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.