The tyranny of banking deposit insurance is leading young people to hate ‘the market’…
Why aren’t young people protesting against bailouts?
Younger adults are usually pretty quick to protest injustices, but they’re strangely quiet on financial rescues. Few of them seem able to join the dots and see that bailouts are clobbering them hardest. Here are some thoughts on the matter:
1) The British economy is currently in a state of permanent government bailout. After spending all the money it raises in taxes our government prints £15 of new money per working person, per day, which it injects into the economy as public sector wages. The amount of cash in our system increases daily by about £300 million, as does the debt of the British government. If the tap were turned off we would sink into depression and most of our banks would fail amid a whirl of default and collapsing asset prices. That might be a bad thing, as most people think, or a good thing. It depends on whether you already own some of those assets, or whether you don’t, but would like to one day.
2) That daily money torrent prevents a collapse, at least for the moment. The cash swirls around for a bit, stimulating a little demand, before settling permanently in the bank accounts of wealth accumulators – both individuals and companies. There is nowhere else for it to go.
3) Years ago, before this continuous pumping of new money, banks had less investable cash. They had less scope to lend it badly, and more motivation to seek the highest return by finding productive outlets for the limited amount of savings available. They sought out talented, ambitious people, who would have a long career in front of them, sufficient to pay back a loan – with interest. Credit found its way to the proto-entrepreneurs who would start and drive each new generation of businesses.
4) But with the modern money tap stuck in the ‘on’ position a sort of natural selection has favoured a less productive type of entrepreneur — typified by the property developer – who uses money to acquire non-productive, rentable assets, and leaves someone else to get on with the tedious business of producing something. The wonder of workless income and capital gains has always spawned the search for rent and capital growth. But it used to be much riskier, because market forces usually kept prices in check with sharp periodic corrections. There used not to be £300 million pounds of new cash settling daily into the hands of wealth accumulators, and propping up the values of their assets.
5) Regular price corrections, and liquidations of overextended risk-takers and their banks, used to redistribute property away from rent seekers, and offer opportunity to people who were productive. This was the market at work, regulating itself, and oscillating in favour of the young and the productive instead of the old, rich, and un-productive. It brought asset prices back to levels which permitted sensible buying at sensible prices, and the sensible lending to support it. That is not a bad re-allocation of capital, and it required no special rules.
6) But then a political shift created an idea which is very beguiling – that ‘innocent’ depositors should never lose money. This meant that banks should be guaranteed by central government, no matter how poorly they had chosen their borrowers.
7) This scheme is – like most kinds of government protection – superficially attractive. But it turns out to be very bad news for the young. It has the effect of refusing to allow the price of assets to fall, so the bad lending decisions made by bankers are never exposed to insolvency, the marketplace is never cleansed by liquidation, and the re-allocation of capital to productive youth never occurs. Eventually credit is only available to people who are already asset-rich, and the gap between poor and rich grows wider.
8) Nowadays at thirty and forty, you are forced to stay on in your salaried role, paying inflated housing rent, and avoiding inflated commercial rent. Because of newly indestructible wealth any shops, factories and land which used to have a capital value equivalent to 1,000 days of your labour now cost 4,000 days of it. That four-fold multiplier turns a sensible risk for a young buyer into a dangerous one for both the buyer and his bank. It’s no wonder younger people see the ‘market’ as their enemy.
9) Meanwhile the banks are swelling with all the cancers which develop in state-run enterprises. They are no longer effective intermediaries for capital because what they borrow at 1% they distribute at 8%. They have become hopelessly inefficient at their core function. Instead they are supported by government money to provide — like corrupt governments — an increasingly politicised service while distributing almost the entire benefit handed out by government to their own staff. And as that pernicious drift to self-serving bureaucracy continues we see government feeling forced to intervene again, to correct the monster it has created, and direct banks to lend for political rather than business gain.