Tackling "too big to fail" banks

Banks that are too important to fail can bring a global economy to its knees.  If financial institutions are too big to fail, then disastrous incentives are created: banks are encouraged to take excessive risks.  Why?  Well, if the risk pays off, the benefits are privatised (the bank profits) but if they fail, the costs are socialised (through bailouts from the taxpayer).  Hence, banks are not subject to market discipline - moral hazard is created.

There are several ways to tackle this "too big to fail" problem.  First, banks that have too large a market share can be forced to sell off some of its branches.  Second, the retail and investment arms can be ringfenced.  Third, (as is currently deficient in the USA) a strong safety net for individuals can be created.  This will enable governments to allow organisations to fail without allowing individuals to.  Firms should be allowed to fail, but not individuals.

However, these solutions bring its own problems.  The first solution assumes that market share is the problem with banks that are too big to fail - often this is not the case.  Market share may be a unwise barometer for breaking up banks since the problem may take other forms - for example, the level of exposure other firms and individuals have to that bank.  The second solution, suggested by the Vickers Report, may not tackle the too important to fail problem: for example, if Barclays Capital was about to fail, no sensible government would allow it to do so in light of the level of employment and pension funds it holds.  The third solution assumes that creating a strong safety net equates to not allowing an individual to fail.  However, perhaps it is precisely that that means an individual is failed - they are unemployed.

ECB intervention is necessary

Eurozone leaders need to take bold, decisive action to quell market fears.  Their lack of effective action is fuelling a run from the assets of weaker economies.  The longer Angela Merkel et al are indecisive, the scale of action that will be eventually required will keep on rising.  Even the election in Spain that delivered a thumping mandate for the People's Party who are firmly committed to austerity and reform did not slow the country's rise in borrowing costs.  Their yields on ten-year bonds are above 6.5%.  A similar story can be painted in Italy: the appointment of technocrat, Mario Monti has not seen much success with bond yields either.  Borrowing costs also rose notably in Belgium and France.  Germany, the country of "safe assets", only managed to sell 60% of ten-year Bunds at auction.

The problem is that Eurozone leaders are pursuing the wrong strategy.  They are talking about long-term strategies to reform the Euro: greater fiscal integregation and increased fiscal governance.  However, these policies do not have enough immediate effect.  The ECB is their best bet for quelling fears.  It needs to step in as the lender of last resort and offer unlimited liquidity to banks and pursue large-scale bond buying.  This will calm the markets and investors will be more confident buying sovereign debt from the peripheral economies.  This increased demand for bonds will reduce the bond yields.  Germany needs to overcome its inflation memories of the 1930s and overcome domestic political opposition regarding constitutional issues - because the consequences of not doing so are far too great: the break up of the Euro.

Is redistributive taxation just?

Redistributive taxation can be used to reduce the economic inequality in society.  To understand if this is a just policy, we need to consider why inequality exists in the first place.  If those that are successful in society are successful due to their hard work and effort, then redistribution may be unjust.  The well-off deserve what they have.  If, on the other hand, they are rich because they were favoured by the natural lottery (perhaps being born talented or into a wealthy family), then perhaps redistribution is just - because fair equal opportunities do not exist.  The status quo can be seen as arbitrary and therefore, can be legitimately altered.

On the other hand, there is a morality argument to be made against redistribution.  According to Kant, individuals should not treat others as a means to their own end - but as an end in itself.  Thus, redistribution at the expense of the well-off for others may not be morally sound.

However, perhaps this question - whether redistribution is just - can only be answered if we know inequality is just.  Inequality may well be justified for several reasons.  According to Rawls and his Difference Principle, inequality is justified if it maximises the position of the wost-off (principle of maximin).  What matters is their absolute position - the size of the pie they have, not their relative shares.  Furthermore, Nozick would claim that claiming justice is about the distribution of resources is nor here or there.  What matters, according to Nozick, is whether people's property rights have been respected.  If these two justifications for inequality hold, then it follows that redistribution is unjust. 

Do we have duty to do what is morally good?

We do not necessarily have a duty to do what is morally good.  A morally good action may require an individual to make a sacrifice on his part - for example, give some of his income to charity.  It is morally good precisely because it is not a duty - an individual goes beyond his duty.  If it were his duty, then the action would not be morally good.  It would simply be a requirement of him.

To understand this, we can use a simple example - should I give £10 to a homeless man on the street?  If I were not to give it, my inaction would not be morally bad.  It is morally neutral.  For the action to be morally bad, I would have to cause the homeless individual a direct, first-order harm.  If, on the other hand, I stole £10 from the man, then it would be morally bad since I have caused direct harm.

Is greater income equality desirable?

You earn £150,000 a week.  I earn £200 a week.  Why such a gulf?  You, by virtue of being the beneficiary of the natural lottery of genetics, are a world-class footballer.  If some income inequality is caused by those who succeed because they are the ones who are the most talented, then this is unfair.  A natural lottery, because of its sheer arbitary nature, should not decide who becomes the most prosperous in society.  Greater income equality is necessary to minimise nature's crapshoot.

This argument is severely weakened because it assumes that individuals have no bearing on how well they do in life.  Yes, a world-class footballer may have been talented to begin with - but the reason he made it to the top ahead of the thousands of other equally talented footballers who did not is because he worked hard.  We cannot deny that hard work has led to the success of many high earners.  Thus, although talent may be seen as a necessary condition to become a footballer - it is not sufficient (it requires hard work, too).

So, greater income equality may not be desirable in terms of fairness.  But, it may be desirable from a macroeconomic outlook.  By redistributing income from the richest to the poorest, we may be able to stimulate large economic growth.  Lower income groups tend to have a higher marginal propensity to spend.  This extra consumption in the economy will increase aggregate demand, and hence, stimulate economic growth.

In terms of maximising the overall happiness of society, greater income equality may be the path too.  As you earn more and more, the marginal utility of income diminishes.  If I give £10 to Bill Gates, his overall happiness will not be increased much (if anything).  But if I gave that £10 to a homeless child, his happiness is drastically improved - he can have a hot dinner that evening.

There is also a political case for greater income equality.  Democracies are intended to give each person an equal opportunity to influence the governing of their country.  Income inequality vitiates this democratic goal - those who are richer are able to "buy influence."  We have seen this illustrated by numerous scandals - the 'Cash for Honours' scandal to name one.  High income earners also exert disproportionate influence in another indirect way: the rich can afford an expensive private education which gives them the best employment prospects.  They then become the elite of that country - and run the country that way.  Income equality would remove this dent in so-called democracies.

Buy British? Or not...

In the late 1960s, the 'I'm Backing Britain' campaign was launched - a campaign to encourage British consumers to buy British goods and services.  The campaign was well-received: Union Jacks sprung up all over the place, newspapers were enthusiastic and even the government lent its support.

With the British economy in the doldrums, there have been calls to 'buy British.'  The argument goes like this: buy British because the manufacturing sector is in dire need of a boost and people are losing their jobs.  But, should we really be promoting economic nationalism?

My first objection is on ethical grounds.  Yes, the British economy may be struggling - but so too are other economies.  In all likelihood, a farmer in Brazil is probably suffering more than his equivalent in Britain.  So, if we are 'buying British' to support struggling farmers, then perhaps it would make more sense to 'buy Brazilian' to support struggling Brazilian farmers.

Some may claim that our first and foremost duty is towards our own citizens.  I ask - on what grounds?  I certainly agree that a government has a duty to help its citizens - that's how global governance functions - each government helps its own people.  But this duty does not extend to consumers.  Consumers should buy their goods blind of what country it is produced in.

Even if you do not accept this line of thinking, then there is an economic case for not 'buying British.'  If David Cameron proclaims that British consumers should buy British goods, how are other countries likely to react?  They will naturally retaliate with a similar response - 'buy our goods not theirs.'  Since the British economy relies on international trade, it shows that a 'buy British' campaign can be counter-productive.