“We must do something!” It’s been the rallying call of the bail-out brigade since the financial crisis kicked off more than two years ago, and they’re still screeching it from the rooftops today.
But the trouble with doing ‘something’ is that once you start, you can’t stop. Because every little something that you do creates further unintended consequences.
For example, the Bank of England – and in the US, the Federal Reserve – slashed interest rates and pumped liquidity into the financial system last year in a desperate attempt to stop the banks from going under. If they hadn’t saved the banks, we’re told, then civil society would all but have collapsed as ATMs stopped functioning and bankers stopped buying Porsches.
Maybe central bank bosses Mervyn King and Ben Bernanke thought the banks would have learned a lesson from this experience. They did. They learned that no matter what they do in future, taxpayers – the mugs – will save them.
And now we’ve been told this week by Lord Griffiths, vice-chairman of Goldman Sachs International, that we should be tolerant of banking bonuses and income inequality because it’s for the common good – because if we didn’t pay big bonuses, they would all run off to Switzerland.
Lord Griffiths was speaking at a public debate which I didn’t personally attend, so I suspect his remarks were not as inflammatory in context as they appear in the cold light of newspaper print. But this sort of thing is hardly a recipe for social cohesion when the rest of us are being warned that income tax might have to go up by 7p in the pound to plug the black hole in the public finances.
To be fair to Mr King, he’s always been keenly aware of the moral hazard problem, and is now proposing various ways to reform the banks. But maybe – just maybe – things would be better now if we’d let the market deal with the banks. We’d have gone through the pain barrier, society wouldn’t have imploded, and we’d be on our way to a genuine recovery, instead of still fretting over what to do about the banks and those bankers’ bonuses.
Sound far-fetched? It’s been done before – Bill Bonner talks about how US president Warren Harding just did nothing and let the economy sort itself out after the Panic of 1920. Never heard of it? That’s probably because it didn’t develop into anything greater. Sadly, I don’t think future generations will be able to say the same about the Great Recession of 2008-09.