Cable’s anger is misdirected

Vince Cable’s recent attack on capitalism has predictably and deservedly generated a lot of comment.  His remarks might have gone unreported in previous years, but his position in the government means that we can no longer afford to ignore his rants.

Cable believes that “economic recovery will not happen automatically, by magic”

Government has a key role. It has to sustain demand. That is basic Keynes.

Basic Keynes it may be, but Keynesian logic is as flawed today as it was in 1932.

Cable’s views are no sounder when it comes to the role of our banking system:

On banks, I make no apology for attacking spivs and gamblers who did more harm to the British economy than Bob Crow could achieve in his wildest Trotskyite fantasies, while paying themselves outrageous bonuses underwritten by the taxpayer. There is much public anger about banks and it is well deserved.

At the Cobden Centre, we share the public’s anger, but we trace the problems to their root cause.  Formidable as they are, the bankers did not have the power to compel taxpayers to underwrite them; only the government could do that.

Cable proudly declared that he has “managed to infuriate the bank bosses”, but his threats of meddling and taxation have done nothing to endanger their privileged position.  In fact, the interventionist system that Cable favours is responsible for a massive, ongoing transfer of wealth from those he claims to represent, to those he purports to loathe.

The IEA’s Nick Silver explained it well last week,

Every fortnight I play poker with banker friends. Recently I asked them why asset values are increasing so much when there’s so much uncertainty and bad news. Looking at me as if I were stupid, they said something along the lines of “of course they’re going up; the Fed has effectively guaranteed very low interest rates for the foreseeable future and so we’re borrowing money for practically nothing and investing in anything which is obviously increasing in value because of the reduced interest rate expectation; we thought as an actuary you understood how to value assets using discounted cash flows.”

In addition to making profits in a rising market, anecdotal evidence also suggests that, because of the collapse of the securitised market, there is a high demand for credit, so banks are not passing on the low interest rate to their customers. So by setting low interest rates, central bankers are delivering super-profits to banks, the results of which have been widely publicised in the media.

But who is paying for these profits? Let me hypothesise that, without the interference of the central banks, there would be a market interest rate, and let us say for argument’s sake that it is 4%. The effects of the artificially low interest rate on the economy are manifold and complex, but let us just isolate a couple of groups who are directly affected. Savings in the UK are £1.2 trillion, so that’s an annual lost income of £40 billion and people who are purchasing pensions annuities would be losing about a quarter of the value of their pension. So this represents a wealth transfer from savers and pensioners to bankers – I leave the reader to decide on the fairness of this.

Cable’s “range of sticks and carrots” will not bring the banks in line, nor can he know what is best for the “real economy”.  His “tough interventions” will at best be futile, and more likely counterproductive.

The Business Secretary insists, ominously, that “the Government’s agenda is not one of laissez-faire”

Markets are often irrational or rigged. So I am shining a harsh light into the murky world of corporate behaviour.

But never in the history of politics has has the government’s agenda been one of laissez-faire, and this is the problem.  Markets are rigged, by the agents of government.  If Vince Cable wants to understand the murkiness of corporate behaviour, he should shine his harsh light a little closer to home.