Anyone who has read much of what I have written will be aware that I consistently take a position that appears contrary to current "popular thought".
If you read carefully you might see that I tend toward a more rational, rather than emotional view of economic events. This modern world is very much caught up in slogans and "tweets" that are,at best, simply half truths. Obviously long explanations are unpopular and difficult as they require the listener/reader to think and consider the arguments. Thinking, is perhaps the least popular of all human occupations.
We have just seen the Euro-Zone take a decision regarding Cyprus that seems to fly in the eye of all that we believe or have been led to believe as right. Ever since 2008 it has seemed that "Banks" are too big to fail and that if we allow them to fail the world will come to an end! For Cyprus indeed their banking sector was "too big to fail", being many times the size of the Cyprus economy, the population are unable to underwrite the banking sector. This is little different from the UK, our banking sector is between 4 and 5 times the size of the total economy.
The Euro Zone have decided to bail out Cyprus on condition they allow their two largest Banks to fail!
Disgraceful we say, the Euro must fail, how can they do this?
The EU and implicitly the Euro was not built around a concept of preventing insolvencies where business took risks. In fact it is specifically a rule of the EU that Governments should not be providing direct support to businesses! Insolvency and liquidation are the natural mechanics of correction in Capitalistic systems.
At the time of the Northern Rock failure I showed that liquidation would have cost the UK taxpayer far less than the bail out, that the viable part of Northern Rock would have emerged from the liquidation as a "new business" and life would have carried on as normal, with the bad practises being applied by Northern Rock eliminated by a new management team.
We are told that the RBS failure was as a result of taking on too much debt in it's takeover race. Liquidation would again, have had a short term disruptive effect, with the good parts emerging as a new business and the rest being sold off. The cost to the UK taxpayer would have been far less than will eventually emerge … and we would not have had to endure the scenario of the massive pay-offs and bonuses to Fred the Shred.
Yes, there would have been a confidence crisis and Sterling would have devalued quite sharply, but as much of what I have written since the crisis has shown that the only path to economic recovery in the UK requires a sharp devaluation. A slow drifting downwards of the value of Sterling does not carry the same benefits that a sharp devaluation has. Business is always uncertain when there are inherent exchange rate risks in the economic environment.
So hats off to the Euro-Zone for reaching its senses, and further for showing that they are prepared to allow individual members to adopt a level of exchange control in order to stabilize their economies!
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