Thursday, September 20, 2007

Simon Heffer gets it wrong on Northern Rock

Simon opens his latest missive with the following:
Just as war is too important to be left to generals, the economy is too important to be left to politicians. This was blindingly clear from the antics on Monday, when a bank in no danger of failing was underwritten by the Government.
Presumably, Simon thinks that the economy should be run by journalists since he has called for borrowers and lenders to be locked up in previous columns. He is also wrong in a simple matter of fact: the government has not underwritten the bank; it has underwritten the depositors if the bank were to fail. Unless he has insider access to Northern Rock Simon also has no basis for his assertion that it is no danger of failing either. The stock market certainly does not agree; check out Northern Rock's share price, but what do they know against Simon's massive experience in wholesale finance? He then moves to his central thesis.

Taxpayers have now become bankers. At a stroke, the fundamentals of the capitalist creed on which many of us thought our economy was based are compromised. There is no price on risk, except that paid by the state with our money.

Can anyone actually be this stupid and still be able to use cutlery? Regardless of the government's guarantee Northern Rock are still facing the same penalty that any company faces when they make a bad decision: they are going to lose money. The price on risk, which Simon thinks has evaporated, remains the same. All that has changed is that were Northern Rock to go bust ordinary depositors would not be wiped out as well as shareholders. Why it is important for capitalism that grannies' lose their life savings just to drive the point home is unclear to anyone but Simon. His view is that in the absence of customers feeling financial pain British bankers will go crazy.

They now, as I see it, have carte blanche to take the most awesome risks with the money of their depositors, knowing that if they goof badly, the taxpayer will compensate their aggrieved customers.

So, the prospect of financial failure leading to a loss of their jobs, reputations, pensions and savings, most hold shares in their own institutions, is not enough. All that keeps these madmen in check is the thought that their customers might suffer. Not very plausible, Simon. He carries on in this vein for some time with no context on the credit crunch, the operation of wholesale banking markets, the comparative regulatory actions of the Bank of England, Federal Reserve or European Central Bank, nothing, in fact, that a decent treatment of the subject demands. Instead, we get a saloon bar rant of the type that first requires imbibing four pints and a double whiskey. He then gives Gordon Brown a bit of a kicking, conveniently forgetting that he has spent most of his journalistic career cheering him on, before moving onto familiar ground in criticising the Conservative Party. He demonstrates that he is unfamiliar with the Conservative front bench team in the process, which is pretty catastrophic for a political columnist. Hint Simon, you could always use google.

People shouldn’t write about things they no nothing about. The trouble is that in Simon's case that would not leave a great many topics for him to attempt.

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