"The Trouble With Markets: Saving Capitalism From Itself"

Bootle Roger         author The Trouble with Markets: Saving Capitalism From Itself
Nicholas Brealey Publishing £ 18, 282 pages
ISBN 9781857885378

Pouring scorn on the Professors       Bill Jamieson 2 Jan 2010

Review by Bill Jamieson, executive editor of The Scotsman

Bill Jamieson praises an accessible but damning assessment of the financial crisis

Out of what seemed a clear blue sky we were hit by the biggest financial failure since the Great Depression. Its full consequences are still to feed through, so judgment as to cause and remedy must be tempered. But of the many analyses already competing for attention, this book has a fair claim to the status of 'must read'. Clearly and compellingly written, provocative in its critique and with many suggestions for reform, The Trouble With Markets will command attention from practitioners and lay readers alike. Midway through the drama we may be, but we are in need of accessible analysis and explanation and this Roger Bootle ably provides.

It will make distinctly uncomfortable reading for his fellow economists. In his opening account of what caused the financial system to fail in such frightening and spectacular fashion, Bootle lists no fewer than eight contributory factors:

the bubble in property; the explosion of debt; the fragility of banks;
the weakness of risk assessment; an error of monetary policy;
the super saving of China and other countries;
the complacency and incompetence of regulators and the docility of outside assessors.

But he reserves his fiercest scorn for the greater underlying failure -- that of his fellow economists. 'The long line of professors, thinkers and teachers who at first propounded and disseminated the ideas that underlay the disaster: the idea that markets know best; the idea that markets are efficient...' It was, he declares, 'the efficient markets theory that really led people up the garden path'. The source of this pernicious Nile and all its toxic deltas is traced to the shores of Lake Michigan and the Chicago School -- Milton Friedman and also former US Federal Reserve chairman Alan Greenspan. However, as the central bank was the regulator -- the steward supposedly in charge of the punchbowl at the party -- it bears a considerable degree of responsibility, along with markets, for the debacle.

Bootle is on target when attacking the complacency of those who believed that the risks inherent in complex derivatives would somehow be spotted and acted on by someone further along the line, and that problems could be contained before they escalated into systemic failure. Everyone thought someone else would blow the whistle. No one did. So trading in debt derivatives boomed, with catastrophic effects on Wall Street, London and other financial centres.

What will it take to fix the banks and pull economies from recession to recovery? Bootle advances the standard Keynesian line: more borrowing and more public spending, which is fine if you are not starting out with a hefty budget deficit. There is the Keynesian admonition against the flight to saving. But as Bootle has so cogently warned about the explosive growth of household debt over the past decade, a recovery in the savings ratio might to some degree be welcome.

His prescriptions are more restrained than the fiery tone of the opening chapters. He is in like a lion but out like a lamb. The tone softens, the condemnations are qualified and the recommended reforms contain little that an enlightened banker would not endorse, though Bootle would probably retort that the words 'enlightened' and 'banker' are not often found together.

The greatest danger, he warns, lies in over- rather than under-regulation. 'There is a real risk,' he writes, 'that we will end up with a shackled and crippled financial system that is unable to provide support to the real economy.' The British Bankers' Association couldn't put it better.

His prescriptions include tighter capital ratios, more reserves held in liquid form, bonuses paid in stock rather than cash and subject to claw-back, and regulatory separation of 'narrow' banks (the bank of you and me) from investment or 'casino' banking. All these have either been taken up at G20 level or are on the shortlist for regulatory action. He flirts with a Tobin tax on financial trading, though is more surefooted with other suggestions such as a tapered capital gains tax system to penalise short-term trades and a restriction of dividends to shares held for two years and more. He rightly wants monetary policy to track, though not target, asset prices, and proposes an independent Fiscal Policy Committee, similar to the Bank's Monetary Policy Committee, to monitor public spending, borrowing and debt: commendable, if idealistic.

For all his criticism of finance capitalism, its fundamental characteristics of adaptability and responsiveness are not addressed. Yet these tellingly account for its endurance.
Bootle cites among those who 'got it right' Keynes and Galbraith.
He is more dismissive than he has cause to be of the work of Joseph Schumpeter.
Not only did he describe, half a century ago, the rise of regulatory capitalism, but he singularly and distinctively recognised the agencies so crucial to recovery: entrepreneurialism and technological innovation.

It is these that have repeatedly delivered us from previous recessions and will in due course deliver us from this one. It is an odd lapse in an otherwise admirable book.

We say that state interference is to blame for this BIG BUST (the first of the 21C).
British economists since WW2 have encouraged the monster state
appetite such that BUSTS which are in the main asset price
(especially real estate) driven,  are exaggerated by the raw appetites of
CITY monsters spawned and bloated through force feeding by our state.

Worse still the warning signs are ignored.
Overheating is always evident in land price data -- which economists do not track!!