And still the bills roll in.  Taxpayers have already written impressively large cheques for Northern Rock and Bear Stearns.  This week they are asked to dip into their pockets for Fannie Mae and Equitable Life.  Ten billion pounds is more than a week’s public spending.  But the sum is now the small change of subvention to failing financial services businesses.  The common cause of all these calls on the public purse is the gap between the responsibilities government is thought to have assumed and the powers and competence government has to discharge these responsibilities.  

Equitable Life, the mutual life insurer which closed to new business in 2000, did not fail.  Most of its policy holders did not do badly:  but they did less well than they had been led to expect.  Regulators did not cause the crisis, but things might have been done that were not done and there were specific procedural failings.  In a world populated by real people, hindsight will almost always reveal such mistakes.  

It is not uncommon for products to disappoint.  But we now have high hopes of our regulators.  We look to them to ensure that our expectations are met.  The Parliamentary Ombudsman seems to add the corollary that taxpayers have a responsibility to compensate the customers of regulated businesses whose expectations are not fulfilled.

Fannie Mae is an organisation the US government created, but could not control.  It has always been difficult for Europeans to understand why Fannie Mae and Freddie Mac exist in the heartland of capitalism.  During the New Deal, measures to enable low income households to buy their own homes seemed a proper government objective.  But in more recent times, private institutions have been all too willing to provide such mortgages.

But established agencies do not disappear quietly.  Fannie Mae built up a balance sheet whose overall size was, and is, large even by the standards of the US economy and US Treasury.  The business model exploited the difference between the rates at which money could be raised with an implied government guarantee and the rate at which it could be lent commercially.  The gap not only provided mortgage guarantees but rewarded the company’s shareholders and, with considerable generosity, Fannie Mae’s own executives.  

The company was a powerful influence on Capitol Hill.  Its lobbyists attracted support across the political spectrum:  the left applauded its help for poor home owners while the right relished the business Fannie Mae generated and subsidised.   Only a nervous Alan Greenspan and a few ideologically hostile right wing congressmen spoke for the poorly organised contrary interest: the future taxpayers who might one day be called on to honour pledges they had liberally if unknowingly given.  And now that day has arrived.

The problem is the difference between effective government powers and implicit government responsibility can be addressed by increasing the powers or reducing the responsibility. We could  do the former but should do the latter.

The near collapse of Equitable Life happened because the company had encouraged its policy holders to believe they might receive almost the full value of the funds that underpinned the with profits funds of the business.  With profits policies are vaguely defined contracts which are probably only viable in the traditional insurance world of benign cartels.  It was a mistake for regulators ever to become involved in policing these arrangements and a disaster if the further consequence is that government becomes involved in underwriting them.  

If Fannie Mae was to remain an institution distinguished mainly by its – outdated – social purpose, it should have retained a limited remit and should never have acquired private shareholders.  If Fannie Mae was to become a major financial institution in its own right, it should have severed its special relationship with the US government.  

The costs of the casual assumption of government obligation for private actions will continue to mount.  The inference of public liability for the alleged costs of regulatory failure may be the most potent argument of all for limiting the scope of regulation.