Were bailouts the only option in 2008?

The more information that surfaces on current events in the Eurozone, the more questions are left unanswered about the UK’s own crisis in October 2008.

Were the bank bailouts the only option?

We are regularly told that the Government had no choice but to intervene during those October days, because a shutdown of ATMs was only hours away.   Was the option of a temporary shutdown, and any failed banks meeting their commercial fate, ever considered?   Might this have proved a lesser disaster than the events that have since taken place?

What would have been the consequences of RBS and HBOS going into bankrutpcy, like Lehmans, with their debts falling on their various major creditors across the world rather than on the UK general public?   Were the consequences of bank default worked through in any detail, before the decision on the bailout?

ATMs closing down would have been a huge inconvenience, but would the sky have fallen in?   Could not the Government have announced the immediate full nationalisation of RBS and HBOS, with a guarantee that deposits up to £50,000 (as the figure then was) would be honoured?

A temporary absence of cash from ATMs, or the short-term inability to transfer savings online, is hardly the end of the world (and was an experience that Northern Rock customers had to deal with in 2007).    Local councils could have been authorised overnight to make temporary cash loans to anyone who could demonstrate they had money in one of the bankrupt banks.

Huge loss of confidence in the UK banking system would have been a consequence, with RBS a a major player on the global stage. When Lehmans went bust, the Dow Jones lost 500 points (or 4.4%) in a day.  There was a further drop of 7% a couple of weeks later.  But we now see volatility not far off these figures on a regular basis.

These questions may appear hopelessly naive, but it would be good to know if the alternative of bankruptcies was talked through in any detail, and what advice was given the Alistair Darling and Gordon Brown when (and if) they asked the question ‘is there another way of handling this?’   Where exactly would we be now, three years later, if RBS and HBOS had been allowed to go to the wall?

How come we have a governmental system that made the bailout decisions possible?

The bailouts at their peak totalled £1.12 trillion.  As of July 2011, the NAO was forecasting that the banks still owe £436bn.    No one ever seems to ask how come the executive in the UK (i.e. government ministers of the day) could simply authorise the handover of these extraordinary sums without so much as a by your leave from Parliament, let alone the public.

Unlike Germany, we don’t have a written constitution that sets out limits on the powers of the executive.   So it seems that there are no constitutional principles which state that  our Government cannot give away our national wealth to whoever it chooses, and whenever it wishes.   Am I alone in thinking that it would be nice to be asked first, before it happens again?

In Germany, the constitutional court has recently ruled that further bailouts for Greece (or any other country) will need to be approved by the Bundestag.   This ruling followed a legal challenge by six Eurosceptics.  The presiding judge said “The government is obligated in the cases of large expenditures to get the approval of the parliamentary budgetary committee.”   That seems fair enough, in a representative democracy.   Yet no financial commentator seems to have questioned why a similar situation does not apply here?   Anyone trying for judicial review of the Government’s decisions in October 2008 would have had nowhere to start.

Instead, we are told that it is a positive benefit that the UK has a ‘strong executive’ model of government, where such decisions can be taken swiftly in an emergency and before the money markets  cause mayhem.   But a positive benefit for whom exactly?  Many UK citizens would still it like to have it to be explained to them, in simple terms, why their future prospects (and those of their children)  have been severely damaged in order that private banks can recapitalise their businesses, and their creditors be protected?

Why no ‘haircuts’?

We are now told that those banks and financiers who lent money to Greek banks and the Greek government will have to accept a loss, or haircut, on their loans.   This is to avoid sovereign default by Greece.   In June the level of haircut for private lenders was to be 20%.   Now it is to be 50-60% because circumstances have changed.

Where was the haircut for those embroiled in money market or currency deals with RBS or HBOS?   Did we miss it?   Is it too late for it to be applied now, given that ‘circumstances have changed’? It now looks as though the national exchequer will not be repaid the remaining bailout sums for many years to come, if ever.

It is very hard for ordinary citizens to gain an understanding of the workings of global finance, and in particular of the inter-actions between governments and the money markets.    What used to be taken for granted (that sovereign nations in the developed Western world will never go bust) was, we now learn, never the case.   The parameters change, month by month, and old certainties are replaced by wholly new scenarios.

We do get  explanations on the evening news, but it feels if the bigger and more basic questions are still avoided.   The FSA report on the failure of RBS is to be delayed yet again (see previous posts) because some of those involved are not happy with the way in which their actions have been described.

Meanwhile the UK public are far from happy about what is happening to them, week by week and month by month.    But our views do not seem to count for much in this continuing saga.

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