100% Bail-Out Of Icelandic Bank Retail Deposits Is Crazy
by Dr. Ros Altmann
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Short-term measures will not get us out of this mess.
The Government’s decision to protect 100% of all retail deposits in the Icelandic bank IceSave is the most dangerous, misguided act of the credit crisis so far. Anyone who put their money into this bank was doing so because it offered attractive interest rates. The press has been full of information explaining that only the first £50,000 was protected by compensation schemes and any amounts above that were at risk. Depositors knew that. Yet, in another panic reaction, the Government has promised taxpayers’ money to reimburse unlimited amounts to all IceSave retail depositors. This is crazy.
In fact, it is really dangerous. Firstly, it was not even a British bank so why should taxpayers fund people who saved in an Icelandic institution? This implies that anyone saving in any bank that fails (not just a British one) will have to be bailed out by the taxpayer too – where will it stop? This is the road to hyperinflation. Secondly, why should those who were seeking higher returns be rewarded with both better interest rates and a ‘money-back guarantee’ from the rest of society? If people take a risk, they cannot expect it will always pay off, otherwise it is not a risk at all! This makes a mockery of the whole idea on which capitalism is based. There have to be failures and Governments cannot just prevent them by printing money to bail people out and please the bankers. Thirdly, if all bank deposits are 100% protected, but pensions and other long-term savings are at best 90% safe up to a £35,000 cap, why bother with pensions? Keep all your money on overnight deposit and forget about investing longer term. This is the opposite of what we need as society ages.
We urgently need to get away from short-term thinking. Here are some suggestions.
Banks are short of liquidity. They need longer term money _ why not only offer a guarantee of safety above £50,000 for money that is tied up for a longer time? Why not only offer a guarantee if people are willing to forego interest on the money and use the interest to shore up the system? At least that would be some quid pro quo.
Promising that taxpayers will print money is not a solution. Some banks cannot pay the money back and have to fail. Of course it will be painful if people lose money, but that is what has to happen if the system is to survive and thrive again.
I believe that Mervyn King can see the longer term dangers and the futility of the short-term panic measures being taken. He has not been able to voice his concerns but they are valid. We cannot avoid recession, it is inevitable. The bubble has burst and the authorities cannot just keep trying to blow it up again. Having lived beyond our means for years, it is time to retrench. The markets will have to find a level from which they can start to recover and that will be painful for all of us but it is the result of many years of unsustainable growth and borrowing from the future which has to be repaid. It is time for straight talking, not throwing good money after bad. But the politicians and financial experts who got us into this mess have not understood that short-term thinking is responsible for the crisis. Until they do, they will not take the necessary measures to start a recovery. That economic recovery is some way off as there is so much debt to be repaid first. We need canny policymakers to steer us through these difficult times, not to destroy pensions as the population ages.