ordinary and otherwise
who could possibly etc
(If this post were an aphorism, it would be something to the effect that it’s great fun to say NOBODY COULD POSSIBLY HAVE PREDICTED, but much harder to get any real sense of what it is reasonable to ask people to have predicted. That absolutely doesn’t mean I’m going to stop doing that joke, btw.)
A few weeks ago, when Silicon Valley Bank’s collapse was first hitting the news, I found myself arguing with a lot of tech industry people over the question of deposit guarantees. They were saying that a typical tech startup might consist of five coders with no real management and certainly no finance director, who might have raised $20m to cover 18-24 months of “runway”. A company like this couldn’t be reasonably expected to monitor the credit quality of their bank, or to manage the $20m as if it was a corporate treasury. Therefore, they needed to be treated as if they were retail depositors; the FDIC guarantee should cover them up to the full $20m.
I quite vehemently disagreed, but that’s not the purpose here; I don’t want to carry on weeks-past arguments in a venue where people can’t answer me back. What is, so to speak, at the back of my mind with respect to this argument is that although I don’t agree, I can see where it’s coming from. One of the most important distinctions in modern, complex societies, is that between “ordinary risks” and “out of the ordinary”.
People draw the line differently. Ordinary things are the ones that you’re expected to be able to handle for yourself. Out-of-the-ordinary is more of a spectrum – as something gets further away from the general run of events and choices that most people have experience of, you find more people agreeing that it isn’t something that someone should be expected to deal with on their own.
And immediately we can see that this is very much bound to be a disputed, politicised concept. Some people, for ideological reasons, will deny that there’s any relevant category of out-of-the-ordinary. Others, for different ideological reasons, will say that absolutely every negative event is out of the ordinary. And everyone will start from their own experience and prejudices – I think financial risks are sufficiently ordinary that tech companies ought to be set up to manage them, while a tech guy might think, for example, that cybersecurity is a basic competence and anyone hit by ransomware only has themselves to blame.
Andrew Hauser is the official at the Bank of England whose job it is to make policy about the occasions on which the Bank will intervene in financial markets (most recently, to help pension funds deal with the consequences of the Truss/Kwarteng budget). He thinks, and I think I agree with him, that one of the vital policy issues facing central banks in the new world is to get some sort of public consensus about the boundary of the ordinary, because that’s the balance between social risk-bearing and personal responsibility.
The general question of bailouts is one for another week. Personally my view on state bailouts is that “they are good and we should have more of them”, but it’s a view which needs more context. For the moment, I’m more interested in the basic underlying concept of the ordinary, the out-of-the-ordinary and for that matter, the liminal space in between them. (“Liminal” – relating to a transition, boundary or in-between state. I know you know, I’m just writing it down because I keep forgetting it).
The government and the central bank tries to manage the business cycle, so that people can concentrate on doing their own “ordinary” economic activity as well as they can. The residual risk is treated as “out of the ordinary” for workers, and so some state unemployment insurance is provided, but very much less than full coverage. The state doesn’t provide business cycle insurance to capital-owners at all … unless the economic recession has been caused by a pandemic, or they happened to own just the right kind of assets that were bailed out for another reason. Meanwhile the risk of technological obsolescence of one’s skills is not insured, but people often talk about it as if it ought to be, seemingly out of the same intuitions about what’s ordinary.
The idea is clearly that people ought to be expected to look after themselves with respect to risks that they might reasonably have anticipated if they had expended reasonable effort to do so. That’s why nobody agrees about it.
But a consequence of that is that as the world grows and gets more complicated, it becomes more difficult to anticipate change; more things are “out of the ordinary”. That’s why there’s a structural tendency for the state to grow and for risks of all kinds to be socialised. One of the deepest questions of the modern state is to decide what is the ordinary course of business which people need to deal with on their own, and what is an out-of-the ordinary occurrence that needs to be handled collectively.
I see that Andy Haldane (who isn’t the same person as Andy Hauser, referenced above!) has views. As always with Andy, I disagree with his answers more or less completely, but you have to listen to him because he’s asking the questions that matter. Personally I think the reference to “zombies” is a giveaway that someone’s talking blackboard economics without really thinking about what bankruptcy means, but that’s for another day.