Use the market force, Luke


I nearly threw up over the Daily Telegraph on Monday, as I read Roger Bootle arguing that "banking is too important to be left to the bankers". I like Roger, he's very brainy and we've had him at our Power Lunches here from time to time. But unfortunately the truth is that banking is too important to be left to central bankers.

Make no mistake, they're the ones who got us into this mess. As cheap imports flooded in from China, prices should have been falling; but the Fed and the Bank of England were content to preside over (modestly) rising prices. There was, simply, too much money around for far too long. True, with events like 9/11 lots of people were calling for yet more money to be injected. But now we know that simply lowering interest rates and keeping them low is no long-term formula for economic success. We binged on credit, and now we're hung over.

John Stepek of Money Morning has a better idea.

"I’d say just ditch central banks and let the market set interest rates. Central banks, regardless of how ostensibly independent they are, are instruments of the government. The government wants happy voters, and free money makes people happy. So there’s always the temptation to keep the money flowing freely. "

"The market on the other hand, couldn’t care less what voters think. One feature of the credit boom is that most people in the City and on Wall Street knew it couldn’t last forever, and they had a hunch it would blow up in a very unpleasant way. But they couldn’t stop playing along, because they had to compete with their peers. However, if markets set interest rates rather than governments, then arguably this mood of rising concern among the participants, would be reflected in the price of money long before things got out of hand. Anyone who had overplayed their hands would run into trouble long before they became “too big to fail".

That seems like a much better idea than spending hundreds of billions of dollars and tens of billions of pounds to create a welfare state for distress banker-folk. Use the market force, Luke!