Rioters and bankers do have something in common, but not what pundits think.
18 August 2011
That so many commentators have compared British looters to bankers appalls many people who believe in the rule of law and in free markets. It was a given that Britains left wing would make that analogy. But the right-wing Daily Mail similarly editorialized that the bankers refusal to rein in their greed is fueling the politics of envy in Britain, and Peter Oborne, a columnist at the conservative Daily Telegraph, wrote that New Labor promoted a divisive and unequal society via its support for finance. These conservatives, however, are almost on to something. Its not that looters and bankers are alike in being greedy and lacking empathy. Nor is it that looters are jealous of rich bankers wealth. Its that for two decades, the British government has taken the same approach to its financial industry and to its underclasstreating them as protected groups and shielding them from the forces of disciplineand that both the bankers and the looters responded predictably to that coddling.
Lets start with the bankers. London, like New York, is a global financial capital. Since the 1980s, Londons big financial firms, like Americas, benefited from Western governments willingness to protect them from market forces. As English banking veteran Philip Augar wrote in Reckless: The Rise and Fall of the City, the perception that the U.S. central bank would bail out markets whenever necessary helped drive investors money (not just in New York but also in London) into finance, rather than into other industries. After all, this hugely profitable business was failsafe. Big-bank investors and executives knew that they werent subject to discipline; its no shock that they didnt do a great job of disciplining themselves. In pursuit of fees, banks sent the money that investors had entrusted to them down a black hole of securities made up of loans that borrowers would never repay. And since 2008, government support for finance at all costs has only solidified. The British government still owns two of the nations biggest banks, Lloyds and Royal Bank of Scotland. The moral of the story is simple: if you dont let reckless finance take its lumps, youll get more reckless finance.
A similar moral applies to the looters: if you dont punish bad behavior, youll get more bad behavior. Britain has made it clear that it doesnt believe in lengthy prison sentences for crimes short of murder. Writing in the London Times last Sunday, Harriet Sergeant, author of Wasted: The Betrayal of White Working Class and Black Caribbean Boys, described how one boy told her that We got away with making drug deals in class. They knew what we were doing but they did nothing. This weeks British tabloids reported another instance of the governments refusal to punish criminals: a judge reducing a drug dealers prison term because a year-long sentence would mean that immigration authorities could launch deportation proceedings against the man, who had already been expelled from Britain twice.
So the looters, like the bankers, were a tiny minority of people who had become adept at exploiting the governments policiespeople who recognized the governments signals and responded rationally to them. Its no surprise that the looters thought that they could get away with joining the smash-and-grab fun. Unlike the bankers, they were wrong: Britain is coming down hard on them. But the best way to govern both people and markets is to make predictable, consistent long-term signals, not sudden shows of force. If law-abiding Britons arent happy with the results of central financial planning and social engineering, theyve got to get their government to stop sending the wrong signals.
Nicole Gelinas is a contributing editor to City Journal.