Andrew Lilico is an Economist with Europe Economics, and a member of the Shadow Monetary Policy Committee
It’s so obvious that it’s almost an embarrassment having to write this, but here goes: Bailing out the banks did not prevent a Depression. UK quarterly GDP contracted 7 per cent in 2008/9, larger than in any depression since the 1920s. Greek and Spanish unemployment has exceeded 25 per cent. The Greeks have had a formal sovereign default – the first in a developed economy since the 1940s – whilst Ireland, Portugal and Cyprus effectively defaulted. UK annual GDP may exceed its 2007 pre-crisis peak in 2014 – seven lost years; the slowest recovery since the 1920s (perhaps slower). UK real wage declines are the most sustained since the 19th century. Bailing out the banks did not prevent a Depression.
I am driven to write this only because it is still endlessly repeated all over the media that the bailouts of 2008 and 2009 “may have been costly, but at least they meant we avoided a Depression”. We didn’t avoid a Depression. We didn’t avoid one in Britain. We didn’t avoid one across much of the developed world.
When this is pointed out to people, they say: “Well, things could have been much worse.” Indeed they could. We could have had 25 per cent unemployment, like in Spain and Greece…who both bailed out their banks. We could have had 14 per cent unemployment, like in Ireland…which bailed out its banks. The main respect in which things have gone better in the UK than in other countries has been that our rise in unemployment was much less than elsewhere. But that is not because we bailed out our banks whilst other countries that did worse did not.
Ah, folk say, but the countries that did worse did so because they were Euro members. I’m not convinced that that is actually true, but insofar as it is true, all it would mean is that the UK was able to engage in quantitative easing, as a sovereign money printer, whilst Ireland, Spain and others could not. And that is all very well, but it is nothing much to do with whether we did or did not bail out our banks. Why could we not have not bailed out our banks but also done quantitative easing – perhaps even more quantitative easing, if you think not bailing out the banks would have meant more quantitative easing would have been necessary?
Folk then typically abandon all attempt to claim they have any actual evidence that bailing out the banks prevented anything, and resort to assertion. They say: “Think of the chaos there would have been had folk not been able to take money out of cashpoints! Think of all the businesses that would have gone bust! There was no credible alternative!” Setting aside one’s strong suspicion that even simply relying upon well-established administration law would have avoided the nightmare fantasies painted by bailout supporters (reinforced by the experience that when RBS shut down for a week in 2012 because of an IT glitch, society unaccountably failed to degenerate into mobs with burning brands rampaging the streets cracking open each other’s heads to feast on the goo inside), I emphasise once again that my favoured alternative was not simply to rely upon administration law. I proposed that we enacted debt-equity swaps with bank bonds made junior to deposits, which would in the case of all UK banks have meant that the banks were recapitalised, more or less instantaneously, by their bondholders not the taxpayer. So there wasn’t any question of them shutting down operations for any sustained period.
You may feel the idea of converting bank bonds to equity, followed by deposits if necessary, sounds strangely familiar. That’s because it is now the policy throughout the world as to how to deal with the next crisis. So it obviously isn’t a totally implausible or impractical concept that would only be proposed by an ideological crank. No. It’s now the policy. There is not the slightest reason that what is now the policy for the future could not have been used in 2008.
I’ll say it one more time: it’s not true that bailing out the banks prevented a Depression – we’re in the middle of a Depression and there’s no good reason to believe it would have been even worse everywhere if the banks hadn’t been bailed out. And it’s not true that there was no credible alternative to bailing out the banks. The credible alternative that we could have used then is what is now the policy for the future.
So it’d be nice if newspapers, TV and radio would stop telling us bailing out the banks saved the world economy and avoided a depression, and that there was no alternative. But though that would be nice, I’m not holding my breath.