What is this bail-out all about? Firstly we need to summarise why the banks need bailing out to understand what the UK bailout is, then we can assess what the bailout might mean for ordinary people like ourselves.
Tripped up by their own greed.
Banks had been selling "sub-prime mortgages", mortgages that are sold to households who to buy their home. The banks felt happy doing this because they had, so they thought, clever ways of "slicing and dicing" and repackaging these mortgages, selling them and the risk on, so that they can lend some more. They felt these practices were quite safe, with the risk spread out.
As a result, greedy and overly-confident banks were trying to give as many mortgages as they could, to people who couldn't really afford them, so they could make money out them, believing that they were largely protected from risks by the huge market in 'credit derivatives' and 'credit default swaps'. This was the root of the financial market bubble.
However, these households unsurprisingly could not afford the repayments, and so defaulted, and stopped paying them: banks started to realise that this bubble was unsustainable. Banks began to collapse, and the entire banking system went into a panic, and they stopped lending money to other banks, multiplying the problem.
The financial market bubble burst, and its effects are spreading into the 'real economy' where it will threaten our jobs, pensions, homes, and public services.
For more detail and accuracy on this, see "The cause of the crisis in global capitalism"
What is this bank bail-out then?
In a move that wont be discussed or voted on in parliament, the government plans to temporarily part-nationalise the banks. They will then be able to order the banks to start lending to one another, and inject them with cash so that they have the money to start lending again.
To do this the Governement is buying preference shares in many major banks, and will end up with very large shares of the bank. The Gov't will own a majority stake (something like 60% the financial times estimates) in Royal Bank of Scotland, one of the world’s biggest banks, and more than 40 per cent of the combined Lloyds-HBOS, which looks like it will be Britain's largest mortgage lender. They will also have agreed to new Gov't controls: the Treasury will appoint several directors to the boards of RBS and Lloyds-HBOS
Some aspects of the bank bailout could appear positive, in theory. As part of the deal for the banks, they must stop paying huge dividends they pay to shareholders, and bonuses they pay to financial bosses, for the time-being. However there are no guarantees that excessive dividends and bonuses will legislated against in the future, and even if they are, the bosses of banks are canny people, and I'm sure they can find other ways to get rich from their positions.
Also the bailout plan involves part-nationalising the banks, which might present an opportunity for them to be kept nationalised and run in the interests of ordinary people, rather than the rich. But this is again quite unlikely: the government likes wealthy people more than us, and Gordon Brown has pledged to re-privatise once the crisis is over. The left is certainly not organised enough to force them to keep the banks public, let alone to run them in our interests.
As part of the deal, the government will gain loads of 'preference shares' in the banks and other such things. These shares are shares in a bank, which if everything goes according to Gordons plan, and the banks recover, will be worth a lot of money, and the government will be paid dividends on them. This could mean that when the banks recover they make a tidy profit, which the government can then spend on things like the expensive ID cards programme, or on more guns and bombs for the army.
So if it works, we might just be bailing out these corrupt bankers so that they can continue with their corrupt work, maybe the government makes a little more money than they invested in the bailout, but business largely as usual for the banks; there will still be a recession, and you can be sure that ordinary people will still be hit with job losses, wage and pension cuts, public service cuts. If it doesn't work, then they have thrown a whole load of our money at these corrupt banks, the British government goes bankrupt, and things will get really bad.
A better bailout?
Despite all this, the government regulation of financial markets is ultimately futile. A "shadow banking system" of private dealings exists alongside and within the official system, and operates where there is no transparency and governmental oversight. Such a financial "black market" ensures that the greed of the wealthy CEO's, bankers, and investors will go on, and they will continue exploiting us, even if tighter regulation of the financial system remains. The governments bail-out, whether it succeeds or fails, wont help people like us, and the economy looks set for a deep recession either way.
A better bailout would be one which guarantees our jobs, homes, wages, pensions and public services (all of which are still under threat). For example the 500bn could be used to create cheap finance for workers cooperatives, housing cooperatives, community land trusts; and could make investments in healthcare, public transport and other essential public services. This could make ordinary people like ourselves better off, now and for the long term.
But a better bailout will not be implemented by the government. The only way to gain financial control of a country or the world is to organise in our workplaces, where the actually existing physical assets exist (tools, machines, buildings, land, computers) and seizing it for use in our own interests. But we are a long way from achieving this.
Disclaimer! This article is written as accurately as I can (I am not an economist!), and with the best information I could find. It is up to date at the time of writing, but things are moving so fast at the moment, its tough to write something that doesnt show its age 24 hours later.
You might find it useful to read these articles along-side this one:
- Labour government pledges up to £500 billion for Britain’s banks
- Edinburgh Financial Crisis Protest: "We wont pay for your crisis!"