Thursday, 20 November 2008

Bailing out the bozos

So the great unwinding is finally happening...the time has come for the prudent and responsible to emerge from obscurity; or maybe not? As put by one reader of the FT Alphaville section ( “So I’ve cautiously decided to keep my cash on deposit in the bank - taxed at 40%, not only do I have to put up with falling interest rates and a depreciating currency but as a tax payer I will be bailing out all the people who told me: ‘You are an idiot, because what you don’t understand is that house prices only ever go up’”

Precisely. Why should the cautious now help to subsidise the fast cars and expensive holidays that certain individuals purchased with debt secured on inflated assets? Many borrowed money and overspent without regard to prudence; thus implicitly forgoing future consumption. It’s now time for these individuals to save and repay their debts. If they can’t repay with current income, then they should lower their living standards and/or liquidate their assets. However, government action across the world seems bent on bailing out these poor souls by paying their debt with other people’s money. In other words, a policy of “the gain is individual while the pain is socialised” has now been institutionalised.

Another mistake. If individuals are spared from the consequences of self-inflicted actions, the necessary learning process will not take place. Lessons must be learnt for mistakes to be avoided in the future. True, there might be grievous instances of injustice which can and should be covered by a safety net, but these represent a small minority.

Similarly, companies and their senior management have to pay for past mistakes. I remember advising corporate CFOs to lock-in long term committed facilities to finance long term assets, yet many refused because this implied a higher cost in commitment fees. Those that took such advice are sitting pretty while the ones who didn’t are now clamouring for government rescue packages. I don’t think the latter will be returning their 2003-2007 bonuses anytime soon. Why should taxpayers then shoulder the consequences of their bad management? I take the point that systemic risk should be avoided, but companies that access public funding should, as a condition precedent, remove all the top management which led them into the situation in the first place. Only then will the lessons be learnt.

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