Ben Chu: It's bankers who are the real drain

I am ready to accept that the benefits system harms those it is intended to help. But if a life of reliance on others is bad for the poor, then surely it is equally so for the rich

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But it's surely preposterous to compare the hard workers of our financial services sector to the able-bodied welfare recipients that Iain Duncan Smith and George Osborne have pledged to liberate, isn't it? Correct. The comparison is unfair. The scale of the two abuses is quite different. The right-wing think tank Policy Exchange has estimated that £2bn a year is wasted on paying incapacity benefit to the able-bodied. But the financial support given to the financial sector by the state since 2008 amounts to £1 trillion, according to Mervyn King, the Governor of the Bank of England. As Mr King put it last year, "never in the field of financial endeavour has so much money been owed by so few to so many". No: in recent years, the bankers have been by far the bigger drain on the public purse. And while benefits scroungers unfairly appropriate the taxes of workers, their excesses, unlike those of bankers, do not have the capacity to sink the entire economy.

Mr Duncan Smith is frustrated by the complex array of benefits on offer to the jobless, the poor and the incapacitated. Well, the Work and Pensions Secretary should take a look at the financial sector's complex state support system. At the height of the crisis there were injections of £76bn of taxpayers' money to recapitalise the Royal Bank of Scotland and Lloyds Banking Group. A £500bn Asset Protection Scheme was set up to guarantee their loans. And an £185bn Special Liquidity Scheme for the sector allowed banks to swap hard-to-sell mortgage-backed securities for government bonds (which are as good as cash). Barclays is fond of reminding us that it did not take any state capital in the crisis. Yet the bank happily tapped the assistance on offer from the Bank of England's Special Liquidity Scheme.

Monetary policy, too, is the banker's constant friend. The unprecedented slashing of interest rates in recent years has been, in effect, a benefit for borrowers at the expense of savers. There are few bigger borrowers in the private sector than the banks, and unlike most normal borrowers, the UK banks can borrow short-term at the ultra-low 0.5 per cent rate directly from the Bank of England. If they use those funds to buy 10-year Treasury bonds that yield 3 per cent, which many of them have, they register an instant profit. This has been the covert bailout.

It is not just Britain that has a problem of banker dependency. The favours granted to America's giant financial institutions have been just as generous. The vast capital injections for all large US banks have now been repaid, but the Federal Reserve continues to hold interest rates down. Alan Greenspan might have left the Fed, but the old "Greenspan put" – the assumption that the central bank will slash interest rates if Wall Street gets into trouble – is alive and well.

Across Europe the bankers' welfare state also flourishes. During the crisis, the European Central Bank permitted the continent's banks to swap their dodgy sovereign bonds for cheap borrowing. And in Ireland, the toxic assets of the banks are, even now, being transferred to the state balance sheet. Being a too-big-to-fail banker in any country is the ultimate state benefit. The banks get the financial upside of the debt bubbles they inflate and society takes the downside. Heads they win, tails taxpayers lose.


So those on the right who are cheering on Conservative ministers as they attempt to spring the benefits trap for those at the bottom of the social heap, I implore you: don't forget their brothers and sisters in need. Don't forget the too-big-to-fail bankers.

Some of you cheerleaders, I suspect, are insincere in your proclamations of concern for the poor and, in your heart of hearts, want to see benefits cut because you believe the recipients are mostly feckless and deserve to be punished for it. But I am ready to accept that many of you genuinely believe the benefits system, as presently configured, actually harms those it is intended to help. Yet if a life of reliance on others is demoralising and debilitating for the poor, surely it's demoralising and debilitating for the rich, too. Why should gilded lives be any less stunted by state dependency?

The solution is to break up the banks. Shrink them down and separate their functions so there can be a credible threat that they will be allowed to fail without the state needing to rescue them when they run into trouble. That is the medicine recommended by the Bank of England Governor. And that is the only way to liberate the bankers from their expectation of state benefits in times of trouble.

So if you abhor cultures of dependency, press for the Coalition's Independent Commission on Banking to recommend radical structural reform of the financial sector. Don't fall for the special pleading of the banking lobby. And a message for George Osborne, David Cameron and Iain Duncan Smith: you need to throw your weight behind this effort because otherwise the public will come to the dangerous conclusion that you only care about welfare dependency when it's the poor who are doing the depending.

For further reading : Speech by Mervyn King to Scottish business organisations:

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