Readers,please excuse me, and I have a lot writing to do relative to local projects right now, I do not have time to add commentaries right now. In time, I will be less obliged, I hope. Tadit Anderson

The expression “good servants and bad masters” has been applied to so many things: technology, government officials, mathematical models and much else. Today I want to apply it to the financial markets. It goes without saying that we need mechanisms for channelling surplus savings into physical investment, for a second-hand market in titles to ownership, for shifting personal spending over time, for saving for old age, and much else. But when these markets become overextended to the point of determining the fate of governments it is time to call a halt. This is especially the case when the funds in question arise from artificially created money rushing across frontiers. To change the metaphor, it is the tail wagging the dog.

These reflections have two distinct origins. One is seeing press discussion of the possibility of credit agencies downgrading US government bonds. My immediate reaction was: how dare these agencies, whose own record in the run-up to the financial tsunami was pretty abysmal, threaten the constitutionally appointed government of the US? All right: these agencies do not make direct threats. Their findings are presented as investment advice. But discussions of what they might do treat them as threats. I am reminded of James Carville, a political adviser to former president Bill Clinton, who observed: “I used to think if there was reincarnation I wanted to come back as the president or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

The second origin is a recent lecture “On Growth-Mediated Development” by Amartya Sen, a winner of the economics prize established in memory of Alfred Nobel. Here I must declare an interest. Not only were we contemporaries at Cambridge, but he quotes approvingly from the remark in my last column that the UK authorities have a vested interest in marking down the growth capacity of the economy so that low expansion of output cannot be blamed on their policies.

One of Professor Sen’s main queries is whether European leadership should come from “democratically elected leaders or financial institutions and rating agencies that seem to be in a position to lord over European political terrain quite freely right now”. He goes on to argue that European policies to address large public sector deficits accept the lowering of growth rates “as a kind of inevitable natural process rather than being substantially if not exclusively the result of their own over-restrictive policies”.
I would be more cautious than Prof Sen in treating democracy as a summum bonum, partly because democracy is so often interpreted to mean mere majority voting and also because of the number of crimes that have been committed in its name. I would prefer some more anodyne expression such as constitutionally appointed government. And I would add that lasting growth, as Adam Smith observed, comes from the efforts of innumerable individuals to better their lot – or from the mere urge to activity. What Prof Sen has in mind is the short- to medium-term downward pressure on output and employment of restrictive fiscal and monetary policies, which could have longer-term effects. But there is no reason to dispute his basic argument.

One of the earliest and best-written books on The Origin of Financial Crises, by George Cooper, a financial analyst with a science background, appeared as early as autumn 2008 and accepted the orthodox case for a free competitive market in consumer goods but then explained why asset markets were peculiarly vulnerable to boom and bust. Two years later, Matt Ridley, who was non-executive chairman of Northern Rock when that bank had to be rescued by the government, wrote in The Rational Optimist that the experience left him “mistrustful of markets in capital and assets” yet passionately in favour of them in goods and services.

One can go back further. Rudolf Hilferding, the early 20th century German-speaking neo-Marxist, annoyed many of his soulmates by denying that capitalism was bound to collapse. But – in his 1910 book, Finanzkapital – he was one of the first to observe the changing nature of the system. He asserted that financial forces were leading to the cartelisation of industry. He did not live to see them threatening to bring down governments.

I have no 10-point programme for making “finance less proud”, as Winston Churchill once put it. I do not believe it will be done just by calling for more macro prudential bank regulation; nor by the so-called Tobin tax on all financial activity.
It is more a matter of recognising, at every point of policy decision, that the free movement of artificially created electronic money across frontiers is not on a par with the free movement of goods and services, let alone more basic human freedoms, and recognising this not only for developing countries but for the so-called advanced ones as well.

www.samuelbrittan.co.uk

Copyright The Financial Times Limited 2011