Wednesday, 13 May 2015

Another economist who can’t recognise a bank subsidy when it stares her in the face.

I drew attention yesterday to an economist (Bill Mitchell) who doesn’t seem to be able to recognise a bank subsidy when it stares him in the face. Another instance of the same failure is this Forbes article by Frances Coppola where she admits that the loans made by central banks to commercial banks during the recent crisis were at an artificially low rate, but doesn’t seem to think there’s anything wrong there.

I shouldn’t have to explain this, but it’s widely accepted in economics that subsidies do not make economic sense: that is, they result in a misallocation of resources. Even most of those who have never studied economics understand that.

The only exception (which again, is very widely understood) comes with subsidies for which there is a clear social justification, as for example in the case of education for kids.

Most of those who ponder the improvements that need to be made to bank regulation recognise that there is something fundamentally wrong with taxpayer funded subsidies or guarantees for private banks. As the UK’s Vickers commission put it, “The risks inevitably associated with banking have to sit somewhere, and it should not be with taxpayers.”

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