Cormac Hollingsworth asks what use the Bank of England is if it's afraid of one of the key tools in its arsenal
Suppose you were on the interview panel for a new lifeguard at your local swimming pool, and the interview inevitably comes round to the best technique of saving lives.
“I’ve thought about this, and if you save someone’s life then that will encourage more mucking about, so I think on balance it’s better not to save someone.
“It’s a tough judgment call, and it depends on the overall behavior of the people in the pool that I observe over a number of months, but there have been times when I’ve decided that it’s better not to save someone, because afterwards things round the pool would just get out of control – you know, moral hazard.”
If there’s been one persistent theme from the Bank of England since the beginning of the financial crisis it is their eagerness to share with us their concern with moral hazard.
Even while it’s been clear that they will soon be the lifeguard for the whole banking market, they’re still going on about it.
But now they’ve been given the keys to the pool, and we’ve made them the supreme regulator. But if they’re scared of the moral hazard effects of some actions they might have to take as regulators, why did give them that power?
After all, after their intervention they’ll still be the regulator; are they saying that they won’t be able to see the moral hazard afterwards? Then they shouldn’t get the job.
Are they saying that they won’t do anything about any new moral hazard afterwards? Then they shouldn’t get the job.
Are they saying that because of their fears of moral hazard they definitely won’t take the risk to intervene to stop a systemic problem? Then why are we giving them regulatory powers?
Today, for the second time, the European Central Bank has provided half a trillion euros worth money lent to banks for three years to try and ease the new credit crunch. Why haven’t the Bank of England done the same?
Here’s a clue: First word, two syllables, rhymes with schmoral; second word, two syllables, rhymes with schmazard.
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• No, really, RBS and Lloyds are being bailed out by the EU – Cormac Hollingsworth, February 29th 2012
• If RBS’s board is not held to account, it could become a new Leyland – Cormac Hollingsworth, February 24th 2012
• Is it really best if Greece goes bust? – Ben Fox, June 22nd 2011
• What would happen if Spain follows Ireland over the edge? – November 25th 2010
• Progressives should unite for a fairer, slower reduction plan – Will Straw, June 24th 2010