Adam Smith Institute

I nearly threw up over the Daily Telegraph on Monday, as I read Roger Bootle arguing that "banking is too important to be left to the bankers". I like Roger, he's very brainy and we've had him at our Power Lunches here from time to time. But unfortunately the truth is that banking is too important to be left to central bankers.

Make no mistake, they're the ones who got us into this mess. As cheap imports flooded in from China, prices should have been falling; but the Fed and the Bank of England were content to preside over (modestly) rising prices. There was, simply, too much money around for far too long. True, with events like 9/11 lots of people were calling for yet more money to be injected. But now we know that simply lowering interest rates and keeping them low is no long-term formula for economic success. We binged on credit, and now we're hung over.

John Stepek of Money Morning has a better idea.

"I’d say just ditch central banks and let the market set interest rates. Central banks, regardless of how ostensibly independent they are, are instruments of the government. The government wants happy voters, and free money makes people happy. So there’s always the temptation to keep the money flowing freely. "

"The market on the other hand, couldn’t care less what voters think. One feature of the credit boom is that most people in the City and on Wall Street knew it couldn’t last forever, and they had a hunch it would blow up in a very unpleasant way. But they couldn’t stop playing along, because they had to compete with their peers. However, if markets set interest rates rather than governments, then arguably this mood of rising concern among the participants, would be reflected in the price of money long before things got out of hand. Anyone who had overplayed their hands would run into trouble long before they became “too big to fail”.

That seems like a much better idea than spending hundreds of billions of dollars and tens of billions of pounds to create a welfare state for distress banker-folk. Use the market force, Luke!

As a purely personal opinion reform of the Common Agricultural Policy should be achieved by burning the entire structure to the ground and ploughing the intellectual landscape that produced it with salt: the selling of the administering population into bondage would perhaps be a step too far in this age.

In the absence of a Cato to lead the mob with burning brands and pitchforks aloft I am left to consider less radical alternatives. Like this one from the European Centre for International Politial Economy. They open with two quite mindboggling points: 

Alasdair Darling, the British Finance Minister, recently proposed to abolish tariffs and all other measures that keep EU agricultural prices above world market levels, as well as to end the direct payments that farmers receive irrespective of their output.

Good grief, almost makes me warm to the man, such an entirely sensible proposition. This is less sensible: 

Michel Barnier, his French counterpart, even deems the CAP so effective that the policy should be exported to developing countries.

Just what the developing world needs, high food prices, a tax burden supportable only by the already rich and limits on what farmers may produce and how.

The basic outline of their proposal is that: 

First, that all measures that distort market prices and production should be abolished. This includes production quotas, land set-asides, storage aids, export refunds, output payments, and area payments. Second, the Single Farm Payment (SFP), which provides income support to farmers independently of their current production decisions, should be phased out because it does not serve any societal need. Third, targeted subsidies that reward farmers for providing socially valued services that are not remunerated on the market, such as maintaining scenic landscapes, should be adapted. Many of these subsidies should be provided at the national or local level without or with little EU co-financing.

In a nutshell, that the Common Agricultural Policy should, as a policy, have almost nothing to do with agriculture and should not be common. Yes, I'd happily sign up to that, even in the absence of an oratorial firebrand whipping the mob along with cries of CAP delenda est for the end result would indeed be that delenda* to all our benefit.

* Yes, yes, I know, pig Latin of the most appalling kind

Banks going down like ninepins, fortunes being wiped off the stock market, inflation haywire, loans unobtainable – the market's messed up, hasn't it? The newspapers tell us that even the most ardent defenders of the free market are calling for government action.
 
Well I'm not. It's perfectly obvious to me that it's governments and regulations that have messed up, not free markets – because in the financial wonderland that our regulators have created, free markets do not exist.
 
Much of the problem comes down to US government 'anti-redlining' legislation, which forced institutions to lend to people in parts of town where the local property market was bad collateral. Lenders knew they'd have to comply or face regulator's retribution. True, the rules meant that a lot of people were able to own their own home for the first time. Unfortunately they also meant a lot of 'sub-prime' debts on the institutions' books.
 
That was no problem when everything was booming. But the  'prudence' of Gordon Brown, and Alan Greenspan's confident mastery of the markets now turn out to have been prolonged, stealthy, credit binges. It was great for politicians and business, at the time. The trouble is that after every binge, there's a hangover. In the cold light of day, nothing quite looks so clever.
 
Like Northern Rock. The Bank of England thought it was taking too many risks months before it collapsed – but the Financial Services Authority did nothing. When it failed, three regulators – the Treasury as well – were all stepping on each other's feet.
 
This week's turmoil owes its origin not to the free market, but to politicians engineering booms in which everything seemed to succeed, and in reassuring investors that their money was completely safe. Financial markets are better regulated by their customers looking carefully before parting with their cash, not by distant regulators.