The latest bailout of the banks will cost at least £200 billion according to the government’s own figures – and we will get nothing in return.
The bailout comes on top of the £250 billion in credit and the £37 billion in hard cash that was handed to the banks last October.
New Labour chancellor Alistair Darling explained the latest measures by saying, “What I’m doing today is putting in place a range of measures that are all designed to get lending going again.”
Yet the only lending taking place is on the part of the government to the banks – and it is doing a fair amount of giving away on top.
Under Darling’s latest scheme, the government will guarantee about 90 percent of the banks’ potential losses on assets that could further erode their capital.
The banks still aren’t sure how much bad debt they have, yet the government is guaranteeing it whatever the amount turns out to be.
In return, the banks have to pay a fee – which means that we give them lots of money and they give some of it back.
This is instead of the government taking any control over the banks or even taking partial control through shares.
The bailout misses the point that banks are in the business of trying to make a profit, not in helping the economy or act in the interests of ordinary people.
The money handed to the banks has not gone into the economy.
Instead it has gone into filling some of their accounting blackholes.
Unfortunately, as the holes are deeper than anyone initially realised, they now claim they need more cash.
Consequently, Northern Rock will be paying back the money used to bail it out later than the government originally promised.
Northern Rock will now sell on fewer of the mortgages that it owns, to show that it is “still lending”.
This will do little for the housing market.
But it will mean that the speed of repayments to the government will slow down, as mortgages are repaid over years, rather than the bank getting a lump sum by selling them on to other financial institutions.
The government is involved in a complex three-card trick. The bad debts of the banks get packaged up and the government guarantees that it will cover any losses incurred.
These packages – known as “securities” and “bonds” – are then traded. The government is selling bonds in these insurance schemes to raise money from the same financial institutions it is bailing out.
Overall it amounts to a transfer of wealth from the public purse to the bankers – with absolutely no influence over what they do.
At the same time as the government hands the banks more money, it is reducing the influence it has on the banking sector. The case of the Royal Bank of Scotland illustrates how this works.
The government has increased its shares in the bank to 70 percent.
But it has done so by giving the bank, which just announced losses of £28 billion, an extra £600 million.
It has changed £5 billion of its shares in the bank from “preference” to “ordinary” – essentially giving the government less say in the running of the company.
This also means the bank has to pay back the government less money.
“I am angry at the Royal Bank of Scotland and what has happened,” Gordon Brown said this week.
If this is the case, why is he rewarding it with more cash?