Dr Copp's Blog
When kindness is cruelty:
The folly of governments and the wisdom of markets
On 15th October 2007 in my blog Northern Rot I condemned the nationalisation of Northern Rock, asking the question:
"How long before the government interfered in its management when tough decisions had to be taken, say, to repossess a defaulter's property or to close an unprofitable branch?"
We now see the answer to this question writ large across the banking sector (or with looming nationalisation we should give it the title the government Department of Easy Access to Terrible Housing, DEATH for short). The Daily Telegraph reports on the government's change in the law to make it more difficult for lenders to repossess housing (25TH October 2008 "Property market: word on the street").
The late economist Arthur Leff told this story as long ago as 1974:
"There is an old widow, see, with six children. It is December and the weather is rotten. She defaults on the mortgage on her (and the babies') family home. The mortgagee, twirling his black moustache, takes the requisite legal steps to foreclose the mortgage and throw them all out into the cold. She pleads her total poverty to the judge. Rising behind the bench, the judge points her and her brood out into the swirling blizzard. 'Go', he says, 'Your plight moves me not'. 'How awful', you say?
'Nonsense', says the economi[st] ... 'Look at the other side of the coin. What would happen if the judge let the old lady stay on just because she was out of money? First of all lenders would in the future be loath to lend to old widows with children. I don't say they wouldn't lend at all, they'd just be more careful about marginal cases, and raise the price of credit for the less marginal cases. The aggregate cost to the class of old ladies with homesteads would most likely rise more than the cost imposed on this particular widow. That is, the aggregate value of all their homes (known as their wealth) would fall, and they'd all be worse off.
'More than that, look at what such a decision would do to the motivation of old widows. Knowing that their failure to pay their debts would not be visited with swift retribution, they would have less incentive to prevent defaults. They might start giving an occasional piece of chicken to the kids, or even work up a fragment of beef from time to time. Profligacy like that would lead to even less credit-worthiness as their default rates climb. More and more of them would be priced out of the money market until no widow could ever decide for herself to mortgage her house to get the capital necessary to start a seamstress business to pull herself (and her infants) out of poverty. What do you mean, "awful"? What have you got against widows and orphans?"
((1974) 60 Virginia Law Review: 460 – 461, cited by Cento Veljanovski in "The Economics of Law" (London: Institute of Economic Affairs, 2006), pp. 48 – 49 – the full version of which can be accessed on line at www.iea.org.uk)
The moral to all this is clear. If the government wants to restore a financially strong banking sector, it must make it much easier for lenders to repossess property so as to restore proper incentives. There is a rumour which I can't verify that one of the dominos that fell, leading to the present credit crunch, was a US court failing to permit just such repossession. If the government fails to liberalise the repossession market, we will never again have a viable banking sector. Charity there should be. Perhaps the bankers with their multi-million pound bonuses might shed a tear for the homeless and exercise the Christian philanthropy of a former generation to them.
The consequence of banks not being able to repossess property is that they will not lend, will lend at much higher prices, or, if these options are forbidden by state control, they will not make the money needed to attract shareholder investment. If they cannot attract shareholder investment, they will remain nationalised in the long term. There will be knock on consequences for businesses needing to borrow money, for many small businesses are financed by security over a family home. Before long the government will need to engage in massive intervention in property markets too, to shore up prices. Open markets with other countries will have to be closed to prevent the exit of funds. In a nutshell, communism will be on us within a decade.
Posted by Copp @ 14:14pm | 14 November 2008
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Will No One Rid (Us) Of This Turbulent Priest:
What the Archbishop Should Have Said About The Credit Crunch
Idolatry has a tough time in Rowan Williams' article in The Spectator this week ("Face It: Marx Was Partly Right About Capitalism", 24th September 2008), so much so that one feels tempted to come to the defence of idols since they clearly have no voice of their own. Markets are condemned as a mere "abstraction". Dark references are made to "the pseudo-objects of much modern financial culture." In the Old Testament the response to idols was clear – they were to be burnt, smashed and pulled down. So this is perhaps an unfortunate comparison for the Archbishop seemingly to make with "unbridled capitalism", not least because in this self-same article he confusingly refers to "securing profit is a legitimate (if not a morally supreme) motivation for people". But if the Archbishop sees capitalism as idolatrous, what is his alternative? As ever with the Archbishop's writing it is not clear. Despite tantalising references to Karl Marx, he rejects Soviet-style centralised direction. He says that "The question is not how to choose between total control and total deregulation, but how to identify the points and practices where social risk becomes unacceptably high", suggestive of constantly closing stable doors after horses bolt, to no good effect. He criticises the financial world for its "exemption from scrutiny and regulation", suggesting he would like (yet more) financial services regulation. Oh dear!
There is, of course, much careless use of the language of "markets", as with much else, and Rowan Williams is correct to draw attention to this. It is entertaining on TV nature programmes to see the unwitting anthropomorphism of hardened evolutionists describing how Nature or Evolution has a purpose in giving one creature or another specific attributes. In reality, the use of the language of markets is little more than shorthand for expressing what choices different groups of people make, whether to shop at Tesco's rather than their corner shop, borrow rather than save or buy a house to rent to others rather than to live in themselves. Confusingly, Rowan Williams concludes that "We need to be reacquainted with our capacity to choose ...", something which is, of course, at the heart of any free market and something which regulation, bringing with it all the coercive powers of the state, is there to restrict or prevent in some way.
The real question, perhaps the "deeper moral issue" that Rowan Williams should be referring to, is not questions of semantics, such as the appropriate use of abstraction, but rather the choices that people have been making for themselves over the last decade, encouraged by government, the whole property boom edifice (including mortgage lenders, builders and estate agents), and the media, for which they are now, sadly, having to pay. The Church of England might have done rather more to discourage the real idolatry of property worship which has gripped many in the UK to their (perhaps fleeting) material gain, not least the ceaseless stream of TV programmes such as Homes Under the Hammer or To Buy or Not to Buy. To have done so might not have been good economics but at least it would have been good Christian morality. The Church of England might, as an example of better economics, have attacked the state planning regime. This regime restricted the ability of markets to respond to the increase in demand for housing (caused much by the explosion of the buy-to-let market) by preventing the building of more houses where people want to live, leaving UK housing so painfully overpriced. More fundamentally, if the Church of England were true to its calling it would recognise the fading value of all things material, point people to the fickleness of relying on man-made institutions and to the need for people to rebuild their most important relationship – that with God. Sadly, Rowan Williams' article in the Spectator fails to do so.
Posted by Copp @ 10:16am | 2 October 2008
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Northern Rot
The queues outside Northern Rock branches will be one of the most enduring memories of 2007. How meaningful the TV images are is, of course, always a matter for conjecture. I waited in a pretty long queue at a Nationwide branch over the same period but there were no cameras waiting to capture that. The question everyone is asking is, of course, about the wisdom of state intervention in markets. For some there are few doubts. Amongst them is Will Hutton, who argued (BBC News,17th September 2007) that:
"They must say, that if they can't find a commercial buyer for Northern Rock, the Government will nationalise it."
I heard the words myself. They were uttered with the passion of a true believer. Many watching may have been born after the 1970s. There is a danger they will take them seriously. There is, after all, a growing retro trend for all things 70's, from T. Rex (which I like) to Life on Mars (which I don't). Why not nationalised industries? Let us speculate as to what might have happened if the government had taken Will Hutton's suggestion seriously and actually did nationalise Northern Rock. Given the readiness of a Treasury Select Committee to attack its commercial decision-making, over a matter such as a dividend payment, this is perhaps not so fantastic.
First, nationalisation would cost a lot of money. Surely, if the government wanted to own a bank, why this one? Why not spend taxpayer's money on a successful bank instead?
Second, what would the purchase achieve? Would state ownership encourage savers to put their hard-earned money in it? Would savers be happy for the government to have such ready access to their financial details? How long before the government interfered in its management when tough decisions had to be taken, say, to repossess a defaulter's property or to close an unprofitable branch? What about the competitive impact on successful banks and building societies not propped up by inevitable state subsidies? Worse still, what about the corrosive ideological effect of enlarging an already bloated public sector – the 'ratchet' effect of nationalisation?
Third, what is so wrong with the alternatives? We have to be careful here of talking about letting market forces work, as market forces are constrained in industries such as banking by a web of state intervention. One only has to reflect on newspaper reports questioning whether the crisis was caused by the failure of FSA regulatory processes or by some obscure EC Directive, the Market Abuse Directive 2005 with its delicious acronym (MAD). We can only speculate as to what the ultimate effects of non-intervention might have been for shareholders, savers and borrowers. But at the risk of sounding callous: who cares? In a market economy failure may not be good but it is certainly not bad. Competitive markets are the best way of delivering economic prosperity; competition implies that there will be losers. That threat can never be taken away, only shifted to others who bear the cost.
Even if talk of nationalisation is absurd, the extent of interventionist thinking revealed by the Northern Rock affair shows how deep the rot at the heart of UK economic policy, post-Thatcher, has become. Time for an election?
Posted by Copp @ 13:59pm | Monday 15 October 2007
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