Iain Martin asks this important question in the Wall Street Journal:
It has become the new consensus, apparently bought into by “everyone,” that if the U.K. government had not bailed out the banks to the extent that it did then, Britain would now be in the Great Depression II. But many of the same people who trumpet this as the new orthodoxy were equally fervent believers in the old orthodoxy (which was that there would be no need for a new orthodoxy because most economic problems had apparently been solved).
Before the crisis, “everyone,” or a great many people at least, thought that through a combination of narrow inflation targeting, endless cheap money, “modernized” regulation, financial innovation that allowed much higher leverage and the innate superiority and cleverness of this generation (that old one again) we had changed the rules of the game. There would be no return to boom and bust, as it were. This turned out to be not exactly true.
But what if the U.K. government had not organized the massive bailouts totted up in the latest NAO report? The figures are not new, although it’s still eye-watering when you see them laid out.
Andrew Lilico of Europe Economics is an imaginative thinker. He gets in touch to reiterate what he has claimed since last autumn. He argues it is possible to imagine that the mind-boggling sum involved in bailing out the banks could have been put to better use helping the real economy:“I note that the NAO insists that the bailouts were justified. But I still have read no answer at all to my question of whether this could conceivably have been the best use of £131bn (or £180bn or whatever larger number is actually credible). £131bn is 9% of GDP. Are we really to believe that if taxes, say, had been cut by 9% of GDP then the recession would have been much worse than it has been (and of course it would have had to be much worse, since the way the government chose to spend its £117bn/£131bn/£850bn has destroyed the functioning of capitalism, and will thereby reduce the average growth rate of the economy for decades)?”
It is an interesting thought. What if bust banks had gone to the wall and instead of bailouts there had been an immediate 5 pence reduction in income tax, a substantial reworking of thresholds and big cuts on taxes on business. Would the result have been any worse than the current deep recession? It would have taken political nerves of steel to implement such a policy. But Andrew Lilico thinks the bailouts weren’t just an economic mistake, he says they represented a moral failure.“I continue to believe that the moral aspect of this is totally under-reported. In the bailouts we identified some of the richest people in the world - bank bondholders, bank employees, bank depositors with cash sums in excess of deposit insurance thresholds - and used money raised in taxes on the poor to spare those rich people the consequences of their mistakes. How is that the press is not more outraged by this? And why is there so little outrage that whereas when miners and shipbuilders and car manufacturers argued that there were systemic consequences from the shut-down of their companies - blighting whole regions for a generation - we all (rightly, in my view) said they had to be sacrificed on the altar of the free market, but when it’s bankers and London that’s involved, suddenly systemic effects and the misery of unemployment are rediscovered? It has absolutely, unequivocally, been one rule for the rich and another for the poor; and one rule for London and the South-East and another for Yorkshire, Wales, and Belfast. I think that’s immoral, and I am disappointed that so few journalists seem to be able to see it.”
As I said in the comments to his piece, right-wing lunatic libertarians have been banging on about “moral hazard” since day one. This particular right-wing lunatic libertarian feels that if one bank had gone to the wall pour encourager les autres, none of the rest would have gone to the wall, we would have been on the hook for the deposits of one bank, everyone else would have picked up the pieces and this would all have been over already.
But instead, we know have naked “special interest” rent-seeking from a whole host of companies (are carmakers really essential for the survival of the economy?) and all the practitioners of sharp practices know that they can get away with pretty much anything because the government will bail them out.
This is why we don’t negotiate with kidnappers or blackmailers. Just because the blackmailer happens to be your bank manager doesn’t make it any different.