A necessary evil

11 October 2008

The Spectator on the Government's £50 billion bailout

Another price the banks must be made to pay for submitting to a government bail-out is regulation to treat their customers better. By this we do not mean, as some have suggested, that they should be forbidden from repossessing the homes of those who cannot pay their mortgages. The real victims of the banking crisis are not feckless consumers but businesses, especially smaller ones, facing ruin due to the arbitrary increases in overdraft rates and the calling in of loans — even when interest payments were being met. If banks were to call in the mortgages of homeowners who slipped into negative equity, even though they were still meeting their interest repayments, there would be outrage. Yet that is the reality which small businesses face, and the reason so many go to the wall in a recession.

Some will see in the banks’ troubles an object lesson in the evils of capitalism. They should be reminded that the crisis has struck the social-democratic paradise of Iceland — which, thanks to its spending programmes, last year topped the UN’s list of best countries in which to live — much harder than it has Britain. Anger with irresponsible businesses should not translate into a reactionary attack on markets: still the best mechanism devised by humanity for trade, wealth generation and the distribution of resources. Without a free, wealth-creating private sector, powered by the promise of personal reward, there cannot be sensible public spending. For the next couple of years or so the majority of bankers are going to have to accept that they will not be part of that private sector: but — amid all the crisis chatter — we dare not lose sight of the market fundamentals that will, more than any government intervention, ensure the eventual resumption of wealth creation and stability. This rescue package is a necessary evil, not the dawn of a new era.