Bailouts - It's all rubbish, isn't it? A few months ago, it was all "well, once we've done this, we'll get the financial system moving again". And that explanation has quite clearly shown itself to be nonsense so far, on both sides of the Atlantic, since more action has apparently been required since. As, to be honest, I expected it would. I had already been reading about the so-called Austrian School of economics. These guys are extreme free-marketeers, and although I don't agree with absolutely all of their practical suggestions (e.g. many of them seem to be for no tax at all, Dubai-style - and I wouldn't go that far), they have a lot of sensible things to say about the current situation in which the world finds itself. Specifically, one of the founders of the school, one Ludwig von Mises, said that there is no way of solving a banking/economic crisis caused by a build-up of extreme credit. And that pretty much sums it up; this is not a liquidity crisis but a solvency crisis. In other words, if I had credit card trouble, liquidity problem = I don't have the cash this month to make my monthly payment; solvency problem = I'm overwhelmed with £100,000 of debt on my card that I could never possibly pay back in a month of Sundays. What the world faces is the latter problem IMHO, and what the governments are trying to tackle is the former, simply because they're hoping that's what it is, because they couldn't solve the latter. (And I've not even gone into the whole "shadow banking" side of things, the derivative markets, which IMV have exacerbated the current problems. That's a bit technical, and for another post, perhaps.)
Of course, this puts politicians in a bind: either do nothing and let institutions fail (which I do think would be the fastest way for things to sort themselves out and for the world economy to recover), and be seen by the voters to be 'callously and irresponsibly' doing nothing; or else intervene in the hope that the problem is a short-term liquidity issue, thereby making things worse but at least they can defend their actions to the electorate: "we tried!". (No wonder politicans love Keynes; his ideas make them feel they can do something effective.)
For this reason, I don't blame the politicians. They are only doing what, by their very nature, they must - if they don't they will be replaced by others who will. In the credit card analogy, they've been offering me a personal loan to help me pay my monthly payments, or possibly, if that didn't help, offering me a wodge of cash in return for some of my salary, and then just trying to come up with ways to help me out that no-one's explicitly done before, but they're running out of ideas, and hoping no-one will notice.
Similarly, I don't blame the bankers, either. In a credit bubble such as this, only the bankers who are trying to build market share by participating in the game will remain; the others will be sacked for poor performance as the bubble grows and before it bursts. Also, I blame not the regulators: even if they are not in the pay of the politicians or the bankers, they will still be subject to extreme social/cultural pressure by the system in which they find themselves operating. There is something Darwinian going on here, therefore: as the bubble grows, only those bankers and so on prepared to add to the bubble survive. Of course, blame abounds. You takes your choice, and you lay the blame where it won't come back to you. So if you're an ordinary Joe, you blame the banks; you're a banker, you blame the regulators or government; you're one of those, you blame the bankers and the general economic climate. Not me, guv'nor.
No, in my opinion, the blame lies entirely with the philosophy of fractional reserve banking itself. This crisis was bound to happen eventually. We have had mini-crises over the years, the decades, the centuries. The whole point of moral hazard is that this is where we ultimately end up, if each little problem is 'solved' at the time, short-term, shoving the basic problem forwards into the future. When those gold-lenders several centuries ago first tumbled upon the idea of lending out some of the gold to their profit as they would never be required to give all their clients' gold back at once, they unknowingly set the world on course for this disaster. It was bound to come to pass one day, at the point where the entire world had finally become inter-connected politically, technologically and financially, and there was ultimately no outside agent to shovel in more dough at the bottom of the pyramid.
But of course, our world is so fundamentally based upon the philosophy of fractional reserve banking, that even those who realise what is going on cannot possibly force those in power to face the basic issue, because it would mean changing the way the world works in a way that seems impossible now. And that possibly *is* impossible now. We just have to hope that all that's being done to stall the problem will stall it effectively.
I don't want to give the impression that I believe full reserve banking to be a panacea; it isn't. A move to full reserve banking would mean a use of capital that, compared to nowadays, is horribly inefficient. This, I believe, would mean the entrenchment of financial privilege. To give an example of what I mean, imagine if availability of credit were suddenly reduced to the extent that it became very unusual to be able to secure a bank loan to start a business. Person A has a good workable business idea and a wealthy family; person B has a good idea but a poor background. Neither can secure a bank loan in the brave new full reserve banking world, but person A can still start a business because their family puts up the capital; person B's idea withers and dies because they do not have that opportunity, and cannot secure finance to get their business off the ground.
So what's the answer? Well, there isn't an easy answer in my book. But I worry about the fashion for throwing good money after bad. I'll freely admit that I am a laywoman when it comes to finance, and therefore I have much to learn - but I do think that this current crisis is structural rather than cyclical, and that we should all be aware of that.
Have a nice weekend, all. :o)