No, no, no. The government should not insure the wealth of people.
The New York Times published an article about a Greek man who lost a lot of money because his investments in SNS, a Dutch bank that was recently nationalised, were wiped out as Jeroen Dijsselbloem, the Dutch minister of finance, did not recognize the claims of junior bondholders of this bank. According to the article. But that’s not what really happened. SNS had invested a lot of money in all kinds of prestigious real estate projects which did not yield the expected returns and which therefore could not pay back SNS anymore, which meant that SNS could not pay its bondholders anymore. That is what really wiped out the value of these investments. And Jeroen Dijsselbloem only stated:
‘hey, I’m not the one who’s going to pick up that bill! You’re the one who has been stupid as you did not read the SNS accounts before investing and as you did not read the fine print stating ‘junior bond’. And yes, the Irish have been *daft* to bail out the creditors of reckless banksters, but well, you should always learn from the mistakes of others. Anyway – the government needs the money to invest in the future and to guarantee minimum incomes for people in real need. The government should protect people from the worst consequences of loss of income. But the government is should not insure loss of wealth“.
And indeed, the Dutch government should never, never ex post have given a 100% guarantee to Dutch people who invested their money in Icesave savings accounts, an Icelandic bank which went broke. And the Icelanders where completely right to reject the bill which the Dutch government presented to them because of this ridiculous ex-post guarantee: ‘hey, you’re the one who has been stupid!’. We learned from their wisdom. The government should guarantee basic income security. It should not insure perceived wealth.
Yes, I agree Mr. Dijsselbloem should be applauded considering he is now the head of Euro Group.
We should also note the greed of the investor (and of its financial advisor).
The junior bonds had a coupon rate of 6.258%. But considering when the Greek speculator (not investor) bought them (like Nov- Dec based on the article), were quoted by the Frankfurt stock market at around 45-55% of their face value. So, the Greek speculator hoped for a yield on his speculation of 55-65% if the junior bonds of this bleeding SNS Reaal bank were saved by the tax-payer’s money.
So, nothing to cry about the “poor investor”.
Sorry about the post above. The yields hoped were 100-110%.
Last sentence, “not”.
I recall reading a story about the British Army in the Second World War, I believe. A large stockpile of rubber tires destined for trucks and military vehicles necessary for the Allied war machine were destroyed by a fire in India, on their way from Malaysia. The Generals were, of course, horrified. However, a Government Bureaucrat responded “Don’t worry, it’s all insured!”
Unfortunately, you cannot insure wealth with the accountants pen.
All insurance is really just a means to socialise losses. It doesn’t magically bring the physical item back.