Wrong analysis, wrong prescription

On his blog today Robert Peston, BBC Business Correspondent, was guilty of a Brownian mis-analysis in trotting out the Brown line.

What he wrote was that the financial crisis was "caused by the mis-pricing and misallocation of capital by the free market on a magnificent scale."

Leaving aside the assumption of a free market in the presence of what should have been highly regulated, if the authorities had done their work. (In some countries, especially Canada, there was much less trouble, because regulation had done its work properly.)

In fact the markets seemed to have responded rather well to massive mistakes made by bankers and governments in causing the downfall of badly run banks. Again, there were banks which did not fail, because they followed sound traditional banking rules in the absence of adequate regulation.

Let us concede, however, that the Peston assumption is correct, that the "greedy bankers" were partly responsible, in that many of them bought worthless paper in bundles, often including the sub-prime mortgages. The question then becomes, "Were any other groups culpable?"

The finger of accusation must point to governments, who kept interest rates too low too long for political reasons and presided over asset bubbles, including house prices, which could not be sustained, and allowed citizens to accumulate massive debt and insufficient saving to provide the asset base for bank lending.

There were other errors, perhaps for the best of reasons, such as President Clinton encouraging the granting or mortgages to those who would not be able to repay, as well as abolishing the Glass-Steagall Act which would have stopped over-lending.

Finally, the G.Brown-designed regulatory system in the UK was not up to the job. There was confusion and uncertainty. It failed its first test.

Whether there would have been a recession in the absence of greedy banks, I do not know and I suspect no-one knows. They obviously made a contribution. But to ignore the contribution of governments and failures of regulators is to paint a very distorted picture.

Brown wants more and more regulation, not because it will necessarily be any more effective then before, but for doctrinaire reasons and to deflect criticism of his own role in the mess.