Saturday, October 17, 2009

A More Complete Hannan Critique

PragueTory has suggested that my initial critique of Dan Hannan lacked depth, so allow me to offer a more extensive argument against the "state intervention caused the crisis" idea.

Interest rates were left too low...
At the time interest rates were low, the Bank of England was in a serious bind. On one hand, British manufacturing was struggling and crying out for cheap credit, on the other hand we had a slowly growing housing bubble.
Assuming that the BoE did not exercise any kind of policy influence over the banks and that interest rates were set at a market rate decided by the banks themselves and that this rate would have been higher what we are likely to have seen is a lower housing boom but also higher unemployment due to the adverse effect of expensive credit on manufacturing.

The relationship between interest rates and credit is more complex than simply lower = more credit, higher = less. As an example, the European Central bank had consistently lower interest rates than the UK, yet we witnessed nothing like the same kind of housing boom in Germany or France. Whatever the causes of the current financial crisis, it would be very hard to put it down to simple matter of interest rates. Interest rates alone just don't explain the problem. Further to this it has to be asked if Hannan somehow managed to miss endless discussion on the role of credit derivatives in causing this crisis.

Every Action taken by the Government has been either ineffective or made things worse..
It's hard to know exactky what he is referring to here, but let's go through a few:
  • Guaranteeing deposits at Northern Rock - Stopped the run on Northern Rock, I'd say that's a plus
  • Nationalising Northern Rock & Bradford and Bingley - Both seem to be doing alright under national ownership no savers at either bank have lost anything
  • Recapitalising the banks - Has kept the supply of credit flowing and ensured that a number of businesses have agreed new finance deals
  • Quantitative easing - Has not caused runaway inflation, has lowered gilt yields and has kept credit flowing
It's hard to see what the hell Dan Hannan's on about.

Tax Havens = Countries with more Competetive Tax Rates
Let's take the example of the Caymans, by Dan Hannans view the Caymans should be attracting international investment by the bucketload and have many many highly competetive businesses. Why then, if this country supposedly attracts so much foreign investment is the major industry of the islands tourism? Why are the country's exports worth only 0.12% of GDP if so many foreign firms want to invest here? Hannans argument here is bull.

Reform? Aren't things bad enough already
Is the man so blinkered by ideology that he can't see the need for changes to the way we regulate finance? The buildup to the crisis is marked by several clear steps where certain regulatory changes were made that allowed certain financial activities to take place. The need for reform is obvious.


Tom Freeman said...

He isn't insane. He's just a completely shameless liar.

You're right: low BoE rates didn't cause the high loan-to-value or loan-to-income ratios of recent years. State intervention last year stopped the banks from self-destruction. And firmer regulation now, for instance on capital requirements, is a must.

"If all you have is a hammer" - And if all you have is an axe, every problem looks like big government in need of cuts. Alas, Cameron and Osborne have been going to the same axe shop as Hannan.

Andreas Paterson said...

Tom, that quote is fantastic.

Thomas Byrne said...

The credit required to make these things sustainable in the minds of bankers was being provided by the Federal Reserve and to a lesser extent by the ECB. It was being pumped into the system because of Dot-Com and because of 9/11 because Greenspan thought the best way to stimulate the US economy was an increase in credit and a lowering of interest rates. Of course, Government didn't directly go to the banks and say "Hey, if you do all this dangerous stuff you can make alot of money" -- they figured that out on their own -- but without the Government ownership of the means of production in money itself, I doubt whether this particular crisis would ever have happened. Recessions do from time to time happen under systems of free banking, but recessions involving large financial institutions occur because of the relations between these institutions and the central bank. It was the central bank who acted irresponsibly here. They have been tasked to oversee our economy, not flood it with credit and watch as the dam bursts. The BofE acted more responsibly there than the ECB or the Fed, but they still played their (minor) part.