The Labour Party is always having big new ideas – if only because the old ones tend not to work out very well.

This big idea this time is called ‘skin in the game’. It’s not actually new – rather it draws on ancient ethical practices as vividly described by Nassim Nicholas Taleb in his must-read book Antifragile. Most recently, the idea has been applied to a British policy context by Duncan O’Leary in a thought-provoking publication for Demos – which is how Jon Cruddas, Labour’s licensed thinker, appears to have come across it.

In an article for the New Statesman Cruddas explains what ‘skin in the game’ means:

“The phrase comes from Warren Buffet, who demands that people investing his money have some of their own money at risk. They must have some skin in the game. The principle is that people who have the power to make decisions on your behalf should share in the risks, not just enjoy the rewards. Only then can they be truly accountable.”

The most obvious application of the principle is in financial regulation:

“In the US, the government is already experimenting with the skin in the game idea. Banks can no longer package up and sell on all the debt from the mortgages they offer. They must retain some skin in the game: 5 per cent of every mortgage must stay on their balance sheets. The idea is that lenders start to consider not just whether they can sell a loan on to others in the market, but whether the loan itself is a good one. The hope is that more skin in the game will encourage more responsible lending.”

This seems fair enough. One could always argue that the principle of ‘buyer beware’ is more appropriate, but when the consequences of systemic financial risk ultimately fall on the shoulders of the ordinary taxpayer, then it’s absolutely right that the originators of that risk should not be able to wash their hands of it.

Cruddas goes on to describe the two big advantages of skin in the game over conventional top-down regulation:

“First, it avoids the kind of top down micro-management that belongs to the politics of the last century, not this one. The task is to ensure that we really are ‘all in this together’, but through reforming the incentives within markets, not tying business up in complex rules and regulation. The skin in the game idea has a simplicity to it that is attractive. Second, the principle seeks to prevent problems occurring and to align power and accountability where they have become detached from one another.”

Significantly, Jon Cruddas then declares that these are “organising principles of Labour’s policy review that I lead, whether in the public or private sectors.”

It remains to be seen whether Labour policy review is truly lead by Mr Cruddas or if the party’s manifesto is effectively faxed over from Unite HQ. Either way, there is an aspect to this skin in the game business that is seldom acknowledged – which is its application to public sector debt.

All but the most boneheaded apologist for the banks would agree that financial institutions should not be able to get away with pumping vast quantities of dodgy debt into the economy. But what about governments who do the same thing through reckless public sector borrowing? Why should the ministers and senior civil servants responsible for the ruin of nations be able to get away it?

Jon Cruddas should go away and read what Taleb has to say about debt – and how its manipulation allows unscrupulous and dishonourable individuals to pass the downside of massively asymmetric risks to other people.

Greedy bankers did this with their crooked financial instruments and spendthrift politicians are guilty of much the same through their own scams – from Quantitative Easing to the Private Finance Initiative.

One waits in hope, but not expectation, for Labour to acknowledge the full implications of their latest big idea.