There was no plan B to deal with a major catastrophe, no historical knowledge (everybody had forgotten about the UK’s secondary banking crisis of the 1970s, for example) and very little practical and theoretical understanding of the issues. It was not just regulators, central bankers and academics who were stumped, but also many independent commentators. The result was a hodge-podge of solutions made up as everybody went along, each intended to prevent a 1930s-style depression and each, to a varying degree, flawed. There were various bailouts, nationalisations, asset guarantees and so on. We were in an emergency with often limited transparency, plenty of rumours and genuine panic; the name of the game was to survive another week, not to put rational solutions into place.
In retrospect, many of the decisions taken at the time were wrong. More banks should have been allowed to fail. The authorities should have organised compulsory bail-ins of bondholders, rather than constantly calling on the taxpayer. This would have damaged pension funds and insurance companies and would have been even more painful in the short-term but would have avoided more problems later. It is now all too clear that the bailouts might have saved the system temporarily but caused immense cultural and psychological damage to all financial institutions and business in general.
Regulations and taxes are being prepared or are already in existence that are going to do huge damage to the economy and cost vast number of jobs over the next few decades – increasingly, it looks as if the cost of this will be greater than any benefits derived from the botched bailouts of 2008. What is really galling is that the authorities in the Eurozone have learnt nothing and are still acting as if this were 2007 or 2008. Again, all the talk is of bailouts, of a European Tarp and the like.
But don’t these people remember how hated all of these things were by the electorate? Think again if 50 per cent is the highest you believe income tax can go. Capitalism is a great system when it is allowed to work properly – and that means big rewards when things go well and big losses when things go badly. We are now in a latter scenario – and yet once again the establishment wants to socialise losses and prevent a natural correction. Those in the City who support this are making a mistake.
Does anybody think that bailed-out Eurozone banks will still be allowed to run vast London-based investment banks or wealth management units that pay large salaries? There will be another crackdown, wealth taxes, war on accountants, a Tobin tax and so on.
It would be better for the Eurozone to accelerate the reforms the FSA, the Bank of England and the G20 have been working on – and which the Vickers report embraced as its own – and impose bail-ins onto the system, with senior creditors being turned into equity-holders to help institutions cope with sovereign debt defaults. The only way modern financial capitalism can survive the cultural and political backlash is if it learns to stand on its own two feet.
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