Wednesday, 26 May 2010

I may be stupid, but they're utterly mad

Gosh I'm daft.

After we finally got rid of Brown, I put up a post wondering what I ought to blog about now that the evil Statist was gone. I was so pleased to be rid of the little platoon of nasty Statists camped at the end of my driveway that I completely forgot about the entire army of Statists sitting at the end of the road, grinning.

Well, they've reminded me of their presence today, alright. Oh yes. Bigtime. Oh, Brussels, how could I have possibly forgotten eu?
A network of national funds should be introduced so the cost of bank failures are not met by the taxpayer, the EU internal market commissioner has said.
Are you sure that we should not just implement better regulation and rely on the rule of law and market competition, M. Barnier? No, it seems that:
banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion
Surprise surprise, the Statist organisation to end all Statist organisations proposes that we increase taxes in order to pile up a huge wad of cash which the State will use to rescue us all when the world ends because of our own silliness.

Now, like all Statist plans this is flawed. We know that, of course, just from the fact that it is a Statist plan. There are (after all) only two sorts of Statist plan, first those with obvious undesirable side-effects, and second those with undesirable side-effects that we haven't worked out yet. So where are the flaws in this plan, then?

Well, I was wondering what will happen to the money? The idea, as I understand it, is that the money will be kept, waiting around for a bank failure, at which point the men in grey suits will rush in holding great wads of cash and use it to bail out the bank in question run the bank down in an orderly fashion. But what will happen to the money until then?

Will Governments put it in a bank account? I hope not - if the money is waiting until the banking system collapses and banks can't pay out the deposits they hold, it's going to be embarassing when M. Barnier turns up with his chequebook and ask them to cash a cheque for him on the account they never thought they'd have to pay out from. Ooops.

Is it going to be invested? Again, where? In the financial system that it will have to be used to rescue? In an instrument that we can sell to someone else to raise the cash, just as soon as they can withdraw the cash to pay for it from their bank...?

No, the money will have to be held as cash. By a government. Now, let's assume that they keep it as cash and don't spend it on a pet project. No, it's possible. Really - there are some honest politicians around who... oh. OK, there's the first problem; we are going to give this huge pile of cash to a government and say "Look, we might need this later; keep it safe. Don't use it for something else, no matter how certain it is". We just know that one day the banks will teeter, the grey men will knock at the door and ask for the cash, and then we'll go back to the politicians and shout "What do you mean, it fell at the first fence??".

Assuming that we somehow overcome this problem (stop laughing, please), there is still a deeper problem here. We have worked out, by a process of elimination, that the money needs to be taken from the banks and put in a huge dungeon somewhere, safe from the politicians, where it will be ready to spring into action at the first sign of a crisis. In order words, in a very real sense and completely unlike the sense in which Mr Brown used the phrase, we are going to take all of this money out of the economy. That was a bad idea a few weeks ago. Apparently, it's a good idea now.

This money will not be there for banks to lend to citizens and businesses. It will not be there to invest in new and promising companies. It will not even keep pace with inflation. That will mean fewer new businesses, less growth in existing businesses, fewer new jobs, and higher interest rates. And all of that means less tax income for governments and less wealth in the economy. How certain is M. Barnier that the growth this money could create if it is left in the economy would not better equip us to deal with a banking crisis?

In other words, if the problem is that Governments don't have enough money to bail out the banking system when it does something daft, this solution could make that problem even worse.

Surely, the solution must be to stop the banks doing daft things? Surely?

This is, it seems, a classic Statist solution. But on the brighter side, it looks like my blogging inspiration is far from exhausted.


  1. This is, it seems, a classic Statist solution. But on the brighter side, it looks like my blogging inspiration is far from exhausted.

    I want to know why you don't think Nickndave will do that for you.

    I agree about this bank tax. I suppose economics is to me what theology is to other people, so perhaps I shouldn't comment, but the way I see it is this:

    Problem 1. Credit crisis caused by...well the clue is that it's called a credit crisis.
    Solution to problem 1. Massive governmental borrowing.
    Result: the cost of the irresponsibility is paid for by everyone, regardless of whether they were responsible.

    Problem 2: Banks don't lend because they feel they haven't got enough cash.
    Solution: Tax them.
    Result: banks have even less cash, and those who are able to invest do so in the same dodgy investments, knowing that they have already paid for a safety net and therefore feel entitled to take the risk - and more importantly they know that risk is shared by more careful banks, so the risk is even more justified.

    As I say, I don't understand economics, so perhaps there is a flaw to my reasoning here. Or perhaps not.

  2. Don't they understand what central banks are for over there?

  3. Albert - try reading The Economist for a while. It tries to explain economic news to non-economists, and does quite well (or at least, it did when I used to read it). Usually, though, it boils down to common sense - which your two examples display. Both "solutions" fail to address the real problem, which is that banks have been doing silly things. Both just address the symptoms instead.

    Steven L - I guess the clue is in the name? :-)

  4. So The Economist is a magazine for non-economists. I think I can see why I've missed it in the past.

  5. "Give me all your money. I promise to look after it, really I do!"

  6. :-)

    If you get too much to keep in your own pockets, Blue, I'll look after some for you.

  7. Basically I reckon it will be included in the calculations of the B of E's reserves and if they can't borrow against it, it will at least improve their looks. ;-)

    There is a problem though that does need to be tackled. Put simply, some banks have become too big to be bailed out or let go bus,t and that does create systemic risk. They are just too good at the current form of capitalism so don't get angry with them. Their shareholders aren't complaining.