Monday, 14 June 2010

Whyte: Subsidizing Risk

The Cobden Centre has published a characteristically brilliant article from Jamie Whyte:
Industrial subsidies are a bad idea. They replace the judgement of investors risking their own money with the judgement of politicians playing with other people’s money. Not only does this reduce the chance of wise investment, it distracts entrepreneurs from their proper business. They devote themselves to winning the sympathy of the subsidy dispensers rather than producing things that consumers will pay for voluntarily. A planned economy is an economy of political favours.

In the run up to the financial crisis, government subsidies of bank risk-taking ran into the hundreds of billions of dollars. So it is unsurprising that banks took so much risk. It is just another example of the immutable law of economics that if a subsidy is offered, it will be accepted.

The politicians who arranged the subsidy now like to complain about the greed and irresponsibility of the bankers who accepted it. This is like a man who has had his wife murdered protesting in court that he never imagined the hitman would be so wicked as to do what he was paid for.

When it comes to absurdity, however, our politicians’ rhetorical response to the crisis is nothing compared to their policy response. They have not removed the risk subsidy by eliminating the guarantees – perhaps by making it a criminal offence to administer a bailout of bank creditors. On the contrary, they have made the formerly implicit guarantee to wholesale bank creditors explicit.

But do not fear. This time, things will be different. This time the laws of economics will be suspended and the subsidy will not be taken. Financial regulators will come up with rules that prevent bankers from taking excessive risks, even as politicians increase the subsidy for bank risk-taking.

I recommend the whole article.

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