The bail-outs: how much do they cost, and who pays?

Submitted by martin on 2 November, 2008 - 12:14

Bank of England and government support for the banks so far totals something like the equivalent of £18,000 for every child, woman, and man in the UK.

The Bank of England's Financial Stability Report of 27 October 2008 estimated that "perhaps as much as £5,000 billion has implicitly or explicitly been made available by central banks and governments since April 2008 to support wholesale funding" by banks.

Robert Peston, on his blog, says that the Bank of England told him that the figure £5,000 billion was a mistake, and it should be a bit less, US $5,000 billion.

However, he says that the Bank then said it would change the electronic version of the report. It hasn't done so; maybe the original figure was right. Checking back to the tables from which the Bank derives the figure, it looks right to me. Peston himself says that the £5,000 billion figure (rather than US $) is probably right because of things which the Bank hasn't counted.

Anyway, as Peston puts it: "That is a genuinely big number. It's equivalent to about a sixth of the total annual economic output of the whole world. So to put it another way, we as the taxpayers of the world are funding our banks to the tune of one-sixth of everything we produce".

The Bank's figures are a total just for the Euro area, the UK, and the USA, so in fact the amount per head of population is bigger than Peston says.

From the Bank's tables, I make the figure for the UK alone £1107 billion. That's over £18,000 per head of population.

The figure is dizzying. It seems just impossible. The average household in the UK is about 2.4 people. That average household just doesn't have £43,000 (£18,000 times 2.4) to give to the banks, even if it wanted to.

In fact, the Government and the Bank of England have not been packing up £1107 billion in banknotes to hand over to the banks. The entire total of bank notes and coins in the UK is much less than that, about £50 billion.

The Government has been extending credit and guarantees to the banks. The banks hadn't been lending to each other; so some banks go bust; so the Government steps in and says that it will guarantee the loans; so the banks start lending, and don't go bust, and the Government doesn't have to pay the guarantee. That's the theory.

Across the system, a lot of the dodgy assets "cancel out". For example, the Bank of England reports that "the notional principal of outstanding over-the-counter derivatives contracts has grown rapidly over the past decade [from maybe $70 billion, worldwide, in 1998] to almost $600 trillion".

Another dizzying figure - $100,000 for every child, woman, and man in the world. But if Bank A sells Bank B a piece of paper with a promise to pay $1 million if the euro interest rate over the next year is higher than the dollar rate, and Bank B sells Bank C a piece of paper to pay $1 million if dollar rate is higher than the euro rate, and so on, the total amount at risk obviously nets out to something less. The Bank of England reckons $14.5 trillion.

That helps explain how the figures for Government guarantees to banks are so huge; why they still may be not enough; and why, however, it is pretty much inconceivable that any large proportion of the guarantee total can be called in.

Some journalists argue that the Government could even make a profit on the whole operation. For example, the special shares it has bought in most of the big banks carry a high rate of return, 12%, and the banks are obliged not to pay dividends to ordinary shareholders in the meantime.

It's possible. No-one knows. The picture is further complicated by the fact that the Government, ultimately, does not have get money from anywhere, as the rest of us do. It can just print it. Sometimes printing extra can slow down an economic downturn, so that paying out what appeared to be "taxpayers' money" leaves taxpayers better off, or not as badly off, as they would be otherwise.

So, yes, the £18,000 per head is a fancy figure. It raises three real questions, though.

It blows a hole in the "not enough money" argument as used a million times to justify social cuts and wage cuts.. If the Government can find £1107 billion in credit for the banks, it can find credit for any social goal you can imagine. Some social goals may be unrealistic because there are not enough real productive resources to realise them; but the arguments about "not enough money" are just top-dressing from the argument about real productive resources.

Triple everyone's real wages? Yes, that would be truly impossible. But giving public sector workers wage rises beating inflation; raising the minimum wage to a decent level; expanding public services to create decent and useful jobs for all - all those are certainly possible. The question is not "enough money" or "not enough money" but how the real economic resources are allocated.

Inequality has spiralled. Between 1990-1 and 2004-5, the top one per cent of taxpayers in the UK increase their percentage share of total household income by 40%. The top 2% of households have increased their share of marketable wealth from 44% in 1980 to 55% in 2002. That inequality is the problem, not "not enough money" in general.

The Keynesian economist Anatole Kaletsky made the point like this in the Times, February 18, 2008

"The provision of £100 billion of state guarantees to a grossly mismanaged and insolvent mortgage bank [is] a gross insult to the hundreds of thousands of workers in businesses from coal, steel and textiles to performance cars and advanced electronics whose jobs could have been saved with Government guarantees or 'temporary' nationalisations costing one-tenth or even one-hundredth of the £100 billion".

Second: the Government is not literally "printing money" in vast amounts. (The amount of notes and coins in circulation is not increasing especially fast). Where the Government is not just giving guarantees, but actually paying out amounts, as for Northern Rock and Bradford and Bingley and the shares in other banks, it does it by selling Government financial paper.

Those pay-outs thus increase the size of the total debt from Government to the public. "The current public sector net debt figure of £632bn, now inflated by £87bn via the nationalisation of Northern Rock and set to go higher after the state took over Bradford & Bingley... If the whole £500bn package to the banking system were to become a contingent liability and put on the public accounts, that would rise to almost 100 per cent of GDP, a 50-year high". Even short of that, many economists reckon that the national debt could rise another £100 billion in the next year or so. (Sean O'Grady, Independent, 14 October).

Say £200 billion increase in the national debt. Assume the rate of interest the Government pays on that debt is about 5%. That is £10 billion a year extra in interest payments - equal, for example, to one-quarter of the Government's total schools budget.

Karl Marx wrote about burgeoning national debt over a century ago: the people who buy Government securities "actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation-as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven - the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy" (Capital chapter 31).

Further, in Capital chapter 33: "The American Civil War brought in its train a colossal national debt, and, with it, pressure of taxes, the rise of the vilest financial aristocracy..."

In other words, in rescuing "bankocracy" and "vile financial aristocracy" today - which it does because a collapse of the banks would bring a collapse of the whole capitalist economy - the Government sets things up for more "bankocracy" and "vile financial aristocracy" tomorrow.

Finally: the Government has said vaguely that it demands restraint on bosses' bonuses as a condition for the credit to the banks; some bank shareholders, in Northern Rock and Bradford and Bingley, have lost heavily; a few bank bosses have been pushed into resigning.

But on the whole Government-supported or even Government-owned banks are run in just the same way, by the same sort of people, as the pre-crash privately-owned banks.

Ron Sandler, put in by the Government to run Northern Rock, gets £90,000 per month - £1,080,000 per year - actually higher than the £690,000 basic salary of Northern Rock's previous chief executive, Adam Applegarth.

Sandler's deputy, Ann Godbehere, is on £75,000 a month. Meanwhile, Northern Rock workers lose their jobs and Northern Rock mortgage-holders have their homes repossessed.

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