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A necessary evil

Wednesday, 8th October 2008

The Spectator on the Government's £50 billion bailout

Though largely forgotten now, the headlines ten years ago this week had an uncanny resemblance to those of the past few days. There was an emergency bail-out, demands to slash interest rates, bankers warning that the world’s economic system was in danger of systemic collapse — countered by disgusted voices warning that nothing good would come of using taxpayers’ cash to prop up failed financiers. The only difference was the scale. The bail-out of the collapsed hedge fund Long-Term Capital Management in 1998 cost US taxpayers $2.3 billion. This week’s bail-outs will cost US taxpayers $700 billion and British taxpayers £50 billion. And already there are warnings that these mind-boggling sums will not be enough.

The disgusted voices of 1998 were right. There is a connection between what happened ten years ago and what is happening now. The bail-out of Long-Term Capital Management by Alan Greenspan, then chairman of the US Federal Reserve, encouraged reckless behaviour just as was warned. The emergency cuts in interest rates, intended to avoid a collapse in the global economic system, instead inflated the dotcom bubble. While that collapsed 17 months later, the era of cheap debt was to inflate other asset prices, culminating in the property boom and the subprime scandal which has got us to where we are today.

A purist would argue that we should learn the lesson of this: banks should on no account be lavished with a penny of taxpayers’ money. True, many minds would be concentrated if bad banks were allowed to go bust. The bankers would not get their bonuses, nor even the final instalment of their salaries; the shareholders would lose everything. Such a laissez-faire approach would certainly discourage an irresponsible lending spree in the future. Unfortunately, it would also lead to depression, as blameless depositors lost their savings and responsible businesses were starved of loans. So sharp has been the decline in banks’ share prices this week that we risk being left with no banks at all. It is little comfort to think that a more responsible breed of capitalist would emerge from the economic ruins which would be left as a result.

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A child of our time

From the economic and psychological bedlam of the global downturn has emerged a particularly dangerous false dichotomy: namely, that there is somehow a choice for ministers over the next few years between economic reconstruction and the repair of Britain’s broken society, and that the government (whether Labour or Conservative) must prioritise the former at the expense of the latter.

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The Spectator's Notes

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‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.’ So said Ben Bernanke, now the chairman of the Fed, in a speech about how to ward off the ‘extremely small’ chance of deflation, which he delivered in 2002.