Dawn breaks on a socialised banking system
OK we now have two major banking groups effectively nationalised: HBOS and RBS. I say effectively because it looks like they will both end up with a majority government stake.
The others are committed to raising capital and have to do it on a bigger scale than envisaged last Wednesday, largely because the FSA has - one is tempted to say "at last" - taken a precautionary view of the situation and forced them to recapitalise on a bigger than expected scale.
What does the taxpayer get for their money? These details are crucial because they will then reveal the answer to a more fundamental question: what happens to competition within the retail banking sector?
My thesis is, now, competition is effectively over. These banks were competing with each other at the margins - churning customers to get people onto more lucrative deals, encouraging credit-card swapping, bombarding us with ads designed to generate specific business etc.
Any state-backed bank that does this will be greeted with howls of protest by the others and some customers: for example one bank, if I remember rightly HBOS, was offering new customers better mortgage deals than existing ones etc.
So if there is no competition in the sector, then - as with gas - profits have to be regulated by the regulator. The banks will become utility like and unable to leverage their monopolistic position to reap a super-profit.
Hence we have a socialised banking system. (Incidentally, Paulson's problem is this: you can't easily do this when the institutions are effectively investment banks not commercial banks: how would you "socialise" an organisation bred for predatory M&A and financial speculation on a vast scale?).
The next question is what do we want to do with this part-socialised system: not a question most politicians are prepared for even thinking about. Who are the stakeholders in this question:
a) The new shareholders - that's mainly taxpayers for the big two plus Rock and B&B
b) The customers
c) The staff
d) Society which licenses them to operate and may set conditions for that privilege.
If you are, say the head of corporate social responsibility at a bank like RBS your main obsessions have been with responding to lobbyists on two of the great issues of our time: climate change and international development. I suggest that this will now lead to a reprioritisation to a third great issue of our time - ending rip-off banking.
Once the wing public realises these companies are being run in part in the public interest there will be an avalanche of campaigns: over small business interest rates, over rip off lending practices, over offshoring. The banks, in other words, will be required to show some social responsibility towards their actual customers.
In the past this might have taken months to emerge, but surveying the blogs and bulletin boards it is clear it may take just days,
When my grandfather's colliery was nationalised they stood there and watched the flag go up, got in the cage and hacked away at the same coal on the same wages etc. Only crazy radicals believed there ought to be some actual change in the way the pits were run. This is a very 21st century nationalisation: the first in the age of info-capitalism. I have no way of predicting what its social or economic outcome will be, because there is nothing in the manifestos, think tanks, books, speeches of any of the main parties to indicate what they might do.
The politicians and technocrats have a huge opportunity, rare in life, to shape something different from scratch. The more we learn about the way HBOS and RBS were run (I am working on a Money Programme Special on this) the more we realise both had unrealistic goals and pursued them with catastrophic means: namely expansion pursued by wholesale funding and unwise M&A.
The final caveat - and a big one. A lot of my economist contacts think it won't work: that the shares will carry on sliding and they will have to be nationalised. Not because of the inadequacy of the move but because they will now feel the full force of recession.
One final point: the FTSE100! It was already looking a bit wierd, dominated by mining companies and the like. Now four of the top ten blue chips have gone cap in hand to the state, what does that mean? My mind is boggling.