Jan 28 2014

Smaug’s gold and the payment protection scandal

Posted by: Nicholas Shaxson in: Thoughts

John Lanchester in the London Review of Books, not so long ago:

“If there hadn’t been so much other lurid wrongdoing in the world of finance, and if mis-sold payment protection insurance had a sexier name, PPI would stand out as the biggest scandal in the history of British banking.”

Which is, of course, a big claim. Lanchester has a new article out, and it’s fascinating. Read the whole thing, but here’s just one factoid worth remembering, about the PPI fines that have been handed out. First, the garnish:

“The PPI fines being paid by the banks are a form of transfer from the banks to the real economy: picture Smaug in The Hobbit, lying on his mountain of gold, being reluctantly forced to part with a few coins by Middle Earth’s version of the Financial Conduct Authority. The recipients of the money do exactly what the banks/Smaug won’t: they spend it on goods and services.”

And now the meat:

“In their response to last year’s budget, the OBR [Office for Budget Responsibility] included a modest boost to ‘household consumption growth’, i.e. people spending money, thanks to the effect of PPI repayments. The OBR’s assessment of Osborne’s other policies showed no effect on household consumption growth. So the OBR reckons that the PPI repayments have done more to help the economy than all the other stuff the chancellor is trying to do put together!

. . .

That’s really amazing. The banks are so bad at their primary function, lending money, that it’s better for the economy if they pay billions of pounds in fines to the customers they ripped off.”

Wow.

One last thing. I’d take issue with Lanchester’s use of the term ‘mis-sold.’ That is a euphemism. It was straightforward fraud.

But as I said, read the rest of the article. It’s good.

one comment

Jarrod 2th February, 2014 5.59 am

Nick, might want to check the meaning of the word “factoid”. I think you might mean “fact”

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