Thursday, December 11, 2008

Learning the wrong lessons from the Crash

The scale of the financial and economic crisis that we now face, across the globe, is exceptional. It not just the absolute numbers- which, in a growing economy increase anyway- but the relative numbers which now look eye-popping. The scale of capital destruction is now even beyond the levels of the 1930s. There is no measure that we can grasp that means anything.

Many assets- like your house- are unsaleable at any reasonable price, possibly at any price at all. Meanwhile, Britain is choosing to take on the unlimited liabilities of the banking sector, and thus nearly doubling long term government debt and massively increasing state control over the economy. The idea of bank nationalisation- rejected by socialists in the past as too radical- is now embraced across much of the political spectrum. Government investment and even control is regarded as vital.

Er... hang on a minute.

It is not freedom or the free market that got us into this mess.

It was the fervent belief by bankers that they could predict the future and thus accurately price any given risk that got us into this mess. It was the epistemological arrogance of those who wrote endless reports predicting quarterly earnings or economics and continued to do so despite the fact that they were always inaccurate- I mean their inaccuracy was so total that they never got it right even by accident. It was those who chose closed models to represent open ended reality who have made the mistake.

Now we have had the longest boom in history, so sure enough it seems reasonable that we could have the longest bust in history simply to bring the imbalances back to normal.

Of course one of the reasons for this unexpectedly long boom was the repeated bubbles inflated by the policy makers. Therefore it does not make me comfortable that we are now handing over our entire finance system to precisely these same policy makers.

In the end letting banks fail -while protecting deposit holders- may well prove to have been a better option than keeping alive zombie banks. However the "decisive action" of Brown and Darling in "saving the world" now means we are committed to an open ended funding of all of the liabilities of the banks- not just their deposit holders. The state is over riding the creative destruction of the free market. The state is second guessing what market outcomes could, or rather should be.

Bad idea.

I believe that the current policies of the Brown government will, in time, be regarded as a major mistake. The bankers will continue to function as if their sacred cow- the "bell curve" was not an intellectual fallacy, and will delay the implementation of open ended risk control systems.

By which time the British economy will be worth precious little and our financial services sector, which historically employed millions and was the engine room of innovation and wealth in our country, will be dead.

3 comments:

Jesse said...

Agreed: The service sector is guilty of squalid speculation reflected in huge bonus payments to help the hapless into severe debt problems and all aided and abetted by government policy. This however goes back to the Thatcher years when everyone and his dog were invited into buying shares in Government run utilities. But the big sell off started long before that as far as private industry is concerned when factory after factory closed bewailing their plight about wage demands. Of course the unions were partly to blame for not understanding manufacturing competition.
Through the 90's and up to the present we have (all?) stood idly by while most our industry fled abroad along with our utilities. A limbless torso finds it difficult to compete and a headless, limbless one is dead meat!

Newmania said...

My feeling is that at heart this is a value problem not a confidence problem ie a speculative bubble.Without painful restructuring of banks businesses and economies confidence cannot return because lack of confidence is very sensible when rubbish is over priced .I agree with your broad intuition that sending state pounds after bad money is worryingly pyramid like . You were , a long time ago talking about the need for tax cuts and you were dead right there . This would entail Service cuts or at least a rigour the private sector are used to. So you are right from start to finish .

Instead we have run up debt...well don’t get me started ..... I increasingly agree with you in general actually so......


It occurs to me that there may well be a hung Parliament after the next election and if the Liberal Party were full of your sort then a workable Liberal Conservative Government would be possible . I was thinking about this with the possible re-inclusion of Ken Clarke a pro EU Conservative of course. What occurred to me was that some of the bitterness about this has receded but the fault for that was not all on one side .
On Europe we will never never agree I daresay but DC shows every sign of wanting that kicked into the long grass and just maybe , Liberals may start to share some at least of the concerns of Conservatives.
If the issue were ,as you once suggested , drained of the lies and emotion a sensible conversation of how much sovereignty is sacrificed and for what ? Internationalist dreams must be abandoned as must sentimental attachment to isolation .


If as seems likely we have more immediate concerns Liberal and Conservatives are close now than ever before ...if , as I say , you are to be believed.


I can hardly oversate the sacrfices Conservatives would be prepared to make to avoid a Brown administration

Cicero said...

Interesting comments Newmania- and suspiciously un-manic.. :-)

I certainly do not support the something for nothing ethos of this increasingly fraudulent government, but have still yet to be convinced that DC and Osborne are not out of the same box as Blair- but I am not closed minded, just not convinced.