Tuesday, December 30, 2008
A defensive defence of capitalism 2008
A review of the Economist’s economic coverage of 2008 reminds its blog readers that the magazine often took a pessimistic stance even before the worst of the crisis broke. It also provides a useful reminder of one of its key articles of the year. In October it published a markedly defensive defence of capitalism. After setting itself up as “on the side of economic liberty” it went on to argue that:
“In the short term defending capitalism means, paradoxically, state intervention. There is a justifiable sense of outrage among voters and business people (and indeed economic liberals) that $2.5 trillion of taxpayers' money now has to be spent on a highly rewarded industry. But the global bail-out is pragmatic, not ideological. When François Mitterrand nationalised France’s banks in 1981 he did so because he thought the state would run them better. This time governments are buying banks (or shares in them) because they believe, rightly, that public capital is needed to keep credit flowing.”
It goes on to argue that Walter Bagehot, one of the early editor’s of the Economist, supported state intervention to prevent bank runs from damaging the real economy. The article concludes with the lines:
“Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.”
It is true that the recent massive state intervention to bail out the financial system is pragmatic rather than ideological. Nevertheless it shows that the notion of a vibrant free market is a myth.
“In the short term defending capitalism means, paradoxically, state intervention. There is a justifiable sense of outrage among voters and business people (and indeed economic liberals) that $2.5 trillion of taxpayers' money now has to be spent on a highly rewarded industry. But the global bail-out is pragmatic, not ideological. When François Mitterrand nationalised France’s banks in 1981 he did so because he thought the state would run them better. This time governments are buying banks (or shares in them) because they believe, rightly, that public capital is needed to keep credit flowing.”
It goes on to argue that Walter Bagehot, one of the early editor’s of the Economist, supported state intervention to prevent bank runs from damaging the real economy. The article concludes with the lines:
“Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.”
It is true that the recent massive state intervention to bail out the financial system is pragmatic rather than ideological. Nevertheless it shows that the notion of a vibrant free market is a myth.
Tuesday, December 16, 2008
Call for debate on real economy
Frank Furedi has an important article on today’s spiked arguing it is time to have a debate on the real economy. For him this means discussing how it should be restructured and reorganised in contrast with the current narrow focus on financial problems.
Labels: economics, finance, spiked
Monday, December 15, 2008
Downturn stems from fear and green growth
The following comment by me appeared in the latest Fund Strategy (15 December).
As the days go by explanations for the economic crisis pile up. Initially the favoured explanation was a combination of greedy bankers and irresponsible borrowers. Others added to the list since include insufficient state intervention and timeless financial euphoria.
This column has argued instead that other factors are key. It can be seen as a crisis of green capitalism and of risk aversion.
Green capitalism is key because it means that the growth in productive capacity is being slowed by subjective limits. There is a widespread fear of growth and innovation. As a result a disparity arose between the scale of production and that of consumption. In that sense it can be called a crisis of underproduction.
Risk aversion also plays a role. As the financial sector has swollen it has been shaped by risk aversion. Many key financial instruments that have played a large role in the crisis - including credit derivatives and securitised mortgage products - are essentially mechanisms for transferring risk. Yet, contrary to what their creators intended, they have created the basis for "contagion" as financial problems have spread.
On reflection there is also another important factor to consider. It could indicate the decline in importance of a one-off boost to the global economy.
With the end of the Cold War a huge new labour force became more closely integrated to the global economy. China and India boomed and the world economy enjoyed a strong growth spurt as a result.
Clearly China, India and other emerging economies will still continue to exist and, hopefully, to grow. But it is hard to see any equivalent additional boost to the global economy of the scale of the addition of these countries.
In the past two decades the world has enjoyed an unprecedented period of extensive growth. The scale of involvement in the global economy has grown hugely and many millions of people have benefited as a result.
This boom is entirely different in character to that which followed the end of the second world war. That was much more characterised by intensive investment in technology and machinery.
Experience provides little guide to the character of the economic crisis. Its roots in green capitalism, risk aversion and extensive growth make it unlike any other.
As the days go by explanations for the economic crisis pile up. Initially the favoured explanation was a combination of greedy bankers and irresponsible borrowers. Others added to the list since include insufficient state intervention and timeless financial euphoria.
This column has argued instead that other factors are key. It can be seen as a crisis of green capitalism and of risk aversion.
Green capitalism is key because it means that the growth in productive capacity is being slowed by subjective limits. There is a widespread fear of growth and innovation. As a result a disparity arose between the scale of production and that of consumption. In that sense it can be called a crisis of underproduction.
Risk aversion also plays a role. As the financial sector has swollen it has been shaped by risk aversion. Many key financial instruments that have played a large role in the crisis - including credit derivatives and securitised mortgage products - are essentially mechanisms for transferring risk. Yet, contrary to what their creators intended, they have created the basis for "contagion" as financial problems have spread.
On reflection there is also another important factor to consider. It could indicate the decline in importance of a one-off boost to the global economy.
With the end of the Cold War a huge new labour force became more closely integrated to the global economy. China and India boomed and the world economy enjoyed a strong growth spurt as a result.
Clearly China, India and other emerging economies will still continue to exist and, hopefully, to grow. But it is hard to see any equivalent additional boost to the global economy of the scale of the addition of these countries.
In the past two decades the world has enjoyed an unprecedented period of extensive growth. The scale of involvement in the global economy has grown hugely and many millions of people have benefited as a result.
This boom is entirely different in character to that which followed the end of the second world war. That was much more characterised by intensive investment in technology and machinery.
Experience provides little guide to the character of the economic crisis. Its roots in green capitalism, risk aversion and extensive growth make it unlike any other.
Labels: china, economics, environment, finance, Fund Strategy, india
Tuesday, December 09, 2008
Microfinance loan sharks
Saturday’s FT Weekend magazine had an article by Tim Harford, a senior columnist at the Financial Times, on microfinance. The most interesting point in made was on the split in the ranks of those providing microfinance:
“The commercialisation of microfinance has sparked a fierce debate between profit advocates such as Carlos Danel and Carlos Labarthe, the founders of Compartamos, and traditionalists such as Muhammad Yunus, who see microfinance lenders such as Compartamos as indistinguishable from the moneylenders he set out to replace in 1976. Between these two poles lie the majority of microfinance practitioners, eager to gain access to capital and commercial expertise, but concerned that competitive market forces may not help the poorest.”
It also pointed out that microfinance arguments can charge interest rates with an annual percentage rate of over 100%. Harford argues that this “is not as usurious as it might seem” as the overheads are so high. Sounds more like glorified loan sharks to me!
“The commercialisation of microfinance has sparked a fierce debate between profit advocates such as Carlos Danel and Carlos Labarthe, the founders of Compartamos, and traditionalists such as Muhammad Yunus, who see microfinance lenders such as Compartamos as indistinguishable from the moneylenders he set out to replace in 1976. Between these two poles lie the majority of microfinance practitioners, eager to gain access to capital and commercial expertise, but concerned that competitive market forces may not help the poorest.”
It also pointed out that microfinance arguments can charge interest rates with an annual percentage rate of over 100%. Harford argues that this “is not as usurious as it might seem” as the overheads are so high. Sounds more like glorified loan sharks to me!
Labels: development, economics, finance
Monday, December 08, 2008
A production dearth not consumer binge
The following comment by me appeared in the latest Fund Strategy (8 December).
In this upside down version of events, the fundamental problem was cheap credit fuelling extravagant purchases of houses and consumer goods. Feckless consumers and reckless lenders are the villains in this sordid morality tale.
What this scenario misses is that it is necessary to produce before you can consume. Production is a logical pre-condition for consumption and everything that is consumed has to be produced first.
This means that consumption cannot be considered in isolation from production. The myth of the overconsumption binge is hopelessly one-sided.
It would be more accurate to say that the fundamental problem was one of underproduction. Insufficient real value was being produced in the developed western economies. Often paper wealth – such as bonds and equities – was confused with real productive capacity.
The British housing market provides a prime example of this trend. One reason that British house prices rose so much was the artificial constraint on the supply of new homes by “green belt” legislation. As a result of such archaic rules few new houses were built – with the bulk of the population condemned to live in antiquated dwellings. If house building was easier and more efficient it is doubtful that such a large bubble would have developed.
Of course it is true that credit fuelled economic expansion during the relatively good years. But that was a result of economic weakness rather than its cause. The authorities, most notably the Federal Reserve in America, encouraged cheap credit as a way of offsetting a tendency to economic stagnation. It would have been far better if the American authorities had encouraged real productive investment.
The problem of underproduction was exacerbated by the prevailing bias against production in western societies (see the comment in last week’s quarterly review). Attempts to bolster production were viewed with suspicion or hindered by bureaucratic delays.
In contrast projects that squandered individual’s most valuable resource – their time – were lauded. If the effort used to keep turning lights on and off or stop water taps running was used more productively, the economy would have benefited. Instead, society got caught up in a wasteful cycle of mind-numbing rationing.
In this upside down version of events, the fundamental problem was cheap credit fuelling extravagant purchases of houses and consumer goods. Feckless consumers and reckless lenders are the villains in this sordid morality tale.
What this scenario misses is that it is necessary to produce before you can consume. Production is a logical pre-condition for consumption and everything that is consumed has to be produced first.
This means that consumption cannot be considered in isolation from production. The myth of the overconsumption binge is hopelessly one-sided.
It would be more accurate to say that the fundamental problem was one of underproduction. Insufficient real value was being produced in the developed western economies. Often paper wealth – such as bonds and equities – was confused with real productive capacity.
The British housing market provides a prime example of this trend. One reason that British house prices rose so much was the artificial constraint on the supply of new homes by “green belt” legislation. As a result of such archaic rules few new houses were built – with the bulk of the population condemned to live in antiquated dwellings. If house building was easier and more efficient it is doubtful that such a large bubble would have developed.
Of course it is true that credit fuelled economic expansion during the relatively good years. But that was a result of economic weakness rather than its cause. The authorities, most notably the Federal Reserve in America, encouraged cheap credit as a way of offsetting a tendency to economic stagnation. It would have been far better if the American authorities had encouraged real productive investment.
The problem of underproduction was exacerbated by the prevailing bias against production in western societies (see the comment in last week’s quarterly review). Attempts to bolster production were viewed with suspicion or hindered by bureaucratic delays.
In contrast projects that squandered individual’s most valuable resource – their time – were lauded. If the effort used to keep turning lights on and off or stop water taps running was used more productively, the economy would have benefited. Instead, society got caught up in a wasteful cycle of mind-numbing rationing.
Labels: consumption, economics, environment, finance
Tuesday, December 02, 2008
Ditch green dogma for real growth ethos
The following comment by me appeared in the latest Fund Strategy Quarterly Review of World Markets (1 December).
Governments around the world have announced measures to bolster liquidity in their financial systems and fiscal packages to boost consumption. Yet none of them seems to be getting to grips with the real problems facing their economies.
There is a need to support liquidity in the short term. The supply of credit to the economy is being constrained. To an extent this problem can be addressed by government-backed liquidity packages.
Bolstering consumption is more questionable. Tax cuts may get people consuming more in the short term but it will not address the weaknesses of the world's economies. It will also be bought at the expense of greater austerity in the medium and longer term.
A programme of public spending is more desirable. Even the developed countries, particularly Britain, need better infrastructure. More airports, roads and power stations would be a good start. It would create jobs and the basis for raising productivity. Small increases in personal consumption, in contrast, only have a fleeting effect.
But suggestions for an ambitious programme of public works raise a broader problem of contemporary attitudes to the economy. There seems to be a reluctance to invest in productive capacity. The sphere of production has become stigmatised.
This is a particular problem as the key underlying weakness of the economy is that consumption has moved out of line with production. In the short term this problem was dealt with by the creation of credit but, as the world has seen over the past quarter, reality has a nasty way of biting back.
Rather than reduce consumption growth, the solution is to increase productive capacity. Yet production nowadays is often seen, literally as well as figuratively, as dirty. Just think about the way productive areas of the economy are portrayed. Factories are seen as polluting. Roads are portrayed as producing more congestion. Projects for power stations are subject to protests and strangled by bureaucratic delays. Airports are seen as damaging the planet.
Instead we live in a world where the small-scale and worthless gestures are celebrated. Recycling. Micro-generation of power by mini-windmills on top of houses. The creation of brands and logos.
The fundamental solution to today's economic problems is a reinvigorated culture of production. Environmentalist dogma needs to be ditched in favour of a genuine growth culture. Productive capacity needs to be raised rather than consumption curbed. The anti-growth and anti-industrial ethos needs to be reversed.
Governments around the world have announced measures to bolster liquidity in their financial systems and fiscal packages to boost consumption. Yet none of them seems to be getting to grips with the real problems facing their economies.
There is a need to support liquidity in the short term. The supply of credit to the economy is being constrained. To an extent this problem can be addressed by government-backed liquidity packages.
Bolstering consumption is more questionable. Tax cuts may get people consuming more in the short term but it will not address the weaknesses of the world's economies. It will also be bought at the expense of greater austerity in the medium and longer term.
A programme of public spending is more desirable. Even the developed countries, particularly Britain, need better infrastructure. More airports, roads and power stations would be a good start. It would create jobs and the basis for raising productivity. Small increases in personal consumption, in contrast, only have a fleeting effect.
But suggestions for an ambitious programme of public works raise a broader problem of contemporary attitudes to the economy. There seems to be a reluctance to invest in productive capacity. The sphere of production has become stigmatised.
This is a particular problem as the key underlying weakness of the economy is that consumption has moved out of line with production. In the short term this problem was dealt with by the creation of credit but, as the world has seen over the past quarter, reality has a nasty way of biting back.
Rather than reduce consumption growth, the solution is to increase productive capacity. Yet production nowadays is often seen, literally as well as figuratively, as dirty. Just think about the way productive areas of the economy are portrayed. Factories are seen as polluting. Roads are portrayed as producing more congestion. Projects for power stations are subject to protests and strangled by bureaucratic delays. Airports are seen as damaging the planet.
Instead we live in a world where the small-scale and worthless gestures are celebrated. Recycling. Micro-generation of power by mini-windmills on top of houses. The creation of brands and logos.
The fundamental solution to today's economic problems is a reinvigorated culture of production. Environmentalist dogma needs to be ditched in favour of a genuine growth culture. Productive capacity needs to be raised rather than consumption curbed. The anti-growth and anti-industrial ethos needs to be reversed.
Labels: economics, environment, finance
Tuesday, November 18, 2008
Real Clear Markets picks up my cover
Real Clear Markets has picked up my Fund Strategy cover story on the global financial crisis.
Labels: economics, finance, Fund Strategy, media appearances
Monday, November 17, 2008
U-turn leaders treat us with contempt
The following is my latest comment from Fund Strategy. I have also written the cover story which reviews the financial crisis so far
Another day, another U-turn. Western politicians seem to be in a competition over who can do the most. Unfortunately it is the rest of us who suffer as a result of their policy gymnastics.
Henry Paulson, the American Treasury secretary, was the latest culprit - at least at the time of writing. At the end of September he led a charge demanding that a $700 billion (£478 billion) programme to buy up troubled mortgage assets be passed. If it failed it would, we were told, lead to disaster.
Eventually, after an initial rejection by the House of Representatives, it was passed. But last week Paulson gave a speech saying the programme would not be used for its original purpose (see page 10). Instead its main focus would be to purchase equities directly from banks.
It is not that the first plan was necessarily right and the new scheme wrong. It is rather that politicians feel comfortable making U-turns without properly accounting for their actions. A particular course of action is first deemed essential and not long afterwards portrayed as unimportant.
The problem with such an approach is that it undermines confidence in markets and the economy still further. Rather than offering decisive leadership the politicians simply react to the latest news story. Their response is inherently short-termist.
Nor is such short-termism unique to Paulson or even America. Gordon Brown is a past master. It was he who for many years propounded fiscal "golden rules", which he has now broken with a fiscal stimulus. He claims that circumstances have changed but this begs the question: why have such rigid rules in the first place? He cannot have it both ways.
Brown also is now trumpeting the need for international economic cooperation. Yet Britain refused to join the euro when it had the chance.
Again, the point is not that one course of action is necessarily right and the other wrong. It is that politicians feel no need for consistency or accountability. They treat the electorate with contempt and then wonder why they are viewed with cynicism.
Politicians bear a large share of the blame for the severity of the current crisis. What we need is decisive action rather than leaders with the backbone of a jellyfish.
Another day, another U-turn. Western politicians seem to be in a competition over who can do the most. Unfortunately it is the rest of us who suffer as a result of their policy gymnastics.
Henry Paulson, the American Treasury secretary, was the latest culprit - at least at the time of writing. At the end of September he led a charge demanding that a $700 billion (£478 billion) programme to buy up troubled mortgage assets be passed. If it failed it would, we were told, lead to disaster.
Eventually, after an initial rejection by the House of Representatives, it was passed. But last week Paulson gave a speech saying the programme would not be used for its original purpose (see page 10). Instead its main focus would be to purchase equities directly from banks.
It is not that the first plan was necessarily right and the new scheme wrong. It is rather that politicians feel comfortable making U-turns without properly accounting for their actions. A particular course of action is first deemed essential and not long afterwards portrayed as unimportant.
The problem with such an approach is that it undermines confidence in markets and the economy still further. Rather than offering decisive leadership the politicians simply react to the latest news story. Their response is inherently short-termist.
Nor is such short-termism unique to Paulson or even America. Gordon Brown is a past master. It was he who for many years propounded fiscal "golden rules", which he has now broken with a fiscal stimulus. He claims that circumstances have changed but this begs the question: why have such rigid rules in the first place? He cannot have it both ways.
Brown also is now trumpeting the need for international economic cooperation. Yet Britain refused to join the euro when it had the chance.
Again, the point is not that one course of action is necessarily right and the other wrong. It is that politicians feel no need for consistency or accountability. They treat the electorate with contempt and then wonder why they are viewed with cynicism.
Politicians bear a large share of the blame for the severity of the current crisis. What we need is decisive action rather than leaders with the backbone of a jellyfish.
Labels: America, economics, finance, Fund Strategy
Monday, November 10, 2008
Why Britain's plight is Brown's fault too
The following is my latest comment from Fund Strategy.
Gordon Brown persists in presenting Britain as simply a victim of the global financial crisis. Such an approach conveniently absolves him of any responsibility for the mess. But it is becoming clear that Britain’s position is particularly precarious.
The idea of a uniform global crisis certainly does not square with the revised growth forecasts published by the International Monetary Fund last week. While Britain’s GDP is projected to fall 1.3% in 2009 that of China is expected to rise by 8.5%. Even Africa is expecting growth of 4.7%.
Perhaps it is unfair to compare Britain with emerging economies. But the average GDP fall for advanced economies is forecast to be 0.3% next year. Britain is likely to be the worst performer next year with the exception of disaster areas such as Zimbabwe.
Britain is particularly vulnerable thanks to its large financial sector and correspondingly small industrial sector. Industry as a share of GDP has fallen to about 23% compared with 43% in 1971. Much of Britain’s wealth comes from financial services, which are in turn heavily dependent on real economic production in other parts of the world. Britain is the consummate coupon clipper economy.
If there is an anomaly, it is not Britain’s current position but its relatively buoyant growth since the 1990s. The City of London benefited from the growth of global capital flows and the general trend towards increasing financial activity worldwide. As such activity has diminished, the British economy has been hard hit.
To an extent these are long-term trends that would have existed regardless of who was in office. But, in a desperate attempt to distance himself from Labour’s state socialist past, Brown has made frequent displays of public obsequiousness to the City.
It is not a question of blaming the City for Britain’s economic problems. On the contrary, the rising importance of financial markets is largely a symptom of the decline of the real economy. The challenge, which Brown has failed to meet, was to regenerate Britain’s productive base.
Britain’s economy is more like a geriatric than the dynamic “Cool Britannia” the government likes to portray. Brown should not bear all the blame, but he should certainly take a share of the responsibility.
Gordon Brown persists in presenting Britain as simply a victim of the global financial crisis. Such an approach conveniently absolves him of any responsibility for the mess. But it is becoming clear that Britain’s position is particularly precarious.
The idea of a uniform global crisis certainly does not square with the revised growth forecasts published by the International Monetary Fund last week. While Britain’s GDP is projected to fall 1.3% in 2009 that of China is expected to rise by 8.5%. Even Africa is expecting growth of 4.7%.
Perhaps it is unfair to compare Britain with emerging economies. But the average GDP fall for advanced economies is forecast to be 0.3% next year. Britain is likely to be the worst performer next year with the exception of disaster areas such as Zimbabwe.
Britain is particularly vulnerable thanks to its large financial sector and correspondingly small industrial sector. Industry as a share of GDP has fallen to about 23% compared with 43% in 1971. Much of Britain’s wealth comes from financial services, which are in turn heavily dependent on real economic production in other parts of the world. Britain is the consummate coupon clipper economy.
If there is an anomaly, it is not Britain’s current position but its relatively buoyant growth since the 1990s. The City of London benefited from the growth of global capital flows and the general trend towards increasing financial activity worldwide. As such activity has diminished, the British economy has been hard hit.
To an extent these are long-term trends that would have existed regardless of who was in office. But, in a desperate attempt to distance himself from Labour’s state socialist past, Brown has made frequent displays of public obsequiousness to the City.
It is not a question of blaming the City for Britain’s economic problems. On the contrary, the rising importance of financial markets is largely a symptom of the decline of the real economy. The challenge, which Brown has failed to meet, was to regenerate Britain’s productive base.
Britain’s economy is more like a geriatric than the dynamic “Cool Britannia” the government likes to portray. Brown should not bear all the blame, but he should certainly take a share of the responsibility.
Labels: economics, finance, Fund Strategy
Tuesday, November 04, 2008
Unsavvy bankers
When I went into my bank today to pay some bills I came across a couple of small cards headed “Be a savvy saver”. One advised people to “keep your tyres pumped up” and the other said “make lunch at home”.
It is ironic that such unsavvy institutions as British banks are giving such advice to consumers. Perhaps it points to a novel explanation for the huge problems facing the financial sector. Maybe top executives were spending too much of their valuable time making sandwiches and not enough minding their own businesses?
It is ironic that such unsavvy institutions as British banks are giving such advice to consumers. Perhaps it points to a novel explanation for the huge problems facing the financial sector. Maybe top executives were spending too much of their valuable time making sandwiches and not enough minding their own businesses?
Labels: corporations, ethics, finance
An exciting challenge ahead
The best thing about last weekend’s Battle of Ideas festival was the large number of young people looking for answers to economic questions. At least the financial crisis has had some benefits! The challenge now is to develop a rigorous understanding of recent economic developments.
Thursday, October 30, 2008
Be careful what you wish for
“Be careful what you wish for” is going to be the theme of my introduction to the session on “growing pains” at this coming weekend’s Battle of Ideas.
For a long time growth sceptics have expressed concern about the rising affluence of places such as China and India. They have argued, at least implicitly, for a cut in their economic growth. Now, with the global financial crisis, they could get what they wish for. If they do it will be a tragedy as billions of people will not be in a position to benefit from rising prosperity.
There are already signs that instability is spreading to developing economies. This was discussed in last week’s Economist (25 October) as well as by such luminaries as Paul Krugman of Princeton and Dani Rodrik of Harvard.
Over the past couple of days the authorities (the International Monetary Fund, America’s Federal Reserve and the European Union) have offered financial help to emerging economies in a bid to stabilise them. The catch is, according to a report by Capital Economics, that they are offering help to those countries that need it least. Those which most need help are unlikely to qualify.
For a long time growth sceptics have expressed concern about the rising affluence of places such as China and India. They have argued, at least implicitly, for a cut in their economic growth. Now, with the global financial crisis, they could get what they wish for. If they do it will be a tragedy as billions of people will not be in a position to benefit from rising prosperity.
There are already signs that instability is spreading to developing economies. This was discussed in last week’s Economist (25 October) as well as by such luminaries as Paul Krugman of Princeton and Dani Rodrik of Harvard.
Over the past couple of days the authorities (the International Monetary Fund, America’s Federal Reserve and the European Union) have offered financial help to emerging economies in a bid to stabilise them. The catch is, according to a report by Capital Economics, that they are offering help to those countries that need it least. Those which most need help are unlikely to qualify.
Labels: development, economics, finance, speeches
Tuesday, October 28, 2008
Atwood book on debt
Margaret Atwood, a Canadian writer and activist, has had a non-fiction book published on debt. Payback: Debt and the Shadow Side of Wealth is a collection of essays based on the annual Massey lectures she gave this year. From what I can gather it is against “greed” and pro-environmentalist. For an extract click here.
Labels: book, debt, environment, finance
Monday, October 27, 2008
Put politics back into economics
The following comment by me was published in this week’s Fund Strategy.
Mervyn King, the governor of the Bank of England, has stated that he would like to see economics become boring again. Although his instinct is understandable it is profoundly mistaken.
It is easy to look back with nostalgia at those halcyon days - just a few weeks ago - when stockmarkets seemed to go up most of the time. No doubt everyone in the investment industry, except perhaps short sellers, is yearning for such happy times to return.
But King's oft-repeated desire for economics to be boring means something different. What he is really saying is that economics should be left to clever chaps like himself. It should not be the subject of debate by the mass of the population. In other words, he is saying economics should be apolitical. In his view the masses cannot be trusted.
Leave aside for a moment the fact that such a conception of economics is undemocratic. That it disenfranchises the mass of the population and leaves important decisions in the hands of unelected technocrats such as King. It is also the wrong approach to economic decision-making.
Although Britain has its particular institutional structures, the same argument applies worldwide. Economics should be taken out of the hands of the technocrats and once again become a subject for popular debate.
What is needed now more than ever is a debate about how to deal with economic problems. It is necessary to discuss how to respond to recent volatility in the short term. Over the longer term it is also vital to work out strategic priorities.
The truth is best achieved through rational debate. Each side can put its case and the one which is right should be the most convincing.
Such a procedure also ensures that the right questions are asked. Technocrats tend to get too bogged down in technical detail. They easily lose sight of the bigger picture. Having a broader debate among the public ensures that questions that are important to most, such as raising popular prosperity, receive a proper airing.
A good first step would be to abolish the independence of the Bank of England. New Labour's move to make it independent in the first place was always anti-democratic. Now the downside of taking politics out of economics should also be apparent.
Mervyn King, the governor of the Bank of England, has stated that he would like to see economics become boring again. Although his instinct is understandable it is profoundly mistaken.
It is easy to look back with nostalgia at those halcyon days - just a few weeks ago - when stockmarkets seemed to go up most of the time. No doubt everyone in the investment industry, except perhaps short sellers, is yearning for such happy times to return.
But King's oft-repeated desire for economics to be boring means something different. What he is really saying is that economics should be left to clever chaps like himself. It should not be the subject of debate by the mass of the population. In other words, he is saying economics should be apolitical. In his view the masses cannot be trusted.
Leave aside for a moment the fact that such a conception of economics is undemocratic. That it disenfranchises the mass of the population and leaves important decisions in the hands of unelected technocrats such as King. It is also the wrong approach to economic decision-making.
Although Britain has its particular institutional structures, the same argument applies worldwide. Economics should be taken out of the hands of the technocrats and once again become a subject for popular debate.
What is needed now more than ever is a debate about how to deal with economic problems. It is necessary to discuss how to respond to recent volatility in the short term. Over the longer term it is also vital to work out strategic priorities.
The truth is best achieved through rational debate. Each side can put its case and the one which is right should be the most convincing.
Such a procedure also ensures that the right questions are asked. Technocrats tend to get too bogged down in technical detail. They easily lose sight of the bigger picture. Having a broader debate among the public ensures that questions that are important to most, such as raising popular prosperity, receive a proper airing.
A good first step would be to abolish the independence of the Bank of England. New Labour's move to make it independent in the first place was always anti-democratic. Now the downside of taking politics out of economics should also be apparent.
Labels: economics, finance, Fund Strategy
Tuesday, October 14, 2008
Bear article picked up
Real Clear Markets and Times Comment Central have picked up my article on yesterday’s spiked.
Labels: economics, finance, media appearances, spiked
Monday, October 13, 2008
Spiked article on market meltdown
Spiked has published my latest article on the financial crisis. It looks at “why the bear markets are talking bull”.
Labels: economics, finance, spiked
Saturday, October 11, 2008
Media appearances
This week my recent Fund Strategy news analysis on the market meltdown (see 6 October post) was reproduced on Real Clear Markets while spiked ran an updated version of my review of Robert Reich’s Supercapitalism. I was also invited to appear on the Al Jazeera English TV station and Sky News but could not do either as I was in Dubai. It seems that I am at my most popular during a global financial crisis!
Labels: book, economics, finance, Fund Strategy, media appearances, review, spiked, television
Monday, October 06, 2008
Growth belies hysteria over downturn
The following is my news analysis from the latest Fund Strategy. It is an attempt to develop a framework to understand the current crisis
Given the pervasive sense of doom about the global economy at present it is worth taking a step back to work out what is really happening. In all the hysteria about plunging stockmarkets and failing financial institutions it is easy to lose a sense of perspective.
In broad terms there are several ways in which the impact of the market turmoil can be assessed. There are quantitative measures - the hard numbers so beloved of economists - and more qualitative ones. The latter involve asking what is the precise character of the problems.
It is also important to distinguish between what has already happened and what could happen. This may seem obvious but they are often muddled together in the anxious discussion.
In terms of economic indicators the striking thing is that, so far at least, the impact of the financial turmoil has been muted. Although the credit crunch started back in August 2007 the main developed economies are still - just about - growing.
The only significant developed country in technical recession - defined as two consecutive quarters of falling output - is Ireland. Denmark was in recession but has recently started to grow again.
This is not to say that the textbook definition of a recession is perfect or that things cannot get worse. It is likely that both the eurozone and Japan will soon be in recession.
But what is happening is that growth in many of the developed countries has fallen to about zero rather than there being a sharp drop in output. America is doing relatively well with GDP growth at an annual rate of 2.8% in the second quarter of 2008, although it did suffer a 0.2% fall in the final quarter of 2007.
In contrast, it is worth remembering that America's GDP fell by 30% and industrial output fell by 47% during the Great Depression of the 1930s. Even in the recession of 1981-2 America's output fell by 2%.
Nor are the forecasts for global growth in the coming period that bad. The official International Monetary Fund (IMF) forecasts for the world economy are not out till this week. But last week Michael Mussa, a former IMF chief economist, published economic forecasts last week on behalf of the highly respected Peterson Institute for International Economics in Washington DC.
Overall he forecasts 1.2% growth for the industrial countries in 2009 compared with 1.5% in 2008 and 2.5% in 2007. This is hardly rapid growth but it is a long way from a severe downturn.
The outlook for emerging economies, which today account for almost half of the world economy, is much better although they are expected to slow. Overall emerging economies are forecast to expand by 5.7% in 2009 compared with 6.4% this year and 7.4% in 2007.
Of course the forecasts for future growth could be wrong. To get a better idea of what is going on it is necessary to look more closely at the character of the slowdown. Often conventional economists rely too much on the numbers and appreciate too little the peculiar character of the economic situation. In this respect there are several factors to consider.
This is a consumption-led downturn. What is happening is that people's disposable income is being squeezed by rising energy and food prices while credit is becoming more expensive as a result of the financial turmoil. This is the reverse of a "classic" recession in which problems tend to start in the industrial sector and then spread to the rest of the economy.
In this context it is worth remembering how the Great Depression of the 1930s developed. The initial decline in America's economic output was already apparent in the summer of 1929 - that is before the stockmarket crash. The crash itself started in October 1929 while banking panics did not begin for another year, in the autumn of 1930.
In contrast the banking crisis this time around started about a year ago, stocks have suffered more recently and a fall in output is still not certain. Not only is the magnitude of the downturn not comparable but the character of the crisis was entirely different.
A risk-based financial system. The financial system has been reforged as more of a mechanism for transferring risk than a channel for capital flows. Under the old model if a mortgage lender suffered bad debt problems it could go under.
Under the new model of finance the mortgage lender will have most likely repackaged its debt and passed it on to other institutions. This means the lender is less exposed to risk but there is a greater chance of "contagion" when things go wrong. Such developments as the rise of derivatives and securitisation help to diversify risk but they can also mean problems can spread more easily.
Lack of political leadership. A chronic lack of leadership on both sides of the Atlantic has exacerbated the crisis. In Britain it was most apparent with Alistair Darling, the chancellor, saying the economy was facing its worst crisis for 60 years then backtracking.
In America it was even more glaring with the House of Representatives voting against the first attempt to pass the bail-out plan.
Strong emerging economies. On the positive side, the strong growth of the developing countries gives added resilience to the global economy.
Even though their growth looks set to slow it is still moving forwards at a reasonable pace. Developing economies are also less dependent on the industrial world than in previous slowdowns.
Overall the world economy looks set for a slow, painful squeeze rather than a violent downturn. Financial markets are likely to continue to be volatile but, unless the credit markets seize up in panic, the real economy should continue to move forward, if at a slow pace. Developing countries should outperform the advanced economies by a wide margin.
Given the pervasive sense of doom about the global economy at present it is worth taking a step back to work out what is really happening. In all the hysteria about plunging stockmarkets and failing financial institutions it is easy to lose a sense of perspective.
In broad terms there are several ways in which the impact of the market turmoil can be assessed. There are quantitative measures - the hard numbers so beloved of economists - and more qualitative ones. The latter involve asking what is the precise character of the problems.
It is also important to distinguish between what has already happened and what could happen. This may seem obvious but they are often muddled together in the anxious discussion.
In terms of economic indicators the striking thing is that, so far at least, the impact of the financial turmoil has been muted. Although the credit crunch started back in August 2007 the main developed economies are still - just about - growing.
The only significant developed country in technical recession - defined as two consecutive quarters of falling output - is Ireland. Denmark was in recession but has recently started to grow again.
This is not to say that the textbook definition of a recession is perfect or that things cannot get worse. It is likely that both the eurozone and Japan will soon be in recession.
But what is happening is that growth in many of the developed countries has fallen to about zero rather than there being a sharp drop in output. America is doing relatively well with GDP growth at an annual rate of 2.8% in the second quarter of 2008, although it did suffer a 0.2% fall in the final quarter of 2007.
In contrast, it is worth remembering that America's GDP fell by 30% and industrial output fell by 47% during the Great Depression of the 1930s. Even in the recession of 1981-2 America's output fell by 2%.
Nor are the forecasts for global growth in the coming period that bad. The official International Monetary Fund (IMF) forecasts for the world economy are not out till this week. But last week Michael Mussa, a former IMF chief economist, published economic forecasts last week on behalf of the highly respected Peterson Institute for International Economics in Washington DC.
Overall he forecasts 1.2% growth for the industrial countries in 2009 compared with 1.5% in 2008 and 2.5% in 2007. This is hardly rapid growth but it is a long way from a severe downturn.
The outlook for emerging economies, which today account for almost half of the world economy, is much better although they are expected to slow. Overall emerging economies are forecast to expand by 5.7% in 2009 compared with 6.4% this year and 7.4% in 2007.
Of course the forecasts for future growth could be wrong. To get a better idea of what is going on it is necessary to look more closely at the character of the slowdown. Often conventional economists rely too much on the numbers and appreciate too little the peculiar character of the economic situation. In this respect there are several factors to consider.
This is a consumption-led downturn. What is happening is that people's disposable income is being squeezed by rising energy and food prices while credit is becoming more expensive as a result of the financial turmoil. This is the reverse of a "classic" recession in which problems tend to start in the industrial sector and then spread to the rest of the economy.
In this context it is worth remembering how the Great Depression of the 1930s developed. The initial decline in America's economic output was already apparent in the summer of 1929 - that is before the stockmarket crash. The crash itself started in October 1929 while banking panics did not begin for another year, in the autumn of 1930.
In contrast the banking crisis this time around started about a year ago, stocks have suffered more recently and a fall in output is still not certain. Not only is the magnitude of the downturn not comparable but the character of the crisis was entirely different.
A risk-based financial system. The financial system has been reforged as more of a mechanism for transferring risk than a channel for capital flows. Under the old model if a mortgage lender suffered bad debt problems it could go under.
Under the new model of finance the mortgage lender will have most likely repackaged its debt and passed it on to other institutions. This means the lender is less exposed to risk but there is a greater chance of "contagion" when things go wrong. Such developments as the rise of derivatives and securitisation help to diversify risk but they can also mean problems can spread more easily.
Lack of political leadership. A chronic lack of leadership on both sides of the Atlantic has exacerbated the crisis. In Britain it was most apparent with Alistair Darling, the chancellor, saying the economy was facing its worst crisis for 60 years then backtracking.
In America it was even more glaring with the House of Representatives voting against the first attempt to pass the bail-out plan.
Strong emerging economies. On the positive side, the strong growth of the developing countries gives added resilience to the global economy.
Even though their growth looks set to slow it is still moving forwards at a reasonable pace. Developing economies are also less dependent on the industrial world than in previous slowdowns.
Overall the world economy looks set for a slow, painful squeeze rather than a violent downturn. Financial markets are likely to continue to be volatile but, unless the credit markets seize up in panic, the real economy should continue to move forward, if at a slow pace. Developing countries should outperform the advanced economies by a wide margin.
Labels: economics, finance, Fund Strategy
Panic reaction causes widespread damage
The following is my latest comment from Fund Strategy.
An unfortunate feature of the discussion of the financial crisis is the tendency to blame greedy individuals for the problems. This is in contrast to discussions in the past when such difficulties were seen as more systemic.
More than ever before the responsibility for the crisis is pinned on individual "speculators" and "spivs". To the extent that broader factors are blamed it is generally that the regulatory system has allegedly given too much leeway to such people.
This is also the significance of the frenzied debate about short selling. It does not seem to be based on objective analysis of how important that particular technique is in exacerbating volatility. Rather, it represents a moralistic attack on greedy individuals.
This assault on individual speculators spans the political spectrum. It is as much the domain of conservative politicians and commentators as it is of those who see themselves as on the left.
The problem with this view is that it mystifies what is going on. Rather than provide a rational explanation of recent developments it reduces them to a moral fable.
In fact the most striking feature of the contemporary financial markets is how they have been reshaped by risk aversion. As argued in Cowardly Capitalism, my book on global finance, in 2001 the financial markets have changed fundamentally in character. Whereas financial markets used to be primarily about acting as an intermediary for capital they have increasingly become a way of transferring risks. Developments such as the rise of derivatives and securitisation can be understood in this context.
This development has the paradoxical effect of diversifying risk in the short term while at the same time increasing the dangers of risk spreading. It means that individual lenders can, for example, reduce their risk by removing potentially problematic loans from their balance sheets. But if the loans do go bad it can spread a contagion effect far further than it would otherwise have gone.
This climate of risk aversion has also exacerbated problems in the markets more generally. Politicians have reacted in a panicky way and banks have become reluctant to lend to each other.
The contemporary culture of fear rather than individual greed explains the current crisis.
An unfortunate feature of the discussion of the financial crisis is the tendency to blame greedy individuals for the problems. This is in contrast to discussions in the past when such difficulties were seen as more systemic.
More than ever before the responsibility for the crisis is pinned on individual "speculators" and "spivs". To the extent that broader factors are blamed it is generally that the regulatory system has allegedly given too much leeway to such people.
This is also the significance of the frenzied debate about short selling. It does not seem to be based on objective analysis of how important that particular technique is in exacerbating volatility. Rather, it represents a moralistic attack on greedy individuals.
This assault on individual speculators spans the political spectrum. It is as much the domain of conservative politicians and commentators as it is of those who see themselves as on the left.
The problem with this view is that it mystifies what is going on. Rather than provide a rational explanation of recent developments it reduces them to a moral fable.
In fact the most striking feature of the contemporary financial markets is how they have been reshaped by risk aversion. As argued in Cowardly Capitalism, my book on global finance, in 2001 the financial markets have changed fundamentally in character. Whereas financial markets used to be primarily about acting as an intermediary for capital they have increasingly become a way of transferring risks. Developments such as the rise of derivatives and securitisation can be understood in this context.
This development has the paradoxical effect of diversifying risk in the short term while at the same time increasing the dangers of risk spreading. It means that individual lenders can, for example, reduce their risk by removing potentially problematic loans from their balance sheets. But if the loans do go bad it can spread a contagion effect far further than it would otherwise have gone.
This climate of risk aversion has also exacerbated problems in the markets more generally. Politicians have reacted in a panicky way and banks have become reluctant to lend to each other.
The contemporary culture of fear rather than individual greed explains the current crisis.
Labels: economics, finance, Fund Strategy
Monday, September 29, 2008
Fear, not spivs, is the root of financial crisis
The following is my latest comment from Fund Strategy.
An unfortunate feature of the discussion of the financial crisis is the tendency to blame greedy individuals for the problems. This is in contrast to discussions in the past when such difficulties were seen as more systemic.
More than ever before the responsibility for the crisis is pinned on individual "speculators" and "spivs". To the extent that broader factors are blamed it is generally that the regulatory system has allegedly given too much leeway to such people.
This is also the significance of the frenzied debate about short selling. It does not seem to be based on objective analysis of how important that particular technique is in exacerbating volatility. Rather, it represents a moralistic attack on greedy individuals.
This assault on individual speculators spans the political spectrum. It is as much the domain of conservative politicians and commentators as it is of those who see themselves as on the left.
The problem with this view is that it mystifies what is going on. Rather than provide a rational explanation of recent developments it reduces them to a moral fable.
In fact the most striking feature of the contemporary financial markets is how they have been reshaped by risk aversion. As argued in Cowardly Capitalism, my book on global finance, in 2001 the financial markets have changed fundamentally in character. Whereas financial markets used to be primarily about acting as an intermediary for capital they have increasingly become a way of transferring risks. Developments such as the rise of derivatives and securitisation can be understood in this context.
This development has the paradoxical effect of diversifying risk in the short term while at the same time increasing the dangers of risk spreading. It means that individual lenders can, for example, reduce their risk by removing potentially problematic loans from their balance sheets. But if the loans do go bad it can spread a contagion effect far further than it would otherwise have gone.
This climate of risk aversion has also exacerbated problems in the markets more generally. Politicians have reacted in a panicky way and banks have become reluctant to lend to each other.
The contemporary culture of fear rather than individual greed explains the current crisis.
An unfortunate feature of the discussion of the financial crisis is the tendency to blame greedy individuals for the problems. This is in contrast to discussions in the past when such difficulties were seen as more systemic.
More than ever before the responsibility for the crisis is pinned on individual "speculators" and "spivs". To the extent that broader factors are blamed it is generally that the regulatory system has allegedly given too much leeway to such people.
This is also the significance of the frenzied debate about short selling. It does not seem to be based on objective analysis of how important that particular technique is in exacerbating volatility. Rather, it represents a moralistic attack on greedy individuals.
This assault on individual speculators spans the political spectrum. It is as much the domain of conservative politicians and commentators as it is of those who see themselves as on the left.
The problem with this view is that it mystifies what is going on. Rather than provide a rational explanation of recent developments it reduces them to a moral fable.
In fact the most striking feature of the contemporary financial markets is how they have been reshaped by risk aversion. As argued in Cowardly Capitalism, my book on global finance, in 2001 the financial markets have changed fundamentally in character. Whereas financial markets used to be primarily about acting as an intermediary for capital they have increasingly become a way of transferring risks. Developments such as the rise of derivatives and securitisation can be understood in this context.
This development has the paradoxical effect of diversifying risk in the short term while at the same time increasing the dangers of risk spreading. It means that individual lenders can, for example, reduce their risk by removing potentially problematic loans from their balance sheets. But if the loans do go bad it can spread a contagion effect far further than it would otherwise have gone.
This climate of risk aversion has also exacerbated problems in the markets more generally. Politicians have reacted in a panicky way and banks have become reluctant to lend to each other.
The contemporary culture of fear rather than individual greed explains the current crisis.
Labels: economics, finance, Fund Strategy
Mainstream view of world economy
The following Fund Strategy news story by me sums up the current orthodoxy on the global economy.
The world economy is likely to enjoy a gradual recovery in 2009 despite the financial turmoil, according to a senior figure at the International Monetary Fund (IMF).
John Lipsky, the first deputy managing director of the IMF, told a meeting in Washington DC that a severe downturn can be avoided if the policy response is right. "This storm can be weathered without a damaging global recession," he said. "But attaining such an outcome will require clear and coherent policy responses from public authorities and institutions around the world, together with the restoration of private market functionality and an end to investors' spiraling crisis of confidence."
He said the backdrop to the current crisis was that the world economy was becoming "bifurcated" rather than, as many had hoped, decoupled. Both advanced and emerging economies were slowing although they are facing different sorts of problems.
In the developed world the slowdown that started in America has spread to the eurozone and Japan. Such economies seem to be facing a protracted period of slow growth.
Emerging economies are showing resilience but there are signs that capital is starting to flow out of them. Their growth prospects are diminishing and the risk appetite of investors in such countries is declining. As a result the currencies of many emerging countries have weakened.
The outcome of the volatility will depend on the ability of both sets of economies to deal with three simultaneous shocks: rising energy and commodity prices, the housing downturn and the financial turmoil.
Lipsky argued that, despite the scale of these challenges, there are several factors that make a gradual recovery likely. First, oil prices have declined from their summer peak. This should give a particular boost to the American economy.
The IMF says it is also likely that the American housing market will bottom in 2009. Key indicators, such as affordability levels, are improving. In addition, economies are in reasonable shape in many respects. In America, for instance, corporate finances remains relatively healthy. Finally, emerging economy growth remain robust. Such buoyancy should also help American exports.
* "The global economic and financial turmoil: finding our footing". Available at www.imf.org
The world economy is likely to enjoy a gradual recovery in 2009 despite the financial turmoil, according to a senior figure at the International Monetary Fund (IMF).
John Lipsky, the first deputy managing director of the IMF, told a meeting in Washington DC that a severe downturn can be avoided if the policy response is right. "This storm can be weathered without a damaging global recession," he said. "But attaining such an outcome will require clear and coherent policy responses from public authorities and institutions around the world, together with the restoration of private market functionality and an end to investors' spiraling crisis of confidence."
He said the backdrop to the current crisis was that the world economy was becoming "bifurcated" rather than, as many had hoped, decoupled. Both advanced and emerging economies were slowing although they are facing different sorts of problems.
In the developed world the slowdown that started in America has spread to the eurozone and Japan. Such economies seem to be facing a protracted period of slow growth.
Emerging economies are showing resilience but there are signs that capital is starting to flow out of them. Their growth prospects are diminishing and the risk appetite of investors in such countries is declining. As a result the currencies of many emerging countries have weakened.
The outcome of the volatility will depend on the ability of both sets of economies to deal with three simultaneous shocks: rising energy and commodity prices, the housing downturn and the financial turmoil.
Lipsky argued that, despite the scale of these challenges, there are several factors that make a gradual recovery likely. First, oil prices have declined from their summer peak. This should give a particular boost to the American economy.
The IMF says it is also likely that the American housing market will bottom in 2009. Key indicators, such as affordability levels, are improving. In addition, economies are in reasonable shape in many respects. In America, for instance, corporate finances remains relatively healthy. Finally, emerging economy growth remain robust. Such buoyancy should also help American exports.
* "The global economic and financial turmoil: finding our footing". Available at www.imf.org
Labels: economics, finance, Fund Strategy
Friday, September 26, 2008
BBC TV appearances
I am due to appear on BBC television this evening talking about the role of greed in the current financial crisis. Naturally I will be arguing that it is not the driving force behind the market turmoil. I am scheduled to be on BBC World at 7.30pm (London time) and later on the BBC News 24 channel.
Labels: economics, finance, media appearances, television
Thursday, September 25, 2008
Risk aversion exacerbates crisis
Phil Mullan has an excellent article on the current financial crisis on spiked. The thrust of his argument is that the current climate of risk aversion is exacerbating what would otherwise be a more limited crisis. Politicians and the financial authorities have simply reacted in an over-anxious way while financial institutions have ceased lending to each other.
Labels: economics, finance, spiked
Saturday, September 20, 2008
Debating capitalism’s future
Recent financial market volatility has prompted a debate about the future of capitalism. The BBC has even done a vox pop on it. But there is less to the discussion than first appears. No one is arguing for a replacement of the market system with something else. Instead the discussion is really about new forms of regulation for markets and the economy.
Thursday, September 18, 2008
Real Clear Markets picks up myths article
Real Clear Markets has picked up my Spiked myths article in its “off the street” section today.
Labels: America, economics, finance, media appearances, spiked
Wednesday, September 17, 2008
Myths article published on spiked
Spiked has published an expanded version by me of yesterday’s post on myths about the Wall Street crisis.
Labels: economics, finance, spiked
Tuesday, September 16, 2008
Myths about the Wall Street crisis
Since the troubles on Wall Street at the weekend many key notions have been repeated as the accepted wisdom. However, on closer examination they are both old and inaccurate.
* Myth one: recent developments prove that Wall Street is nothing but a giant casino. This notion was stated explicitly by John McCain, the Republican candidate in the American presidential race, when he argued that the American worker has “been betrayed by a casino on Wall Street”. He was, probably unknowingly, echoing the ideas of Susan Strange, a leftist thinker, who in 1986 had an influential book published entitled Casino Capitalism.
In fact as I argued in my book Cowardly Capitalism (Wiley 2001) the contemporary financial markets are characterised by risk aversion rather than a hunger for big bets. This is much more than saying the markets are simply fearful. Rather I argue that the main reason for existence of financial markets has changed from raising capital to transferring risks. Financial markets used to provide a mechanism for businesses to raise funds or for individuals to obtain funds if they needed them. Today the purpose of many financial instruments is to transfer risk from one party to another.
This “cowardly” nature of the financial markets explains why the financial crisis has spread in the way that it has. Repackaging or “securitising” mortgages initially provided a way for lenders to sell on the risk to other parties such as investment banks. In the short term this had what was seen as the desirable effect of diversifying risk. But the risk was simply transferred rather than disappearing. Once problems emerged it could spread more easily from one institution to another. This explains what is sometimes misleading referred to as a “contagion” effect or virus in the market.
* Myth two: the markets were driven by greed. It would be more accurate to say that the developments are driven by fear rather than greed. However, it is not fear in the sense of a timeless human emotion. Rather it is a general climate of anxiety in contemporary society that affects the financial markets as everyone else.
* Myth three: it is all about confidence. It is true that confidence plays more of a role in the financial markets than in the economy as a whole. But it is a mistake of exaggerate the importance of confidence in the resolution of the crisis. The strength of the underlying real economy is a key factor to consider when trying to determine the likely outcome. The contemporary economy has a weak growth dynamic but it is not facing any fundamental crisis. It is characterised by sluggish growth but there are no signs of collapse.
* Myth four: it all started with irresponsible American subprime mortgage lending. The crisis is routinely blamed on irresponsible lenders and reckless borrowers whose debts have now gone bad. According to this caricature a combination of greedy bankers and “trailer trash” are to blame for the crisis. In reality the American housing bubble was simply a response to the low interest rates maintained by the Federal Reserve earlier this decade. This loose monetary policy was in turn a way of keeping an otherwise sluggish economy going by means of promoting a consumer boom. The fundamental problem was therefore a weak economy rather than subprime borrowers or lenders.
* Myth five: The recent actions of the American authorities, particularly last week’s bail-out of Fannie Mae and Freddie Mac, represent an end to the free market on Wall Street. Several commentators have bemoaned the fact that the American authorities have taken a strongly interventionist stance on dealing with the financial crisis (see recent posts). However, even on Wall Street, despite its reputation as a bastion for free markets, state intervention has long been pervasive. The American authorities intervene in the economy in numerous different ways and tightly regulate the financial markets. Indeed, as argued above, the roots of the current crisis can partly be attributed to the earlier actions of the Fed.
* Myth one: recent developments prove that Wall Street is nothing but a giant casino. This notion was stated explicitly by John McCain, the Republican candidate in the American presidential race, when he argued that the American worker has “been betrayed by a casino on Wall Street”. He was, probably unknowingly, echoing the ideas of Susan Strange, a leftist thinker, who in 1986 had an influential book published entitled Casino Capitalism.
In fact as I argued in my book Cowardly Capitalism (Wiley 2001) the contemporary financial markets are characterised by risk aversion rather than a hunger for big bets. This is much more than saying the markets are simply fearful. Rather I argue that the main reason for existence of financial markets has changed from raising capital to transferring risks. Financial markets used to provide a mechanism for businesses to raise funds or for individuals to obtain funds if they needed them. Today the purpose of many financial instruments is to transfer risk from one party to another.
This “cowardly” nature of the financial markets explains why the financial crisis has spread in the way that it has. Repackaging or “securitising” mortgages initially provided a way for lenders to sell on the risk to other parties such as investment banks. In the short term this had what was seen as the desirable effect of diversifying risk. But the risk was simply transferred rather than disappearing. Once problems emerged it could spread more easily from one institution to another. This explains what is sometimes misleading referred to as a “contagion” effect or virus in the market.
* Myth two: the markets were driven by greed. It would be more accurate to say that the developments are driven by fear rather than greed. However, it is not fear in the sense of a timeless human emotion. Rather it is a general climate of anxiety in contemporary society that affects the financial markets as everyone else.
* Myth three: it is all about confidence. It is true that confidence plays more of a role in the financial markets than in the economy as a whole. But it is a mistake of exaggerate the importance of confidence in the resolution of the crisis. The strength of the underlying real economy is a key factor to consider when trying to determine the likely outcome. The contemporary economy has a weak growth dynamic but it is not facing any fundamental crisis. It is characterised by sluggish growth but there are no signs of collapse.
* Myth four: it all started with irresponsible American subprime mortgage lending. The crisis is routinely blamed on irresponsible lenders and reckless borrowers whose debts have now gone bad. According to this caricature a combination of greedy bankers and “trailer trash” are to blame for the crisis. In reality the American housing bubble was simply a response to the low interest rates maintained by the Federal Reserve earlier this decade. This loose monetary policy was in turn a way of keeping an otherwise sluggish economy going by means of promoting a consumer boom. The fundamental problem was therefore a weak economy rather than subprime borrowers or lenders.
* Myth five: The recent actions of the American authorities, particularly last week’s bail-out of Fannie Mae and Freddie Mac, represent an end to the free market on Wall Street. Several commentators have bemoaned the fact that the American authorities have taken a strongly interventionist stance on dealing with the financial crisis (see recent posts). However, even on Wall Street, despite its reputation as a bastion for free markets, state intervention has long been pervasive. The American authorities intervene in the economy in numerous different ways and tightly regulate the financial markets. Indeed, as argued above, the roots of the current crisis can partly be attributed to the earlier actions of the Fed.
Labels: America, economics, finance
Monday, September 15, 2008
Pragmatism chokes principled policies
The following comment by me appeared in this week’s Fund Strategy Although I think the argument is more valid than ever it has been over-taken by events over the weekend including the bankruptcy of Lehman Brothers and the takeover of Merrill Lynch. To me all of these developments reinforce the argument that “neo-liberalism” is a myth.
Last week marked another tightening of the noose around the neck of the free market. The American government felt obliged to nationalise two institutions, Fannie Mae and Freddie Mac, at the heart of free market capitalism: Wall Street.
Of course it does not follow that capitalism itself is about to collapse. Rather it means that virtually no one believes in the ideal of the free market. Even ardent free marketeers quickly ditch their beliefs at the first hint of serious trouble.
The trend has been clear for a while. Back in March the chief economic commentator of the Financial Times, Martin Wolf, started an article on the bail-out of Bear Stearns, a Wall Street investment bank, with the line: "Remember Friday March 14 2008: it was the day the dream of global free market capitalism died". He also quoted Joseph Ackermann, the chief executive of Deutsche Bank, saying "I no longer believe in the market's self-healing power".
The nationalisation of Fannie and Freddie takes the trend a step further. It is worth pondering just how big a deal it is. America is seen as the bastion of free market capitalism. Wall Street its staunchest supporter of all. The scale of the bail-out - with up to $200 billion (£113 billion) pumped into the two institutions - is huge.
However much free marketeers play down the significance of the deal it is hard to take them seriously. It has illustrated in the most stark way possible that the market remains heavily dependent on state intervention. Such intervention may be driven by pragmatism, rather than by ideology, but it is just as real as in the past.
It is true that in earlier times the supporters of the free market have become advocates of intervention when their favourite institutions get into trouble. The difference with the past is the pervasive disaffection with the free market idea.
In fact hardly anyone expresses a strong principled stand on economics any more. Both right and left have more-or-less ceased to exist. Pragmatism rules.
While this development is welcome to some it brings many problems. In particular it means that policy-makers simply react to developments after they happen. The idea of shaping the world for the better seems to have been forgotten by all sides.
Last week marked another tightening of the noose around the neck of the free market. The American government felt obliged to nationalise two institutions, Fannie Mae and Freddie Mac, at the heart of free market capitalism: Wall Street.
Of course it does not follow that capitalism itself is about to collapse. Rather it means that virtually no one believes in the ideal of the free market. Even ardent free marketeers quickly ditch their beliefs at the first hint of serious trouble.
The trend has been clear for a while. Back in March the chief economic commentator of the Financial Times, Martin Wolf, started an article on the bail-out of Bear Stearns, a Wall Street investment bank, with the line: "Remember Friday March 14 2008: it was the day the dream of global free market capitalism died". He also quoted Joseph Ackermann, the chief executive of Deutsche Bank, saying "I no longer believe in the market's self-healing power".
The nationalisation of Fannie and Freddie takes the trend a step further. It is worth pondering just how big a deal it is. America is seen as the bastion of free market capitalism. Wall Street its staunchest supporter of all. The scale of the bail-out - with up to $200 billion (£113 billion) pumped into the two institutions - is huge.
However much free marketeers play down the significance of the deal it is hard to take them seriously. It has illustrated in the most stark way possible that the market remains heavily dependent on state intervention. Such intervention may be driven by pragmatism, rather than by ideology, but it is just as real as in the past.
It is true that in earlier times the supporters of the free market have become advocates of intervention when their favourite institutions get into trouble. The difference with the past is the pervasive disaffection with the free market idea.
In fact hardly anyone expresses a strong principled stand on economics any more. Both right and left have more-or-less ceased to exist. Pragmatism rules.
While this development is welcome to some it brings many problems. In particular it means that policy-makers simply react to developments after they happen. The idea of shaping the world for the better seems to have been forgotten by all sides.
Labels: economics, finance, Fund Strategy
Whatever happened to “neo-liberalism”?
Charles Dumas of Lombard Street Research joins those who bemoan the lack of a free market reaction to Wall Street’s problems. In an article in the Telegraph he argues that: “Free markets have been abandoned in America at the crucial hour by their chief exemplars, the financial masters of the universe.”
Dumas also says that: “It seems that: President Bush and the Republicans are not just well to the left of Grover Norquist. They leave clear blue water on the left of Gordon Brown, much to the envy of Euro-lefties no doubt, who would love to ditch what they call "neo-liberalism", and what we call free markets, as easily as the American right wing.”
In a related argument Dumas also points to the surging level of public sector debt in America as a result of the recent bail-outs. As a proportion of GDP it is now not far behind highly indebted countries such as Italy and Japan.
Dumas also says that: “It seems that: President Bush and the Republicans are not just well to the left of Grover Norquist. They leave clear blue water on the left of Gordon Brown, much to the envy of Euro-lefties no doubt, who would love to ditch what they call "neo-liberalism", and what we call free markets, as easily as the American right wing.”
In a related argument Dumas also points to the surging level of public sector debt in America as a result of the recent bail-outs. As a proportion of GDP it is now not far behind highly indebted countries such as Italy and Japan.
Labels: America, economics, finance
Friday, September 12, 2008
More market misery
Anatole Kaletsky, an associate editor of the Times (London), argues in an article today that the nationalisation of Fannie Mae and Freddie Mac in America represents a ditching of faith in the free market: “just as the triumph appeared to be complete the innermost sanctum of the global capitalist system suddenly collapsed.”
He goes on:
“The nationalisation last weekend of Fannie Mae and Freddie Mac, the two largest financial institutions the world has ever known, signalled the complete failure of the biggest, most dynamic, most innovative and competitive markets that have existed in the history of capitalism - the Wall Street stockmarket and the market for US bonds.
“Their failure has been so obvious, that even the most capitalist administration ever, in the world's most capitalist country, had decided to wipe out the private owners of its biggest and most important financial companies and replace them with state-appointed bureaucrats.”
Meanwhile, Samuel Brittan, a veteran Financial Times columnist, sounded glum writing yesterday in response to the same events:
“Even if in the end we suffer no more than an average post-second- world-war recession it will still look like a narrow escape owing to the readiness of leaders such as Hank Paulson, the US Treasury secretary, not merely to jettison free-market principles but to take risks with prudence to bail out US corporate bodies. There will be no “glad confident morning” for free-market principles for a long time to come.”
Both writers have a point but they are behind the times. Disillusion with the free market has been pervasive for a while; even among its supporters. For example, see my recent spiked article on the subject (link available on the bar on the left).
He goes on:
“The nationalisation last weekend of Fannie Mae and Freddie Mac, the two largest financial institutions the world has ever known, signalled the complete failure of the biggest, most dynamic, most innovative and competitive markets that have existed in the history of capitalism - the Wall Street stockmarket and the market for US bonds.
“Their failure has been so obvious, that even the most capitalist administration ever, in the world's most capitalist country, had decided to wipe out the private owners of its biggest and most important financial companies and replace them with state-appointed bureaucrats.”
Meanwhile, Samuel Brittan, a veteran Financial Times columnist, sounded glum writing yesterday in response to the same events:
“Even if in the end we suffer no more than an average post-second- world-war recession it will still look like a narrow escape owing to the readiness of leaders such as Hank Paulson, the US Treasury secretary, not merely to jettison free-market principles but to take risks with prudence to bail out US corporate bodies. There will be no “glad confident morning” for free-market principles for a long time to come.”
Both writers have a point but they are behind the times. Disillusion with the free market has been pervasive for a while; even among its supporters. For example, see my recent spiked article on the subject (link available on the bar on the left).
Labels: economics, finance, spiked
Friday, September 05, 2008
Quick catch-up
There have been several interesting articles and discussions this week but until now I have been too busy to blog them all. Here is a quick round-up:
* Debate on geo-engineering. The Royal Society (Britain’s premier science organisation) has published a series of papers in its Philosophical Transactions on geo-engineering. That in turn prompted a substantial article in the Economist (6 September edition) and a piece by Oliver Tickell (an environmental campaigner) on the Guardian comment is free site supporting geo-engineering but only if it is linked to a reduction in emissions.
* Book on Nazi’s green credentials. I came across this when I heard radio presenters making fun of the title How Green were the Nazis?. To me it is a perfectly reasonable question and the book looks interesting. There is no doubt that many Nazis supported what are today classified as environmental ideas - which does not mean that all environmentalists are Nazis. The most serious critique I could find of the book was in Haaretz (Israel’s leading newspaper).
* Critique of Garrett Hardin’s classic article on “The tragedy of the commons” from a leftist viewpoint. Available here.
* Article on conservative assumptions of organic food movement. Conservative in a literal Burkean sense. Available here.
* Poll on hostility to local development in America, Britain and Canada. Available here.
* James Heartfield on Enron as a pioneer of environmentalism. Based on extracts from his latest book. Available here.
* Debate on geo-engineering. The Royal Society (Britain’s premier science organisation) has published a series of papers in its Philosophical Transactions on geo-engineering. That in turn prompted a substantial article in the Economist (6 September edition) and a piece by Oliver Tickell (an environmental campaigner) on the Guardian comment is free site supporting geo-engineering but only if it is linked to a reduction in emissions.
* Book on Nazi’s green credentials. I came across this when I heard radio presenters making fun of the title How Green were the Nazis?. To me it is a perfectly reasonable question and the book looks interesting. There is no doubt that many Nazis supported what are today classified as environmental ideas - which does not mean that all environmentalists are Nazis. The most serious critique I could find of the book was in Haaretz (Israel’s leading newspaper).
* Critique of Garrett Hardin’s classic article on “The tragedy of the commons” from a leftist viewpoint. Available here.
* Article on conservative assumptions of organic food movement. Conservative in a literal Burkean sense. Available here.
* Poll on hostility to local development in America, Britain and Canada. Available here.
* James Heartfield on Enron as a pioneer of environmentalism. Based on extracts from his latest book. Available here.
Labels: book, development, economics, environment, finance, food, geo-engineering
Monday, September 01, 2008
Fed critic deserves a decent debate
The following comment by me appeared in this week’s Fund Strategy.
Central bankers are not generally known for having blazing public rows. But the recent annual shindig organised by the Federal Reserve at the mountain resort of Jackson Hole, Wyoming, was an exception. Once the debate is translated into straightforward English it can be seen to have important implications for economic policy.
The row was precipitated by Willem Buiter, a professor at the London School of Economics and former Bank of England monetary policy committee member, in a paper to the conference.*
Shorn of the usual caveats, maths and technical language it seemed to be arguing that the Fed has been too timid in dealing with the credit crunch. It should have been prepared to tolerate greater economic pain in the short term to pave the way for a stronger recovery. This weakness was presented as a result of being too sensitive to political pressure and the needs of Wall Street.
Alan Blinder, a professor at Princeton and former vice-chairman of the Fed, led a vigorous response. In a reference to the fact that Buiter was born in the Netherlands he said that: "One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. 'The companies that built this dike did a terrible job,' the boy said. 'They don't deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain.' The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy."
But Blinder's response, while amusing, was based on a caricature of Buiter's argument. Buiter specifically said in his paper that the Fed was not facing the possibility of a catastrophe. In Buiter's view it had a choice between a short, painful but not fatal shock and a prolonged period of slow growth.
Buiter over-estimates the stomach of the Fed, or any of the other main central banks for decisive action. But the debate is certainly worth having rather than dismissing with a caricature.
* Papers available at: www.kc.frb.org
Central bankers are not generally known for having blazing public rows. But the recent annual shindig organised by the Federal Reserve at the mountain resort of Jackson Hole, Wyoming, was an exception. Once the debate is translated into straightforward English it can be seen to have important implications for economic policy.
The row was precipitated by Willem Buiter, a professor at the London School of Economics and former Bank of England monetary policy committee member, in a paper to the conference.*
Shorn of the usual caveats, maths and technical language it seemed to be arguing that the Fed has been too timid in dealing with the credit crunch. It should have been prepared to tolerate greater economic pain in the short term to pave the way for a stronger recovery. This weakness was presented as a result of being too sensitive to political pressure and the needs of Wall Street.
Alan Blinder, a professor at Princeton and former vice-chairman of the Fed, led a vigorous response. In a reference to the fact that Buiter was born in the Netherlands he said that: "One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. 'The companies that built this dike did a terrible job,' the boy said. 'They don't deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain.' The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy."
But Blinder's response, while amusing, was based on a caricature of Buiter's argument. Buiter specifically said in his paper that the Fed was not facing the possibility of a catastrophe. In Buiter's view it had a choice between a short, painful but not fatal shock and a prolonged period of slow growth.
Buiter over-estimates the stomach of the Fed, or any of the other main central banks for decisive action. But the debate is certainly worth having rather than dismissing with a caricature.
* Papers available at: www.kc.frb.org
Labels: economics, finance, Fund Strategy
Tuesday, August 26, 2008
Green culture fuels inflationary surge
The following comment by me appeared in this week’s Fund Strategy. It is related to my cover story on the rising trend in oil prices which you can read here.
Although this week's cover story is about oil it also helps explain why inflation is rising so strongly. It is not just that energy prices are rising - such an assertion simply begs the question of why energy is becoming more expensive. Insufficient investment in energy supply is a key factor in rising prices more generally.
Showing that inflation can largely be attributed to rising food and energy prices at present is simple mathematics. It can be seen by looking at the breakdown of various inflation indices that are available.
It is also clear that rising energy prices are a significant contributor to rising food prices. Energy is used to fix nitrogen from the atmosphere to make fertilisers and it powers farm machinery. The diversion of crops from food to biofuels is another related factor. There are other reasons for rising food prices (see 12 May 2008 cover story) but energy is key.
There may also be other factors pushing up inflation. And at other times a different explanation for rising inflation might be necessary. But at this juncture the energy sector seems to be central to the explanation.
As this week's cover story argues the broad story in relation to energy is that supply is not keeping up with rising demand. As developing economies grow they rightly want and need more energy. The challenge is to ensure there is sufficient investment to guarantee such needs are met.
In the abstract there should be no problem in meeting such needs. There is no absolute shortage of energy resources. There are ample reserves of oil, hundreds of years' worth of coal reserves, plentiful hydroelectric power sources and nuclear.
The problem is insufficient investment to exploit these resources fast enough. That in turn is pushing up prices as rising energy demand exceeds supply growth.
The obstacle is environmentalism in its broadest sense. It is not a question of a few "tree huggers" protesting outside proposed power stations.
Rather it is a culture that is reluctant to invest in energy supply. America, for example, has not built an atomic power station since the 1970s. In Britain too the investment in renewing the energy infrastructure is pitiful.
The best response to inflation would be to invest to make energy too cheap to meter.
Although this week's cover story is about oil it also helps explain why inflation is rising so strongly. It is not just that energy prices are rising - such an assertion simply begs the question of why energy is becoming more expensive. Insufficient investment in energy supply is a key factor in rising prices more generally.
Showing that inflation can largely be attributed to rising food and energy prices at present is simple mathematics. It can be seen by looking at the breakdown of various inflation indices that are available.
It is also clear that rising energy prices are a significant contributor to rising food prices. Energy is used to fix nitrogen from the atmosphere to make fertilisers and it powers farm machinery. The diversion of crops from food to biofuels is another related factor. There are other reasons for rising food prices (see 12 May 2008 cover story) but energy is key.
There may also be other factors pushing up inflation. And at other times a different explanation for rising inflation might be necessary. But at this juncture the energy sector seems to be central to the explanation.
As this week's cover story argues the broad story in relation to energy is that supply is not keeping up with rising demand. As developing economies grow they rightly want and need more energy. The challenge is to ensure there is sufficient investment to guarantee such needs are met.
In the abstract there should be no problem in meeting such needs. There is no absolute shortage of energy resources. There are ample reserves of oil, hundreds of years' worth of coal reserves, plentiful hydroelectric power sources and nuclear.
The problem is insufficient investment to exploit these resources fast enough. That in turn is pushing up prices as rising energy demand exceeds supply growth.
The obstacle is environmentalism in its broadest sense. It is not a question of a few "tree huggers" protesting outside proposed power stations.
Rather it is a culture that is reluctant to invest in energy supply. America, for example, has not built an atomic power station since the 1970s. In Britain too the investment in renewing the energy infrastructure is pitiful.
The best response to inflation would be to invest to make energy too cheap to meter.
Labels: apocalyptic, consumption, economics, energy, finance, Fund Strategy
Monday, August 25, 2008
London lecture on trade and development
Supachai Panitchpakdi, the secretary general of the United Nations Conference on Trade and Development, will present The Trade and Development Report 2008 at a public lecture at the London School of Economics on the evening of Tuesday 2 September. The theme of this year’s report is "Commodity Prices, Capital Flows and the Financing of Investment”. I am planning to attend.
Labels: development, economics, finance, trade
Saturday, August 16, 2008
More on delayed gratification
Rob Williams, a freelance journalist and former assistant to a Labour MP, echoes David Lammy’s call for delayed gratification (see 14 August 2008 post) in an article in the Guardian Comment is free blog today:
“if there is a common theme running through the last decade, indeed, the last 30 years, it is one of instant gratification for businesses, governments and for individuals. There has been a total unwillingness to plan, wait for something, to save or to look more than five minutes ahead.”
He hopes the credit crunch will bring delayed gratification back into fashion again:
“For a start deferred gratification (remember your sociology classes?) needs to become acceptable again. The right amount of money to have is actually not quite enough, so that you have to save for a treat, and even, shock, horror, go without another luxury to get what you want. If you really want that holiday, or car, then save up for it.”
His conclusion:
“plastic is no longer fantastic, and our flexible friends are now cracking the whip. Hopefully the lesson of the next couple of years will be ‘how I learned to stop worrying and love the downturn.’ “
It is amazing how creative New Labour and its supporters are when it comes to trying to get the rest of us to make do with less.
Sadly I expect this to be a common reaction to the economic downturn. If anything green trends are likely to be strengthened rather than weakened.
“if there is a common theme running through the last decade, indeed, the last 30 years, it is one of instant gratification for businesses, governments and for individuals. There has been a total unwillingness to plan, wait for something, to save or to look more than five minutes ahead.”
He hopes the credit crunch will bring delayed gratification back into fashion again:
“For a start deferred gratification (remember your sociology classes?) needs to become acceptable again. The right amount of money to have is actually not quite enough, so that you have to save for a treat, and even, shock, horror, go without another luxury to get what you want. If you really want that holiday, or car, then save up for it.”
His conclusion:
“plastic is no longer fantastic, and our flexible friends are now cracking the whip. Hopefully the lesson of the next couple of years will be ‘how I learned to stop worrying and love the downturn.’ “
It is amazing how creative New Labour and its supporters are when it comes to trying to get the rest of us to make do with less.
Sadly I expect this to be a common reaction to the economic downturn. If anything green trends are likely to be strengthened rather than weakened.
Labels: affluenza, consumption, economics, finance
Monday, August 04, 2008
The credit crunch as the new climate change
The following comment by me appeared in this week’s Fund Strategy.
Has anyone noticed that the credit crunch is the new climate change?
Until about a year ago, we were being advised to take such measures as reducing energy consumption, not wasting food and being financially frugal to save the planet. Now we are being told to do more-or-less the same thing for the sake of our household finances in the midst of recession. It seems that austerity is in the air.
The most stomach-churning expressions of this trend are the self-appointed experts who dispense their banal advice at every opportunity. They tell us how much money we can save by making packed lunches to eat at work or making sure we do not leave our televisions on standby. Such trite observations are routinely indulged by the media.
But such measures are also backed by government and business. The government sponsors reports such as those on how much food is wasted and promotes regulations to discourage the use of plastic bags. A Scrooge-like attitude to consumption is being encouraged at every opportunity.
This is all pretty strange because the credit crunch and climate change are two fundamentally different types of problem. The former is a relatively muted economic slowdown driven by difficulties on the consumption side of the economy (see last week's comment). The latter is a long-term trend towards an increase in average global temperatures.
If the two have anything in common, it is more in the reaction to them than what they are. Both seem to be prompting a panic reaction that is out of proportion to the immediate threat.
In both cases, the reaction emphasises the need for people to behave "responsibly" and curb their consumption. At best, such measures are irrelevant. At worst, they encourage a small-mindedness that detracts from finding a solution to the problems that they are ostensibly supposed to tackle.
In the case of the economy the challenge in broad terms is to find new ways to promote economic growth and encourage a culture of genuine innovation. In relation to climate change, it is to develop new technology and to work out the best way to adapt to the challenge.
Looking at either problem from the narrow perspective of the individual consumer only mystifies what is going on. We need a broader vision if we are to move forward with confidence.
Has anyone noticed that the credit crunch is the new climate change?
Until about a year ago, we were being advised to take such measures as reducing energy consumption, not wasting food and being financially frugal to save the planet. Now we are being told to do more-or-less the same thing for the sake of our household finances in the midst of recession. It seems that austerity is in the air.
The most stomach-churning expressions of this trend are the self-appointed experts who dispense their banal advice at every opportunity. They tell us how much money we can save by making packed lunches to eat at work or making sure we do not leave our televisions on standby. Such trite observations are routinely indulged by the media.
But such measures are also backed by government and business. The government sponsors reports such as those on how much food is wasted and promotes regulations to discourage the use of plastic bags. A Scrooge-like attitude to consumption is being encouraged at every opportunity.
This is all pretty strange because the credit crunch and climate change are two fundamentally different types of problem. The former is a relatively muted economic slowdown driven by difficulties on the consumption side of the economy (see last week's comment). The latter is a long-term trend towards an increase in average global temperatures.
If the two have anything in common, it is more in the reaction to them than what they are. Both seem to be prompting a panic reaction that is out of proportion to the immediate threat.
In both cases, the reaction emphasises the need for people to behave "responsibly" and curb their consumption. At best, such measures are irrelevant. At worst, they encourage a small-mindedness that detracts from finding a solution to the problems that they are ostensibly supposed to tackle.
In the case of the economy the challenge in broad terms is to find new ways to promote economic growth and encourage a culture of genuine innovation. In relation to climate change, it is to develop new technology and to work out the best way to adapt to the challenge.
Looking at either problem from the narrow perspective of the individual consumer only mystifies what is going on. We need a broader vision if we are to move forward with confidence.
Labels: climate, consumption, economics, finance, Fund Strategy
Sunday, July 27, 2008
A Green New Deal?
The New Economics Foundation is promoting a Green New Deal which it analogous to President Franklin Delano Roosevelt’s response to the Great Depression of the 1930s. Andrew Simms has also written about it on the BBC website.
Just some of the things wrong with it include:
• The assumption that the world is facing an economic crisis comparable to the Great Depression. I will publish a post on this tomorrow.
• The assumption there is only 100 months to act to deal with runaway climate change.
• The idea that the world is facing a problem of “peak oil”. More on this soon but I am coming to the conclusion that the key driver of surging prices is the lack of investment in energy supply.
• The idea that the problem to energy shortages lies in curbing demand rather than bolstering supply.
• The notion that there is any direct link between environmental problems and the financial crisis.
• The argument that financial problems are undermining the economy. This confuses cause and effect.
Just some of the things wrong with it include:
• The assumption that the world is facing an economic crisis comparable to the Great Depression. I will publish a post on this tomorrow.
• The assumption there is only 100 months to act to deal with runaway climate change.
• The idea that the world is facing a problem of “peak oil”. More on this soon but I am coming to the conclusion that the key driver of surging prices is the lack of investment in energy supply.
• The idea that the problem to energy shortages lies in curbing demand rather than bolstering supply.
• The notion that there is any direct link between environmental problems and the financial crisis.
• The argument that financial problems are undermining the economy. This confuses cause and effect.
Labels: climate, consumption, economics, energy, finance
Monday, July 21, 2008
Nudge
The following comment by me from Fund Strategy looks at how ideas from behavioural finance are being used to influence individual behaviour. It is written for a financial readership.
Last week's oddest spectacle was probably Richard Thaler, a professor of economics at the University of Chicago, talking about knife crime on the BBC Newsnight programme. Thaler probably knows as much about knives as the average street fighter knows about Sharpe ratios. Yet the venerable professor was expected to speak with authority on the recent spate of teenage stabbings in Britain.
To anyone familiar with Thaler's work, this is a strange development. He was until recently well known within the economics profession as an expert in behavioural finance - writing technical papers on the relationship of human psychology to the financial markets. But recently he has metamorphosed into a policy guru.
This has come about because Thaler has applied what he has learned about individual decision making - what he calls "choice architecture" - to areas outside finance. Nudge, his book on the subject, co-written with Cass Sunstein of the University of Chicago Law School, has caught the imagination of policy-makers. David Cameron has embraced him as a guru in Britain, while in America he has influenced Barack Obama.
There are many serious examples in Nudge but Thaler's favourite involves public urinals. Evidently, putting a picture of a fly in the urinal reduces spillage as it gives men something to aim at. For Thaler this is a fine example of how small measures can influence individual behaviour for the good.
Unfortunately, few have drawn attention to the problems with this approach. Most clearly, it reduces politics to a debate about how to control individual behaviour. Politics used to be about competing visions of how to organise society. Nowadays, it seems to be about such things as discouraging smoking and encouraging us to urinate in the right way.
It also means that bigger problems are seen in an exceedingly narrow way. For instance, climate change is viewed as a problem of behaviour that can ultimately only be dealt with by discouraging consumption. Discussions of developing new forms of technology or the need to increase the supply of energy are marginalised.
Ultimately, it suggests that the trendy area of behavioural economics is itself flawed. It views economics as primarily to do with individual behaviour and neglects the complex web of social relationships that make up the contemporary economy.
Last week's oddest spectacle was probably Richard Thaler, a professor of economics at the University of Chicago, talking about knife crime on the BBC Newsnight programme. Thaler probably knows as much about knives as the average street fighter knows about Sharpe ratios. Yet the venerable professor was expected to speak with authority on the recent spate of teenage stabbings in Britain.
To anyone familiar with Thaler's work, this is a strange development. He was until recently well known within the economics profession as an expert in behavioural finance - writing technical papers on the relationship of human psychology to the financial markets. But recently he has metamorphosed into a policy guru.
This has come about because Thaler has applied what he has learned about individual decision making - what he calls "choice architecture" - to areas outside finance. Nudge, his book on the subject, co-written with Cass Sunstein of the University of Chicago Law School, has caught the imagination of policy-makers. David Cameron has embraced him as a guru in Britain, while in America he has influenced Barack Obama.
There are many serious examples in Nudge but Thaler's favourite involves public urinals. Evidently, putting a picture of a fly in the urinal reduces spillage as it gives men something to aim at. For Thaler this is a fine example of how small measures can influence individual behaviour for the good.
Unfortunately, few have drawn attention to the problems with this approach. Most clearly, it reduces politics to a debate about how to control individual behaviour. Politics used to be about competing visions of how to organise society. Nowadays, it seems to be about such things as discouraging smoking and encouraging us to urinate in the right way.
It also means that bigger problems are seen in an exceedingly narrow way. For instance, climate change is viewed as a problem of behaviour that can ultimately only be dealt with by discouraging consumption. Discussions of developing new forms of technology or the need to increase the supply of energy are marginalised.
Ultimately, it suggests that the trendy area of behavioural economics is itself flawed. It views economics as primarily to do with individual behaviour and neglects the complex web of social relationships that make up the contemporary economy.
Labels: economics, finance, Fund Strategy
Tuesday, July 08, 2008
Obsession with M&S is pants
The following comment by me appeared in yesterday’s issue of Fund Strategy:
It may be that many journalists wear Marks & Spencer underwear - Jeremy Paxman famously wrote to the company's chief executive complaining about its quality - but that does not excuse the media's obsession with the retailer's fortunes.
Last week's profit warning from the middle class's favourite retailer led to a 25% fall in the share price and widespread gloom about recession. But while M&S investors may have reason to worry about its share price it is wrong to draw sweeping economic conclusions from its troubles.
There are three reasons why it is wrong to see M&S's plight as an indicator of economic problems. First, M&S accounts for only a small part of the economy. Chris Dillow, an economist who runs the Stumbling and Mumbling blog, estimates that M&S's value added is less than 0.2% of Britain's GDP. It therefore represents only a tiny proportion of economic activity.
He also points out that the Game group reported spectacularly good results last week. But it does not follow from these results that the economy is booming. Some companies do badly and others do well in difficult economic circumstances.
Second, the economy is more than a collection of firms. That is why John Maynard Keynes wrote of the "General Theory". He was concerned about the behaviour of the economy in general rather than that of individual companies. Many economists have realised that the economy consists not just of companies but also of the relations between them as well as other factors such as consumers, workers and governments.
Finally, contemporary economic discussion focuses far too much on consumption. It obsesses over such issues as branding, shopping and consumer confidence. News items on the economy are virtually guaranteed to feature a shop. At the same time the production side attracts relatively little attention. Factors such as return on investment, productivity and profitability are hardly mentioned, despite their central role in economic activity.
Marks & Spencer's recent stockmarket troubles say a fair amount about the company but little about the wider economy. To really understand Britain's economic troubles we must look deeper and wider than just M&S. No single company, even one with as high a profile as M&S, tells the story of the whole economy.
It may be that many journalists wear Marks & Spencer underwear - Jeremy Paxman famously wrote to the company's chief executive complaining about its quality - but that does not excuse the media's obsession with the retailer's fortunes.
Last week's profit warning from the middle class's favourite retailer led to a 25% fall in the share price and widespread gloom about recession. But while M&S investors may have reason to worry about its share price it is wrong to draw sweeping economic conclusions from its troubles.
There are three reasons why it is wrong to see M&S's plight as an indicator of economic problems. First, M&S accounts for only a small part of the economy. Chris Dillow, an economist who runs the Stumbling and Mumbling blog, estimates that M&S's value added is less than 0.2% of Britain's GDP. It therefore represents only a tiny proportion of economic activity.
He also points out that the Game group reported spectacularly good results last week. But it does not follow from these results that the economy is booming. Some companies do badly and others do well in difficult economic circumstances.
Second, the economy is more than a collection of firms. That is why John Maynard Keynes wrote of the "General Theory". He was concerned about the behaviour of the economy in general rather than that of individual companies. Many economists have realised that the economy consists not just of companies but also of the relations between them as well as other factors such as consumers, workers and governments.
Finally, contemporary economic discussion focuses far too much on consumption. It obsesses over such issues as branding, shopping and consumer confidence. News items on the economy are virtually guaranteed to feature a shop. At the same time the production side attracts relatively little attention. Factors such as return on investment, productivity and profitability are hardly mentioned, despite their central role in economic activity.
Marks & Spencer's recent stockmarket troubles say a fair amount about the company but little about the wider economy. To really understand Britain's economic troubles we must look deeper and wider than just M&S. No single company, even one with as high a profile as M&S, tells the story of the whole economy.
Labels: consumption, economics, finance, Fund Strategy
Friday, June 13, 2008
An eco-toff archetype
Adair Turner, to take up the position of chairman of Britain’s Financial Services Authority (FSA - the main financial regulator) in September, is an archetype “eco-toff”. He is a multi-millionaire member of the establishment with strong environmentalist leanings:
* Toff: chairman of the Cambridge University Conservative Association (later defected to the Social Democratic Party during its brief existence), president of the Cambridge Union, a consultant at McKinsey, director general of the Confederation of British Industry, member of the House of Lords and now FSA chairman.
* Eco: trustee of the World Wildlife Fund and has an organic farm.
His wife, Orna Ni-Chionna, also fits the mould. She graduated from Harvard Business School and did a stint at McKinsey. Now she is chair of the Soil Association (which promotes organic farming) and a director of Northern Foods (brands include Goodfella’s pizza and Fox’s biscuits, it also makes many food products for retailers using their own labels).
Turner’s 2001 book, Just Capital, advocated a “middle way” between free market economics and socialism.
* Toff: chairman of the Cambridge University Conservative Association (later defected to the Social Democratic Party during its brief existence), president of the Cambridge Union, a consultant at McKinsey, director general of the Confederation of British Industry, member of the House of Lords and now FSA chairman.
* Eco: trustee of the World Wildlife Fund and has an organic farm.
His wife, Orna Ni-Chionna, also fits the mould. She graduated from Harvard Business School and did a stint at McKinsey. Now she is chair of the Soil Association (which promotes organic farming) and a director of Northern Foods (brands include Goodfella’s pizza and Fox’s biscuits, it also makes many food products for retailers using their own labels).
Turner’s 2001 book, Just Capital, advocated a “middle way” between free market economics and socialism.
Labels: consumption, environment, finance
Sunday, April 06, 2008
Co-op packed lunch misery
I must receive many thousands of press releases every year but one last week from Cooperative Financial Services must rank among the most despicable. It started by revealing that “the British workforce spends a staggering £162 million on lunch every day”. It then calculated that this figure represents an average of £5.503 per day, which equates to £1,265 per year or £50,600 in a lifetime. The next stage was to declare that “the research shows that only just over a quarter (29 per cent) of the 3,200 people questioned take a packed lunch to work with them. Two-fifths (41 per cent) of the British workforce purchase their lunch from the local supermarket while one in seven (14 per cent) prefer to stay close to the grindstone and visit the staff canteen.”
I do not know about my readers but spending £5.50 per day on lunch does not seem excessive to me. However, the Co-op has done its sums. It says that “official statistics show that the Great British favourite is a BLT sandwich with a banana and a packet of crisps washed down with a café latte. If everybody took the time to make their own BLT sandwich at home and substituted the expensive caffeine option for water, they could save £4.36 every day which equates a total saving of over £1,000 per year.”
It seems to me excessively churlish to begrudge people the “luxury” of buying a sandwich and packet of crisps for lunch. And having a café latte instead of water is hardly the height of decadence. This also underlines James Heartfield’s point about environmentalists having contempt for our time.
Of course the Co-op has a reason for asking us to forsake consumption in the present. If only we invested in a Coop personal pension we would be much better off in retirement, it says. However, according to my calculations it could mean about 11,000 frantic morning rushes to make packed lunches and the same number of miserable lunchtimes.
I do not know about my readers but spending £5.50 per day on lunch does not seem excessive to me. However, the Co-op has done its sums. It says that “official statistics show that the Great British favourite is a BLT sandwich with a banana and a packet of crisps washed down with a café latte. If everybody took the time to make their own BLT sandwich at home and substituted the expensive caffeine option for water, they could save £4.36 every day which equates a total saving of over £1,000 per year.”
It seems to me excessively churlish to begrudge people the “luxury” of buying a sandwich and packet of crisps for lunch. And having a café latte instead of water is hardly the height of decadence. This also underlines James Heartfield’s point about environmentalists having contempt for our time.
Of course the Co-op has a reason for asking us to forsake consumption in the present. If only we invested in a Coop personal pension we would be much better off in retirement, it says. However, according to my calculations it could mean about 11,000 frantic morning rushes to make packed lunches and the same number of miserable lunchtimes.
Labels: consumption, finance, food, work
Wednesday, March 26, 2008
The defensiveness of free marketeers
A substantial feature in Monday’s Wall Street Journal on the new “limits to growth” illustrated, if anything, the limitations of the free market critique of enviro