In his recent posting on Linked In, entitled, ‘The death of macro-prudential’, Stuart Trow of the EBRD delivered a well-aimed broadside at the pitiable conduct of the Bank of England and elaborated on some of the malign consequences of its catalogue of errors. Without wishing to single him out unduly for criticism for a piece with whose broad outlines I concur, I see it as a prime example of where even those who are not wholly in thrall to the cult of ‘Whatever it Takes’ often miss the critical features of that cult’s essential evil. Left unaddressed, therefore, I fear this lack can only leave the intellectual soil fertile for a continued harvest of malign outcomes on the part of our clay-footed idols in the central banks.
Where better to start than with the following bold assertion of the author, viz., that ‘…if only policymakers had been allowed to exercise their judgement, crises could have been anticipated and avoided…’?
In my eyes, that heroic presumption of policymakers’ qualities of ‘judgement’ almost vitiates the argument from the off. Irrespective of whether one can be persuaded that Mario Draghi, Jerome Powell, Divus Marcus Carney and the like are the most intelligent, most far-sighted – most impartially Olympian – beings on the planet, the reality is that neither their fervid number-crunching of rows of abstracted, statistical time-series nor the GIGO output of their horribly over-specified macroeconomic ‘models’ can possibly substitute for the particular judgement and uniquely individual preferences of untold millions of men and women interacting, every minute of every day, every where in the market.
No, the best the central bankers can hope to achieve – in finest Hippocratic fashion – is that their own meddling does not send too any wrong signals, conjure up too many wrong incentives, or encourage too many, ultimately self-defeating behaviours among the innocent millions over whom they have been almost divinely-appointed to hold sway and over whom they hold seemingly limitless power.
Sadly, that is NOT a degree of humble forbearance ever likely to be practiced by today’s crop of policy makers, all relishing, as they are, their phone-box conversion from nerdy, PhD-economist, Clark Kent into cape-and-tights, Committee-to-Save-the-World Ubermensch.
Matters of Public Choice theory aside, Stuart goes on to state that: ‘…Central bankers should have tattooed on their foreheads the mantra that continuing economic growth requires ever increasing credit growth.’
Well, no! What they should have tattooed on their foreheads is that SUSTAINABLE, coherent, robust, efficiently low-amplitude economic growth requires the voluntary provision of investible savings made out of a perceived surplus of current resources to those who experience an equal-and-opposite drive to acquire extra current means. Of such savings – not all of which need be undertaken in the form of lending, of course – a goodly part will find their way, one hopes, to honestly-intentioned, prospectively value-additive entrepreneurs rather than to hapless, zero-sum prodigals, whether public orprivate in origin.
Given today’s penchant to deface vast tracts of one’s hide with the tattooists ‘art’, those sporting the cranial blazon which Stuart recommends should carry a lengthy and equally indelible footnote elsewhere on their bodies that, for saving to occur, creditors and investors must feel they have negotiated with their would-be obligors a mutually-agreed – and hence an intrinsically fair – market price for that provision. Patently, that is not a discussion which the MIT Macromancers – in all their ‘fatal conceit’ – ever feel happy to let the two parties undertake, presuming instead to insist upon the application of their own, narrowly-derived and inherently biased suppositions of what that price should be.
Even those who would reject the philosophy entailed in this – that the most vibrant and liberated societies emerge from the bottom-up and are not enacted in Sistine Chapel-finger fashion from the top down – can hardly trumpet the successes of the present system.
In particular, look at the awful distortions – as well as the gross inequities – being fostered by this ludicrous dogma which predominates today that the principal price of credit – the policy interest rate – should aim at reflecting a disembodied ‘natural’ one (paradoxically, in a world of pervasive, positivist hyper-mathematization, one which is unobservable and so also incalculable). For all its implied import, this particular shibboleth has come to mean only that the level of a select, arbitrarily-weighted price of certain goods, notionally intended for end-consumption (or, even more fatuously, the nebulous ‘expectations’ thereof) will rise at the entirely cabbalistically-derived rate of two per centum, per annum.
No amount of the ‘exercise of judgement’ can salvage such a dreadful mis-specification of the problem not least because, in a materially progressive world – as the long evidence of history confirms, as well as simple reason demands – prices tend to fall: that the measure of progress itself is a simple matter of doing more with less!
The attempt to override this basic truth – indeed, actively to pervert its expression – leads inexorably to the violation of that far more critical ‘natural’ rate; the one that keeps borrowing and saving in a dynamic, but self-governing counterpoise, only delivering up for present use and future fruition that which people – people in the round, not the privileged Templars of some central-bank Sanhedrin – feel they can spare from their present uses and which other people in the round wish to employ in addition to the ones of which they can instantly dispose themselves.
As both I and my peers and four generations of our more illustrious Austrian School predecessors have taken untold pains to try to explain, whenever the Planners’ mania for inciting ‘ever increasing credit growth‘ is indulged, savers become borrowers; the safety-first become the speculators; the prudent become the profligates and we are all thereby set on a Road to Ruin – one which, all too frequently, leads from there to a dreary terminus in Serfdom, too.
In such circumstances, the mispricing of capital – a kind of financial, anti-selective ‘grade inflation’ – drowns out the sober offers of genuine entrepreneurs in a clamour of Musks, Madoffs, start-up-and-sell-out serialists, one-trick cyber-ponies, and other species of scam artists. The parasitism of the professional political class – few of its members those who have ever worked to a proper budget or had their livelihood depend on convincing a discerning customer to choose their services over those of a thousand others – also rages unchecked. The banks no longer provide a useful function ‘intermediating’ between today’s needs and tomorrow’s hopes but instead degenerate into polluters of the wellsprings of the economy, their apparently boundless offer of what our forefathers rightly condemned as ‘fictitious capital’ acting to corrode the undergirdings of our commerce and to pour sand in the gearings of our industry.
Of course, in the ensuing crisis, Stuart’s beloved ‘policymakers’ will only receive even more urgent demands that they should ‘exercise their judgement’ – and do so in a more forceful and pervasive manner than before, into the bargain.
Since the wearisomely predictable thrust of said exercise will only be to ensure no halt is suffered in the business of ‘ever increasing credit growth’, the disease ravaging us will only become more deep-rooted, the crises it throws up more frequent, and the ensuing central bank quackery its remedy seems to imply more intrusive.
Sadly, all this means that, far from being laid permanently to rest, the dreadful vampire of ‘Macroprudential’ will not lay long in his unhallowed grave but will rather be conjured back to life by his coven of central-banking cultists and set free to stalk the night, battening on our veins, and draining much of the life-blood from our economies, all over again.