UK loss on RBS sale: so what

Bygones are bygones. Or as economists call them, 'sunk costs'. If you invest in something that doesn't pay off, you can kiss your sunk costs goodbye. Just sell for what you can get. Today we are being told that UK taxpayers are going to take a £7bn loss when the government sells its stake in the the mega-bank RBS. Add fees and costs, and it might be £14bn. So what?

When the UK's Labour Chancellor Alastair Darling spent £45bn of our money bailing out RBS – and another £63bn on Lloyd's, Bradford & Bingley, Northern Rock and the rest – he wasn't going through the Financial Times with a highlighter to pick good investments to enrich taxpayers. He was trying to rescue Britain's financial services sector during the financial crash.

For a sector that brings in £66bn a year in taxation, that was a pretty good deal. Yes, you can argue that if he had done nothing, the market would have sorted it out. Or that the government should have simply lent the banks more money. But at the time it was all pretty hair-raising. Banks exist on trust, because if all their customers pull out at the same time the banks don't (usually) have enough cash on hand to repay their deposits. They have lent out that cash to help grow businesses, jobs and prosperity. So when 20,000 queued up to take their savings out of Northern Rock, and the RBS said its cash machines were going to run out of cash in 48 hours, it wasn't unreasonable to do something.

Actually, when you look at that £108bn went, taxpayers are already in pocket. Slices of Lloyd's have already been sold off, and Northern Rock is looking like a really good business again. It depends on your predictions of what the remaining bits are worth, but taxpayers could already be £14bn up on the deal. That's no surprise: the same happened in Sweden when its banking sector was bailed out years ago.

So what of RBS? Bygones are bygones. The bank grew bloated in the boom years, and has had to spend hundreds of millions restructuring. And being involved in just about sort of financial business known to humanity, it has picked up more regulatory penalties than most. So it is trading well below the 502p share price that Alastair Darling bought it at.

But that money was spent, not on buying a bank as an investment, but on buying a bank to save it from utter collapse. Money spent, job done. Bygones are bygones, let's move on.

Should we wait until things improve, so that taxpayers get all their money back? No. After all, as they keep telling us, shares can go down as well as up.

Wikipedia: Another answer to the tragedy of the commons

The tragedy of the commons is an oft-cited theoretical example by those who advocate government intervention. It postulates that, without regulation and intervention, public goods that everyone has an interest in using will actually not be provided (or at least not efficiently or to an optimal quantity) if contributions are voluntary. The logic is that everyone’s dominant course of action is to essentially just refrain from contributing because, if one contributes and others don’t, then the public good is not provided and their payoff is worse than if they don’t contribute and the public good is not provided. Additionally, if they don’t contribute and the public good is provided, the individual’s payoff is higher than if they do contribute and the public good is provided. In this sense, a society full of rational, self-interested individuals (as this scenario represents it) could actually lead to a harmful or sub-optimal outcome for society in the long run. However, Wikipedia is a prominent, empirical illustration of how the tragedy of the commons does not always hold since the website runs purely on private donations. Periodically, the site’s owners ask for donations to maintain it and keep it running ad-free. They claim that if everyone who read their plea paid £3, then fundraising would be over within an hour – nice in principle but not everyone pays up in practice. Some, inevitably, end up contributing more than others and many don’t contribute monetarily at all.

The following chart lists the percentage of donators corresponding to each reason for donating to Wikipedia, according to Wikipedia.

Conversely, here are the reasons cited for not donating:

Of course, one might argue that the knowledge found on Wikipedia is unreliable. However, a study published in Nature found that Wikipedia “is about as accurate on science as the Encyclopaedia Britannica”. Of course, Encyclopaedia Britannica attempted to refute the study. Access to a vast store of monitored, reviewed information via Wikipedia is an incredible asset to humanity and this asset is made possible entirely through voluntary contributions (whether this be in terms of time spent editing or money contributed) rather than through the coercive dictates that people are so often subject to.

Furthermore, it’s interesting to note that if you were to, hypothetically, replace “donating to Wikipedia” with “tax” in the second bar chart, you might find a lot of people agreeing with the affordability, with unwillingness to pay tax based on principle or their belief that it would not be used properly. Similarly, people may want to contribute time to society rather than pay money to preserve it.

In our rapidly changing world, voluntary contributions to fund public goods may become feasible sooner rather than later.