15 August 2011

Strange Fruit

I think it was Arthur Scargill who said that if people start attacking you, you are obviously shaking the right tree. The interesting thing is that when you post a plan to stabilise the global financial system it is Austrians who fall out of the tree. They feel duty bound to contest the fact that politicians can have any kind of positive impact on the situation.

I have some time for the Austrians because at least they are intellectually consistent. Their position appears to be that banks should be free to make money in a money market system with no inteference from politicians. If the banks fail, those foolish enough to deposit money with them lose it. Similarly, those who in vest in duff businesses lose their investment. The market is ruthless but fair, as are the Austrian theorists themselves.

The problem with this view of the world is that it is ethically, socially and politically untenable. What Hayek learned from the financial chaos of the 20s and 30s was that politics and economics did not mix. What he failed to learn is that unmitigated market chaos generates extreme politics, of both right and left. The role of politicians in a democracy is to mediate that, and they cannot do this without involving themselves fundamentally in the economic framework within which market transactions take place.

My ten-point stabilisation plan is no doubt flawed - and I am grateful to initiate a debate to identify and remedy those flaws. For fear of being seen to be fools, politicians are singularly failing to rush in and sort out the financial crisis. At the risk of appearing a fool I have made a proposal for others to support or attack.

Lee the Austrian makes some points typical of his intellectual wordview. However, when he responds that 'Suspension of government bond trading would push lending costs through the roof, bankrupting all world governments and ending the welfare state for good' he seems to miss my point about suspending such trade in sovereign debt. Perhaps he cannot imagine a world without markets, but I see this as analogous to the situation when a company is going bankrupt and trade in its stock is suspended. So there is no market and hence no price - so there cannot be an increase in the price of lending.

Tim Worstall raises another point that is worth debate in his comment that 'If we stop trading currencies then we've got to stop trade'. This suggests that most of the trade in foreign exchange is directed to settle external trade balances, rather than for speculative reasons. I don't have the proportions to hand, but the residual quantity of exchange between, say, pounds and Ukrainian Grivnya that relates to exchange of goods could surely be suspended for the six-month period, held as an external trade debt? Alternatively, IMF special drawing rights could be used for the purposes of external commitments, until a new global reserve currency has been negotiated.

The tone of the Austrians' comments is harsh, to match their philosophy. I would invite those holding other positions to join the fray. Surely it is worth the risk of appearing a fool!

1 comment:

  1. I think Lee's point is slightly more subtle than his rhetoric would suggest. During the six-month suspension in trading, governments would be unable to refinance their debt. Given that many Western governments are running a deficit, this would necessarily require an immediate reduction in spending in proportion to that deficit. This is a structural shock beyond any experienced throughout the recession so far.

    I would also point out that your analogy to a corporation facing bankruptcy is incorrect; states cannot become bankrupt. They can, however, default on their loans, which is what a suspension of trading would resemble.