Wednesday, 25 May 2016

A Comment on Ferguson - Pt. 1

After last week's complete outburst in high-quality Great Lectures by Great Speakers (Yeonmi Park, Yanis Varoufakis & Niall Ferguson), and the accompanied boost in readers, I'm going back to more detailed analysis today. All good things must come to an end, but when they do, new cool stuff take their place.

The last few assignments of my last semester in Australia is coming to an end, after which I'll enjoy a much-deserved break before final exams. In procrastination however, I skipped the gym and read the first 50 pages of Ferguson's The Great Degeneration - a perfectly reasonable tradeoff.

There are much to comment on, and I'll restrict myself to a few points. Let's start with excellence and gradually deteriorate from there.

Ferguson does a great and concise job of outlining the major flaws of the 'Deregulation Freaks' as I like to call them (pp. 49-60, essentially chapter 2), that is, those economists in the media and the U.S. Government Inquiry to the GFC, Paul Krugman and half the academic establishment, every leftie with an unjustified hatred towards bankers and markets, that believe Deregulation Caused the Financial Crisis. A more shallow and incorrect account could scarcely be found, and Ferguson points to 6 major reasons for why that is:
  1. The only major piece of deregulation that actually did occur was the repeal of Glass-Steagall, that separated commercial banks from investment banks. But the lead roles of the financial crisis (Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide etc) were strictly one or the other - and so the story must be wrong or at least mistaken.  
  2. Allegedly, productivity grew faster when banks were tightly regulated. Too bad that Krugman & co neatly forgot about the 70's total economic collapse when banks were still tightly regulated - or that the story doesn't hold for the U.K. Oops.
  3. Excessive leveraging and pouring those loans into bonds and mortgage products was largely an effect of BIS Basel accords that classify mortgage borrowing as "low-risk". Regulators, not free market excesses, pushed funds into housing bubbles.
  4. Central Banks, most notably the Fed, playing the 'Greenspan Put', ensured that asset prices wouldn't fall (and lowered interest rates whenever they did), and completely screwed up the capital structure - Governments, not free markets.
  5. Both parties of the U.S. Government were passing legislation to push lending into housing markets. CRA, Fannie & Freddie and directing lending to low-income and minority households. Evil free market doing what its government demands from it. Shame.
  6. Chinese Central Bank intentionally channelled dollars acquired from its fixed exchange rate regime into U.S. Treasury bills, pushing down the yield and making borrowing cheap for the U.S. government. Again, evil free markets at play.
Or as captured in one of Ferguson's lovely and snarky comments:
We also like to blame bankers and financial markets as if their reckless lending were to blame for our reckless borrowing (p. 48).
Cognitive Dissonance #1
Where Ferguson goes hopelessly wrong is his two really awkward cognitive dissonances in the first chapter. The first echoes what I noted in my review of his Opera House lecture: not dealing with McCloskey's critique of institutionalist stories (the effect is too small, and occurred elsewhere prior in history). But the remarkable contradiction occurs when he first explains how the growth we've seen in the West ("The Great Divergence") is accounted for by superior institutions of rule of law and democracy and property rights, after which he shows us how exactly how laughably bad those institutions were:
[...] successful societies - like eighteen-century England - often had institutions that today most people would be inclined to condemn. Already by the time of the Victorians, Hanoverian England looked shockingly corrupt in respect. And even in the 1850s, to Dickens, England's rule of law was still an object of derision, not admiration.
How is it, professor Ferguson, that the very same institutions you claim were laughably bad also account for the greatest enrichment in human history?

Cognitive Dissonance #2
In Ferguson's world, accountability is one of the important features of the institution 'Democracy' that made the West rich. That is, the increase in popular political power from the Glorious Revolution and forward made for improved governance and spurred the industrial revolution (read extended suffrage and parliamentary sovereignty),. Or so the story goes. But Ferguson's main story in The Great Degeneration is a break-down of the "real social contract" described by Edmund Burke (1790) as
the partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.
since today's government ramp up unsustainable debts and gigantic unfunded liabilities of welfare for current generations, that future generations will foot the bill for. That is, current societies, of much larger governmental accountability than the marginal changes in suffrage and parliamentary power during the 17th & 18th & 19th centuries, renege on their social contract by running up debts for the next generation. How is possible then that accountability of government is this panacea that contributed to the greatest enrichment of humanity while the same (and larger) accountability of government is now destroying it?

Finally I want to give Ferguson a hint of where he goes wrong, a concrete example illustrating that institutions are not enough (in academic speak: a necessary but not sufficient condition). The institution of property and rule of law criminalizes theft as much in Britain or Sweden or Australia as it does in Venezuela or Argentina or South Africa. But in the latter countries I would never leave my bag or smartphone or computer unattended like a girl just did at the Sydney café where I'm reading Ferguson's book - or I and thousands of university students at the USYD library do every day. The institution to protect against theft is equally there in both groups of countries, but the virtues and social trust and ideas of an impartial spectator are not.

Virtues matter. Ideas matter. And what people believe about them matter. They are not captured in the institutions of law or democracy. And those institutions are not enough to explain the modern world.

(See the second part of my review here).

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