The Undercover Economist, Revised and Updated Edition: Exposing Why the Rich Are Rich, the Poor Are Poor - and Why You Can Never Buy a Decent Used Car! by Tim Harford

Author:Tim Harford [Harford, Tim]
Language: eng
Format: mobi
Publisher: Oxford University Press
Published: 2012-07-17T16:00:00+00:00

Cheap bailout, costly crisis

Soon enough, Lehman Brothers had gone under and more and more banks were teetering on the edge of collapse. The rest is folklore: although the banks had been greedy and stupid, governments couldn’t afford to let the financial system collapse so they began desperately to throw taxpayers’ money at them. This incurred debts for which ordinary people are even now suffering, through hefty tax rises and painful cuts in public services.

Or did it? There is truth in that analysis, but the story is not quite so simple.

The banking crisis has, indeed, cost citizens and taxpayers dearly. And in some countries—such as Ireland—the cost of bailing out the banks was directly responsible for crippling levels of public debt. No wonder: the banks were large relative to the size of the economy and made astonishing losses. The official estimate in late 2010 was that Anglo Irish—“probably the world’s worst bank,” says the hedge-fund manager Theo Phanos—had managed to lose €30 billion (about $42.5 billion) despite making only €72 billion (about $102.5 billion) of loans. This is an almost inconceivable rate of losses. It is also almost a quarter of Irish national income—from just a single bank.

For comparison, the stricken British bank Royal Bank of Scotland lost similar sums of money: £24 billion (about $40 billion) in 2008 alone, and £3.6 billion (about $6 billion) in 2009. But RBS was a far bigger bank and the U.K. economy is well over ten times the size of Ireland’s. RBS’s losses were a few percent of its loans; Anglo Irish’s losses were approaching 50 percent.

While it’s easy to draw a straight line between the government bailout of Ireland’s banks and the Irish’s government’s debt problem, in other countries the story of the bailout is a subtler one.

In the U.K., for instance, Gordon Brown’s Labour government ended up borrowing gigantic sums of money. The budget deficit reached around £150 billion ($247 billion) a year, the equivalent of £2,500 ($4,000) of yearly borrowing on behalf of every man, woman, and child in the country. But very little of this was to do with the banking bailout itself. While British taxpayers did indeed bail out British banks, the taxpayer is likely to get most of the money back. Some of the intervention took the form of guarantees for the banks, reassuring creditors that they could continue to lend money to any British bank. This was invaluable, but in the end the banks did not use the guarantee, so fortunately it turned out to cost nothing. The Treasury even turned a profit, because the banks paid fees for these guarantees. Other money was spent injecting capital into the banks; in exchange for this, the British government received shares in the banks; this transaction may also make a profit.

It’s difficult to tell exactly what the U.K. bailout will end up costing the taxpayer directly. The budget of June 2010 estimated that the likely cost would eventually be £2 billion ($3.2 billion). That’s a very uncertain figure. The

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