Is this the best use of £50bn?

We would like to draw readers' attention to a CentreRight post by Andrew Lilico on Monday.

This was Andrew's key question:

"If, in fact, the cupboard is not bare (which it is not), then why does Osborne think that spending the money recapitalizing the banks is a superior strategy to saving the money and employing it, later, in a huge tax rebate-based fiscal injection?"

£50bn - or a fraction of it - could have been used for massive tax relief for small businesses, for families or for major investment in infrastructure.  It is not clear to us that the Conservatives are right to support Brown and Darling and their chosen path.

Andrew's question still needs to be answered.

Comments

[Malcolm Dunn]

I think the answer is nobody knows. What is clear is that unless some confidence returns to the banking sector the rest of the economy will founder.

[Deborah]

The Conservatives should be providing constructive criticism, not simply supporting whatever desperate scheme the govt comes up with.

The banking system is looking more and more like a bottomless pit. Until the bankers sort out betweeen themselves who is trustworthy and who isn't, this charade will continue - and the taxpayer will be bled dry.

[Chipatwork]

We need to differentiate ourselves in a meaningful way. As 'we' have agreed to the Chancellor's plan, we need to move on and focus on the aftermath. In particular, we should call for:
1. Restructuring BoE and FSA roles to give BoE powers of bank oversight and intervention
2. Halting ridiculous government expenditure on large IT systems (ID card for one) and consultants to bring some more money into the pot (the people who will lose out from this are by and large well paid already)
3. Potential (not guaranteed) tax reductions to small businesses, who after all employ more than any other sector
4. Implementation of the council tax freeze and fair fuel stabilizer

[Andrew Lilico]

Actually, I think the correct question is whether this is the best use of £300bn. For under the government's scheme, in addition to the £50bn equity injection, there is £250bn of guarantees for interbank loans - this is certainly monies that will go onto the national debt. (This is in addition to the £200bn for the Bank of England's Special Liquidity Scheme - contra what is said in the other ToryDiary piece.)

This is a bit less than 25% of UK GDP. How bad could the government believe things would get if the banks failed that it prefers to spend 25% of GDP shoring up a failed system rather than spending that money to smooth transition to a new equilibrium and new clean growth?

[Alan S]

The lending guarantees may have been enough to get the interbank market going again.

The recapitalisation simply nationalises bad debt, transferring liabilities from banks to the taxpayer.

Now the cupboard really is bare for a stimulus for the real econonmy.

I think the answer to the question is certainly "no".

[Deborah]

BBC LATEST: Gordon Brown says the government has done everything in its power to protect the taxpayer.

Classic.

[Martin Jee]

Guido has pointed out that the Government’s £200bn bank bail out is secured against Britain's 28 million taxpayers, meaning that they're now risking more than £10,000 for each taxpayer.

Aside from the fact that I'm not sure this particular taxpayer is worth that kind of figure, I can't help but think that all this money would be far better put straight into those taxpayers' hands. I mean what would they do with it? Spend some and put some in the bank. That would not only introduce plenty of liquidity back into the banking system and boost the economy in general but also boost the market in banking offers - just think of all the toasters that would be on offer!!

But of course the taxpayer can't be trusted with such a large sum of "public money"...

[Pensioner]

Remember that we need the income from our pensions and investments to survive. Panic is setting in fast and unless something happens soon some of us will starve. If one is redundant and not yet pensionable age and ill the other scrimping on the money we have saved !

[Norm Brainer]

They are wrong to support it.
But what choice is there?... they can be 'on side' with labour which means that they are more likely to be influenced slightly or come up with a reasonable plan which involves tax cuts that brown/darling will reject on principle and ignore everything else that the conservatives say, perhaps even doing the opposite to spite them.

[Mark Hudson]

Malcolm Dunn is correct. This is an economic crisis of unprecedented scale and complexity, so no-one knows if this will be sufficient.

This said, a bit more thought, vision and activity from the Conservative Front Bench is essential. At the moment, their response has been uniformly woeful. Bring in Michael Fallon or John Redwood for God's sake and put some grown-ups in charge.

[Matt Wright]

Good point many ordinary people nowadays rely on interest earned on savings.

[Cleethorpes Rock]

This is a pathetic response from the government and a dereliction of duty from us. The country will be bankrupt within months if this goes on.

There's plenty of money to be saved:

- Withdraw from the EU
- Get out of Iraq
- Scrap ID cards
- Scrap the overseas aid budget
- Scrap regional assemblies
- Cull the departments

Think of all the money saved from just those six things if it were put back into the hands of the taxpayer. Taxpayers would then recapitalise the banks themselves, thereby choosing which ones to keep and which ones go bust. The alleviation of taxes and fuel bills would follow. Excellent point from Martin Jee. Why are we subsidising failure and bad businesses? I notice we were against such policies when it was Coal Mines and not Corporations who wanted the money.

[resident leftie]

First, I'm glad Lilico gives the lie to the Tories constant ill-judged refrain about room for borrowing. As he demonstrates using Eurostat figures, borrowing was greater under the Tories in 1996, and debt is low compared with many other countries, so the Chancellor has room for Keynesian policies.

Second, to see the effect of Lilico's proposed solution, you only have to look to the States, where borrowing has been used to fund tax cuts. What a result! It's really helped liquidity, hasn't it?

This is simply a case of ideology trumping reason. Osborne and Cameron are right to support the socialist solution, even if they are doing it for the wrong reasons.

If it works, interventionist nationalisation will be demonstrable working (and hence socialism) making their existence and beliefs look pointless; if it fails, then why were they supporting socialism instead of a delightful Lilico-esque or Redwoodian monetarist solution?

[David Cooper]

Matt @ 10.17 - and dividends from bank shares, amongst others, going into pension funds. If the small print of this bailout is likely to put those at risk, it's yet another illustration of the Clunking Fist being smashed mercilessly into hopes of prosperous retirement.

[Al]

Just everybody stand back and think for a second.

What mess would a possible future incoming Conservative Government be left with?

It will take years to sort out and any Tory spending plans or elections pledges would be ripped up trying to unpick this.

We are all looking at the short term and watching the FTSE - but who is watching the pockets of us taxpayers and Gordon & co mug us now and in the future.

[DCMX]

If Cameron really wanted the best for the country he'd move Osborne out of the Treasury post and put Redwood, Clarke and Flight in his place. Grown up times demand grown ups.

[Sammy Finn]

First the markets panic and now the politicians panic.

If we are going to throw real money around let's throw it at the real economy and not at the banks.

[GB£.com]

No.

If we need serious people for serious times, surely now it is time to ask Osborne to step back until we reach squeaky times?

[Richard Woolley]

Why should the banks in particular be bailed out? Rover wasn't bailed out during the last election campaign so what is unique about the banking industry? Why should the Tories be supporting this when it conflicts with their free-market principles? And I believe that ideology and philosophy are important.
As I wrote yesterday i believe that part of the solution is to drastically cut interest rates to zero, in fact i believe there should be coordinated international action (Fed, BOE, ECB) to slash interest rates. Forget about inflation and concentrate instead on averting a major depression. Also, reduce public sector waste by about 80 billion pounds, cut taxes by about 50 billion pounds and try to reduce the PSBR. Government must live within it means. If we had a much lower tax burden on individuals and companies people would have more to invest in banks so they would be better capitalised.

[C Powell]

Darling said one very good thing this morning, namely, that the Government would ensure that savers in ICESAVE would be compensated in full, despite what he rightly described as the Icelandic Government's "disgraceful" decision not to honour their commitments. This was important - and not just to those savers - because otherwise people could have had no confidence that they wouldn't lose their money with NS&I for instance. So I think you are ignoring the real issue here which is that there is no point giving money back to taxpayers if they can't have the confidence that if they put their money in banks it won't then vanish. So it is essential that people have confidence that our banks won't go bust. I can't comment on whether this is the right technical solution - though it seems to have worked for the Swedes in the past. I agree that the Tories' response has been a bit woeful: they need to be on the side of ordinary people, savers, those who wonder whether they'll be able to get their salary out of the bank every month etc and they need to start fashioning, fast, credible policies about how to ensure that these sorts of problems don't recur in future. Cutting bonuses is the least of it: introducing responsible lending criteria, minimum deposits for houses etc are the sorts of things they need to start thinking about it plus how the government is going to pay off all this debt, which means thinking clearly which functions government has taken on these last 11 years have to be abolished.

[Cleethorpes Rock]

I totally agree DCMX, and so do most of the members. Osborne doesn't have a clue. I've long been in favour of the rehabilitation of Howard Flight, but the party would rather promote CRD or Policy Exchange wonks than people with real life experience. Redwood, Fallon, Spring, Flight, Clarke and Ruth Lea all have more economic nous in their little fingers than Gideon will ever acquire.

[Deborah]

"So I think you are ignoring the real issue here which is that there is no point giving money back to taxpayers if they can't have the confidence that if they put their money in banks it won't then vanish."- C Powell

You're living in the past. Nobody is going to trust the banks or the government again until the market has sorted itself out.

And agreeing to guarantee funds placed with a foreign bank at ridiculous rates is NOT a good thing.

[Friedmanite]

The problem is with the banking system. I'm not sure that the government's "recapitalization" plan will do the trick, but I'm fairly confident £50 bn of tax cuts would do little to solve the underlying problem.

Of course Andrew Lillico is right that the cupboard was never really bare. The problem with the government wasn't so much that borrowing was excessive, but that the money was wasted. Far better to borrow to finance supply-side tax cuts a la Reagan.

[David_at_Home]

In theory we will get our £50bn back, or some of it, when the “investment” in the UK banks is sold off but it will take a very long time and there is a risk that a sizable proportion might never be recovered.

By contrast, a major investment in the infrastructure (power plant, railways, coastal defences) would certainly have stimulated the economy, given a much needed boost to manufacturing industry and mitigated the major recession that is to come.

However, without this massive injection into the banks, some would have gone belly up. Others (HSBC, Lloyds TSB, Standard Chartered) would have continued so my feeling is that those banks which deserved to go bust should have been allowed to do so.

The argument against this is that the “bad” banks would have taken many quite viable companies with them; companies which would not receive payments due, not be able be able to pay their workforce or not have access to the revolving credit they require to conduct their business. So it would have been necessary to put transitional arrangements in place. One would have thought that such an arrangement would not have been beyond the whit of the Bank of England, The Treasury, the DTI (or whatever it is now called) and the remaining “good” banks.

Additionally, if we want to stimulate employment and business in a recession (and we jolly well should!), we should be reducing that tax on employment (Employer’s National insurance) and that tax on investment (Corporation Tax).

Finally, though £50bn seems a lot of money (and it is!), it should be seen in the context of the many other ways we squander taxpayers’ money. For example, £50bn is the equivalent of about 3.5 years of dues to the EU or five times the intended budget for the Olympic Games.

[Andrew Lilico]

resident leftie@10:27

If you follow the link trail back to my July 15th piece in which I originally attacked the "cupboard is bare" comment and said we should be considering a large borrowing-funded attempt to address the situation, I stated that I thought the original US rebates had not worked because the "Ricardian Equivalence" issue meant they were saved instead of spent. At that stage the US banks were too bust for the modest depost injections resulting from the US tax rebates to help, and yet society wasn't desperate enough to need the cash because borrowing-constrained. Tax rebates will only really work once either the banks have clean enough balance sheets or the recession is deep enough that private borrowing constraints are binding.

My solution is, of course, the ultimate Keynesian approach - not Socialist interventionism or nationalisation of any sort. And I don't support attempting (at this moment) any more spending constraint than is already in the pipeline.

My approach would trust markets to sort themselves out, and in the meantime use government borrowing to smooth the social impact. This seems to me to be the market-believing approach that Conservatives should favour - neither libertarian/ultra "take all the pain and cut more" nor Socialist "the Market can't cope so Government must step in".

[Vincent Wall]

An alternative would have been to abolish council tax and business rates for one year. Adding both up comes to nearly £50bn.

[The Wilted Rose]

No, it is certainly not the best use of £50bn.

[DCMX]

Osborne is too busy calling Liam Fox as "shit" to be focused on the financial crisis:

http://www.mirror.co.uk/news/columnists/maguire/2008/10/08/george-osborne-s-foul-mouted-tirade-would-make-joe-kinnear-blush-115875-20784628/

[Conand]

But the cupboard is bare. Lilico's CR post really annoyed me. Do you think Darling is dipping into some magic pot of money that Prudence hid under the stairs at No 11?
WE are borrowing the money. That borrowing is on top of the enormous borrowing that he and Prudence had already racked up on our behalf.
Prudence has said the markets need to be moral. If only his government had been slightly so. They lied to the people about almost all the countries problems and applied some extremely expensive paper over the cracks.

[David]

The problem is interbank liquidity and lending confidence. Giving the money in a tax rebate sounds nice, and would no doubt be welcomed by recipients, and may even boost some spending.

However, it would do little to improve the liquidity and confidence issues, and the latter may in fact reduce the propensity of recipients to spend, or even place in a bank savings account, simply due to the lack of confidence in banks.

Every solution to every problem does not simply consist of tax cuts and tax rebates. You have to be more nuanced and intelligent about this.

[Libertarian]

George Osborne clearly thinks that the Chancellor is right - Blue Labour, Blue Danger!

[Cleethorpes Rock]

David. The point about a free society is that people have the right to choose whether or not they have confidence in a bank. Thy have the choice about when and where they spnd their money.

For you to say "you can't give people their money back because they'll spend it on the wrong things" sounds like you should be a nannying socialist.

If banks don't have confidence of the consumer, that's their fault and they live and die by their investment decisions. It is not the place of the government to decide which banks are deserving of state aid and so to decide which banks survive and which ones go to the wall.

[Rugfish]

I dunno what the future holds but it best hurry up cos since I'm down to my last coupla million, I don't have a mortgage, debt or credit cards, don't owe anyone owt, don't need insurance, my cupboards are cram packed to the ceiling with enough Spam and Luncheon meat, beans, cornflakes, dried milk, dried and tinned fruits, several ranges of pulses, tinned juice and bottled waters, wines and spirit mixers plus soda syphon, plenty spare soda gas, 400 xmas cakes, a few dozen packets of dehydrated bread rolls, tinned salamis, chickens, and vast range of fine meats etc etc etc, which are only enough to keep the entire family going for another 40 years.

I've only paid 10 years in advance for lecky and gas and council tax, only have 58 plane tickets to anywhere I fancy by exclusive business class charter, and my slippers are warmed every night by three young women in their late twenties, anything could happen I guess.

Other than that and the fact no one is buying precious oil paintings' jewellery or ancient Egyptian artefacts these days, and I only have one OXO cube, I guess I should count my blessings that I'm still in perfect health and have no reason to visit one of Labours NHS hospitals in the near future, so I should count myself lucky I guess. Scoff scoff munch munch

[resident leftie]

Andrew Lilico,

I'm not in favour of spending constraint either, but I disagree with you that tax cuts are the right solution. Infrastructure investment would be better. I don't follow your argument about the American example; you say the "I thought the original US rebates had not worked because the "Ricardian Equivalence" issue meant they were saved instead of spent." I thought that was the idea - you want people to save in order to recapitalise the banks? You want us to spend our way out of a recesssion? I thought that is the argument you had against Brown.

Also, there seems to be a disconnect between money "spent" and money invested - while the taxpayer might lose some of the £50bn, it is by no means spent. Your one-off cash rebate could have any number of effects, including hyperinflation, money flowing out of the country or into gold, reckless spending on foreign consumer goods, and a temporary reprieve before an even worse recession hits.

Do you have any historical examples of your suggested approach working? The goverment's approach (supported so ably and opportunistically supported by Cameron and Osborne) at least has historical precedent.

[Adam]

Osborne shouldn't support the chancellor's proposals unconditionally. At the very least he should raise questions regarding the bailout. We are told that the taxpayer may even gain in the long term but there's no guarantee of this and Osborne should at the ask how taxpayer money will be protected if things go completely pear shaped and whether taxes will rise in the short to medium term.

[Rugfish]

They had better start ripping in to them today to gain some ground.

Fancy a Game Taxpayers Poker ?

You be the banker and the dealer and I'll play the MUG who loses.

Oh, bye the way, here's some of my money to bet with because I'm so stupid and I just do this for fun !!

Right, so I have a pair of 2's, a 3 of diamonds, 6 of spades and ace of clubs.

If you pick that lot up over there, which I know is a Royal Flush, and you'll beat me !!

Fancy another game or would you like to play something different where I have a chance to win ?

[GB£.com]

Whoah simultaneous global rate cuts!

[Rugfish]

Oooo, Bank of England has cut rates to 4.5% on the money they just printed from your taxes.

That's good innit !

Now you can go out and borrow your own money again, isn't life wonderful !!!

[David]

"For you to say "you can't give people their money back because they'll spend it on the wrong things"

I don't care what people spend their money on; however the question here is the appropriate response to the problem at hand, and trying to mitigate it. They are two different issues, you see.

And with respect to people being free to have confidence in banks or not, I suggest you look up systemic collapse.

[Cleethorpes Rock]

Well maybe the system is wrong and needs to change, rather than the government propping up a discredited system?

[Mark Williams]

Hang on a mo'. Even after the share price rises this morning the market cap of the big UK banks (excluding HSBC) is less than £59 billion. The government wants to put up almost that much in Tier 1 capital and supply nearly 10 times that amount in liquidity, and all we get for that is some pref shares? I am against privatisation in principle, but on these terms the government would do better to nationalise the banks.

LLOY.L 12,205,046,570
BARC.L 20,855,712,840
RBS.L 18,266,727,145
HBOS.L 7,165,285,120

Total 58,492,771,676

[snegchui]

Case by case, lots of cases maybe. Will he have time for anything else? A gentler touch by DC at QT on this question would have left him room for a good biff to the chin now.
"At the same time, economic forecasters predicted that City bonuses this year will top £3.5 billion, despite the banks' catastrophic performance, with further payouts of £2.75 billion next year. Both figures are lower than in previous years."
Cheer up, it's only 1% of the whole package (round up or down to suit the case)
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