Sacrificing Liberty for Stability (and deserving neither)

The Credit Institutions (Financial Stability) Support Act 2008 is one of the most important pieces of legislation ever passed by the Oireachtas. This is what it says. First, the justification:

2.—(1) The Minister has, in the public interest, the functions provided for under this Act because, after consulting the Governor and the Regulatory Authority, the Minister is of the opinion that—
(a) there is a serious threat to the stability of credit institutions in the State generally, or would be such a threat if those functions were not performed,
(b) the performance of those functions is necessary, in the public interest, for maintaining the stability of the financial system in the State, and
(c) the performance of those functions is necessary to remedy a serious disturbance in the economy of the State.

So functions are to be carried out because the Minister has various opinions about these issues. Who’s to say if a disturbance is “serious” or if instability is threatening “the public interest”? Who knows how to measure these things? The Minister, that’s who. Fair enough. This is what he can do:

6.—(1) As and from the relevant date, the Minister may provide financial support in respect of the borrowings, liabilities and obligations of any credit institution or subsidiary which the Minister may specify by order having regard to the matters set out in section 2, the extent and nature of the obligations (including the degree of control over possible abuse of the financial support) undertaken and which might be undertaken in the future and the resources available to him or her in that behalf.

I’m glad he will consider the extent and nature of the obligations and the resources available to him, but it’s not much reassurance given that the government is already facing a deficit of over €9 billion and we are talking about liabilities of several hundred billion.

(4) Financial support may be provided under this section in a form and manner determined by the Minister and on such commercial or other terms and conditions as the Minister thinks fit. Such provision of financial support may be effected by individual agreement, a scheme made by the Minister or otherwise.

There is a huge amount of discretion here which makes the position of Finance Minister look more and more like that of a financial strongman, someone who has the power to decide which institutions to save and which to let go to the wall. Are we on the Road to Serfdom?

We get the promise of more regulation:

(6) Without prejudice to subsection (4), the conditions under which the Minister provides financial support under this section may include conditions regulating the commercial conduct of the credit institution or subsidiary to which the support is provided, and in particular may include conditions to regulate the competitive behaviour of that credit institution or subsidiary.

And nationalisations:

(9) The Minister may subscribe for, take an allotment of or purchase shares and any other securities in a credit institution or subsidiary to which financial support is provided under this section on such terms as the Minister sees fit.

And borrowing:

(11) For the purposes of this section, the Minister may, whenever and so often as he or she thinks fit, create and issue securities—
(a) bearing interest at such rate as he or she thinks fit, or no interest,
(b) for such cash or non-cash deferred consideration as he or she thinks fit, and
(c) subject to such terms and conditions as to repayment, repurchase, cancellation and redemption or any other matter as he or she thinks fit.

And control over the mergers of financial institutions:

(12) The Minister may approve a merger or acquisition to which this section applies even if he or she forms the opinion that the result of the merger or acquisition will be to substantially lessen competition in markets for goods or services in the State but that the merger or acquisition is necessary having regard to any or all of the following:
(a) maintenance of the stability of the financial system in the State;
(b) the need to avoid a serious threat to the stability of credit institutions;
(c) the need to remedy a serious disturbance in the economy of the State.

So this is a very serious piece of legislation. It’s very difficult to predict exactly how it will be used, and much will depend on how events unfold over the coming weeks and months. But the amount of additional power now vested in the hands of the Minister for Finance is an unnerving prospect. Instead of dealing with the real causes of the business cycle, and in a vain attempt to provide stability, this Bill only awards the Minister with even more control.

What we are going to find out is that softening a crash is impossible, and that allowing the government to try to bail everyone out only makes it much worse. Furthermore, that reckless decisions taken in the middle of a crisis can have consequences which will be with us for a very long time. Powers seized by governments during panics are not lightly surrendered.