If any industry has more than its fair share of “too big to fail” wards of the state, it’s the banking sector. Allister Heath in the Telegraph:
There is a horrendous problem, certainly, and urgent reform is required. But the ailment has been fundamentally misdiagnosed: banking has become a ward of the state, a cossetted, subsidised industry with captive consumers, and it is that which has crippled it. We have been there before, in other sectors, and the medicine is always the same. This may come as a shock, but we need more capitalism in banking, not less.
Banks need to be allowed to go bust, like every other private company. It was a disgrace that taxpayers were called upon to bail out some of the City’s grandest names. This must never happen again. The reason capitalism works so well, whenever it is tried properly, is that the principle at its heart — profit and loss — is the toughest of disciplines and the best of motivators. It is more ruthless than anything regulators, however clever, could ever dream up. It allows two conflicting emotions, greed and fear, to balance one another out. Shareholders, creditors and bosses want to make money — but they know that a step too far might entail ruin.
That, at least, is how it works for much of UK Plc — but no longer in banking, where profits have been privatised and losses nationalised. It is an obscene perversion of capitalism. Forget the nonsense about “light touch” regulation: the problem is that the fear of failure ceased to exist. Market discipline was replaced by extreme laxity.
There was no longer much need for prudence, proper capital buffers or strict internal controls: the taxpayer was ready to pick up the bill if anything went wrong, while incompetent regulators signed everything off. The Labour government which introduced this mad system wasn’t deliberately seeking to subsidise risk: it merely made a terrible mistake, though with the politically useful side effect of reducing the cost of credit and increasing its availability. The real blunder was that the Financial Services Authority had no plan to cope with a bank going bust. It simply assumed failure would never happen. After all, how could it? Gordon Brown had abolished booms and busts.
