Finance Minister Jim Flaherty is arguing that he should have more power over what banks do because if the banks screw up it is Ottawa that is “on the hook.” Of course it doesn’t occur to him that Ottawa isn’t actually “on the hook” in the sense that the government HAS to bail out banks. In fact the government is not responsible for dumb decisions made by bank executives unless the government DECIDES to be responsible.
What we need here is a metaphor: Say I have a 30 year old son that is pretty reckless with his finances. He is undoubtedly a full adult and he actually has a really good job that gives him a strong income. Despite this he keeps getting in trouble with harebrained schemes and silly ideas. He is completely broke and he can’t possibly pay even the minimum requirements on his credit card.
I as his parent have two options: I can let him go bankrupt, or I can bail him out. As a loving father, and despite the fact that it puts my own finances under strain, I decide to bail him out.
Now there is somewhat of an assumption that I will be “on the hook” the next time he screws up. I haven’t even so much as tried to say this is a one time deal in any credible way, so this assumption seems to hold. So in order to protect my own savings I start telling him what to do and I start interfering with his life. He lets me because he knows that he relies on me to save him (and if this metaphor were to be more complete he would also allow me because I own a gun and he doesn’t).
If I had treated my son as an adult and allowed him to work out his own mistakes I wouldn’t have a reason or an excuse to interfere so much with his life. The reason for my interference isn’t to prevent him from screwing up, it is to protect myself, but the best way to protect myself would just be to declare that he will never receive a bailout ever again.
There are several problems with my metaphor (what metaphor isn’t problematic?). The biggest problem is that the government doesn’t have a paternal relationship with the banks. There are no familial issues of love and loyalty. A more accurate metaphor would be that I am not bailing out my son but a complete stranger.
Actually come to think of it, that isn’t a metaphor at all. I am in fact bailing out a complete stranger. I am not even doing it by choice I am being forced to bail out this stranger. In exchange another stranger (who is supposedly acting as my agent) is going to start vetoing decisions of the first stranger. I fail to see how this is remotely a good deal for me. It is far worst than bailing out my son because at least that was someone I presumably love.
So no Mr. Flaherty you shouldn’t get more power to veto bank decisions. You should instead stop forcing me to bail them out of the bad decisions. I am not even sure why you think you are such a mastermind that you can do a better job at producing a secure banking system than the market anyway. Or for that matter why you assume your successor will be as brilliant as yourself. It isn’t like government decisions have never lead to horrific disasters at any point in history.