Government must resist temptation to nationalise banks on the run

TO say we live in interesting times somehow doesn’t capture the enormity of the events in the global financial system.

Market capitalism as practised for the last couple of decades will never be the same again. ‘Never’ might be too long, so let’s say it won’t be the same for a very, very long time.

Like you, I imagine, I haven’t been watching the news these past weeks exactly wiping away tears at the thought of bankers having their Ferraris repossessed. It’s the people on less than €500 a week getting the chuck who deserve our sympathy.

We are witnessing a very radical modification of capitalism indeed and the full consequences cannot be foreseen.

Some things are clear. The old view that some banks are too big to fail has been augmented by the view that some financial institutions are too interconnected to fail.

It seems our tolerance of failure is just not what it used be. There is a growing desire for shelter from the storms of market economics, hence the Government’s intervention to guarantee savings in Irish-headquartered banks.

Attitudes might appear to have revolutionised but, actually, it has been a gradual coming together of different sentiments. The picture of bosses of failed companies strolling off with multi-million bonuses has made many people wonder whether what goes on in boardrooms isn’t much more than a secretive meeting of cronies to decide how to carve up the pie.

Combine this with increased dissatisfaction at ostentatious displays of wealth,pressures on the real wages of ordinary workers and the feeling that free trade is not fair trade, and you have a heady brew.

The danger is that the baby will be thrown out with the bathwater. Capitalism without risk is like religion without sin.

It’s the duty of priests to rail against Mammon, but when the worldwide head of the Anglican Church starts quoting Karl Marx approvingly, all sense of irony has been lost.

At times like this our high-minded French and German friends can be insufferable. Their anti-Americanism, rarely far below the surface, has positively erupted. Take the German finance minister who offered the Bundestag a lengthy lecture on the evil of profits. He could hardly wait for the US to “lose its status as the superpower of the world financial system”.

Not to be outdone, Le Monde gleefully remarked upon the decline of what it called the American Empire: “The US seems to be heading for a cliff, paying cash for their years of financial debauchery and an orgy of credit.” Orgies? Debauchery? Who are the French to lecture? Their president has been at it too, railing against “financial capitalism” and issuing calls for more — not better — regulation. Sarko has the wind in his sails, demanding an emergency G8 summit and even unspecified sanctions against “the perpetrators” of the crisis.

Mostly, this is just old-fashioned Gaullist populism, but it shows one of the unintended consequences of the massive US government interventionism which began with Bear Stearns.

Those smoothies in Europe who never liked markets or competition are grinning from ear to ear, crowing about what they see as the defeat of capitalism and denouncing its sheer wickedness. Their main complaint, it seems, is that the carnage doesn’t go far enough.

At the same time, some capitalists have given capitalism a bad name. Look at what we have seen in America: financial institutions trading their freedom for state protection and institutions under stress accepting pervasive regulation in return for insurance against failure. This is change indeed.

Many in financial services as much as admit they have been greedy. Having knowingly collaborated in encouraging the credulity of American homeowners, who have taken on more debt than they can manage, they are now begging taxpayers to come to their rescue. That the Congress pushed back on Monday night is understandable even if it looks like petty politicking. The international banks have not covered themselves in glory. They have been lying to each other about the debts they carry. The result is that trust has broken down, the banks have stopped dealing with each other, and no one can get any credit.

Not that all the doom-mongering and apocalyptic talk has exactly helped: the general climate of fear and anxiety has influenced the way a lot of people have responded to the problems in the financial sector.

So we are where we are. The mob is agitated, but hardly blameless either. While extremely low interest rates were being held out, few complained about cheap loans and doubling home values. Now, all of the sudden, everything is the fault of financiers.

Were there some predatory lenders? Of course. But only a fool would suggest that this is a major part of the problem. Nor is it some great indictment of capitalism. Capitalism is what people do if you leave them alone. People want hands-off until they want hands-on.

Where was the gun held to the temples of borrowers who put little or no money down, took out special offer rates and then pleaded ignorance or victimhood when rates were, quite legitimately, ramped up? Lenders and borrowers alike expected taxpayers somehow to step in and shield them from the consequences of their actions. That is a perversion of capitalism, not an indictment of it.

By over-expanding credit for far too long, reflected in historically low interest rates, the American Federal Reserve in particular created a classic boom-and-bust business cycle, concentrated mostly in the US housing bubble. Now that the bubble has burst, the Fed, in effect, has been printing money to pay other people’s debts. The upshot, almost certainly, will be higher inflation on both sides of the Atlantic.

FACED with a run on the banks, governments around the world felt they had no choice but to act. The trouble is, as we shall see in the period ahead, when governments get involved in the market they create an opportunity for further speculation, a feeding call to the sharks. Regulation introduced in response to one crisis almost always helps to create the next one.

The second danger is that, through the best of intentions, these interventions will not end here. We can fix the economy right now, these well-meaning types say, if only we could just impose some new regulatory burdens on the greedy, corrupt businesses that actually hire workers and pay their wages.

Memories are short. It’s no accident that the world’s freest economies enjoy the highest levels of prosperity. If regulation were the solution to economic problems, then the Soviet Union would have been a rip-roaring success.

But capitalism cannot function properly without risk. Of necessity, a system built on risk will occasionally go wrong. But governments creating banking oligopolies is not the answer. Thankfully, the Government here has resisted the temptation to nationalise. It must hold out if it can. We need more smaller banks, not even fewer large ones without any incentive to innovate and offer us products to suit all our different needs and circumstances.

So it’s easy to see why people are angry. They are crying out for safety and security. The bankers in the wrong must pay a price, too. But no government can start writing blank cheques.