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?