BOOKS The Trouble With Markets
By Roger Bootle
Nicholas Brealey (£18)
After the hairpin turns of last autumn, the financial crisis has shifted into a slower- moving phase. Authors who were wary about trying to discuss and describe the mutating crisis are now rushing forward to offer their interpretations in time for Christmas. Roger Bootle, the economic adviser to Deloitte and a former group chief economist for HSBC, is an eminent addition to their ranks with this enjoyable book.
His explanation of the crisis is rooted in the standard “global imbalances” model: savings in surplus nations, mostly in Asia, weighed on inflation in the west. Central banks in Europe and the US, focused on price stability, kept rates low to compensate, and ignored rising asset prices. Bank regulators, in thrall to the efficient markets hypothesis, imposed rules that did not seem to prevent banks from doing as they pleased. The result was that the financial system was allowed to become bloated, less robust and massively exposed to a property super-bubble.
Most of his suggestions for how we exit this mire are similarly conventional. He proposes counter-cyclical capital requirements, liquidity rules, some regulation of pay structures and financial instruments and, perhaps, the introduction of some kind of separation between casino banking and other financial institutions. Looking at the macroeconomy, he thinks central banks need to consider the long-term impact of changing asset prices on consumer price inflation more carefully, and exhorts the surplus nations to expand domestic spending and so rebalance the world economy.
Bootle does have a few novel ideas: He can see merits in a financial Tobin tax set high enough to discourage frothy short-term speculation but too low to impact sound investment. More interestingly than the old Tobin blunderbuss, he also proposes a capital gains levy whose rate would vary with the length of time over which investments were held in order to encourage long-termism: a tax break for buy-and-hold. He does not sell either proposal well: it is not clear what problems he thinks either measure would help to address.
Throughout this tale, the author, an academic economist long based in the City, is scathing about the role of the two worlds he has inhabited and takes great pains to explain the problems with both. The economics profession, he correctly fears, has become too wrapped in trying to conjure up over-mathematical universal field theories about the behaviour of homo economicus to come up with anything useful. The discipline attracts too many would-be Einsteins and too few would-be Brunels. Economics, he fears, could be marooned in genteel irrelevance. He also believes, quite rightly, that much of the City’s activity was not productive: a great portion of it was pure zero-sum gambling and risk-recycling that did not help the intermediation process. He also believes that a large portion of the financial sector’s profitability came from a lack of competition. And while Bootle defends high pay and bonuses in principle, he attacks compensation in the City as evidence of the fact that banks were captured by, and run in the interests of, their management teams, not their shareholders.
This is a rather conventional account, but what really marks this book out is the admirable care that Bootle has taken to address concerns that a reader who is new to the topic might have. He answers popular worries, for example, about the global role of the dollar and the political influence of Goldman Sachs. He includes a section on relevant historical precedents for our current conundrum, and the oft-cited arguments that swirl around them. There is also a chapter that attempts to answer the question of where retail investors should keep their cash in the years ahead. The author bristles with caveats and warnings about uncertainty: one suspects he was bullied by an anxious editor into writing them. But, still, he gives a useful list of things to consider.
In his devoted service to the neophyte, Bootle is also diligent in shooting down some of the most common canards that have flapped their way through the crisis. He explains why counter-cyclical fiscal policy is necessary, why banks had to be recapitalised and why masochistic Austrian prescriptions should be ignored. The book does not set out to change the way the specialist reader will consider the crisis. But The Trouble with Markets is an excellent potted explanation for the general reader of the events that led up to what Bootle calls the “Great Implosion”, and is a clear and cogent guide to the problems – and the solutions – that lie ahead.
The writer is an FT leader writer
