Why we should have let the banks go bust

penguine

From Moneyweek:

The big players in the financial sector knew that the good times couldn't last – that's unquestionable. But with the US central bank clearly behind them every step of the way, they gambled on the notion that they were too important to the economy to be allowed to fail, and that the authorities would do whatever it took to bail them out.

And they were right. Politicians have indeed done 'whatever it takes'. And now the banks – having been allowed to dump all their toxic assets on to the taxpayer, and fiddle their accounts – are turning profits again, which has in turn helped ignite the current bear market rally we're seeing.

The banks will have to return to the taxpayer for more and more money as the economy worsens and bad debts continue to mount. The International Monetary Fund (IMF) reckons there's at least another $1,500 billion to write off at US and European banks....

But by engaging in what is effectively a cover up, and accepting that the banks are too big too fail, the authorities have now ensured that they can't let any more banks go bust. That means our economy will be held back by lumbering, "zombie" banks, just as Japan's was. And it also means a lot more public money being spent.

I was in favour of bailing out the banks at the time, because I thought the consequences if we didn't would be devastating for the rest of the economy. I'm starting to wonder if I was wrong.

Is it too late to stop bailing them out?

Pal

The Banks should have been (and should still be) completely nationalised as a condition of financial assistance. Then we can bail them out knowing that we should have pretty strong businesses which can be re-privatised at a profit in a few years.

geo555

The bailing out of the RBS and HBoS was more to do with the fact that if they let them go bust, every scottish banknote would be worthless!

RabbitMad

geo555 wrote: »

The bailing out of the RBS and HBoS was more to do with the fact that if they let them go bust, every scottish banknote would be worthless!

What about clysdale* bank notes?

*Sorry if I spelt it wrong

cronos

geo555 wrote: »

The bailing out of the RBS and HBoS was more to do with the fact that if they let them go bust, every scottish banknote would be worthless!

There is the small matter of Clydesdale Bank which also issues notes, but ignoring that, the reality is somewhat different. The Scottish banks issuing their own notes deposit 100% of the value of their notes with the Bank of England to guarantee their value. This used to be for only weekends, but was increased to a full week following the run on Northern Rock.

There may have been a public perception or panic that Scottish notes became worthless, but in effect their full value was held as collateral by the Bank of England.

Radiantsoul

How much of that loss sits in British banks though?
It seems HSBC is fine, Barclays hasn't accepted any money yet, LTSB has guaranteed most of its liabilities and RBS shareholders have pretty much been wiped out.

bubblesmoney

by allowing zombie banks to be subsidised by tax payers we are rewarding bad management and penalising good management of other good banks.

in effect we the public are subsidising the bad banks and allowing them to undercut the good banks due to this subsidy (bailouts). so it harms the good banks and also encourages the banks to takle more risks knowing that they cant be allowed to fail and will always be bailed out by tax payers.

Radiantsoul

bubblesmoney wrote: »

by allowing zombie banks to be subsidised by tax payers we are rewarding bad management and penalising good management of other good banks.

in effect we the public are subsidising the bad banks and allowing them to undercut the good banks due to this subsidy (bailouts). so it harms the good banks and also encourages the banks to takle more risks knowing that they cant be allowed to fail and will always be bailed out by tax payers.

But that hasn't really happened. The really bad bank(RBS) has been virtually wiped out. Barclays and HSBC (no government bailout) are doing well. And Lloyds TSB has taken a huge gamble on which the jury is probably still out.

bubblesmoney

Radiantsoul wrote: »

But that hasn't really happened. The really bad bank(RBS) has been virtually wiped out. Barclays and HSBC (no government bailout) are doing well. And Lloyds TSB has taken a huge gamble on which the jury is probably still out.

we bailed out bradford & bingley, northern rock, HBOS, Lloyds, RBS etc. if you put together their market share and the bailouts needed by them arent we subsidising the bad companies to the detriment of the good ones who they compete against. these bad ones got govt subsidised credit in a tough climate while the good ones have to raise that credit at market rate.

geoffky

but did Barclays not sell its !!!! to the arabs

Thrugelmir

Financial services are key to the the British economy. And will be in the years to come as we come out of recession.

If the banks had gone bust who would have repaid all the savers their deposits? The Government. Which means us the taxpayer. Banking is a profitable business so how ever long it takes the money will be repaid now that we hold an equiy stake in the banks.