Ten years on: was it right to bail out the banks?

During the 2008 financial crisis, taxpayers had no choice but to underwrite the entire banking industry. And we're still doing it, says John Stepek.


Ten years ago, any illusion that we operated within a framework of free market capitalism was completely shattered (or at least, it should have been, even though people still throw around the words as though they mean something).

The collapse of Lehman Brothers triggered a bailout bonanza, proving that certain companies were simply not allowed to go bust.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

People argue over whether Lehman should have been saved or not. It's the wrong question entirely. If ever a bank deserved to go bust, it was Lehman.

But Lehman was merely a particularly repellent symptom of a diseased system.

Advertisement - Article continues below

The real problem is that we ended up in a situation where we, the taxpayers, had no choice but to underwrite an entire industry, effectively at gunpoint.

And the real issue today is that this unbelievably is still the case.

Bernanke was right to bail out the banks but now they need to be shrunk

Ben Bernanke, who was Federal Reserve chief during the crisis, has just published a paper in which he concludes that the government was right to focus on saving the banks after the financial crisis.

That might sound self-serving ("man who bailed out banks reckons it was right to bail out the banks" is the obvious headline).

But in a very narrow sense, it's true. By the time we got to the Lehman Brothers bankruptcy, it was all over anyway. The system was set to topple, and the solution was always going to involve some sort of emergency taxpayer intervention. It was very much a "you wouldn't start from here" situation.

As a youthfully idealistic semi-libertarian, I was against the bailouts at the time. I'm still against them now. But I'll acknowledge that once you end up in that position, there's not a lot you can do without causing even more havoc and collateral damage to people who had nothing to do with the original problem.

Advertisement - Article continues below

If you're Iceland, you can let your banking sector collapse and you can survive (though I suspect plenty of Icelanders would debate whether it was the right move, because it really, really hurt). Essentially, you are small enough that there are sufficient pre-existing trust networks to keep your society together.

You can't apply the same thing to the entire globe, because if a guy in China can't be sure that a guy in the US is going to pay him for shipping a cargo of plastic around the world, then it's not going to happen. And there is no point on paralysing our entire system of exchange and financial interaction because a bunch of self-serving chancers have run it into the ground.

Quick illustration: infuriatingly, I can't find the original article this story came from, though I know it was on the Bloomberg terminal originally. But I specifically remember a story about a group of researchers stuck on an island north of Canada just as winter was drawing in. They were effectively going to be stranded which would basically have meant dying without any supplies, if confidence in trade finance was not restored. (If you find the original story, by the way, then do please feel free to tweet it to me @John_Stepek.)

So yes, by the time we got to 2008, you needed a big lender of last resort to step in and save the system. And it wouldn't be the first time this had happened.

We'll be back here one day and I don't know if we'll have learned anything

But what is a problem is the extent to which those same self-serving chancers who brought the system down were then given an easy ride. Virtually no one went to jail (Libor-rigging and rogue trading doesn't count, as far as I'm concerned those were separate scandals related to specific organisational culture issues, and in both cases, Libor in particular, minnows were picked on and turned into scapegoats).

More importantly, we've really only paid lip service to the idea of restructuring the financial system. We're still left with the fundamental problem that profits are privatised, while losses are still highly likely to be socialised, because the big banks are still huge enough to blow a hole in the global economy if they screw up again.

Advertisement - Article continues below

Meanwhile, you've got those same banks lobbying for the restrictions that have been placed on them to be rolled back or scrapped. And even if that doesn't happen today or next week, it'll happen at some point in the future. Because it will be politically expedient for some future administration to do so.

I don't believe that the next big crisis the next date for the diaries of bubble historians will be centred on the banks. That's just not the way these things work. But at some point in the future, we'll be back here again.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019

The charts that matter: the Powell put is in place

The Federal Reserve has done not so much a U-turn as a handbrake turn on monetary policy this week. John Stepek looks at how that’s affected the globa…
2 Feb 2019
EU Economy

Investors needn’t fear the rise of Europe’s green parties

Green parties across Europe are finding the centre-right to be natural allies. That will be great for business, says Matthew Lynn.
12 Jan 2020

Most Popular


Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020