Friday, September 11, 2009

Mugs Of Last Resort

Back when Vauxhall made a profit and Likely Lads stayed up North

That long-awaited report on the Rover collapse is finally with us (or at least, it's been shown to favoured journos). It's taken four years and cost us an extraordinary £16m.

Actually that's not extraordinary at all, since as we blogged here, cost and delay are the hallmarks of such independent reports into politically embarrassing disasters. The Bloody Sunday enquiry holds the record at nearly 200m, but Laming 1 cost £4m, and Hutton £2m (both almost certainly underestimates because they will exclude knock-on costs incurred inside the public sector).

As for the substance of the Rover report, it apparently puts all the blame on the four guys who bought it for £10 from BMW, and subsequently ripped out £40m for themselves. There is no criticism of the government whatsoever.

But as BOM readers know only too well, the real villains are the self-serving politicos who sacrificed taxpayer interests in a desperate attempt to save jobs in the politically critical West Midlands. As we blogged here, after Rover's final collapse in 2005, the National Audit Office reckoned the entire fiasco had cost taxpayers £250m. We said:

"If it hadn't been for political interference and DTI's hamfisted meddling, BMW would have sold to Alchemy in 2000. The company would then have been downsized pretty drastically to become a specialist sportscar maker. The downsizing would have been done in a properly planned, orderly manner, paid for by the company itself, not taxpayers. And the creditors would have been paid off. Even the pension fund deficit would have been less problematic because its equity investments were worth so much more in 2000.

And as the specialist producer of MG sportscars, the company would surely have had a much better chance of survival than the clueless fag-end of a defunct volume manufacturer. So a good chunk of the jobs would still be with us today."

Of course, standing in the ruins of today's public finances, £250m may seem like chump change. But the fundamental message is more relevant than ever: when it comes to propping up ailing chunks of the economy, our politicos will always take the easy option, even if it exposes taxpayers to huge risk of big costs further down the road.

We are the mugs of the last resort. We are always the ones left holding the ticking packages that commercial operations want to offload.

Of course, the left's response to that is that leaving these packages with their commercial owners takes us straight back to the economics of the Great Depression. The reason government has to intervene is that left to themselves, markets and commercial calculation might drag us all into the pit. The German government has to bail out GM Europe because otherwise the German economy might lurch into the second down-leg of the W without ever getting the up-leg in between.

It's the age-old divide between those of us who believe in markets and those who believe in government.

Which brings us to the anniversary of Lehman's collapse. Because it was the refusal of the Bush administration to prop up Lehman that triggered the final wild blow-out of the credit bubble. By putting the interests of taxpayers first, it is said, Paulson and Bush brought the roof down. They surely ended up costing taxpayers far more than rescuing Lehman would have done.

We're now learning a bit more about what actually happened during that critical weekend last September. Some of the participants (but notably not Paulson) have been spinning their side of the story, and last night they lined up for a BBC documentary.

Predictably, the doc was irritating. Apart from its value-loaded title - "The Love of Money" - we got a Newsnight-style music track, gimmicky editing, and even a "statesman" appearance by Gordo.

But setting all that aside, the basic message was that Paulson was trying to draw a vital line in the sand. He was trying to protect US taxpayers from bailing out the egregious bankers at Wall Street's most egregious bank. He was saying to the other banks, you need to find a way of covering Lehman's $15bn+ balance sheet hole because the taxpayer has had enough.

So does the fact that he failed mean he should simply have signed the cheque?

Well, it's true the officials did not foresee quite how dramatic the consequences would be (as Mervyn King said on the prog), and in hindsight would probably have been more circumspect - certainly they rescued AIG a few days later.

But Paulson's basic stance was surely correct - taxpayers should not be expected to pick up the downside that commercial operators want to offload.

We are fed up with being the mugs of last resort.

PS For the most unconvincing accent since Dick Van Dyke in Mary Poppins, you need to check out James Bolam in the Last Days of Lehman Brothers. It's the BBC's drama piece to celebrate the end of capitalism, and Bolam plays Ken Lewis, head of Bank of America. Lewis is from Mississippi, in the Deep South. The furthest south Bolam's accent gets is South Shields. Hilarious.

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