Jeremy Warner: Money may be root of evil, but regrettably we are stuck with it
Outlook: Boom and bust is as much a part of capitalism as night and day
Tuesday 30 December 2008
So money is the root of all evil, is it? A group of Anglican bishops has attacked the Government for the "scandal" of trying to borrow its way out of recession and of "morally corrupt policies" in encouraging a culture of indebtedness. The Bible says love of money is the root of all evil, Nigel McCulloch, the Bishop of Manchester, reminds us, and he accuses the Government of being guilty of just such a sin.
It's not my function to defend the Government from proselytising clerics, but what a load of moralising, finger-wagging old twaddle this is. Regrettably, depicting the credit crunch as some kind of thoroughly deserved, even divine, punishment for decades of credit-fuelled greed has become very much the order of the day, not just among the clergy but across whole swaths of the political and media establishment.
I don't particularly blame the bishops for their preaching. If anything they come to the pulpit rather late in the day. The bishops do no more than repeat the new consensus, or zeitgeist, in finding a moral message in present adversity. Nor are they the first to identify the apparent contradiction of trying to address a crisis caused by an excess of credit by borrowing and spending even more.
While the clerics bemoan the evils of money, others have used the crisis to push home political and ideological agendas on the economy where nationalisation and other forms of state intervention once more become the norm.
Not to be outdone, David Cameron, the Tory leader, has climbed aboard the bandwagon in demanding the authorities lock up miscreant bankers.
As the mob bays for more, the last rites are being read to three decades of Thatcherite economics. Meanwhile, the "old" state-controlled capitalism of the immediate post-war period is being enthusiastically piped back in. Naively, the new austerity is seen as morally superior, more decent and caring than the credit-fuelled consumerism of recent years.
They won't be saying that in six months time, when the jobs cull reaches its crescendo. Decency is not a word normally associated with a capitalist correction at full tilt. I see few reasons to believe the private sector will prove any more restrained this time around.
Can state-controlled capitalism deliver in the way proponents claim, and is it in any case a desirable outcome? First, let's nail the specific charge levelled by the bishops of "scandalous" policy in addressing the recession by seeking to spend our way out of it. The Archbishop of Canterbury, Rowan Williams, has gone further to liken the process to an addict returning to the drug.
Yet what does he suggest ministers do by way of alternative? Outside praying, there seem to be few answers. To do nothing would surely be to condemn Britain to a decade or more of mass unemployment and take living standards back to where they were in the 1970s.
Perhaps the bishops hope that by depriving the masses of mammon, they will return to God and once more fill their empty churches, yet this hardly amounts to a compelling argument for sitting there in stoic resignation as the rising tide of insolvencies and repossessions engulfs us.
When banks fail, governments must, in so far as they are able, step into the breach to provide the credit that the markets have chosen to withdraw. This is not an addict returning to the drug, but rather a necessary act of substitution, for no modern economy can function without credit.
The markets won't lend to banks in the quantity they used to because they don't trust the banks to be able to repay the money, but for the time being, they will still lend to governments, backed as they are by the compulsion of the tax base.
If the economy is to be saved from catastrophe, governments must step up to the plate and provide the services that banks used to in maintaining and creating credit. The effect is to allow the bubble of the previous boom to deflate more slowly, rather than blowing up in everyone's face with devastating consequences all round.
By supporting the system, governments are engaged not in further recklessness, but an act of well-intentioned charity. It may not work, but it is rather the purpose of government at least to try.
Boom and bust is as much a part of capitalism as night and day. Each boom ends in an orgy of excess in which the lessons of the previous bust seem to be entirely forgotten. As the cycle moves from creation to destruction, a "crisis of trust in capitalism" is declared, and the call goes up for more state intervention and regulation to keep the greed-fuelled money men of Wall Street and the City at bay.
So serious does the present bust look like becoming that, this time around, the politicians may end up abolishing the boom bit of the cycle altogether, so as to save the banking and money system from any future self-harm.
Perhaps surprisingly, the Labour leadership seems to recognise the dangers of such over-reaction better than many parts of the media.
For the Treasury, part-nationalisation of the banks is not an end in itself, but a necessity from which the Government should extricate itself as soon as it can. The last thing you want politicians in control of on any long-term basis is credit allocation.
Besides, even after three decades of privatisation, deregulation and "rolling back the frontiers of the state", the public sector still accounts for rather more than 40 per cent of the UK economy, which strikes me as quite large enough. Not since the Second World War, when the economy was on a command footing, has it been much above 50 per cent. There is nothing new, or rediscovered about state intervention. The state has always been far and away the largest force in the economy.
Some aspects of the present crisis, far from being the fault of the free markets system, are in fact the direct result of over-regulation, political meddling and distortive tax policy. For instance, the US subprime crisis finds its roots not in over-enthusiastic lending, though that is certainly where it ended up, but in the politically orchestrated quota system for encouraging home ownership among ethnic minorities.
Booms are not something to be condemned, as the clerics suggest. To the contrary, they should be celebrated for the innovation, prosperity and creativity they give rise to. Do we really want to get rid of, as the bishops seem to, the democratisation of credit and mortgages? Far from being an evil, this has been one of the great economic boons of the past 30 years, enabling unparalleled levels of home ownership and making the accoutrements of modern living available to all.
Admittedly, the process eventually got out of hand and went too far, as these things always do, but that doesn't mean we should throw the baby out with the bathwater and return to a world of credit rationing and mortgage queues where only the middle classes get access to affordable debt.
As Niall Ferguson, the economic historian, brilliantly describes in his new book, The Ascent of Money, down the ages financial innovation has in fact been responsible for far more good than harm, though, as we are now experiencing, it is also the cause of periodic outbreaks of crisis. Nevertheless, in the round, the money men have done more to enhance than undermine prosperity, hard though it might be to credit in today's turbulent world.
Capitalism survives because societies have learned how to deal with the crises it is prone to. So we have our social safety nets, our deposit protection schemes, we have our solvency and liquidity regimes (now under active reconstruction once more), and when all else fails we have governments and central bankers prepared to borrow or simply print the money to act as lender and spender of last resort.
You can argue about the detail of the policy response, but the idea that society at large should passively accept some kind of hair-shirted penitence of mass unemployment and misery for the sins of past over-indulgence is ridiculous. If policy makers are guilty of anything, it is not that of feeding the addiction, but of underestimating the scale of the crisis and leaving it too late to act.
Over Christmas, I've been reacquainting myself with some of the predictions I made this time last year, and pretty humiliating reading they make too. In defiance of many of the bankers I was talking to at that time, I thought the crisis would slowly abate and Britain and the world would narrowly avoid a nasty recession.
I don't want to excuse my failings, suffice it to say that I was hardly alone and I continue to believe this view might have been proved correct but for the oil and commodity price spikes, which collapsed consumer and business confidence across large parts of the world economy and thereby greatly exaggerated the consequences of the accompanying credit squeeze.
But one mistake I didn't make was to advise that governments withdraw all support and allow fire and brimstone to rain down from the heavens on an unprotected land in punishment for the excesses of the past. When markets fail, governments must be seen to act. Love of money may be the root of all evil, but, perhaps unfortunately, money itself is a rather necessary commodity.
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