Hindsight & Muddled Thinking

Two or more years ago I coined the term ‘Assured Corporatism’ to describe the system that had replaced capitalism as we knew it. Under AC organisations are considered too big to be allowed to fail and are bailed out with public funds when they begin to sink. This has been most noticeable in, though not confined to, the banking system. I argued that Northern Rock et al should have been allowed to go down the pan, with the State guaranteeing depositors’ money, but not that of shareholders.

The fundamental error made by politicians and their advisors was to confuse banking as a function, with the organisations performing it. The function is critically important to economic wellbeing. That is not true of any organisation performing the function. When an organisation fails an opportunity is presented to other organisations ready to step in and fill the gap, having learned from the other’s failure. That is capitalism.

Now, at last, a deputy governor of the Bank of England has come round to that view. Hindsight, as they say, is a wonderful thing. What a pity that it was preceded by such muddled thinking.

Author: tomkilcourse

A sceptical Mancunian who dislikes pomposity and rudeness.

2 thoughts on “Hindsight & Muddled Thinking”

  1. Where interest rate payable/receivable should reflect risk and the maturity profile of the intrument involved, is there any reason why depositors drawn to crazy get-rich-quick rates of return which some of the dodgier institutions were offering at one time, should NOT lose their shirts, along with shareholders? Incidentally, I don’t count Mr and Mrs Clapham-Common-Omnibus with their savings in Northern Rock or RBS amongst that group. I continue to be amazed by people being duped by Ponzi schemes and the like, and I wish I had a cent for every time I had warned a client about to invest good money in something crazy, that if it sounds too good to be true, it generally is. I have also in my lifetime come across banks with customers with dubious loans (i.e. they were not able to meet repayments punctually, and where interest was say 15%p.a. for illustration purposes) being persuaded to switch the outstandings to a credit card account (at 30%) Hey Presto, the evil day to have to provide for the Doubtful Debt is postponed for a further six months or so. The Management of that institution should have been taken out and hanged, by the (un)concerned Central Bank Authority.
    I think the issue for the BofE and FSA in the case of the UK was the preponderance of Pension Funds’ block holdings in the banks. It would have led to a near total collapse of the Pensions Funds if shareholders were allowed to go to the wall, much as I may wish that could have happened in a perfect world. The failure to punish senior bank management through fines/loss of pension/imprisonment is disgraceful, but I suspect that there has been negligence of a major nature by the supervisory authorities themselves, in allowing situations to develop, such as Northern Rock, whose funding profile was unsustainable, and led eventually to its collapse.

  2. CWJ, I agree with your first point. My concern for depositors was with the ‘little man’ trying to save a few quid. As for your other points, I still cannot understand why the crash was not anticipated. I have written a novel called ‘The Great Collapse’ about an authoritarian government coming to power on the back of an economic meltdown triggered when Americans dump their credit cards en masse. I started writing it in 2003, sure that such a collapse was coming. What alerted me? The knowledge that many people were taking out credit cards, and encouraged to do so, to clear the debt on an existing card. Unsustainable behaviour that made the crash ever so predictable.

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