Moral hazard and social discount rates

Why was Mervyn King - along with other economists - more worried (pdf) than Alastair Darling (a successor to Nigella’s dad)  about the moral hazard problem associated with bailing out Northern Rock and giving support to longer-term money markets?
Put it this way. Bailing out a bank today encourages banks to lend recklessly in future, in the belief they’ll be bailed out too. This means there’s a greater danger in future of a financial collapse.
Why does (did?) this prospect loom larger to King than Darling? It’s not just that King is more puritanical than Darling and instinctively hostile to borrowing - not at all. Nor is it, probably, that King is more aware of the effects of bad incentives and so attaches a higher probability to future financial troubles. Instead,  I suspect one overlooked reason lies in their time discount rates.
As a product of Cambridge in the 1960s, King will have been heavily influenced by the views of Pigou and Ramsey, that policy-makers should have a zero time-discount rate, because future people have the same moral status as current ones.
This means that he attaches (attached?) a high weight to the future cost of a probable financial collapse.
Darling, by contrast, attaches less weight to it. He’ll be out of office then, but faces the political costs of depositors’ distress today. So, even if both men were equally aware of the moral hazard problem, Darling would discount it more heavily, thus causing a difference between the two.
Which raises questions. Even if we take the moral hazard problem seriously - as we should - is King right to not discount rate it much? There are arguments (pdf) for policy-makers to discount the future.
And, is the government’s time discount rate consistent across policies? When I look at the bail-out of Northern Rock, I see a high time discount rate. When I look at policy towards climate change, I see a lower time discount rate. Am I right to see this? Am I right to think it inconsistent?

Comments

[Matt Munro]

"I look at policy towards climate change, I see a lower time discount rate. Am I right to see this? Am I right to think it inconsistent?"

Yes you are. Like most people I'm deeply suspicious of green political agendas in part because they are inconsistent with the (entirely logical if ethically bankrupt) short-termism prevalant in politics. Why do politicians care about what happens to the planet when they will be out of office and quite posssibly dead ? Worried about their kids ? Some evolved genetic imperative to protect the future of the species ? Or do they just sense votes and tax revenues ?

[Mark Wadsworth]

It's not "inconsistent" it's "Totally bloody hypocritical".

That said, Mervyn was morally right and The Badger was politically right, so I wouldn't get too upset either way.

[dsquared]

another possibility is that your first link refers to a hypothetical possibility of a run on a bank of unspecified size, whereas your second refers to an actual event of a top ten deposit-taker. just saying.

[Dipper]

Isn't it just that King is a civil servant and so has to operate within the regulatory framework given to him, but Darling is chancellor so can shape the regulatory framework?

I would be surprised if anyone was saying NR had got away with it by the time Darling has finished with them.

[Mike Woodhouse]

As long as politicians' investment horizon is no longer than the next election then we'll know where we are at least.

I suspect we may get more trouble when they are in a planned final term, at which point they may begin to seek a place in history, or at least some kind of political legacy. That's when we are at risk of getting ourselves an Iraq.

But mismatched objectives has been my favourite subject for a good while now (I don't get out much).

[jameshigham]

You are right to see it as inconsistent, for sure.

[Blissex]

To get an idea of the magnitude of the effect and the discount rate, this excellent piece on Northern Rock a bit of sensational news:

http://www.ft.com/cms/s/0/4e7ecfc8-6624-11dc-9fbb-0000779fd2ac.html
«It quickly became clear that any deal would be done at a substantial discount to Northern Rock’s share price, which at the time was about 650p: The board was apparently willing to recommend a bid worth around 300p.»

So without Darling Northern-Rock's own management valued their bank at 300p/share instead of 650p/share.

However Darling's actions seem to have had relatively little effect as the share price is now at 185p, that is the government guarantee has vertically reduced the value of the bank:

http://uk.finance.yahoo.com/q/bc?s=NRK.L&t=3m

At that price the P/E of Northern-Rock is less than 2. Amazing!

[kinglear]

Mark Wadsworth is right - it frequently happens that a good for one is a bad for another, and vice versa.
I was at the LSE during the 60s ( Mick, Danny and Tariq etc)and Pigou was very big then. He's slipped down the scale somewhat

[Dipper]

do you have a large colleciton of pictures of Nigella? I find your ability to produce photos of Ms Lawson at will faintly disturbing.

[ian]

Nothing disturbing about that picture - well not mentally disturbing anyway!