Former central banker Don Brash hands out a history lesson in this morning’s Herald to some of the country’s biggest big-government cheerleaders.
[Former UK Labour Party leadership hopeful] Bryan Gould argues that the world must learn many lessons from the current international economic crisis ("Global crisis shows need for revision of economics"). Alas, most of the "lessons" he proposes we learn are absolutely the wrong lessons…
Gould implies that the crisis was caused by "free" and unregulated markets, especially in the financial sector. This is quite simply nonsense. Banks may be relatively lightly regulated in New Zealand (where there is no banking crisis), but they have been highly regulated in the United States and Europe for many years…
Gould seems not to have noticed that the crisis emerged not in the essentially unregulated hedge fund industry, or even among private equity funds, but in the most highly regulated part of the financial sector, namely banking.
Gould argues that "Government involvement in the management of the economy is essential", implying that that has not been the case in recent decades. Again, that could hardly be further from the truth.
Government taxation and spending make up some 40 per cent of total economic activity in most developed countries, and in all developed countries regulations of one kind or another tightly control what businesses can do.
Even in monetary policy - where Gould seems to imagine that central banks are a law unto themselves, operated by bankers primarily for the benefit of other banks - Governments ultimately hold the whip hand.
Brash, naturally, still defends the ridiculous central bank efforts to maintain “price stability,” which both in the 1920s and the 2000s led directly to economic disaster.
With the benefit of hindsight, monetary policy was probably too loose in recent years...
Sure as hell was – but it wasn’t just hindsight that revealed that news.
And one of the primary reasons they were “too loose” was the ridiculous attempt to fix prices by use of inflating the money supply. But that aside, his conclusion is correct.
We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.
And driving the housing bubble in many markets, in the English-speaking world at least, were the highly restrictive zoning policies of local governments - policies which sharply increased the price of residential land and led both borrowers and lenders to assume that the price of housing would increase forever.
They were clearly wrong, but they were hardly operating in the "free and unregulated" markets which Gould imagines.
Sure as hell weren’t. What sort of “free and unregulated” market is it in which the government’s banker gets to set the price of loanable funds?
Still, great to see the likes of Don Brash telling it like it is. Would that more of those who know better would speak out against the pervasive nonsense peddled by the world’s big-government cheerleaders.
UPDATE: Full credit to those who are speaking out. Forbes magazine argues that while politicians are going left, even leftist economists are going back to basics. Writing on the Davos talkfest in Forbes, Brian Easterley says,
The conventional view at Davos is that a previous consensus in favor of free enterprise has taken a huge beating from the Great Crash of 2008-2009. What is much less known is that many economists are not willing to play along.
Instead, the crisis seems to have scared many economists of all kinds--including some previously heterodox--to reassert the orthodox recommendations of Econ 101.