John Redwood: let the banking system collapse
2:57 pm - October 7th 2008
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PLANET Vulcan is obviously blessed with an advanced Hayekian economy, in which self-clearing markets guarantee perpetual capitalist stability, with the sole proviso that supply and demand are always allowed to find their own equilibrium. So banks wouldn’t get into trouble in the first place, and if for any reason they did, that would be their tough luck.
That is the kind of mental universe inhabited by a certain hard right Tory called John Redwood. Remember him? The guy who once fancied himself as leader of the Conservative Party?
Although I gather he is, formally speaking, onside with the current leadership, it is fair to say he isn’t really a public figurehead for Team Cameron. With opinions like his, that probably isn’t surprising. Take this argument, published on Redwood’s blog today:
There is no case whatsoever to nationalise more banks, let alone for taxpayers to be made to take equity stakes in all the banks. There is a new kind of madness stalking the government world, as the governments lurch from one inappropriate response to another in response to a fast moving banking crisis. Governments helped create the crisis, by keeping interest rates too low and looking the other way as the banks and Shadow banks heaped debts on debts. Then governments helped bring the crisis on by keeping interest rates too high and refusing sensible help in the early stages of the crunch.
That’s right, folks. All our present little local difficulties are entirely the fault of state intervention. Boo! Hiss! That stupid risk taking on the part of bankers, which occurred in precisely the sort of deregulated adventure playground for the Fat Cats advocated by Redwood’s creed had nothing to do with it. But never mind; luckily, John has the solution all worked out.
Some of the world’s banks should be put through administration because their balance sheets are blown to pieces by the changed climate.
I am the only one to find this attitude frighteningly complacent, given that most major UK banks are currently insolvent and could go bust in short order, taking down a wide swathe of High Street retailers with them?
The subsequent collapse of the financial system would plunge the British economy into a deep and lasting depression, costing millions of workers their jobs and hundreds of thousands of people their homes.
All that might be a matter for so much blithe nonchalance on the part of the blowhard Friedmanite Tory hardcore; even the experience of the 1930 has not disabused them of naïve notion that such a situation would eventually self-equilibriate if pay packets were cut back far enough. But here on Earth, the prospect scares many of us witless.
Meanwhile, Alistair Darling – according to some sources, an alumni of the International Marxist Group – cannot afford to be so squeamish about state intervention. All those cadre schools with Ernest Mandel were evidently not entirely wasted; the likelihood is that several leading banks will be at least partially nationalise.
As is widely reported, a delegation of bank bosses – including the heads of Royal Bank of Scotland, Barclays, and Lloyds TSB – met Darling last night, urging him to press ahead with a proposal for the government to take substantial equity stakes in their businesses in return for an injection of fresh capital. The bill to the taxpayer could come to anything up to £50bn.
Officially, the government is refusing to be drawn on its plans. But after some stunning falls in the share prices of the outfits at that particular confab, few commentators other than Redwood can see any realistic alternative.
Of course there are huge risks with this course of action. The liabilities of the banking system probably run to trillions of pounds. It may ultimately be beyond the capacity of the British state to guarantee them.
But when New Labour is being forced to implement key planks of the Transitional Programme, it is abundantly plain that we are living in remarkable times.
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Dave Osler is a regular contributor. He is a British journalist and author, ex-punk and ex-Trot. Also at: Dave's Part
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Reader comments
“PLANET Vulcan is obviously blessed with an advanced Hayekian economy”
Hayek’s early works actually explained how these sorts of crises occurred. He would have fingered the low interest rates kept down by the BoE.
I suppose you could credit Redwood for being consistent. However, this really is the bullshit that the far right believe. It is also what Cameron really believed until he got the job of decontaminating the brand.
But it is the same belief that the Right had during the Wall street Crash and the Great Depression. They saw no need for intervention, and if people starved to death, well fine, that is free market capitalism. Just as they saw no need for intevention in Ireland during the Potato famine.
They will never except that FDR had to step in with Govt help. What they love is the idea of the atomising of society down to individuals. Just think how worried the poor and lower middle classes will be if they are scared that their money will disappear in a flash. It will keep them on their toes, and make them much more likely to obey their masters.
“They will never except that FDR had to step in with Govt help”
Only problem with that comment is that FDR’s government help actually did they little to cure the unemployment problem. Furthermore America experienced a recession within a recession in 1938.
US unemployment rates:
1930: 8.7%
1931: 15.9%
1932: 23.6%
1933: 24.9%
1934: 21.7%
1935: 20.1.%
1936:16.9%
1937:14.3%
1938:19%
1939:17.2%
1940:14.6%
Richard
So what are you saying? Do you support Redwood bullshit or not ?
I think he’s saying the facts fit his “bullshit” better than your truths. The thing about economics is that if you don’t get it, it gets you! Not even the state can ban supply and demand.
I’m not a fan of Redwood, but I’m concerned that the long shadow of 1929 is being bandied around by bank bosses who see the state as a source of easy money. The end product could be a bankrupt banks AND a bankrupt state with no more money to pay them.
I don’t know what the answer is but I’m concerned that we’re seeing a whole load of money being thrown at the banks without more than a whisper of meaningful reform.
Paul,
Correct me if I am wrong, I usually am, but my understanding of the ‘bail-outs’ is that the government has nationalised the banks in question. That in cases where there has simply been a run on money, they have taken a large equity stake. Where they have seen the possibility of the market managing it’s own mess HBOS, for instance, it has bent competition laws in favour of stability.
These seem to me to be reasonable interventions, however if there is no meaningful reform as a consequence of this, it will be a complete, utter disgrace,
What are the prospects for re-mutualising B & B, say, rather than placing it directly back on the market? I’d like to see something positive come out of this, such as Building Societies returning to what they did best. With a clear law that says they can’t ever de-mutualise in the future.
ok Sally – how much are you prepared to pay to support the banks? All that Redwood is pointing out is that State intervention will cost money…and someone will have to pay for it.
Well I think it is right to question precisely what we are getting for our money is it not?? Are we going to get regulation that caps bonuses?? Are we going to have savings guranteed?? We will wait and see but I rather think that the answer will be no to both so I see no reason to support this bailout….
‘Key elments of the tranistional program’!!! what rot….let’s rewind, this is a bailout to save the system, it isnt a transition to anywhere I am afraid and will most likely fail in any case….
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