Your guide to some of the foolish claims being made by Occupy LSX protestors
Arguments are flying round Twitter and Facebook justifying the Occupy London Stock Exchange protests. It’s about greed! And bankers! And a financial system which creates money out of thin air!
But I couldn’t help notice that many people are getting riled by obvious nonsense. If the UK government really had spent “£850 billion” bailing out the banks we’d be livid too.
But myths are myths. And they need to be exposed as such. So here is your guide to the 10 most erroneous tropes of Occupy LSX protesters.
Myth 1: We spent hundreds of billions bailing out the banks
The oft-repeated figure of £850bn comes from a National Audit Office report in 2009. The report listed:
- purchased £37bn of shares in RBS and Lloyds Banking Group and, in November 2009, agreed to purchase up to an additional £39bn of shares in both banks;
- indemnified the Bank of England against losses incurred in providing more than £200bn of liquidity support;
- agreed to guarantee up to £250bn of wholesale borrowing by banks;
- provided approximately £40bn of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and
- agreed in principle to provide insurance covering more than £600bn of bank assets, reduced to just over £280bn in November 2009.
Looks like a lot. But most of this “money” was mere guarantees. Only if some unforeseen disaster occurred would the taxpayer be liable. Pure worst case scenario accounting.
In fact the disaster did not occur, so this figure of £850bn is entirely bogus.
So how much did the bailout cost us directly?
Tim Harford, the Financial Times’s Undercover Economist, wrote in Junewe might make actually make a profit.
As things stand today, the share prices of RBS and Lloyds Banking Group are pretty depressed, so the taxpayer is sitting on a potential loss of £27.2bn. But the share price may pick up in the future. If it does, the taxpayer may indeed may make a profit on the both firms.
PS: As for another truly bonkers figure that is occasionally mentioned, of £1.5 trillion, this is pure fantasy. It is a misreading of the way banks are viewed by the Office for National Statistics. The ONS looks at the liabilities (deposits) but not at the assets (the houses borrowers have bought with their loan money). As the ONS repeatedly warns, this is not a figure to be quoted as a debt figure.
Myth 2: The credit crunch caused the cuts
The UK had a massive national debt before the crisis ever happened. And the bank intervention added negligible amounts to it. In fact, the official national debt figure doesn’t include any bank bailout figures. My full analysis is here.
Furthermore, we had a structural deficit problem, way before any bank problems emerged. This meant we were borrowing money at the top of the economic cycle. This year the interest on the national debt is about £50bn, and will rise to more than £70bn by the next election. To put this into perspective, council tax, which almost every household in the country pays, raises only £26bn.
Why are libraries really closing? The money has been sheared by rising interest on the National Debt and the need to eliminate the structural deficit.
And just in case anyone tries to suggest we are being wise in hindsight…
Dec 2003 IMF gives Brown borrowing warning
Sep 2005 IMF report warning over £1 trillion mountain of debt
Sep 2005 Brown besieged over growth and borrowing plans
Dec 2005 IMF fires new warning over Britain’s finances
Sep 2006 IMF warns over UK property crash
Oct 2007 IMF report UK house market is ‘heading for crash’
Apr 2008 IMF: UK vulnerable to US-style housing slump
(Hat-tip, Guido Fawkes)
Myth 3: A Robin Hood Tax would fix the banks and raise billions for good causes
No it wouldn’t. It would be a net tax loser. And it would damage both the banks and the businesses that rely on it. My full rebuttal is here.
Myth 4: USA is to blame
The embarrassing truth politicians hate to admit is that the global financial crisis was nothing more than a boring old housing bubble. Much of it local, and nothing to do with the US. Take Northern Rock: it was a British bank lending to British customers to buy British houses. British politicians ramped the UK housing market for political reasons. And not very subtly. Here is Ross Clark’s Spectator cover story from 2004 in which he accuses Gordon Brown of fuelling the housing bubble to push Labour through the 2005 election.
The Irish banking crisis was entirely self-made. As the paper “The US and Irish Credit Crises: Their Distinctive Differences and Common Features” by three Irish economics professors establishes convincingly that the US had nothing to do with Ireland’s meltdown.
Yes, the Americans created a nightmare housing bubble. But they weren’t the only nation to do so.
Myth 6: Vodafone escaped a £6bn tax bill. Boots, Barclays and Philip Green also dodged tax
Debunked repeatedly (best is here). Still very hard to get protesters to check their facts though.
Myth 7: Banks create money out of “thin air”
A preposterous allegation. But one made by the New Economics Foundation (NEF), and repeated by credulous protesters who are convinced Fractional Reserve Banking is a stitch up.
Usually one of three things is to blame for the misunderstanding:
- The belief that banks can print money. Well, RBS, Clydesdale Bank and Ulster Bank can issue their own notes. But they need to deduct the new asset from their balance sheet. No new money is created this way.
- The expansion of the money supply. Money is measured using a variety of methodologies. Cash and coins are M0. When money is lent out by a bank and re-deposited, and lent out again, the money supply can grow, but this is M4, not M0.
- Pure ignorance. The NEF alleges banks can digitally create money that they then lend out. Naturally, this is nonsense. If banks could do that they wouldn’t need depositors.
Myth 8: Short selling causes price volatility
Lots of empirical studies debunk this claim. The most famous example is the Onion Futures Act of 1958, in which short-selling was banned on onions. The result? Wild price fluctuations.
Myth 9: Capitalism is failing: The poor are getting poorer and we are working longer hours.
Both are untrue. This study looks at income brackets in the US over 30 years. It finds that the rich got richer, the middle got richer, and poor got richer too.
“For instance, the conventional wisdom holds that the poorest households saw their income shrink by a third over the last three decades. But accounting for income transfers and the value of fringe benefits, this research shows that the bottom 20 per cent of households actually experienced after-tax income growth of more than 26 per cent.”
Hours worked? The OECD says hours worked have been tumbling in Western economies since 1960
Myth 10: The problem is greed!
Milton Friedman, the Nobel prize winning free market economist, dealt with this canard in a brilliant television interview with Phil O’Donahue in 1979:
Donahue: When you see around the globe the mal-distribution of wealth, the desperate plight of millions of people in underdeveloped countries, when you see so few haves and so many have-nots, when you see the greed and the concentration of power, did you ever have a moment of doubt about capitalism and whether greed’s a good idea to run on?
Friedman: Well, first of all, tell me is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course none of us are greedy; it’s only the other fellow who’s greedy.
The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.
And one last myth: You have to be left wing to protest
Capitalists ought to be first in the queue to protest about bank bailouts. Nationalising banks is the last thing free market devotees would support. No surprise therefore to see the Conservative MEP Dan Hannan and the free-market think tank, the Adam Smith Institute, campaigning against bank bailouts.