This cri­sis has been caused by ar­ro­gant cen­tral banks

The Pak Banker - - OPINION - Al­lis­ter Heath

IT was Friedrich von Hayek, the great Aus­trian econ­o­mist, who ex­plained just how cen­tral the price sys­tem is to cap­i­tal­ism and our civil­i­sa­tion's as­ton­ish­ing pros­per­ity. The fact that goods, ser­vices, as­sets, money, time, ideas and risk all come with a price at­tached al­lows re­sources to be al­lo­cated re­mark­ably ef­fec­tively.

An in­crease in the price of oil means that de­mand has gone up, which en­cour­ages pro­duc­ers to in­vent new ways of ex­tract­ing more of it. A re­duc­tion in the price of corn means that there is too much of it, and the fact that it be­comes less prof­itable to sell it en­cour­ages pro­duc­ers to exit the mar­ket. Adam Smith de­scribed this as an in­vis­i­ble hand that aligned the self-in­ter­est of in­di­vid­u­als, co­or­di­nat­ing their ac­tions for the greater good.

The free mar­ket makes mis­takes, of course, but it fails far less fre­quently than any al­ter­na­tive way of al­lo­cat­ing re­sources. The only other way is to di­rect ac­tiv­ity cen­trally - an ex­treme ver­sion of cen­tral plan­ning - but that is a recipe for catas­tro­phe. Trag­i­cally, while pol­i­cy­mak­ers sup­pos­edly un­der­stand this, they have spent years un­der­min­ing the price sys­tem, mak­ing it less use­ful and ef­fi­cient, plant­ing the seeds for one cri­sis af­ter an­other. The cur­rent mar­ket tur­moil - which has pushed the FTSE 100 down 22pc from its re­cent peak, sent yields into a spin and tur­bocharged gold - is one con­se­quence of all of this. Far from be­ing a man­i­fes­ta­tion of what the left de­scribes as "neo-lib­er­al­ism", it is pri- mar­ily a fail­ure of statism.

The trig­gers for the re­cent tur­moil were the slow­down in China and emerg­ing mar­kets - re­duc­ing the de­mand for oil, en­ergy and com­modi­ties - a group of economies that were propped up di­rectly and in­di­rectly thanks to do­mes­tic and global mon­e­tary eas­ing and other in­ter­ven­tions fol­low­ing the Great Re­ces­sion of 2007-09. As a re­sult, many of the prob­lems be­set­ting those coun­tries were not tack­led and just grew worse; it was al­ways a cer­tainty that re­al­ity would even­tu­ally catch up with them, and that bad debts would have to be writ­ten off and re­sources re­al­lo­cated to more pro­duc­tive uses. An­other name for that process is a re­ces­sion, or - at least in the case of China - a slow­down.

Not ev­ery­thing that is go­ing wrong can be blamed on politi­cians or cen­tral bankers, of course: the pri­vate sec­tor can also make spon­ta­neous er­rors. But the US, UK, Euro­pean and Ja­panese economies would not be in the po­si­tion they are in to­day had the price sys­tem been al­lowed to clear freely and had pol­i­cy­mak­ers al­lowed more of the ma­l­in­vest­ments of the past to be liq­ui­dated more quickly. Kick­ing the can down the road can help ease an ad­just­ment, but it can also al­low de­nial to set in. Trag­i­cally, the lat­ter is what ap­pears to have hap­pened in many economies and mar­kets around the world.

Ever since the Wall Street crash of 1987, cen­tral banks have re­lent­lessly dis­rupted the price sys­tem to smooth eco­nomic ac­tiv­ity and pla­cate fi­nan­cial sys­tems. The for­mer goal came from a be­lief in the power of mon­e­tary ac­tivism; the lat­ter from the view that higher as­set prices can only be good for growth.

The trig­gers for the re­cent tur­moil were the slow­down in China and emerg­ing mar­kets - re­duc­ing the de­mand for oil, en­ergy and com­modi­ties - a group of economies that were propped up di­rectly and in­di­rectly thanks to do­mes­tic and global mon­e­tary eas­ing and other in­ter­ven­tions fol­low­ing the Great Re­ces­sion of 2007-09. As a re­sult, many of the prob­lems be­set­ting those coun­tries were not tack­led and just grew worse; it was al­ways a cer­tainty that re­al­ity would even­tu­ally catch up with them, and that bad debts would have to be writ­ten off and re­sources re­al­lo­cated to more pro­duc­tive uses. An­other name for that process is a re­ces­sion, or - at least in the case of China - a slow­down.

Not ev­ery­thing that is go­ing wrong can be blamed on politi­cians or cen­tral bankers, of course: the pri­vate sec­tor can also make spon­ta­neous er­rors. But the US, UK, Euro­pean and Ja­panese economies would not be in the po­si­tion they are in to­day had the price sys­tem been al­lowed to clear freely and had pol­i­cy­mak­ers al­lowed more of the ma­l­in­vest­ments of the past to be liq­ui­dated more quickly. Kick­ing the can down the road can help ease an ad­just­ment, but it can also al­low de­nial to set in. Trag­i­cally, the lat­ter is what ap­pears to have hap­pened in many economies and mar­kets around the world. Ever since the Wall Street crash of 1987, cen­tral banks have re­lent­lessly dis­rupted the price sys­tem to smooth eco­nomic ac­tiv­ity and pla­cate fi­nan­cial sys­tems.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.