Simon Jenkins is one of my favourite columnists. But I could not understand an article he wrote for the Guardian last week about the banking crisis, ending up:
I find it simply incredible that a chancellor can take over a trillion pounds of public money, some of it in secret, without giving a remotely plausible account of why it was risked as it was, rather than in boosting consumer demand.
He apparently believed that it was not necessary to bail out the banks:
As yet, no one has explained why such stupefying sums of money were really needed to pay off the rotten debts of banks, whose speculative activities should have been nationalised and left to default.
He seems seriously confused here. We are not talking about the rotten debts of the banks, but the rotten assets of the banks, which prevent them paying off the loans which innocent people, including widows and orphans have made to the banks. Because many of the banks’ assets are rotten they would – without government help – be unable to pay off these loans.
You may say that some of these people deserve to lose their money. That may well be true. They may have been careless or greedy in the way they lent to the banks. But plenty of others were relatively innocent. In any case, particular loans to the bank are not tied to particular loans from the bank. So if the bank is caught short then everyone who lent to it suffers, whether or not they are deserving.
Moreover, there is a liquidity issue. Banks inherently lend long and borrow short, so if there is a crisis of confidence then those lending to the bank will demand repayment before the bank is entitled to demand repayment from those to whom it has lent. So even if it is sound and profitable, it can quickly be put in a position where it is unable to meet its obligations.
This means that in practice the government is forced to (A) invest tens of billions in the bank in new equity to restore its solvency, and (B) guarantee hundreds of billions of loans. You might think that (A) on its own would be sufficient, but those who have lent to the bank may still panic and want repayment, thus causing further problems. So in practice the only way of reassuring them is to guarantee.
Clearly none of that helps the economy. None of it encourages the banks to make large loans to businesses. Jenkins would like those things to happen. Fine, but that is a separate issue. The government is faced with wanting to rescue the banks and wanting to help the economy by encouraging bank lending. Unfortunately, it does not have the resources to do both (at least not on the scale that Jenkins would like). It reckoned that rescuing the banks was more important. That is hard to quarrel with. The collapse of Lehmans triggered the current mess. The collapse of RBS would have been much worse.
Of course, the government should have done more in earlier years to prevent us getting into a situation where it had to bail out the banks. Of course, the banks are not responding well to current concerns about salaries and bonuses, but none of that seems to me to suggest that the government was wrong to rescue the banks.
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