I am writing a book on why economists need to study the history of economics which is due at the publisher on New Year’s Eve. It has certainly kept me busy, but it has also kept me vastly entertained. Whenever I listen to the shallow maunderings of economists educated from some Samuelson clone, I can only laugh. But to the point at hand. In doing this research, I have been reading Arthur Latham Perry’s Political Economy, the 19th edition (!) published in 1887. He has a section on money and banking that is as long as some entire texts. Chapter XI deals with credit and there, in the summary (p 460), is this:
Good bankers are great benefactors
As it happens this is something I believe myself but the likelihood of such a sentiment appearing in an economics book today must be vanishingly low. I’m not even entirely sure that someone taking a course in economics that bypassed monetary theory would end up being guided through much in the way of a discussion of credit markets, their operation and their value. There is also this from that same chapter, which I am certain is not taught any more. And with this we have an overlap between economics and morals.
Here the vexed question arises, how far has one generation the right to throw upon succeeding ones the burdens of national debt? The true answer is, that it has a very limited right indeed. The opposite doctrine tacitly implies succeeding generations will have no occasion for extraordinary expenses of their own, and therefore may rightfully be made to contribute to the extraordinary expenses of this generation. But it is pure assumption to take for granted that the next generation will not have, of some kind or other, as much occasion for an extrordinary effort in the way of defence or of improvement as the present generation has had. It is an illusion to estimate what has now to be done as of much more importance than what will have to be done. Therefore to throw our burden forward on another generation that may have its own peculiar effort to make, just as great and just as imperatively called for, is an unwarranted procedure. (Perry 1887: 458-59)
If he could only see us now, bankrupting the future and laying waste to our potential. Economics was once part of the moral sciences. It is now for the most part a handbook for bureaucratic control and socialist predation.
Great post, well said!
Writing a plea for the economics profession to not ignore its intellectual history is very important. The timing couldn’t be better, actually, as the insights of generations past largely seem to be lost upon the great numbers of people obsessed with math and toy models which passes off for “economics” these days.
Julie Novak
3 Nov 12 at 12:32 pm
Anyone care to name a great banker from the last 100 years who has done anything more than enrich themselves and their company?
There is a strong argument that the guys who took Hill Samuel and then Macquarie Bank, took on the big boys in infrastructure finance deserve wider respect. There are still relatively few examples of Australian companies genuinely mixing it on an international stage, particularly outside mining.
Wall Street investment bankers have enriched themselves beyond anyone’s wildest imagination, taken massive risks with other peoples money, misallocated billions upon billions in capital and then looked to government to bail them out when it all went tits up. The moral hazard of “too big to fail” still hasn’t been fixed.
H B Bear
3 Nov 12 at 12:39 pm
Mr Bear. You add such joy and merriment to my day that you cannot imagine how much. Many thanks.
Steve Kates
3 Nov 12 at 1:35 pm
and the problem with that is?
Does Bear prefer the Albanian economic model?
Does Bear do class envy and resentment?
banking makes capital markets work and is the keystone of economic growth and prosperity.
anyone who takes a small commission off large licks of money floating around the finance system will make a lot of money, and if there has been any misallocation, it is solely due to government intervention and regulation
Will
3 Nov 12 at 2:30 pm
Will
That’s great but virtue doesn’t come from subsidies etc. Australian banking has worked a lot better than US banking because of incentives.
Jensen and Murphy (1990) looked at incentives and found that the banning of paying executives in equity gave them an incentive to manipulate share prices than create actual firm value.
.
3 Nov 12 at 2:39 pm
Don’t understand Dot – all executives have an incentive to increase the share price as evidence of their competent stewardship, and continue to hold their jobs. If this means conjuring up profits a la Enron, then so be it. An equity stake is just an extra incentive.
Will
3 Nov 12 at 2:49 pm
The regulation creates incentives for fraud, not increasing sales, products, quality or reducing costs.
Equity stakes allow for that, on the other hand.
The US banking system is riddled with bad incentives.
Take FHA PMI for example
http://en.wikipedia.org/wiki/FHA_insured_loan
or depression era mortgage relief rules
http://en.wikipedia.org/wiki/Nonrecourse_debt
It is only used for residential mortgage loans in the United States,[1][2] although most of Europe enforces mortgage debt forgiveness after eviction.[3]
Whereas in Australia we can get sued on a personal covenant to make up the shortfall of the auction price.
I don’t think it is surprising we have a better banking system than a lot of the OECD.
.
3 Nov 12 at 2:53 pm
Before lauding the local banks, consider what happens if our housing prices fall. A rising tide lifts all boats, and when the tide drives up the value of mortgage securities, it provides windfalls to both borrowers and lenders at the expense of those “outside” the market.
Given how difficult it is to enforce creditor rights these days, it will be interesting when the next serious hit occurs to the housing market; I suspect the “personal covenants” will become practically unenforceable in the face of ASIC’s insistence on alternative dispute resolution mechanisms; ITSA’s anti-creditor stance and the anti-creditor attitudes of the Family Court which sanction the use of divorce as a means of defeating and delaying creditors.
Pyrmonter
3 Nov 12 at 3:47 pm
If LVRs are low enough, it doesn’t matter that much.
ADRs really repudiate the power to exercise a mortgagee sale? The bank owns the house remember. You only get equitable title.
I just hope what you’re saying can’t be right.
.
3 Nov 12 at 3:59 pm
The problem remains that when profits are private and losses are able to be made public – of which there are plenty of examples around the world, there is incentive to take excessive risk. That is nothing to do with class envy or resentment.
Ask the Irish how they feel about their banking system, a decade of private profits, salaries and bonuses replaced with potentially decades of public debt, taxpayer recapitalisations and support. And massive disruption to the non-financial economy to accommodate past excesses.
H B Bear
3 Nov 12 at 4:58 pm
Dot. Well, I hope I’m wrong too – I believe contracts are made to be performed; but we have developed a legal system in which “unconscionable conduct” has been given such a broad, “situation marxist” interpretation that any virtually any dealing with a listed company is liable to challenge, and fetters to enforcement – such as the “duty to get the best price” that make traditional enforcement processes both risky and expensive. When the banks’ lenders wake up to this, they could be in for a shock. As the contingent lender of last resort is the very federal government that has undermined creditors’ rights, this could be interesting.
HB – exactly. Ireland was similarly self-satisfied about the performance of its banks, until suddenly it wasn’t. I don’t think though that the performance related pay is the issue, more the implicit government guarantee.
Pyrmonter
3 Nov 12 at 5:57 pm
Indeed. Which means that a bank who is not a great benefactor is a poor banker and should be avoided like the plague.
Samuel J
3 Nov 12 at 6:59 pm
It cuts both ways. Greece, Italy and Spain public debt markets aren’t being propped up by the EU and ECB for the benefit of their populations, rather for the benefit of the German, French, UK and US banks that are holding all their crappy bonds.
I think it was John Howard who said people never came up to him and complained that the value of their house was going up. While that is true on one level, it is clear that governments and central banks should have taken steps to moderate asset price growth. At the first sign of problems in the equity markets, Inflate ‘Em Al Greenspan would pass around the red cordial and the party would get going for another couple of years until it needed to be done all over again.
From a government point of view democratic government, particularly in Europe, has an inbuilt bias that allows governments to bribe people with their own money through taxes or more often public debt. By the time people (other than crank economists) realise there is a problem it is generally too late.
Additionally, the voting power of the baby boomer demographic cannot be discounted, particularly when it comes to inter-generational fiscal and public spending equity.
H B Bear
3 Nov 12 at 7:01 pm
Yes Steve, the quote you have selected makes a very good case study indeed of the folly of relying on ancient thinking for the modern world. preceded the realisation that ongoing economic growth and increasingly higher living standards are (notwithstanding the odd dip) now the long term norm, and that therefore it is entirely equitable that today’s generation lift its living standards at the expense of future generations, who will inevitably have far higher living standards than today’s folk anyway, even with the debt they inherit.
William Bragg
3 Nov 12 at 8:28 pm
They don’t.
US contingent liabilities and national debt equals all the money in the world. Keynesian thinking.
.
3 Nov 12 at 8:31 pm