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Wednesday, July 23, 2008

Commenting on FT article - Lose the safety net and banks might find balance

Lose the safety net and banks might find balance

By Paul Amery Published: July 22 2008 19:59 | Last updated: July 22 2008 19:59

In 1964, Martin Luther King Jr spoke of “socialism for the rich and rugged free market capitalism for the poor” in the US. Nearly 50 years later, King’s first phrase might describe Britain’s finance industry, which our politicians and regulators are trying so desperately to prop up. From the failed rescue and nationalisation of Northern Rock, to the provision of extra funding and the swapping of illiquid mortgage paper for liquid government securities by the Bank of England and now the repeated attempts by the Financial Services Authority to enlist investors to save Bradford & Bingley, it seems that the free market ends whenever financial institutions are involved. / Comment & analysis / Comment - Lose the safety net and banks might find balance

Paul Amery highlights the fact that has been discussed in financial and policy circles for almost a year now. The free financial markets require large-scale state intervention when they are about to fail, because the costs of failure are too large.

I think Amery is too sanguine when he notes that banks have failed in the past with little impact on economic growth (eg England in the nineteenth century and Russia in the late 1990s). Bank failures can ruin individuals and if they are not speculators an injustice is done. And if depositors perceived higher risks, they would demand higher interest on their cash.

The way forward is for banks to pay up front into a fund that can be used in crises.

As for the socialisation of finance - perhaps the experiences of the past eleven months have simply highlighted that taxpayer funded government and infrastructure are essential to build up the 'commonwealth' on which successful finance and business depend.
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