Banks do not award themselves pensions, bankers do. Helping banks is not usefully understood as helping bankers (even though that happens – to an extent – as a consequence of it). When helping banks takes the form of buying them or lending them money or selling them insurance, so long as we do not pay too much, lend on too generous terms, or sell insurance too cheaply, then helping banks is usefully understood has helping ourselves.

The crisis raises major issues about free markets in finance. I can’t see why it raises broader implications for free markets in other goods and services. People who support free markets in other goods and services ought not have their faith shaken by this crisis, because the fragile and volatile nature of financial and asset markets has been known for a long time. Take a look at quick glance through this reading list, for evidence of that.

I think it represents an ideological problem for the current generation of neo-liberals. For free marketeers, there are several solutions that will be preferred depending on how anarchic their attitude it:

- Let the whole crisis do its worst (not necessarily that bad in the end, there is a lot of doom mongering out there from those who ideologically want to have an excuse to control people’s lives and property). People will know better next time and that they can’t rely on bailouts.

- Print enough money so to cover the current crisis, then introduce 100% reserve capital requirements on ordinary banks. This means that if you want to borrow money, you actually need to find someone to lend it to you rather than relying on the magic trick of fractional reserves which allows the same money to exist in several accounts at once.

- De-monopolise currency so that the state can no longer exclusively demand issue or demand payment in its own currencies and allow private operators to offer their own. We would probably see a return to various commodity backed currencies that way.

These are genuine free market solutions. I don’t know which ones would work best given our current situation but we aren’t short of ideas.

Of course it undermines free markets. The fact is markets cannot be and never will be free. The state and the market have a relationship which cannot be taken apart. Neoliberalism, is essentially a way of getting the state to prop up corporate interests at all costs. So this situation is nothing different to what has gone before, the difference is, its a bit more obvious that neoliberalism has/is failed/failing.

Its a blow to free markets because it has proven deregulation is not only undesirable but can be catastrophic. Luis, I think your wrong about this being confined to finance markets. The free market had no answer to the housing bubble/crash, to sustainable development, to stable growth, to equality and even abstract notions like happiness.

Its a pretty big failure if you ask me

“I think it represents an ideological problem for the current generation of neo-liberals.”

The hardcore free-marketeers in the Austrian School predicted the crisis and argue that it was Central Banks (government institutions) that are to blame for holding interest rates too low. See here – http://mises.org/story/3128

If you want a free-market perspective on the crisis in book form also check out http://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-Bailouts/dp/1596985879/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1235742124&sr=8-1

That was meant to read: this situation is only marginally different from what has gone before

Actually Joe, markets can exist or emerge pretty much anywhere, regardless of the state’s existence. In fact, market activity predates the notion of the modern state by at least a couple of thousand years.

But you are right in so far as when the state gets involved in them, it usually becomes a recipe for re-inforcing the interests of a political and economic establishment. I feel our best option is in trying to figure out how to disentangle state institutions from the market rather than trying to mix them up even more.

True Nick but the state and the market is now intertwined and cannot be separated.

Look at E.U legislation/ W.T.O rules/Regional trade Agreements/IMF structural adjustments etc etc. The notion that a market can be remotely free is fanciful so thats why i take issue with the question of whether the free market has been undermined. As you correctly point out, the modern state means there is no such thing.

Well, if you take that kind of totalistic view of what a free market would be, then you are correct. But if you consider individual transactions, then there is still plenty of market activity that is taking place that is free. The problem is, those things are not in fairly important areas like banking!

But isn’t there an ideological problem for people who believe in free markets?

Yes it is , I think if you have an ideological commitment to such a thing and no experience of the reality of a free market then this would be a real problem. The funny thing is that the New Labour Blairite wing are far more committed to abstract Free markets than Conservatives ever were .
I do not have an ideological commitment to the “Free market” . I believe in Protectionism at times , certainly of jobs I daily witness the chaos and danger of the free market in Insurance across the EU ( Scandal about to hit the papers BTW ). I am highly suspicious of internationalism I value institutions that control capitalism and in general the social structures that free markets can attack. . I value the spiritual and social resources of the Nation along with its wealth and any dogma is to be viewed askance until tested by experience .
Brown thought he could have a high tax economy and pay for it by letting his Banking chums rip internationally . I think in his insane hubristic arrogance he thought he could ride the markets and deliver a greater Sweden to the British as well.
He is not a conservative man he is a chancer . I see on this site many people who have never been near a market commenting with great confidence and this is typical of the left . Giving them the market is like giving the Indians Whiskey with predictable results.
The true pain will begin after the recession , Its easy to borrow and blame the word . When the tax rises and cuts have to be inflicted after the stories have gone then you will see how angry people really are .

Thanks god we will soon have a Conservative government.

“The true pain will begin after the recession”

That is why you and the Tories are hopelessly out of touch

Joe – if I know anything I know that the government sure as hell has no “answer” to happiness!

Nick, isn’t point 2 just more regulation, but of a different kind? And point 3 is just absurd, come on!

“Nick, isn’t point 2 just more regulation, but of a different kind? And point 3 is just absurd, come on!”

The idea of abolishing exchange controls or privatising the telephone network was once seen as absurd. If you gave people a choice in currency people would quickly begin to use whichever was the most trustworthy, which I suspect would be a currency backed up by gold.

Re outlawing fractional reserve banking as regulation, the free-marketeers who support such a policy simply consider it to be outlawing fraud. They would view it as a regulation in the way that outlawing burglary is a regulation rather than in the way that the minimum wage is a regulation.

“If you gave people a choice in currency people would quickly begin to use whichever was the most trustworthy”

Nightmare scenario for so many reasons. Just a couple.

1) There could be a huge devaluation of a certain currency because a few people decided it was no longer trustworthy (even if this was total balls) thus ruining a perfectly good economy.

2) A currency plummeting would ruin ordinary people’s savings if they happened to hold the wrong currency. People need saving from the market not more exposure to it.

Markets are not ideological constructs, they are just organic structures that emerge whenever free people come together to pursue their own rational self-interest in a consensual and voluntary manner.

The discussion to be had is not whether markets will survive or not – of course they will. The real problem is to work out how to control money supply when a nation like China loads cheap debt onto a profligate West and simultaneously brings billions of pounds worth of cheap labour onto the global marketplace.

Can any left-liberals answer this question? Or don’t they believe in money supply?

But while the Tories keep crying about the national debt

Oh do grow up. The national debt is not some partisan issue that Tories have latched onto. A massive national debt affects us all. We will sadly see unprecedented cuts in frontline public spending and higher taxes, just to pay for all this.

Lefties like to think the world can be made perfect but guess what? Someone has to pay.

“Markets are not ideological constructs, they are just organic structures that emerge whenever free people come together to pursue their own rational self-interest in a consensual and voluntary manner.”

That may have been the case 5 thousand years ago but its not today

“Markets are not ideological constructs, they are just organic structures that emerge whenever free people come together to pursue their own rational self-interest in a consensual and voluntary manner.”

You missed out the end- “assuming naturally occuring resources have been first siezed by the state and placed in the hands of individuals.”

Modern private property is merely the latest link in a chain stretching back to the early monarchies. Neo-liberalism is pure selective statism- it’s goal is to prevent secular democracies from undoing the actions of theocratic dictators.

Modern private property is merely the latest link in a chain stretching back to the early monarchies. Neo-liberalism is pure selective statism- it’s goal is to prevent secular democracies from undoing the actions of theocratic dictators.

You enjoy dressing up quasi-Marxist meaningless babble in obscure language do you? Keep at it, there needs to be someone to chuckle at…

“You enjoy dressing up quasi-Marxist meaningless babble in obscure language do you? Keep at it, there needs to be someone to chuckle at…”

Obscure language? It’s very simpe indeed. It’s nice to see free-market voices growing ever more shrill recently, though.

@ 8 – Thanks god we will soon have a Conservative government.

Oh rejoice because they wouldn’t have got into this mess and they certainly know how to deal with it now too?!
By the way didn’t they set this particular ball in motion years back by deregulating the market, and also selling off gas, electricity etc? But not to worry because we all have our shares (individually held or through pensions etc) just like Maggie said, which of coure are worth nowt now.
And yes Tony Flair continued with pretty much similar policies under New Labour(Old Tory?), which to my mind just goes to show that neither have much of an idea.

Will the bailout undermine free markets? No I don’t think it will, but it would be nice to think that in the financial sector tighter legislation in the future would prevent this happening again. Maybe banks should stick to banking in the traditional sense and maybe a nationalised bank in amongst the PLCs would be a good thing. If there was the Royal Building Society of England I think they would be struggling to process all the savings/loans etc that would be coming their way right now. I’m no economist but most people aren’t either, and I do think the idea of one fully nationalised bank would gain a lot of traction with the electorate.

Mike – you have a point in some respects. We never really had decent land reform in this country and so a few institutions and families continue to live off rents given to them by previous regimes.

Where you are wrong is that the majority of stuff on the market doesn’t really rely heavily on those sort of rights. Much of it was just down to hard work and talent. Plenty of people started from pretty much nothing and became rich thanks to our relatively free markets (think Marks, Spencer, Jack Cohen, Sugar etc.). Of course, once you become a big deal, then you have to get involved with the political establishment to maintain your interests. But that is a case of state action corrupting market actors, rather than the other way round.

Sunny: “Nick, isn’t point 2 just more regulation, but of a different kind? And point 3 is just absurd, come on!”

Think about it this way. 100% capital reserves are the one regulation which would mean you could do without every other regulation. It could be justified both on Austrian economic prevention of fraud grounds and on neo-liberal “have regulation but keep it simple and easy to follow” grounds.

As for point 3, the question why we aren’t talking about these sort of options and instead talk about more state control options that we already know don’t work both from experience and theory. That is what is truly absurd.

@Nick: There would be no markets without private ownership. How did land and resources come to be privately owned? In all cases- seizure by a state or similar entity. “At the point of a gun”, as Libertarians are so fond of whining. Property is nothing but an artificial state construction.

It isn’t that companies get involved with the state as they get bigger at all. It’s that their very basis is the state.

Property is nothing but an artificial state construction.

Yes, and unicorns are purple and live in magic forests.

If this is the standard of discussion normal on this website, then this is dire indeed.

Mike, it is certainly true that some land has been seized at the force of a gun hence why even some right-wing libertarians favour land reform. Right-wing libertarians tend to follow Locke’s theories on property – if you come across unowned land and mix your labour with it e.g. build a house then it’s yours.

Markets are not ideological constructs, they are just organic structures that emerge whenever free people come together

Rubbish – regulation is ideologically drive, as is how those markets are structured, who gets what legal rights and all the rest of it. In fact its claptrap to think that our current economy is the most natural order of things.

Anyway, on to more intelligent arguments.

Think about it this way. 100% capital reserves are the one regulation which would mean you could do without every other regulation. It could be justified both on Austrian economic prevention of fraud grounds and on neo-liberal “have regulation but keep it simple and easy to follow” grounds

Possibly, but I don’t think financial institutions would go for it. Firstly because it doesn’t make economic sense because its not necessary to maintain 100% capital reserve percentages.
And secondly because it would stunt economic development.

I would argue that the free flow of credit in an economy is a good that the government could partly look to provide. In other words have a few mutual banks. I say this because even if you have a bank 100% capitalised then its assets still have to be, to a certain degree, guaranteed by the Central bank. Otherwise people may not have the confidence to deposit large sums with an institution that isn’t protected in some way.

It’s a recession….we’ve had a number in the last few decades.
Boom, bust, bubbles…etc.etc.

And what happens? After a difficult and painful period things get better.

While the larger shareholders bleat, they should be reminded that they have responsibility for appointing the inept onto the boards of these banks.

Shareholders need to take a greater interest in who they appoint to run institutions, and how those institutions are then run. Similarly, members of the public need to take a greater interest in who they appoint to run the country, and how the country is run.

Everyone’s responsible for this mess. We’ve all borrowed too much. The shareholders wanted ‘double digit’ growth. The bankers wanted huge profits to pay large dividends to attract ever greater investment. The Government didn’t care so long as ‘Little Britain’ could sit with the other, seemingly, strong economies. It was all built on debt.

Mr Prescott on Radio4 yesterday was seeking to promote the Government’s history and citing ten wondrous years of economic growth. Doesn’t he realise that the ten years of growth came about due to ten years of insufficient financial regulation? Probably not.

The Locke argument is untenable- it’s completely arbitrary, and accounts for 0% of property ownership anyway. It’s just Locke looking for an excuse and settling for sophistry.

Any land reform that leaves it in the hands of private individuals is just a reboot of the same morally baseless system. I confess I came here looking for a left-libertarian website, not a right one. It’s hard as hell to find a “left” on the internet, or anywhere (except as caricatured scapegoats in the press.)

“I confess I came here looking for a left-libertarian website, not a right one”

I strongly suggest you check out Kevin Carson – http://mutualist.blogspot.com/

His brand of left-libertarianism is probably mroe to your liking. He also has some very interesting things to say re the development of capitalism and how state-intervention has actually caused many of the negative effects that the Left associate with free markets.

There is a free-market solution, or at least one that doesn’t involve taxpayers’ money, but may well involve government mediation to begin with:

Debt-for-Equity Swaps.

I’ve written on it here:
http://soc-liberal-party.blogspot.com/2009/01/mystery-that-is-debt-for-equity-swaps.html

…and compared it to other options here:
http://soc-liberal-party.blogspot.com/2009/02/solving-banking-crisis.html

It’s been done by many companies already, but obviously not by banks thanks to the government’s guarantees of bailout.
In answer to the possible question “So if it’s so great, why haven’t they done it?”, it’s probably because bondholders will have squealed – they’d much prefer to get everything back from government that to get the equivalent of if either the banks had failed or the debts had been rescheduled (another free-market and v effective policy).

“Rubbish – regulation is ideologically drive, as is how those markets are structured, who gets what legal rights and all the rest of it. In fact its claptrap to think that our current economy is the most natural order of things.”

The point is, Sunny, while regulation is ideologically driven and distorts markets, they do not actually constitute them. Markets emerge in many contexts and, of course, they are affected by whatever coercive actors are operating, but they do not require coercive actors to function. The 2nd chapters of a recent IEA book are particularly good at explaining this: http://www.iea.org.uk/record.jsp?type=book&ID=438 (free to download).

Consider markets in contraband. They certainly are not constituted by the state (they shouldn’t even exist according to the rules of the state!), but they operate quite predictably along similar economic lines with additional risk of being imprisoned or targeted by the state factored in.

On the 100% reserve point, yes, of course, financial institutions would be against it which is perhaps the best reason why we should be for it! Also, a system of 100% reserves does not necessarily retard investment, it merely makes it explicit how things are being invested. One way or another, everyone with a bank account has been investing in these crappy housing markets. No one ever asked us (I would have chosen my money to stay put if I had much choice!), but because fractional reserves allow the same money to exist in different places at the same time, it all gets murky and no one knows where the risk and responsibility lies. Perhaps if it was less murky, you would see less investment but you might also see smarter, more risk aware, investment.

I’m no economist but even I can see that 100% capital reserve banking is a nonsense.

Say I deposit £100 000 in a bank one day and that bank then lends £100 000 to a buisness as the bank now has an extra £100 000 available to lend. The next day I decide to go back to the bank and withdraw my £100 000. Oh look whoops now the bank’s reserves are £100 000 short of being 100% capitalised.

On a larger scale a bank could be easily made to break any such regualtion by something as seemingly harmless as another bank enticing the first bank’s savers away with a more attractive interest rate. So the first bank loses deposits and so no longer has the capital to back up 100% of its loans.

There is always going to be a certain amount of fluction in savings and loans at a bank. You can argue for a higher % reserve than banks currently have but as the required reserve level approaches 100% you increase the liklihood of the regulation being broken through no real fault of the banks.

Peter – I am not an economist either, but my impression is that under 100% reserves, you wouldn’t loan the money out to another entity at all! When it comes to ordinary bank accounts, banks would act merely as a safe place and an easy way to transfer funds. You wouldn’t receive any interest on such an account, and you may even have to pay a small fee for the bank’s services. This is because banks would be subject to the same law as anyone who claimed “I will keep hold of your money, and you can come and collect it any time you want”. As soon as they started investing with money they collected on those grounds, such a person would be committing fraud. Why not so with banks?

Of course, plenty of people would still seek a return on their funds. And for that, they could use investment accounts and other structures. But those would have a specific risk profile (how much of their money is being invested at any one time? What sort of places is it going to?). The important thing is making investment something that you choose to do rather than something you are forced to do.