Guest post: The parable of the bailouts

In Blog by Ian Fraser1 Comment

October 18th, 2012

By Tom Nicol

‘Then the flying machines started falling from the sky.’

Once upon a time in the Westerlands, people became aware of a developing phenomenon: flying machines were falling from the sky with a great deal more regularity than was previously the case. Understandably, the people became uneasy and started to demand explanations from their elected rulers.

The people were aware that the flying machine industry had become a core part of the Westerlands economy in recent years. It provided jobs for the people, taxes for the elected rulers and a vital source of transport. The Westerlanders were also aware that the management in charge of operating the flying machines seemed to grow richer every year – so much so, in fact, that it became the ambition of the brightest people in the land to work there.

The people were also aware, however, that in recent years the service provided by the flying machine industry seemed to have deteriorated: prices had risen, flying machines were getting older and were not being replaced, and, it seemed, staff were under pressure and had become detached and arrogant. The people hoped that the industry wasn’t taking too many risks with their safety.

For many years their fears appeared unfounded, although there were the occasional rumblings from a few commentators on flying machine safety. Such commentators were generally seen as a little eccentric, or perhaps simply mad, and they were ignored. It was a happy time; everyone went about their business and so what if the managers became very rich? They probably deserved their wealth and, anyway, don’t people get jealous of others’ success?

Then it started. The flying machines started falling from the sky.

Initially, at least, some elected rulers were horrified and promised an immediate investigation. The people of the Westerlands welcomed this; sensing a real change and safer skies were in the offing. For the elected rulers though, it was a difficult time. Their investigation into flying machine safety revealed that the flying machine industry had, for some years, been compromising safety for the personal gain of the operators.

Outraged, some of the elected rulers called on the most senior flying machine managers to appear before them and publicly apologise to the people of the Westerlands, whilst assuring them that this would never happen again. These elected rulers also made gave solemn vowss that those operators who were found to be the most guilty of compromising safety would be appropriately punished.

Waiting expectantly on the side-lines were new operators, untainted by the scandal who, having previously been unable to gain a foothold in the flying machine industry, were ready to fill the gap which would surely be left by the previous, now disgraced, operators.

In the Westerlands, however, there were other rulers, unelected, but rulers nonetheless. They had invested heavily in the flying machine industry and had much to lose — since admission of past mistakes and improving safety would be very expensive. Indeed it would quite posssibly bankrupt them. After the public humiliation of the apologies, they had managed to regroup and agreed amongst themselves how best to keep things exactly as they were before.

These unelected rulers still had a great deal of influence over the elected rulers, having previously shown favour to them. They managed to persuade them that some very bad things would happen in the Westerlands if the operators and their investors, alone, were forced to address the safety issues. They convinced them that the machines would stop flying altogether and that people who had been injured by the flying machines falling from the sky, might oust them as elected rulers – perhaps violently. Since they were persuaded, by a seemingly endless repetition of the warning, the elected rulers panicked and decided they had not option other than to act.

For many years In the Westerlands, there had been laws against the collective ownership of important services – and anyway, this would have wiped-out these influential investors, so the elected leaders were anyway obliged to consider another approach. Discreetly, they decided to underwrite, at enormous public expense, the repair of the flying machines and to allow the old operators to remain in place. From time-to-time, one of the elected rulers would publicly denounce the ‘reckless’ safety record of the old operators. But that was just for show. The over-riding objective had become to keep the elected rulers in power and ensure that the unelected rulers could carry on exactly as they had before.

The vast majority of the public of The Westerlands was uneasy. On the face of it, the flying machines were still flying – and it seemed like fewer were falling from the sky. But the flying machines had become more expensive and the staff were as detached and arrogant as ever – perhaps even more so.  While the elected rulers kept on reassuring the people that everything had changed and things were getting better, for some reason, the people were not quite sure whether to believe it; they still felt unsafe.

Enjoy the flight.

Tom Nicol is a former interbank foreign exchange trader, an occasional treasury risk consultant, and an active investor. info@almanac-consulting.com

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