JP Floru is the Director of Programmes at the Adam Smith Institute.
Free marketeers are deluding themselves if they believe that their cause will be helped by attacking bankers or the City. This morning, Radio 4 had another shamelessly biased item on “bankers’ bonuses”. This time, the assault was led by John Humphrys. It was peppered with clichés such as “this is the public mood”; “the squeezed middle are fed up”; and “inequality is growing”. Regulation would of course solve all the problems. The Occupy Movement was granted Kim Jong Il-style Messianic Status. It was all put into an historical perspective, making the defeat of capitalism seem all but inevitable. No attempt was made at balancing the debate: all contributors were resoundingly anti-City and anti-capitalist. Nice one, Humphrys.
As Hayek wrote in The Intellectuals and Socialism, it is usually the intellectuals (all those who inform themselves of current affairs early) who are at the vanguard of public opinion as a whole. Contrary to John Humphrys’ assertion, I believe the assault against capitalism is still at this early stage. Though endless repetition on our taxpayer-funded state radio and state television may very well infect the population as a whole.
As a free market capitalist, I agree that banks and bankers have done unpleasant things. But at all times their actions were encouraged and approved by government. Government firmly encouraged the bankers’ behaviour from the very beginning. The banks’ recklessness stems directly from the government’s loose monetary policy and state guarantees. State guarantees for deposit holders (which means that they themselves do not exercise due diligence) and for the banks – in that politicians decided that they were too big to fail and needed bailing out with taxpayers’ money. The crisis set off with the collapse of Freddie Mac and Fanny Mae – and this originated directly from statist Bill Clinton’s policy of forcing them to lend money to uncreditworthy mortgagees. These were politicians’ decisions – not bankers’ decisions.
We are being told that the whole financial system would have collapsed if the banks had not been bailed out by the Labour government (such a coincidence that those banks were in Labour politicians’ heartlands). Mervyn King holds this belief – it stems from his misguided interpretation of the Great Depression – an interpretation which was decisively disproved by FA Hayek’s research and writings.
Too big to fail is the statist’s pink elephant. There are excellent insolvency procedures in existence. There is no need to make banks an exception to normal bankruptcy rules. What happens if a bank goes bust? Quite simply: those who stupidly invested in it lose their dosh; and the bank will most probably be taken over by somebody else. It is not the end of the world. Cows will still give milk. As to the domino-effect: it exists in every industry. It encourages prudence. This is why no prudent shopkeeper will put all his eggs in the same basket. It is inherent in the normal workings of a free market economy. I strongly believe that there is no need to single out banks for special treatment – doing so buries Equality before the Law.
It is convenient for politicians to blame bankers for the decisions the politicians took. This is not a chicken or egg conundrum: bankers did not take the decision to bail them out; politicians did. Nobody is responsible for somebody else’s decisions: responsibility is always personal and individual.
As to the question: “what should we do to prevent such things in the future”, the free market capitalist’s answer is crisp and clear. Reduce the power of politicians; abandon deposit guarantees; make it clear that nobody is ever too big to fail; NEVER EVER bail out any industry or company with taxpayers’ money; and make money printing illegal. Above all: let free market competition do its creative and destructive job: create growth so everybody is better off; and destroy mistakes by making failing businesses go bust.
Free market capitalists must face reality. Attacking the cosy coalition of special interest bankers and politicians is unlikely to result in the free market nirvana they are hoping for. What is far more likely to occur is a Roosevelt style statism where individuals are enslaved to the collective.
It is time for our libertarian friends to wake up to this unpleasant reality. Last week, a few brave ones went to talk to the Occupy Movement people at St. Paul’s Cathedral; to try to explain to them that what they are fighting against is not free market capitalism, but the special interest group of bankers and politicians. Their analysis certainly factually true; but giving credence to Marxists, BBC journalists and other Guardianistas will never benefit freedom or free market beliefs.
So, free marketeers beware: the assault on bankers and the city will not bring about free market capitalism – it will make things worse. The right strategy against the assault from the left is to speak up for capitalism and the free market – not to attack banks, bankers, or the City.