FRIENDS IN NEED

James Meek writing about the Irish bank bail-out on the LRB blog:

You could be forgiven for not noticing it, but the new British government has just been forced to do what the old British government was forced to do: bail out Britain’s banks. The bail-out of Ireland marks a new stage in the privatisation of government by the financial system. Two governments, the British and the Irish, have been effectively taken over by a venal banking network which, using ordinary savers and productive businesses as hostages, forces the state to cough up whatever sums are required to save it from the consequences of its own greed and idiocy.

Even before coming to power the dominant Conservative side of Britain’s governing coalition was making Gordon Brown the scapegoat for the UK being broke, maxed out, skint, and claiming that only by savage cuts in state spending could Britain hope to salvage some vestige of public services among the ruins. Why, then, is this same British government about to lend Ireland, a member of the Eurozone, some £7 billion to see it through its current financial difficulties?

The answer is straightforward, although you wouldn’t think so from the way the story is being reported. The Conservatives have been remarkably successful in promoting a false version of the events of the past couple of years – that excessive government spending is the cause of the present mess.

The fact that the first great Eurozone financial crisis, in Greece, really was caused by crazily loose public purse strings has helped spread the lie. But the truth is that Britain and Ireland, like Iceland and, indeed, Spain, are in trouble not because these governments spent and borrowed too much but because households, businesses and banks spent, borrowed and lent much too much.

What is being presented as a loan by the British government to the Irish government is, in fact, a loan by the British government to the remnants of Ireland’s commercial banks, which are melting down. And the reason the British government is lending to the Irish banking system is because British commercial banks lent so much money to Ireland in the boom years. British banks hold less than £10 billion worth of Irish government bonds. But they hold something like £130 billion worth of other Irish debt – property loans, business loans and so on. George Osborne is not, as he claimed, helping Ireland because it is ‘a friend in need’. He is to all intents and purposes bailing out British banks.

It has been depressingly easy for the Cameron administration to hypnotise the British public into forgetting that our current economic plight is a result of reckless lending by the country’s banks rather than reckless Labour borrowing. £7 billion, the government must feel, is a small price to pay to avoid another British banking crisis, and to avoid the country waking up and remembering that we are much more like Iceland than we ever were like Greece.