The study of economics is wisely divided into two separate parts, one logical and precise, the other certifiably insane. On the one hand, there is economic theory, predicated on assumptions such as equilibrium, constants, all other things being equal and rationality. In its way, it has the beauty of a mathematical science. Applied economics, on the other hand, is chaotic, unreasoning, unpredictable, and unmanageable.
What separates the one from the other is human behaviour. Walter Bagehot, the constitutional historian who was also an economist, warned in a different context of the danger of letting daylight in upon magic. What ruins economic theory is letting humanity in upon logic.
If economic theory had had its way we would not now be in the mess we are in. Homo economicus, the rational, perfectly informed and self-interested creature of the theoreticians, would not have advanced 125% mortgages to anyone, let alone people of modest incomes and dubious credibility. Nor would he have invested billions in securitised assets whose nature he could not possibly understand or define. And only an irresponsible and negligent regulator would sanction a banking system that rewarded container cargoes of bonuses in return for gambling with other people’s money and without any penalties if ever the bets turn sour.
It could only get worse. Now that we are in a mess caused by folly, imperfect understanding and incompetence, it is left to the lord of misrule, homo insanitus, to apply those same three qualities to the task of extricating ourselves. Which explains why trillions of public money is being poured into bottomless pits; the rate of interest is heading towards zero; the Government is planning to print money on a Zimbabwean scale; and a malaise caused by heavy and unsustainable indebtedness is being subjected to a cure comprising still more of the same.
It also explains why Mervyn King, the affable and mild-mannered governor of the Bank of England, finds himself enmeshed in a thicket of metaphors, many of them mixed (as in “mesh” and “thicket”). In normal usage, the metaphor is a handy verbal device that assists understanding. When touched by economics, however, it achieves the opposite effect.
So, in the course of a single day, Mervyn may be seen, metaphorically speaking, putting on his leathers and skid lid, ready to kick-start the economy; standing in the signal box frantically pulling on all the levers as the economy heads for the buffers; seated before his laptop, ready to re-boot the economy; pulling on his blue overalls and seizing his spanner, ready to unplug the blockages in the economy; slipping into his meteorologist’s white coat and puzzling over the phenomenon of markets that are simultaneously freezing up and melting down; applying his stethoscope to assets that are variously toxic, troubled and distressed; and stepping out in his gumboots to look for the first signs of those notorious green shoots of recovery.
Occasionally the metaphor may be more revealing than the speaker intends. Thus, one American observer says, “Hopefully, Mr Paulson’s fiscal moves will provide enough fiscal laxative to unplug the banking sector and get money flowing again.” The reader is left in little doubt as to the nature of the matter in which the economy is deeply mired.
This plethora of metaphors serves only to remind us that we are the hapless and helpless victims of forces that we can neither understand nor control. Mervyn King, along with other central bankers and economic ministers, is powerless to effect a remedy because of ignorance. It is a lack of knowledge and information that has caused global economies to stall, crash, block, freeze or melt, according to one’s metaphorical preference.
The root problem is not the price of credit – which is why a zero interest rate will have little or no effect – but its availability. Banks will not lend to each other, nor to anyone else for that matter, because they simply do not know the extent of each other’s exposure to worthless assets. One feature that homo economicus and homo insanitus have in common is a need for trust, a yearning for confidence. Without trust, money is worthless, and credit, which is just another kind of money, is also worthless.
If we are to remove the blockage and once again free the bowels of the global economy, the banks must be made, under legal duress if necessary, to disclose in private to each other and to central banks, the full extent of the valueless junk buried in their balance sheets. Until and unless that happens, we shall all continue to feel the stomach cramps of constipation by proxy, and slow strangulation by metaphor.