Monday, 29 September 2008

Bank crisis: last gasp of a gilded age?

Reflecting of recent financial news, this weekend has produced two articles that have had me rocking on the seat crying “Amen, brother!” — Incisive, creative, and understanding reponses to the recent UK ban on Short Selling in the City.

Giles Fraser in the Church Times puts in a good word for the short sellers. We’ve all been on the game, and the easiest thing in the world is to fix on someone to blame, when, to use and abuse a metaphor from the world of choir training, we all need to tighten our underpants. “The Bubble needed to burst.”
... by blocking short-selling, all that the regulator does is to en­courage the value of stock to become over-inflated — and that is precisely the problem of our world markets. For instance, there is no way of short-selling the housing market. As a result, house prices have become absurd.

Householders may scream blue murder if the value of their property goes down, but it ought to be clear to most people that a great many houses are vastly overvalued. It is just this overvaluation that generated the sub-prime crisis in the first place.

Short-sellers are a vital corrective to the instinctive bullishness of most city traders. Sure, it is immoral to sell a stock, talk it down, then buy it for a large profit. But that is no different from buying a stock, talking it up, then selling it on at an inflated price — the “pump-and-dump” man­oeuvre.

Modernity has given us the myth of continual improvement; that technology and human advancement will lead us ever onward and upward. It is the philosophy of New Labour’s “things can only get better”.

And it is the naïve mantra of the city trader for whom the stockmarket always goes up. Such a philosophy encourages us to borrow money against our ever-rising fortunes. In such circum­stances, making money is easy: bor­row as much as you can, and invest. It is a proven recipe for boom and bust
My other weekend serendipity was Andrew Brown’s Guardian article. He starts from the twaddle the ignorant and foolish produce, painting Rowan as a crude Marxist (actually ludicrous, if you know anything at all about where he’s coming from) and draws attention to his work on Dosteyevsky, in which Rowan

...hates the consumerist ideology of limitless choice because he thinks it tears us way from our real and limited wants; and he sees it prefigured in some of Dostoevsky's villains, for whom "Everything depends on choice, and what is chosen today need have no relation to what is chosen tomorrow or what is chosen by anyone else". Reading these words detached from their context, it's obvious that they are also the perfect description of the workings of an untrammelled market, which may go up, down, or merely sideways depending entirely on the free choices of participants today. For Williams such a market is dehumanising and by extension diabolical:

What is depicted as The Devils moves towards its conclusion is the process by which the elevation of choice increasingly produces an evacuation of desire.

Bruce Springsteen put it in rather fewer words: "57 channels and nothing on".

...Williams's real objection to the market is that it turns its participants into things to one another – and that, he believes, is a blasphemy because we are not things, but, in some sense, images of God. Money allows us to treat other as impersonal means to an end, and this offends both his reactionary and his socialist instincts profoundly. In 19th-century Russian literature, it is almost always nobler to be a serf than a wage-slave. Though the relationship between a serf and his master is based ultimately on violence, it is personal violence, not the impersonal and invisible transaction of the market, and so it has more room for virtue, and for growth.

...There's a great deal that could be said about Williams's particular critique of the markets: although he's a very clever man, I don't suppose he knows any more about economics than all the other very clever people currently bewildered by the question "What should we do?"; and to know that the archbishop supports a ban on short-selling doesn't make it much clearer that this ban is a good thing.

But the one thing you can't say is that this is a knee-jerk response, or a piece of publicity seeking. The belief that capitalism tends towards evil is one of his deepest convictions.

This is not crude Marxism. The old puritans drew all their theology from what they called “total depravity”. The current bonfire of the vanties on Wall Street is its own critique of human tendencies to build castles in the air out of fantasy. Perhaps the whole sorry business started in the garden, when Adam and Eve chose “choice.” It’s no more realistic to point a grizzled finger at City Traders as though they were somehow qualitatively more selfish than the rest of us — Christian views of the human condition caution about idolising “choice”. We are all in need of redemption, including our fears and fantasies... interesting times!


Anonymous said...

I agree completely with ABC, too many have succumbed to the idolatry of the marketplace as "perfect". Worse some of these individuals seem indifferent to human suffering in deference their perfect systems "seeking balance." These are people who have never contemplated the problems of the South Sea Bubble, tulip mania, the 1929 crash and the Great Depression. As a born again capitalist I can say with confidence that we have failed to raise several generations of economists with sufficient appreciation of the economic history of capitalism, much less mandatory exposure to the likes of Dicken's "Hard Times." Capitalism is a good system but it needs adult supervision, limits on leverage and fraud,and an untainted, vigilant court system mitigated by some compassion. No economic system is perfect, certainly not the human endeavor of capitalism. Unfortuanately, I suspect we're all going to suffer from this latest case of idolatry.
Vashti Winterburg

Bishop Alan Wilson said...

Thanks so much for putting this in a bigger historical context — very few commentators get beyond 1929 in their time machines. Tulip Mania seems to me a very good counterpart to the housing bubble. Like you,I realise there are virtues in Capitalism, but to make the market in itself the great regulator is like letting go of the steering wheel in the hope your car will steer itself — it won't for long! Let's hope there's learning from what's going on right now.

Pierre said...

Dear Bishop Alan,
Thanks for these. I believe that while some short-selling is essential to a healthy market, it has become an art form rather than a needed market corrective.
There is an old Wall Street adage: "Bulls make money, bears make money, hogs get slaughtered." A whole lot 'o' squealin' goin' on...
+Pierre Whalon

Free to think, free to believe said...

Is that Giles Fraser - vicar of the CofE or Liberal Free Markets? Part of my problem is that that's an honest question whereas conflating the housing prices with a lack of ability to short sell is nonsense.

House prices went up for two very good reasons (or bad ones if you prefer) - the government allowed banks et al to increase the multiplier of annual income of the perspective buyer and Gordon Brown struck off housing prices from his inflation index thereby allowing him to rub his hands and do nothing to address the inflation in the market.

Short selling has very little to do with this - not even the lack of it, as previous house price collapses have shown.

I wouldn't ban short selling in the market we have due to the inevitable unintended consequences - but it is the rules of the market that is protecting empty homes from the homeless...

Bishop Alan Wilson said...

I think all the gentleman meant was that we don't have a mechanism for hort selling houses; though I could imagine one (where you borrow the house against a falling market at today's value, then sell the house at a later date for less, taking the difference as profit). I suppose one reason is that we haven't really had consistently falling house prices since the 30's, just temporary-ish blips.

Many thanks for your cmment on house price hikes, which seems IMHO absolutely on the button. Very few people are cash buyers, so the gearing of the loans is bound to have more influence on the asking price than pretty much anything else.

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