The Corner

The End of Capitalism?

Here’s Simon Jenkins, no man of the right, writing in the Guardian on the current crisis:

Socialism is now cock of the walk, capitalism mugged by reality.

It is rubbish, total rubbish. Market failure has been compounded by brain failure of the discredited profession of economics, overwhelmed by journalistic wish-fulfilment and glee. The banks have not been “nationalised”, just deluged with money.

They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.

Guardian writers and Labour politicians have been drooling all week over what they call the “collapse of the free market model” of a modern global economy. They are simply wrong. All markets required regulating. It was regulation that failed last month, not the market economy. When a car is driven too fast and crashes it does not invalidate motoring.

For the record, exactly the same gloating was heard after the crash of 1987. It too “spelled the death of market economics”. As Martin Taylor, formerly of Barclays, said on the radio yesterday: “Yes, people will return to old-fashioned banking – until they forget about what has happened.” Then the game will start all over again. Business can do without most things, but not private banks.

That’s right, I think, but while I certainly (to confirm what Iain was saying about my views on the Corner last night) have taken the view that, when it came to trying to solve this mess, the best approach (or, in a sense, lesser evil) was for the government to take direct equity stakes in troubled banks. I’m not so sure what I think about the coercive aspects of the current plan, but it would be foolish to deny that it comes with considerable management risks – political too, but that’s another discussion. Simon Jenkins touches on them in this passage (he’s talking about the British buy-in, but his points have obvious application to the US):

The toxic housing loans that were the cause of the credit crash will take time to bleed out of bank balance sheets. But bleed they will.

Provided politicians can be restrained from re-hyping the British and American housing markets, the system will return to normal. Taxpayers will then get their money back, as shares are sold in tranches when the market suits. This is state “greenmailing”, albeit on a grand scale, as was done with British oil shares in the 1980s. Governments will have performed their proper function in easing market adjustment after the bursting of a bubble.

How quickly this works will depend on how far ministers show they understand banks. The toxic loan scandal began with politicians mesmerised by house-buying. MPs even expected taxpayers to pay their own mortgages for them. Mortgage splurging became so politically correct that nobody dare associate it with loan sharkery.

On Monday Brown demanded that the banks in which he now has an interest stop paying dividends and bonuses, and return mortgage lending to its 2007 level. This was the surest way both to send bank shares through the floor and to revive the sub-prime chaos. The City minister, Lady Vadera, then added to the confusion by wanting the banks only “to maintain the same level of marketing and availability” of their mortgage offers. What does that mean?

Brown’s purpose in aiding the banking sector should be simply to guarantee a revival of reputable borrowing, not to pick and choose. Forcing banks to eschew commercial decisions and make bad mortgage loans will drive them back to dodgy derivatives. The arrival on the scene of Vadera, author of the chaotic nationalising of Railtrack, is hardly inspiring. These people have failed the whelk-stall test too often for comfort.

All this has nothing to do with the death of capitalism, rather with its resuscitation after a nasty accident. As every student of economics knows, capitalism depends on confidence, and confidence depends, in the final analysis, on power. Belatedly, governments are feeling their way to honouring this responsibility.

Most Popular