Oct 2008 08

TPA briefing paper on the £50 billion bail-out6

Download the full paper (PDF)

The TaxPayers’ Alliance today publishes a new briefing paper on the financial crisis, which forms the basis of our response to the bail out plan and which we hope will be of use to journalists reporting the issue. The briefing also outlines several ways in which the Government can and should limit the amount of taxpayers’ money the banks need. The briefing paper can be read here.

Key points

The Government has turned to taxpayers to fund their £50 billion bailout of the banks without fully exploring other measures that could have contributed to resolving the financial crisis.

A £50 billion capital injection commits significant amounts of taxpayers’ money – £2,000 per household in Britain. This creates a number of issues:

  • Taxpayers’ money will be exposed to significant risk for an extended period of time. Funds will need to be raised now and that borrowing will pose a significant risk to the economy over the medium term.
  • The authorities charged with protecting taxpayers’ interests are unlikely to be effective, particularly if they are required to outwit financial institutions.
  • There will be a huge public backlash if this money is seen to be used inappropriately, to support high levels of remuneration and bonuses.

Examples responses the Government should have pursued first, and should now consider to limit the need for injections of taxpayers’ money, are:

  • Suspending mark to market rules that cannot function effectively in the absence of a liquid market for many key assets. This would significantly ease the pressure on many banks’ asset sheets. If mark to market had been in place during the 1980s all 10 of the largest US banks would have become insolvent.
  • Big interest rate cuts: While inflation is currently quite high it is widely expected to fall substantially in the coming year. Cuts in Bank of England rates might have a limited effect on market rates but it will help some borrowers more immediately and any effect on the market rate would be valuable.
  • Strengthening the credibility of deposit insurance: 97 per cent of depositors were covered even before this week’s increase in the deposit protection limit to £50,000; however it is understandable – in the wake of crises such as that at the Rural Payments Agency – that ordinary people are not entirely confident those guarantees protect their interests.

Matthew Elliott, Chief Executive of the TaxPayers’ Alliance, said: 

“The Government is using taxpayers’ money as an easy way out, and haven’t fully explored other options that don’t put £50 billion of our hard-earned cash on the line. With ordinary taxpayers’ money at stake, they must put mechanisms in place to ensure that the money isn’t frittered away on excessive bonuses and to make sure that it is not wasted. The Government must now explore other options to reduce the amount of taxpayers’ money the banks need, including making deposit protection more credible, suspending mark to market regulations and cutting interest rates. The Government say they have the interests of hard-working taxpayers at heart, now they need to prove it.”

Related Posts

  • http://www.eureferendum.com Richard North

    “Suspending mark to market rules that cannot function effectively in the absence of a liquid market for many key assets. This would significantly ease the pressure on many banks’ asset sheets…”
    Today in Parliament:
    Ann Winterton (Congleton) (Con): There has been much speculation about the mark-to-market rules, which have played their part in creating this instability. Can my hon. Friend confirm that the implementation of mark-to-market rules is a European Union competency?
    Mr. Hoban: As I understand it, the mark-to-market rules fall within international accounting standards, which are implemented through EU law. The International Accounting Standards Board is looking at how illiquid financial instruments are valued in the absence of financial markets. That work is ongoing, and we need co-operation between the EU and the United States on that issue because there is a risk of divergent standards being used
    How would you suggest that the government suspend the rules when their implementation is an EU competence, and when the EU has considered that option and rejected it?

  • Bob Stott

    Gordon Brown’s and his Chancellors simplistic approach to solving the crisis (have you noticed how across the globe, everybody is great at ‘solving the crisis’ but not one of them was any good at preventing the problem) will inevitably fail because to describe the dynamics of an economy, it is necessary to have a detailed understanding of many economic ‘variables’ from numerous individuals and organisations. That this understanding is not present is why we have the problem in the first place. It is painfully obvious after the economic collapse, that everything ‘depends on everything else’ and that the global economy is a complex and non – linear world.
    So the recent policy measures will have the opposite effects to those intended because the complexity of the economy is not considered never mind addressed. From Paulson to Brown the cry is that; the world’s largest economies ‘must act together and act together now. It is never going to happen because they don’t understand ‘complexity’ and non-linear thinking and practice.
    The message from Albert Einstein was “It is seeing with complexity and more dimensions that enables the development of simple solutions” Einstein never saw much virtue in ‘grasping at straws’ or ‘closing the stable door once the horse had bolted.’

  • simon swayne

    is it true that a goverment tax inspector gets a percentage if he finds errors in your tax returns of 8%

  • Steve Robson

    Lets not forget that it is not the Government that caused this crisis, but rather the unbridled capitalism that you people love and the private sector employees who earn many many times the salary of your so called public sector rich list, who you castigate as useless despite the fact that none of them has ever got near to achieving the levels of failure of your public school mates in the bank. I just say, thank goodness the public sector exists to save the country from the mess caused by your philosophy and your friends.
    You should all hang your heads in shame and never again criticise those who have saved the country from the appalling failings of the real rich list.
    I expect you’ll have some excuse though and some way to blame the poor and the public sector.

  • Bob Stott

    Hi Steve,
    Sorry, you don’t know me, my philosophy, my political persuasion or my friends or indeed my view on capitalism. I would love to understand what group represents ‘you people are’ and I would be genuinely interested to hear the ways in which the ‘Public Sector’ is saving the country from the mess it is in!

  • Steve Robson

    Bob
    My comments are addressed to the TPA in general and not you personally and I think we all know that the TPA are a conservative organisation who will almost all support the Conservative party, apart from a few who may support fringe rightist parties such as UKIP or the BNP. I would bet my house that all those young looking staff called Matthew, Tim and Fiona voted Tory in the last election.
    With regards to the public sector saving the country, we’ll see wont we. If the government has its actions right, which I suspect it does, we’ll have a much shorter recession than we would otherwise. The list of benefits of taxation and the public sector in the past is so long that I’d crash the website. One just has to compare the benefits of our national health system to the low tax alternative of the US. This is not to forget the massive improvements in public health, the public realm and education that have come from collectivist philosophy as opposed to the individualism of the TPA.
    Of course, the TPA would argue that it all costs too much and we should have all these benefits much cheaper, but really that is just lazy and dishonest. For some reason, organisations like the TPA get away with labelling public provision inefficient, when it patently costs less than the private alternative, just look at education and health. You could actually also just compare the BBC to Sky!
    As someone who abhors conservatism, I just bask in being on the right side of history. It has been conservatives who have defended the indefensible throughout history – monarchial rule, slavery, apartheid, homophobic laws, the absence of a minimum wage, you name it and conservatives have defended it. They have been proved wrong by history every time and will continue to be so.