I've argued against the bank bailouts strategy from the start last September, both on principle (I'd have been against it even if it had "worked") and in terms of feasibility (I've argued that we don't face the kind of crisis that can be addressed by loans or recapitalisation schemes). I want to say something brief on the latter of these points, since recent events demonstrate it.
Vince Cable asks where the £37bn of taxpayers money for recapitalisation has gone, and why it hasn't led to additional lending. Well, not all of it has gone anywhere, yet, but it will eventually all go in ongoing bank losses unless the banks are seriously restructured (i.e. unless they undergo the kind of process that would occur if they went into administration). We can get a sense of the scale of ongoing losses from the US. Merrill Lynch has lost $39bn in the past six quarters, including $15bn in the quarter since it was "saved" last Autumn by Bank of America. Citigroup has lost $19bn over the past year, including $8bn since the bailouts process began. The bailouts money is vanishing rapidly in the gaping hole of insufficiently restructured loss-making businesses the business models of which will either not generate profits in the future at all, or if profits are generated they will not be sufficient to pay off loans the financial institutions have taken out.
Perhaps you think this is just American, or just something to do with complex derivatives arms of businesses that will be quickly shut down? I'll demonstrate to you that that is wrong with one killer statistic from before the madness of 2005/6/7. Let's go back to 2004. Even by 2004 mortgages were the single most important source of income for retail banks in the EU. They generated 30% of the gross income to retail banks from personal customers (see here, middle of p6.). That's right: 30%. Even before the madness of bond markets and derivatives, the retail banks were heavily dependent on mortgages. But the numbers of mortgage transactions are way down - to one third or less. And even when numbers pick up, the value of mortgages will only be a half to two thirds of what it was (because of the falls in house prices). That 30% of gross income is going to shrink dramatically - and that's before we even get warmed up with the other stuff.
Many of the business models in the sector are finished as profit-making exercises. The only way these business could continue without significant restructuring of the sort that would occur under administration is for governments to provide an ongoing stream of subsidies (perhaps by nationalising the entire sector, or at least all the loss-making enterprises within it). Is that what we want? £200bn is £33,000 per UK taxpayer [I'm not sure how this number is arrived at, but I read it in the Telegraph, so it must be true!]. Is that what you want your £33,000 spent on? And is it even vaguely plausible that the recession that would have resulted from allowing the market to function and banks to be restructured under administration would really have been so bad that the government could not have helped us better by sending the £33,000 to taxpayers directly without the massive loss-making middleman?
