Sardanapale

“Food is a vital issue that must not be left solely at the mercy of the laws of the market and of international speculation”.
Michel Barnier, French agriculture minister

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Enemies of economic liberalism are blaming the current food crisis on markets.

Mass hunger has been added to the evils that capitalism is loosing upon the world – on top of poverty, exploitation, inequality, health hazards, and climate change.

This, of course, is nonsense: high food prices have nothing to do with selfish speculators or free markets. The reason is rising demand, mostly from fast-developing countries like China and India.

Governments, from alleviating the problem, have so far made it worse.

In the rich world, they are still paying farmers not to grow crops, not an ideal way to boost supply.

The US and the EU are also blocking food imports and subsidizing exports, which is destroying farming in the developing world.

And as everyone except officials seem to realise these days, subsidizing biofuels is crazy.

In America, ethanol soaks up almost 20% of corn production, and encouraging ever more farmers to grow for fuel, not food.

The EU, which mostly castigates US policies when they make sense, is following suit.

In the developing world, governments have dealt with the crisis in equally idiotic ways.

They have fixed prices, punished “hoarding” (punishable by life imprisonment in the Philippines), and restricted exports.

All of this, of course, reduces incentives for farmers to grow more, making the problem worse.

Government could and should do something to alleviate shortages and stave off mass poverty, but interfering with price signals and castigating “speculators” is exactly the wrong way to go about it.

Here are a couple of good articles I’ve read on the subject recently – in the The Economist and The Wall Street Journal.

Let me know about any other I may have missed.

During my recent trip to the Balkans, I was struck by the attitude of people towards communism.

In that country, which endured the most stifling brand of totalitarianism for decades, there is no sense that its passing was a milestone.

Communism is not popular, but neither is it regarded as absolutely evil, like Nazism in Germany, or fascism in Italy or Spain, or apartheid in South Africa.

I visited a fortress that was used as a jail and torture center until 1968. The row of empty cells contained no explanation, and conveyed none of the horror they had seen. Robben Island it wasn’t.

In Enver Hoxha’s house – which has been turned into an “ethnographic museum” – there was no sense that one of Europe’s worst dictators lived there.

I could not imagine Salazar’s family home being turned into the replica of an ordinary Portuguese house in the early 20th century. When I asked the guide how the people view Hoxha, she said some remembered him fondly, others not.

She pointed to a bunch of flowers placed on a table by local admirers for the 23rd anniversary of his death.

Some of the people we spoke to were not shy about noting some of the achievements of the old regime. One pointed out that it had educated a country that was 80% illiterate in 1945. There was no crime or prostitution under the communists, he said.

Our hosts described Hoxha as a tyrant, but they insisted that nothing was black and white. Yes, socialism was an abject failure, but it had positive aspects.

The worst our guide was willing to say about it was: it looked great on paper, but the reality didn’t match the ideals. Unlike fascism, the ideology itself is not stigmatized.

This, of course, is partly a question of generation. Younger people did not mention the positive side of communism. But neither do they see 1992 as a watershed.

All, young and old, insist on the corruption of the current leadership. You might say: it is understandable for people to highlight the problems they face – those of today, not those of the past.

Current leaders don’t deserve to be thanked just because they are not communist. All very true. Similarly, it would be absurd to ignore the failings of the ANC for the sake of the past struggle against apartheid.

But the comparison with South Africa highlights a big difference. Few of those who criticize Mbeki, Zuma et al would have anything good to say about apartheid; the same is not true of communism is that small country.

Communism, on the other hand, is controversial. It is not taboo, something that must be condemned in polite society – that would attract the comment “inveigh against it” in Flaubert’s Dictionary of Received Ideas.

I see this as another example of what Jean-François Revel called communism’s “most favored totalitarianism” status.

Before taking a two-week vacation, I thought I’d mention a leader by The Economist, in which the paper clarifies its position on financial regulation.

In recent weeks it had appeared to look favorably on much stricter controls, but this piece warns officials against overdoing it:

“Regulators cannot know how trust will ebb and flow as new markets develop the experience and practice they need to work better. They therefore cannot predict the peril of new ideas. They have to let new markets develop, or stifle them.

The system learns—dangerous junk bonds are reborn as respectable high-yield debt; bankers will now be scared of extreme leverage—but it is delicate, as the world learned last summer. The regulator is condemned to muddle through.

The notion that the world can just regulate its way out of crises is thus an illusion. Rather, crisis is the price of innovation, so governments face a choice.

They can embrace new financial ideas by keeping markets open. Regulation will be light, but there will be busts. The state will sometimes have to clear up and regulation must be about cure as well as prevention.

Or governments can aim for safety and opt for dumbed-down financial systems that hobble their economies and deprive their people of the benefits of faster growth. And even then a crisis may strike.”

The whole leader is here, and links to an interesting article on financial regulation.

PS: Never mind the text opposite. I don’t have time to do any translating before leaving, and just copied and pasted something in French to fill the space.

I profess my ignorance, for once (I usually keep quiet about it).

Would someone help me understand what’s so new about the current financial crisis?

Why should the classic pro-market view on such things – that the state usually makes things worse by stepping in – no longer be valid?

This view was popularized by Milton Friedman, who argued in his book “Free to Choose” that the Great Depression had been caused not by flawed markets but by the policies of the Federal Reserve.

The regulatory system, Friedman wrote, tends to blame

“all problems on external influences beyond its control and takes credit for any and all favorable occurrences.

It thereby continues to promote the myth that the private economy is unstable, while its behaviour continues to document the reality that government is today the major source of economic instability.”

Some commentators have used similar arguments in the context of the present crisis.

Alvaro Vargas Llosa, in the New Republic, argued that the Fed had created conditions for the turmoil through credit expansion, which encouraged reckless lending.

But the underlying problem, as Vargas Llosa sees it, is not so much the Fed’s decisions as its very existence: a financial system underpinned by the officials wielding monopoly power can never be as stable as one where private banks are free to issue money.

Vargas Llosa, of course, knows that abolishing the Fed but is inconceivable right now, but nevertheless calls for bold thinking:

“There are less dramatic measures that can be taken on the road toward a definitive solution. The most obvious one is to simply stop using the Federal Reserve to inflate the currency.”

The strange thing is, this classical view of the crisis is very much in the minority – even among analysts that are usually pro-market.

In The Wall Street Journal, Arthur Levitt Jr blames new fancy financial instruments for the debacle:

“The combination of structured financial products and subprime mortgages fundamentally changed the lending business.

No longer did those doing the lending have to expose themselves to the credit risks of the borrowers. Instead, they packaged their loans for sale to the investing public.

With no exposure, loan originators offered mortgages to just about anyone they could find.”

Levitt does not exonerate regulators, but he says their basic failure was not too much supervision, but too little – “regulatory underkill”, as he puts it.

The Economist, meanwhile, defends the emergency measures taken by the Fed to tackle the crisis: helping JP Morgan acquire Bear Stearns, lowering the discount rate, and offering $200bn in short-term loans to investment banks, etc.

The Financial Times‘ Martin Wolf – one of the most eloquent advocates for globalization – also seems to take a positive view of the Bear Stearns rescue and other moves by officials, and argues that the era of financial deregulation is over.

His point is best encapsulated by a banker he quotes: “I no longer believe in the market’s self-healing power.”

For these analysts, the rules of the game have radically changed: the financial system has become inherently unstable, and it is incumbent on enlightened officials to save it against itself.

I’m not dismissing such ideas out of hand.

But before I turn my back on Milton Friedman and give up on a central tenet of my faith in markets, I want to make sure it is truly obsolete.

You see, I have a sneaking suspicion that these guys are rushing into the protective arms of the state – as people tend often do in times of trouble. Help anyone?