Economics Views : 24 Nov

November 29, 2010

Truth emerges eventually from error.

Francis Bacon—but it seems often to take an inordinately long time for the process to work!

The scales having fallen from his eyes, . . .
Patrick Honohan, Governor of the Irish Central Bank, said earlier this week that he’d welcome offers to buy the country’s commercial banks. What he was saying, in a heavily coded format, was that he thought the bailout two years ago had been ill-conceived. He was right, of course: it’s always wrong to try to save the unsavable.

. . . the Irish Governor is Saul reborn.
Surgeons understand these things. Faced with tissues that are half-diseased and half-healthy, they sacrifice the former for the latter. Only politicians or central bankers are daft enough to attempt the reverse.

He’s acknowledging that the banks oughtn’t to have been bailed out.
If the banks couldn’t have been sold in the immediate aftermath of the cri¬sis in 2008, they ought to have been eliminated. Doing the sums, the authorities would have known their policies were almost certain to fail. The Irish economy simply wasn’t large enough to bear the burden posed by the banks. The bailout would destroy what was healthy without cur¬ing what was diseased. Instead of the failure being partial, it would be¬come systemic.

Perhaps, the UK’s Governor will eventually concur.
It was much the same in Britain, of course. The delinquents there were no less insolvent, but were somewhat smaller as a proportion of the eco¬nomy. In consequence, the non-banks were able, just about, to bear the weight of the banks. But they shouldn’t have had to!

It ought not to have been the good guys who were harried.
The burden should have been distributed very differently. Regulators, po¬liticians and bankers should have borne as large as possible a share of the costs. Taxpayers as small as possible a share of them.

But the bad ones.
In the midst of a crisis, it’s not easy to think clearly. Panic overwhelms the brain. The reaction of Brown and Darling two years ago illustrates the phenomenon. Stunned, they left it to the Governor of the Bank of England to call the shots.

Regulators, Manadarins and Central Bankers, for instance.
Unsurprisingly, he didn’t recommend a public flogging for himself and his opposite numbers in the Treasury and the FSA. Nor did he propose that the delinquents who’d been in charge of the banks bear any respon¬sibility for the disaster they’d caused. Instead, he loaded the burden in its entirety onto the shoulders of taxpayers!!!

The Coalition’s leaders don’t agree.
What did Cameron and Osborne think? They’d had two years to ponder the issues when they took office. Their conclusions? To leave things as they found them. To continue to punish the innocent, but not the guilty. Regulators were to go uncensured; Treasury mandarins undenigrated; Banking executives unmolested; and, incredibly, B-of-E officials pro¬moted!

They want to pour yet more money down the black hole that is banking.
When the Irish tragedy took its latest turn for the worse, the PM and the C-of-E were quick to offer aid. Though resources couldn’t be found for the deserving poor at home, they were readily available for undeserving rich overseas. What curious priorities!

Very uncommercial of them!
It’s a loan, they said, it’ll be repaid. Probably not. Do the sums. Can Ireland survive a penally high real interest rate and a substantially over¬valued cur¬ren¬cy? How will it fare in the global economics slowdown that lies ahead? The country might leave the EMS, and repudiate its eu¬ro obligations. The banks might renege on their debts.

Markets are distraught now; they’ll be better later.
Little wonder that investors are nervous. Little wonder they distrust their politicians. Markets will probably rise in the next twelve
months. But they’ll do so despite government policies, not because of them.

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