In a banking crisis, many – or most – banks flirt with insolvency. They stay in business through cheating, lying, and blackmailing the state. As I said in a speech in Tokyo in January 2009:
The past does not predict the future, of course, but it should make us wary. The pattern, as Japan found, is for policy-makers to underestimate the seriousness of the problem and for financial institutions to spend years refusing to confront their predicament head on. The required psychological shift is a profound one.
Throwing money at the problem is, in many ways, the easy bit. Much more demanding is the process of unpicking and revaluing the poorly-understood risks that are at the heart of the financial sector’s difficulties. This is a process that has barely begun.
Back in April last year… bold action was promised to sort out the ‘bad’ from the ‘good’ banks, but nine months’ later that is only beginning to happen.
Instead, many countries have pumped money into their financial institutions, without having the tools to force these institutions to identify, value and dispose of toxic liabilities.
This mistake is likely to prove costly. As Ben Bernanke admitted last week, large quantities of “troubled, hard-to-value assets” have now become the primary obstacle to the financial system’s recovery.
The Eurozone is now riddled with zombie banks, all using their too-big-to-fail status to distort the response to depression in the European periphery, while the deceptions of British banks are steadily being exposed, with Barclays currently in the firing line. In the United States, too, a pattern of rampant criminality is steadily emerging. Liars. Cheats. Blackmailers. Guilty as charged.
But as the Leveson Inquiry has shown, the British media has many of the same bad habits. Not just a willingness to break the law and bully both the powerful and the helpless, but a casual mendacity, where the story is pre-determined and facts are twisted to give it as much viral zing as possible.
We don’t know each other, but I want to offer you a deal: You each give me £20,000. And that’s it. What do you get in return? Well, it’s a fair question but I can’t even promise to pay it all back. But let me assure you of this: your hard-earned cash will keep me in the style to which I’m accustomed. And that’s got to be good for all of us. So I’m sure you’ll agree that 20 grand is an absolute bargain. Indeed, I would call it a once-in-a-lifetime offer; only I can’t promise not to come back again.
You’ve probably guessed that the transfer I’m talking about has already happened. Each man, woman and child in Britain has already handed over £19,271. And our money has gone to the banks.
That’s a carefully crafted hook, reinforced in the last paragraph (“next time, the British might need to cough more than 20 grand each”) to hammer the lesson home. It’s designed to be picked up on Twitter and Reddit, and grumbled over down the pub, all driving eyeballs to the Guardian’s website.
But as a meme, it’s deceptive at best. If 63 million UK citizens had each coughed up £19,271, the total bill would be around £1.2 trillion – but that’s more than the UK’s entire national debt which exceeded £1tn only at the end of last year. It’s simply impossible for the government to have dished out so much money to our banks.
So what’s going on here?
Chakrabortty’s £1.2 trillion figure is sourced to an IMF report. It is, he says, composed of “bailouts, and loans and state guarantees on bankers’ trading.” And, also, “a sliver of that money eventually went unused.”
We’ll come to the sliver in a moment, but let’s look at Chakrabortty’s categories of support first: (i) bailouts and loans where money has indeed ‘already’ been ‘handed over’ and (ii) guarantees where no money has changed hands (but could do so in the future).
Turn to the NAO’s admirably clear official estimate of UK support for the financial sector (which Chakrabortty doesn’t link to – odd that) and one quickly sees that the second category vastly out weights the first. At the height of the crisis, £1 trillion was offered in guarantees. What NAO helpfully labels as the ‘cash outlay‘ totalled only (!) £133bn.
Moreover, far from a sliver of the money not being used, the guarantee has now fallen by two thirds, to £332 billion. Neither did it come for free, bringing in £12 billion in fees (although the NAO believes this is not enough to compensate the taxpayer for the risk incurred).
The cash transfer has shrunk slightly too and is an asset (although one of uncertain value) in the form of shares (which will eventually, one hopes, be sold) and loans (which attract interest and should be repaid, at least in part). For this reason, as the NAO notes, “the final cost to the taxpayer of the support will not be known for a number of years.”
The NAO numbers are horrific but, far from a transfer of over £20k, we’ve each coughed up around £2000, an order of magnitude less than Chakrabortty’s ridiculously inflated figure. Isn’t £2k enough money to impress a Guardian journalist?
The size of the guarantee is also shocking, but I can’t think of a single reason – apart from whoring for pageviews – for misleading readers into thinking this too was a cash transfer. And even if it was legitimate to say this money was handed over (and clearly it isn’t), then you’d have to point that two thirds – and not just a ‘sliver’ – has been handed back.
The Guardian makes much of its values, quoting an essay by its former owner, CP Scott in its editorial guidelines:
Character is a subtle affair, and has many shades and sides to it… Fundamentally it implies honesty, cleanness, courage, fairness, a sense of duty to the reader and the community. A newspaper is of necessity something of a monopoly, and its first duty is to shun the temptations of monopoly. Its primary office is the gathering of news. At the peril of its soul it must see that the supply is not tainted. Neither in what it gives, nor in what it does notgive, nor in the mode of presentation must the unclouded face of truth suffer wrong. Comment is free, but facts are sacred. “Propaganda,” so called, by this means is hateful.
Facts held sacred? Or hateful propaganda (albeit against an often justly loathed group)? I wonder how the Guardian’s readers editor will adjudicate this question.
Addendum: After writing this post yesterday, I paused before pressing publish, tracked down Aditya Chakrabortty on Twitter, and asked him about his misuse of data in his article. The response clarifies little, but here’s what he had to say:
- Chakrabortty’s £20,000 number comes, he claims, from ‘reading and maths’ – and he insists that all the money was provided upfront. “If i lend you £10, it’s in your hands.” [Completely misunderstands or misrepresents what happened.]
- Me: “Loans and other cash transfers are 12% of the total. The rest is a guarantee – no money is ‘handed over’ ” and “The cash transfer is nearer to £2k per head than £20k (which is around the size of the total national debt).”
- Him: “Agree it doesn’t go on the national debt; about 40% of PFI costs don’t go on uk balance sheet, either” and “So we’re not disputing the IMF finding that we put 1.2 trillion behind the banks?” [Er - what?]
- Finally, he argues his ‘sliver’ isn’t a reference to the substantial fall in the size of the guarantee, but to some other portion of unused money. [Again, a very odd justification.]
All of which leaves me confused. Does Chakrabortty not grasp the distinction between a grant and a transfer? Has he never heard of the NAO? Is he obfuscating? Hoping to get away with it? Simply doesn’t care? For a journalist at a leading newspaper, it’s very strange indeed.
Addendum II: For added head-shaking, here’s Chakrabortty hailing Gordon Brown for “having saved the UK” through the bailout.
The decision to put government money into stricken banks was exactly the policy that Bush and his treasury secretary Hank Paulson had pooh-poohed. In the end, however, the US and others copied the British plans,” he gushes in an article written just a few months back.
How quickly he changes his tune. Now he slams the very same decision (without naming Brown, natch) for having been pushed through without proper public debate.