The world is in the grip of a banking crisis. It would be easy to blame it all on the bankers, to watch their gloomy desk-clearing with barely concealed Schadenfreude and to look to government and regulators to rebuild a wrecked financial system. But it would be wrong. It may seem an inopportune moment to say that bankers might be the solution, rather than the cause, of the current turbulence. Yet it needs to be said.
The demise of Lehman Brothers is already being written up as the latest drama in an unbroken narrative of capitalism’s demise that links the collapse of Northern Rock, the fall of Bear Sterns, the troubles of Freddie Mac and Fannie Mae. There is no shortage of gravediggers happy to declare the market has failed us. In fact, the opposite is true: it is working.
Henry Paulson, the US Treasury Secretary, in allowing Lehman to go to the wall if a buyer cannot be found, has demanded that the bankers clear up their own mess. The high command of Lehman Brothers took risks with their shareholders’ capital that turned out to be unwarranted. It is now paying the penalty for its arrogant management. Rumours of Lehman’s impending downfall allowed traders to move money into safer havens. Predators will happily take over any assets with residual value. Profitable parts of the business will find a new home and the weaker parts closed down.
This is painful and worrying but the opposite of a disaster. It might be brutal and unforgiving but this is how capitalism works. The market ensures that those who make mistakes are accountable for them. What critics are too hasty to see as capitalism in crisis is, in fact, capitalism in action.
Mr Paulson has taken a gamble on contagion. Until Lehman, it has been conventional to say that no single bank can fail for fear that it would drag down all the others. But banks should not be treated as a bloc. They run very different books, with very different exposures to sub-prime assets. The revealed writedowns are, so far at least, by no means uniform.
None of which is to say that all is for the best in the best of worlds. Gaps in the regulatory apparatus have been exposed, and governments and central banks have been reluctant to burst the credit bubble on which the health of their domestic economies has largely depended. But the most conspicuous difference between the current turmoil and that, for example, that ended in the chronic Depression of the 1930s, has been the intelligence of the policy response.
At times instant action has been required – liquidity is needed in the marketplace at once; a buyer for Bear Stearns is needed over the weekend. After Lehman, the cry of the jeremiahs rings out: something must be done. But regulating for the worst possible outcome, in the middle of the storm, is rarely sensible policymaking. The US markets are still disentangling the effects of the Sarbanes-Oxley Act, passed in haste after the Enron scandal.
The inadvertent lack of activity from an indisposed government has been strangely welcome. There will be calls to consider the role of hedge funds, the dangers posed by short-selling of banks and brokerages, the tripartite regulatory system and the role of the Bank of England as a guardian against inflation but not an enabler of growth. These calls should be heard, heeded but, righ now, not acted upon.
To do nothing is often more difficult than it sounds. But in this case it would be wise. “Capital is money, capital is commodities” said Marx. “By virtue of it being value, it has acquired the occult ability to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs.” The source of the solution will be the same as the problem – rational actors in the marketplace.