George Irvin responds to Nick Clegg's share giveaway idea for the bailed-out RBS and Lloyds.
Clegg’s idea that the public should be given shares in the banks – first mooted early this year – is reheated populist opportunism. RBS and Lloyds banks were bailed out by the government to the tune of £66 billion in 2008. We are told that each taxpayer would receive 1,450 shares of RBS and 450 of Lloyds – together worth around £770 at current share prices.
But current share prices are below what they were when the banks were bailed out, so the poor taxpayer, naively thinking that he/she is getting ‘free shares’, would need to wait until share prices rose again in order not to take a loss.
Moreover, to realise the money, the taxpayer would need to sell the shares, probably driving share prices down further.
If all (or even most) taxpayers sold their shares, there would be a one-time boost to private spending – but largely on consumption goods, some of which would be imported. Moreover, some of the money would be used to pay off credit-card and mortgage debt.
So selling the shares would have a relatively small, one-time impact on growth. The shares themselves would end up back in the hands of institutional investors, who having bought cheaply would wait for prices to rise and then take the profit. A further £2bn might go to City traders charged with selling them.
What should the government do? Ed Balls says:
“They should listen to Labour’s call for a tax on bank bonuses this year to create 100,000 jobs for young people and build 25,000 affordable homes.”
Yes, but if getting back to 2007 levels of British national income and jobs is the aim, these publicly-owned banks should be turned into a British Investment Bank (BIB) – as advocated by various economists including Robert Skidelsky and Gerald Holtham to name but two. (For Skidelsky’s view, see here; for Holtham, see ‘A National Investment Bank Can Raise our Growth’, here).
A public-owned investment bank could help to ‘green’ the economy by helping to expand renewable energy sources and to increase energy efficiency. A BIB could help rebalance the economy by concentrating on new investment in manufacturing; since most of what Britain manufactures is exported, this would help Britain’s external balance as well.
A BIB would also be tasked with renewing Britain’s poor economic and social infrastructure, everything from new schools and social housing to high-speed rail transport.
Britain’s new housing starts have fallen away to nearly nothing, a major reason why house prices are rising again; Britain spends half as much per capita on schools as France, and Britain has fallen behind quite lamentably in its transport infrastructure. A major investment push in these areas alone (and there are more) would not only create jobs but help stimulate private investment.
How much would a BIB cost? Clearly, the Treasury would need to provide the seed capital, but having done this, the BIB could mobilise resources in two ways.
First, like its European counterparts – the Luxembourg-based European Investment Bank; the Nordic Investment Bank in Finland; or the Kreditanstalt für Wiederaufbau (KfW) in Germany – it would be able to raise capital in the market where the cost of capital is at historically low rates. (Germany’s KfW raises nearly 90% of its capital in the market.)
Secondly, the BIB would draw in private sector investors as partners in particular projects. Most important, because RBS and Lloyds have the skills and capital required, the scheme could start today – it need not wait until 2015 to borrow money as has happened in the case of Chris Huhne’s Green Investment bank.
Nick Clegg knows this quite well, but he is disingenuous enough to try to peddle a second-rate scheme to Britain. Maggie Thatcher’s fire sale of council houses in 1980 brought her a few extra votes – but the loss of public housing left the country with an enormous property shortage. Clegg’s latest opportunist ploy is no better.
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