Where did our money go?

Despite at least £1.2 trillion of taxpayers’ money being put at risk to bail out the banking system, many of the major high street banks may well be asking for another hand-out from the public purse in 2011, according to new research from my colleagues at nef (the new economics foundation).

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Their research raise the question of whether the Government is aware of the problem, and if so, whether the scale of planned cuts to public services is being influenced by the likelihood of another bail-out.

In  Where did our money go? published yesterday Bank of England data is used to investigate what happened to the bail-out money, two years on from the credit crunch that sent shockwaves through the banking system and just ahead of the second anniversary of the biggest single bail-out in UK history on 8 October 2008.

The report findings are staggering. It shows that there is a shocking lack of information in the public domain about where the money has gone, how it has been used and what has been the ‘quid pro quo’ for the support. Interest rates are higher than before the crisis for firms and households, including on mortgages, despite the Bank of England cutting interest rates to historic lows. Lending to households and firms has stagnated despite the bail-outs.

As the report shows, the roots of the banking crisis lie in the political crisis of weak and ineffective regulation. The fact that we are on the cusp of a second banking failure just as a range of government commissions and enquiries are underway mean that not only must the reviews directly address fundamental reform of the banks, but that action will be required ahead of the outcome of the enquiries.

The report calls for a comprehensive package of reform, including:

  • The separation of retail banking from speculative trading, and the curbing of socially unproductive financial activities.
  • Breaking up the big banks, reducing them to a size where the failure of one would not jeopardise the whole economy.
  • The transformation of the bailed-out Royal Bank of Scotland into a Royal Bank of Sustainability which must redirect its investment away from fossil fuels and towards building green infrastructure.
  • The introduction of a Community Reinvestment Act which would bring much needed transparency to banks’ lending and ensure they invest in all communities from which they take deposits. nef believes that an effective banking system is one that can channel resources into financially sound investment that creates social value without causing environmental degradation.

The former Chancellor, Alastair Darling, conceded in September this year that the so-called ‘Super Tax’ on bankers’ bonuses had failed to change the behaviour of the industry in giving excessive, unjustified rewards to executives. And, new international rules on how much capital a bank must hold compared to its liabilities sets the threshold actually lower than that already held by many banks and is also unlikely to change the industry’s behaviour. nef is urging policymakers not shy away from radical reform. In the current climate, the greatest risk is not to act.

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