When it comes to the financial crisis, the conventional wisdom is “blame the (commercial) bankers”. But as is so often the case, the conventional wisdom is just plain wrong.
My good friend Godfrey Bloom MEP has a colourful way of expressing himself, which occasionally causes a spot of bother — for example when he was reported as urging housewives “to spend more time cleaning behind the fridge”. But he had an earlier life in the City, and it’s worth listening to him when it comes to financial issues.
He has a letter in the Telegraph business section today (for some reason I can’t establish a link), entitled “Central Banks are solely to blame for the mess we’re in”, and it’s worth reading. He starts out by saying that Internal Market Commissioner Michel Barnier fails to identify the main cause of the crisis, which Barnier attributes to commercial banks and a lack of regulation.
Barnier is certainly wrong, as are Merkel and Sarkozy, who are trying to solve the eurozone problem by imposing what they call “fiscal union” (although it’s not really fiscal union at all — Merkel simply means that all eurozone members should obey German rules). They have failed to identify the problem correctly, and so they are failing to find a solution.Bloom goes on to direct the blame at central banks (which despite the common term “bank” are, of course, quite different beasts from commercial banks). He blames the Fed, and the Bank of England, and the ECB, who created an artificial bubble by keeping rates too low for too long. Indeed you can go even further back and blame two Democrat US Presidents, Jimmy Carter and Bill Clinton. They wanted to promote home ownership (good) but did so by persuading lenders, notably Freddie Mac & Fannie Mae, to lend to home-buyers who were unlikely to sustain mortgage repayments (bad).
Of course the commercial banks came along for the ride, and made some foolish decisions. You can’t blame the fish for the water they swim in. But the problem started with politicians and central bankers. This isn’t a crisis of capitalism. It’s a crisis of political interference in markets.
With current policies, Bloom fears a ‘30s-style depression, and concludes “We must return to hard money, realistic market-led interest rates, and reduced regulation. We must embrace flat taxation, and start again”. And I would add: over in the eurozone, they need to start dismantling their disastrous and failing monetary experiment, because the underlying problems of divergence were baked into the €uro pie from the start, and can only be solved by dismantling it.
I’ve been banging away at these points for rather a long time, and I am heartened to see Godfrey ploughing the same furrow.