take a hit in the case of a national default. The labyrinth of guarantees agreed from 2008 that sees governments guaranteeing banking sector debt, leaving governments on the hook for banking losses, has become ever more enmeshed.
The calamitous results of the bank bailout strategy make no sense if you view them as an economic policy, because they never had much to do with the economy. Bailing out the banks was not an economic policy, but an ideological policy. The intention was never to rescue the economy, but to rescue an ideology (two ideologies, if you include the Brussels ideology of enforced EU integration). The economy didn’t benefit as a result because no-one intended it to.
It is only when viewed in this light that the bailouts make sense. Because in bailing out an ideology, they have succeeded spectacularly. The investment banks are still ‘investing’. The casino gamblers are still gambling. Commodities traders are still speculating. Bonuses are still astronomical. Boardroom pay still rises exponentially. For the financial elites, the torchbearers of free market fundamentalism, nothing has changed. And they’re still forcing the rest of us to pick up the tab.
In that sense, the bailouts have worked a treat.
Europe now stands at a crossroads. Down one road lies madness, with safety nets ripped open and public services torn apart, unemployment and poverty shooting up, and democratic mandates tossed aside as nations are locked together in loveless debtor-creditor marriages. Down the other road lies a chance of starting over.
The investment banks and financial elites – and their hired guns in the political mainstream – claim that if these bailouts don’t go ahead, the investment banks will collapse.
So be it. Protect retail banking and the real economy, let casino banking collapse. Withdraw the government guarantees if need be to protect public sector balance sheets. It’s what we should have done in 2008; it’s what we must do in 2011. This roulette wheel’s been spinning far too long.
We can’t afford to bail out financial capitalism. If the financial capitalists can’t afford that, then we can’t afford them.