The Wall Street Journal today tosses off one of the more disappointing pieces I’ve read in this crisis—and that’s saying something.
The fact that it runs as a Heard on the Street is doubly disappointing. Far from a fact-based, evidence-supported “Heard,” which are intended to be useful to investors, this is opinion writing, pure and simple, with emphasis on the “simple.” It reads like it was cribbed from the Cliff’s Notes version of a Milton Friedman reader.
The gist is that the G-20 protesters (nice to erect a straw man of a few thousand threatening-looking anarchists to delegitimize your opposition) are dumb (naturally; are they ever not in a business column?) because it’s not laissez-faire/deregulated capitalism that did us in, it’s that there wasn’t enough of it.
If there is one myth the credit crunch has surely exploded, it is that the financial system is a free market. The world is in a mess because the financial system wasn’t capitalist enough.
This is tendentious ideologically driven material that belongs on the Journal’s Op-Ed page, if there. It doesn’t belong as a “Heard.” How does this, for one thing, help investors decide anything? What are they supposed to do: short placard and bandana-makers? Arbitrage between the teargas and the giant creepy-puppet markets?
The author tries to back up his really original notion by saying past bailouts and the prospect of the current bailouts prevented the markets from adequately pricing risk:
Financial theory says the cost of capital to an enterprise should rise in line with risk.
I see. Well that’s that then!
We then are told deposit insurance is a bad thing:
The U.K. is even proposing to raise depositor protection in certain circumstances to £500,000 ($717,360), further undermining the principle of personal responsibility.
In a fully capitalist system, there would be no guarantees. The market would ensure banks didn’t become too big or too leveraged.
Tell that to Teddy Roosevelt! But really, I just don’t see the point of these evidence-free assertions. The value to news readers here is zero. Take it to the Dartmouth Review.
But since removing the guarantees and breaking up the banks is outside the realm of political reality, an alternative solution is to charge banks explicitly and upfront for all guarantees. The charges would rise in line with leverage. That at least would raise the cost of funding, helping to generate a price signal to the market.
On the substance of the argument, if that’s what you call it, breaking up the banks isn’t outside the realm of possibility. Second, why does the market need a government price signal if it’s The Market? Isn’t his whole argument that markets are best at determining that?
Those who provided funding to banks correctly gambled that governments would ride to their rescue.
Except all those investors who lost trillions as stock and debt markets collapsed. Somehow, the Market didn’t price that in? Hmm. Must revisit Atlas Shrugged.
And of course, this is a business column, so the regulation bogeyman must be wheeled in.
The results, if that goes too far, should be clear enough: lower bank profits, less capital generated, less credit created, lower economic growth and more bureaucratic control over the banks and the wider economy.
Yeah, we miss those Pay-Option Arms and synthetic CDOs, too.
And of course, the picture accompanying the column is of some thug breaking a window at RBS with twenty photogs in the background. No sign of the thousands of peaceful protesters.