Political Economy
by Quinn
I’ve largely kept out of discussions about the current financial crisis, and in a bit I may well wish I had maintained that position. I try not to talk about issues I don’t really understand, and international finance is certainly one of those issues. On the rare occasions when my eyes don’t glaze over at the merest mention of short selling and hedge funds my grasp of the subject itself is at best tenuous. Still, that doesn’t stop opinions from bubbling up within me from time to time in need of release, and this blog seems the obvious place to do that very thing.
And I like The Economist, I do, although I often skip the Finance section. I’ve subscribed to it for a number of years and I intend to continue. But good God does it have its faults. Don Paskini, for example, wasn’t far of the mark when he said
I’ve heard people say [The Economist] is very good because of its international coverage. On closer inspection, its international coverage turns out to be articles from round the world about the need to cut taxes, privatise services and deregulate in [insert country here].
And I have nothing against cutting taxes, privatising services and pruning regulation myself, but The Economist tends to hold so dogmatically to these ideas, laughably so at times, and so it can be easy to dismiss a paragraph here or an article there as simply lazy space filling plucked from the ideological section of their style guide, where the “public sector” anywhere is always “bloated” – or at the very least “inefficient” – and so to blame for whatever failure is imagined, even if the failure appears to be of the market rather than of government.
So to this week’s Economist leader, discussing, of course, the recent financial problems. And it’s fine stuff in the main, much I agree with. But then, towards the end, we read
Regulation is necessary… But naive faith in regulators’ powers creates ruinous false security. Financiers know more than regulators and their voices carry more weight in a boom. Banks can exploit the regulations’ inevitable blind spots: assets hidden off their balance sheets, or insurance (such as that provided by AIG) which enables them to profit by sliding out of the capital requirements the regulators set. It is no accident that both schemes were at the heart of the crisis.
And that’s fair enough in the main. Of course a naive faith in the regulator is wrong. But is that any worse than the naive faith that financiers “know more than regulators”? It is touching that The Economist still feels emboldened to make such a bald assertion in these times, but haven’t bankers pissed away any unquestioning faith that once went their way? I’ve never met a generalisation I didn’t hate (even if I issue as many as anyone) and this simple comment crystallises the bugbear I have with some of the recent comments on the financial crisis. I mean, if financiers are that much better than the regulators then they have done a good job of hiding it recently, especially considering their risks. After all, bankers have a far greater incentive than regulators not to fuck up royally, so what is their excuse? It is gratifying, in a way, to find out that those described by some as the very cream of the global market for “talent” can be quite as inept in their field of expertise as I am in mine. (And not just inept. In an article I read somewhere last week one particularly brainy employee from the UK arm of Lehman Bros. complained about the better treatment the US employees were receiving and so vowed never to work for an American company again. What a clot.)
The credit crunch can appear at times to be a canvas on which one can project whatever opinions one already holds; or at least that seems to be the case judging by some newspaper opinion pieces and from within the echo chambers of the blogosphere where sober analysis is at a premium. Perhaps the only change in some has been a new found acknowledgement that government can be good for something (ie. good for $700bn.)
On the one hand those opponents of capitalism, markets and globalisation have been handed their ammunition on a plate; but the joyful conclusions drawn, that rapacious capitalism is fucked and global finance cracked beyond repair, are simplistic and flawed. At least I hope they are, as does the manager of my pension fund. In reality we will get through this; there will be changes to regulation, lessons will be learned, and then we will carry on again in our own sweet way until the next financial crisis, when it will be realised that we overlooked something else again.
It is the opposing views that interest me more however since they seem more perverse; the defensive glossing-over and scapegoating that has gone on, the search for blame that fits in with existing prejudices. Hence in some we see the pointed criticism of the regulators given more weight than the grudging criticism of the financiers, reminiscent of the way voices complaining about the failures of a social worker can drown out those criticising the parents of an abused child; how for some it is the police rather than the murderer that is are more to blame when they fail to prevent a stabbing, or it is in fact the terrorists’ fault when the police feel forced to mistakenly gun down an innocent. It is to be expected, no doubt, but it drives me up the wall. So we hear this bleating that the regulators have failed, which they have to an extent; but it is a second degree failing let’s not forget. We are then warned repeatedly that if there are to be any regulatory changes we should ensure that they are appropriate and not of the knee-jerk variety, that there is a danger in bad regulation, or too much regulation. Do we need such statements of the bleeding obvious? To those I sense are still instinctively opposed to regulation then it seems the answer is “yes we do”. But an excess of anything is bad, and to voice such a truism adds nothing of any real value to the debate. We know that water is essential to human life, but also that drinking too much of it or drinking it badly can be fatal; we don’t need to be told this, and I would suspect anyone who felt the need to state something so basic to be either a simpleton or to be trying to diverting attention from something. Look, a bird! Obviously we need regulation that is as “just right” as Baby Bear’s porridge, but we can take that as read. We know all this. And we also know that Goldilocks is a fairy tale.
Some critics go further, however, and blame regulators and central banks for not only failing to prevent the current crisis but for helping to create it, which can seem like just another bit of blame shifting to me. So the argument is made that existing regulation is bad because it made banks look for weaknesses in the regulators’ armour, to hide items off balance books and away from regulators’ prying eyes, to surreptitiously duck capital requirements and to be forced into a lack of transparency which is where much of the damage was done. They just couldn’t help it, bless them. But isn’t it the height of naivety to believe that if there wasn’t such regulation the banks’ actions would all be honest, above board, adequately insured and funded? Isn’t this like blaming the number of dogs killed in illicit dog fights on the law banning dog fighting in the first place; to then draw the conclusion that this problem would never have occurred at all if dog fighting hadn’t been made illegal, so forcing it to operate underground; and to then warn against any tougher enforcement of the existing law as that may exacerbate the problem? Well, that makes about as much sense to me.
As for central banks, there is a general belief that Alan Greenspan helped create our predicament by cutting US interest rates too low and holding them down for too long in response to earlier crises; but how comforting to be so wise after the fact. Sure, these criticisms of Greenspan were always there, and kudos to the people who have held onto this opinion through thick and thin, but this was always a miniscule minority view, barely audible when he retired from the Fed to almost universal acclaim. Now this complaint is pretty much the consensus position, and other central banks have also shared in the blame for having too loose a monetary policy (but with less justification as far as I can tell.) The impression given is that keeping interest rates higher during, say, the dot com boom, would have been the obvious cost-free policy solution without any further consequences; and it may have been. But it also may have tipped the world into recession there and then, we just don’t know. Gordon Brown’s announcement of no return to boom and bust was always a hostage to fortune, but in all fairness developed countries have seen more of a period of sustained growth rather than a boom over recent times (asset prices notwithstanding) and higher interest rates could have put that at risk. It is easy to suggest different policy decisions in hindsight knowing they cannot be enacted and that no ill can befall the economy as a result.
Which is not to say that central banks didn’t make mistakes and perhaps did keep interest rates too low for too long, but even then surely this can only lay the groundwork and create the conditions that allowed the banks to chase illusionary pay days and to lose sight of their own risk management; there was no compulsion, no one put a gun to the financiers’ head. I’m not seeking to have a go at the banks here, or to seek to deny the important work they do, it’s just that they are at the heart of the storm and those that failed should take the bulk of the blame regardless of whatever else was going on around them; the fact that others were at fault should be an aside, not the set-piece soliloquy that some have sought to make it. After all, do we blame the proprietor of the All-You-Can-Eat Chinese Buffet when we pig ourselves sick? Do we say that it is Wetherspoon’s fault that their cheap beer leads some people to empty their stomach’s contents in a taxi at four in the morning? Some may, but they’re dicks. Whatever happened to personal responsibility?
I’ll go now as I have wittered on for too long and I now appear to be drowning in a sea of weak analogies. All I will add is that in common with most people my opinion hasn’t shifted with events. I believe in a mixed economy, in the power of the market and in the necessity of government; they both have their role, they both have their faults, and I don’t like seeing people trying to shift the blame from one to the other, not when it doesn’t seem deserved and not when it looks like a transparent attempt to deflect attention and to defensively bolster one’s own ideology.
So we hear this bleating that the regulators have failed, which they have to an extent; but it is a second degree failing let’s not forget
You do go on to acknowledge the possibility that “privatised gains and socialised losses” might create bad incentives, but that undermines this passage. It’s not a second degree failing – you don’t have to believe in time travel to understand why a $700bn bail out is a *cause* not a consequence
Isn’t this like blaming the number of dogs killed in illicit dog fights on the law banning dog fighting in the first place
Not really. To someone that thinks lending money to someone else has the moral equivalence of dog fighting, perhaps. But financial regulation can be welfare-reducing. It can create dead wight loss. It can prevent efficient trades being made. Bad metaphor
but how comforting to be so wise after the fact
How about April 2004? on The Filter^, or try any economist vaguely familiar with the Austrian business cycle theory that has been warning about this for years. Ron Paul made it part of his Presidential campaign, and the blogosphere is awash with his statements predicting this mess. It’s factually incorrect and personally insulting to claim that ‘Austrians’ are playing Monday morning quarterback.
But it also may have tipped the world into recession there and then
Yes, this should have happened. The longer we keep propping up bad investments the higher the resulting inflation, and the higher the resulting unemployment.
It is easy to suggest different policy decisions in hindsight
Seriously, it’s not hindsight.
I appreciate your plea for ambivalence, but that doesn’t alter (i) what’s at stake; (ii) why this has happened; (iii) what the solution is.
You do go on to acknowledge the possibility that “privatised gains and socialised losses” might create bad incentives, but that undermines this passage.
I don’t see why. I’m not denying there may be bad incentives but they are only that, incentives; as I say, regulators can only create the conditions and should be blamed accordingly, but in doing so they are by their nature secondary actors, the primary fault should surely lie with the banks that made the bad decisions. There was no compulsion on the banks to lend to those who could not repay or to under capitalise, just as there was no compulsion on ratings agencies to over-value securities, these could have occurred regardless of government actions. Also, are you suggesting that banks took risks in anticipation of a $700bn bail-out? I suspect that is unlikely. Even then, bail out or no bail out, there is still every incentive for banks to avoid becoming another Northern Rock, or Lehman Bros. Ultimately the banks chose their course of action voluntarily, and should take the lion’s share of the blame.
To someone that thinks lending money to someone else has the moral equivalence of dog fighting, perhaps. But financial regulation can be welfare-reducing. It can create dead wight loss. It can prevent efficient trades being made. Bad metaphor.
I’m making no such claim of moral equivalence; I’d assumed you were intelligent enought to see that, but lesson learned. Bad metaphor I’ll accept – I said weak analogy myself – but it seem to me better to engage with the substance of an analogy rather than picking apart at the differences between a metaphor and the subject (which will always exist since no analogy is exact, and indeed without some differences there won’t be an analogy in the first place.) The point I was trying to make is that it is wrong to blame regulation itself for the effects of any illicit breaches of that legislation. By all means attack regulation for imposing an unnecessary cost, or for creating hitherto unknown problems, but I was attacking the charge that regulation had pushed off the balance sheet that which was already occurring anyway. It seems ridiculous to me to blame on regulation any continued breaches of that regulation that occur in defiance of it. It may be that you can claim the regulation is ineffective, but not that it has caused a problem that was evidently already occurring and which it has subsequently failed to prevent.
It’s factually incorrect and personally insulting to claim that ‘Austrians’ are playing Monday morning quarterback.
You mentioned Austrians, I made no mention of them, or you for that matter. I can’t help it if you feel personally insulted when I wasn’t giving you a second thought. Still, as you’re here, I’ve read your post on The Filter and while interesting I’m not sure quite how prescient it is. Sure, if people expect a housing crash then those that can will sell up. That is a truism as far as I can tell. It is hardly a foretelling of the current predicament, it doesn’t really explain how we got here, just predicts what one of the consequences will be if there is a crash, and makes no mention of the drying up of credit which has surely caused many of the recent problems in the housing market. You were advising people to sell four years ago, following which there was a soft-landing before house prices shot up again, and anyone following your advice has probably still lost out as things stand despite the recent drop in house prices.
Yes, this should have happened. The longer we keep propping up bad investments the higher the resulting inflation, and the higher the resulting unemployment.
I’m tempted to agree with you, but it seems a counterfactual where we can only truly guess at the ultimate outcome.
Seriously, it’s not hindsight.
Well it is. Maybe not for you, and as I said “kudos to the people who have held onto this opinion through thick and thin”, but if hindsight hasn’t been liberally used in order to be wise after the event, how do you explain the volte-face in Alan Greenspan’s reputation in recent months?
I appreciate your plea for ambivalence, but that doesn’t alter (i) what’s at stake; (ii) why this has happened; (iii) what the solution is.
Cheers, but I am not trying to be ambivalent, or to issue a plea for ambivalence. I want blame to be applied fairly, not along political lines, in order to prevent a repeat. Don’t get me wrong, I’m not trying to deny the role of central banks and regulators, and I’m not trying to say this is all the fault of evil financiers. The point is that it occurs to me that some commentators have tried to downplay the importance of the bankers in all this and to lay the primary blame at governments’ door and they may be right; I have already acknowledged that my understandings of global finance are slight. However, apart from feeling that this is letting the primary actors off the hook the allegations seem weak to me, they don’t seem to add up, and that is why I voiced my concerns here. I’m sure we are both as equally concerned about why this has happened and how we solve it, indeed that is the point of me writing this post.
Thanks for the response – as insightful and balanced as ever.
I’m going to try to make a number of points, that I *think* we agree upon:
A1: Regulators and politicians create the incentive structures that bankers face. In this situation they have failed, for two reasons: (i) loose monetary policy has created an asset price bubble; (ii) investments banks have been allowed to keep the profits of their successes but only faced a soft constraint regarding losses
A2: Many banks have made bad investment decisions and should incur the consequences (e.g. bankruptcy). The banks should take a massive share of the blame
A3: The economy is in a pretty bad state and a correction is inevitable
A4: If banks manage to pursue illegal activity through complex operations, we should not blame regulators per se. Although their job is to ensure full compliance – and full compliance is what *should* occur – criminals should obviously bear responsibility for their actions
Now, a couple of points that I believe, but I *think* you disagree with:
B1: Commentators familiar with Austrian cycle theory foresaw that (i) a bubble was developing in the housing sector; (ii) a necessary adjustment would be inevitable in which unemployment and inflation would both rise. This narrative is emphatically occurring right now
B2: The potential for bank failures to create widespread panic and completely undermine the entire economy is overblown – government intervention is *not* necessary to ensure stability.
B3: Greenspan was living on a false reputation. It was only a matter of time until his true legacy would be known. Those commentators who changed their mind are using hindsight, but that’s fine (just take what they say with a pinch of salt next time). Some of us have been completely consistent on this.
B4: Although the banks didn’t necessarily anticipate a $700bn bail out, they knew that the government would intervene if the financial sector was threatened.
B5: A lot of financial services activity that is welfare enhancing is being punished due to excessive regulations. Unnecessary regulation can encourage firms to push activity off balance sheets and therefore regulators shouldn’t be surprised that the more regulations they pass, the more complex finance becomes
Fair assessment??
Then I think we agree on more than you think we do. Indeed, I wouldn’t outright disagree with anything you’ve said here. Rather I would have some minor reservations about some of what you have said, although that is probably down to gaps in my own knowledge.
I suppose my reading of the situation is that yes, central banks (or at least the Fed) kept rates too low and for too long, and this produced a bubble. This had to work its way out at some time, but needn’t have led to a full blown recession, a soft landing was possible, since however inflated house prices became, clearly someone had the money somewhere to afford paying such high prices at the time. In tandem with that we had banks engaging in sub-prime lending and in devising ever more complicated bundles of securities in an effort to wring out every last drop of profit (the latter clearly not in itself a bad thing); the banks would probably have engaged in both these activities with or without low interest rates and excessive banking regulation (although they probably exacerbated the situation) and this would have led to a financial crisis at some point, when the loans defaulted or the true worth of securities was ascertained . The fact that the problem broke now, with the bubble still in place and with debt levels where they are, coupled with the banks’ reaction to the crisis by changing their policy from “lend to everyone” to “lend to no-one” means that the problem is far worse than if the banks had buggered things up in a different economic climate. What do you think? If my reading is accurate then I feel it is fair to place the primary blame on the bankers (albeit for creating a credit crunch that no-one foresaw) with central banks taking some secondary blame for creating and/or failing to deal with asset bubbles which first increased the number of sub-prime loans – and so increased banks’ eventual losses – and then compounded the situation once the credit crunch had taken hold (which some, such as Austrian economists, did foresee).
A couple more points; I accept that Austrians saw the bubble developing, and indeed for years now the man on the Clapham omnibus has been talking about how house prices are getting ridiculous and how something has got to break. Even George Osborne claims he was warning about debt levels for years. The problem is how to deal with it. Do we expect central bankers to spot bubbles occurring and nip in to deal with them? This seems to require an omniscience you don’t normally credit government officials, and I can see all manner of problems in calling a bubble when there may be other factors at work. And what tools would you use in, say, the case of a housing bubble? Raise interest rates? But that is a blunt instrument that could decimate manufacturing industry and provoke a recession while merely knocking a bit of froth off the buy-to-let market. Restrict buy-to-let mortgages? That’s a tricky act to pull off, since if I am selling my house a buy-to-let landlord’s money is as good as a first-time buyer’s. For some it seems easier to simply criticise central bank in hindsight rather than to offer any policy alternatives.
As for the bail out, yes banks that mess up should be allowed to fail in my opinion; however conventional wisdom currently says that to let one bank fail is to invite a complete financial meltdown, and tempted as I am to say that these fears are overblown and government intervention not required I simply don’t have the requisite knowledge to state this with any confidence, and I guess I have to operate on trust. I would be genuinely interested if some financiers did act with extra risk because they thought government would step in to help; I would personally have thought that whatever incentives regulators or governments help create, the greatest incentive not to fuck up is that you may personally lose your job if you do. Perhaps those so-called “golden parachute” deals are more relevant in that case.
A final point. As I have said, my target in this post was largely those people who have been seeking to lay all the blame unfairly at government’s door. On Channel 4 News last night there was again an interviewee who seemed to wholly blame the crisis on central banks and their low interest rates and I just find this perverse, as if bankers had no option but to take the cheap credit and piss it up against the wall. Such arguments seem to me to be unhelpful, fallacious and ideologically driven because I don’t think any reasonable assessment of the current crisis can come to such a conclusion.
Yes, I think we agree on most of it so I’m just trying to pinpoint what area we disagree on
the banks would probably have engaged in both these activities with or without low interest rates and excessive banking regulation
I think this is the key thing. You view the banks as the primary cause, I think it’s the Central Banks. For me though the issue is if the Central Banks weren’t inflating the money supply, where would the ordinary banks be getting the money from that they’re lending out? You’re right though, bankers have made mistakes and engaged in risky lending. The issue then turns into response, and after last night I don’t think I’m as extreme as I originally thought when I argued against the bailout.
Do we expect central bankers to spot bubbles occurring and nip in to deal with them? This seems to require an omniscience you don’t normally credit government officials, and I can see all manner of problems in calling a bubble when there may be other factors at work. And what tools would you use in, say, the case of a housing bubble?
This is monetary theory 101 – bubbles come from a high money supply. The government has nationalised the money supply – they dictate how much money to print and so we know that if the money supply is increasing at a rate above GDP then bubbles are occurring. The difficulty is knowing for sure where the bubble is, but the solution is simple – don’t create bubbles. Don’t have artificially low interest rates.
But that is a blunt instrument that could decimate manufacturing industry and provoke a recession while merely knocking a bit of froth off the buy-to-let market.
It’s not so much that an increase in interest rates would be a good thing, but that they should be at their “market” level (i.e. where voluntary savings = investments). Yes, if after a period of artificially low rates you raise them then this would “provoke” a recession, but rather it would “permit” the mild recession that is inevitable (due to the misallocation of resources brought about by an artificially low rate) rather than keep inflating the bubble and create the conditions we see today. A mild recession in 2005 for example would have been better than what’s happening now.
For some it seems easier to simply criticise central bank in hindsight rather than to offer any policy alternatives.
Stop inflating the money supply.
conventional wisdom currently says that to let one bank fail is to invite a complete financial meltdown
Convention wisdom also said that invading Iraq would be quick and easy! Banks fail all the time. I understand the basic point, but people need to keep their money somewhere. I find it very unlikely that people would panic and want to take all of their money out of financial instruments. When politicians and army generals told you we *Must* invade Iraq you recognised that this was biased information. Same goes for the alliance of politicians and investors who want a bail out now. Not all banks think this is a crisis (note, it’s the ones that are run well)
I would be genuinely interested if some financiers did act with extra risk because they thought government would step in to help; I would personally have thought that whatever incentives regulators or governments help create, the greatest incentive not to fuck up is that you may personally lose your job if you do. Perhaps those so-called “golden parachute” deals are more relevant in that case.
I think it’s naive not to accept that moral hazard plays a huge role. Fannie and Freddie, for example, had Congressional legislation promising to bail them out. I don’t know enough about whether the “golden parachute” clause is just an opportunity for the socialists to get at some rich people, but I’m not trying to say that bankers are completely blameless. I’m sure that evidence will emerge that some broke the law – hopefully like Enron markets will react swiftly (and bankrupt the company) and the legal system will punish. There’s few commentators from the right making this point because I think it goes without saying.
On Channel 4 News last night there was again an interviewee who seemed to wholly blame the crisis on central banks and their low interest rates
That sort of economic literacy is so rare I want to defend that man. This is such an important issue I think it’s wrong to allow ambivilence to cast blame widely. This is a government failure. You point out that bankers are to blame, but lets look at this at a simple level. Person A can’t afford a mortgage, but Bank B lends a shed load of money with no downpayment and no scrutiny. There’s blame on all sides – A for borrowing money they can’t really afford, B for being reckless with his shareholders capital, and the central bank for creating that excess credit in the first place. Why don’t we view B as a Robin Hood type figure, throwing mortgages, holidays in Ibiza and new cars to the poor? The people to blame here, in actual fact, are those who borrowed the money, and those who created the money. The banks are just the bridge, and I would have thought that many ordinary people should be grateful for their recklessness. If someone wants to spunk you £200,000 what’s the problem??
I think we are probably getting to that point where we have agreed upon everything except those issues that we will never agree on. However, a few points.
I see why you say that central banks are the primary cause, but I just can’t agree. It is like if we return to my Wetherspoons example: if people get drunk and throw up is that the fault of the pub that supplies the cheap beer or the drinker who overdoes it while others around him remain sober? And you can still get drunk on expensive beer, don’t forget (last analogy, promise.)
On not creating bubbles by having artificially low interest rates: that seems fine in theory, but in practice the level of interest rates will always be a judgement call that central banks could get wrong and so promote a bubble. Even then, is it always so easy to judge what is or is not a bubble? In the middle of the dot com boom could you tell it was a bubble or just an understandable desire on the part of investors to move their money into what was seen as the future? Even when you believe you have accurately spotted a bubble, how can you easily deal with that without damaging other parts of the economy that are not overvalued, and perhaps provoke a major recession, rather than minor correction? Or will it always be a case of “well, I wouldn’t start from here”?
On conventional wisdom: like I say, I have my doubts about these bail-outs but I don’t feel I know enough about the issues in this financial crisis; that wasn’t the case with Iraq.
On moral hazard: I agree it plays a huge role, but let’s look at it on a personal level. If I believe that if I mess up my employer will be nationalised and I will end up skint and on the dole then I still think I will be somewhat risk averse even if I do expect government to step in in the event of a financial collapse. However, if I believe that messing up and losing my job will also trigger a massive golden parachute payment then I think I am likely to take more risks; that is all I was trying to say.
Finally, a bank that gave loans to the poor would be a Robin Hood figure as long as it didn’t expect the money back if the customer defaulted. That doesn’t happen. If someone wants to spunk me £200,000 the problem is that I can’t afford to pay it back. Of course individuals must take responsibility if they have borrowed what they can’t afford; the simple fact is that some people are not very financially astute. (There was a Panorama programme a while ago where a whistleblower from a bank talked about the reckless lending that was going on, and they also talked to some of the customers who had racked up massive debts. It was amazing just how mindblowingly stupid the borrowers were, but such people exist and we just have to deal with that. They enjoyed their new houses, cars and holidays for sure, but I don’t think they see the banks as their friends anymore.) I agree we should blame the central banks for the cheap credit that enabled the banks to lend to the degree they did, but to claim that the banks are just a bridge seems to grievously downplay their culpability. Their job is to make money, and under any circumstances if they thought there was money to be made in the sub-prime market then that is an area they would want to lend to; the cheapness of credit then increases the scale of this misjudgement. Perhaps it is wrong to allow ambivalence to cast the blame too widely, but I feel there is more of a risk in having too narrow a focus and blaming everything on just one cause, overlooking other vital factors in the process (and this is something that some on “the left” are equally guilty of when placing all the blame on “spivs”.)
if we return to my Wetherspoons example: if people get drunk and throw up is that the fault of the pub that supplies the cheap beer or the drinker who overdoes it while others around him remain sober? And you can still get drunk on expensive beer, don’t forget (last analogy, promise.)
But surely in this example the people getting drunk are the general public who’ve got mortgages and credit card bills that they can’t afford? The full analogy is the government supplies Weatherspoons with lots of alcohol who then sell it on very cheaply to the public. I get your point that responsibility must be taken by the people who are doing the consuming, but that’s the people with their savings in Northern Rock rather than the Northern Rock executives?
Or will it always be a case of “well, I wouldn’t start from here”?
We know that Central Banks have a perverse incentive to inflate. Since the whole practice started those of us in favour of “sound money” have warned against the inflationary tendencies of nationalised money supplies. If we all agreed that “we shouldn’t start from here”, and agreed *why* then I’d count that as a major advance in public discourse. But I still think there’s measures of the money supply that tell us whether interest rates are too low.
You’re right, I think that we agree on a lot. I’m still not fully clear on precisely where we disagree. As I say, bankers shouldn’t be let off the hook, I fully expect to see people going to jail, and I hope that regulation is improved as a result. Most of all, I hope that Central Banking is improved so that the general public aren’t fooled into raking up such large amounts of debt, thus destabilising the economy.
For what it’s worth, I have a couple of papers on this topic in publication and will link to them when they’re out. Thanks for the as always insightful commentary.
Well it’s my analogy so I’ll tell you who’s who! Seriously, I think you are again tackling the effectiveness of the analogy rather than the point I am trying to make, in this case that the availability of something on the cheap, be it beer to drinkers or credit to bankers, does not excuse any irresponsible behaviour on the part of the drinker or banker; indeed that the drinker/banker may well have acted irresponsibly anyway regardless of the availability of cut price beer/credit; that the supplier of cheap beer/credit is not primarily at fault in such a situation, and that the availablity of cheap beer from Wetherspoons, or cheap credit courtesy of the central bank, is more an exacerbating factor as the drinker throws up or the banker lends to those who cannot repay. Of course, you can’t drink credit, and you can’t buy a house with beer, and in many other ways the analogy breaks down, but in the way I intended it I feel it still holds.
I think we disagree mainly in emphasis. I feel that the current problems started with the banks; that they made bad loans and created complicated securities that were overvalued and that these events would have occurred anyway regardless of central bank or regulatory errors; however there were such governmental errors and that has exacerbated the current situation. You, I believe, feel that this started with government; with central banks losing sight of inflationary pressures and the money supply so creating a bubble that led banks to make those bad loans, and with overbearing regulators that forced the complexity in those securities that became overvalued, so enabling the current situation. We probably both think that the blame is shared between government and banks, but we also probably both think the other is putting the cart before the horse when we ascribe primary blame. You think that this is initially a government failure while I think this is initially a market failure (or at least a failure of actually existing markets). I would hate to think that in doing so we have just reverted to type, but I wouldn’t bet against it!
It’s a good analogy – I just think that the equivalent of the drinker is the subprime mortgage holder.
You think that this is initially a government failure while I think this is initially a market failure (or at least a failure of actually existing markets)
Fair enough, it’s just that with a nationalised money supply I don’t see how banks can take primary blame for there being too much money in the economy.
They don’t; they take the blame for what they did with the money in the economy. As I see it whether there was too much, too little or just the right amount of money in the economy has little bearing on the precise and primary origins of this crisis.
OK, we’ve got to the rub. The question is “to what extent does loose monetary policy create business error?” You’d be amongst the majority of economists who’d say that businesses are smart enough not to be fooled by the central bank, and you’d be with the majority of the public to conclude that if they’re not being fooled – i.e. that they’ve acted deliberately, then this implies it’s out of greed (or at least it’s worth talking about bad motives). I get that. But note that the Austrian position rests on a theory of error. It’s about the confusion created by loose monetary policy and genuine mistakes that this creates. But I accept the responsibility to make a more persuasive case that this applies to current events.
Yeah, I think that’s it basically. I’m not doubting that too loose a monetary policy causes problems; I just question whether it was the primary cause of this current problem.