It was in 2000 that I first discovered a systematic explanation of boom-bust business cycles, one of which is causing so much misery today: it is the monetary theory of the trade cycle. I had left the RAF to pursue a career in software at the height of the dot-com boom. While I was investing in an MSc in Computer Science at Oxford, the bust came. I wanted an explanation of why so many entrepreneurs and investors had been misled at once.
A friend mentioned the work of the “Austrian School” economists Ludwig von Mises, Friedrich Hayek and others. That school accepts that interest rates are an important price signal about how people value goods in time. A loaf of bread is worth more on the table today than in a year, but by how much? Unfortunately, the financial system is set up to produce massive distortions in the market for credit, whether through direct interest rate manipulation by central banks or by allowing banks to extend credit far in excess of what their assets would support, and with the risks forced onto the public too.
As Mises wrote in Human Action:
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
We are today, in 2012, in a crisis produced above all by a long period of artificial credit expansion, stoked by the central banks and exacerbated by other flawed state interventions, such as bad accounting standards, deposit insurance, limited liability for bank directors and fiat money.
The UK money supply tripled between 1997 and 2010, widening wealth inequality, raising house prices out of the reach of young people and reorienting the economy towards the City, the South East and housing. Arguably, such an inflation will have destroyed real capital too. Sadly, this chronic inflation has been going on for 40 years since the Bretton Woods monetary system broke down.
The bust is now producing unemployment and hopelessness. The measures taken by the central banks and the Government, including ultra-low interest rates, quantitative easing and soon “credit easing” are creating further problems including increased disincentives to saving, atrocious terms on annuities for those about to retire and further distortions to the structure of the economy. And all the while the Bank of England’s QE programme is propping up bond prices to keep long term interest rates low, we risk a bursting of that bond market bubble and a further economic shock.
The key problem creating so much suffering today and setting up egregious problems for the future is systematic state intervention in the financial system. That’s why I joined Toby Baxendale to co-found The Cobden Centre, an educational charity for social progress through honest money, free trade and peace. I also founded Parliament’s All-Party Parliamentary Group on Economics, Money and Banking, which has held a series of events in collaboration with six partner think tanks.
I work hard to change the terms of the debate on money, banking and this crisis and to remove the injustice currently inherent in the operation of the financial system. For example, I have:
- Fought unjust bank bonuses arising from illusory profits manufactured by poor accounting standards. I brought forward a Bill in May 2011, explaining how bankers are able to unjustly award themselves huge bonuses and setting out measures to deal with the problem. The issue is gaining increasing traction with figures including former Chancellor Lord Lawson and the Bank of England’s Andy Haldane criticising accounting standards. You can find more on this subject here.
- Called for increased liability for bank directors and treating bonuses as capital for five years. Those measures would mean bank executives and staff carrying their own commercial risks. I will be bringing forward a related bill on 29 February 2012.
- Spoken on the financial crisis with a range of think tanks, voluntary groups and other organisations across and apart from party affiliation, including for example Positive Money.
- Consistently spoken in Parliament for substantial reform, beginning with my maiden speech.
- Written many articles on economics on this site, for The Cobden Centre and at Conservative Home (previously here).
- Produced supporting material including reading lists, quick guides and presentations on the crisis and what to do about it, including ten plans for reform. I contributed to the IEA’s Ludwig von Mises Primer and the Adam Smith Institute/Cobden Centre paper The law of opposites: Illusory profits in the financial sector written by my Cobden Partners colleague, Gordon Kerr. Please browse this site and The Cobden Centre for more.
A developed society based on the division of labour such as ours needs a good medium of exchange, unit of account and store of value: that is, a good money. It also needs a good system for intermediating that money between savers and entrepreneurs, home buyers and other borrowers.
Unfortunately, as Sir Mervyn King, Governor of the Bank of England, said, “Of all the many ways of organising banking, the worst is the one we have today.” That is what must change if we are to build just and sustainable prosperity for all in our society.