Government bail outs for banking system

March 22nd, 2008 by Daniel Young | Filed under Politics.

In response to the credit crunch, central banks have been using public funds to bail out big business in the financial services sector. There are some big ethical issues around this topic for me.

Mervyn King, the governor of the Bank of England, has warned about the moral hazard of bailing out the banks but ultimately the central banks have been forced to intervene in order to protect the financial system.

The US Federal Reserve has been relatively co-operative when compared with the Bank of England. The European Central Bank recently made billions in EUROs available.

This is the ultimate Government subsidy and its comes in response to years of commercial greed and irresponsible behaviour.

The financial services sector is perhaps the purest form of free-market that we have, yet when things go South the State comes in to bail it out. When the hand of Government is being forced – King eventually conceded to the UK banks after a prolonged lobbying campaign – and the reason given is that the Government needs to protect and uphold the financial system you realise that things are seriously messed up.

But why do we want to protect a financial system that got us into this mess in the first place?

These Government bail outs set a dangerous precedent for the future. Some of these banks should have been allowed to go to the wall in order to highlight the fact that some fundamental changes are required to the system.

The bail outs can’t and won’t solve the under-lying problems that caused this mess and the general feel seems to be that there is a lot more bad news to come from the sector.

This Steve Bell cartoon is called ‘The Old Lady of Threadneedle Street Meets Oliver Twist’, it appeared in The Guardian.