In this fifth part of his look at the financial crisis, John Griffin examines the secret handouts given to banks

I thought we’d got to the end of the banking saga, but then on the 24th November Mervyn King (pictured right), Governor of the Bank of England, revealed further handouts to RBS and HBOS which had been kept secret. Having developed an out-of-controlness theme in Part 4 (Freedom, 21st November), this latest instalment builds on rather nicely.

The sums involved are £36.6bn to RBS and £25.4bn to HBOS – a total of £62bn. All told, this is a very big number, even though a relatively small addition to the eye-watering amounts previously disclosed. Let’s hope there is no more black-budgeting. The emergency loans were made up until 13th December 2008, when there was a real danger of the collapse of the entire banking system, and the Government was persuading Lloyds to take over HBOS rather than having to nationalise it. The loans were secured with £100bn of collateral and subject to interest paid to the Bank of England. Repayment was completed in January 2009.

There are several deceits here. For the merger to go ahead, it was necessary to gain the agreement of Lloyd’s shareholders who, it was rightly assumed, would not be pleased to take on the £25.4bn debt, so they were kept in the dark. King, however, made it clear that: “The board of Lloyds was fully in the picture, knew exactly how much support HBOS was receiving, as did their legal advisors, and they concluded it still made a considerable amount of sense for Lloyds and HBOS to merge”. So the Government, Bank of England and Lloyds’ directors together conspired to deceive the shareholders, but this deception was not apparently fraudulent in any way. Everything was under control!

Long before the takeover, we can imagine the HBOS directors frantically selling their HBOS shares – they knew better than anyone else where the bodies were buried, one of whom being that bearer of unwelcome news, Paul Moore, their Risk Manager, whom they had sacked.

I would have thought that the secret State bail-outs would have run foul of the EU competition laws, but I have so far seen no reports of this. Assuming the EU was told before King’s announcement, one wonders if this was before the Lloyds-HBOS merger? I bet it was after! And the Government, we are now told, changed the rules used by its own Financial Services Authority to make its manoeuvres legitimate. So that’s all right then!

The Government and Bank of England must surely wish that their mucky little secret remained buried forever, not just for the last year, although that may be enough to blunt the wrath of Lloyds shareholders. The Bank of England says that disclosure now has nothing to do with the imminent publication of a report from the National Audit Office. They tried to smooth their passage by first getting King to make his announcement to a Treasury Select Committee of MPs. Darling faced the Commons the next day.

Inflation, deflation and Gaia
I have the uneasy feeling that the vast amounts of money pumped into the economy must eventually encourage inflation and debase the currency further – the Pound has already fallen about 25% against the Euro since the crisis began.

The Bank of England of course knows the dangers, but prefers inflation to deflation because it encourages people to spend and thereby boost tax revenues. Also, as time passes, inflation reduces the real cost of debt repayments – handy that. On the other hand, when there is deflation and prices are falling, people tend to hold back their spending, anticipating that prices will fall still further, thus prompting a downward spiral in economic activity. Hence all that quantitative easing. Yet quantitive easing did not work in Japan.

The Japanese quantitive easing, like ours, involved their Central Bank buying back government bonds, whilst keeping interest rates just above zero. It was introduced in stages from 2001, after prices had been falling for two years, and ended in 2006. However, the Guardian has just reported that prices are now falling again. Brown and Darling may have copied the Japanese, so no doubt they are keeping an eye on developments there.

The Japanese have been feeling the draught from competition from India, China, Taiwan and Korea – they call the 1990s ‘the lost decade’. This turn of events may be ominous for other economies, there being far too many producers using too much technology to glut the world with goods and generate unemployment. All of which threatens the stability of the financial world – together with the planet’s ecology. Gaia will never dance to their kind of music.

Underneath all the hoo-hah coming from Copenhagen lies the uncomfortable truth that to save our planet we have to produce and consume much, much less. That means falling prices, more unemployment and less tax revenue: deflation. We are currently experiencing the biggest financial crash since that of 1929, but in the UK output has fallen only 6%. To make things right with Gaia, we have to make far deeper cuts than that. The economic implications are obvious – that’s why Governments around the world will never agree on a sound ecological strategy, it’s up to us!

We could conclude,tying together the economic, the ecological and the out-of-control, by saying that we are so eager to destroy our habitat that we want to do it on credit, so much so that recently we broke the banks in the process.

Some would call this madness.