Sunday, September 23, 2007

Saving the banks

So, last week, to save Northern Rock from a devastating "run" (that would have, as panic runs go, naturally have ended with the bank running out of cash and being declared insolvent) the Chancellor -- with enthusiastic support of the FSA and the Bank of England -- stepped in and, essentially, said that taxpayers' money was at hand to guarantee all depositors' moneys.

Nothing wrong with it, surely?
These are, for the most part, ordinary people, like you and I, and deserve to be protected by the nasty consequences of global finance markets turmoils, and the greed and incompetence of the 'fat cats' bankers. Do they not?

Well, yes, in a sense, but the real question is, at what price?
The immediate consequence is that the 'run' has ended, Northern Rock has been spared more dire consequences, other banks (C&G and Alliance & Leicester were rumoured to be next) have escaped unharmed, and ordinary folks are safe in the knowledge their hard-earned money will be there when they need it.

An unqualified success for all involved, then?

A well-known concept in economics is that of 'moral hazard': that is, investors and bankers are more likely to take greater risks than would be rational (sub-prime lending, anyone?) if they know that someone with big pockets (the State) will step in and save them if things go horribly wrong (as they do, almost invariably).

In other words, we have witnessed today that some banks and institutions are "too big to fail" and that the Government, for political expediency, is well prepared to squander taxpayers' money to protect the above-mentioned 'fat cats'.

These bankers, in fact, by investing large sums in riskier assets have indeed generated excess returns in good times, and pocketed large bonuses (the last 3-4 years have seen monumental increases in City bonuses, usually paid around Christmas' time) - but, when the time came to pay for the deed -- that is when these 'riskier' assets prove to be, well, riskier, and the most foolish were exposed, big Nanny State intervened to save their necks.

it is only too easy to predict that, next time round, the bets will be bigger, the risks greater and the heights from where to fall higher - but, no matter, our Tax monies will be there to save and protect City bankers, no matter how greedy, incompetent or foolish.

Well done, Mr Brown - indeed a worthy achievement for a Labour PM.

No comments: