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Bail-out banks need a strong-arm, not a sell-off

bankThe announcement that Lloyds TSB are back in profit has automatically triggered discussion of the government selling off its 39% share in the bank, back to the private sector. For Labour, it should trigger a discussion on an increasingly interventionist approach to the economy.
Britain’s privately-owned banks were bailed out with billions from the taxpayer when they failed. Cameron and Osborne plan to sell them back to the same people at a cut-price rate. As has been written about Lloyds and RBS in The Guardian, the government wants to ‘sell them off fast, regardless of the loss to the public purse or the damage to the economy.’
What has the government done with the banks over the past five years, whilst it has owned large or even majority shares? Though bailed-out by the taxpayer, the state has kept the job of running the banks at arms-length. The government has not made use of the economic levers available to it. As one economist said:
the government kept out of the running of these state-owned banks even though the taxpayers are invested in them. The government allowed the top executives to continue with their grotesque bonuses, speculative investments and rate-rigging…the banks have failed to revive lending to the small businesses and households who need it.
Michael Burke described these banks, sitting on growing funds, as having “uninvested profits sitting idle in state-owned banks … the private sector’s refusal to invest is because they cannot be certain of making a profit.” On the other hand, he said, the state:
can make successful large-scale investments which are not profitable to the private sector because uniquely it derives its return from taxation… It is simply a matter of political will to tap these vast resources for investment in housing, energy, transport, infrastructure and education.
But rather than use its control of the banks to rebuild the economy, when private investment has collapsed, the government’s ‘overriding political concern has been to prepare them for re-privatisation.’
Labour has already announced its commitment to an investment bank but did not outline an alternative strategy for using the bailed-out banks. Neither has it made a commitment to significantly increase investment if elected in 2015, including borrowing whilst interest rates are low. It has instead called on Osborne to bring forward planned spending.
At the TUC in 2012, the Congress backed a statement for ‘turning the government ownership of RBS into 100% ownership as a State Investment Bank‘, while also backing ‘full public ownership of the sector and the creation of a publicly owned banking service, democratically and accountably managed‘, such is the level of public disgust with the banking sector.
The sell-off of Lloyds and with RBS only a matter of time, is part of the Tory commitment to shrinking the public sector and leaving economic decisions to the market. A strategy that has demonstrably failed since they took office in May 2010.
In contrast, the Labour Party must make a much clearer commitment to making use of economic levers, directing banks it owns to invest in major infrastructure projects, as part of a wider commitment to a more interventionist approach into the economy as a whole. The bail-out banks need a strong arm, not a sell-off.
This post first appeared at Ben Folley’s blog

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