Your aim is too narrow, your grace

The two archbishops recently have stepped outside their area of expertise in order to aim at certain speculators, - those who sell short.

Doubtless short sellers are motivated by personal self-interest, but they also perform a function in market adjustments. If the shares are overvalued, that is represent a sum much larger than balance sheet assets, then normally the share price will tend to fall, or the company would seem to offer a prospective lender or share investor a misleading picture of the company. (This is particularly true if the company is concealing disadvantageous off- balance sheet items. Bottler Brown has rightly condemned this, but of course in the national accounts he himself has indulged in this in order to conceal the extent of his borrowings and liabilities.)

Short sellers would be ill advised to buy if they have strong suspicion that an adjustment in share price downwards will occur. They could gamble and make a profit, but only if the market agrees with their judgement on value. Or are the two clerics concerned not so much about the market mechanism, but rather more about the sums involved? This is a different argument.

The whole economic situation is also about misselling mortgage loans to people who would not be able to repay, because of the size of their debts and their incomes. These mortgage providers are also to be condemned. They should also be condemned for their parcelling up these doubtful mortgages into huge bundles to sell to unwary and greedy banks. Thus we have two more groups whose greed got the better of them.

Everything could have been better if the big players, Governments, had not been greedy for power. They pursued policies to avoid downturn (USA) or have a spending spree (UK), with interest rates low and looking kindly on their own borrowing and on the borrowing and debt positions of the public. People borrowed, encouraged by the higher values of assets, especially their houses. The percentage rate of income saved went down from about 9% in the Thatcher period to even under 1%. The people, like the UK Government, has no reserve to fall back if things turned unpleasant.

Fraser Nelson, in his message on the Coffee House blog yesterday, lists 4 occasions between September 2004 and September 2006, when the IMF or the Federal Reserve Board warned about the growth of indebtedness. The warnings went unheeded, or at least unacknowledged, as the pace of indebtedness continued.

The two archbishops were right to remind us that greed can lead to great problems, but it could be argued that they fell into a familiar trap in talking about an area they know little about, - the operation of financial markets, of condemning easy targets. They should made their accusations against those much more guilty, - those who lent to borrowers unlikely to be able to repay, bankers who did not trouble to ask about bundles of potentially bad debts, and Governments who were determined to counteract deflationary pressures (Greenspan) or deliver on social policies (Brown) with insufficient thought about what their policies might lead to in the future.