For Mr. Chakrabortty: why we saved banking and aren't saving steel

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Over in The Guardian Mr. Chakrabortty asks us this fascinating rhetorical question:

Why don’t we save our steelworkers, when we’ve spent billions on bankers?

There's two answers to this, neither rhetorical.

The first is that those billions we spent upon bankers, that trillion in fact, was temporary:

Imagine what would happen if manufacturing were centred around the capital, and its executives had Downing Street on speed dial. Actually, you needn’t imagine – merely remember the meltdown of 2008. Then Gordon Brown was so desperate to save the City that the IMF estimates he propped it up with £1.2 trillion of public money. That’s the equivalent of nearly £20,000 from every man, woman and child in the country doled out to bankers in direct cash, loans and taxpayer guarantees.

The vast majority of this was emergency liquidity provision, something that a central bank is supposed to do in a fractional reserve banking system. It's all been paid back, with interest. It's not made a loss, far from it, it's made a profit for the taxpayer. Yes, there's interesting arguments we can have about those residual stakes in Lloyds and RBS but it's absolutely not true that it all "cost" each taxpayer that sort of sum. That we use the central bank in a fractional reserve system to do what the central bank should do in a fractional reserve system is not in any manner an abuse of said system.

The second answer is that we actually want to continue having a financial system after that wobble of the Crash. It's not in fact true that we want to have a basic steel industry. Technology does change, there's little to no reason for rich countries to still be running blast furnaces. Which is why so many of them have closed over recent decades in those rich countries. It's not just here: even the French let the Florange furnaces close. Making basic steel is, these days, a pretty basic industry. Those parts of the British steel industry that are making the high value added products (like the higher end of the stainless steel industry) are still, as they have been all along, exporting to places like China. And this is what makes a country rich in the first place: that it concentrates on the high value added parts of production. Simply because that's how high wages can be paid, concentrating on doing things with high value added.

In a nutshell, aid to banking was a temporary measure to cover a known weakness of the system, a system we most definitely wanted to retain (try thinking about an economy with no banking system: it's to think of an economy with no economy). Aid to basic steel production, from virgin materials in those blast furnaces, would need to be permanent as it is in fact a residual technology, one that we almost certainly shouldn't be doing any more given the low value added.

If the problem were, as it was in banking, to do with short term liquidity and confidence in the steel industry then sure, why not think about covering, at a profit, that gap using the power of government and the taxpayers' funds? But if that ain't the problem then what's the justification?