A genuine question, and I’m trying to work out the answer (so here I’m thinking out loud).
If Greece defaults – which looks very likely very soon – then there are banks which have made loans to the Greek government which will then not have those loans repaid. This is on such a scale that it is likely that many banks would themselves become insolvent. There is thus great pressure on governments to ensure either that Greece does not default (they’ve lost that one) or, if it does, that the banks are ‘ring fenced’ from the consequences of their actions.
This doesn’t seem right to me.
Assuming Greece defaults (or the other PIIGS) why shouldn’t we let the banks go bust in consequence? After all, it is their decision making which such a fault would put to the test. What would be the malign consequences?
Well, for the ‘average person’ probably not very much. In the UK – and I guess elsewhere – there is deposit insurance, which means that most people’s bank accounts are protected. If one bank goes bust then their customer base is an asset which is then sold on by the auditors who are trying to maximise the asset value from the bankruptcy proceedings. So that side of things is covered.
Those who are richer will get a more or less severe financial haircut, in several ways. Firstly, there is a threshold to the deposit insurance, so deposits above that level would be lost. Second, those who have shareholdings in the bank will – largely – see that investment be destroyed. Thirdly, those who have pensions may be at risk of seeing those pensions lose value if those funds are invested in insolvent institutions.
The thing is, those latter malign consequences I do not see as being anybody else’s business. That is the nature of the free market. If you invest in a company that makes bad decisions then you will likely lose your money. What I most object to is a systemic bias towards privatising gains whilst socialising losses. Or, to put that more simply, I believe that it is shockingly immoral for general taxation to be used to subsidise incompetence and greed. To use an admirable politician’s latest catchphrase, this is simply crony capitalism, and it is corrupt.
At this point the spectre of ‘systemic risk’ is raised. If we don’t stop the banks going bust then civilisation will collapse – I paraphrase, but that is normally the gist. Civilisation is collapsing anyway – and not least because we have ignored the moral foundations of our communities and societies. My view, therefore, is that destroying the notion of moral hazard, making the rich invulnerable to the consequences of their own misjudgements, is part of the problem, not part of the solution.
So I say – let the bankrupt go bust. If we no longer bail out the venal and the incompetent then perhaps there will be a little bit of money left over to look after those in genuine need.