Morning:
10°c
When the House of Lords or now, as I suppose we have to get used to calling it, the Supreme Court tossed out the case for reclaiming bank charges the immediate reported reaction of the assorted quangos and competition authorities was that they would have to find other ways to protect the public.
This coincided with another story this week about an EU idea that a fund should be created by a levy in the industry to fly home holidaymakers if their airline goes bust. Then we had the Walker report tightening up corporate governance of banks with a view to minimising the risk of another financial crisis like the current one, so shareholders and depositors will be better protected. Elsewhere, almost without notice, some rule or code was mooted which will make it much harder for building societies and other housing lenders to foreclose and repossess homes where people have given up trying to pay the mortgage.
What these all have in common is an escalation in the amount of protection being offered to the public, be they bank customers, airline travellers, householders or shareholders, at the expense of…well, who exactly? Society is riding on an escalator where all risk is being passed upstairs to someone bigger, better, with deeper pockets and more equipped to deal with it, or so we are told.
The mantra that no member of the public must ever lose money no matter how responsible they are for their own predicament is gaining more and more ground. The fact that all these obligations are being passed up to the state, one way or another, has not registered, and neither has the fact that the state is us, so we cannot avoid the tab. The LMX spiral which bankrupted the Lloyd's of London insurance market in the early 1990s happened because people thought they could get rid of risk by chucking it out through the front door and failed to realise it was coming back in four times as expensive through the windows. We as a society have adopted the LMX spiral as the national business model. In deciding that no one, however irresponsible, feckless or just plain unlucky can ever be allowed to lose money, we have nationalised risk, passed it up to the government and by a major feat of doublethink convinced ourselves that somehow we will not have to pay.
There is more to it than this, however. If you think about what is happening in financial regulation, in the tightening of capital requirements, in the vetting by the Financial Services Authority of those who would aspire to be members of bank boards, in the possibility of pay curbs, in short, in all the stuff coming down the track, it is creating the expectation that banks will be so well regulated in the future that there will never be another failure. The idea is that the piling of regulation upon regulation will make the system safer but in fact precisely by creating the mindset that things cannot fail the Government is increasing, not decreasing, its commitment to the system. The more it regulates so this can never happen again, and the more it promises that this will never happen again, the more it imposes on itself the moral obligation to pick up the tab if for any reason it does all go pear shaped.
What does this mean? Well basically two things. First, the more regulation we have the more likely it is that taxpayers will pick up the bill when it goes wrong. Second, the more complex and detailed the regulation the more likely it is to suppress or eliminate low-level problems so that when the system does blow, the bill will be so massive that it will do to us what its own banks did to Iceland.
I think it is known as the law of unintended consequences.
Some thoughts about think tanks
An acquaintance of mine who has worked for years in the public policy arena came up with an interesting problem this week.
A feature of the past few months — probably because there will soon be a general election — is that every week has seen the launch of a new think tank. Presumably it is easier to raise cash to finance these things when there is the hope — no doubt misplaced — that a new lot of politicians will be more amenable to thought than the old lot. We shall see.
My friend's complaint was that all the new groups seem to have no idea what to think about other then regulation. There is just too much competition among free market think tanks.
But studying regulation is such a waste of effort. Simply put we are at a stage in the 30-year generational cycle where people no longer believe in markets, so they believe instead that regulation will protect them. We will therefore get more regulation for the next 10 years till the economy gradually grinds to a halt, and makes us all impoverished. Then the pendulum will swing, things will loosen up and over the following 10 years markets will go faster and frothier till there is another free market blow up like the one we have just had. Then we will start regulating again. It's called history repeating itself.
So just who needs a think tank to study that?
