Carney Falls for the Same Trap

An irony of today’s world is that capitalism is not allowed to operate but yet whenever a problem occurs it is always capitalism’s fault somehow. The most typical example of this is the conventional wisdom today that the recent financial crisis was due to capitalism taking place in the financial world without sufficient regulation. Nothing could be further from the truth.

Besides the fact that there were many regulations, the core of the financial world is based on central planning! The price of money (i.e. the base rate) is decided by the central bank- which is endowed with certain powers by the government- and so is the supply of money through quantitative easing. A capitalist banking system, on the other hand, is a deregulated system and a system with no central bank to distort the price signals. How would this work?

First and foremost, you will have competing base monies – a ‘denationalization of money’ as Hayek argued in 1976. In other words, there would be no national currency. People decide for themselves how they want to make their transactions: some may opt for a commodity based exchange rate like the gold or silver standard (incidentally a pound is called a pound because it used to be equal to a pound of silver); some will opt for foreign currencies; yet others might prefer money printed by certain private institutions (albeit I do not think this would be a particularly popular option) and some might even prefer to barter. This activates the market forces so that the price and supply of money is as close as possible to the equilibrium. Secondly, a deregulated banking system (with an assurance that there will be no bailouts for failed banks) will force the banks to be prudent and selective about those who they lend to and, on the other side of the coin, will force savers to be prudent about those institutions which they trust their money with.

Mark Carney Davos 2010In this context let us revisit the financial crisis. Low base rates (from 15% in 1981 to under 5% in 2006) created cheap credit which led to careless lending which in turn led to a temporary boom followed by a devastating bust when it dawned on everyone that the boom was spurred merely by debt. It was all started when price signals were distorted by the central bank. It is perplexing to see politicians making the same mistake over and over again. Mark Carney has said that he wants to keep interest rates as low as 0.5% until unemployment reaches 7%. What he does not realise is that even if he does achieve that goal it would only be in the short-term and will very shortly be followed by a bust when everyone realises that the growth had been, once again, riding on nothing but debt. What we need to realise is that no matter how smart our Bank of England governor is, he is still one man. A man who has been given an impossible task of determining the price and supply of money – a task only fit for society as a collective through a spontaneous order. What is worse is that the new planned mortgage schemes will further misdirect the credit into the housing market. Business Secretary Vince Cable has himself warned us of a housing bubble if this scheme goes through (he also predicted the last recession by the way!).

When will politicians understand that interfering with the market will only exacerbate things in the long run and have severe unintended effects? When will they understand that we – the people – are better placed to make judgements about our lives than a group of politicians who are designated to make our decisions for us?

The scariest thing is that when the next economic catastrophe occurs, capitalism will most probably be blamed again and more socialism and Keynesianism will be invoked as a solution to our economic problems.

Hayek: Prices, self-interest, altruism and more

Richard Carey has had a prolific week on Libertarian Home and his thoughts on Hayek have proved most popular. His review of the Master’s of Money Hayek profile has drawn some few hundred new faces to Libertarian Home. This is great, because from here these strangers might become aware of the Libertarian meetup at the Rose and Crown, of the Pro Liberty Party and of the ILN and so, in perhaps a few clicks, those people will have gone from their first encounter with Hayek on BBC TV to their first connection the libertarian political community, for the most part with a stop-off over at Samizdata.

To celebrate, I’m sharing this fascinating interview with Hayek as recommended by Richard.

Taking Hayek in vain

Well, my hopes weren’t high. I made it to the 16th minute of the BBC’s documentary on Friedrich Hayek, before having to switch it off. I challenge anyone to do better than that.

What we are dealing with is a documentary formula, into which Hayek’s life and work has been stuffed. The particular formula is the one they use for pioneering scientists who discover bacteria or something like that, and the need is to stress just how isolated and way-out the fellow was considered by everybody else. That might be fine for doing the mathematician who cracked Fermat’s Last Theorem, and may lend itself to atmospheric long-shots of the presenter walking through empty courtyards and down echoing corridors, but Friedrich Hayek was not a man working alone, and his ideas built on the ideas of other earlier and contemporary economists. I kept waiting for the name Ludwig von Mises to crop up, and it never did. It’s kind of hard to discuss Hayek’s early years in Vienna without once mentioning Mises. The final straw came when the presenter described his work at the Institute of Business Cycle Research which was founded with Mises at the Chamber of Commerce where Mises worked, and where he held his legendary seminars, which Hayek attended, and even then she could not bear to utter Mises’ name. The following is far from a perfect analogy, but it’s like watching a documentary about Mark Antony with no mention of Caesar.

The documentary is from a three-part series called ‘Masters of Money’. The other two parts feature Keynes and Marx. Somehow I figure the Beeb may be in far more familiar territory with these two, especially the last one, although how he can be considered as a master of money, is a mystery, unless it is referring to his incredible talent to leech off his friends, followers and family to fund his decadent, bourgeois life of leisure.

All I can say, is thank goodness we don’t have to rely on the BBC to (mis-) inform us anymore.