Thursday, 25 September 2008

Archbeard to the rescue: With a nod to Marx, Rowan Williams condemns City bankers

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The Church of England has already issued a special Prayer for the Current Financial Situation ("Lord God, we live in disturbing days: across the world, prices rise, debts increase, banks collapse, jobs are taken away, and fragile security is under threat"), but you know things are really getting serious when the Archbishop of Canterbury pops up in the Spectator in order to slam the actions of investment bankers.

To be fair to the Archbish he's not saying anything unreasonable, repeating what many more qualified writers have said elsewhere over the past week or so – there's been a lack of regulation, banks have played with large-scale debt solely for their own gain, it's the ordinary people who will suffer in the end. But it's the last paragraph of his piece that will really raise eyebrows, where he likens the trust people have placed in the power of the "market", as if it has a life of its own, to a kind of economic fundamentalism, and suggests that in his critique of capitalism Karl Marx may have had a point:
"Fundamentalism is a religious word, not inappropriate to the nature of the problem. Marx long ago observed the way in which unbridled capitalism became a kind of mythology, ascribing reality, power and agency to things that had no life in themselves; he was right about that, if about little else. And ascribing independent reality to what you have in fact made yourself is a perfect definition of what the Jewish and Christian Scriptures call idolatry. What the present anxieties and disasters should be teaching us is to ‘keep ourselves from idols’, in the biblical phrase. The mythologies and abstractions, the pseudo-objects of much modern financial culture, are in urgent need of their own Dawkins or Hitchens. We need to be reacquainted with our own capacity to choose — which means acquiring some skills in discerning true faith from false, and re-learning some of the inescapable face-to-face dimensions of human trust."
The phrase "In urgent need of their own Dawkins or Hitchens" also caught our eye. Could Williams be suggesting the New Atheists have played a valuable role in critiquing certain other "mythologies and abstractions"?

The Archbishop of York, John Sentamu, has also weighed in on the issue, saying "We find ourselves in a market system which seems to have taken its rules of trade from Alice in Wonderland."

Taking your rules from stories? Whatever next.


Pete Moss said...

Is that the same Archbish whose
"Church Commissioners maintain a diverse portfolio of shares in UK and overseas industrial, commercial and financial companies, with a smaller proportion in fixed interest securities. The majority of their securities assets are in UK equities. The stock exchange portfolio is externally managed by a number of professional fund managers with a mix of styles and approaches in accordance with mandates determined by the Commissioners. The performance and risk profiles of the fund managers are carefully and regularly monitored." ?
Thought so.

Paul Sims said...

Yep, that'd be him.

Anonymous said...

There are a number of reasons why this current economic crisis has occurred.

One major reason is that the period between 2003 and 2005 saw the US experience negative real interest rates. Negative real interest rates occur when the federal funds rate is lower than the inflation rate. This means that even people who have money sitting in their bank accounts or cash management trusts or time deposits are losing money - inflation outstrips the interest rate. Now the reason why this occurred was because Alan Greenspan in his infinite wisdom decided to push interest rates really low after the 2001 recession to help the economy recover. Greenspan and the FOMC didn't have to do that - they could've chosen to not let rates go so low, a process which would've pushed down inflation and encouraged people to invest money into bank accounts and government bonds. Instead, by running negative real interest rates, people threw their money at anything whose value was increasing faster than inflation. The housing bubble was thus formed and as the market expanded and people invested in housing, the prices kept going up and up. Because interest rates so mega-low, banks could afford to throw money at almost anybody who wanted a loan - even poor people. After all, if a poor person owed, say, $400,000 in a mortgage on a house that had increased in value to, say, $500,000 and beyond, what harm was there in doing so?

The bubble and its subsequent popping therefore had more to do with irresponsible monetary policy on behalf of the Federal Reserve under Alan Greenspan. It was not the fault of the fractional banking system. Had Greenspan raised rates in 2003 rather than dropping them, negative real interest rates would never have occurred and a bubble would never have formed. Even in a fractional banking system it is possible for central banks to adjust interest rates to prevent investment bubbles from forming. Central banks could also, quite easily, cause massive DEFLATION if they choose to.

So Greenspan's to blame. But there are others. Ben Bernanke has cut rates drastically and so negative real interest rates have been experienced yet again this year. That is not going to help at all.

The other culprit is Bush. Bush's tax cuts and spending increases not only ran the budget into deficit, it also acted to expand the economy. Cutting taxes during an expansion is not always a good idea since such actions could end up overheating the economy. That is what happened - Bush's tax cuts ended up being ploughed into the growing housing bubble, making it bigger. Fiscal irresponsibility from Bush helped make it worse.

The financial world is, of course, to blame too. How many Wall Street bigwigs and corporate CEOs criticised Bush for cutting taxes or pressured the Fed to raise interest rates? None that I know of. It was their desire and intent to cut taxes on the rich and keep rates low because they were making lots of money out of it. But let's be fair - although these financial bigwigs had influence, they did not actually have any power. It was Bush and Congress who cut taxes, not Wall Street. It was the Federal Reserve that kept rates unspeakably low, not Wall Street.

Of course, there is some truth to the belief that these financial know-it-alls were bending the rules and that regulations were not as tight as they should be. But that by itself would never be powerful enough to shake the economy as badly as it has in recent times.

There is one last thing to be said about negative real interest rates. In the past, any country whose economy was expanding quickly during periods of negative real interest rates ended up not just crashing and burning, but also with weak currencies. The Asian economic crisis of 1997 and the Russian crisis of 1998 saw first a crash in shares and economic growth, followed by international investors pulling out of the currency, leading to badly devalued currencies. The after-effects of such an action led to a violent increase in inflation that scourged their already-devastated economies.

AT said...

First off, anonymous, awesome post. You should read Alan Greenspan's biography, published in 2007, which went quite quickly from autohagiography to ironic comedy.

I would argue that while the Fed and a Freeman-obsessed administration precipitated the crisis, there were enough other national governments setting themselves up for a fall to not point the finger only at the US.

'Taking your rules from stories'? Who doesn't. The quoted paragraph wouldn't be too bad - don't worship money, put your trust in things w/ substance, and it's written well towards the end - if he wasn't such a fool hypocrite.