The Bankers’ Recession and the £200 billion bail-out

A Mr. David Smith in a letter to the Financial Times, (29 Aug 08) has suggested we brand this global recession ‘the bankers’ recession’.  He has my support and enthusiastic commitment to raising awareness of the brand.  Especially after today’s UK news.

Bloomberg (3 Sept 2008)  reports that the Bank of England has, these last few months, bailed-out British

banks to the tune of 200 billion pounds. Compare that to the miserly 1.6 billion pounds found yesterday by Chancellor Alastair Darling, to bail out victims of Britain’s housing crisis.

Bankers and their shareholders are benefitting from fully £198.4 billion more of taxpayer-backed funds, than taxpaying homeowners. These homeowners are  burdened with debts showered on them by, ehem….bankers.

The bail-out is a complex thing: Bloomberg describes it as a “special liquidity scheme, established in April and set to close in October ..that …allows banks to swap mortgage-backed securities…… for government bonds.”   In other words, the governor of the Bank of England is handing over taxpayer-backed assets (bonds) in return for mortgage-backed securities, owned by the banks.

Now a security is a form of property pledged as security for a loan. In this case, the property (I promise to pay…by…..) is backed up by bundles of mortgages – which many banks worry will not be repaid in full. Indeed that is why there is a crisis in the first place. Banks fear that (other)  banks have mortgages on their books they treat as sound and likely to be repaid, when in fact, many doubt they will be repaid.  These are the ‘securities’ that the Bank of England has swapped for £200 billion of sound, heavyweight, UK taxpayer-backed Treasury bonds. I repeat, £200 billion pounds.

I pose this question again: how will that £200 billion be compensated for, in the event that banks fail to repay? Where exactly are these liabilities posted? Will they turn up in the Public Sector Borrowing numbers? Will they increase taxes?

I have visited the website of the esteemed Institute of Fiscal Studies (IFS), who very cogently report on government income and spending. I see no mention there of an increase of £200 billion in government liabilities. (Let us not forget the Bank of England is a nationalised bank, and its liabilities therefore part of government liabilities.)  Instead the IFS adopts a highly ideological standpoint, taunting government for spending on benefits and public services, at a time of rising unemployment.

The bankers recession, that is hurting millions of innocents, has led to a  massive, virtually invisible, and unremarked upon, bankers bail-out.   Its a bad old world.