Monday 23 September 2013

Could the banks have been allowed to fail?

The Brown Delusion II.

CU asked 'what preparations did the government take having been given a full years warning of a possible crash to the banking system?'

The answer was - not many.

The Brown memoirs make clear that the government was completely surprised by all the banks debts..far in excess any prudent lender would have risked. The Daily Mail's McBride serialisation has Brown telling cowering bankers the state of their finances, what has gone wrong, where it went wrong, inaccuracies in their balance sheets and that he was the only man in the UK, probably the only man in the world, who could save the banking system. Without his powerful intervention the cash points would have failed and the mobs taken to the streets and looted their way to anarchy and revolution.

And there may even be a very large amount of truth in that. I agree with government intervention in the banks. The idea that the banks could have just been left to fail is supremely risky. 
If we recall Northern Rock only went from a banking failure to a banking crisis and panic because the government did not act swiftly enough. Early on in that train wreck the Brown government had refused to guarantee savers deposits properly so the inadequate £30k deposit guarantee scheme was in place. It was only after the £85,000 amount was agreed, with an implied, if not confirmed, 'unlimited' did the panic slow.

And as the 2008 banking crisis hit the government billions in bailouts did turn a potential Wall Street Crash and the possible end of capitalism into simply a long, long recession. Better that than the sort of riots Britain saw recently, and the vigilante response to lawbreakers. So the Brown government's immediate spend of some £500bn did save us from anarchy and only landed the nation with zombie banks that could continue on life support and a century worth of additional national debt.

A good result really. Better a 10%-20% reduction in living standards and house prices than mob rule and the guillotines. that may not have happened. It didn't in Cyprus. There the banks were shut for a fortnight and the riots never began.  But who wants to take the risk? And HMG only had hours to sort out a rescue, according to Brown.

BUT - if as CU said, it wasn't hours, but months to plan something, why were there not better contingencies in place?

On a micro level, if the banks closed their doors, how could the government ensure the operation of the nation? The people aren't concerned with hedge funds. They want their money. 

The Cyprus situation showed that with EU consent, limited funds were made available. A daily withdraw limit, set very low - £100. Not great, but enough to prevent riots and enough to prevent bank runs. Not enough for an industrial nation to run its businesses and pay its bills, but enough to get by for a few weeks.

And in the UK there was even an alternative methods to the banks. For example, up until the Blair government the Post Office handled payments of most pensions and benefits. There were some 6 million customers. And it was largely a paper based system. A pension/benefits book. With the switch to a complicated application process for a payment card system DWP deliberately closed about 5 million Post Office accounts. But, with a bit of contingency planning there could have been a system in place to simply issue a card, open an account and receive benefits  that way. The government could have pumped their money through the 12,000 {2008} post office branches. A total of branches greater than all the banks combined. That sorts out mums, and pensioners and the disabled. Online would be dodgy. PO had no current or business bank accounts. But with a year to think about it, it could have been set up.

And, with some planning, the rest of us could have been sorted too. There were around 8,000 large Supermarkets in the UK in 2008. The biggest chains had top notch IT systems. They had lots of cash. They wanted to be banks anyway.
Governments could have guaranteed all our the savings, as they did. Then, over a short period, allowed the transfer of funds into either the new supermarket banks or the post office government owned bank.
{Post Office using the Northern Rock banking licence re-branded as National Bank Of UK or something. It was on the cards. Only Post offices involvement with Bank of Ireland on a 25 year agreement scuppered it in 2010. But if you're going to collapse banks..well..''s an offer for your share...Take it or be nationalised, capiche?' } 

Paystation & Paypoint had around 10,000 outlets too. And would have been able to issue 'daily' use amounts of money as long as the government pumped some of that £500bn their way.

IF the government had set up, ready to go in emergency, quick transfer bank accounts. Business accounts Loan and deposit guarantees. Electronic money injected into the new banks,they may...may..just have been able to let the big banks fail, the shareholders take the hit and keep the revolution from Downing Street.
It would no way be easy. Certainly chaotic and panicky and fraught with great danger. But it may well have been cheaper, and possibly better for Brown once he had rescued the old banks not to continue with the business as usual model.

And all our mortgages ? - Hell..write them off! 
Recession over before its even begun!


Nick Drew said...


so why are you languishing on the back-benches, Mr Q ?

(what do the Whips know about you ..?)

Nick Drew said...

one problem with contingency planning quite as large-scale and radical (and imaginative!) as some of your ideas, is that it could have caused the very panic it set out to forestall

a real catch-22

clever contingency planning is either secret (e.g. pre 1984 Miners Strike) or 'publicly endorsed', e.g. building flood defences - where openness strengthens confidence rather than frightens the horses

CityUnslicker said...

Plus not all the banks would have failed. HSBC, Lloyds and Barclays made it and would have made it with minimum support - this is over 60% of the high street banks.

Bill Quango MP said...

Quite so, Mr Drew.

It would have been impossible to keep quiet. But it could have been spun. Creation of new banks for end to rip off charges, etc.

Real problem is the whole exercise buys a few weeks at most. Paying benefits through PO is easy. It's gov money going into gov accounts.

But how would the business be able to pay their staff? No money coming in. No way of sending it out. And my chosen vehicles of supermarket banks and pay point only have the ability for small essential cash payments.
An emergency response to prevent looting only.

Letting the banks go could only work if there were new banks ready to immediately take over the collapsed ones. And how smoothly would that go?

A better idea was the one that we almost followed.
Take over the banks. In effect this is what happened.
Except they weren't taken over, but bailed out.

Short term, an excellent solution. And Browns real success along with the interest rates slash.
But immediately afterwards.... Zero lending.
And a banking failure tipped into a world recession.

Ryan said...

Northern Rock and banks like it ran into difficulty because mortgage borrowers didn't pay back their debts and Northern Rock couldn't roll over the long term debt using short term finance. This was a rather separate issue from over-the-counter and ATM transactions for retail savers.

It was actually extremely simple to keep these two things separate. Runs on banks are not caused by homeowners demanding to pay their mortgages!!!! And foreign investment funds don't try to get their money back by queuing up at an ATM!!!!

If that moron Brown had simply had the BofE step in to ensure over-the-counter and ATM transactions were processed as normal then the foreign investment funds would have taken some of the heat - instead the UK took all the liability, bailing out UK savers but also bailing out Arab oil-men!

Electro-Kevin said...

I do think there should be a certain amount of personal responsibility here as well.

I have two week's supplies of tinned food at home, a can of petrol and some cash held in reserve. All put together at leisure and it doesn't go to waste. Most of it gets rotated. People think I'm a bit odd for doing it. I'm not really a 'prepper', honestly.

I might not have made the effort if I didn't have kids.

Why do people always panic ?

What do they not factor in such things as the occaisional ME oil crisis or domestic network failures and strikes ? It doesn't take anything as massive as the collapse of the western banking system.

Shouldn't our civil contingencies include personal planning too in order to reduce the risk of disorder ?

I wouldn't expect the idea to come from Labour. They seem to dislike the idea of personal responsibility.

Ryan said...

"And a banking failure tipped into a world recession."

Another victim of left-wing propaganda.

In a "boom":

M4 broad money = cash + debt

If debt > ability to pay, then debt defaults and:

M4 broad money = cash

since: cash < cash + debt

there is less money in the system

less money in system = recession


Recessions are caused by debt being allowed to expand until debt cannot be repaid, then debt defaults cause a contraction in the money supply and that means there isn't enough money in the system to keep everyone in a job on the same wages as during the boom. Gordon caused the "boom" thus he also caused the inevitable bust.

Furthermore a full depression is caused by keeping the money supply at a low level due to a reticence about replacing debt money with cash. This is what is happening in the EU right now, and in particular with Greece. The BofE saved us from being another Greece, and Osborne will take the credit.

Blue Eyes said...

Write off the mortgages? Along with lots of people's pension funds/investments? Let those who've saved and invested all their life sink, there are more borrowers so more votes from them. Hang the consequences. This is a true Ed Miliband policy.

Is there any economic problem that cannot be solved via the Post Office network? ;-)

I agree with your thrust though, the bit of the banking system which is essential to the basic day-to-day functioning of the economy are the current account and payment systems. We don't even really need cash points these days. If the government had planned properly, it could have nationalised certain bits of the banks - the retail accounts and back-office infrastructure. Quite how that would work I do not now. Would Visa and Mastercard UK have been caught up in it? No idea.

When you start thinking about it it gets quite complicated.

Blue Eyes said...

EK - did you watch that Blackout drama? Only one character had any means for survival at all. The rest ran out of cash and food immediately. In the show the government managed to get drinking water out to people quite quickly, but the fuel strategy failed and there was no food.

You aren't bonkers to keep some spare food in the house. I could probably not die for a few days if there was a disruption just from the freezer and stuff, but I'd struggle without some way of cooking it. As you say it doesn't have to be a global financial crisis or failure of energy networks. We occasionally get snowed in or flooded or have strikes in Britain!

Bill Quango MP said...

Ryan- The post was about the panic. Brown was convinced .. and others have confirmed, that the banks were going to button down; shut their doors and refuse to allow any money to move from their accounts. this was going to happen until the bailout was agreed. According to Gordon he had about 12 hours to fix a deal.

If the government was prepared in advance then it might have begun regulating the banks to split retail/casino. But not without causing the sub-prime junk debt to become exposed. just earlier than it did.

CU made a great point though. Not all the banks were about to collapse. Barclays. Lloyds. Co-OP. Santander all 'looked' strong in 2008.
And they could have just taken 'the good bank- current accounts/ savings accounts- and business accounts bit and leave the junk mortgages to sink with the 'bad banks bit.'
Problem solved - fewer banks in the uk but same number of branches.
if only it were so easy but was an option, for sure.

EK - crisis after crisis. I did wonder during the riots what would happen if it just continued. the shops would be shut. the online go offline. But only bought a few tins of soup...optimist see.

BE - nah! that bit wasn't serious.Just wishful.
And - as you well know, PO is a client.
But their job is/was to transfer government money to gov accounts. So the benefits money could still flow.
One MAJOR headache resolved.
And in 2007/8 PO had their best ever financial products sales. people were switching to safe over higher reward risk.
Piece of cake to offer bank accounts in 2007 and build up the base and systems ready for a possible banking failure.

Of course they could have done it with Tesco/Salisbury etc instead. Or even as well. It would have solved the counter, ATM problem. Which is what we were looking at today.

Tomorrow..How Ed Miliband will price energy so it never costs more even if the wholesale price goes up.
Over to you Nick..

Timbo614 said...

@BQ "Brown was convinced .. and others have confirmed, that the banks were going to button down; shut their doors and refuse to allow any money to move from their accounts. this was going to happen until the bailout was agreed. According to Gordon he had about 12 hours to fix a deal."

Then I would have declared a state of emergency or even war footing. Put the military into the top bank offices and TOLD them (at gunpoint) to keep the cash machines the wages payments the UK retail/food/energy business payments system running - OR ELSE immediate military prison or worse.

23:59 bankrupt banks bankrupted into "Administration". 00:01 govt buys them for song without casino debt liability :)

Pump in whatever "cash" in whatever form to keep the country going and banking normally - all casino debt/liabilities creditors - "Move along now, the liquidator will see you next."

Sort out the legal mess later - probably decades later :)

Timbo614 said...

Oh and I'm in EK's camp I have 3 weeks food, camping style cooking gear (and gas bottles!) backup power to run the two freezers and a few lights for 2 weeks- ish. All as EK says acquired at leisure, most of it brand new but very cheaply (think car boot sales).

Not a prepper but a boy scout!

Blue Eyes said...

BQ - I know you aren't that stupid, but I worry that Red Ed is! Or at least thinks voters are!

Ryan said...

I've got Ed's number. He's a sneaky little shit. Last week he was telling us how he wants to cut the ties with the unions - this week he's sucking up to them.

Threatening to cut the ties with the unions pointed out to the rest of Labour how much Labour needs them, so the Blairites have got no room to move. Cunning as a fox. But never let him in the hen house.

dearieme said...

The government could even have said that it was a pity that the Savings Banks didn't exist any more and that it would open a countrywide one which would have a 100% deposit insurance, paying an interest rate on savings accounts equal to that on gilts less the expenses of operation. They could have alluded to the old PO bank, to ns&i, to the local savings bank I remember from boyhood.

I give this simply as an example of one of the kinds of things that could be done by a government that grasped that there was a problem.

Anonymous said...

As it was Brown's mad regulation scheme which allowed the banks to go out of control, he was hardly likely to make sensible provision for the crash.

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