WHEN BUSINESS VOLUMES are as low as they are, one has plenty of time to contemplate the whichness of the why. I have never really seen myself as much of a libertarian but judging by the classic definition of libertarianism proffered by Roderick Long – “any political position that advocates a radical redistribution of power from the coercive state to voluntary associations of free individuals” – then I guess I must be moving that way.
I certainly have a sinking feeling that the free market we are supposed to be living by is in the process of being legislated out of existence. And why? Probably because it is telling us things that we – or, to be precise, our governments – don’t really want to hear.
Could it be that the more governments intervene in the free movement of goods and services, the less free that movement becomes. Are markets at a standstill simply because the space they live in has become fatally polluted by a collective of small-minded, self-seeking demagogues?
I wrote a piece in early 2008 that suggested that the credit-fuelled growth economy embedded a network of fatal flaws and that the collapse – this before the death of Lehman Brothers – of the credit markets offered up a huge opportunity to right the sinking ship, and to rebalance our lifestyles back to spending what we could afford and not what we liked to. I didn’t quite mean that we should go back to knitting our own jumpers but that a readjustment to living within our means would not be a bad thing.
As we Europeans and Americans know well, living on what we earn and earning what we deserve isn’t a lot of fun. Household wealth was largely built on asset price inflation and not on productivity and in order to prevent a very painful downward adjustment in asset prices, central banks slashed interest rates. As a result, here we are six years on with a large part of the asset price bubble still intact.
Seven years after the banking crisis began, the hard decisions have still only been postponed
ENTER, STAGE LEFT, the UK’s residential property market.
Last week saw the extension of the Help-to-Buy scheme in the UK under which the government will guarantee 15% of the price of a first-time buyer’s property.
Banks are now generally looking for a 20% deposit on a house against which they will lend 80%. As that is beyond many families’ capacity, the government has relented and is sticking its nose into an otherwise free market. Buyers can put up 5% as the first loss piece, the government will then offer a guarantee on the next 15% and the banks take the top 80% risk.
In other words, we, the taxpayers, exclusively own the mezzanine tranche of new mortgage loans. Great! So, rather than letting property prices adjust downwards to where they become affordable to “ordinary, hard-working people”, the government has decided to lift them up – at everyone’s expense – by buying into an overpriced asset class.
Has anyone in government ever heard of risk management? In my opinion, this is another case of the irrational belief by the people in the power of governments and of governments in their own power. It is this which pushes me towards classic libertarianism which, whether corporatist or individualist, resists authoritarian pomposity – of which we currently have more than enough.
That aside, I have an innate sense that the reason markets are so discombobulated is because they instinctively know there is something terribly wrong but they are not sure what it is.
I suppose I would have to plump for suggesting that, seven years after the banking crisis began, the hard decisions have still only been postponed rather than taken.
Abenomics, as exciting as it is, is just another case of piling debt on debt and the debate in Washington concerning an increase in the debt ceiling is about the same thing. I can’t remember when I first dragged out the old Levi’s jeans concept of “shrink to fit” and applied it to our fiscal position but it is neither less relevant nor closer to actual implementation today than it was back then.
THE REALITIES ARE that debt is still rising and not falling, although the political classes parade around like peacocks behaving as though reduced deficits were surpluses and slowing rates at which indebtedness is rising counts as debt reduction.
Not only that, but the private sector indebtedness that was shipped on to the public sector balance-sheet during the crisis is now, at best, being returned to the private sector without having been significantly reduced. In the land of smoke and mirrors, there is always a good bid for wet wood and reflective glass.
Probably the greatest single driver of what Sir Mervyn King once referred to as the NICE economy (non-inflationary constant expansion) was disinflation imported from China. Not only is that no longer present, we are hugely exposed to importing that country’s inflation and we have no sensible means of combating it.
As noted above, harsh decisions concerning the asset-price inflation based socio-economic models in the West have been postponed again and again but they cannot be so forever.
I believe that to be something markets have finally understood – without knowing it, of course – but have not yet found a way of expressing. Perhaps they are simply too scared to want to even contemplate what it might be and the best they can do is to close their eyes and behave as though the problems simply weren’t there.