The true cost of the bank bailouts

Yes, still entirely possible to have a lovely screaming match about the real costs but:

Although the net burden so far has been just £90m, the NAO said

That\’s the actual cost on the current or income account.

The Government\’s bank rescue debts amount to £124bn, with £67bn of capital injected into the lenders and £57bn of loans provided.

That\’s the cost on the captial account, most/all of which we expect to get back at some point or another.

Despite the ongoing costs of the bail-out, the overall risk for the British taxpayer has shrunk from £955bn to £512bn,

That\’s the amount at risk, given the guarantees offered to bank deposits and bonds etc.

So, if we were to be honest about all of this we would say that the amount being sucked out of this year\’s tax revenues to pay for the banks is £90 million odd: essentially, in the scheme of things, spit. Especially when we consider what the costs of not having a functional banking system would be.

The second number, the £124 billion, is the amount that has been added to the National Debt (and recall, the banks are paying interest and fees on some of this, making the carrying cost that £90 million).

The third number, £512 billion is perhaps what we really ought to be saying has been added to the National Debt: except that we don\’t add contingent liabilities to said debt. If we did then we\’d have to add all the PFI. future pensions (but only those already accrued mind!) and so on, blowing out the national debt to that very scary £4 trillion or so that the Taxpayers\’ Alliance talks about.

But the real lesson to take away from these numbers is that no, the current costs of bailing out the banks are not a limitation on what the government can spend on services. We\’re not having the cuts because of the current costs of the banks falling over (you can still argue that we\’re having them because of the decline in the economy, caused by the banks, but that\’s a very different argument).

So, if you were being honest, rather than being a political shill, you wouldn\’t say that we are having the cuts as a result of the costs of propping up the banks.

15 thoughts on “The true cost of the bank bailouts”

  1. it’s odd isn’t it.

    we’re having all these cuts, and experiencing unemployment because the banks blew themselves up not because we then had to repair them. I genuinely don’t understand why so many people want to blame the repair bill, instead of blaming what caused the damage in the first place. We’re in this situation because of the financial sector’s behaviour, not because of the subsequent bailouts.

  2. here’s one idea:

    if somebody smashes up your car, you need to spend £x to repair it, the cost of the repair bill is a good way of capturing the cost of the initial damage.

    But the situation we’re in is more like having your car smashed up and that causing you to lose your job then lose your house. In which case the repair bill is a very poor way of capturing the damage done.

    for reasons I don’t understand plenty of people approach the present situation as if it’s the former rather than the latter

  3. There’s a fourth cost, which is the increase in moral hazard that will come in the future from the knowledge that there will be a bailout (which might not be limited to banks)

  4. Actually (and I guess this is the problem with something as central as banks) I can think of other current costs too, which is presumably monetary policy is being set with an eye to implictly bailing out the banks (and getting the governments money back).

  5. We’re in this situation because of the financial sector’s behaviour………

    egged on by politicians drunk on the increased tax revenues, by consumers in a desperate bid to buy ever bigger houses and fueled by the cheapest money imaginable.

  6. Luis concludes with:
    “for reasons I don’t understand plenty of people approach the present situation as if it’s the former rather than the latter” – which seems to imply he thinks the banking element cost should be larger.
    But his car loss analogy doesn’t match. Does the car owner lose his job and house because of the state of the economy – or because of something personal?

    Surely there can be no doubt that the economy could not sustain balloning government debt – caused by overspending on the current account (debt for capital spending may be justified)?

    The banks may have brought forward the day of reckoning – but blaming them for Govt. recklessness is a blame too far.

  7. matthew

    yes. the cost of the ‘stealth bailout” (using monetary and fiscal policy to enable banks to rebuild capital by making high profits by borrowing from and lending to different arms of government) is hard to quantify but could be large.


    you are over thinking it. In the analogy you lose your job because you cannot get to work without your car. The point is merely that the true cost of the financial crisis lies in the knock-on effects of it (the recession, the fiscal adjustment) not in the direct cost of repairing the banks.

  8. vimothy

    yes I’m not being very clear. What I mean is, yes blame the banks, but for what? I’m saying it’s odd that the thing many people seem to blame them for is the cost of the bailout, rather than the recession etc. The problem with the former is if – as it turns out – the cost of the bailout is negligible, are we to think that the financial crisis was negligible too?

  9. Luis,

    I guess it looks to many people as though the government is taking public money from spending programmes and funnelling it straight to the banks, so that the (opportunity) cost of the bank bailouts is in fact austerity. Worse still, the banks/financial sector are to blame, so that for all appearances it looks like on the first day fenance says, “sorry everyone, screwed the pooch here big time–I’m going to be needing a *lot* of your money, but trust me the alternatives are worse”. Okay, thinks Joe Six-pack, but I’m not sure about this. Day two there’s a knock at the door: it’s fenance. You again, thinks Joe, but fenance acts as if they’d never met. “Listen, Joe, you seem to have been spending a lot of money. In particular, the loan you made yesterday–we’re not trying to tell you how to spend your money, but you obviously need to do a bit of restructuring or we’re going to have to hike rates on you. We feel that if you downsized into a nice flat we’ve found for you on the outskirts of town…”

  10. In other words, smarter people than Joe are telling him that, given the unfortunate circumstances, he is probably doing as well as could be expected—largely thanks to their smart advice. But Joe can’t shake the feeling that what is actually happening is that he is getting fscked, and that its the smart people who are claiming to help him who are doing the fscking. Now, Joe may not be top of the class, but then knowing when you’ve been fscked is probably not rocket science. Trouble sitting down, teeth marks on the back of his neck—I mean, smart or not, he is getting fscked, isn’t he?

  11. you’re right – to steal Dillow’s idiom, the big truth is that people have been screwed, the small error is thinking that what screwed them was paying for the bank bailout. The small truth is that the banks didn’t need a *lot* of our money to repair them.

  12. It doesn’t matter if it was £90m or £9. It shouldn’t have happened. If you don’t run your business properly then you should go to the wall.

    Many members of the public look on this as a pretty unfair deal. The banks made a lot of money by taking some bad risks, but when those risks came home to roost, they got taken care of.

    Now, this isn’t the free market in action, but many on the left are now using this to say “look, the free market is just about the rich”. It’s made arguments in favour of the free market harder to make, and will only send more voters looking leftwards.

  13. Luis,

    Exactly–small error, big truth. I like that. Dillow’s, you say? I have a feeling that I’ll be passing it off as my own in the near future!

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