Fantasy economics: Nationalising RBS would be an epic nightmare
HOW many investors would lose £26,000 on a £45,000 investment and then come back for more? That is the kind of investment strategy which only makes sense when you are gambling with someone else’s money. And apparently the government is considering playing the same game on a million times this scale.
“Senior government figures” are said to be discussing the possibility of buying out the rest of RBS. Most estimates suggest it would cost another £5bn.
To put this in context, over £45bn of your money has been invested bailing RBS out so far. All that money bought over 90bn shares. Today, that is an 82 per cent share of the bank, and worth less than £19bn, a £26bn loss.
If taxpayers want to invest in RBS, they can. They don’t need anyone to step in and invest on their behalf. Given the record of the nationalised banks since the bailouts though, few people are queuing up to buy bank shares. And major shareholders that are invested in RBS are not keen on being bought out. They have complained to the Treasury about being forced out.
The public finances are in enough trouble already with the government continuing to spend much more than it can squeeze out in taxes. This government should be preparing properly for the long-term fiscal challenges that will come with more pensioners claiming state pensions and NHS treatment. Public finances are in a mess. Wasting another £5bn would not help.
It gets worse. The plan is to buy RBS so that we can force it to make loans that don’t make commercial sense. That means either lower returns, and less profit, or more risk. Either way, the bank is more likely to lose more money. So it isn’t just that ministers want to play double-or-quits on the bailout game. They want to stack the deck against themselves.
The supposed justification for staking another pile of taxpayers’ money on RBS is that we will be able to get the economy going by forcing them to make lots of loans to British industry that the bank itself now thinks are too risky. But if RBS becomes a nationalised lender of first resort, what happens to the other banks?
It will be a huge challenge to combine a massive state-owned bank with private sector institutions that have to justify their lending decisions to their own investors in a freer market. It is easy to imagine under such circumstances that the sector would become more and more dominated by a big bank with all the advantages of a direct state guarantee. This could well lead to less lending, as the other banks retreat from competing.
However imperfect the financial sector today might be, do we really think the politicians are up to the job of allocating capital by state diktat? More and more distorted decisions at a politicised and too big to fail RBS would end in tears – a financial crisis to make even the last one look modest.
Politicians need to be realistic and accept that recovering from a financial crisis is difficult, particularly with another crisis still bubbling away on our doorstep. They can’t wish that away. What they can do is look at the financial regulations that went so wrong in the first place, so we don’t have another collapse to contend with.
However some politicians try to spin it, the public clearly want their money back from the banks, not billions more wasted on bailouts. The government should clearly and publicly reject this reckless plan for yet more intervention in a banking sector that has already been ruined by so many clumsy regulations and so much inept policy.
More than that, this government needs to bring on a supply-side revolution, which will do far more for economic growth than yet another attempt to artificially manipulate the flow of credit.
All is not lost. George Osborne isn’t convinced by the arguments for nationalisation, while the plan may be impractical because of EU state aid rules. But this ludicrous idea should be nipped in bud – and quickly. The Treasury can’t duck the issue like they have, to a certain extent, with the Tobin Tax, trusting leaders in other countries to block it while publicly feigning support or indifference.
Politicians need to do their job of getting policy right, before putting even more of our money at risk buying a bank to play fantasy economics with.
Matthew Sinclair is the chief executive of the Taxpayers’ Alliance.