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Senseless consensus

There is nothing worse in politics than a consensus. When politicians from all parties and the City or Fleet Street and archbishops in glass palaces come together to pronounce on great public issues, you can be sure that they are probably wrong.

In the last recession, such a consensus assured us that sterling was really worth DM2.95 when the markets clearly thought otherwise. This time, the consensus across the Western world is one of “bailout and regulate” while blaming the banks for the current crisis.

So everyone nodded when president Bush assured them the value of their retirement accounts would fall without the bailout – as if the link from a faltering real economy to stock prices could be suspended until everyone retired. So the bailout passed…and the markets fell anyway.

Just as everyone nods at the mantra that bailouts are essential for the “real economy”. Forget that the market is correcting a huge inflationary fallacy across the globe, that house prices and house-price backed securities are somehow worth much more than they really are, that a huge swathe of economic activity from building to banking to mortgage brokers earning nicely through volumes of sub-prime products has all been down to the system printing money like Bob Mugabe.

Forget that we are in this mess primarily because of monetary policy – the Federal Reserve lowering the federal funds rate target down from 6 per cent in 2001 to as low as 1 per cent in 2003 or Gordon Brown setting the Bank of England on to a CPI target that, by definition, missed a massive expansion in bank credit and the ensuing asset price bubble.

Forget also that for every pound or dollar used to finance ballooning public sector deficits, there is a pound or dollar less for anybody else to borrow.

No. Instead, we apparently need to bailout these banks. Not because they will all go under otherwise. They won’t – just the ones who deserve it. No. Apparently, we need a bailout or two to get them lending to each other and then to the man in the street.

Of course, all this intervention slows the market in correcting the problem. The shares of the worst banks rise while those of better banks like Barclays fall. Failed banks like Wachovia get better rescue offers and the need for the Lloyds-HBOS deal gets questioned. The blow to house prices might get cushioned for the time being, the markets might rally for a few hours and we might believe the balance sheets of some financial institutions are still better than they really are, held up on an edifice of more bank credit.

The market, however, will correct the consensus in the end – just like it did last time.

The only question is whether this correction (“recession”) will be 12 months or so of dramatic and shocking headlines? Or will it be long and drawn out over a decade or so – like the US after 1929, when everybody was trying to intervene to cure unemployment while holding up real wages, so unemployment never fell below 14 per cent until the attack on Pearl Harbour?

The real certainty is that the bailout and regulate consensus misses the root cause of the problem.

Nothing is proposed about the way the Federal Reserve or Bank of England conducts monetary policy.

In the US, nobody has proposed scrapping Roosevelt’s Fannie Mae which was telling bankers until 2007 that the “teaser rate” mortgages missold in droves to people without jobs were somehow “conforming”.

Neither presidential candidate proposes to repeal Clinton’s Community Reinvestment Act that effectively bans the banks from refusing mortgages to people who might not pay them back (“indirect discrimination”).

Nor will the UK get a much needed relaxation in our Stalinist town and country planning regime.

We do not need bailouts and more regulation to save capitalism or shore up market values. That is what has caused this mess. We just need the creative destruction of a rapid correction, followed by years of sound money and some more genuinely free markets.

Jonathan Purle is technical & compliance director with Intethic


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