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Andrew Lilico: Abandoning all respect for property rights won't end happily

Here's how it should work: if you own something, then setting aside trivial cases such as a toddler stealing her brother's lollipop, the government should protect your property.  If you enter into a contract, then the government should assist in enforcing it (again subject to a materiality condition - a teenage boy failing to turnup for his date when he'd promised needn't be subject to law; and this time subject to certain moral limitations - e.g. we shouldn't be able to contract to become each others' slaves).

Doesn't sound terribly hard, does it?  And furthermore we'd think it a pretty useless form of government that didn't do these things.  Suppose governments started confiscating your property instead of protecting it, or started enforcing "property rights" for people that didn't own that property, or started changing the terms of your contracts even when both parties were content to honour them?

Yet, alas!, since 2007 property and contract rights have started being routinely violated in the banking sector.  If you lend money to a bank, in the form of making deposits or buying bank bonds, you have a contract with the bank - it promises to repay your money under certain conditions; you don't have property - the money you lent the banks is not yours any more.  Those that own property are the shareholders - it's their bank.  The contracts different lenders have with the bank are promises that the bank makes to them.  These include an order in which promises (contracts) will be honoured/broken if not all promises (contracts) can be kept.  Banks (the property of shareholders), like other businesses, also enter into contracts with (make promises to) their employees - they promise them certain salaries, bonuses under certain conditions, and pensions in due course.  And there is an order in which those promises are to be honoured/broken, also.

A government that honoured property and contract rights would therefore:

  • see to it that sharedholders owned whatever property was left in a bank when it had met all its other promises
  • ensure that the order in which promises to creditors and employees were met or broken corresponded to the order specified either in contract (or in rare cases of uncontracted contingency) in Natural Law

Alas, since 2007 governments around the world have ceased to do any of this.  Bank shareholders have had their property confiscated (their shares have been deemed to be worthless) even when no promise to a creditor had been unmet.  Bank employees have had bonus promises reneged upon, even when the meeting of those bonus promises ranked above or equal to the meeting of promises to other creditors that were protected by the government (depositors and bondholders), or had their pensions de facto confiscated (e.g. Fred Goodwin; James Crosby) - again whilst claimants that ranked equal to pensions were kept whole.  Where creditors have lost out, as for example in Cyprus, they have not done so according to the contracted/promised order - larger depositors have had their contracts violated so as to pay the insurance for smaller depositors (something that did not feature in their contracts), meaning those depositors faced much larger losses (twice as much or even more) as they would have done had the proper order been preserved.  Where banks have been fined (e.g. over the LIBOR scandal) it has not been the shareholders of banks (i.e. their owners - now mainly the government) that lost out; no - those fines were converted into reductions in the bonus pools for employees, violating their contract rights whilst protecting a "property right" that didn't exist, of government shareholders.

And all this because governments refused to implement the one violation of written contract that was clearly not a violation of the promise in Natural Law - namely that bank bondholders should, under the conditions of 2007-9, rank below all depositors.  No-one could reasonably have argued, under the conditions of 2007-9, that it would have been unnatural or immoral for bank bondholders to become the owners of banks (to have their bonds converted into equity).  That has been such an obvious manoevure that it is now the official policy of the Basel Committee, the European Union, and the British Government.

When I and others argued that bank bonds should be converted into equity in 2008 we were told that this would be an unconscionable violation of the property rights of bank bondholders.  But policymakers seem to think it's absolutely fine for bank shareholder, bank trader, bank CEO, and large bank depositor property and contract rights to be set aside or blatantly violated?

Once governments start thinking it's fine just arbitrarily to set aside property and contract rights, without any appeal to underlying Natural Law, but simply because of what seems politically expedient at the time and because the true property/contract owners are politically unpopular (bank CEOs) whilst those that are not property owners are politically valuable (bank depositors; taxpayers), the whole role of state as protector and guarantor of property and contract rights comes into question.  Today they came for the bankers, and you cheered.  But whom will they come for tomorrow...?


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