Now we're getting somewhere

The British government has abandoned proposals for non-voting preference shares and is moving towards full-scale nationalisation of the banking sector. According to the London Times(h/t Felix Salmon) the latest proposals would leave the government owning 70 per cent of Royal Bank of Scotland and 50 per cent of Halifax. The London stockmarket is likely to be closed, and it seems unlikely that many banks will remain private by the time it reopens. Presumably, with Morgan Stanley and Goldman Sachs in deep strife, the US can’t be far behind, though Paulson is still talking nonsense about non-voting shares. Still, it’s only three weeks ago that he was opposing any kind of public equity, and only six weeks ago that he was claiming that there were no real problems.

As the Times says, no-one knows how much toxic sludge will turn up when the government finally gets access to the books, but it seems unlikely that most governments will be overwhelmed in the way that Iceland has been. The capacity of developed-country governments to raise additional revenue is huge, easily enough to cover trillions in bad debt over a few years. So, once the sector is nationalised it should be possible to get lending flowing again. And, the prospects for an orderly shutdown of the massively overgrown markets for derivatives like credit default swaps suddenly seem a lot better.

It’s fascinating to wonder how Gordon Brown and Alistair Darling must feel about all this. Having long abandoned their youthful leftism, they have suddenly been forced by circumstances to implement something that looks superficially like socialism, and might even lead to a genuine restructuring of society (utopian I know, but who would have thought a month ago that we would have been wondering what to do with a nationalised finance sector). At the very least, Brown and Darling must have found it easier to adapt to the sudden collapse of the existing order than those who have never imagined anything else.

33 thoughts on “Now we're getting somewhere

  1. John, partial nationalisation of the banking sector may be the future norm but governments should focus more on pump priming the economy in order to avoid any recession and an economic crisis. Failure to do so will be detrimental and doubly impact on those countries facing a liquidity crisis.

  2. Sounds like the stirring trumpet call for a Summit of the good old Axis of Evil there Michael. Big Govt/Biz/Unions all coming together in one big love-in while the battlers get to sing God save the Queen and pass the vaseline!

  3. There is no such newspaper as the “London Times”, and never has been. The British newspaper the Times was the original and so never had its name qualified like its imitators, e.g. the Irish Times, the Times of Calcutta, the New York Times and so on.

  4. John, if I may respond to Observa by saying others are of a similar view requiring governments to do much more. HSBC argue that as reality sets in, “the worsening global financial crisis will prompt Asian governments to draw up more measures for fiscal pump-priming as well as incentives for domestic investment and consumption to brace for dwindling inflows from exports and foreign capital”.

  5. And where does the oversupply of capital fit into all this? And how ironic that so much of that is in the sovereign wealth funds of communist China and only just out of communism, but we kept the authoritarianism, Russia. They will have to be careful to stop it melting into air though.

    I’m also quite partial to Keating’s description of the banks as mere utilities. Why do we need all those inefficient and moral hazarding overheads of shareholders and executives with share options anyway? Surely we could take advantage of the present opportunity to at least cull a large amount of them with a thoroughgoing nationalisation. Time to cut the threads of every golden parachute.

    As to ways to refloat the economy, here’s to a solid dose of inflation to create a bit of intergenerational wealth redistribution, and alongside that a big increase in benefits to those with the least. Rationally the best means to stimulate the economy from the bottom up with a bit of basic consumption. And finally, if you gave the unions back at least a small amount of power they could shift the capital/wage ratio back towards something both more efficient and more human.

    (a) None of this will do much about climate change.

    (b) capitalism is a system of power not the mere market economy its ideology disguises it as. So the policies above are the least likely to get backing. But two cheers for the market for at least partially de-stabilising those vested interests. Smith was not all wrong.

  6. “’s to a solid dose of inflation to create a bit of intergenerational wealth redistribution, and alongside that a big increase in benefits to those with the least. Rationally the best means to stimulate the economy from the bottom up with a bit of basic consumption.”

    You need to bear in mind here tflip that it was a good dose of monetary expansion(those long low interest rates) that began the inflation in assets and fuelled consumption on credit. Those malinvestments have created a housing affordability crisis and hollowed out real production. Ask those Chinese SWFs where the opportunity cost of that forgone investment is now?

    So now Rudd subsidises bank profits and shareholder value and when Turnbull essentially queries throwing good money after bad he replies that essentially the authorities that have recommended such policy will see to it. The same authorities that oversighted all that money creation, etc. I agree with Marc Faber(Lateline)that this is really sending in the clowns.

    Lastly, it sounds like Turnbull’s on the same wavelength as you regards increasing pensions and bringing forward tax cuts, re bottom up consumption for the needy.

    The overarching lesson is that monetary inflation is noone’s long term friend but once let out of the bottle it’s extremely hard to pop the nasty genie back in again. It’s a long slow process and don’t be fooled by false dawns in that regard.

  7. […] John Quiggin wonders if New Labour can at least remember their old-skool social democracy days. William Davies instead points out that New Labour has significant experience with PFI, which are like the proposed nationalisation plans in reverse. Also, the government is keen to point out that these are temporary measures, not a return to British socialism. […]

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