Miles Saltiel is a former investment banker and a Senior Fellow at the Adam Smith Institute
First a tedious reality check. It is depositors, that is ordinary savers, who got bailed out. Shareholders of failed banks (generally another bunch of ordinary savers, through their insurance policies or pension funds), lost much or all of their money.
Top management, eg, Sir Frederick Goodwin of RBS (Fred the Shred), generally left the scene in circumstances which many might reasonably feel were a tad too comfortable. On the other hand, there is a very good question about treating top managers whose strategies fail: how to penalise misconduct without stifling innovation? Answers, please, on a postcard.
Of course, what everyone really wanted to see was bankers losing their jobs. And they did: some 450,000 in the US, 70,000 in the UK, 30,000-plus in Germany and 12,000-odd in France. But I’m not sure this was enough to mollify popular anger.
All of this may be ancient history, but it has lessons for here and now. The dirty little secret of ‘08 is that government’s footprints were all over the crisis - not so much of a secret for those in the swim. Banks blew up after several decades of increasingly easy credit and regulatory forbearance, instigated in the US from the mid-seventies on a bi-partisan basis to promote minority homeownership; from the early nineties in Japan to protect zombie companies (still going on); and for prolonged periods in Europe and from the late nineties in the UK, to goose up local rustbelts. Thus, the exclusively provincial origins of the failed UK banks: Bradford & Bingley, Dunfermline, HBOS, Northern Rock and RBS. It’s a parallel story with the German Landesbanken.
The ensuing crisis was a ghastly corrective for all who place faith in public intervention. This ran from the Attlee nationalisations, which led to decades of subsidy, to the industrial chaos which provoked the Thatcher disestablishments. As we see, it concluded with the futility of enlisting the financial sector to mop up the mess.
The public may well have wanted to see bankers doing the perp walk, but the trouble is that they would have taken a generation of politicians and regulators with them.
What lessons for now? First, the climate of public trust. It should be no stretch to see the line between the justified perception of a whitewash over ’08 and the general discredit of the public realm now prevailing, via the State’s perennial thumb on the scales. Choose your pet offence: austerity? Climate emergency? DEI? Energy costs? Fiscal incapacity? Lying Leavers? Everyone will have their own top twenty; all lend themselves to the coarsened public debate of our times.
Second, the danger of manipulating the financial system to serve political purposes. This is a particular temptation for the left, who are always up against fiscal limits and have only the dimmest understanding of finance’s nuts and bolts - remember “Rachel from accounts”. In the UK at present, Burnham has been elevated by his Manchester model. But this is a risky business, taking funds from the Public Works Loan Board, an arm of the Treasury, which explicitly declines to look at the uses to which its money is put. The funds then go to local projects, also free of arm’s-length scrutiny, in effect using the national credit rating for local projects. Lenders call this “moral hazard”: it puts all concerned on a slippery slope to disaster.
These are not propitious times for such risks. Public balance sheets remain bloated by the Covid spend, for which the “bank bailout” was taken as a precedent. Capital markets are fuelled by an AI boom which is bound to boil over. It is not yet clear that the financial system has been unbalanced by untoward borrowing, but last time this was concealed by the “shadow banking” system. In the nature of things, no-one knows what we are missing at present.
The conclusion is that the financial market can bite you in the bum, with weak borrowers at particular risk. This means you, Andy, so it means all of us.