Bailing Out or Bankrupting Britain?

Hitting the buffers

Faced with the real possibility of huge swaths of businesses in the UK going under due to the Corona virus, Boris Johnson’s UK PLC renaissance plans for this year have seemingly hit the buffers. It is within this context that the author of Where Does The Money Come From? Josh Ryan-Collins believes that in order to keep jobs and maintain a level of productivity in the economy, the government was right to have bailed out many businesses in the short-term.

But Ryan-Collins also acknowledges the need for a transition of the economy in the longer term to meet the climate emergency and wider threats to the environment, which will have massive economic impacts further down the road. The indiscriminate nature of the bailouts and the limited conditionalities imposed, however, do little to create a culture of corporate governance necessary for such a transition to take place that will rein-in the kind of inequality and financialization currently driving UK industry.

Bailing out Zombies

One of the key problems identified by Ryan-Collins is not the governments bailing out of industries faced with liquidity problems but the unsustainable and insolvent (Zombie) variety.

This means that the Zombies will be faced with more loans with interest and therefore growing debts that they won’t be able to repay which will make the problem worse.

The economist argues that what’s required is a different type of long-term strategic market-shaping and focused approach to policy that enables the taxpayer to have a stake in, and help transition, firms towards a zero carbon economy or a more socially acceptable corporate governance model. What seems to be holding the UK back, argues Ryan-Collins, is the cost benefit culture within the Treasury.

What is needed is a shift in mindset within the Treasury that encompasses a more ambitious approach to investing with the potentiality for far bigger longer term returns that this implies. Ryan-Collins points to the Furlough Scheme as one of the more ambitious and large-scale government interventions in recent times in terms of the cost relative to GDP aspect.

The Ultimate Magic Money Tree

The wider issue is whether the government can run out of money and whether or not debt is sustainable. Following the Treasury and the Bank of England joint April 9 announcement of an open-ended extension of the government’s overdraft at the Central Bank (the Ways and Means Facility) – in effect, a form of direct monetary financing that has been termed the Ultimate Magic Money Tree – it is likely that debt to GDP will soar to stratospheric levels in the post-Covid-19 environment. In such circumstances, the chances of a new break with the past appear to be Panglossian.

Bailout Britain is a concern to economist and author, Laurie Macfarlane who characterizes government bailouts, not as if they are a neutral process, but rather as though they are part of implicit decision-making efforts that favour some industries over others. Macfarlane points to the Bank of England’s financing of carbon intensive industries and the government’s significant protection of the rentier economy as examples of this lack of neutrality.

Closing ranks

The process of bailing out vested interests highlights how the establishment close ranks predicated on the surreptitious nature of an economy divided into the protection of rentier economics at the expense of real economy economics. Macfarlane illustrates how during the Covid-19 crisis, for example, the government have guaranteed landlords their income in full while furloughed households are having theirs cut and businesses are being told they have to shut down and are seeing collapses in revenue. Similar protections have been granted to the financial sector.

Macfarlane says:

“What’s striking about the UK government’s approach to supposedly helping businesses is that it’s all been mediated through our private banking sector. So the government’s flagship Business Interruption Loan Scheme isn’t a scheme to support businesses. It’s a scheme to provide a guarantee to banks, to de-risk bank loans and cajole them into ploughing money, not into businesses, but into real estate and financial markets to then lend to businesses.”

The £330 billion ex Goldman Sachs banker and current UK chancellor, Rishi Sunak, claimed was going into supporting businesses was in reality £330 billion worth of guarantees to banks.

Zero sum game

This kind of parasitical rent extraction model is effectively tantamount to a perpetual transfer of wealth machine, a bloated zero sum game system that favours vested interests. How long the UK economy is able sustain itself under such conditions is an open question. Macfarlane says that the omens are not good.

The economist believes another economic crisis is looming with a likely double digit recession on the horizon this year. However, the ‘solution’ the government is proposing appears to be the Thatcherite property owning wealth extraction model that was a huge factor in creating the conditions for the crisis in the first place.

Macfarlane proposes three ways in which the UK government could begin to pivot away from the property owning democracy concept towards a more sensible kind of economy. Firstly, the economist suggests the government create a social wealth fund with the aim of transforming companies on to a sustainable path. Secondly, that the government buy up the remainder of the stakes in RBS and to transform it into a bank geared towards serving the real economy. Thirdly, Macfarlane would change incentives in the economy in order to wean the public off its dependence on property asset price inflation.