Samizdata

This is a good, very fair-minded take on the current financial turmoil and all the more impressive for its insights precisely because the writer is not some sort of ultra-free market ideologue:

“The real roots of the crisis lie in a flawed response to China. Starting in the 1990s, the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policies. But the flip side of China’s export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets ’round the world, driving up the price of everything from Florida condos to Latin American stocks.”

Absolutely. China, and the massive pool of savings that Asian economies have been able to provide to Western borrowers, is the 800 pound gorilla in the room in the current saga.

The author continues:

“That gave central bankers a choice: Should they carry on targeting regular consumer inflation, which Chinese exports had pushed down, or should they restrain asset inflation, which Chinese savings had pushed upward? Alan Greenspan’s Fed chose to stand aside as asset prices rose; it preferred to deal with bubbles after they popped by cutting interest rates rather than by preventing those bubbles from inflating. After the dot-com bubble, this clean-up-later policy worked fine. With the real estate bubble, it has proved disastrous.”

Yep, Mr Greenspan has a lot to explain.

“So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that. Moreover, the Fed’s track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet. Financial engineers built huge mountains of debt partly because they expected to profit in good times — and then be rescued by the Fed when they got into trouble.”

“Of course, the financiers did create those piles of debt, and they certainly deserve some blame for today’s crisis. But was the financiers’ miscalculation caused by deregulation? Not really.”

Try telling that to the likes of Will Hutton.

“So blaming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis. Even before finance went haywire, the Doha trade negotiations had collapsed; wage stagnation for middle-class Americans had raised legitimate questions about whom the market system served; and the food-price spike had driven many emerging economies to give up on global agricultural markets as a source of food security. Coming on top of all these challenges, the financial turmoil is bound to intensify skepticism about markets. Framing the mess as the product of deregulation will make the backlash nastier.”

Quite. In recent years, I have often heard fellow libertarians say something on the lines that “we’ve won the economic argument but lost the cultural one” sort of thing. I have never been entirely convinced about that. Yes, old-style central planning and crushingly high tax rates are unlikely to make a comback, but never underestimate the age-old hatred of financiers, of speculators and great wealth. Those of us who might imagine that the big battle of ideas fought after the war against socialism have been won may want to shake off some complacency. But maybe I am being gloomy. After all, much of the current round of government “rescues” are not quite of the same order as the nationalisations of the past. And in some cases, we might hope that eventually states will return banks they have nationalised into private hands.

As the French example of Credit Lyonnais shows – a corrupt bank if ever there was one – state-run banks are just as capable of making a mess of lending as any private one.