Wise virgins, foolish virgins

Wise virgins, foolish virgins

Wise virgins, foolish virgins

Here is the text of a letter which I am sending to a couple of my favourite economists.

Gentlemen: I wonder if you can help me with an economic question which you are probably better able to answer than me.  I am interested in the overall medium and longer-term impact of the funds being disbursed by banks to members of the public as compensation for “mis-selling” of various financial products.  I don’t have a figure to hand but I think it runs into billions.

There is considerable anecdotal evidence that these funds are having a positive impact on the housing market.  Consumers who have received pay-outs are more likely to trade up, to buy new household equipment and appliances, and indeed to buy new cars.  So there is an immediate boost to consumer spending, which is clearly positive.

But it occurs to me to wonder: in overall economic terms, is it better for a bank to lend £10,000 to Mr. Patel to open a corner shop, or to Mr. Higginbottom to invest in a new widget machine for his factory?  Or is it better to give it in compensation for mis-selling to Mrs. Lumsden, to spend on a new Mini?

Clearly banks which are paying out large aggregate sums in compensation are less able to build their reserves, and less able to lend.  And because they will be less profitable, they will be less able to reimburse the government for bail-out funds they may have received.  They will pay less tax, so the Treasury and the tax-payer lose out, and they will pay lower dividends to shareholders, and so indirectly to investors and pensioners.

So as with most economic questions, there are winners and losers.  On balance, are we better or worse off as a nation in consequence?

There is also the matter of justice and moral hazard.  It takes two to tango, and it takes two parties to a transaction that is later found to be “mis-selling”.  There is the mis-seller, but there is also the mis-buyer.  Are we saying that the purchaser has no obligation to check the facts, understand the offer, read the small print, be circumspect, exercise due diligence?  Can we confidently make any purchase, carelessly, rashly and fecklessly, and subsequently blame the seller and demand compensation?  Is caveat emptor dead?

I am put in mind of the New Testament account of the wise and foolish virgins. (For those readers — probably a majority — who are unfamiliar with it, ten virgins undertake an overnight vigil before a wedding.  Five have sufficient oil in their lamps, five don’t.  When the foolish virgins run out of oil, they ask for some more from the wise virgins.  But they refuse, lest they too should run out).

Only now, it seems, the wise virgins will be obliged to sub-out the foolish, and they may all run out.  Those bank customers who mis-buy products and then receive compensation are in effect transferring the consequences of their error to other customers of the bank who did not make the same mistake (and to investors, pensioners and tax-payers).  Is that fair?  Or am I missing something?  As Peter Simple used to say, “I only ask because I want to know”.

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8 Responses to Wise virgins, foolish virgins

  1. The wasp says:

    I can still remember the days when the local bank manager was a trusted confidant. This is no longer true. Banks now expect their staff to make money full stop. I would compare the situation with going into hospital when your surgeon tells you that you require an operation. Few patients have the knowledge to query the recommendation. Should the operation prove to be a mistake should the patient share the blame?

  2. The real problem is that so much of the payouts are going not to the customer but to lawyers, brokers etc.

    It’s doubly daft when two of the banks involved are taxpayer owned.

  3. Me_Again says:

    The banks were under commercial pressure to sell ‘add-on’ products with their basic things i.e mortgage + home & contents insurance, mortgage + critical illness cover. It was never openly spoken but back in the days when bank managers themselves had the purse strings and were independent to some extent from the regional HO, they had their own targets to hit, and if a product was going out without an add-on it might be subject to delay or refusal or even directly conditional in the early days. For ordinary bank staff who had never had to do anything but look after people’s money and protect the bank from fraud, this sudden immersion into the dirty business of selling was a real shocker. Suddenly the place was overun with spivs who had no morals and no compunction about turning away 20 year customers because they didn’t want the protection alongside the loan. When you are told by the person selling to you that the loan will sail through if they have the £1.75 per month income protection then of course people will take it.

    So yes, whilst I hear what you are saying, the simple reason we got to this was actually commercial greed. Income protection was sold to servicemen an women by people who knew it wasn’t valid for servicemen.

    So when the must [formerly respected] staff of your local bank branch tell you the way to go you did it. That my friend is mis-selling.

  4. neilfutureboy says:

    This is equally an argument against all sorts of welfarism. That doesn’t mean it is wrong but I believe state regulatory parasitism costs society several times more than welfare. As an incredibly wealthy society, by any historic terms, we can afford such generosity but we cannot afford the unlimited growth of government regulation.

  5. Mike Stallard says:

    Roger – I am worried.
    At the moment, I very much like UKIP because it says what I believe. But is getting bogged down in all this stuff really necessary?
    The major thing is simple: leave the corrupt and grasping and invasive EU as soon as possible.
    We ought, surely, always to put that first.

    PS Why is nobody admitting that the HS2 train is an EU idea? I am genuinely puzzled.

    • Thanks Mike. Of course we concentrate first on leaving the EU, and big issues like energy and immigration. But then we’re told we’re “a one-issue party” and that we don’t have “a full programme”. I write more or less a blog a day, so of course I will occasionally write about some issue that interests me, but doesn’t come under the rubric of a big issue. And the above isn’t policy — it’s just an issue that interests me personally.

      We politicians get asked all sorts of questions, like “What are you doing to stop the mis-treatment of dogs in Romania?” (Answer — bringing all the Romanians to Britain, early next year!). It’s not good enough to say “We’re only interested in the EU, and we don’t have an answer to your question”.

  6. Me_Again says:

    Mike, to some extent I agree with you. Over the last 4 years I have waxed and waned over whether we need any other policies than ‘get out of the EU and all else will follow’. Seems obvious to me that that is the case. We shall then drop ourselves in our own poo and take the consequences ourselves.

    In fact when people nowadays attack me with the ‘one trick horse’ thing instead of denying it I say something along the lines of ‘The single largest issue of our time is our membership of the European Union. I’m proud to be a member of a party which puts that at the top of its agenda. However you are incorrect because we do have policies on the usual trivia that Westminster is still allowed to deal with.’

    In essence, no matter what smoke and mirrors are in play, for UKIP policies to work they can only be applied -in the main- if we are out of the union.

    The problem has been that ‘The Public’ want more than just an exit strategy. They want to know ‘…and then what happens?’ or ‘What then?’ So UKIP get beaten up for having the cornerstone policy of EU exit and get beaten up for having more than that as a policy.

    • neilfutureboy says:

      I think that we do need a wide range of sensible policies. Without that there is now way those who do not consider the EU more important than all the other issues put together would, or should, vote for us. It is necessary to have a wide range of policies which are better than our opponents. Fortunately that is not difficult and we have them (opposition to mass immigration, economic freedom in energy, economic freedom generally, a state with less than 1/2 gdp, popular referenda, end of false ecofascist scares and subsidies, technological progressivism, PR etc. etc.) . I don’t see any of these net losing us votes.

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