The moral hazard of Gordon Brown

Just before last weekend, when it seemed likely that we would soon be plunged into an early election, Tory Leader David Cameron accused Gordon Brown of spending too much time focusing on politics and not enough on running the country. I thought this was a bit unfair, given the hailstorm of crises that Brown has faced since he replaced Tony Blair: terrorist attacks, foot-and-mouth, flooding, Northern Rock...

Most commentators, regardless of their political persuasion, seemed to think that Brown had handled these crises competently and with next to none of his predecessor's phony emoting. This is, of course, precisely why the opinion polls seemed to be moving in the Government's favour, opening up the possibility of an early election. Then a couple of populist (and wrong-headed and poorly costed) Tory tax proposals pricked the election balloon and Brown was forced to announce that there would be no election until, probably, 2009.

This should have been no more than a short-lived embarrassment for Brown, not least because there is no hard evidence that he personally ever favoured an early vote -- the worst that can be said is that he failed to rein in his closest advisors quickly enough. However, there are now signs that the phoney crisis has badly unhinged the Government, which is now firing off half-baked policy announcements in all directions.

The most egregious example so far is, of course, the pre-Budget statement, which borrows to a quite shameless extent from last week's Tory conference speeches -- inheritance tax reform, poll tax on the non-doms, changing the basis of taxation on air transport. Get a grip guys -- these ideas were intended to forestall an early election, not to become the centrepiece of public policy. Aside from the air tax reforms, they're not particularly good ideas in themselves (see my previous posting) and they're not really consistent with the supposed principles of the Tory party, let alone Labour.

Now Chancellor Darling is at it again, announcing new measures designed to prevent a recurrence of the Northern Rock debacle. While the debate about who is supposed to be in charge in these situations -- is it the Bank of England, the FSA or the Government -- is set to continue, the Government is moving ahead quickly with steps to improve the "protection" of depositors.

There's little doubt that the pre-Northern Rock level of deposit insurance was inadequate. Only the first £2,000 of each individual's deposits with a particular bank was fully covered, with 90% coverage between £2,000 and £35,000, and no protection above that. The Government has already decreed that £35,000 will be fully protected in future, but it intends to go much further, probably by requiring banks to pay premiums in order to raise the fully insured amount to £100,000.

There is a real risk that the Government is going to go all the way from a patently inadequate level of depositor protection to dangerously excessive one. The Association of British Insurers estimates that the £35,000 limit will cover 98% of individual bank accounts. If you have more money than this, there's a good argument that you should take some responsibility for your own protection by doing a bit of due diligence about the institution where you are keeping your money, but evidently that's not an argument the Government thinks it can afford to make right now. Interestingly, media commentators, even those on the right of the opinion spectrum, are shy about taking a stance on this as well.

The bigger banks will no doubt be aghast about this. They will argue that they will pay the bulk of the premiums even though they are the least likely candidates for failure. Smaller institutions with riskier business models, like Northern Rock, will get something of a free ride, which only makes it more likely that problems will occur again some time in the future -- what economists call "moral hazard". However, it's reasonable to believe that they won't be saying these things very loudly, at least in public, for as long as the memories of queues outside Northern Rock branches remain fresh.

Inheritance tax, non-dom tax, deposit insurance -- populist measures all, bespeaking a panicky Government making policy on the fly. And they may not be through yet -- the Government says it is re-examining the model for payment for seniors' residential care, in response to complaints from people forced to sell their homes to pay their care bills. It says it wants to preserve the principle that better-off users should pay, but given the way things are going at the moment, another ill-judged giveaway must be in the offing.