Visit me on Seeking Alpha where I publish exclusive articles.

Tuesday, 4 March 2014

The Paradox of Money

By Pedro Schwartz

In this third of my columns on the contradictions of liberal democracy, I want to consider a worrying source of disorder in democracies: money and credit. This is a topic I necessarily had to deal with before closing the series. The financial upheaval which the world has suffered has dealt a body blow to liberty. I could not pass it over with a few general comments.

Let me state from the very beginning the paradox of money: that money, one of the greatest instruments of individual freedom ever invented by man should have become an instrument of political exploitation in the hands of government. The effects of this abuse go further than upsetting the financial equilibrium of market economies and reducing their productive progress. It undermines the whole philosophy of liberty. If laissez faire has to be suspended in the field of money and credit and if the most important institution for trade, contract, saving and investment cannot be left to be managed by individuals and firms, then what is left of our personal self-government? We shall have to slip through the nooks and crannies of State control to attain our goals, untiringly hounded by the henchmen of "that insidious and crafty animal, vulgarly called a statesman or politician." And the pretexts for public intervention in all spheres of life will be ready at hand for those who never believed in a free economy as the foundation of a free society. As David Laidler has recently said on the causes of the Great Recession:
More than competing ideas about the proper conduct of counter-cyclical economic policy were at stake here [...]. Profound and ideologically loaded questions about the capacity of the market economy to function smoothly without the benefit of constant attention from government, and hence about the appropriate political framework that should underpin macro-economic policy, were also getting renewed attention in 2008.
I must confess that I did not expect the depth of the Great Recession that hit our world from 2008 to 2011 (to 2013 for the Eurozone). I discounted the warnings those few economists who said that another Great Depression like that of the thirties was coming. I thought central banks had the instruments to contain the recession, without having recourse to extraordinary monetary and fiscal measures. There must have been something wrong in my understanding of our financial world when I underrated the danger of the turmoil getting out of hand and paralyzing banks, stock exchanges, Treasuries and firms. I was not seeing the whole picture.

I am not alone in having failed to foresee what was coming. When one reads the policy declarations and academic papers of central bank officials and monetary economists when they found themselves in the middle of the maelstrom, the impression is one of improvisation and of desperately reaching for whatever tools were at hand: interest rates brought down virtually to zero, quantitative easing through central banks hugely increasing their balance sheets, governments coming to the rescue of banks before having to be rescued themselves, a helping hand proffered to quasi-banks; in the United States things went as far as rescuing GMAC and nationalizing AIG and General Motors. I understand the urgency but must point out how light-weight the explanations were of why the whole thing had happened; at most one finds allusions to imprudent deregulation, excessively low interest rates, loose money creation, disruptive speculation, financial innovations—and greed, especially bankers' greed. There was no real attempt to understand what had gone wrong with the financial and indeed economic system as a whole.

Read the rest here.