Why depositors are powerless and why bank bail outs make things worse.

Two related issues came up at post-film discussion yesterday where people's thinking appears to be a bit confused, so for the benefit of anybody who's interested:
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1. There is a theory that if a lot of depositors ganged up and all withdrew their money from a bank on a particular day, then if more than ten per cent of deposits were withdrawn, they could bring the bank to its knees (in which case depositors would demand, what? Higher interest rates on their savings?), see e.g. Cantona's Cashpoint Revolution.

Most people ignored Cantona, but what if they hadn't? Well, it would have been a good old fashioned bank run like on Northern Rock, and the government would have just stepped in and lent the bank(s) the spare cash.

Remember that people would have to withdraw their savings in cash (merely taking it from one bank account and putting it in another achieves very little), and a bank note is just an interest free loan that you are making to the government (it is your financial asset and the government's financial liability).

Therefore the government can easily provide loans to banks which are equal to the cash withdrawn. Before the depositors' strike we have this position:

Banks -> owe £ billions to - > people with cash in the bank

And afterwards, we end up with the following:

Banks -> owe £ billions to -> government -> owes £ billions to -> people with 'cash under the mattress'.

If people are too worried about being burgled, they will put their saving in the safest place possible, i.e. the government-run National Savings & Investments, which makes the picture even clearer.
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2. Why don't savers demand higher interest rates? Well, they do, I suppose, but the banks aren't offering them and that is the end of that. It is a cartel which has most successfully managed to widen its profit margins after the downturn, because the banks know (or have good reason to believe) that if they can't get enough money from savers or bond investors, they can borrow it cheaply from the government (and they have done, in spades).

I mean, why would a retailer bother paying a supplier £100 per unit if the government were offering them for £50 each?
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3. As I tried explaining before, the politicians claim that they are bailing out the banks to 'protect savers' money' which is hokum, of course.

The analogy I used was a bit left field, so let's assume that Farepak is a bank and they have managed to lose four-fifths of their savers' money, or £400 per saver.

Now, let's assume that the government had previously enacted a law saying that Xmas club savings accounts were guaranteed by the government/taxpayer, and Farepak went *pop*. Does it make more sense for the government to:

a) Give the savers directly the £400 they lost (or whatever higher or lower amount an individual saver lost) and have done with it (chasing Farepak and its directors for any shortfall), or

b) Give or lend all that money to Farepak on the condition that they fulfil their pledges and promise to play nicely in future?

I'd submit that (a) makes more sense but in most cases, governments around the world have chosen (b). Very few governments allowed banks to collapse and agreed to pay some compensation to savers (method (a), which worked a treat for Iceland) and other countries who are a bit more clued up (and not in cahoots with bankers) have asked their banks to sort themselves out via debt-for-equity swaps (Denmark, and rather bizarrely, Northern Rock in the UK after three years' wrangling), but these examples are few and far between.

Obviously, the government doesn't guarantee your money if it's with a Xmas club and you might not agree with the law guaranteeing your money up to £85,000 if it's in a bank, that's a separate issue.
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4. So there we have it. There is precious little we can do because the government will thwart us at every turn, using our money to do so.

And the underlying reason why 'they' have us by the short and curlies is because they know and we know that the only way to keep house prices at double their true value is by continually pumping in money via the banking system, so while we curse and swear at bankers and their bonuses, this is about as much use as Catholics complaining about priests abusing children.

Until we abandon this thinking that high house prices make us richer, there will always be bankers and politicians ready to exploit this for personal gain, and as long as there are Catholics who believe in their church as an institution, there will be people who abuse that trust, end of.