Reply to post: Re: "how stupid will British economic policy be if it does leave the EU?"

Re: "how stupid will British economic policy be if it does leave the EU?"

>>"So why are banks so different?"

I'll take a stab at this one otherwise Tim Worstall might reply with something I actually agree with and that would make me feel a little sick in my mouth.

There are two reasons that "banks" are different. Possibly three though the last is more arguable. The first and clearest distinction is that it is our money in there. I don't think anyone in living memory in the UK recalls a proper banking collapse. I'll put it succinctly: imagine going to your bank or cashpoint today and seeing a message saying "this bank cannot afford to give you your money. Your savings are lost". Literally, you cannot access your money because it no longer exists. And to those reading this who have debts, keep in mind that those wont be gone - they are assets that will be seized by the banks creditors and you'll now owe your money to some other entity.

Once you've got your head around the idea that your high-street bank simply vanishes with all your savings and what that would mean for many people, there's item number two.

Now purely investment banks don't necessarily tie into the first reason; that only ties into some of the banks. Reason number two applies to all and it is that the banks were viable businesses. What do you do when you see a viable business that is suddenly in crisis and available super-cheap? Yep, you buy it. At least you do if you have lots of money or credit. This is what the UK government did with those they bailed out (Northern Rock being an exception and an older case). The UK government is actually profiting from the RBS bailout. Effectively, they bought low and sold high. And that's because the nature of the banking crisis was not one of a business that was no longer viable, but one that had gotten itself into a crisis situation.

Now whether the bankers running those companies should have got bonuses is a whole different question and one which I imagine most people here can answer quite succinctly. But the principle of bank bailouts itself has sound underpinnings.

The third argument is the more arguable. "Too big to fail" is a dangerous phrase and as a capitalist, one that makes my skin crawl. But there is an element of truth there. The West's economy was teetering on the brink of a major slide. Worst case scenario, a catastrophic one. The banks that we're talking about, are a large part of the economy and if they collapsed it would certainly result in big repurcussions. Now I'm not going to strongly argue this one - look at Iceland. They let things collapse and have rebuilt. I'm inclined to attribute a big part of that to the fact that they have a small and very educated population which gives them strong foundations on which to rebuild. I'm not sure the UK would be so fortunate. However, there are good arguments for letting markets correct themselves and I'm kind of in favour of that generally. Otherwise there's a risk that you're merely delaying the problem and making it worse when it does happen. But I do acknowledge that there impact of their collapse would have been huge and resulted in a lot of economic suffering.

So to conclude, those are the principle reasons why the banks were different to other companies and why (imo) bail outs were justified.