Lorenzo Bini Smaghi (executive board member of the ECB) published an article in the Financial Times that blames the Irish taxpayer for the banking crisis. Irish taxpayers voted for successive governments that supported minimal regulation of the financial system and therefore they should not complain about the cost of bailing out the banks. It gives a very important insight into the thinking of the ECB and their understanding of the economic crisis. It is a must read. The article is flawed in so many ways it is hard to know where to begin. But, the erroneous assumption in the first paragraph sets the tone for the rest of the article. So, illustrating the falsity of this assumption seems an appropriate way to highlight the fallacy of the argument
“If taxpayers have the right to share in decision making, they must also accept the consequences”
The Irish taxpayer did not share in the decision making of private banking and regulation of finance markets. Technically, the central bank and the regulator are independent agencies that are free from political influence. If we are to follow through on this argument then the ECB is directly accountable to European citizens and operates according to what citizens want.
The Irish electorate was bought with low taxes. This is true. Every election from 1997 was in effect a tax auction – who could offer the lowest. The electorate are responsible for voting in a right of centre liberal market government that espoused the low tax, minimal regulation model (as did the media and a significant section of academia).
But, to jump from this valid statement to the conclusion that the Irish electorate are responsible (as taxpayers) for the specific decisions that took place in private firms (banks as buyers and sellers of money) in a private market (that is so complex that most people know little or nothing about it) that was ‘regulated’ by unaccountable bureaucrats is not only logically incorrect but ridiculous.
The whole argument is based on a completely abstract idea of a ‘perfectly informed rational voter’. The voter has an incentive to vote for more or less regulation given a certain set of conditions. The conditions enabled a fully informed rational vote to support flexible financial regulation. That is, the voter knew precisely that their vote would contribute to a risky financial environment that they may have to pay for in future years. Nonsense. I would be hugely surprised if 1 percent of the electorate voted for their party of preference on the basis that an unregulated finance market benefits them, let alone the risk involved in having a lax financial regulatory regime.
Poorly managed banks (as firms) that go out of business should be allowed to fail. This is what a market economy would look like. However, we don’t live in a market economy. We live in a socio-economic system called capitalism. You cannot model this on the basis of perfectly informed rational consumers or voters because it is premised on structural relationships that involve power.
The conclusion that transnational supervision across the Euro area is the most prudential way forward is correct. The ECB and all member states in the Euro area should have recognised this 12 years ago. They did not. To engage in a post hoc analysis and argue “responsibility was national but it should have been European, but given it was national – you have to pay the bill” is just lazy thinking. To then argue “don’t complain” is just provocative.
The people are not to blame nor are they accountable for the reckless behaviour of private banks and the flawed design of the Eurozone. If this is the lazy analysis informing ECB policy on who is responsible for the crisis and how to get out if it (i.e. blame the people not the finance system) we should be all very very worried.