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If markets don't work, what will?

Robert Peston | 09:24 UK time, Tuesday, 28 July 2009

The following seemingly unconnected events of the past 24 hours all have a big thing in common:

a) the chancellor of the exchequer warning big banks that he fears they may be overcharging companies for credit and withholding vital loans from credit-worthy borrowers;

b) the Commodities Futures Trading Commission in the US raising serious concerns that gyrations in the oil price do not reflect actual or perceived changes in fundamental supply and demand, but are the consequence of financial speculation (see today's Wall Street Journal);

c) the media regulator, Ofcom, pointing out that internet service providers systematically overstate the speed of their broadband services (to which my colleague Rory Cellan-Jones would probably say "duh!", in that he has been banging on about this for months).

Well, these are all examples of public authorities - regulators or elected politicians - claiming that markets aren't working properly.

In other words - if these state authorities are correct - the market clearing price for small business loans, or energy or broadband are not the "right" prices. They are not the prices that would be set if there was healthy competition and if buyers and sellers had relevant information.

Which, in these cases, means that customers are being overcharged. And also that decisions on how and where to invest - how to allocate capital - are probably being taken in an inefficient way, with negative implications for growth and prosperity.

We're going to see a good deal more of the state interfering in markets - largely because we're enduring a painful recession caused by what many would see as the most serious market failure since the late 1920's.

In that more grave case, what happened was that banks and other financial institutions systematically under-priced loans - or, to use the jargon, mis-priced risk - for the reasons I've been boring on about here for a couple of years (defective risk-control systems in banks and regulators, judgements distorted by self interest in firms, finance ministries, and central banks, and so on).

So we seem to be moving away from the Anglo-American political consensus of the past 20 years that the markets are normally right, reversing the Thatcherite/Reaganite movement of rolling back the state and expanding the domain of the private sector (to be pretentious for a moment).

But what we are heading towards?

If markets are routinely wrong, what does that mean for how we organise our economies?

The influential chairman of HSBC, Stephen Green - in his new book, Good Value - defends market-based economies as simply the least bad of the available options.

Trader on floor of New York Stock Exchange

And that may well turn out to be the view of the majority.

But, many would say, it's not a very inspiring view of how we live now.

Does it mean, inevitably, that the role of the regulator, the public inspector, will inevitably become more and more powerful?

What about our attitudes to wealth creators, how will they change?

Right now, it's become almost an article of faith among the current generation of regulators and central bankers that markets almost always overshoot (replacing the previous religious conviction of market perfection).

Behavioural economics, a hybrid of psychology, is in. The efficient market hypothesis is widely viewed as an embarrassing example of primitive fundamentalism.

According to the new ideology, participants in markets who accumulate the biggest personal fortunes are merely those most adept at predicting the irrational behaviour of the herd.

Which probably shouldn't be seen as any more noble or as a more socially useful form of wealth creation than betting on the 3.30 at Kempton Park.

And yet we have a tax system, introduced by this government, that disproportionately rewards capital gains generated in financial markets.

So the differential rates of income tax and capital gains tax probably aren't sustainable.

There is a much more fundamental dilemma for this government and the next one.

Which is that public faith in markets and the private sector is being tested at a time when many would argue that the relative size of the public sector has grown disproportionately.

The public sector is heading towards a size - not far off 50% of our economic output or GDP - we haven't seen since the 1970's.

To state the bloomin' obvious, unless the private sector expands to create jobs and generate tax revenues, we're going to be considerably poorer for years.

But how on earth can that happen if the state has to employ a growing army of officials to prevent the private sector ripping us off?

And if we've fallen out of love with unfettered markets, does that mean the end of privatisation and the abandonment of the attempt to introduce market structures into public services.

Interestingly the Tories have work in progress on this in their fledgling policies for what they call the "post bureaucratic" society.

Broadly, this is about providing households with as much relevant information as possible via the internet to make informed choices about which financial services to buy or which state school to choose.

The theory is that Google-style algorithmic data sorting replaces state-funded watchdogs and nannies.

A worthwhile ambition? Most would probably say so.

But implementation won't be cheap and would take years and years to touch even a slim majority of the population.


  • Comment number 1.

    The real problem is the poor quality of people running the country. Crash and Ali could if they wanted order the nationalised banks to lend more to smaller companies in particular but won't because they are lacking the balls to take the banks on properly.

    Similarly they know nothing about Broadband technologies and aren't bright enough to appreciate how slow Broadband impacts on business.

    Regarding the oil price then I'm afraid this speculation is also a result of Govt weakness. Oil and gas prices should be controlled by Govts not speculators and oil companies should be nationalised.

  • Comment number 2.

    For bank charges, I think we need to ensure balance sheets are ONLY restored through additional investment not through raising charges to customers. Obviously the expense of taking loans will still fluctuate according to supply, demand and risk. But this would ensure bank shareholders take the pain for bank errors and that they insist on better governance and risk control in future. Since banks are using balance sheet restoration as an explanation for the high charges currently being levied that should at least go some way to restoring more practical lending costs. Though it may see the Government increasing our share in banks.

    On broadband I think the answer is fairly simple. This isn't market failure so much as a natural inclination for companies to put their offer in the best light. So they tend to state the speed at the exchange rather than the speed you're likely to get, which will depend upon your location. We just need simple regulation stating that these providers must advertise the median speed actually experienced by their customers. Providers should then be encouraged to provide information on the speed you are likely to get from their service depending on your postcode.

    Oil is another story. The many variables, including the whims of OPEC, will always make that a bit of a klondike. I suspect the answer, for both reasons of financial stability and environmental benefit, is to wean ourselves off oil and look for more locally available and sustainable sources of energy. But I think we all know that!

  • Comment number 3.

    It is a myth that markets have ever been free and fair. Large, rich and powerful concerns have always been able to manipulate the market to protect their income compared with small, but often vital enterprises. Thus, for example, supermarkets have tended to be more profitable than their suppliers.

    There are perhaps no easy answers, but a recognition of the fact that the prevailing market theology is WRONG should pave the way towards a rational debate about how we could organise society to secure the greayest good for the greatest number.

  • Comment number 4.

    We are all just a commodity: labour power.
    This is all we have to sell on the market.
    We sell this to the few who have control over the means of production.
    Both workers and capitalists are then enslaved by the rate of profit.
    This is the 'freedom' of the market.

    Humanity collectively controlling the means of production through direct democracy is the alternative.

  • Comment number 5.

    Surely the people who make money by prediction irrational behaviour also help to correct the mispricing caused by that behaviour?

  • Comment number 6.

    ' Stephen Green - in his new book, Good Value - defends market-based economies as simply the least bad of the available options.'

    Well he would wouldn't he. Within the limited sphere he operates in he is probably right but as I have said before 'you can't fix a mess using the same brains that made it' (Einstein) but we don't seem to be able to learn that lesson. I notice today that the person in charge one financial wreck - Citibank/Group/Corp is now going to be in charge of Lloyds Banking Group.

    On another matter 'we've fallen out of love with unfettered markets' is because actually there is no such thing, if there was they might work but because so may factors are left out of the equations and and may fetters exist (import tariffs, lack of product knowledge by the buyer to name but 2) markets are far from unfettered. Otherwise our friends in banking and other financial institutions couldn't 'make any money'. Actually of course they don't, they create it out of thin air and pump it round the system shaving a bit off every time it passes them. We really do need a complete rethink but while everybody of the receiving end has a vested interest in business as usual it probably isn't likely we will get one.

    Providing those on the losing end with more information about how the smoke and mirrors results in their loss may help even up the odds.

  • Comment number 7.

    It's not that markets don't work, it's because regulation has failed that we're in this mess.

    Just make the transgressors in the system pay for their transgressions and the "psychology" would be fine!

  • Comment number 8.

    Just noticed that the "market" doesnt work ?

    This was so, so obvious during the commodity boom. Unfortunately this situation has been going on for quite a while now.

    How to solve the problem ?

    1) Fines and jail sentences - specifically those in charge of the banks over the last 5 years should be puti n jail for 15 years minimum.
    2) If someone buys a commodity they should be forced to recieve it before they can sell it on. This includes all spread and short selling.
    3) Political will to put the public interest first.
    4) News papers actually reporting on the news and some REAL investigative journalism.

    But I have no delusions that this will happen,,, pigs will fly first.

  • Comment number 9.

    "We're going to see a good deal more of the state interfering in markets - largely because we're enduring a painful recession caused by what many would see as the most serious market failure since the late 1920's."

    The current Depression was caused by Government interference with the markets, specifically the FEDs inflationary policy of artificial low interest rates. The Depression of the last century was similarly caused by by government interference with the market. This is certainly the view of the Suatrian School of Economics which is spectacularly successful at spotting Depressions in advance.

    "According to the new ideology, participants in markets who accumulate the biggest personal fortunes are merely those most adept at predicting the irrational behaviour of the herd."

    These are called Entrepreneurs and their existence is one of the fundamental planks of the Austrian School. So rather than anything new this idea is pretty close to being a 100 years old!

    Being wrong wont stop this, nor any other government, from using it as an excuse for more interference and regulation. Governments wont let a crisis go to waste.

  • Comment number 10.

    Since many of the consumer rip-off are in markets that already have "regulators" (FSA, Ofcom, Owat, etc) more regulators is clearly not the solution. Where regulators try to insert themselves into the pricing mechanism they may well be a big part of the problem. Most of the pricing mis-matches are structural or informational. Either there are too few alternative suppliers, as is now becoming apparent following the recent bank mergers, or that the effort and cost of swapping between suppliers is too high, or that consumers don't get easy access to enough relevant information to make informed decisions.

    If regulators want to do a useful job their role should be to break up any supplier that has a dominant market position and is abusing it through pricing or restrictive terms of supply, and to making sure that consumers are supplied with timely and relevant information to compare alternative suppliers, and to report to the competition authorities those companies that seem to be abusing their consumers.

    Almost all of these powers already exist through EU and national competition law. All consumers need are some regulators that have not sucumbed to the Stockholm Syndrome, and have the guts to take real action.

    If you want to test whether it will work lets start with UK retail banking and float off the UK retail banking business of Lloyds and RBS into at least four independent operations and see if increasing the choice from five to seven major banks improves consumer choice and prices. If that is not enough take a bigger axe and chop them all in half again.

  • Comment number 11.

    A mouth watering blog - discovering the distinction of free markets and free enterprise. In essence large corporations ruthlessly manipulate consumer perception of both price and value through a broad range of marketing, packaging and advertising. There is no single way this can be 'corrected' so governments will have to intervene to prevent/outlaw extreme cases. Public ownership and control of natural monopolies is valid but strengthening consumer protection and related laws including an array of penalties that have a real impact is also necessary. I hope no one thinks the Reagan/Thatcher/Blair cringing faith in free markets actually paralleled a period when they worked. The shear magnitude of the recession shows that they have never worked other than to make a small minority physically wealthy as never been seen before. See you at the barricades, Robert, - can we share a taxi!

  • Comment number 12.

    Yet last week a utilities regulator ruled a cut in bills of £14 average (4%)by the suppliers of water and sewage services. Could this be an example of how monopoly utilities can be forced to respond to the views of the consumers?

    Would be interesting to hear from Robert Peston about what led to OFWAT bucking the trend.

  • Comment number 13.

    A lot in this blog and a little confused....

    Mmmmmmmm......Taking your three main points.

    (a) The banking industry has never operated as a free market. It has regulation. It has been charged previously as operating as a 'complex monopoly' to the detriment of consumers and less so businesses.
    Now with governmnet intervention we have even worse - an oligopoly which accentuates this overpricing. It's an unfortunate by-product of 'saving' them.

    (b) commodity futures markets are as you pint out basically betting markets and always have been. Whether there is fraudulent trading going on is another matter and even if it was heavily regulated would not necessarily stop it

    (c) The telecomms market is regulated and in every sense of the word has been a monopoly until very recently, with BT the ex-public sector monopoly (i.e. don't forget the pension cost driving prices up). And if there was proper recourse you could claim discounts for standard of service received.

    However the 'free market is dead' argument based on the above comment looks a bit weak..........

  • Comment number 14.

    Nice work Robert - tee up another swipe at markets for the Marxists to belt into the stands. BBC - being better communists.

    We have had market manipulation, that is why they have been seen to fail - like entering the Olymipic 400m with two broken legs. Central banks with a base rate is market manipulation. Governement support for some industries or companies is market manipulation. Government covering loans is market manipulation.

    Government regulation does not work - look at the FSA - clearing clearly bankrupt enterprises as sound so that individuals invest in and lose money. This is fraud. What we need are better fraud laws. Peer regulation works much better - for example look at eBay with its selling rating driven by peers.

    Government run capitalism is fascism. Perhaps this is secretly what you yearn for?

  • Comment number 15.

    IF we want faster broadband the solution is simple, give BT a tax break on the understanding that they run fiber to the grean boxes.

    The simplest TAX break would be to give BT the 15% VAT to fund the investment. And a massive insentive such that IF they fail to upgrade all green boxes within 5 years then the must repay the TAX break in FULL!

    80% of green boxes are within 2km of houses and a lot are closer. Which would give adsl speeds around 20-32mb. BT could be forced to make 100% lines within 2k of a green box to give universal faster service.

    Also most ADSL users shair the 8mb bandwith with 50 other users. IE home ADSL has 1:50 contention which as more and more people are starting to discover and is why during bussy times your conection speed drops. The regulator should be attempting to force ISP's to lower the contention rate to say 1:10 in 5 years time.

    ADSL or ADSL/2 from the green box. Force BT to rent this to ISP's at a fixed but cost covering rate as 3rd parties will not be able to put their own equipment in the green boxes due the space requirements.

    BUT all this goverment wants to do is charge us £1 a month for each line and hope and pray that we will get faster broad band.

  • Comment number 16.

    #7 Spot on.

    Any propoperly working economy is a market based system with government intervention.

    Its just a question of getting the intervention right.

    Taking away peoples' market incentives completely has been a disaster in every economy it has been tried.

    But even a weakly regulated system is also a disaster.

    These are obvious statements maybe but talk of ripping down the entire capitalist system or reducing the role of government as much as possible should both be seen as equally barmy solutions.

  • Comment number 17.

    #8 JackMaxDaniels wrote:

    'But I have no delusions that this will happen,,, pigs will fly first.'



  • Comment number 18.

    The financial system in the UK and many other businesses seemingly operate according to the following business plan: let's maximise profits using any means we can get away with, no matter the consequences for ripped-off customers or society at large.
    There are few values, few principles, but greed in abundance dominates the contemporary business world. Basically the UK has become an overpriced paradise for get-rich-fast schemes (where only those at the top of the pyramid profit) and for often undereducated media pundits, stars and starlets entertaining the masses. Tinkering around the edges won't change this sad state of affairs. Serious, highly educated and courageous politicians and real 'corporate responsibility' are needed, not just applying cosmetics to a fundamentally flawed and outdated way of running an economy. Enforcing effective regulation and transparency are a must. However, without a public sphere where high values, independent thinking and ethical standards are clearly shaping public life it is difficult to see how governments can assist in transforming the business world. Hopefully the coming 2010 election will provide a forum for a serious discussion of what needs to be changed for the better in the UK society, beyond simplistic party political slogans.

    For more analysis of what went wrong with the markets:

  • Comment number 19.

    "the chancellor of the exchequer warning big banks that he fears they may be overcharging companies for credit and withholding vital loans from credit-worthy borrowers"

    Just how lilly livered can we get?

    Surely he only needs to call in the chief executives of the nationalised banks and explain to them in words of one syllable that the taxpayer owns their arses. He can then ask whether any of them wants to be in a job next week. That should serve to sharpen their focus on the national interest.

    Once the nationalised banks have lowered their cost of credit and started lending sensibly again the others would have no choice but to follow suit.

  • Comment number 20.

    Look, mate: markets work best when there are plentiful suppliers and no supplier has market power associated with dominant market share. When three or four players remain, collusion on price-fixing always occurs. In any industry. With shareholders' tacit collusion.

    The thing always oscillates, sometimes benefitting the customer too much, sometime the suppliers too much. At each maximum amplitude from equilibrium, either suppliers or consumers fall out of the market and the rules change.

    Banking in this country has been a cartel for years. You know it, I know it, the bankers know it. Was that terrible? Not necessarily for all. For bankers it wasn't. For shareholders it wasn't. For the Exchequer it wasn't. For small businesses, it was. So UK plc was characterised by a lack of a Mittelstand, retaining huge corporations and microbusinesses, with an undersupply of real SMEs and Mid-Cap companies as compared to our major competitors.

    Problem with that is that engineering capability, manufacturing capability and product design capability slowly eroded. Is that bad? Yes, for those whose skills are in those arenas. Yes for communities begetting high unemployment as a result. Yes for politicians needing to regenerate those communities. Did the bankers mind? Not too much.

    Pricing risk is always an art form not a science. Too many imponderables to be exact. And always when a dislocation occurs in the market, the opportunity for winners and losers emerges. So Goldmans cleaned up recently when their opponents went tits up. Did Goldman do TARP as a bung to repeal Glass-Steagall? You tell me.

    Where I think we are at is a fundamental branchpoint in UK plc.

    The key question is: 'will a dominant banking sector continue to generate sufficient GDP to support the resulting under-nourished industrial base or will a model closer to the post-war German relationship banking model be more appropriate going forward?'

    There are of course shades of grey in between those two extremes and what bankers, politicians, industrialists and pension fund managers alike need to discern is what, broadly, is the best way forward.

    With the understanding that if there is no agreement, then I guess they will need to let global markets decide for them..........

  • Comment number 21.

    Markets don't work because they are always rigged in the interest of the players and against the customers. Look at privatised utilities. In the last 8 years unit prices for gas and electricity, for example, have risen by more than 200% while provider profits have gone through the roof. All the time the cartels have pleaded poverty. Don't take any notice of the price comparison sites, they are rigged too. Just do some sums with your actual meter readings for the main suppliers. You will find costs to the consumers are virtually identical, hence there is obviously a cartel at work. These all need to be put back into public ownership without compensation, the shareholders have had their glory days, it's time for the poor old customers to come first.

  • Comment number 22.

    This is just more evidence that the people running this country just don't know what is going on. All these 'new' revelations are only new if you happen to be an ostrich, and have spent the last year or so staring where the sun don't shine!

    Time to get rid of them all (to a man) and get a system that is aware of what is happening in this country, and sensitive to the continual change. The politicians would say the current system does that but this and all other evidence shows this is not the case.

  • Comment number 23.

    Banking can't be classed as private sector any longer, its been nationalised in all but name.
    Utilities - Oil, Water, Gas should not be in private ownership.
    Other markets should be left alone.
    The problem is... the vast expanding beauracratic army of public sector officials with blue sky thinking time to waste, armed with clipboards of red tape and health and safety waffle are strangling private sector businesses.
    Its the hard working innovative private sector who have to feed the bloodsucking non productive public sector.
    In the last 12 months
    Private Sector Prices - Down ... goods, food, furniture, holidays and my rural broadband, BT cheaper, faster + a free printer for loyalty.
    Public Sector Prices - Up ... council taxes, passports, land registration fees, planning fees.
    Its the public sector that requires urgent neutering, so that the private sector can operate unfettered in a Free Market which in turn allows humans genes to do what they do best... compete

  • Comment number 24.

    The markets seem to operate OK to me - went down to my local one last Saturday and picked up some lovely veg and a couple of cheap T-shirts as well as an "Armani' belt - can't see what the fuss is to be honest...

  • Comment number 25.

    This article isn't a bad summary of the last twenty years of economic theory. The fascinating thing is that it completely turns the old "government versus market", left-right debate on its head.

    The paradox is that these problems are intrinsic to unregulated markets - and thus, new regulations can in fact make markets more free!

  • Comment number 26.

    And any sane person's reaction to all three of your points you give as examples, Robert, would be 'No, really? Tell us something we don't know'.

    The prevailing view that the markets are always right is correct - in theory. But we don't live in a theoretical world, we live in a practical one. The three examples could all be put right quite easily though:

    A) establish a band relating to the government base rate within which all consumer lending must be listed.

    B) Ban anyone who is not a producer or an end user from trading in oil (prevent large investment banks from buying tankerloads of crude when the price is low and parking them in the gulf of Mexico until the price goes up - and they claim at the same time that the oil rise has nothing to do with speculation).

    C) All broadband companies must submit to a random sampling of 1,000 homes per year to provide an average speed which must be listed on their advertising.

    Of course my arguments are simplistic and full of holes, and I fully expect them to get shot down in flames, certainly the first two, but the broadband one wouldn't be too difficult to put into practice would it - except that it might upset our glorious leaders promise to have everyone up to 2Mbs...

  • Comment number 27.

    Markets DO work.
    Uncontrolled markets DO NOT work.
    Margaret Thatcher, Ronald Reagan, Gordon Brown and George Bush must surely see the folly of it all now.
    ONE SIMPLE REGULATION would have stopped the financial disaster in its' tracks....none of it would ever have happened.
    That regulation is.....No bank may lend more than 4 times single proven income or more than 3 times joint proven income, or more than 90% of valuation on any mortgage. No exceptions.
    Sub-prime would never have happened.
    Dangerously over-priced and over-heated property markets would never happen.
    Similar strict regulations about remortgaging, second properties and buy-to-let speculation would also have stopped the wreck.
    Businesses didn't cause all the destruction....houses did.
    This is an excellent article by Robert Peston about the viability of "free-for-all markets" in the future.
    Uncontrolled markets operate like an enormous dam (without control-gates).
    The only way it is contolled is by over-flowing, and the population all live downstream.
    When it's dry behind the dam, we all die of thirst, and when it overflows, we all drown.
    Regulations are the answer.....i.e. sluice gates.
    There are political alternatives to uncontrolled markets....i.e. Russia 1917 and Germany in the 30s.
    Those who believe that this sort of thing cannot return are sadly deluded....poverty stricken people will not vote for cosy old Tory, Labour or Liberal. Their votes may be for far more radical parties.

  • Comment number 28.

    Good post, Robert, and you are really describing the (only) two possible fundamental approaches to 'regulation' in a western economy.

    The black box approach - which could be summarised as "we regulators are extremely intelligent people, so leave it to us to take a look inside this company/fund/bank/black box and we will determine if we think they are behaving OK. Then, you people, just don't worry your pretty little heads about it......"

    .... or the open book approach - which is "we regulators are extremely intelligent people but we do not have a monopoly on perfect judgement, acuity, objectivity etc. (Quite often in fact we just miss things and make mistakes etc, and furthermore some of our staff have very good friends and colleagues in these institutions they are checking out and as you know it's difficult to tell a friend he or she can't do something. Sometimes in fact our staff are looking for jobs at these very same institutions, and of course that's a bit awkward as well). Therefore we are not going to make all the judgements ourselves, but force these companies to tell us, in fact tell everyone..... a huge amount more about what they are doing. We are going to get them to open up their books so that absolutely anyone who is interested, who has some sort of relationship with the company (supplier/customer/investor/employee) can take a view on what they are doing, or hire an independent third party who has the time to do some good analysis and take a view".

    The concept of limited liability for a company was introduced in the 19th century (following so many railway companies going bust) in order to keep sources of private investment open, but in exchange for this benefit the requirement to put certain information (a balance sheet, a profit and loss account, details of directors etc) into the public domain was demanded.

    This was a reasonable bargain and indeed a very far sighted measure to take, and has surely increased 'efficient allocation of capital' in a massive way.

    We now need to go further in this direction, as it is the only route to follow.

    Indeed the Tories initiative you mention does take this line and that is why it is interesting...... don't try to regulate more and more "black boxes" (with a larger and larger state), just force people to declare more information and then let the market (the private sector) do it's job and make it's judgement.

    This will in the long term lead to not just a more productive and efficient economy, but a fairer one.

    So that's why we now need new legislation to force all financial institutions of any sort (defined as people who deal in only money in some form i.e. including ordinary banks, insurance companies, betting shops, casino banks, building societies, investment trusts, private equity funds, etc etc) to start opening up their books to greater inspection by the market.

  • Comment number 29.

    At this moment I am doing what I expect many other wrinkleys are doing, I am trying to lend my savings to a bank at best possible rates of interest. If I am willing to buy a 5 year fixed rate bond I might manage to get 5%. ("But what about inflation?" I hear you say.) If I settle for 5%, how can small business expect banks to lend to them at less? Isn't this what market forces are all about?

  • Comment number 30.

    Hmmm, I'm not sure I agree with this assertion that we need more regulation. The problem over the last few years was not that we didn't have regulation; its that the regulator (the FSA) failed in its duties. Now the FSA may argue that they didn't have enough resource to manage everything but on a macro level they just didn't see this coming, so they failed and must be fixed before they are expanded.

    As for the markets, I'm glad the realisation has hit that they are not rational, anyone who has been through a stock market crash (previously branded 'correction') knows this to be true. Irrational behaviour inflates the bubble and the market finally over-reacts to fix the problem. At least now that everyone accepts this we can start finding was to fix that problem. I like the Tories idea of the information availability but it's not enough, people need to be able to understand the information and for that we will need more education.

  • Comment number 31.


    How can we ask the free market to operate correctly when the banks don't have to follow free market accounting rules(Mark to Market). This is what is causing the perverse market conditions and is causing the real economy to detach from the la la land economy. I believe that Geitner, Bernanke, Bush and OBAMA are all complicit in this fraud.

  • Comment number 32.

    Ahh the "fun" of the perfect market hypothesis.

    When their is a profit incentive to manipulate markets, when localised monopolies are common and prosecutions for cartel type operation and insider trading are so rare what do you really expect big business to behave in ways that benefit the consumer?

    Indeed, excessive regulation of the wrong kind often supports such practices by creating additional barriers to entry and preventing outside competition to the status quo.

    Does anyone seriously believe that investment houses and pension fund managers don't get additional privileged information from "social" events with company directors?
    Does anyone believe that "trade associations" don't just look out for their members and look to get them to work together in ways that to many could seem very "cartel-like"?

    Markets aren't rational, they're driven primarily by confidence, and with people being panicky / opportunistic herd animals. People get carried away, hence we get boom and bust.
    If you can manipulate opinion and therefore influence confidence you can "beat the market". Its why market makers tend to come out ahead - they move first and others follow, allowing them to get the best prices.
    Its why there's so much effort being put in to find "green shoots of recovery" especially by those with a direct vested interest in profiting from increased confidence (e.g. CML, RCS). Just the kind of spin such organisations and the Govt. backed by the "look easy money" property shows used to get us into this mess.. and will no doubt use again.

  • Comment number 33.

    "Broadly, this is about providing households with as much relevant information as possible via the internet to make informed choices about which financial services to buy or which state school to choose.

    The theory is that Google-style algorithmic data sorting replaces state-funded watchdogs and nannies."

    So one can be informed and make a decision. What if the decision is wrong though due to either lack of time-sensitive information or just a mistake being made. Who does one turn to for help? Does one just post a comment on a webpage decrying the bad choice and live with it?

    This is already the case with broadband. Many webpages exist reviewing, comparing, criticising and complimenting the various possibilities. However, it is guranteed that
    a) for every compliment there is a criticism
    b) for every criticism there is a compliment

    leaving the consumer none the wiser. Even when one chooses the best possible option according to the reviews (which may have been biased by the companies concerned of course), it could still be a useless service for that particular area.

    Without OFCOM to beat the ISP over the head, what else is there?

    An informed masses cannot replace an empowered regulator


  • Comment number 34.

    Was oing to write a long explanation to this but thought that I could summarise it as;

    The Tories allow the private sector to grow and retain the majority of what they make.

    The communists treat the private sector like a cash cow to be raped at every opportunity for the much needed cash to grow their ever more complex government.

    Make no mistake it is Labourt that have broken the markets and bankrupted this country through stealth tax and manipulation.

    Shame on you, shame on you, shame on you!

  • Comment number 35.

    Government rhetoric vs economic reality


    GBP6million is a joke!

  • Comment number 36.

    The CFTC seems to find evidence that oil-price formation is unreliable - just as here at home the FSA apparently concludes the opposite.

    Obviously we await both reports with bated breath: but based on track-record I'm inclined to listen very carefully to the CFTC.

  • Comment number 37.


    At last someone has had the round things to say what needed saying.

    This line sums it up:
    "The influential chairman of HSBC, Stephen Green - in his new book, Good Value - defends market-based economies as simply the least bad of the available options."


    So maybe we should put up with our failed political system because it's the LEAST BAD option on the table.

    This is the split for human beings - those who are prepared to put up with 'second best' and those of us who want to find a better way.

    I bet Mr Green doesn't put up with a 'second best house' or a 'second best car'.

    The cat is out of the bag - you are all in a system which is only there because nobody can be bothered to think of another way or they are too ignorant to realise that previous systems can be resurrected and modified.

    Markets are for LAZY people and LAZY governments. This is why the government is always looking to pass public sector to the private sector - because then it supposedly manages itself.


    The quick brown FOX jumps over the lazy DOG

    The idea that we can create a 'super-duper' regulator to manage the markets is an ongoing joke for me. Costly and pointless are it's too main features. Only a fool continues to think that any sort of regulation wil control the beast that is the market.

    The examples Robert gave about markets not working is limited - I have hundreds of examples of the markets failing, and in all sorts of ways.

    The issue for me is not proving the system is ALWAYS going to fail - but what the alternative needs to be.

    It MUST include fixed price mechanisms to ensure that the lottery of life doesn't leave those with need without - and those without need in abundance.

    I have actually been speaking to ex-Soviet Bloc residents and it's very interesting to hear that whilst they complained about the political aims of the Soviet Union, the Economic aims had big advantages. For instance - the price of bread and milk were fixed and therefore always cheap. That meant that people didn't starve because the price of bread was subject to the instabilities of the markets.

  • Comment number 38.

    A real free market requires two things that are conspicuously absent from the current situation.

    1. Enlightened self interest of informed consumers
    It turns out people think short term and enlightened self interest is a rare thing. Couple that with continued, deliberate confusion and misinformation from commercial interests, collusion and cartel behaviour, and you have lost the free aspect of the market.

    2. Businesses that fail should be allowed to fail. Propping up the banks distorted the free market further.

    Of course, in a 'true' free market, investors would have steered clear of the banks indulging in risky behaviour, because the true risk would have been known, open to public scrutiny and understood by everyone. Then when these banks failed there would have been a loss only by those people that knew and accepted the risks.

    Instead, few people understood what was happening and the economies of entire countries were put at risk.

    I don't believe a 'true' free market is possible when humans are involved. Some will always seek to deceive. Many will consistently underestimate risk. Most (myself included) don't have a clue what's really going on in investment banks and hedge funds. So effective regulation will always be a necessity.

    Perhaps the government could focus on that instead of removing our civil liberties.

  • Comment number 39.

    with regards to having market-based system in the public sector, a lot of those fail due to how the public sector works and the fact many people who are making decisions (from ministers, downwards) simply aren't qualified.

    Would you trust an ex-postman with a handful of GCSE's to effectively run your local hospital? No? Then why was Alan Johnson considered qualified to have the entire health portfolio? The root cause of so many of the excess costs and errors (the NHS IT system for example) is that you have unqualified people listening to Whitehall mandarins and salesmen from businesses wanting a slice of taxpayers money, and so making bad decisions based on biased advice.

    Fix that, and you'll see a marked improvement and better value for money within a few years.

    As for the market not working, well we don't have unfettered markets for starters (the banks have been given conflicting orders from government - hold on to more money and hand more out... They can only do one of those), and no human-run system is 100% efficient and protected from irrational behaviour.

    Also, just because a system doesn't have always have a positive outcome doesn't mean it's broken. It just means you have to prepare for negative outcomes as and when they occur(say, a bust), not stick your head in the hand and expect the goose to keep laying golden eggs ad infinitum (like a never-ending boom. Mr Brown.)

  • Comment number 40. all those who claim that the reason the markets failed was because Governments 'keep interefering'. Well how would you sort this one out?

    The shareholders who are complaining about not receiving a 'fair valuation' from the Government after the collapse of NR would have got NOTHING if the bank had failed - as free market principles dictate.

    Are you all saying these people should have got nothing? What about RAB capital? they might be running a fund that YOUR pension pot holds - or that YOUR Stocks and shares ISA holds.

    ....but I suppose if you're not affected then it's 'I'm alright Jack' time....

    Still, what goes around comes around.


  • Comment number 41.

    The markets are like a game of poker. If you have a bit of skill and money you can make more money, but doesn't mean that those skills are useful. Like poker, some people can bet far beyond their means and the impact of their losses are felt elsewhere. While the regulators can try and control the game, their main intelligence is out of date and consists of looking at who messed up in the last game. The winners win, the losers get burnt but without meeting their full losses, while everyone else picks up the costs.
    While intelligent investment does pay an important role, it is the final products of this investment that is important. Investment for nothing more than a short term gain with no regard for a long term return is a waste of time.

  • Comment number 42.

    The Pulic Sector can become more productive and is becoming more productive, all of its costs are spent on in employment and business. There is room for a reallocation of some of its resources being spent in a different way but I cannot see any room for much in the way of cuts, to do so would hinder our economic recovery by the way of hindering the re-distibution of tax revenues. A new conservative government would set out to cut public spending by introducing the concept of it can all be done better and in a less wasteful way by the private sector, well, they sold us that idea before and it was a total waste. Perhaps it is time for many busnismen to create and do the business instead of acting like a flea on a dogs back looking for a free lunch. The public sector re distibutes taxes collected, it is up to private business outlooks to attract the capital being pumped back into the system by being more enterprising and industrious. Red tape in the way of regulation is coming back into fashion for a while, it has to. The private sector will re invent itself and expand, it is in its nature to do so, there is a new ball game in town, a new industry that even the banks are warming up to.

    I would like to see some of the public sectors pot being put into drug research, with a view to cutting NHS drug bill and providing inexpensive essential drugs to combat world epidemics, putting the Great back into Britain.

  • Comment number 43.

    27. At 11:38am on 28 Jul 2009, stevewo wrote:

    "That regulation is.....No bank may lend more than 4 times single proven income or more than 3 times joint proven income, or more than 90% of valuation on any mortgage. No exceptions."

    ...but steve, we've been down this road before haven't we?

    It takes 5 minutes for a young banker to come up with a way around this regulation.
    How about adding the income of people who do not actually live there (i.e. parents who have paid of their mortgages), splitting mortgages down, taking unsecured loans to 'top up' - or even secured ones for that matter (which aren't legally part of the main mortgage)
    How about Buy-to-let mortgages - the income is always a 'best guess' when the application is done.
    What about people who apply - but then loose their job or have to take a pay cut? It doesn't matter what the multiplier is then - they will default.
    What do you do when the Government wants to increase spending - the banks say they can provide the extra tax-receipts if 'we're allowed to lend a bit more and make more profit'?

    I agree that lending got out of control - but then it did in the 80's too. Here we are 30 years later and the bankers found another way around it.

    If the bubble isn't created in property then it will simply go eslewhere. The issue is the competitive nature of markets ensuring we all think that we're loaded and we make some bizarre spending decisions. This coupled with the media's sole goal being to promote the live of 'money fame and fortune' - those who cannot earn - borrow.

    The commercial banks will do whatever they can to steal a march on their competitiors - the only institution that could control this is a non-profit one - i.e. the Government.

  • Comment number 44.

    I agree with all above,the market is the market,left to its on devices we would have no competition,just one company running everything.Its the government job to ensure competition exists, using regulations if required.If we have issues with poor competition or companies mis-selling services its down to poor government.You are right there is lots of examples confirming we have a very poor regulation system, despite having a very high tax payments.
    However I disagree that above means more regulation.We need more deterrents to ensure companies do the right thing.This has been bouncing round the courts for years,I suggest this is a prime example where banks could of faced a heavy fine (Say 10% of all successful claims)if proved that they have been profiteering.The effectiveness of the regulations is not determined by the size of the regulator.The FSA is a prime example of a ineffective regulator,despite having massive resource and high paid staff.

  • Comment number 45.


    Zimbabwe has a version of the fixed price system you allude to. Shops now don't sell bread because to do so would involve selling at a loss

  • Comment number 46.

    34. At 12:32pm on 28 Jul 2009, icantmakeupnames wrote:

    The Tories allow the private sector to grow and retain the majority of what they make.
    -- True, but with the mis-guided belief that the private sector will re-distribute that wealth fairly. Something which it clearly doesn't do as it soon falls into self interest.

    The communists treat the private sector like a cash cow to be raped at every opportunity for the much needed cash to grow their ever more complex government.
    -- Not really communist theory, the eventual goal of Communism is a stateless society once the state 'withers away'. The increase in Government is usually as a result of having to battle the private sector who is keen to retain it's wealth in the short term as well as the ruling classes (who loose out massively). The fact tha individuals (like Stalin) then used this short term interim Government to control the people is where the confusion lies. Don't confuse theory with history - they are not one and the same.

    Make no mistake it is Labourt that have broken the markets and bankrupted this country through stealth tax and manipulation.

    --The markets failed on their own - or was Labour at fault for the other recessions in our lifetime? Labour have assisted in the continuation of a failing system - but they were not the architects and you can add all major parties into this area - red, blue of yellow. Using the phrase 'stealth tax' and 'manipulation' are simply spin words effected by our Governments which you seem to be happy to use (even though they have no meaning here)

    Shame on you, shame on you, shame on you!
    --Shame on you for not getting your facts right before looking for the nearest scapegoat!

  • Comment number 47.

    38. Gothnet

    An excellent summary.

    In a utopian world where all information is freely available and we can all understand that information is one where the free market will work without failure. The point about the banks is totally accurate - nobody would have invested in NR if the knew and understood what was happening.

    The reason this system persists is because those who manipulate and deceive in the markets make money from the rest of us. They are forever increasing their control by taking up more and more of our Economies, thereby giving them more opportunity to decieve and make even more.

    Everyone should read the summary in 38 and understand why the free market will never ever work - and any tainted version of this will be even more unfair (as the current system is today) - stuck between the manipulation of Government (through regulation and law) and the wealth holders (corporations, high wealth individuals etc.)

  • Comment number 48.

    "35. At 12:35pm on 28 Jul 2009, BankSlickerminustheR wrote:
    Government rhetoric vs economic reality


    GBP6million is a joke!35. At 12:35pm on 28 Jul 2009, BankSlickerminustheR wrote:
    Government rhetoric vs economic reality


    GBP6million is a joke!"

    This is the same Gordan who has removed all grants for persional wind / solar generation (ok there are some grants but are now so low as to be pointless and in terms of Wind are now only for 1kw generators that on average installations generate enough for a single light bulb).

    This is the same Gordan that passed the cost of the instulation grants to the power companies. BTW Having tried to use the grants system in kent for my grandparents, 4 companies quoted ALL doubled their quote when asked to quote for a grant funded instulation.

    This is the same Gordan let a major empty north sea gas field to be capped off after drag his feet for 7 years on test sites for carbon capture. Then 6 months after it was capped anounces that the UK will lead the world in carbon capture my forcing new power stations to be carbon capture ready (IE that they have an undeveloped site next to the power station to place the equipment)

    But as we all know there is goverment policy and there is what Grodan claims!

  • Comment number 49.

    Markets will work best when Governments stop interference. Let's look at mortgages and loans. Banks and other financial institutions were strong-armed into 'social inclusion' ideology ie lend to those you would not normally do for they are classed, by the banks, as a high risk. Then when it all goes wrong and the banks are forced to increase their capital ratios, they are again wrong. Maybe if they had not been forced into these ideological moves, the crisis, which started with sub-prime don't forget, would not have occurred?
    And don't forget that as more well meaning but clueless rules come out, the private sector is going to have to raise costs to cover the extra people needed to work on compliance.
    Regarding writingsonthewall comment at 12:59, the chances are that a larger entity would have bought NR which would have given the shareholders some value. Remember as well, that the main problem of NR was bad reporting from a certain journalist that spooked people into believing their money was doomed. The Government jumped in early, in what many consider an ill-considered way - but then they did not like having pictures of the elderly queuing and they had Labour heartlands to protect. As has been said many times before - if it was called Southern Rock, HQ say in Ascot, do you think they would have jumped in so quickly?

  • Comment number 50.

    Part of the problem in letting market forces alone deliver the goodies is that it makes some seriously wrong assumptions about the real conditions on the ground.
    A key assumption behind efficient markets is that there is strong competition; we'll ignore the theoretical construct that all consumers have perfect information, since that is virtually always a load of rubbish. Some markets (aided by the internet) can provide consumers with a reasonable amount of information to make an informed choice based upon price and possibly perceived value of a product, e.g. purchasing white goods on the internet or a book. However, more often it is far from perfect.
    However, when one looks at other markets the idea of competition is a joke. Take for example the railways. I used to commute to London from Oxfordshire. After deregulation I was offered a choice of Virgin Trains (providing the old Intercity service carriages) or Thames Trains (providing the 3 or 4 commuter carriages). This was supposed to be competition! Firstly, if I wanted to be in London around 8am, there was really only 1 train timetable which suited to allow me to make the journey of about 1 hour and 20 minutes so as to arrive into London around 8am. Any earlier and I would be too early, any later and .... you guessed it, I'd be late. So where was my choice? Secondly, the fares on the two services were identical. Except on Virgin you got free coffee in 1st class, whereas Thames Trains charged you for the privilege. My point behind this story is that the government called this competition and presumably thought this was market forces at work. To the consumer this was absolute twaddle.
    Currently, it appears increasingly common to rubbish everything to do with market forces. This is understandable given the blatent incompetence and greed of some in the financial sectors. However, before everything to do with the market is effectively thrown out with the bathwater, we should be clearer about those circumstances where market forces really operate. Of course the government might argue that competition exists for railway franchises, but that's something slightly different, since the government is simply acting as the licence provider (once they'd made their money selling these assets from nationalised status).
    Market forces may well provide a reasonable system of exchange when there is real competition and choice for the consumer. When this is absent, as with railways, then perhaps an efficiently managed state owned network makes more sense. It would be a total mistake to suggest that the market has failed us in everything. Financial services may be a candidate for such a claim, but the daily provision of millions of products and services from around the world to consumers in developed economies illustrates the market at work. Of course, the issues surrounding development economics and fair trade is something else. But paraphrase Kipling "That's another story."

  • Comment number 51.

    Re 43 writingsonthewall

    I agree with much of what you say....."canny" bankers will worm their way round regulations.
    That is why I think these regulations must be set by government, not by banks themselves.
    Let's imagine the ultimate "free-for-all" can borrow whatever you limits.
    Average house price would now be 10 million pounds....20 million next year?
    A million on credit cards each?.....the only reason we stop spending is because we get bored with it?
    Another million on store cards.
    Another million on personal loans?
    And all this for someone who earns 25k?
    And why bother to work?...just borrow another million to keep all the lenders happy for a while, until they all find out that you're broke.
    May sound ludicrous, but we were all on the first rung of this ladder.
    The only possible outcome for such a market is national bankruptcy.
    To my mind, binding regulation is not just necessary, it is a matter of survival.

  • Comment number 52.

    A true market operates on the basis that the seller charges what they can get away with, i.e. what the buyer can afford or is prepared to pay. However, in recent decades the game was complicated by the availability of ever more expansive credit mechanisms - enabling sellers to hike their prices above and beyond the cost of production in the full knowledge that the consumer would continue paying, which indeed they did, happily taking the credit thrown at them.

    The flaw in free market economics is that it assumes that the players operate by a market logic, i.e. sensibly, morally and within their means, which of course they don't.

    To be honest this whole debate is now somewhat academic. We broke all the rules and bankrupted the system, which is why everything is gradually unravelling.

    The myth being propegated is that the masses have the means to continue living the lifestyles they have come to experience and expect. They don't and the gaps between actual rather than available income and expenditure is becoming painfully apparent. Companies will be forced to slash costs and many will go bust. Things will naturally adjust to their level of affordability, but unfortunately we will see that much of what we spend, i.e. satellite tv, broadband, mobile phone contracts, exotic holidays etc. we simply can't afford. Thus more and more businesses and individuals will go bankrupt. It is also why, in spite of all the spin, house prices will collapse by 50-70% from peak to trough.

  • Comment number 53.


    Yes, he has a nuclear agenda. The New Labour Party really has to get it's executive muzzled and under control, it has to become more democratic and embrace friction, the essence of politics, without it there is no politics. Strange that the first thing we learn when doing an A'level in British Government and Politics is the very thing New Labour curtailed, friction.

  • Comment number 54.

    45. At 1:13pm on 28 Jul 2009, Horned_Devil wrote:

    "Zimbabwe has a version of the fixed price system you allude to. Shops now don't sell bread because to do so would involve selling at a loss"

    Don't mix up currency collapse, political unrest and hyper-inflation with a fixed price system that ensures the poorest eat.
    The Government doesn't subsidise bread production and sales in Zimbabwe because most of the Government money is being spent on big cars for the leaders. extreme example and not a particlarly accurate one.

  • Comment number 55.

    As a DC pension fund trustee, where 98% of the members select our default option, and simply as a friend and father, I know that the great majority of people find financial products complicated and confusing. This is especially true with pension and investment products.

    This will continue to be true however much information is on the internet (and how much is net access restricted amongst the people who need financial help the most?) and Google type search algorithms are no substitute for knowlege.

    The Tories non-regulatory approach will simply make it easier for most people to be ripped off by financial product factories, and that's also likely to reduce the number of really good products available for the people who who do understand. Why produce low(ish) margin products for the discerning consumer when there's a world of lemmings waiting to be fleeced? The only winners of the Tory ideas will be the suppliers of financial products and the IT cowboys who make a nice living from manipulating web sites to give them wholly spurious rankings.

    Nothing's perfect, but strong regulation is by far the least bad option. The free market ended with the first tax, and was buried with the first tax aimed producing a social or political change. What's left is a casino as far as financial products are concerned.


  • Comment number 56.

    49. At 1:29pm on 28 Jul 2009, yam750 wrote:

    "Markets will work best when Governments stop interference. Let's look at mortgages and loans. Banks and other financial institutions were strong-armed into 'social inclusion' ideology ie lend to those you would not normally do for they are classed, by the banks, as a high risk."

    No they didn't - that's ridiculous.
    They weren't driven by 'social inclusion - but by the need to make PROFIT.
    They had already sold all the financially aware people mortgages - and they needed to find a new market. Unfortunately the days of 'hopping overseas to the far East and selling your wares' are long over and the markets there are flooded too. As the free market dictates, once everyone had a mortgage - what were the banks going to do? diversify?

    The reality is that if you sell the idea of perpetual growth then you always need to find a new market.

    They're only option was to sell to the people who didn't have mortgages - in the states and over here.

    They ignored their risk assesements (as explained by the former head of risk at RBS).

    To imply the banks were on some form of moral crusade pushed by the Government is absurd.

    Proper cloud cuckoo land.

  • Comment number 57.

    51. stevewo

    True, but in your example it looks like we should stop the process of lending money alltogether as it can never be controlled. The regulation by Government would be infinitely big as it would have to be controlling a market which grows at an incredible rate.
    The end-game would be when the regulator costs more to run than the treasury gets in tax receipts from the banks.

    If we cannot control the pace of water out of the pipe then we must dis-connect it.

    I totally agree that we're already on the first rung of this ladder - in fact seeing how some people behave they are literally relying on the moral hazard being gone.
    There are people with debts that they could never afford to pay back (unless they win the lottery) - and some who play the system (setting up limited liability companies and letting them fold, then forming a new one but making your wife a director)

    However with the Government simply demonstrating that the moral hazard doesn't apply to banks - then can you really expect the people to have a fear of bankruptcy?

  • Comment number 58.

    54 - not really

    You keep pointing out that markets and capitalism is flawed citing real world examples - not disagreeing with you there. However, in theory capitalism and markets etc will work and generate improvements in all of society it just doesn't work in practice.

    All I was doing is pointing out a real life example of price fixing and how it didn't work in practice - corruption, greed and the impact of the world ecomomy (the hyperinflation in Zim is partly related to the rest of the worlds economic impact on it, sanctions and the like). Yes it is an extreme example but so is using the collapse of the markets at the moment as a damning indictment of capitalism - aren't there capitalist countries that have escaped the worse elements of the crash (I believe (although correct me if I am wrong) that Canada isn't too badly affected)

  • Comment number 59.

    55. At 2:12pm on 28 Jul 2009, r377ep wrote:

    "The Tories non-regulatory approach will simply make it easier for most people to be ripped off by financial product factories, and that's also likely to reduce the number of really good products available for the people who who do understand."

    I don't think this is even the Tory policy anymore (non-regulatory approach) - along with smaller Government these seem to have been dropped by the Tory party - such is the chaotic situation we are in.

    Basically when the brown stuff hits the fan all policy and principles go out of the window.
    In fact the Economic liberals are suggesting tighter controls - which is a turn up for the books!

  • Comment number 60.

    Robert, I'd also pay attention to the whole filesharing copyright 'theft' issue. People are being slow to realise the conventional way of thinking doesn't apply anymore. Personally I've not been able to work out how the 'piracy' issue will link to the 'failure of capitalism' issue, I just suspect it might. The open source software model, e.g. Linux or Firefox, is already alive and kicking and accepted and supported by big business.

    Incidentally, I think domestic gas and electricity is a classic example of the market not working, apart from the people that use internet comparison sites it's near impossible to compare prices. Petrol is priced in such a way people can chose the cheapest supplier, but for some reason gas and electricity isn't; the fact Government set up such an uncompetitive market is a scandal. Car insurance is another example, if you spend 2 days phoning 30 different companies you can save a lot of money - but that's inconvenient. Internet comparison sites can be good at the moment, but for how long - one of the largest is owned by a large insurance company, how long before they start using unfair tricks or excluding companies offering cheaper cover, or charging insurance companies too much to be included in the service - this sort of thing should really, really, _really_ have been set up and regulated by Government, with the full scruntiny of MPs and top advisors and of course the public (unfortunately it's a boring subject) - rather than being just left to some entreprenure hoping to make big bucks.

  • Comment number 61.

    58. Horned_Devil

    Reasonable, but I don't rely on the real life examples of failing capitalist markets to demonstrate the eventual collapse.

    I have thought carefully about a system in which eveyone competes to beat the next firm (competition) and the un-reliability and inconsistency of information (marketing etc.). The conclusion is that we wil always end in a situation where there is supply overload and demand shortfall leading to waste and capital destruction - and lo and behold history has proven this to be correct.

    I also don't rely on current events to demonstrate that capitalism is flawed.
    My overriding concern is that relying on markets to distribute resources is not very efficient - there will be a lot of plasma TV's on the scrap heap over the next few years - all because of the oversupply of credit - a sympton we have seen many times before.
    All of this is not good for the planet - as I have said before the markets won't react to the damage to the planet until it's too late to reverse.

    I realise that 'fixed price system' is too vague a remit - but we need a reliable system - and one with fluctuating prices and inflation is not a reliable one.
    How can anyone ever achieve perfect knowledge economics when we all live on the inflation treadmill?

  • Comment number 62.

    Markets work fine when there is a free and willing seller and a free and willing purchaser - the end

    Add anything to the above and it all goes wrong

    The trade has to be between the two protagonists no third party allowed and no one can transfer a debt and a seller can only sell a debt free asset

    Operate under those circumstances markets are fine

    But that is a million miles from where they have evolved to over the last 3000 years
    So we have a long way to go to put them right


    We have to put them right because the alternatives to markets have all failed
    And now manipulation has put them in jeopardy

    Radically speaking put markets right first we may not need an alternative.

    and if we do, we will clearly be able to see what it is, uncluttered by anything else.

  • Comment number 63.

    Well yeh, more regulation is needed, in fact it's the very same ones complaining about the problems that should have prevented them in the first place, and should be fixing them now;

    A) Poor regulation. Because there's such a shortage of credit, they can practically charge whatever they want as long as they beat the loan sharks. This should have been sorted out when the bail-outs started.

    B) Speculative market. This one can't be easily fixed long-term, as cheap oil is a finite resource, large amounts of which we get from the middle east, and their reserves won't last forever, even if Iraq and Saudi Arabia remain relatively peaceful. What's more, China's oil demand has been increasing.

    C) Poor regulation from OFCOM. As others said, they should be taking the ACTUAL measured speeds from each ISP, averaging them, and only allowing those figures to be published as expected speeds. This isn't really the market being wrong, it's little more than mass-false-advertising ("unlimited broadband", etc), and the regulator being toothless.

  • Comment number 64.

    Writingsonthewall I'm going with Horned_devil on fixed pricing. He may have used Zim as a recent example and it may have been extreme but the fact is almost all large scale fixed pricing systems have collapsed.

    They are inherently inefficient because while they help the poor they don't take advantage of people who can afford to pay the going price so they always become too expensive to run in the end.

    Robert's reference to Stephen Green is also interesting, or at least the reaction to it is interesting. Didn't Churchill say the same thing about democracy? (Democracy is the worst form of government, except for all the others). Maybe we just need to understand the least bad economic system and work to counterbalance it rather than throw the baby out with the bathwater.

  • Comment number 65.

    Markets are man-made. Man is subjective and we recognise that markets are subjective by talking about "market sentiment". Blimey (to use one of Peston's favourites), everyone's been banging on about real v perceived value for long enough.

    Markets do what they do, and that varies from day to day. Just like horse racing, some make/lose money by owning/training/riding horses; others make/lose money by betting on the race. Now, if you think horse racing is corrupt...

  • Comment number 66.

    One thing about current banking behaviour is the banks seem to be tacitly admitting that they don't think capitalism works - otherwise they'd be lending money!
    Its been apparent for a long time that the city no longer gets involved in wealth creation - if it ever did. Its much more profitable to have an economy based on borrowing and use the instabilities to acquire more wealth. This accumulation can be sold to the ignorant and faithful as wealth generation.
    As it is now glaringly obvious that once the 'market' becomes a significant proportion of the economy the whole caboodle becomes dangerously unstable measures should be taken to ensure that its size and growth is limited to where it can do no harm to the real wealth generation that seems to go on despite their efforts.

  • Comment number 67.

    The market cannot be understood without reference to the relations of production.

    The price of labour power (the wage) can in general not fall below its value, i.e. the cost of reproduction of the labour force and it can never rise to the point at which it would abolish capitalist surplus value and so threaten the existence of the system.

  • Comment number 68.

    i dont get it....If the amount of lending and borrowing was unsustainable, why are we encouraging more of it? Or is that really to simmple to get to grips with?
    Debt is a way of life, but at some point it has to be paid back. With the amount of debt in the world today we can only be heading for further dispair in the future.

  • Comment number 69.

    1. The return of prudence to banking has absolutely nothing to do with the excesses of rip-off Britain, as per your Broadband example.
    2. Markets are good for trading things and promoting economic competition. That's all they can do for us. They cannot replace political will and economic/financial regulation without leading to disaster.

  • Comment number 70.

    Much as it grieves me to say this and much as it goes agimy beliefs, but the markets are always right.

    It's just that sometimes we don't like what 'right' means.

  • Comment number 71.

    Comment 70 has no basis in fact.

    If markets were free, Northern Rock, HBOS and RBS would ahve gone bust this year. Had they gone bust instantly, billiuons of ounds of loans to householders would ahve been written off thus invigoratign the UK econmy enough to overcome the damge inflicted by 3 major banks becoming bankrupt.

    The oil market is not a 'free market' but an oligopolistic market. By cutting supply, the market can be manipulated and prices increased.

    Sadly in 2009, the CEOs of major companies are the sultancs, Gordon Brown and other politicians are the Eunuchs ...

  • Comment number 72.

    These arguments are not logical, if I (as a bank) have 100 promissory notes (printed by my printer) and lend you 10 of them in return for twenty back over a period of (n) years, and your only customer (also with my bank) comes in for a loan of (say) 10 promissory notes to part finance the deal, then what is the result? Its nothing, as without another party being involved (printing promissory notes) and no-one being able to spend freely, them its all a charade, of course its all worked up to a few years ago because money actually had a value that was based on something tangible and measurable.

    Money and the value of it, is now merely a state of mind.

    This whole business is almost totally outside of the control of any single government, its controlled by the global markets taking a view. It has no foundation in reality (whatever that is) and cannot ever be measured, as its changing by the minute.

    Some sort of datum line needs to be re-introduced into the financial system that has no dependence on any type of view taken by an individual or groups of individuals with vested interests.

    This is then a totally 100% global political issue and has nothing to do with the money lenders only what they have been allowed to control, authorise and value up to now, which we have been stupid enough to let them do in effect without any control whatsoever.

    Until this issue is solved then the foundations on which sit whats know as the global economy, will reside within the hands of those still involved in a game of three card brag as opposed to a structured bridge game.

    Both are in fact gambling, but one is reckless, the other not so.

  • Comment number 73.

    Well of course markets don't work!
    How many photography graduates do we produce every year in this country and why? Wouldn't we, as a population prefere more dentists?
    Do we employ graduates anyway? Or do we prefer experienced graduates to be brought in from overseas (employers prefer not to have to allow graduates to gain work experience), unless of course mummy and daddy can subsidise the employer by taking care of their now grown offspring for a year or two in order for them to gain 'experience'.
    If I need dietary advice then my GP will provide it. I know he is a professional and would never suggest that eating certain berries which are full of 'oxygen' would be helpful in providing oxygen to my brain. He knows, as I do, that lungs are there to oxygenate my blood, unlike some celebrity gurus (who make a lot more money than my GP).
    I expect my financial adviser to be as professional as my doctor, not less. Like health care, should I need more complex advice, then I should be referred to a specialist. And I expect him to point out the perils of investing in companies where the workers are held at gunpoint, just as my doctor would advise me against literally buying a kidney!
    Google is not the answer - what a load of nonsense. On second thoughts, what MP has shares with Google I wonder?

  • Comment number 74.

    Morning Robert,
    may I congratulate you on an excellent blog this time.
    I have enjoyed reading the replies of other bloggers to the questions that you posed.
    My viewpoint is that regulation works but the regulators (Quangos) don't work.So let's do away with all of the Quangos (I bet no one in the country would even notice their absence).
    I think that the main points raised in your article can be expanded to "What kind of society do we wish to live in?" This subject has been covered before in previous blogs with reference to the financial (social) meltdown which took place recently (perhaps you missed it?)
    Nothing has really changed in the last 18 months, we have learnt nothing from the experience so it seem that it must be repeated.
    Back to the subject of meerkats, I too have serious reservations about the commodities manipulation (oil, gold, gas,food) which are taking place at the moment.
    The prices being charged to the consumer defy logical appraisal in terms of supply and demand so the only conclusion that can be drawn is that there is some form of manipulation going on (I understand that most of the oil futures are being held by the financial institutions- what business do they have in gambling on commodity prices?)
    The prices, I predict, will come crashing down in the autumn or winter this year and the banks, pension funds and other financial institutions will be hit very hard (but it won't be their fault as it is a global phenomenon).
    Now where have I heard that excuse before?

  • Comment number 75.

    "So we seem to be moving away from the Anglo-American political consensus of the past 20 years that the markets are normally right, reversing the Thatcherite/Reaganite movement of rolling back the state and expanding the domain of the private sector (to be pretentious for a moment).

    But what we are heading towards?
    Behavioural economics, a hybrid of psychology, is in. The efficient market hypothesis is widely viewed as an embarrassing example of primitive fundamentalism."

    Actually, it isn't a hybrid at all, it was just a change of name from Behaviour Analysis, as behaviour is controlled by contingencies of reinforcement (prices/costs/benefits/values if you must use those terms). Those working in that field from the late 30s onwards know what they are measureing and how it all works. In fact, most journalists don't know what it's based on at all. To see what it is one needs to look well past Tversky and Kahaneman etc (who translated this work into cogntive language and in my view made a mess of it) and on to Herrnstein and Skinnner. In doing so, you will find that Herrnstein was concrned about 'a liberal conspiracy' in the last couple of decades of his life given his treatment when publishing solid facts, and Skinner thouight the most appropriate place for effective implemention of Behvavouur Management along EAB lines was somewhere like China (just as Keynes thought National Socialist Germany was the most approprate type of goivernment for his Gemeral Theory). It was only post war propaganda peddled by free-marketeer emigrees which vilified these systems of socialist government in faviour of market anarchism, which led to a Cold War at all our expense.

  • Comment number 76.

    40. At 12:59pm on 28 Jul 2009, writingsonthewall wrote: all those who claim that the reason the markets failed was because Governments 'keep interefering'. Well how would you sort this one out?

    The shareholders who are complaining about not receiving a 'fair valuation' from the Government after the collapse of NR would have got NOTHING if the bank had failed - as free market principles dictate.

    Are you all saying these people should have got nothing? What about RAB capital? they might be running a fund that YOUR pension pot holds - or that YOUR Stocks and shares ISA holds.

    ....but I suppose if you're not affected then it's 'I'm alright Jack' time....

    Still, what goes around comes around.

    No sensible "investor" would put all their life savings into a single share, that would be crazy, these people were either greedy, stupid or both. So yes by the laws of the market, they should have got nothing if the company was truly bankrupt. But then they should have spread their investments across a range of sectors and compnanies so that one going pop didn't seriously impact their day to day life.


    The real point being made, isn't that government interference caused the current crisis, but governetn policy did. The british banks TODAY are lending more money in the UK than they did before the credit crunch. FOREIGN banks TODAY are not lending in the UK as they did before the credit crunch. Ergo there is not as much money to be lent as their was before and NOTHING Darling or Brown can do can change that. That is the interference that they should stop simply to try and shaw up a bankrupt economy long enough to hold onto their jobs. That would be a disaster by the way

  • Comment number 77.

    71 - and neither do your comments have any basis in fact

    If the banks were allowed to go "bust" - all of the loans wouldn't have been "written off" - if it followed normal company administration/insolvency procedures then these loans would have still existed - in fact under 'normal' administration procedures the administrators would have been responsible for maximising returns to the banks creditors and therefore would have had to deal pretty severly with any mortgage defaulters (more so than the banks would have done probably) - probably increasing the number of repossessions (like NR did after it was rescued!)

  • Comment number 78.

    The problem is that to make a market run properly, it needs a level of expertise behind it to make decisions against a defined risk. Of late the only risk and expertise that has been apparent in major businesses and banking is "will I get my bonus?". This has lead to criminality breaking out, remember Enron and Worldcom? Subsequent plastering over the cracks with SOX for US listed companies (audited in many cases by the same audit companies close to Enron bad practice) gave a false sense of security that bad management was being addressed. Unfortunately within the banking sector the risky bets were just being laid. As to your question, Markets can work but they need to properly learn the mistakes of the past i.e. Markets not Barrowboys!The boss of Ladbrokes probably knows his risks better than big business/banking.

    The hope is that now with less money swimming about CEOs, fundmanagers and bankers will have to work for their depositors and shareholders rather than themselves.

  • Comment number 79.

    One small point of fix priced supply. I note the price of a baguette in France is controlled at 99c.
    Another point. BT has always told its business customers what broadband speed they would get what they would get and now tells it retail customers too. But there is more to purchase than speed, there is the cost of acquisition, and the cost of maintenance (when it goes wrong).
    And another: Because of the last two costs when you are in supermarket you are trapped. Waitrose may have a particular product you want which Sainsbury doesn't but even though Sainsbury has the rest of your shop, you will probably buy at Waitrose's elevated prices because your time is more valuable you think. Even so the cost of acquisition is higher in Waitrose becuse you don''t know where anything is, but if you know the system you can get help! Of course acquisition cost make it 'cheaper' to go to a supermarket you are familiar with.
    And more: You need to understand you market. Until recently mortgage companies sold mortgages priced dynamically. They set up offers to match their daily borrowing made in the wholesale market. When it had gone that offer was withdrawn. Hence I used a broker with access to market details and paid a fee. Cost of acquisition again. I can't see the Cameroons being able to offer this in their franchised model of 'Money Supermarket' (who will get the business?). Maintenance costs arise if the lender is poor at direct debits! Both Ryan Air and BA offer a demand driven version of this. to fill thier planes
    Finally an academic point: It one point I was concerned with managing supply chains. It is best to have a 'market' (even an internal one in a company) or is it best to have a planned chain, or a third version... relationship supply where the purchaser and customer work together within quasi market contract. It depends on the risks of disruption by unforeseen events and how the cost of variation can be shared. There are plenty of egs gas, old style M&S purchasing, buying air tickets on contract or in the spot market etc.
    The point of all this is that real life markets and planned systems and quasi markets do not behave as simple positive micro economics suggests, leaving aside the newer fashion for psychology plain or evolutionary! and even of there is no moral hazard.

  • Comment number 80.

    Comment 26 by #Eddixon

    I think the idea is the right one.

    It seems to me that 'money makes the world go round' and thats what free markets are for. The issue is money made on products and services which are not justified or fair. I opend a Nat West bank account recently and have to pay a subscription of £6.75 a month to have it. I thought banks used my money to make money - that was their benefit in me banking with them! It's not right.

    Free markets need to be regulated in some way to protect the consumer and to ensure services received are services promised and paid for - broadband speeds here being a prime example.

    KPI's are used in business across the board to set a standard of performance - in the same way say, broadband provider offers 8mbps for £14 a month unlimited downloads - if it isn't delivered you shouldn't pay the £14 but a reduced rate based on the speed you are getting and the provider reviews why the promised speed waasn't delivered. I think you get my drift. Regulators should be policing this then and also determining upper profit margins that can be made on transactions offered. You know, it costs this amount to get the broadband in place therefore you can charge upto this % above that for your choice of margin made to the supplier, competition still for the consumer and KPI's to ensure the service promised is that delivered or a reduction in the price to the consumer. Simplistic maybe....but the public has been taken for a ride for too long and bear the brunt of the cost at the end. What happened to the customer is king anyway?

  • Comment number 81.

    Couldn't we control the markets by capping the amount of assets any one person can hold?
    Cap it to, say, 50 times the average cost of 10 years of living in the UK.
    It's an idea I just had, and thinking about it, it is apparent that asset capping could do a number of things:
    Enforce a realistic trickle-down, reduce the poor-rich gap, increase charitable donations, rein-in the property markets, enable much wider property ownership, increase average wages... it could also shift personal aspirations from earning money for personal gain, to earning money for wider social gain.

    Now some boffin can come along and burst my bubble... please do, I'm no economist, and have only a limited vision of this system because of that.

  • Comment number 82.

    The market has worked perfectly in banking. The corrections were in mid-flow last Autumn, but were prevented from taking their proper course by the interventions of government, particularly in the US & UK.

    The real damage from this intervention to save the sociopaths (bankers) has yet to be fully revealed. This is not a 'normal' recession. It is a fundamental collapse in confidence that will take decades to reverse.

    Who can really deny that GREED was the driving force behind the colossal bubble that developed in the west: Greed in devising ever more dodgy financial instruments to multiply leverage; in demanding bonuses for nothing; in ignoring reality and risk; in borrowing against ever growing property prices; no more boom and bust; etc. etc. the list goes on.

  • Comment number 83.

    Robert, you say that:

    "The theory is that Google-style algorithmic data sorting replaces state-funded watchdogs and nannies. "

    Data, data everywhere and not a jot can think.

    It is the pursuit of relentless Arithmomania that got us in this mess, and so yet more of it will surely kill us off!

    Keynes' biographer Skidelsky comments that "Keynes's sense that, at some level too deep to be captured by mathematics, 'love of money' as an end, not a means, is at the root of the world's economic problem".

    Chrematistics is killing economics, and soon it will kill economies too.

  • Comment number 84.

    The higher the monkey goes the more of his behind he shows said Peter Drucker. They must expect their behaviour to be seen scrutinized, analysed, discussed, and questioned. So they have to shun actions that cannot easily be understood, explained or justified. Being visible, Managers are also examples. They are leaders by their very position and visibility, particularly in Top Management. Their only choice is their example leads others to right action or to wrong action. Their only choice is between direction and misdirection, between leadership and misleadership. These terms have ethical obligations to give the example of right behaviour and to giving the example of wrong behaviour.

    A society of organizations is a society in which a great many people are unimportant and indeed anonymous by themselves, yet are highly visible and matter as leaders in society. And thus it is a society that must expect its managers, executives and professionals to demand of themselves that they shun behaviour they would not respect in others and instead practice behaviour to the sort of person they would want to see in the mirror in the morning.

    Having retired after 40 plus years in business I wonder if Peters words are recognized by many of the people you write about. But maybe if you quote him sometimes, your very influential blog will help change society.

  • Comment number 85.

    Re Hawkeye_Pierce comment 83

    'love of money' as an end, not a means, is at the root of the world's economic problem".

    How true is that?


  • Comment number 86.

    the only form of market that works is the local flea/fruit veg market. you can walk up and down, assess the quality, check the prices of equivalent competition and make a decesion.

    everything else has the fatal 'asymmetric information' flaw.

    funnily the best investment i made in the past decade was opting out of shares and my pension plan.

  • Comment number 87.

    The Markets are really a mob or herd mentality highlighting extreme purchasing or extreme caution. Money not available in the market means there is no point risking collateral.

    (but the opposite could also be also true if you know what illegal or should I say inspirational traders know).

  • Comment number 88.

    Now we need to be a bit more sophisticated than we are at the moment. Communist comand ecconomy failed and all government can do is to create the state of balance to stimulate demand, but we are in the real world where there is a price to be paid for consumerism. We can't go back even if we wanted to. If companies want business there must be trust and that has evaporated as damaged consumers find that the Law does not really protect them unless they have money. The concept that we will go back to consumer want instead of consumer need is currently dead in the water.

    In my view the fact that the Government has been responible for the gradual sack of the industrial base leaves consumers without an indigenous option and that also damages demand. I am afraid that it wioll be some years before we get anywhere near where we were before.

  • Comment number 89.

    The system tried to work, the penalty for failure was supposed to be collapse of guilty party. We should have been prepared to live with the fall-out, might have got us off our backsides.

    Government intervention fails every time; badly thought out, conflicting aims, wasting of billions, incompetent leadership.
    Suckered ever time by men in sharp suits and a plummy accent.

    The only big things governments should have done were~

    1- to ensure that no-one could have too great a market-share in any sector (financial, media, transport, healthcare) -i.e. any and all sectors of the economy. (So break up the banks now)

    2- to put in place decent and intimidatory anti-fraud legislation. Everyone in the street knows that massive fraud/ponzi/bonus theft went on in the banking sector, and that it has now moved to commodities pyramid selling -where a helluva lot more damage is going to be done to standards of living across the globe in the next few years. You watch the food riots in the third world within a decade because of market manipulation by financial lizards in basic foodstuffs.
    (You won't notice the energy rip-off, and you won't notice the water rip-off -for those you will believe what guff you are told about 'global shortages'.)

    the system (which could have worked) is broke, and you shouldn't be asking your grandchildren to pay your -and my- bills.

  • Comment number 90.

    Throughout the history of the modern industrialised world, governments have always had to step in to prop up or save the 'market economy'! This is of course to prevent the masses from understanding that they never work!

    We need a new political and economic mechanism but unfortunately as all mainstream journalism is geared to defending the same rotten system this will never happen until all journalism is democratically controlled where all opinions are expressed!

  • Comment number 91.


    What will work???

    Maybe some heavy-duty regulations in the banking industry can always help...

    ~Dennis Junior~

  • Comment number 92.

    You know Robert, I really fear for the future of our country. We’re trillions of pounds in debt with a personal debt rate higher than practically every other nation apart from the USA. All areas of the economy are declining and no one seems to be asking the rather important question of how is the UK going to make its way in the world, now that the one sector we have where we have been acknowledged as a leader (banking) has been totally discredited.

    At least our higher education system has been a success with thousands of foreign students choosing (or having the UK chosen for them) the UK as their preferred country to study. Now this area too is in peril.

    We can’t make money out of making things and the Government wants us as individuals to get further in debt so that we continue to make the same mistakes to buy the foreign goods in the shops to keep the retail aspect of the economy moving.

    Even in the creative arts where Britain was a world leader, we are seeing the music and film industry undermined and we’ve all heard of the plight of the commercial broadcast sector and print media, much of which is doomed. Ok, I know that this is not only due to the worst advertising recession ever seen. The way we (especially the young) consume media is rapidly changing too but this was one part of the economy that was supposed to be a bright light.

    Of course, there will have to be drastic public spending cuts but if the new Government makes radical cuts in defence procurement they’ll devastate yet another area of the economy, with the permanent loss of thousands of highly skilled jobs in the defence industries, including warship and submarine construction and aerospace.

    When the world economy starts to pick up other countries will benefit as they’ll still have industries intact, even if a little bruised. We won’t be able to compete. In fact, it’s becoming difficult to do so now.

    One more thing before I bore you all to death. We live in a global market but how is it that it is acceptable for some countries (major exporters) to have stiff import tariffs but completely wrong for others to do so?

  • Comment number 93.

    Surely the UK’s decline start as far back as the late 1960’s through inept senior bosses at the top of Britain’s large industrial combines who imperiously believed that their factories were producing products that were far superior to anything offered by ‘foreigners’ (British motorcycles v the Japanese). This decline continued throughout the ‘70’s with the politically-motivated strikes and political upheavals and then onto the late 70’s and the 1980’s during the Thatcher years, where the mantra was ‘I’m alright Jack’ and ‘There is no such thing as community.’ At the same time asset strippers were dismantling some perfectly good major British businesses to make money more quickly and to hell with future consequences. Then we all thought that privatisation was an excellent idea. Well, perhaps in certain areas it did work but not all by any means.

    Even after the slump in 1987 we didn’t learn our lessons. Get rich quick was in and planning for the future out. We continued with this idea throughout the 1990s and right up until this horrific slump partly but not wholly thanks to a number of dodgy bankers. This recession/depression was bound to happen eventually and when we enter the so-called double dip we are going to have a devil of a time dragging ourselves out of it. We have been living with a ‘virtual economy’ in the UK for far too long where nothing actually existed. The whole scenario reminds me of Danny Kaye’s song ‘The Kings New Clothes’ where someone dared to speak out and say that the king was in the altogether, in other words naked. It may be a strange analogy but it does describe the UK economy to a tee. What is there left after 40 years of asset stripping and selling the family silver?

    Letting the market decide everything may have seemed like a good idea but it’s now turning around and biting us in the behind! Perhaps the future now lies with countries that have planned economies.


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