Monetary policy, the regulatory agencies concede, is insufficient to prevent asset price bubbles. So a second tool is needed. But what should that be? Don’t ask the Treasury, because they don’t know. If they did, we wouldn’t be enduring the worst economic crisis since the Depression of the 1930s.

How About an Inquest?

 Following the massacre in the markets, the bodies are strewn all around as evidence that something went terribly wrong. Economists failed to alert governments of the impending collapse in the financial sector. And yet, curiously, there has been no forensic examination of the tools employed by forecasters to explain their failure.

In the US, 13,000 people apparently earn their living “doing” economics. That’s according to Professor Robert Samuelson, son of the Nobel prize winner Paul A. Samuelson. He finds it “intriguing” that most economists failed to predict the financial crisis. There is no compelling explanation for this failure, writes Samuelson in The Washington Post (July 6). Because “economists have not engaged in rigorous self criticism to explain their lapse”.

There is nothing mysterious about the unwillingness to scrutinise their failure. The answer is simple. Economics is not practiced as a science. Rather, it is a pretentious way to covertly promote political prejudices. The last thing that economists need is an inquest. But that leaves the UK Treasury mute about the “macro-prudential” tools needed to prevent the next property boom/bust.

They Protest Too Much

Economists love shouting about the failures of others to disguise what they don’t know. Take the case of Paul Krugman, whose competence is such as to apparently warrant a Nobel prize. In a New York Times column (July 3) he admonishes the Obama administration for an inadequate fiscal stimulus programme to cope with a shortfall in jobs of about 8.5m.

Krugman does confess that “as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role. It has been a rude shock to see so many economists with good reputations recycling old fallacies”.

But can we trust Krugman to add up simple numbers? He takes exception to the manipulation of employment figures, but his over-priced textbook on economics claims that the rent of land in the US is just 1% of national income.  Since it’s probably more like 33%, we need to treat the pronouncements of people like Krugman with a pinch of salt.

Camouflaging the Root Cause

No government in the world has shown the slightest inclination to highlight the root cause of the financial crisis. The incentives to create credit on a reckless scale are located in the land market. Ever since the early 17^th century, governments have held enquiries into financial crises following savage bouts of land speculation . Despite all the agonising, however, not once did they remove the rewards to prevent such episodes recurring.

This time, the rush over the financial precipice started in the US. There, bankers had found yet another way to milk the land market. They targeted low income black neighbourhoods with  high-cost/high-risk mortgages, knowing (so clever were they) that they would not bear the risk. Those risks would be sold to mugs like pensioners whose funds would buy the securitised mortgages.

Twisting and turning the bank regulations after this last episode will not prevent the bankers inventing new ways to milk the land market towards the end of the next business cycle that begins in 2010. That’s why the UK’s White Paper on financial regulation isn’t worth the paper on which it is written.

According to Andy Haldane, the Bank of England’s financial stability director, there remain many “unanswered questions”. That’s the clever economist’s way of distracting us from the fact that the coroner has yet to ask the right questions.

If you missed Part 2 The Bailout click here

For the next series Part 3 Income Tax click here