Saturday, September 27, 2008

The stomach retches

I am an elderly gentleman and, in my youth, life was simpler than it appears to be in the modern age. I am therefore bemused by the current crisis in the world of finance; indeed I am perplexed by the responses of politicians who, as is frequent, appear to have learnt nothing from the lessons of history.

I once described the banking system as the stomach of commerce. It is a base comparison and yet so true in many ways. For sometimes a stomach may contract an infection; it may need to be cleansed and the results may be unpleasant.

For commerce to succeed, businesses must start and succeed or fail. There appears to be a belief at large that the great houses of commerce, the banks, are exempt from this rule. One bank teeters on the brink; the British government buys it. A second bank is harassed by the market, whether rightly or wrongly; officials of government arrange for it to be saved by another.

And still the whole system teeters and topples like Sisyphus and his rock. Governments may push it to the top of the hill but it will always roll down. In the United States, the Republicans seek to raise a sum of some 700 thousand million dollars to salvage the world of commerce. The public is outraged; and so they should be. It is as if the government walked into a casino and offered to pay the losses of those desperate gamblers who have invested their house, their savings into the addiction. It is the nature of the economy that the City of London and Wall Street deliver great, even monumental rewards to their participants. Those rewards are predicated, or should be on the scale of risk undertaken by those who earn their living toiling at this coalface.

For whose are the livelihoods that governments seek to protect, that are at risk in the current crisis? No other than these self-same people who have lived lives, created homes of unutterable luxury through their businesses, aided and enhanced it seems by the technology of the 21st century. It is said that homes and livelihoods of ordinary people are at stake. I have studied recent history and learnt how a Conservative government in Britain allowed the collapse of the nation's great northern manufacturing industries. Thousands of labouring people were cast out of work and no solution found; indeed government did not rush to their aid.

I cannot but remember the partners of the bank of Overend & Gurney attending my office some 140 years ago. In spite of their entreaties, we did not rescue their business; they had to pay the price of their recklessness, just as any other gambler. Others also who were thriftless had to suffer the loss of their business; but the system of finance did not collapse. Rather it thrived through the learning of a measure of caution and wisdom.

It is not apparent to me that the collapse of any individual lender of mortages will lead to the loss of homes to any greater extent than is already happening. The Americans perceive, I believe, even more than the British that it is those who have profited most from the gambling of previous years who are likely to lose least. If a bank, a lender were to go bankrupt, their borrowers need not be evicted from their homes, their savers need not be destitute. All that will happen is that another bank will purchase those assets at a market cost. The directors and shareholders may therefore suffer losses; that is a consequence of market failure and their own failure to administer their business in a proper fashion.

The governments meanwhile should save their pennies and their legislation for their proper task: to ensure that noone is destitute, that occupants of homes are not cast out on the streets, that mothers are able to feed and clothe their children.

Nil sine magno vita labore dedit mortalibus.


1 comment:

Geoffrey Kruse-Safford said...

While further in to the red, politically speaking, than yourself, I am more bemused than sickened by the way the stomach (I so like that metaphor better than "heart") of capitalism runs to the State to rescue it from its bad behavior. My own preference is either to let them sink in to oblivion (they seem to have no care than many homeowners have done so) or simply nationalize the lot of them, selling them off piece by piece to any and all comers willing to pay a reasonable price. There is a phrase tossed around quite a bit - "too big to fail" - that defies understanding, at least my understanding. If a company is so large that the entire economy teeters on its success or failure, isn't it much too large in the first place?