Re: Financial crisis

On Fri, 19 Sep 2008 18:43:02 +0100, "Siderius Nuncius"
<matron.nuncius@xxxxxxxxx> wrote:

I really don't understand this. My dad was a right-wing economist, very
much of the "How many economists does it take to change a lightbulb?",
"None - the market will take care of it" school. (We didn't exactly see
eye-to-eye on these matters.) Sadly, he's no longer in a position to
explain and I wondered whether anyone here can.

When Northern Rock went bugger-up there was a lot of talk of "moral hazard"
and the problem of bailing out people who had acted irresponsibly. Now, it
seems, the people who have acted unbelievebly irresponsibly and with an
appalling greed and disregard for consequence are to be relieved of all the
responsibility for the bad debts they have not only taken on but in many
cases encouraged. Now, I know that the consequences for everyone of not
doing this may be even worse than those of doing it, but how do the
monetarists and free-marketeers explain and justify what is going on?
Surely, if the market really can take care of economics then such
intervention is wholly unjustified, and if it can't...well, they were wrong
in the first place, weren't they?

And - worse - what does this say to the people who run our institutions
about the consequences of irresponsible greed? Don't worry - the government
will always pay if you can't be bothered to behave responsibly.

I know I'm a bitter old leftie, but I promise not to have a nasty political
argument and I really would be interested if anyone can explain.

I can't offer a complete answer, but I can make some observations. The
first of which is that capitalism appears to have broken down because
the nature of capital itself has changed.

The logic behind the argument that free trade is a good thing is that
capital is fixed. British capital should be used to produce things
that are most cheaply produced in Britain, while Portuguese capital
should be used to produce things most cheaply produced in Portugal.
They then trade their port for our woollen cloth, and everybody is
better off than if we had tried to make our own fortified wine and
they had tried to make their own woolly jumpers.

But once the British capitalists are able to buy the Portuguese
wineries, and repatriate the profits, this all starts to fall apart,
as Portugal no longer benefits from its competitive advantage. The
rich can get richer without the poor also getting richer.

The second change in capital is the extent to which it has become a
confidence trick. Doom mongers were forecasting this ever since
national currencies moved off the Gold Standard, but as long as people
generally trusted governments and were successfully dissuaded from
asking difficult questions then all was well. Banks make imaginary
money by lending out more than they have, safe in the knowledge that
what they lend will be deposited with them again, so that it can be
lent out to somebody else. As long as they have 10% of their loans in
the vaults they can get by. Of course if the debts go bad, they
suddenly have a problem. In the 1980s most European banks were in as
much trouble as the weakest ones are now. The Midland and Lloyds were
both hollowed out be the Latin American debt crisis. The Midland was
a complete basket case, but it was in nobody's interest to make this
fact public, and in due course HSBC stepped in quietly to bail it out.
Lloyds kept their heads down and eventually pulled through, not least
because inflation tended to erode debt away.

Following the 1980s deregulation the financial markets became global
and more entrepreneurial and it was recognised that there were ways of
making imaginary money out of imaginary money as well as real money.
Because regulation was looser, and different regulators looked at
different things it was hard to see the true picture. And for a while
it worked, and shareholders did well, so traders were rewarded, and so
they became more reckless, and the whole thing became a bubble. And
the internet meant that knowledge moved faster. And then the EU
decided that instead of old fashioned paternalistic regulation, the
answer was transparency, which meant that if you went looking, it
became easier to see that the bubble was a bubble. And eventually the
greed got to great, and too many people saw the bubble for what it
was, and because of the internet nobody could keep it all quiet like
in the past, and the bubble burst.

And the trouble is that nobody anywhere knows whether this bubble
bursting will really matter, so governments veer between intervention
and laissez faire in the hope that it will all go away.

I have never believed in the idea that the market can some how
magically make everything all right, but it didn't use to be quite
this bad. Since your father's day the market has been well and truly
broken, wrenched free from any contact with reality, and used as a
justification for greed. I fear we will have to start again.
--
Stephen

Into my heart an air that kills From yon far country blows:
What are those blue remembered hills, What spires, what farms are those?
That is the land of lost content, I see it shining plain,
The happy highways where I went And cannot come again.
.

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