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.
#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.
So where credit used to flow naturally to real business people with credible and productive plans, the government now mandates the distribution of silly little sums to politically correct but frequently un-creditworthy borrowers. Our bankers now spend their time rubber-stamping government guaranteed lending decisions to offer £2,000 of credit to a college leaver whose willingness to seek £2,000 via credit marks them as a poor risk in the first place, but whose competence at form-filling defines them as a lending prospect not to be discriminated against.
Government intervention has suppressed the price of credit, inflated asset prices, and directed ever larger sums of credit to the already-rich. It has made a mockery of what was previously a credit market. We rarely see markets operating any more; we see government regulating and dictating supply and price. The reason free choice through the market is not now working well is because previous interventions have broken the ability of free choice to apply its regulatory magic. So government blames the market, rather than their own clumsy manipulation of it, and they stack interventions one on top of the other trying to tame the beast of their creation. But that just makes it bigger and uglier than before.
Wouldn't it be wonderful to hear a new generation demanding the market be allowed to function properly? Wouldn't it be wonderful if a couple of million people under thirty finally got the fact that, far from being their oppressor, the unspoiled market is by far and away the best method of delivering practical democracy, freedom, choice and both individual and collective advancement?
Ten times a day or so, each of us chooses how our personal resources are deployed. In Britain the marketplace can thus count half a billion trivially small votes cast by 50 million people daily. The sum total of our economic votes grows the things we approve of and consigns the things we disapprove of to the dustbin. This is how we protect and promote minorities; by allowing smallness to be adequately supported by a small and enthusiastic constituency. It is the mechanism of the market which supports specialisation, diversity, choice, liberty and – let's not forget – efficiency. Government simply cannot compare.
But it can certainly obstruct.
Every time the government takes a pound of tax from you it re-directs it into a state run intervention which will never be tested by your freedom to choose. If you are a middle-income earner, already more than half your income is now taken from you and dropped into inefficient and ill-considered government schemes. You – meanwhile – are reduced to subsistence; because it is impossible for you to save. You can neither accumulate capital nor vote your money toward your own preferred minority interest, because the government takes all your discretionary spend from you for its officially righteous, publicly endorsed projects.
The government took responsibility for our after-school club. It is now overstaffed and half-empty, because they put it in the wrong place, and with state-assured funding there is no market vote forcing it to re-locate to where willing customers would pay to fill it up.
The nearest sports ground is 4 miles away, put there by a non-sports-playing bureaucrat to stimulate a run-down area which is too poor to support any jobs because the return on employment (and the cost of living) are below the government's minimum wage. That's why – instead of supporting low cost services delivered with low overheads – the area has become a complete job desert and a demand void.
There, the local pub closed for the last time last month. Government taxes a business premises at 5 times the rate of a private residence – mainly because the business has no quintennial vote. The market on the other hand used to count the pub's vote too, because its demand automatically allocated resources to things which served the business, like local staff. But that ability to vote by paying for the things it needed was eliminated by government imposing tax rise after tax rise on its premises (business rates), on its staff (Employers' National Insurance), on its product (sin taxes), or on anything else which does not get experienced directly by significant numbers of voters.
So jobs are lost and choices are removed. And soon the pub will be a local eyesore, and that's because of another intervention. You can't just buy it, fix it up, and live there. You need a change of use licence, which won't be granted because the owner has to pay the five-fold elevated council business rates on the property until it's condemned – a process which forces the landlord to pay while 'encouraging' its drift into ruin. So it'll be dragging down the neighbourhood for years.
Everywhere you look government interventions stifle our choices in free exchange and trade. We've forgotten that democracy is not centred on a quintennial popularity contest at election time. Real democracy is about organising things so that as far as is possible those 500 million daily economic choices of free people cause society to re-shape itself according to what people want. It is through the private decisions of un-regulated free exchange and trade, with its self-adjusting expansions and contractions, that government of the people, by the people, and for the people is properly implemented. The market is where you vote.
Oh dear. Having set out to explain that deposit protection is not benign I find I have wandered a little off topic. I seem to have ended where I so often end these days, feeling increasingly desperate and wondering why people cannot see it. We are falling into the oppressive command economy, where all property, price and process are government business, and where nothing happens except slowly, and inefficiently, with explicit government approval.
Even as I finish writing, the public voice of intelligence – BBC radio's Today program – spits out the word 'un-regulated' with its standard contemporary implication of cheating and shoddiness. They too have fallen completely into the trap.