So what would have happened if the banks had been left to their own devices?
I have no doubt that there would have been economic mayhem. There would have been bank runs, bankruptcy, people would have lost their savings, and there would probably have been rioting in the streets. This is why the bailouts took place, to avoid a sudden and painful collapse. In such circumstances, it is easy to see why governments took the option of the bank bailouts. The prospect of a collapse of the financial system is very scary indeed.
It seems that, at this point, I might be supporting the bailout. However, the reason why I highlight the opportunity cost is to highlight the fact that, despite the apparent relative calm, the UK is slowly but surely sinking into the same mire that it sought to escape from. The difference is that it is slower, and the damage to the economy is being moved from a short sharp collapse, to a protracted collapse from which it will be ever more difficult to recover. The difference is that we do not have the rioting in the streets today, but if the collapse takes us in any case to the same place, then it will still be rioting in the streets tommorrow (not in the literal sense of today and tommorrow - obviously).
In other words, has the bailout made any real difference to the actual state of the economy? If the borrowing was really just about a restoration of confidence, and that the economy was fundamentally sound, and the financial crisis was about panic and imagination, rather than the real state of the economy, the bailout would make sense. Under such circumstances, spending money to restore confidence would make sense. However, this is not the case, and it is apparent that the flaws and problems of the economy are very real.
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The trouble that we now have is that the banks have been bailed out, and the cost of that bailout is the lost opportunity for economic growth in the future. The massive government borrowing represents a massive future slowdown in consumption. Nothing will stop the restructuring of the economy away from consuming more than it produces. As such, the crisis will in all events wind its way to its own sorry conclusion. That conclusion to this crisis will be mass unemployment, mass bankruptcy, and all of the social upheaval that will go with that process.
