Watching the UK’s Channel 4 programme tonight, hosted by Jon Snow, whose leftist views are easily discernible, I sensed an aspect of the coverage of the present financial turmoil that bothered me. Several times, during various back-and-forth questions with such luminaries as the left wing journalist Will Hutton and the Cazenove economist Richard Jeffries (I know Richard, he is a smart guy), Snow came up with the idea that instruments such as financial derivatives were “peddled” by banks and other institutions to investors. You see, the viewer was supposed to understand, buying or selling a swap, or a future, an option, a warrant, or basket of bonds and equities is like buying or selling crack cocaine or a porno magazine, not that I have a problem with porn magazines.
Of course, given the way in which hedge funds have been accused of colluding to destroy financial institutions such as Britain’s HBOS – which is beyond daft given that only a small fraction of HBOS shares were available to be short-sold in the first place – we can expect more of this demonisation of financial markets. Please understand me, gentle readers. I am not saying that banks and other intermediaries are not at times at fault for what has happened. Clearly it sticks in the throat to see bankers earn vast salaries in the good times and then bawl like so many 1980s coalminers or wheat farmers when the taxpayer refuses to get them out of trouble. I was grimly satisfied to see that the US allowed Lehman Brothers to go down, since it showed that at least some policymakers in the US were willing to see risk-takers pay the price of risks that have gone awry. But let there be no mistake: the financial derivative instruments that are being credited with voodoo powers by financial dunderheads like Will Hutton or Mr Snow are not the essence of the problem.
Derivatives are, after all, borne out of the desire by people to offload risks and by the desire of others to take those risks on; they are a consequence of the different appetite for bearing risk that occurs in any open market economy. Some people like uncertainty, others do not. That difference explains how, in a world of price movement, it is possible for people to swap uncertainty for certainty and vice-versa. It is the basis of insurance, for example. Without speculators willing to bear risks of fluctuations in everything from wheat to interest rates, other, more timid souls would not have fixed-rate mortgages or upfront payments for their wheat. Without those hedge funds, other, more cautious investors would not get prices for their investments, and so on.
We are in the midst of a very scary time in the financial world and there is no point in my trying to obscure that fact. I work in the wealth management business and have seen even some of the smartest minds in the business lose their heads. But I detect a decidedly unpleasant whiff in the air of scapegoating in the current time. One almost can hear an echo of anti-semitism, or something very similar.
Meanwhile, Roger Kimball pins much of the blame on US policies designed to encourage risky borrowers to get credit. He has got a point. I would also repeat the point that with Japan and other Asian countries operating ultra-low interest rates for a long time, these countries acted like ATM machines for the rest of the world. As Paul Marks of this parish likes to point out, until interest rates are based on a genuine balance between the demand for and stock of savings, the monetary system of the world will keep creating bubbles like this.
Update: here is a fine essay by economics historian Robert Higgs about how disastrous policy responses in the US ensured that the Wall Street Crash of 1929 mutated into a decade-long slump. Over and over again, it is necessary to nail the myth of Roosevelt’s New Deal. Far from “saving” US capitalism from itself, FDR lengthened the misery; unemployment was higher by the outbreak of WW2 than when he was elected to office.