Monthly articles (English and French) on the theme "Querying economic orthodoxy"
No. 39 - March 2009
Credit control is back - upside down!
Where market fundamentalists are totally wrong is in claiming that regulations have to be abolished because of their fallibility. That happens to be the inverse of the Communist claim that markets have to be abolished because of their fallibilty.
George Soros, The New Paradigm for Financial Markets (Public Affairs, New York, 2008)
The deregulation of credit has got us into terrible trouble. Time for a return to discipline.
The challenge in today's difficult circumstances is to regain our confidence. The sooner we do so, the sooner we shall recover. Very well, then, is there any good news? Here are a few interesting price movements. Not everything is on the floor.
Share indices and 3-month metal prices 2009 low 19/20 March 2009 Change
FTSE 100-share index (UK)
3512.09 3842.85 + 9.4% CAC 40-share index (France) 2519.29 2791.15 + 10.8% S&P 500-share index (USA) 676.53 768.54 +13.6% LME copper ($ per tonne) 3085 3975 +28.8% LME aluminium ($ per tonne) 1288 1435 +11.4% Steel (Mediterranean) ($ per tonne) 250 290 +16.0% Oil (light sweet crude) spot ($/barrel) 37.50 51.90 +38.4%
LME = London Metal Exchange. Sources: www.bloomberg.com, www.lme.com,
Now for the main theme of this article. Professor Charles Goodhart, of the London School of Economics, in a recent interview (1) with Le Monde, stated that the British banks have been so traumatised by the crisis that they will regulate themselves...we shall have no need of regulation [by the authorities] for the next five to ten years.
I beg to disagree. Bank lending in Britain, and elsewhere, does indeed need to be regulated right now, and the good news is that it is at last getting the regulation it needs. You may find that surprising. Regulation of bank lending (credit control) normally means restraining bankers from lending too much. That is the kind of regulation that we should have had over the past thirty to forty years. We lacked it because the ridiculous mantras of the libertarian economists so mesmerised almost everyone - including Labour politicians - that they ceased to believe in credit control and refused to practice it.
But surely, you will say, I am not suggesting that we need credit controls now? Yes, I am; but not the controls you have in mind. What we need now are upside-down credit controls, to prevent bankers not from lending too much, but from lending too little. One of the big problems at present is that, having lost tonnes of money through careless lending and by dabbling in esoteric financial instruments, bankers are now terrified of incurring any further losses. They are unwilling to provide even basic, normal credit facilities, especially to smaller enterprises. Thus they inhibit business activity and can even force firms to close down.
So governments, in providing vital financial support for groggy banks, are insisting that they agree to expand their lending.
Royal Bank of Scotland has negotiated with the British Treasury an Asset Protection Scheme, under which the Treasury will insure many of the bank's assets against further deterioration (2). As part of this scheme, RBS has agreed to increase its lending to UK homeowners and businesses by £25 billion this year (ie by about 8%) and by a further £25 billion in 2010. This year's increase is to be split: £9 billion for mortgages and £16 billion for business loans.
The enlarged Lloyds Bank group, which includes Bank of Scotland and Halifax, has negotiated a similar agreement (3), with a commitment to expand lending by £14 billion in the year to 1 March 2010 and by a further £14 billion in the following year.
In France, the government has provided support to the six main banking groups, which represent more than 80% of the French banking sector. These banks have committed themselves (4) to continue to increase their levels of credit outstanding at a 3% to 4% annual rate.
In America, the Citicorp group, said to be the biggest bank in the world (it would probably be a better business if it were smaller) is one of those that have received state aid under the TARP (troubled assets recovery program). The US Treasury has invested $45 billion in Citi preferred stocks, some of which will now be converted into common stock, under agreements (5) which stipulate that Citi will adhere to the following objectives as a condition of the Treasury's capital investment:
* To expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy.
* To work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market.
In accordance with these agreements, the bank has announced a schedule of future lending which covers, so far, $36.5 billion, setting out in detail the amounts to be used for mortgage lending, business lending and other approved purposes.
So we are back to the good old days when it was normal, in many countries, for governments to tell bankers how much they should lend and where the money should go. My friends the free-marketeers are, of course furious. How dare the state interfere with the sacred commercial freedom of bankers to decide for themselves how much to lend and for what purposes?
But the bankers have got us into terrible trouble by lending too much money to too many unreliable borrowers. So now they have to be disciplined and kept in order. Those who swallowed the daft economists' doctrine, that businesses should pursue only the narrow goal of profit maximisation, are being put firmly in their place. They are being forced to accept that it is their duty also to have a care for the public interest, for the 'general good' as the European Community puts it.
'Negative freedom' (absence of restraint and constraint, which according to Friedrich von Hayek (6) is the only real liberty) has not worked in banking, or anywhere else for that matter. A long time ago, in a little mediaeval book called the Imitation of Christ, the Dutch monk Thomas à Kempis wrote (7) that it is a great matter to live in obedience, to be under a superior, and not to be at one's own disposing.
It is hardly an exaggeration to say that the human race has spent the entire twentieth century trying to prove Thomas wrong. We have thought it a great matter to be at our own disposing, to live not in obedience, but free from the constraints imposed by society, by the government, by the Church, by whatever authority may be competent. The individual should have maximum 'liberty' to do his (her) own thing. For has not Ludwig von Mises, idol of the free-marketeers, declared (8) that human action is necessarily always rational?
And we have extended this notion of negative freedom from the individual to the business enterprise. It should not be told what to do by public opinion or authority, in the public interest. It should be driven only by the blind, impersonal dictates of the market, which is ultimately the amalgam of all our private, personal-interest-driven decisions.
Even within banks, traditionally hierarchical organisations with strong internal disciplines, the notion has arisen that the enterprising individual trader should be allowed to act, with very little restraint, on his own initiative, so long as he appears to be making profits. After all, according to Mises, he will always act rationally. Thus the outrageous behaviour of people like Nick Leeson and Jérôme Kerviel has been tolerated until it was too late.
The attempt to prove Thomas à Kempis wrong has failed. That is why authority is coming back, often in strange and irrational forms. People desert the more liberal religious organisations; instead they flock to fundamentalist churches, mosques, or synagogues which impose hard-line disciplines based on ancient precepts designed for bygone ages, even though such rules may make little sense in today's world (9). What matter, so long as they have the sanction of time-honoured tradition?
It is regrettable that we seem, in some respects, to be reverting to obscurantist rather than enlightened forms of authority and order. But perhaps overreaction is inevitable after such excesses of indiscipline. The free-market economists have got it wrong; human action is not always rational, and the market often needs corrective action. The sooner we clear our heads of their nonsense, the better.
* * * * *
1 See Le Monde, 20 October 2008
2 See press release dated 26 February 2009
3 See press release dated 7 March 2009
4 See Observatoire de Crédit, www.minefe.gouv.fr, 11 March 2009
5 See press release dated 3 February 2009 on www.citicorp.com
6 Friedrich von Hayek, The Constitution of Liberty (Routledge & Kegan Paul, London, 1960), chap. 1
7 Thomas à Kempis (1379 - 1471), De imitatione Christi, book I, chap. 9
8 Ludwig von Mises, Human Action (William Hodge, London, 1949), chap. 1, #4
9 It is argued by certain fundamentalists, both Christian and Jewish, that Biblical precepts are in no case rules made for the circumstances of their own times; they are all everlasting laws of universal validity. But this view is rejected by the Bible itself. In the New Testament (Acts chap. 15, Galatians chap. 5) we read that the Mosaic law of circumcision does not apply to Christians; neither (Romans chap. 14) does the law of kashrut, against eating what is not kosher.