Politicians who now criticise the bailout forget there was no alternativeby George Magnus / October 2, 2018 / Leave a comment
Systemic banking crises are not pretty. They have dire economic, and often political, consequences. We have seen a few in the last 25 years, including in Japan (1990s) Mexico (1994/95), Asia and Russia (1997/98), and Argentina (2001), but none as systemically serious as the one that rumbled through the western world in 2007/08. So why did aspiring prime minister Jeremy Corbyn use his keynote speech to the Labour Party conference last week to attack the UK political and economic establishment, which, he said, “instead of making essential changes to the broken economic system, strained every sinew to bail out and prop up the system that lead to the crash in the first place”?
This not-so-veiled attack on the last Labour government and others in positions of authority at the time is as perplexing as it is alarming. It’s perplexing because in 2008/09, there was no space or time for long parliamentary inquiries, or commissions to “make essential changes.” It was a case of act or go under. The then-Chancellor, Alistair Darling, has recalled that the head of the Royal Bank of Scotland warned him at height of the crisis that the bank might run out of cash. Upon asking when, Darling was stunned to be told “this afternoon.” It was about firefighting,nothing more, nothing less.
It’s alarming, because Corbyn gave the impression that he might either have let the banks fail, or introduced a siege economy behind capital and other controls.
In any event, the time for essential changes was before or after the crisis, but not during it. As it unravelled, the Brown government took Northern Rock into public ownership in 2007, stimulated the economy in late 2008, and later nationalised the Royal Bank of Scotland and Lloyds Bank/HBOS. These actions, together with the recapitalisation of UK banks, and the implementation of Bank of England programmes to boost liquidity, guarantee bank debt and insure toxic assets had an upfront cost of over £500bn. At the time this was nearly a third of the UK’s GDP. On top of this, the Bank of England’s QE programme, having started at £200bn in November 2009, peaked at £435bn in August 2016.
These are huge sums. It is no surprise that people take objection. But Corbyn’s judgment on the bailout is flawed for three principal reasons.
First, the end-cost of financial…