At Last! Great Sense on the Current Crisis!

Dr Madsen Pirie, of the Adam Smith Institute (London) reports on an analysis of the current recession, written by Professor David Simpson: The recession – whodunit? (HERE)

A publication the Adam Smith Institute is particularly proud of is The Recession – Causes and Cures by Dr David Simpson. Dr Simpson was Economics professor at Strathclyde, and then economic advisor to Standard Life. His piece is short, eloquent, and utterly convincing. It forms a crucial part of our counter-attack on the facile but common notion that it was greedy bankers who brought about our downfall.

Not so. Dr Simpson methodically traces the bust's causes to the previous credit-fuelled boom instigated by governments and their central bankers. There were indeed bankers who made foolish (rather than greedy) decisions, and who read risks wrongly. But they did so amid a sea of cheap money which governments had flooded onto them. The asset-price bubbles (which are now bursting or deflating as markets correct the errors) resulted from interest rates deliberately kept too low for too long.

The best way to treat a bust is to avoid it altogether by not stoking up the antecedent boom, but given a bust, the treatment should be lower corporate and personal taxes. These should be financed by spending cuts, not by borrowing which signals future tax rises. And the policy-makers who oversaw this crisis should be replaced.

The book is a terrific read, and puts its whole case in fewer than 40 pages. It is both compelling and convincing. Do read it. (HERE)

[Disclosure: I am a Fellow of the Adam Smith Institute]

Great Correspondents in Our Time no. 1

Two interesting letters to the Wall Street Journal (HERE):

“The Moral Hazards of Managing Other People's Money"

“John C. Bogle in "A Crisis of Ethic Proportions" (op-ed, April 21) proposes that we try harder to be more moral, and in that misses the point of Adam Smith. Mr. Bogle cites Adam Smith's statement, "[M]anagers of other people's money [rarely] watch over it with the same anxious vigilance with which . . . [they] watch over their own" which is an indictment of human nature. Smith's position is that man's essential nature is a given, not something which can be altered. It is from this base that the invisible hand is derived. Setting up structures which rely on what man ought to be, compared to what he is, is like building a house on sand.” Adam Freund, Oak Park, Mich.

“Mr. Bogle cites Adam Smith's prescient words about the frailty and the faults of managers who manage other people's money. But this tension between the owners and the overseers of commercial activities goes back much further. Consider these words from John 10:11-13 ". . . the good shepherd giveth his life for the sheep. But he that is an hireling, and not the shepherd, whose own the sheep are not, seeth the wolf coming, and leaveth the sheep, and fleeth: and the wolf catcheth them, and scattereth the sheep. The hireling fleeth, because he is an hireling, and careth not for the sheep." Paul O. Gaddis, Franklin, Tenn.

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What intelligent and informed correspondents write to the Wall Street Journal!
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