29 October 2008
By Deepak Lal, Senior Fellow in Globalization, Adam Smith Institute (October 29, 2008)
Published in the Business Standard here
29 October 2008
By Richard Savill
Published in The Telegraph here
An Anglican bishop has claimed the credit crunch is God's way of punishing Britain and other western nations for being too materialistic.
The Bishop of Lewes, the Rt Rev Wallace Benn, has written in a church newsletter that materialism has a "stranglehold over our lives" and that some good may therefore emerge from the crisis.
In the November 2008 newsletter the bishop said: "I believe that God ultimately has allowed this crisis for good.
"Our nation, like all the western nations, has become consumed with materialism. It has a stranglehold on our lives.
"We have found our security in 'securities' and have failed to grasp that nothing is permanent other than God.
"Our confidence has been misplaced. Something was needed to shake that and that is what we are experiencing.
"If this shakes our confidence in mammon (money) and forces us back to our creator and redeemer it will have been worth it!"
"That should be our prayers as Christians. We may all have to suffer a bit, but God is an expert at bringing good out of sad, difficult, even evil situations."
But Eamonn Butler, director at the Adam Smith Institute, said many people who were not materialistic had lost their entire savings.
He said: "The Bishop of Lewes is right that the present crisis has shaken people's faith in financial securities, but it has also shaken their financial security.
"We should remember that it is people's homes, savings and pensions that are under threat. Many people, who have not worshipped money or materialism, have seen their savings disappear and their lives made poorer.
"I find little comfort in this. The spiritual world may be important to people, but they also need to feed and shelter themselves and their families."
Steve Wheeler, 34, an electrician, from Chichester, West Sussex, who has lost his job in the last month, said: "When church leaders come up with something like this it is no wonder less people go to churches on a Sunday.
"You have to ask yourself what sort of world these bishops are living in when they say the credit crunch could be a good thing."
13 October 2008
by Tim Worstall, Adam Smith Fellw (October 13, 2008)
published in The Guardian here
We need a proper cost analysis of the time we are now required to spend recycling, compared with its benefits: is it worth it?
The government thinks that your time is worth nothing. At least, that's the implication of this written answer in the Commons last week.
The UKip MP, Dr Bob Spink, asked the environment secretary "what estimate he has made of the average time per year spent by a household in sorting and recycling rubbish." An important question of course, for that time spent sorting items to be recycled is obviously a cost of such recycling schemes. The answer came back from Jane Kennedy, minister of state in the department, "No such estimate has been made".
An answer that means that, quite simply, we do not know whether recycling is a good idea or not. For we don't in fact know whether it costs us more to do it than we save by doing it ... for those who have imposed it upon us have not considered one of the major costs associated with doing it.
Starting from the very beginning: your time has a value. This isn't restricted to your working hours either: the time you spend cuddling your inamorata, building a model railway or in contemplation of a pint of Old Wallop has a value to you. That is why you do these things, because you value them. If, by law, we are going to insist that you give up some of that time, to do something we tell you to do, we need to value the time you're being forced to give up. Quite what value we can put on it is a little fraught. It might be that £10 an hour, something like the average wage across the country, is the right number. It might be £5.73 an hour, for that is the minimum wage, the figure below which it is illegal for you to sell your time. But it is some cash amount per hour, for you yourself have already decided that you'd prefer the cuddling, modelling or contemplation rather than working that extra hour for such a sum.
We'd also like to know how many hours you are being asked to give up to aid in the recycling effort, thus the question asked above. I've received a similar response when asking the same department directly: they don't know because they've never bothered to consider the point. There's almost no academic research on this either, the amount of time it takes to prepare to recycle. The best I've been able to find is something from Seattle, showing that it takes a household 16 minutes per week for a simple programme and 45 minutes for one including food and garden waste. We have some 24 million households in the UK, so for a simple system we're asking everyone to give up 6 million hours a week or around 300 million a year. At minimum wage this is a £1.8bn minimum cost of such a system. At the longer estimate of hours for a more complex system and using the average wage, we have a cost of £9bn. These are the numbers we now need to plug into our cost benefit analysis of whether we should in fact be recycling.
Now don't get me wrong, I'm not against all recycling: no one who has bought and sold scrap metal for a living would be so stupid as to say that none of it makes sense. But we do need distinguish between things it is sensible to recycle and things that it is not. Steel, aluminium, copper, yes, clearly so, these make profits even when all of the costs are included and profit is the market's way of working out whether you are in fact adding value in a process. There are also other factors that we might want to include on our benefits side, things that aren't taken account of in market pricing. Say, perhaps, the methane given off from landfills, even the aesthetics of landfills themselves. Fine, add away: then we can work out whether recycling a particular product in a particular way actually makes sense or not. We assign values to all of the costs and to all of the benefits, tot them up and if B is higher than C then it's a good idea. If C is higher than B then it's a bad one for it makes us poorer by doing it.
It's also true that wittering on about "saving resources" doesn't get around this point. For time itself is a resource, one with a value as above. Indeed, it's not a difficult argument to make that time is the only truly non-renewable resource that we have and thus one that we really don't want to waste.
Now I agree that there's a little of tilting at windmills to all of this. Our targets for recycling aren't actually something in the power of our own government to alter. They are fed to us from Brussels, for matters environmental are a sole competence of the European Union. Local councils will be fined if they don't meet the targets and there's an end to the matter.
However, a few more numbers. We were told in the Waste Not, Want Not report that waste disposal was costing us £1.6bn a year and that if we didn't do something this could rise to £3.2bn. We thus needed to recycle more and reduce this cost … but hang on; recycling more also imposes this huge cost of our time. So are we in fact saving resources at all by pushing out our plans to recycle ever more of our waste? Or are we in fact consuming more resources than we're saving?
Here at Cif there are enough environmental and green type authors whose knowledge and brains we can pick. I'm perfectly happy to agree that the numbers I've used for the valuation of our time are back-of-the envelope stuff: however, they're the only attempt so far that anyone has made at all for the UK, as above, even the government hasn't tried to calculate them. So the labour cost alone of a simple recycling scheme is some £1.8bn a year and of a more extensive one, of the type being rolled out, is perhaps £9bn a year. I would say that this is vastly more than any benefits that we receive from that process. It's greater than the resources saved, it's greater than any environmental benefit, greater than any reduction in transport or emissions, greater than any rational calculation of what we get back for what we're being forced to put in.
So how about it? Caroline Lucas, George Monbiot, Oliver Tickell, Mark Lynas, Tony Juniper – there are enough people around here who should be able to prove me wrong. How much time is required to recycle, how should that time be valued, what are the benefits (valued in money please, so that we can compare costs with benefits), whether those benefits are environmental or more direct and, finally, show us that the benefits are greater than the costs. Please do add in CO2 savings for example, using the Stern review's estimate of social cost.
And no, saying that we've a new state religion and that we should all be required to worship Gaia for an appropriate time each week won't cut it. Anyway, it should be easy to provide these numbers – even though the government clearly hasn't done a proper cost benefit analysis, surely those urging us all to recycle more will have done so – won't they?
13 October 2008
By Y. Euny Hong (13 October 2008)
Published in France 24 here
Alfred Nobel made no mention in his will of an economics prize; it was added in 1969. With world markets tanking, some are questioning whether the prize should be abolished.
In an economic climate that many have called the worst since the Great Depression of the 1930s, the awarding of this year’s Nobel Prize in Economics almost seems like a bad joke.
Come to that, there have long been detractors who thought the economics award was a bad joke in itself. Almost since its inception in 1969, some members of the Swedish Academy have called for its abolition, as have descendants of the Nobel family. One winner, Friedrich Hayek, who won the prize in 1974, subsequently said that had his opinion been consulted, he would “have decidedly advised against" its creation.
In fact, the original will and testament of Alfred Nobel, drafted in 1895 (a year before his death), made no mention of a prize for economics. It was in fact a creation of the central bank of Sweden, and is officially known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Purists insist that it is in fact not a proper Nobel Prize but an adjunct prize.
Eamonn Butler, head of the Adam Smith Institute in London and the author of a book on Hayek, concurs somewhat with his mentor. “I’m sceptical as to whether there should be a Nobel Prize in economics. It’s got a way to go," he told FRANCE 24.
Like other critics, Butler believes that economics is a less exact science than physics or chemistry. “The standard joke is if you take two economists, you get three points of view. It’s not like physics, where you can test things and then everyone can agree at the end of the test," he says. “Economics is complicated. It’s a human science, and human beings are unpredictable."
Butler does not go so far as to blame economists for the current crash. He says economics is “academic, very rarefied. Its link with what’s happening [in today’s markets] is tangential. It is too much based on mathematical theorems with little basis in reality."
Are economists’ hands dirty ?
There are those, and not just conspiracy theorists, who believe that rather than helping the economy, Nobel economic laureates have been responsible for market crashes; that the prestige of the prize gives their theories the force of gospel truth, thus affecting investment decisions.
The most notorious example came in 1997, when economists Robert C. Merton and Myron Scholes were honoured for their work (with the late Fischer Black) on the pricing of options - complex financial instruments spun off from traditional investments. Scholes had been one of the co-founders of a boutique hedge fund in the USA called Long Term Capital Management (LTCM). The fund made annual returns of over 40% in its first years; then, in 1998, it lost $4.6 billion overnight, and was bailed out by the US government - the most controversial bank bailout in US history prior to the current financial crisis. Its sensational failure was attributed to holes in the Black-Scholes theorem, which did not allow sufficient room for market anomalies.
Tim Harford, a columnist at the Financial Times, counter-argued in an interview with FRANCE 24 that the current financial crisis arose not because of economists, but because of governments ignoring economists. He notes that Yale economist Robert Schiller has been warning of the housing bubble for years.
Butler, an economist himself, does not question the usefulness of economics as a discipline. He does warn, however, that economists should not directly involve themselves in policymaking. He quotes his mentor: “Hayek used to say the success of a country was inversely proportional to the number of economists. I don’t think he was wrong."
13 October 2008
by Tim Worstall, Adam Smith Fellow (October 13 2008)
Published in The Times here
There's a surprise benefit of nationalising the banks
Look on the bright side: we may be about to solve one of our most intractable political problems - the financing of political parties.
You'll recall that the various attempts to do so recently have always foundered on the issue of large donations. If the Tories can't get millions from companies or those who own them, why should Labour be able to get the same from unions? The travails of the banks allow us to slice through that Gordian knot.
A short-term nationalisation of the banking sector may well be both necessary and the right thing to do. But I think we should go farther and make such a nationalisation permanent. Yes, publicly owned and publicly accountable: that's the way forward for our banks. Not out of any desire to control the commanding heights of the economy, but rather to underpin the finances of that most essential part of a democratic system, the political party.
For publicly accountable does not mean accountable to you and me, nor to the public. It means accountable to our elected representatives. And what happens when politicians control the access to money is something we know about. As P.J.O'Rourke has pointed out, legislation that determines what is bought and sold leads to legislators themselves being bought and sold.
Long-term nationalisation of the sources of finance, though, would be a better deal: that way we'd only need to borrow a politician, not buy one. Need your credit card applications approved? That would be, say, a few weekends' leafleting. A mortgage? That might require actual membership of a party. Which businessman, looking for hundreds of millions to build a new factory or launch a new company, would not remember to ask: “And so how are the election funds, then?"
Who knows, perhaps we will find that politicians, taking advantage of their privileged access in borrowing money, will invest in businesses themselves: it would be nice to see some of them with experience of the real economy. In various places around the world, such as Italy or Spain, the appointment of bankers depends on political affiliation - and the Italians and Spanish have a much better work-life balance than the British do.
Who could possibly object? This is not an echo of Maundy Gregory, the celebrated seller of peerages between the wars. His problem was he just didn't think big. Of course we should hand over the allocation of finance to the politicians: they'll never again run out of money to buy our votes.
Tim Worstall is a blogger and Fellow of the Adam Smith Institute
6 October 2008
By Eamonn Butler (October 6, 2008)
Published in The Scotsman here
Published in The Korea Times here
Published in Turkey Daily News here
Published in the South China Morning Post here
Published in the Jerusalem Post here
Published in The Frontier Post here
Published in European Voice here
Published in The Examiner here
Published in The China Post here
Published in The Daily News here
Published in The Financial Mirror here
With turmoil in the world's markets, politicians and commentators have been demanding for more regulation and control of the financial sector. Their reaction is entirely predictable — but entirely wrong.
This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel.
Indeed, one can date its origin precisely, to October 12, 1977, when U.S. President Jimmy Carter signed the ``anti-redlining" law. Before then, lenders generally denied loans to people in poor neighborhoods, believing that the local mix of low incomes and a weak housing market would lead to many people defaulting.
But the politicians — with good intent — wanted to make home ownership available to all Americans. So lenders were forced into giving out risky mortgages: what we now call ``subprime" loans.
By 1985, this torrent of bad business had nearly bankrupted America's Saving & Loan institutions. So the government took on their bad debt and encouraged them to consolidate — unwittingly making them too big to be allowed to fail.
Meanwhile, several other problems worried the monetary authorities. In 1987, the U.S. stock market plummeted, fearing that other lenders could collapse. Asia's markets sank.
Mexico, Argentina and even Russia defaulted on their loans. Overvalued dotcom stocks crashed. And then there was 9/11. Each time, Western authorities responded by flooding the markets with cash.
After 9/11, the Federal Reserve took U.S. interest rates down from 6.25 percent to just 1 percent, fearing this blow to investor confidence could sink the markets. But again, their action boosted the wrong market by sustaining the credit bubble. With loans now six times cheaper, mortgage applications soared.
Lenders, awash with the Fed's cash, happily issued more subprime loans. With more people buying homes, house prices soared. Buying a house seemed a certain money-maker, so more people got more loans and bought more houses, continuing the spiral.
In London, that other great financial center, a decade of government overspending saw public debt soaring. Private debt and house prices soared even faster.
So for 10 years, economies boomed, the champagne flowed and everyone had a great party. But it was financed by fake money — printed by the authorities solely to keep the party going. When the dawn of realization broke, the long party turned into the inevitable hangover we suffer today.
The regulators, meanwhile, were unconscious on the floor. The U.S. mortgage institutions, Fannie Mae and Freddie Mac, had 200 regulators on their case but still went bust for $5 trillion.
These semi-governmental companies allowed investors to believe the bad mortgages were guaranteed by the government, causing credit rating agencies to give their dodgy bonds high scores.
Mortgage lenders re-packaged these bad debts round the world but nobody cried foul. Institutions were lending 30 times their asset base.
Though the Bank of England knew that the huge mortgage lender Northern Rock was failing, the 2,500 staff of Britain's financial regulator seemed to do nothing until it actually collapsed six months later. Even then, they had no coherent plan.
When the government is persuading the casino to hand out free chips and the regulators are standing drinks at the bar, you shouldn't be surprised if the customers place a few risky bets.
It's the management and not the system that deserves our scorn for breaking the basic rules of economics: There is no such thing as a free lunch.
Any sustainable solution has to get finance back to those basics. But the U.S. bailout package includes so many treats for special interests that it could save the culprits without helping the victims.
But it's a big world out there. China, now the world's fourth biggest economy, continues to grow at nearly 10 percent. India and other emerging economies are expanding too. Even with the West in recession, world growth next year will probably be near 4 percent. That's pretty good.
Western capitalism has been dealt a severe blow by inept politicians and officials. But global capitalism continues to pull hundreds of millions of people out of poverty. It's a great system. Let's not break it.
1 October 2008
Click here to read Dr Helen Evans, Adam Smith Institute Fellow in Healthcare (October 1, 2008)
1 October 2008
By Y. Euny Hong (October 1, 2008)
Published in France 24 here
The proposed US bailout could buy 2,000 apple pies for every American. FRANCE 24 asked two economists how they would spend the money.
If someone gave you $700 billion to rescue the US economy, how would you spend it? Read what two economists say, then give us your ideas by clicking 'React'.
"The bill is a dog's breakfast," says British economist Eamonn Butler of the proposed $700 billion US bailout package. "It's just a bunch of unrelated things cobbled together," adds the director of the Adam Smith Institute, a London-based free market think tank, "from saying that banker bonuses should be smaller, to talking about auto workers in Detroit".
Butler's colleague on the other side of the Atlantic, Oliver Hart at Harvard University (also a Brit), is not happy with the bill either: he signed a joint letter to Congress protesting the measure. Among his objections: What's the rush?
"They're trying to push it through fast, saying if we don't act quickly, the world is going to end," he told FRANCE 24. "Democracy is not meant to work that way." Hart does not feel that time-sensitivity should have been such a chief factor. "There's not much evidence of a market crash. If someone has to wait two weeks instead of one to borrow, it's not the end of the world."
The apple pie index
The proposed bailout plan would allow the Treasury to buy bad mortgage-related assets from banks, thereby freeing up money for the banks to lend to businesses and keep the economy going. The US Senate approved an amended version of the draft Wednesday night, a few days after the House of Representatives first rejected it.
The version adopted by the Senate adds up to 100 billion dollars in tax break extensions for middle class families and businesses, elements designed to entice reluctant Republicans in the House of Representatives to support the measure.
An often-expressed fear is that in the absence of such a bill, the United States - and the world - could see the worst economic downturn since the Great Depression of the 1930s. But many lawmakers, both Democrats and Republicans, are asking why the ordinary Americans they represent should have to foot the bill for the Wall Street banks - whose risky deals created the crisis in the first place.
The common perception of the bill is exemplified by a joke made on the comedy programme The Daily Show: that $700 billion is enough to buy 2,000 McDonald's apple pies for every US citizen. This joke goes to the heart of the matter, that many Americans feel the bailout has no clear benefit for the average person.
A scalpel, not an axe
Asked what he would do if he were given $700 billion to save the US economy, Hart joked: "I wouldn't spend it on apple pies; there's enough obesity in this country." But, he went on, he wouldn't spend it on an industry-wide bailout either - and not with that price tag. "I don't know what Bernanke knows," he said, referring to Fed Chairman Ben Bernanke. "You can't say he's not a good economist. But buying up distressed assets is… not the best way."
The problem with the current plan, says Hart, is that the government has no accurate way of knowing the value of the assets it is trying to buy from the banks. "What is the value of these subprime packages? Nobody knows."
Furthermore, pricing the purchase is a double bind. "If the government pays less (for the assets), they're not helping the banks recapitalize. But if they pay high prices, the government's making a loss." And wasting some of that $700 billion.
Hart, left to his druthers, would "lend money to solid businesses, not a massive bailout... I would tackle the failure in the credit markets directly, using a scalpel and not an axe…. A focused intervention would encourage banks to recapitalize, perhaps by issuing equity. It wouldn't cost $700 billion."
Furthermore, he would spend the cash on concrete measures: building bridges and other infrastructure projects, as well as paying down the budget deficit, which would reduce the need for future taxes.
Free chips, free drinks at the bar
Butler's think tank was built on the principles of Adam Smith, the 18th century economic pioneer, and espouses a free market with minimal government intervention.
One might expect someone with such a pedigree to have little sympathy for a mortgage customer who gets himself into trouble by overborrowing.
Yet Butler takes a surprising stance. If given a $700 billion check, Butler says he would "give it to the individuals that have the loans they can't repay… It's not their fault. When institutions are forced to give loans, it's like being in a casino where the government gives free chips and the regulators are giving out free drinks at the bar."
While Butler, like Hart, opposes the plan for an industry-wide bailout, he believes that bailouts in specific cases are necessary. "Markets depend on confidence. Here in England we bailed out Northern Rock because people were queuing up in the streets to take out their money."
This might have Adam Smith rolling in his grave, but perhaps he wouldn't have understood the US plan.
30 September 2008
by Professor Deepak Lal, Senior Fellow in Globalization of the Adam Smith Institute (30/9/08)
The Nanny State must not be allowed to replace the Planned Economy.
With the ending of political debates about the plan versus the market, Western politicians, particularly on the Left, have been searching for new areas to rouse the political interest of their electorates. Increasingly they have turned to interventions in the previously protected private domain. It began with the attempts by Clinton’s New Democrats and Blair’s New Labour to find a Third Way between collectivism and liberalism. Since this ended in a blind alley, British and US politicians (Obama and Cameron) are embracing a new ruse — “nudging" — to justify their interventionist instincts. This moral paternalism is the subject of this column.
Moral paternalism has a long lineage in social democratic thought, which makes its adoption by the UK’s Tory leader surprising. A clear exposition was provided by the distinguished Oxford legal theorist and philosopher Herbert Hart in a debate with Lord Devlin in the 1960s (Law, Liberty and Legislation, 1963) about the legalisation of homosexuality. Hart upheld Mill’s principle of liberty that an individual is at liberty to undertake feasible actions if they do not harm others, in advocating the legalisation of every consensual private sexual activity. But, he abjured the classical liberal case against moral paternalism, on the specious grounds that individuals are not really free to choose. So while sexual permissiveness is legitimate, all forms of paternalistic supervision or coercion are needed to ensure that all other individual choices are in fact freely made. As these choices are psychologically determined, it becomes imperative to exercise thought control: to make “windows into men’s souls". This is not classical liberalism but the route to 1984 and Big Brother, which classical liberals would eschew.
The most recent manifestation has been labelled “libertarian paternalism" by its progenitors, the behavioural economists Richard H Thaler and Cass R Sustein (in Nudge, 2008). Based on the findings of psychology, behavioural economists have found many anomalies in the standard economic model of an individual’s maximising utility subject to the usual budget constraints. The centrepiece of these findings is the problem of self-control, or akrasia, as the Greeks called it. A divided self is postulated with the short-term myopic self being tempted not to act in the interests of its longer-term rational self. Just as Ulysses tied himself to the mast to prevent his destruction by the voices of the Sirens, it is suggested that “nudges" can help the far-sighted Planner self “to promote your long-term welfare … [which] must cope with the feelings, mischief, and strong will of the Doer [self], who is exposed to the temptations of arousal" (p. 42).
Paternalism is advocated because “of the false assumption that almost all people, almost all of the time, make choices that are in their best interest or at the least better than the choices that would be made by someone else" (p. 9). They are libertarian because instead of coercing people to serve the long-term Planner self, the public and private “choice architects" would merely use “nudges" to point people in the right direction as in the male urinals at Schiphol airport in Amsterdam. These bear etchings of a black housefly, and an economist’s “fly-in-urinal trials found that etchings reduced spillage by 80 per cent" (p.4). But as the economic journalist Tim Harford rightly remarked: “I am no more in favour of spillage than the man standing at the urinal beside me, but how is this libertarian paternalism? ‘We recognise your right to wet your shoes, but in case that is not your objective we will structure your choice environment to help you’" (FT, 22 August, 2008).
But if the ‘nudges’ fail, as in the case of smoking, the State has moved towards coercion.
This is justified by moral paternalists by basing themselves on Mill’s correct argument against a person’s freedom to sell himself into slavery, namely that “the principle of freedom cannot require that the person be free not to be free. It is not freedom to be allowed to alienate his freedom" (On Liberty, Everyman edition, p. 158). Amartya Sen (FT, 11 Feb, 2007) has claimed the smoking ban in the UK is based on Mill’s principles of liberty: “as habit-forming behaviour today restricts the freedom of the same person in the future". But as I and others pointed out, this is a complete travesty of Mill’s argument against slavery (FT, 15 Feb 2007, and especially S Simpson, FT, 2 March 2007). Mill’s robust arguments against bans on addictive substances like alcohol and opium do not mention his argument against slavery as being relevant in any way.
The argument for prohibiting addictive substances, based on assuming a divided self, postulates a negative inter-temporal consumption externality facing potential addicts. Current consumption depends on past consumption but not future consumption. This omission is repaired in the rational addiction models of Becker and Murphy (Journal of Political Economy, 1988). They show how even with inter-temporally inconsistent preferences, consumers maximise utility over their life cycle taking account of the future consequences of their actions in consuming addictive substances.
More seriously, as the economic theorist Dew Fudenberg’s (Journal of Economic Literature, 2006) critical review of behavioral economics rightly notes: “Even if we believe people do make systematic errors in evaluating how various choices will influence the appropriately defined measure of their ‘welfare’, we might not trust that the government or policy analysts would make better evaluations. For this reason, it is consistent to believe both that people make mistakes and that government policy should be based on the assumption people’s actions and ex-ante predictions are the best guide to what is in their own interests" (p.707). Quite!
But, this does not mean that in teaching our children “how to live", they should not be encouraged to exercise self-control and think of long-term consequences. But this is the domain of preachers. There is nothing libertarian about “libertarian paternalism". It is paternalism which should on Mill’s principle of liberty play no part in the public policy of the good society. The Nanny State must not be allowed to replace the Planned Economy.
published in Business Standard here
25 September 2008
by Dr Eamonn Butler, Director of the Adam Smith Institute (September 25, 2008)
The archbishop's criticism of the markets is misplaced; it's governments and regulators that are responsible
I was beginning to like Dr John Sentamu, the Archbishop of York, who seems to have solid views on issues like Robert Mugabe and political correctness. So it's disappointing that he's fallen for the politically correct line on the markets crisis, calling share traders who cashed in on falling prices "bank robbers and asset strippers".
Then, in a pincer-movement of stupidity, I see the Archbishop of Canterbury, Dr Rowan Williams, giving Spectator readers his views about banking regulation. Well I've got a few theories of my own about how Christ fed the 5000, but I don't publish them in the media because I figure lots of people know more about it than me. And the men in mitres should know better than to proclaim such superficial – and wrong – views on finance.
Sentamu told bankers that the financial market "seems to have taken its rules of trade from Alice in Wonderland", and of course he's right. But it's the monetary and regulatory authorities who set these rules, not the players. You've had the Fed dishing out money and credit for the past dozen years, slashing interest rates from over 6% to just 1% as it tried to stave off the alarm of 9/11, the dotcom crash, bird flu, the Russian default, and much else. You've had a British government that's been spending wildly beyond its means. And a regulatory regime so inept that it allows banks to turn one pound of deposits into 10 pounds worth of loans, and then lets other funds ratchet that up even more. It's been a Mad Hatter's tea party right enough, but it's been the authorities who've been inhaling the mercury.
"To a bystander like me", said Sentamu, "those who made £190m deliberately underselling the shares of HBOS … and drove it into the arms of Lloyds TSB, are clearly bank robbers and asset strippers". And in the same vein, Williams backed the curb on short-selling.
That's maybe just how it seems to the uninformed. But short-selling is a risky business. If a £1 stock falls to zero, you make £1. If it rises to £100, you lose a fortune. You need to be thoroughly clued up about the company you are shorting. Short-selling is actually a valuable signal that something is wrong with a company – and that managers or regulators should take action.
When Pakistan banned short-selling back in July, it halted the market's downward drift for a couple of days but had no long-term impact. Nor will ours. It's so easy for pious folk to see a problem and say that more regulation is the answer. Maybe smarter regulation is the answer. But the real bank robbers, who've dipped into our pensions and savings and given the world a decade-long party from which we're now suffering the hangover, are those who were supposed to be controlling this market, not those inside it.
Published in The Guardian here