By Tim Price
“The genius of our ruling class is that it has kept a majority of the people from ever questioning the inequity of a system where most people drudge along, paying heavy taxes for which they get nothing in return.”
- The late Gore
Vidal.
“It’s a
mess, ain’t it, Sheriff ?” suggests the deputy in the Coen brothers’ No
Country For Old Men as they survey the body-strewn aftermath of a West
Texas gunfight. “If it ain’t,” replies Tommy Lee Jones’ laconic lawman, “It’ll
do till the mess gets here.” And our mess is already here, albeit with the
likelihood of plenty more mess to follow. The latest offering¹ (The Mess
We’re In: Why Politicians Can’t Fix Financial Crises) in the
increasingly crowded pantheon of financial crisis porn stands apart from its
competitors for at least three very specific reasons:
- It doesn’t focus
myopically on the mess in banking, but instead puts our giant
international banking mess in the context of a wider analysis of budget
deficits; the slow collapse of occupational pension provision; fears for
economic recovery; and as its subtitle indicates, whether our political
systems are even remotely fit for purpose in attempting to resolve these
various crises.
- It offers a much broader
overview of the sad history of politicians in their various dealings with
the economy and financial markets. (The word
has already been coined: “Omnishambles.”)
- It dares to offer some
practical solutions and a way out of the swamp.
We are now five
years into this crisis and there is no tangible sign of improvement. Having
thrown everything at banks including the kitchen sink, governments are now
starting to appreciate that all they have achieved is the loss of a kitchen
sink. Which may be why the Financial Times last week reported
that the full nationalisation of RBS was back on the agenda. Barclays’
discredited former CEO, Bob Diamond, was obviously ridiculously premature when
he suggested that a period of banking remorse and apology needed to be over. On
the contrary, given the scale of the mess, and its cost to the taxpayer and to
the economy, that requisite period of remorse and apology may yet outlive us.
But bashing the bankers gives only the least satisfying form of relief. As we
have frequently suggested, no account of the crisis can be complete without a
comparable assessment of the role played by our politicians – not just in the
run-up to the events of 2007 and 2008, but in the years and decades that
preceded them.
..that a
government running a budget deficit for any length of time must itself be
inflationary, and the longer and more significant the deficit then the greater
this effect would be. For even a government can only borrow so much money,
after which it will resort to printing more money, and with more money in
circulation its value must surely fall..
Keynes [also]
realised that, once heavily indebted, a country could slip into a vicious
inflationary spiral. If it borrowed in its own currency, then it would need to
print more money with which to pay it back and, if it was running a budget
deficit, perhaps even to service the interest. If it borrowed in foreign
currency, then again it faced the prospect of having to print much more of its
own money with which to purchase the foreign currency with which to repay the
loan..
It was the danger
of widespread economic hardship leading to social unrest, or even revolution
such as the communist uprisings that Germany had already witnessed, to which
Keynes was attempting to alert the French and British governments.
Incidentally, Keynes is widely credited with saying that the easiest way to
undermine a capitalist society is to ‘debauch the currency’, but in fact he was
quoting Lenin, albeit only to agree with him.
Versailles, of
course, begets the Weimar hyperinflation, which in its own way begets Hitler.
There are good reasons for the Bundesbank to be wary of letting the ECB print
money without restraint. But this brings us to the essentially political
problem of our time. Politicians “all have a vested interest in the system
remaining exactly as it is – and it is that system which lies at the root of
our problems. It encourages politicians to make decisions only on their likely
short-term outcomes and it gives them far too much scope within which to make
such decisions, with far too little democratic mandate.” In tune with our own
scepticism, the author takes up arms against the central banks, including our
own Bank of England:
The Bank sees its
role as ‘promoting and maintaining financial and monetary stability and its
contribution to a healthy economy.’ If so, then the astute observer may spot
that it must surely rank as one of the most unsuccessful organisations in human
history, since we currently have neither financial nor monetary stability, nor
a healthy economy. Perhaps wisely, the Bank’s website does not elaborate on how
these things might be defined, nor does it mention its failure to keep
inflation under control.
Perhaps the finest
story in economics is Frédéric Bastiat’s fable of the broken window. A
shopkeeper’s son breaks a pane of glass. A crowd gathers. The spectators soon
conclude that while the broken window is bad news for the shopkeeper, it will
be great news for the glazier. Perhaps more windows should be broken, to enable
the money stimulus spent on mending broken windows to trickle down through the
economy. The crowd sees the window. What the crowd misses is what goes unseen.
Any money spent by the shopkeeper on repairs will not, and cannot, be spent on
anything else. Britain’s politicians today see the Olympic village (for
example) and a host of vanity projects paid for by the taxpayer. What they
cannot see is what that now spent money cannot be spent on instead.
Politicians, like the members of Bastiat’s crowd, see only what they want to
see.
But politicians,
like their appointees in the central banks, believe that they must be seen to
be doing something. Visible action, of whatever form, is deemed to be superior
to thought. This is a workable definition of fascism. So ECB President Mario
Draghi pledges to do whatever it takes to save the euro. But what if the euro
is the problem, rather than the solution?
The Mess We’re
In provides a thorough analysis of the motley interplay between feckless
politicians and clueless economists through the ages. The reputation of Keynes
is largely restored. The growing reputation of the Austrians is rightly
reinforced. And the author doesn’t pull punches in advocating policy measures
that might correct the state’s automatic tendency to inflate, or move
government budgets toward a more manageable balance. What is missing from the
current debate between the various economic schools and between the electorate
and the political classes is a sense of fundamental humanity: an appreciation
that we are in a desperate fix, that genuinely hard choices will need to be
made by all, and that a fiendishly complex sequence of crises cannot be
resolved by overly simplistic economic dogma. In acknowledging that there are
severe and possibly fundamental limits to the capabilities of politicians to
resolve the sort of crisis we now inhabit, The Mess We’re In will
help to manage expectations by voters and investors alike.
¹ The Mess
We’re In: Why Politicians Can’t Fix Financial Crises by Guy Fraser-
Sampson, published by Elliott and Thompson. Available from all good bookshops,
and some thoroughly disreputable ones as well, perhaps.
² As the author
points out, 1930s governments believed in balanced budgets. “Keynes himself
called any period of budget deficit ‘abnormal spending’. This is a crucially
important point, frequently overlooked by present-day politicians eager to pick
out the bits of a theory that they like but leave the rest behind. For it was
to represent a vital building-block in what was to become known as Keynesian
economics, a system of thought that would revolutionise the way in which people
looked at the world. The key word here is ‘system’. Keynes did not intend parts
of his thinking to be applied in isolation while the rest of it, the less
politically convenient part, was ignored.”
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