Tuesday, 14 October 2008

Not Spending Our Rainy Day Fund

Over the last few days, with the Iceland bank adventure and Gordon Brown flinging around taxpayers money with abandon, a few questions have been brought to the fore that don't seem to be being asked, although they certainly should be.
Firstly, where did the Government suddenly magic the £81 billion it used to buy out banks from?
All we have heard these last couple of years is how we can't have this hospital or that school because of belt tightening with pay rises in the public sector pegged at 2%, half of the inflation rate, while all the time Gordon Brown had £81 billion set aside for a rainy day. If he had that much just idly sitting around why are the hospitals understaffed, prisons at breaking point and overcrowded schools having to make do with children sharing text books because they haven't got enough to go around?
Secondly, when the Iceland banks fell over, they took with them £858m of council money which works out at approximately £7m per council.
Did your council tax bill get hiked by a crazy amount this year? The average person's council tax bill soared by 5% this year, taking it past £1300 per household, but still council services are being cut, libraries and community centres closed and projects cancelled. The reason cited on every occasion is lack of finances but now we find out that amongst others, Kent Council had £50m stashed away, Nottingham £42m and Haringey £37m. All squirrelled away in a high interest account in an Icelandic bank while the pensioners meals-on-wheels were cut back, adults sent to prison for failure to pay their council tax bill, parks sold off and fortnightly rubbish collections introduced as ways to save money.
If the Government and councils have this kind of money just slopping around, why are we constantly being squeezed for more rather than spending what they have on facilities and services that we are crying out for?
Obviously saving bankers necks and having a healthy surplus to show off at the next Council meeting is more important than spending our money on some of the things that would make our lives that little bit more pleasant.


Noah "Nog" M. said...

Wanna know where Brown got the money for the banks that he didn't have for schools and hospitals came from? Money borrowed from banks and government bonds held by the rich. Whose wealth is securely protected by the government taxmen.

O' Tim said...

Noah is right but missed the first crucial step in these bailout situations: the taxpayers loan money to the banks. Of course, the taxpayers do not have the money, so they have to borrow it from the banks to give it back to the banks. But the banks do not have the money (in the cash sense) to loan to the government, so they create it into existence through the mechanism of fractional reserve, Now they can loan it to us, at interest, so we can then give it back to them.

In day-to-day world finance, fractional reserve is the system used to expand the money supply, not a special one designed only for the "bailout" transactions. Basically it amounts to a very effective pyramid scheme (i.e. sucks to be at the bottom). It would be nice to have something more equitable and certainly less speculative, but you know pyramids - they seem to stand for thousands of years.

Cheezy said...

O'Tim: Yes, the whole banking system doesn't appeal to my sense of fairness either... I blame the Dutch and the tulip crisis in the 17th century!

Anyway, I approve of the deal Brown stitched together. The good thing is that it's based on the government receiving preference shares (and equity warrants) from the banks in return for that big injection of capital. The preference shares gives the govt effective control over the bank’s activities and the equity warrants are basically options to buy more ordinary shares later on at a reduced rate. No dividends get disbursed until all the preference shares have been repaid, and the warrants provide an exit strategy for a government who wishes to recoup some or all of the taxpayers’ investment. Win-win... Or at least draw.

It's based partly on Warren Buffet's rescue of Goldman Sachs a few weeks ago, and partly on what the Swedes did back in the early 90s when the government held the banks responsible for their failings. That worked rather well. Buying appeals as a much smarter move than merely bailing out. It's less 'cronyist' (sic?) too.

In the current (dire) circumstances, I think Brown could have done a lot worse. Is anyone else wondering what young Georgie Osbourne would have done in the same situation? Wetting his pants for a start, would be my guess.

Having said that, on the debit side of Gordon's ledger, he was Chancellor of the Exchequer during the years of plenty so he was partly responsible for the debt bubble getting too big in the first place.

And don't get me started about the irresponsibility of our Councils... Jesus, it's like they haven't heard about the first rule of investment: High return = high risk.