Sunday, 28 August 2011

Regretful criticism

I have never before written a blogpost in which I have severely criticised the writing of another person, and I do so now with a heavy heart. But I really can't let this nonsense pass.

In a blogpost a week ago, Richard Murphy called for nationalisation of the banks.  He said:

"Of course we can save the banks, again. We can print money. We will have to.

But this time let’s get real. This time we don’t lend them that money. Or give it to them as quantitative easing."

There are two howlers in here, of course:

-  We didn't "lend" banks money. We provided it to them in return for equity. As a consequence two   banks were fully nationalised and we have substantial equity stakes in two more.  As with all equity investments, there is no guarantee that we will ever get our money back - it depends entirely on the eventual sale price of the remnants of Northern Rock and our stakes in RBS and Lloyds TSB.

-  Quantitative easing was not "given" to the banks. It was used to buy securities - which are now held by the Bank of England, increasing its asset base.

However, correcting Murphy's errors isn't the point of this blogpost. It's the appalling suggestion that the UK government should take over organisations whose collective assets total more than four times the UK's GDP.

When I pointed this out to Murphy he brushed it off, claiming that of course when you nationalise you only take on equity, and no compensation would be paid to shareholders. This is true. But when you nationalise you also take on the balance sheets of the organisations you buy.  The UK would end up owning trillions of pounds worth of potentially toxic assets. After all, he is proposing nationalisation to prevent financial collapse, isn't he?

Yes, I know we could print lots of money to cover the inevitable losses on those assets. Or we could issue huge amounts of lovely new government debt.  But if we're going to do that I would much rather it was spent on something useful. Something that really benefited the people of the UK. Not - absolutely not - on propping up failed institutions.

And the most bizarre part of Murphy's writing comes not in the post itself but in the comments.

I commented on his post:

"Yes, I can disagree. Nationalising banks would leave taxpayers owning $trillions of dodgy assets with no prospect of writedown in any way that doesn’t mean more taxpayers’ money going to the very rich. I for one don’t want any part in that."

He invoked the financial armageddon argument, of course, to justify his position, thereby ignoring the fact that there are other options that could be considered to avoid catastrophe. And he claimed that there's no such thing as taxpayers' money. Weird. But not as weird as the next bit.

I reproduce this in full for the amusement of my readers.

From another commenter called Stevo!!! in response to Murphy's reply to my comment:

"Write the debts down and turn them into equity! The debts are mostly commercial paper. Create enough money to buy them and replace the legitimate debt with cash or number money. All you would be doing is replacing these debts with the equivalent money value, therefore not creating any new money. Write any illegitimate debt off as unrecoverable."

This is odd enough. The commenter clearly doesn't know the difference between assets and liabilities where banks are concerned. But Murphy's response is priceless:

"Since debt is money your logic is sound".

Now, I did say "assets", didn't I? Bank assets are money it has LENT. If the people, companies or - most likely, in this case - countries can't pay the loans back, those assets become worthless and have to be written off.  It is total nonsense to suggest that they can be "written down and turned into equity".  Writing off bad debts is an immediate hit to profits, which if it results in an overall loss would have to be absorbed by reduction in shareholders' capital. In other words, we would be on the hook for potentially HUGE losses on our investment.

You'd think an accountant would understand that, wouldn't you?

I would like to think that Richard Murphy would take this criticism in good part. I do not mean it as a personal attack but as a genuine contribution to the debate that we need to have about the best way to deal with our dysfunctional financial system.  But I am not hopeful, sadly.



3 comments:

  1. Richard Murphy

    @Ian_Fraser It isn't bank recapitalization we need - we need fundamental systemic reform. Nothing else will do

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  2. This is priceless and, as you say Frances, from an accountant. (I could almost be ashamed to share a profession with him.) We know he didn't have his clients' interests at heart with his antipathy towards legal tax minimisation, but one wonders how many clients he actually ever had?

    He clearly never prepared any consolidated accounts either if he seriously thinks that nationalisation won't dump the toxic uncollectable debt onto the Government's balance sheet.

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  3. Anyone happen to know what UK banks overseas liabilities are?

    RBS's US subsidiary alone has $92 billion:

    http://www.citizensbank.com/pdf/CFG_Fact_Sheet_2011b.pdf

    Quite a hit for us if we had to pay all that back.

    ReplyDelete