UK Bailout: Socialists 3 Capitalists 0
Now this might seem churlish when the UK bank bailout scheme is being hailed as a bold attempt to backstop the UK financial system, but let's spend a moment thinking about the bigger consequences.
Unlike the US TARP which will relieve the banks of toxic assets on their balance sheets, this UK plan will put the government in the boardroom of every participating bank (figuratively if not literally).
Can anyone tell me now what really separates the banks from the government?
Our liberal, equity-owning democracy has taken a major blow. With this precedent what incentive is there now for me to own another bank share? And if that is the case why should I be prepared as an individual to put my capital at risk recapitalizing the banks when at any point the government is going to help itself to the returns I have gambled on?
The British government is nationalizing the UK banking industry through its ownership of preference shares. The scheme now puts the government alongside bond holders ahead of the equity owner in taking their slice of bank profits. Gordon Brown will be feted by the left in this country as the Prime Minister who has rolled back two decades of Thatcher-led equity ownership.
Let's talk about responsibility.
The government is expecting the equity holder and bank management to suffer for conducting business legitimately in a regulated environment. If there is to be a day of reckoning then surely most of the blame should come back to the regulator and the government that removed the responsibility for oversight of the banking industry from the Bank of England to the FSA.
There are plenty in the city who believe Gordon Brown has over the years worked to undermine the returns for the prudent equity accumulating citizen whilst securing a gilt-edged retirement for public servants. This latest move by the Treasury appears set to hasten further now a greater role for the government in every part of the British economy.
Is it too much of a leap of imagination to ask whether loan officers will feel constrained in their future lending behavior knowing that the government is an important shareholder? Will management of the banks make important decisions on their own business model based on whether they suit the political color of the government?
They can hardly claim they were unaware of the problems the banks were facing. Northern Rock was a year ago!
Their delay in addressing the liquidity issue has resulted in the end for Bradford and Bingley, and now the forced takeover of HBOS. This week's dramatic decline in bank share prices was apparently the result of mismanagement of information about which banks would be interested in taking extra financial support. At each turn the government’s hands are all over this crisis.
That matters because the structure of wealth accumulation and pension provision in Britain is based on long-term equity ownership. Anyone expecting a decent retirement supported by a secure equity funded pension plan has just taken a knockout punch. Forget asking what profit there is in this rescue package for the taxpayer. Instead, ask how ultimately they will be forced to pay for the increased government role in every aspect of the UK economy through their pension fund.
Taxpayer or pensioner? It's really just a matter of timing. Of course our politicians will be OK -- their retirements are all copper bottomed.
The law of unintended consequences suggests this is not going to end well for the British economy.
Final thought: where is the bank of England in all this? If we are to escape the grimmest of economic slowdowns in 2009 then Bank of England Governor Mervyn King and the rest of the MPC need to be getting on with rate cuts. The Aussies didn't mess about. The RBA gave a full 100 basis-point cut.
C’mon BoE – lets get with the program!
(Chris Tinker from ICAP says the UK plan is a return to socialism - watch above).
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