FT:We should not be saved from our stupidity

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Old Teaser


21 March 2010

Written by Dr EamonnButler

It is very hard to play the game of life – or of capitalism – when governments keep changing the rules. Which they do every time they fear that one of the players might actually be losing. It does not matter if the players’ loss is down to their own folly; the politicians still rush to turn them into winners. They do not want voters harbouring grudges. But in making sure that everyone wins prizes, they sap the very incentives that drive our social and economic progress.

The point came home to me after I had invested my worldly wealth in Icesave, mesmerised by its 7 per cent interest rates (remember those?). I knew this rate was probably too good to be true and that I was taking a risk. Not a total risk, because Icesave was registered in the UK, so the first £35,000 was guaranteed by the government’s Financial Services Compensation Scheme.

In the event, when Icesave failed, taking my money with it, Alistair Darling, chancellor of the exchequer, generously sent me a cheque, not just for £35,000 but for every penny I had so foolishly invested. More amazingly, he even threw in the interest.

I wondered why cleaners in Cleethorpes, or road workers in Reyk javik, should pay higher taxes to spare me from the results of my own greed and stupidity. Iceland’s citizens, in street protests and an overwhelming referendum, insisted that they should not do so. But generosity comes easily to politicians, who of course can be generous with other people’s money, even though it shoots a hole not just in incentives but in the public accounts too.

The same happens at the European Union level. Why should the Greeks bother to remedy their notorious corruption and fiscal alcoholism, when it is obvious that the taxpayers of other countries – including Britain – will ultimately be forced to bail them out? What sort of example does that set to other spendthrifts?

Parents know that you need to set clear rules and stick by them. Kids may scream, but they will accept the consequences of their actions if the rules were clear at the outset. Indulge their tantrums and it is mayhem. Yet our leaders imagine that they can fudge the basic principles of capitalism, indulge (on taxpayers’ money) whoever screams about the results, and still maintain a thriving, functioning economy. They are mistaken.

The rules need to be sensible, too. The banks did not fail because there was too little regulation but because there was too much, most of it inept. The regulations did not stop banks from expanding so fast they created megabanks that smothered the last breath out of competition – the best regulator. While the Financial Services Authority busied itself writing “customer care” guidelines, it seemed unaware that these monster monopolies were cheerfully gambling away those same customers’ savings on various arcane financial wheezes.

The regulators should have been making sure that the banks did what it said on the tin – telling savers how safely or how riskily their cash was being invested. But when customers are told that they are safe and warm in the feather duvet of regulation, they do not bother to check the bona fides of their banks. They just snap up those 7 per cent interest rates.

Politicians and regulators have created a looking-glass world in which they suspend reality and gull us into doing stupid things, and then compensate us when we do. Years of easy credit prompted the banks to take wild risks, but they were bailed out when it all went wrong. When inflation was rising, Gordon Brown, Mr Darling’s predecessor, simply changed the measure, making the Bank of England ignore the property boom under its nose. The boom created buy-to-let millionaires but, when it exploded, the Bank simply pushed mortgage rates down to near zero, bailing them out too.

The losers, naturally, are those who have saved and invested prudently and now are picking up the tab for everyone else. Instead of letting the pain fall on those who took the biggest risks (as in the case of Lehman Brothers), politicians and regulators have slowly painted themselves into a corner. The cost is: unemployment, a falling pound, a yellow card from the EU and public debt of £23,000 per man, woman, child and infant.

In the coming election in Britain we do not need simply a different bunch of politicians. The UK – and the western world – needs an alternative politics. We need leaders big enough to admit that they cannot airbrush out our mistakes, and that attempting to do so simply destroys the mechanics that make capitalism work. But if someone does not address the fiscal alcoholism that is affecting our judgments, we will all end up in the economic gutter, while the risk-takers of China and the Middle East pass us by.

Published in the FT here.