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Trouble for the Old Lady
of Threadneedle Street: the Bank of England in the City of London |
Structural cracks in the credit system
When apportioning blame for the credit crunch, make room in the stocks for more than just bankers, writes John Mills
The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide
Economic Crisis.
By Graham Turner. Pluto Press
WHO is to blame for the credit crunch? Is it the banks? The regulators? The politicians? The market? Multinationals? Globalisation? The public?
The honest answer is that all are partly responsible. Could the crunch have been avoided if everyone had behaved rather more sensibly than they did? Tempting though it is to think that it might have been, the reality is almost certainly not, although the mess that we are now all in might have been less than it is. The reason why some sort of downturn was inevitable is simple. Booms and busts are endemic to the market system in which we live.
When a boom is gathering pace, prices go up and speculating that they will continue to rise is too tempting a prospect for many people to resist. Sooner or later, however, the market turns, prices start to fall, and the reverse type of herd mentality takes over. It has happened time after time in the past and it is a very safe bet that it will go on happening in future.
Attributing blame for downturns when they come, however, has many attractions, especially if the fault can firmly be attributed to somebody else. This time round, most people – with, it has to be said, a substantial amount of justification – are inclined to think that bankers were the worst and crassest offenders. Graham Turner, in The Credit Crunch does indeed give them short shrift, although he has a wider gallery of offenders. He thinks that globalisation and politicians deserve a bigger place in the stocks than they generally attract at the moment.
If production and jobs disappear off to the Far East, and with them the incomes they would otherwise generate, what is to keep consumer expenditure going? The answer, he says, is more and more debt. And who is responsible for allowing this to happen? Well, the banks obviously created the debt but Graham Turner thinks that politicians were more fundamentally to blame for allowing the conditions to prevail where debt creation on such a huge scale could take place. This is a plausible case as far as it goes but it is not clear that this absolves a lot of other people other than bankers and politicians.
Credit creation needs borrowers as well as lenders, and politicians tend to go along with what the public want. There were not many people prior to last year complaining that the value of their houses kept going up or moaning about the increasing value of their stocks and shares.
Fabrizio Saccomanni’s book, Managing International Financial Stability, by contrast, tackles the credit crunch from a different angle. The author has spent many years in the top echelons of international financial institutions.
He has seen it all before. He knows only too well that the financial system is intrinsically unstable. He recognises too that bad situations can be made worse by taking the wrong kind of remedial action. He does not think that the ups and downs of the financial cycle can be avoided altogether but he does believe that better governance and regulation can mitigate its downside consequences. He has a lot to say, much of it fairly technical, about how this might be done.
Which book should you read, if you want to understand what has caused the credit crunch and what can be done about it?
Both contain lots of background information and interesting analysis. If you want a relatively easy read, I would go for The Credit Crunch. If you want a more reflective and demanding analysis of what can be done, then Managing International Financial Stability would be your choice.
Whichever way you go, however, you will see that everyone is up against the same dilemma. How do you curb the market’s excesses without killing off the things which the market does better than the state? How do you create conditions which will allow entrepreneurial traders to flourish and to create wealth without their animal spirits doing so much damage that the world would be better off without them?
There are no easy answers.
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