I suppose it was inevitable that we’d need to come to the rescue of the banks sooner or later. And, at face value, it’s not as bad as it could be. Unlike the American bail-out, at least the government will claim some shares and hope to get some money back.
The whole thing is ingenious and ridiculous. What amazes me most is where the £500 billion comes from. We don’t have a third of the entire country’s income lying around anywhere, so we’re going to have to borrow it. Who’s going to lend it to us? The banks. “What’s happening, therefore, is that money managers are lending to governments like ours, and those governments are then recycling that money to the banks” writes the BBC’s Robert Peston today.
The problem isn’t that there’s no money in the system, but that the banks don’t trust each other with it anymore. The banks figure that if the government has borrowed the money first, it’s more dependable. A bank can lose money and has no way to get it back, but a government’s always good for it – if need be, you can just raise taxes to stump up what you’re missing.
Essentially, the bail-out is a continuation of the same old money spiral, except that last week the buck stopped with the bank shareholders, and next week it stops with us.
Commentators seem to generally agree that it had to be done. “The plan is bold, risky and carries no guarantee of success, but there is no alternative” writes Nils Pratley in today’s Guardian. “This is what needs to happen and it needs to happen now” says Damian Reece in the Telegraph. But is this true? ‘There is no alternative’, famously used by Margaret Thatcher to justify building this crazy system in the first place, is rarely true. There is almost always an alternative.
Here are three alternative ways to provide what the banks provide – raising capital for loans, small businesses and mortgages.
- Instead of putting £50 billion into a system that leaks money straight back out again, how about putting it into a national trust instead? Since the government is prepared to guarantee everyone’s savings in the banks, it might as well go the whole hog and hold the savings as well. A national savings trust could be tightly controlled, and if necessary sold back to banks as the market stabilises.
- Do the opposite of the above – de-centralise banking into a series of local or regional building societies. These mutual societies would hold savings and issue mortgages, and while they would be able to lend more broadly, their focus would be on funding local mortgages and businesses. By keeping at least a minimum percentage of their loans within the region, these would not only be small, accountable places to keep your savings, they would also lend towards the local economy and aid regeneration.
- If you’re willing to raise money from tax-payers – in the current instance at £2000 per head, why not cut out the middle man and just facilitate peer-to-peer lending. Organisations like Kiva have been hugely successful in providing micro-loans to entrepreneurs in developing countries, by pooling small loans from lots of people – $25 per person, across 20 people, so the loss is spread. Could you run a mortgage company on the same principles? Groups like Zopa have suddenly taken on a new importance.