Financial district
Many of us have long argued that the welfare state underwrites irresponsible behaviour and crowds out the institutions that could have provided schools, hospitals and social insurances privately. Ultimately, of course, the welfare state leads to the nanny state as the government tries to regulate the undesirable private behaviour that, arguably, is encouraged by the welfare state. The action by the US government yesterday confirms that we now have a welfare state for bankers. The US government has sent a firm signal that irresponsible behaviour in financial markets will be underwritten by US taxpayers. Bankers gain from the upside of their actions and have the downside underwritten, so they will take more risks. The welfare state for bankers also crowds out the development of private mechanisms that could deal in an orderly fashion with difficulties within the banking and financial systems. Worst of all, of course, governments in the future will use the reckless behaviour that will result from all these Federal rescues to regulate the already over-regulated financial system more.

We need to get a few facts straight. Fannie Mae and Freddie Mac were completely unnecessary government creations: the Great Depression did not result from the failure of the private financial system but a failure of US government monetary policy. Secondly, our current bubble was again the result of a failure of monetary policy – interest rates held too low for too long. The government could help in the process of an orderly restructuring of the capital of Fannie Mae and Freddie Mac (whilst providing no financial help) if it is the case that current legal systems are unable to handle that process. But those who have provided capital to the ailing institutions should suffer the losses – not the US taxpayer.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

8 thoughts on “A welfare state for bankers”

  1. Posted 08/09/2008 at 12:39 | Permalink

    excellent analysis

  2. Posted 08/09/2008 at 12:39 | Permalink

    excellent analysis

  3. Posted 09/09/2008 at 07:21 | Permalink

    This is the only critical piece of this change I have read so far. Otherwise most media outlets seem to be all over it, praising it to high heaven. Or maybe I don’t read widely enough.

    Well done.

  4. Posted 09/09/2008 at 07:21 | Permalink

    This is the only critical piece of this change I have read so far. Otherwise most media outlets seem to be all over it, praising it to high heaven. Or maybe I don’t read widely enough.

    Well done.

  5. Posted 10/09/2008 at 20:04 | Permalink

    Philip Booth says: “Secondly, our current bubble was again the result of a failure of monetary policy – interest rates held too low for too long.”

    Clearly this is part of the story, but surely higher interest rates would just have squeezed the private sector whilst having no impact on that part of the economy where spending was (and still is) rampant – the public sector. An (at least partial) alternative to higher interest rates should have been less public spending.

  6. Posted 10/09/2008 at 20:04 | Permalink

    Philip Booth says: “Secondly, our current bubble was again the result of a failure of monetary policy – interest rates held too low for too long.”

    Clearly this is part of the story, but surely higher interest rates would just have squeezed the private sector whilst having no impact on that part of the economy where spending was (and still is) rampant – the public sector. An (at least partial) alternative to higher interest rates should have been less public spending.

  7. Posted 01/10/2008 at 09:53 | Permalink

    Hello
    Nice site!

    Bye

  8. Posted 01/10/2008 at 09:53 | Permalink

    Hello
    Nice site!

    Bye

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