Gloating over broken windows forgets their real costs

Marc Sidwell
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THE price of payment protection insurance (PPI) mis-selling continues to spiral upwards. Barclays put aside an extra £700m in October for PPI compensation, taking its expected payout to £2bn. RBS and HSBC have each set aside well over £1bn and Lloyds added another £1bn at the start of November, taking its PPI provision to an eye-watering £5.3bn.

Today we publish an analysis which suggests that these huge sums may be acting as an artificial boost to consumer spending. Some might want to see this as a good thing for the economy, a way of punishing the banks and rewarding ordinary citizens.

But not so fast. As the economist Frederic Bastiat pointed out in his famous parable of the broken window, “I am sorry to disturb these ingenious calculations, but I beg you to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen.”

What is seen is added consumer spending – with 15 per cent spending the compensation on holidays, 12 per cent on major household goods and five per cent putting it towards buying a car. But you can only read that as a good news story if you ignore the unseen costs: the money lost to ordinary consumers through being mis-sold products in the first place; the reputational damage to the banks and the sums they have lost in the whole shameful process; not to mention the industry of PPI claims that has sprung up to feed the machine, clogging our mobile phones and muddying a genuine injustice with ambulance-chasing.

There is nothing good about the PPI saga. Certainly not the mis-selling of products. But let’s not delude ourselves either that the resolution process is some sort of win for the economy. In Bastiat’s words, “how absurd it is to think we see a profit in an act of destruction.”

There was renewed fear this weekend over the level of fines RBS might have to face over its role in Libor rigging, another reminder of how far the sector as a whole has to go before it is out of the woods.

The majority state-owned bank is anticipated to reach a settlement by February. It had been thought that any settlement would be in the region of Barclays’ £290m fine. However, it now seems possible the regulators are hoping for a bigger bite second time around.

The idea that Barclays was smart to settle early on Libor has long seemed preposterous – the loss of its chairman and chief executive, remains shocking. If RBS does end up paying more, that will be little consolation for Barclays and strike fear into those yet to settle.

It is right that any banks party to interest rate manipulation should be held to account. But the possibility of fines being increased adds uncertainty. Instead, we need speedy and even-handed resolution.