A Blow for Responsibility

The Wall Street Journal described one.

The court of the European Free Trade Association on Monday said Iceland didn’t breach European Economic Area directives on deposit guarantees by not compensating UK and Dutch depositors in Landsbanki’s online savings accounts, known as Icesave accounts.

The beef was this:

The EFTA Surveillance Authority, or ESA, which brought the case against Iceland, had claimed that Iceland should have made sure UK and Dutch savers who lost money on Icesave got repaid from deposit insurance.

UK and Dutch authorities compensated their own savers.

The EFTA ruled that EEA directives don’t

lay down an obligation on the State and its authorities to ensure compensation if a deposit guarantee scheme is unable to cope with its obligations in the event of a systemic crisis[.]

And that’s entirely appropriate.  A nation’s taxpayers should not be held liable for the failure of foreigners’ investment decisions, whether those failures stem from poor judgment, bad luck, or anything else.  A nation’s taxpayers should not be held liable for the failure of its own citizens’ investment decisions, come to that.

Investing is a risk, and it’s the degree of that risk that prices the return on the investment.  To destroy that pricing mechanism is both immoral and fiscally unsound.

Charles Duxbury and Charles Forelle do put up an interesting question in their article at the link above.

If deposit-guarantee programs don’t protect everyone, are they really effective?  That issue was raised by the European Commission, the EU’s executive arm, which joined the case against Iceland.  European deposit-guarantee programs, if they have any funds at all, hold a tiny fraction of the insured deposits in the system.

The interest, though, is in the lack of understanding of the nature of insurance and of the distinction between insurance and welfare that the existence of the question exposes.  Insurance is a risk-transfer for a fee proposition, and nothing else.  The insurer agrees to assume a part of the risk surrounding an event (a decision to place funds with an external agency, in this case), and in return for that assumption, the insured pays the insurer a fee commensurate with the risk being assumed: how much of the value is to be repaid in the event of a loss and the likelihood of that loss.  Of course, the fee to be paid varies with that risk.  Want more protection—want to be made completely whole in the event of a loss?  Pay a higher fee.

Welfare is the function of dinging taxpayers to make whole an individual who suffered a loss, regardless of the amount placed with an external agency (in this case) and regardless of the likelihood of any such loss.  Welfare in this sort of case is nothing more than a “I hurt, and you have money—pay me” government-enforced demand.

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