Friday, 6 July 2012

Libor, Economics and the Temptation To Deceive Ourselves

The Housing Minister Grant Shapps has identified this week’s scandal of the fixing of the London inter-bank landing rate (Libor) as one of the possible causes of rising home repossessions. Even though there is a political agenda to Shapps’ comment – based on the unproven suspicion that the Bank of England and the previous Labour Government were complicit in illicit price-fixing, this is a positive sign of increasing awareness of the often ‘unholy’ alliance between the banks and Government. 

Many still have not grasped the degree to which the financial crisis and the housing crisis are bound up with a debt-based banking system which has relied on unsustainable levels of mortgage lending. The public was encouraged to stoke the boom economy by borrowing, dreaming of scaling the property ladder and making money through buy-to-let and increasing property prices. When the inevitable crash occurred, the hapless public was then told to tighten its belts and accept the pain of austerity. Warning voices had predicted the crash was inevitable, but many did not want to know.

Following the CEO of Barclays Bank, Bob Diamond’s resignation, inevitably the Government and banks will blame each other and attempt to shift responsibility. However, some critics are slowly waking up to the uncomfortable truth that economists are not prophets, that economics is not an objective science like chemistry and that blind belief in economic theories has contributed to the disastrous crash and recession of recent years.

Key dogmas of popularly understood capitalism are total delusions. Endless growth, endless increasing in asset value, limitless credit and the belief that, if it all goes wrong, someone else should pick up the bill are pieces of wishful thinking that Governments, banks and some parts of the public adopted like a religion without any evidence. To sustain the fantasy following the inevitable crash, the public, particularly the poorest who did not collude in or benefit from the fantasy, are being penalised.

It is the business of economists to increase our understanding of how complex 21st century economies may be managed, without presenting theories as facts or treating human beings as numbers on a screen. And it is the business of Government to regulate and maintain the rule of law and justice in economics – which it has failed to do time and again in the last decade - and not to politicise economic decisions. There is no reason why either Keynsian public spending or austerity should be right ‘in general’, but the urgent need for the UK Government to make a massive investment in housing is too easily seen as a matter of ideology not economic justice.

Experts and Governments frequently treat people as identical, impersonal units and where this mentality enriches us personally we may be tempted by wishful thinking into going along with it. By contrast, being economically literate and proactive challenges us to ‘treat others as we would wish to be treated’. Perhaps it is time to stop expecting experts and managers to solve our economic problems? Through cooperative association and empowering activities like participatory budgeting it may resolve issues that expert models based on treating people like machines cannot achieve. 

Faith has much to say about how and why we should do this - individually and collectively. The Christian Socialist Movement produced some reflections on personal banking, but every Christian should think this through themselves

In the words of the recent URC report on Hopeful Witness: Our Christian tradition teaches us that we are called to shape the economic system, as we are called to shape every aspect of our lives, as a service to God. Therefore, we evaluate any economic system not simply on the basis of the material goods and services it provides, but especially on the basis of its human consequences: what it is doing to, with and for people, particularly the most vulnerable among us.