The Great Bank Bale Out – where are the strings?

So, the British government baled out Northern Rock. That seemed bad enough, but at least it was more of a cheap loan than a bottomless pit.

This week HBOS was incomprehensibly brought to its knees by the failure of Lehman Brothers. The story goes that HBOS loaned Lehman Brothers a wodge of cash; Lehman failed; HBOS realised it wouldn’t get its money back; HBOS had its credit rating dropped; creditors started pulling money out; depositors started getting shaky feet; confidence in the bank was falling – banks live on confidence.

Whilst all this was going on the whole hype and hysteria was magnified ten fold by the stock markets – a load of big players started short selling HBOS shares (i.e. betting the share price would fall) to make money. They benefit if confidence is lost in the bank because that would bring the price down. Now, they wouldn’t have spread nasty rumours would they? Surely not?

Wind forward to today and the USA’s government is baling out all of its financial institutions who are exposed to bad debt, but they’re going a step further – they’re going to nationalise that debt and take it away from the financial institutions.

What? Run that by me again?

When I last checked the USA was purported to be a shining example of how capitalism should work. You don’t get the same social safeguards over there that we enjoy in the UK – if you’re unemployed then you’re right on the bread line, if you get ill then you either have insurance, you pay for it (now or for the rest of your life), or you die (not quite, but you get the idea).

If you can’t pay your way in the USA then you’re on your own. Unless you’re a big financial institution it seems.

I thought that capitalism involved balancing potential profits with risk – you speculate to accumulate, but with it comes the risk that you might not accumulate. You cannot make money 100% of the time on 100% of your investments.

The whole argument behind the bale out is that if the financial institutions collapse then so does the economy and everybody suffers. This is an argument that I buy. However if it was so important for these institutions to succeed then where were the safeguards to ensure that they didn’t lend irresponsibly in the first place?

And more importantly, now that the horse as bolted, where are the strings with this rescue package to ensure that this never happens again? Ever? I’m not seeing any.

From around the year 2000 onwards I can recall having loads of conversations with people down the pub about the credit bubble. Everyone was buying things on credit, house prices were rising sharply – everything seemed too good to be true and when you’re borrowing money you’re going to have to pay it back one day, you can’t borrow forever. If we were talking about it down the pub then surely the government and financial institutions were too? Why weren’t they making sure it was all sustainable instead of basking in the glory of having sailed a good ship?

Also weren’t they squirreling money away because times were good in readiness for a downturn? No, of course they weren’t – shareholder dividends were high, Britain was spending tax revenues like there was no tomorrow with our public national debt still rising.

In conclusion, we seem to have created a monster – financial institutions which know that they can do whatever they want to maximise profits to their all important shareholders and security that when they get it horribly wrong by over-reaching then the people at the bottom will be there to pay them out. If I am right then that is unjust, immoral and wrong.

The little guy is being screwed over and when he wakes up to that fact he is going to be really pissed off about it.

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