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Could the banks have been allowed to fail?
The Brown Delusion II.
CU asked ‘what preparations did the government take having been given a full years warning of a possible crash to the banking system?’
The answer was – not many.
The Brown memoirs make clear that the government was completely surprised by all the banks debts..far in excess any prudent lender would have risked. The Daily Mail’s McBride serialisation has Brown telling cowering bankers the state of their finances, what has gone wrong, where it went wrong, inaccuracies in their balance sheets and that he was the only man in the UK, probably the only man in the world, who could save the banking system. Without his powerful intervention the cash points would have failed and the mobs taken to the streets and looted their way to anarchy and revolution.
And there may even be a very large amount of truth in that. I agree with government intervention in the banks. The idea that the banks could have just been left to fail is supremely risky.
If we recall Northern Rock only went from a banking failure to a banking crisis and panic because the government did not act swiftly enough. Early on in that train wreck the Brown government had refused to guarantee savers deposits properly so the inadequate £30k deposit guarantee scheme was in place. It was only after the £85,000 amount was agreed, with an implied, if not confirmed, ‘unlimited’ did the panic slow.
And as the 2008 banking crisis hit the government billions in bailouts did turn a potential Wall Street Crash and the possible end of capitalism into simply a long, long recession. Better that than the sort of riots Britain saw recently, and the vigilante response to lawbreakers. So the Brown government’s immediate spend of some £500bn did save us from anarchy and only landed the nation with zombie banks that could continue on life support and a century worth of additional national debt.
A good result really. Better a 10%-20% reduction in living standards and house prices than mob rule and the guillotines.
Ok..so that may not have happened. It didn’t in Cyprus. There the banks were shut for a fortnight and the riots never began. But who wants to take the risk? And HMG only had hours to sort out a rescue, according to Brown.
BUT – if as CU said, it wasn’t hours, but months to plan something, why were there not better contingencies in place?
On a micro level, if the banks closed their doors, how could the government ensure the operation of the nation? The people aren’t concerned with hedge funds. They want their money.
The Cyprus situation showed that with EU consent, limited funds were made available. A daily withdraw limit, set very low – £100. Not great, but enough to prevent riots and enough to prevent bank runs. Not enough for an industrial nation to run its businesses and pay its bills, but enough to get by for a few weeks.
And in the UK there was even an alternative methods to the banks. For example, up until the Blair government the Post Office handled payments of most pensions and benefits. There were some 6 million customers. And it was largely a paper based system. A pension/benefits book. With the switch to a complicated application process for a payment card system DWP deliberately closed about 5 million Post Office accounts. But, with a bit of contingency planning there could have been a system in place to simply issue a card, open an account and receive benefits that way. The government could have pumped their money through the 12,000 {2008} post office branches. A total of branches greater than all the banks combined. That sorts out mums, and pensioners and the disabled. Online would be dodgy. PO had no current or business bank accounts. But with a year to think about it, it could have been set up.
And, with some planning, the rest of us could have been sorted too. There were around 8,000 large Supermarkets in the UK in 2008. The biggest chains had top notch IT systems. They had lots of cash. They wanted to be banks anyway.
Governments could have guaranteed all our the savings, as they did. Then, over a short period, allowed the transfer of funds into either the new supermarket banks or the post office government owned bank.
{Post Office using the Northern Rock banking licence re-branded as National Bank Of UK or something. It was on the cards. Only Post offices involvement with Bank of Ireland on a 25 year agreement scuppered it in 2010. But if you’re going to collapse banks..well..’BOI..here’s an offer for your share…Take it or be nationalised, capiche?’ }
Paystation & Paypoint had around 10,000 outlets too. And would have been able
to issue ‘daily’ use amounts of money as long as the government pumped
some of that £500bn their way.
IF the government had set up, ready to go in emergency, quick transfer bank accounts. Business accounts Loan and deposit guarantees. Electronic money injected into the new banks,they may…may..just have been able to let the big banks fail, the shareholders take the hit and keep the revolution from Downing Street.
It would no way be easy. Certainly chaotic and panicky and fraught with great danger. But it may well have been cheaper, and possibly better for Brown once he had rescued the old banks not to continue with the business as usual model.
And all our mortgages ? – Hell..write them off!
Recession over before its even begun!
Source: http://www.cityunslicker.co.uk/2013/09/could-banks-have-been-allowed-to-fail.html
