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Howard's Way.... a weekly column from the Rt. Hon. Michael Howard QC. MP. 

25 September 2008

A couple of weeks ago, I wrote about some of the perils facing the world today. Pakistan is one of the many countries which is a grave cause for concern. The bombing of the Marriott Hotel in Islamabad provides dreadful and tragic consequences of that stark fact.

Of equal concern are the dangers facing the world’s financial system on which we all depend for our jobs and livelihoods. Anything which is said or written on this subject is likely to be out of date within hours. I am writing days before this paper reaches you so anything I say may well be overtaken by events. But there are, I think, some principles which should guide government action and provide a framework against which such actions can be assessed.

First, government must recognise its responsibilities. It cannot stand aside while incalculable damage is done to our economy.

But what are those responsibilities? It seems to me that government should not act to save individual companies, far less to protect their shareholders.

If the company concerned is a bank there may well be a responsibility to protect depositors as was recognised by the Government when it intervened over Northern Rock, although it took far too long to decide what to do. But that does not mean that every bank needs to be saved.

There is, however, a responsibility to protect the whole system. So if the collapse of a bank might have such far-reaching consequences, because of its relations with the financial institutions, that the whole system could be threatened, then government should intervene.

That, I think, is the basis on which the authorities in the United States have acted. Of course there is a price to be paid. There is a risk of inflation and it is far too early to be able to assess all the consequences. But I think the initial judgement on what they have done should be positive. And it affects us all, because of the importance of the U.S. in the world economy.

But I return to my original caveat. I am writing this on Monday. Things may have changed dramatically by the time you read this on Thursday. Let’s hope that if they do it will be for the better.