Andrew Hill is, I fear, a bit confused. He starts off with the very important point that in these days of monster bailouts government guarantees ain’t what they used to be:
Pause a second before you transfer your sterling deposits into the welcoming arms of one of the six Irish banks now guaranteed by Dublin. The confidence instilled by government promises to stand behind all deposits and bank debt could be as evanescent as mist on the Liffey. Given the relative size of the banking system and the Irish economy, simultaneous claims from failing banks would be hard for even the optimistic Irish to bear.
The lesson here is that there’s no such thing as a rock-solid guarantee: where there’s money, there’s risk. And of course even cash under the mattress isn’t risk-free, if the whole system of fiat money starts to erode. What the Irish have done is to reduce the risk of the Irish banking system as much as they can: but they can’t bring it all the way down to zero, not when even French credit default swaps are trading at over 20bp.
But then, at the end of his article, Hill seems to have convinced himself that there is such a thing as a no-risk guarantee after all.
The real question now is not whether it makes sense for the government to join a race to make the hollowest promise, but what realistic alternative guarantees can be used to secure the system, without triggering unintended consequences.
There are no "alternative guarantees" which are stronger than a government guarantee, no matter how hollow that government guarantee might be. If you want absolute safety, a government guarantee is as good as it’s going to get. You might not be happy with that — many people aren’t — but any quest for something safer is going to be doomed to failure.
Of course, some governments are safer than others. The US is safer than Ireland; Germany is safer than Italy. World Bank debt is probably safer than most, if not all. But at some point, the rush to safety has to stop, and a modicum of risk appetite has to return, since anybody with assets is taking risk whether they like it or not.