Wednesday, 19 January 2011

Beware the mea culpas of the Central Banks

It seems to be fashionable now for leading figures inside central banks to issue mea culpas. Their statements are along the lines of: perhaps the bank bailout was wrong; the taxpayer shouldn't have bailed out the banks.

Yesterday the Deputy Governor of the Bank of England, Paul Tucker, surprised a few people by saying "something has gone wrong with capitalism, with the very heart of capitalism". After the bank collapse of 2008 that can hardly be argued. However his remedy is that banks must be allowed to fail for capitalism to "work".

Tucker is not coming over to some sort of progressive anti-bank position or becoming an advocate for regulation. Quite the opposite, he is echoing his counterpart on the Federal Reserve's FOMC (the US equivalent of the Bank of England's MPC), Charles Plosser, who epitomises the increasingly vocal, laissez-faire camp, which calls for an end to an active monetary policy to support economic recovery.

Appropriately enough, Plosser was speaking in Chile (petri dish of Friedman's 1970s free market disaster) on Monday. It was the usual mystification thesis of the 'invisible handers': nothing can be planned, the market moves in mysterious ways, there is no alternative; and other total blather. Here's an excerpt:
"Successfully implementing such an economic stabilization policy requires predicting the state of the economy more than a year in advance and anticipating the nature, timing, and likely impact of future shocks. The truth is that economists simply do not possess the knowledge to make such forecasts."

Well free market economists don't. Hence why Plosser was completely taken by surprise by the credit crunch of 2008.

What underpins these public statements from Tucker and Plosser is not a mea culpa on behalf of the banking sector, but actually a coded hands-off warning: State intervention is out of fashion now, because it bank regulation is now on the agenda and because the rest of the economy might demand government support.

The Morning Star today quotes Professor Roger Seifert and me in response to Tucker's comments yesterday:

Professor of Industrial Relations Roger Seifert said banks should be nationalised but the state would have to play an increased role in the long term to "regulate banking behaviour."

"The short-term position would be to nationalise failing banks permanently then use them to encourage behavioural change in other banks through more progressive employment and lending policies, linked with community and government projects," he said.

Left Economics Advisory Panel co-ordinator Andrew Fisher welcomed Mr Tucker's acknowledgement that "something had gone wrong with capitalism."

But he added: "To let one of the big banks go bust would see millions lose their savings and tens of thousands lose their jobs. The Labour government was right to step in and nationalise. However, with that nationalisation should have come democratic public control with fair rates for savers and borrower alike and investment targeted at creating sustainable jobs.

"While Tucker recognises the inherent flaws in the finance capital system, his free-market solution is the exact opposite of what any socialist would want."

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