First it was Northern Rock, and now it looks like RBS, Lloyds/HBOS and Barclays will follow.
We’ve become used to hearing how these banks are “too big fail”, but plainly that’s utter rubbish. They are, in fact, too big to save. Our banks have vastly outgrown the size of their domestic economy and – no matter how you cut the numbers – the UK cannot, and should not, nationalise them.
Yes, banks have a critical economic role to play in our economy. But, no, that does not mean that the state should take full ownership and control of them when they fail to function properly – as nationalisation will only exacerbate the problem, delaying our eventual economic recovery for years.
The government should recognise that, essentially, most UK banks are already insolvent. They should be left to fail in as controlled a manner as possible, with the one caveat being that their UK deposits are ring fenced and transferred to a solvent UK bank. (Even then, there is no reason why a UK depositor should necessarily get 100% of his or her deposit protected beyond a certain maximum amount).
The few banks that are not (yet) insolvent should be pro-actively helped through a combination of the state buying their most illiquid assets, asset price insurance and equity capital injection.
Leaving the banks (largely) to mercy of the free market may seem irresponsible, but all other alternatives are far worse. The less the government meddles in the operation of the free market, the quicker the UK will recover. Beyond pre-emptively helping (not nationalising) the few remaining solvent banks, any further government help is better directed towards bottom of the credit chain (homeowners, the labour force), not the top.
There is no question that our economic predicament will get worse before it gets better. But by sticking to our free market ideals, that have never let our great nation down, we will recover far quicker. Eventually the system will reboot and we will begin anew.