Wednesday, 5 November 2008

Guaranteeing too much means you guarantee nothing

Given that New Zealand has just introduced a deposit insurance scheme, they may do well to read Arnold Kling on Those Wild and Crazy Markets. Kling writes
Uwe Reinhardt writes,
Iceland's problem, like that of the rest of the world, is rooted in the unquestioned belief in the free market doctrine that swept the world during the past two decades...Iceland's liberal government thought it was safe to let the island's bankers loose in a global market of debt and asset financing.

...under European regulations, Iceland is obliged to pay 20,000 euros to each individual foreign depositor in Icelandic banks.
Kling then makes an important point,
It's interesting how often it turns out that where there is a failure of the wild and crazy markets, somewhere in the background is a government guarantee. Maybe governments that try to guarantee too much wind up guaranteeing nothing. Maybe the U.S., too, will learn this lesson the hard way. (emphasis added).
What about New Zealand?

No comments: