For once, Gordon Brown’s sound bite undeniably matched the occasion Wednesday. The £500-billion breakfast bailout of Britain’s banking sector really was “bold and far-reaching” by any measure. With its announcement of the part-nationalization of the heart of the country’s financial system, the government delivered the funeral rites on the corpse of high Thatcherism — strangled to death by the very monsters it brought forth from the deep in the reckless frenzy of Big Bang deregulation more than two decades ago.
Both the scale and the speed of the intervention were an object lesson in the power of government to shape and change the rules of the economic game. After a generation during which any suggestion of interference in the magic garden of City finance has been treated as destructive heresy, the rescue plan is a telling demonstration of the vast potential of public action — as well as that, in the words of the celebrated former British industrialist Arnold Weinstock, “there is no such thing as a free market”.
By taking a major public stake in the most strategically decisive sector of the economy, the government has finally broken the spell of private prerogative and the primacy of the market realm. Unlike the already-failing US Paulson plan, this rescue is based on the principle of cash for public equity. For all its weaknesses, the new package has brought the need for greater democratic control of economic life into sharp relief, as the catastrophic cost of the private sector’s stewardship of finance for the rest of the economy makes the case for the social ownership of the banking system more powerfully every day.
Yes, there are to be negotiations over principles of boardroom pay and new credit support for small businesses and home ownership. But, just as they took every step possible to head off the necessary nationalization of Northern Rock earlier this year, ministers react with horror at the very thought of direct control of the banks the government will now be part-owning. While the TUC yesterday called for “fat cats to be put on a strict diet” and the surreally left-posturing Tory shadow Chancellor George Osborne pressed in the House of Commons yesterday afternoon for a ban on bonuses in the newly bailed-out banks, Brown and the one-time Trotskyist Darling were having none of it. Real life seems likely to shift them both on executive pay — at a time when a good number of bankers doubtless count themselves lucky not to be facing jail terms — and the size of the public stakes, just as it has pushed the government this week to take action that would have seemed impossible only a few months ago. But there have to be the most serious doubts whether even yesterday’s huge intervention will, like Paulson’s, in practice match the scale of the crisis — or instead end up bailing out shareholders and the city elite that brought us to this pass, at the cost of billions of pounds of public money.
The other two legs of the package —- pumping hundreds of millions into the money markets in short-term loans and guarantees — ought to keep lending from freezing up altogether in the short term. But the experience of such repeated transfusions by central banks across the world over the past year should have driven home the point that the core of the crisis is one of solvency rather than liquidity. In other words, banks aren’t lending to other banks because they (and the stock market) are convinced those outfits are sinking beneath a sea of bad debts —- as in the case of the Royal Bank of Scotland, whose share price has fallen more than 80 percent since December.
The government’s planned recapitalization will be injecting cash into the riskiest institutions and the danger is that shareholders will gratefully seize the opportunity to jump ship before their banks go under at huge public expense. Even without such crashes, the public debt pressures from yesterday’s package are going to be heavy. Better surely to guarantee deposits and take over such banks once they’ve effectively failed, as in the case of Northern Rock and Bradford & Bingley, securely recapitalizing them as fully publicly owned enterprises.
They could then become the core of a newly accountable and publicly controlled banking sector able to channel investment where it’s needed, rather than into reckless speculation in debt and housing bubbles. What seems certain is that government intervention is going to have to become bolder still, as the crisis unfolds both in the financial markets and the real economy. Even if yesterday’s package eases the domestic credit squeeze in the short term, all the signs suggest we are heading into something that goes well beyond a normal business cycle downturn, as the IMF’s warnings of the most serious global crisis for 70 years underline. The threat is now of depression, not simply recession.
Only a concerted government-driven expansion — including both a major public works program and a much sharper cut in interest rates than the Bank of England managed Wednesday — can seriously offset that, at both the national and global level. That means a program of public house building, home insulation and transport investment, along with intervention to control gas and electricity costs and action to turn repossessions into social renting.
