* * *I have argued in the Guardian and Socialist Economic Bulletin that the international financial crisis is on such an historic scale that only action that measures up to its colossal proportions has any chance of being effective. Unfortunately, every day confirms this reality. This crisis is rooted in a severe historical overvaluation of assets in the US. As these assets are revalued downwards, to their internationally competitive levels, they destroy the balance sheets of all institutions holding them – as is indeed occurring.
The losses involved in this will be many trillions of dollars: losses on US mortgages are several trillion dollars and losses on US shares are already $8.4tn. All financial institutions that have been significantly linked indirectly to such losses will be overwhelmed by the fallout from this. Compared to the scales of losses, measured in trillions, which are involved in this process the £50bn the British government has proposed to use for the purchase of shares in UK banks is insignificant – it is equivalent to attacking a tank with a machine gun. The bullets will simply bounce off. This sum will be overwhelmed by the downward pressure on asset prices originating in the US and spreading through the world economy. A substantial part of this £50bn of risks being lost.
Indeed, the reason that the government has had to consider making such a capital injection is clear: because private investors will not risk their money in doing so. And they have good reason not to. Those investors who put £12bn into Royal Bank of Scotland and £4bn into HBOS this year have suffered very severe losses.
If it had been the taxpayer that had made this investment, the taxpayer would equally have made such severe losses. The downward movement of asset prices in the US has not yet run its course – that is, asset deflation has not yet ended. Any injection of taxpayers' money into British banks in such a situation runs grave risk of being lost.
However, while it is incapable of affecting the movements of trillions of dollars that are moving the present international financial crisis, that £50bn is a large sum compared to the scale of UK public spending, or the sums that may be needed to protect individual savers. It is therefore essential that this £50bn is not wasted in a bank "recapitalisation" programme, which the basic economic arithmetic shows cannot succeed.
To take an analogy from war, Churchill in 1940 had to take a grave decision for which he is still condemned by many in France. France requested that to attempt to stem the German advance the RAF, including forces vital to the defence of the UK, be totally committed to this battle. If Churchill had taken that decision, the RAF would potentially have suffered such losses it would not have been able to fight the Battle of Britain. Churchill took the strong and vital decision not to do so. It was necessary to prevent the weakening of the RAF in a hopeless battle and conserve its resources to win the decisive Battle of Britain.
That is why £50bn of taxpayers' money must not be committed to a battle to recapitalise banks which involves wholly unacceptable risk. Instead, news published in the Times on Friday evening showed the right way forward: "As the Treasury was set to reveal details of the British bail-out plan, sources at the IMF warned that, if this failed, then the only option would be the wholesale nationalisation of the British banking system." This was adjusted in later editions to read "officials gathered in Washington were forced to contemplate the previously unthinkable: that Britain's enfeebled banks may face outright nationalization."
This nationalisation of a number of major British banks should be carried out immediately. Some banks, notably HSBC, are able to raise private capital, if they require, to strengthen their balance sheet and should be allowed to do so. A number of others led by Royal Bank of Scotland, HBOS and possibly Lloyds TSB cannot – it is clear that the greatest financial strain now exists on the proposed takeover of HBOS by Lloyd's TSB.
Those banks that prove unable to raise private capital should be nationalised. But public taxpayers' money must not be risked in purchasing bank shares when the private sector refuses to do so. Such nationalisations would allow the kickstarting of bank lending – which the further rise in interbank lending rates on Friday confirmed will not be achieved by present proposals.
As the prime minister wrote in the Times on Friday: "The banking system is fundamental to everything we do. Every family and every business in Britain depends upon it. ... The role of banks is to circulate the savings from deposits, our pensions and from companies to those that need to spend or invest them. The cost at which banks can borrow this money directly affects the costs of mortgages for homeowners and of lending for business. This paralysis of lending from loss of confidence jeopardises the flow of money to every family and every business in the country."
Indeed, it goes without saying that the British economy cannot operate without a functioning banking system. The strongest possible banking system would be to proceed to create a strong nationalised banking sector, which will be able to restart lending.
For this reason, the government should set on one side its initial package, which is rapidly being superseded by events, and which carries unacceptable risk to the taxpayer, and proceed immediately to the nationalisation of those British banks unable to raise private capital as the most decisive way to strengthen their balance sheets and resume lending.