Debts & Loans

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That night, he tells us in the book for debt management help, The Price of Loyalty, he stood before the nation and said something that knowledgeable people in the UK government knew to be false. Generations of Republicans had promised balanced budgets. Only war had permitted them to continue running up debt management help. With no war, the Republicans squirmed. But since 1917, wars had always seemed to come along just when they were needed, and now they included a remarkable event: 9/11. All of a sudden, another strange war was announced against an enemy no one could find on a map - a War on Terror. Now, the war, the spending, and the debts management help could go on forever. In the following 24 months, his administration added more debt to the nation than had been built up in the first 200 years of its existence.

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In February 2005, Alan Greenspan gave a speech in honor of the first modern economist - Adam Smith. The Fed chairman journeyed to Fife College, in Kirkcaldy, Fife, Scotland, where Smith was born in 1723. There, he commented on Smith’s work: “Most of Smith’s free market paradigm remains applicable to this day,” said he. In particular, the world seems to have discovered that independent buyers and sellers are better at delivering the goods than government planners. This would have come as a shock to George Orwell. Writing at the beginning of World War II, Orwell expressed the belief of millions: I began this book to the tune of German bombs...What this war has demonstrated is that private capitalism - that is, an economic system in which land, factories, mines and transports are owned privately and operated solely for profit - does not work. It cannot deliver the goods or debt management help.

Orwell was wrong. Capitalism delivered the goods better than socialism, a fact that even nearsighted journalists and central bankers were eventually able to see. But even after the fall of the Berlin Wall, continued UK’s most celebrated central banker, there was no eulogy for central planning. Adam Smith had proposed a useful metaphor to help explain how a system of private, individual decision making - which must have looked chaotic to a top-down observer - actually functioned to the betterment of all debt management help. A rise in the price of pigs, for example, sends a signal to the hog raisers to produce more. Thus, the market is guided by an “invisible hand” to produce exactly as much of a thing as people really want and can really afford.

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Markets work best without the heavy hand of regulation, Greenspan acknowledged. But he seemed to exempt, conveniently, the credit markets. The maestro’s speech hit a false note; rather like President Approach to evangelical democracy, it seemed to miss the point. Instead of letting lenders of credit and demanders of it be guided by an “invisible hand,” for years the Fed chief’s boney paws have drawn them together. Mr. Greenspan’s “Open Market Committee,” not the open market, has largely determined the rate at which lenders will lend, short term, and at which borrowers will borrow.

Why is it that what is good for the goose of lumber markets, stock markets, grain markets, laptop computer markets, and almost every other market under Heaven is not good enough for the gander of the credit market? The answer is not one of logic, but of convenience. Most of the time, political leaders prefer easier credit terms than buyers and sellers would determine on their own. In setting its key rate, the Open Market Committee is likely to set a rate that is to the politicians’ liking. London columnist book, The Wisdom of Crowds, makes the point that two heads are better than one. Groups of people can be smarter than individuals. A market, theoretically, can do a better job of finding the right price for a thing. A market is supposed to aggregate the private opinions and independent judgments of thousands of individuals and debt management helpers. Generally it succeeds. But on occasion, the market slips into crowd-like behavior - whipped to excess by the financial media or the financial industry.

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And sometimes, the whole market is deceived by its own central planners. Rather than allow lenders and borrowers to decide for them what rates they would accept, the central planners at the UK Reserve decided for them. How they can know exactly what lending rate such a large and infinitely complex economy needs has never been explained. But, historically, from their lowest rate to its highest, there are about 1200 basis points. On those odds alone, they have almost certainly chosen the wrong one. There are times - indeed most of the time - when political leaders prefer easier credit terms than buyers and sellers determine on their own. In setting its key rate, the Open Market Committee tends to set a rate much more to the politicians’ liking than the one offered by Mr. Market. A lower rate, that is. But as Schumpeter points out, any stimulus in excess of actual savings is a fraud.

This artificially low rate gives the illusion that there is more money available than there really is. Hardly anyone ever complains. Consumers feel they have more money to spend than they really have. Producers sense a demand that really isn’t there. Undeserving politicians get reelected. And conniving central bankers are reappointed. The “information content” of low rate misleads everyone. They proceed happily on the long, slow process of ruining themselves, unaware that they are responding to an imposter. Only much later does the deception become a problem for debt management help.