Backing a dead-cert loser

Friday, 27 February 2009 16:50
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A bookmaker would not accept a bet that the Houses of Parliament lie to the west of the Greenwich meridian, because it is a fact that they do, with no element of a chance that they do not. By the same token, insurance companies do not issue policies involving paying out against what is inevitable, but only against the prospect of a risk that some specified event might occur. Thus it is undisputed that rain will fall on a particular village green in the Home Counties at some point in the future, but will it rain on the day of the village summer fête? Insurance can be arranged to cover that, at a premium related to the nature of the cover and the conditions to be satisfied.

The Government talks of having put in place an insurance scheme for the nation’s broken banks. RBS is to put £325 billion of assets into the plan, paying fee of £6.5bn. and agreeing to absorb the first £19.5bn. of any future losses itself, but getting the Government (i.e. the taxpayers) to accept 90% of all further losses. The Government has undertaken to put £19.5bn. of new equity into RBS (the “B” shares being talked about, which carry a 7% interest obligation but do not “kick in” until RBS is back in profit) and will make available a further £6bn. All RBS has to do now is set up a new division to hold its “toxic assets” that are destined for the Government’s insurance scheme, and agree to the Governments’s insistence that it will make loans (“safe” loans, of course) amounting to additional £50bn. (in mortgages and to businesses) over the next two years.

It is expected that other banks will follow, in search of similar treatment.

What UK taxpayers have to decide is whether HM Government has made a successful entry into the slump‑damage insurance market. If this is not insurance at all, in any commercial context, is it just “spin now, pay later”? Does it look from the second paragraph, above, that insurance has been arranged at a premium related to the nature of the cover and that the conditions to be satisfied look reasonable? There is no pain‑free way out of an economic depression. The only solution is not to have booms and slumps in the first place, and that can be achieved only by full implementation of the Campaign’s policy of land‑rent capture for the public revenue – a policy known here as land value taxation (LVT).
 

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