Apologies for the lack of recent posting – real life has a habit of getting in the way!
There’s been a large number of protests in financial districts across the world – including in London where I live and work – against the banking industry who are being blamed for our current economic woes. They are right to be angry – but is the focus of their anger correct?
Understanding how we got to this point is crucial, and instead of focusing on commercial banks, we need to be targeting central banks and governments, as they created the underlying conditions that led to the excessive risk taking by the banks. Without the low interest rates provided by the Bank of England and the Federal Reserve, and without the various government policies that created the housing bubble, we wouldn’t be in the mess we are today.
Axel Kaiser has a great article on this today, with a great quote that I’ve seen paraphrased across many blogs this weekend:
In other words … if politicians and bureaucrats had more power than they currently have, the system would be less corrupt.
It seems bizarre at best to be arguing that the financial elite have corrupted government, and turned it to their own ends (for example by lobbying for bailouts), but then to suggest that the solution is more government power. The greater the power we give to government, the greater the incentive for corruption, as lobbying interests attempt to turn that power towards their own benefit. A problem created by governments trying to manage the economy will not by solved by trying to manage it even more.
Banks that made bad loans should not have been bailed out – nor should they be now if they lent to nations that can no longer pay back their loans. Allowing such banks to write off such debt or even go bankrupt will be painful, but bailing out banks that made bad loans only pushes the pain back to a later date, and rewards those who made serious errors.
This is one point of agreement amongst libertarians such as myself and these protesters, but we must remember that it is governments who provided these bailouts, and passed the costs onto taxpayers.
The protesters seem to be forgetting both the cause and impact of inflation on the poor. As Kaiser says,
But more importantly, banks take the money given at artificially low interest rates by the central bank and use it to speculate. The dramatic rise in the price of raw materials and agricultural commodities since 2008 is basically the result of the inflation created by central banks. The most perverse consequence of this government-induced inflationary process is that it redistributes wealth from the middle class and the poor to the rich financial elites and governments, for whom inflation works as a hidden tax.
Let’s protest at Threadneedle Street, and Parliament Square – and then let the market deal with the banks.