Sunday, October 5, 2008


 The Congress of the United States deserves full praise for its resistance over the past week to the President's determination to secure funds for occasional and arbitrary intervention in the banking system. It was unclear from the behaviour of the markets whether the proposals were perceived by their prospective beneficiaries as effective; and indeed it remains unclear. Nevertheless the President and his successor, whoever it might be, were loath to be left powerless and at the end of the affair the resistance of the Congress was futile.

I do not pretend that Governments should turn a blinded eye to the present crisis of economies in the manner of Admiral Nelson; nor do I content that there is no crisis. It is merely necessary to state that,as a matter of principle, intervention should not be arbitrary; nor should those whose recklessness is responsible for the situation gain benefit - for that would appear to be the consequence of arbitrary intervention.

The events that currently are unfolding in Europe are therefore interesting. The blessed governments of Ireland and of Greece have guaranteed the deposits of savers and it is reported that the government of Germany is considering the same policy. Britain already guarantees deposits but only to a certain level and not to an extent that will reassure those individuals who may maintain savings acquired perhaps from the sale of a property.

Mr Vincent Cable, meanwhile, a statesman whose wisdom and prescience is increasingly acknowledged, has suggested it is time to reduce interest rates; this would be achieved I presume by an expansion of the money supply.

These are both interventions which would have general effect rather than providing comfort and solace to businesses that should be allowed to crawl peacefully to their final resting places. They are therefore worth consideration. Public panic and the flight of deposits are proper causes for concern and it would seem unsustainable for one country to guarantee savings and not others.

Meanwhile the man who would be Prime Minister, Mr David Cameron, has appeared before the cameras calling for an "injection of capital" into the banking system, indicating that his office has indeed been busied with the desperate pleas of bankers and that the Conservatives remain unchanged in their willingness to pay heed to the monied classes. He continues to favour, it seems, selective involvement by the government with individual banks. He appears ignorant of the dire state of the domestic British banking system and the increasing absence of competition between banks.

"There is one only thing worse than state aid for banks and that is not doing anything," Mr Cameron stated. He appears incapable of grasping other courses of action. If he and his colleagues were serious in their declarations that politicians should work together they should pay heed to Mr Cable. His simple measure would allow any bank to borrow more capital at a fair interest rate. It would spare the government from becoming a shareholder in an increasing number of banks; it is not its job and would leave public finances dangerously exposed to the winds of commerce.


1 comment:

Geoffrey Kruse-Safford said...

What is quite funny, in a scary way, is that, with several European banks sliding towards oblivion over the weekend (including one that started a cross-border hullabaloo between Belgium and Luxembourg), the bailout our Congress passed last week means less than nothing now. $700B is chump change, considering the disappearance of stock equity the world over as financial markets get even more rickety as credit becomes as rare as hen's teeth.

My own insistence that any bailout be denied was based on the principle that those who live by the market should die by the market. That our much-heralded attempt to salvage something from the wreckage of hyper-capitalism run amok is now quite meaningless and should be abandoned is a nice reality check for those who believe that "doing something" is always better than doing nothing. We did something, it is irrelevant, and we are now faced with a situation where the entire international financial structure is on the brink.

I believe that, just as in evolution by natural selection, we shall have a return someday of investment banking, because it serves an important economic function. It may not appear in the same form it once did; it will most assuredly be much more closely scrutinized than it has been in recent years; but it will be back. My hope is that Britain resist the urge to "do something rather than nothing" because whatever it does, whether done by Labor or the Conservatives, will end up being futile before it is even passed by your Parliament.