Book review: The Trouble with Markets, by Roger Bootle

The author enjoys kicking financial theorists while they're down, but he doesn't offer any fresh thinking.

by Howard Davies
Last Updated: 25 Oct 2010

There are not as many growth businesses in the UK as there were a couple of years ago. Publishing books on the financial crisis is one of the few that remain. Many diagnoses have been published already: here's another one.

Not a promising start for a review, you might think. I don't mean to be off-putting - indeed, I have a book of my own on central banking in the crisis on the way, so I'm part of this industry - but there's a risk of crisis fatigue. Any addition to the groaning credit-crunch bookshelf needs a unique selling proposition. What is Roger Bootle's?

First, let us say what it is not. This is not a comprehensive economic analysis, complete with numbers, graphs and regressions. Indeed, there are just two smudgy charts. In that respect, Bootle has not been well served by his publisher, though the compensation is speed. The book is remarkably up-to-date, with an introduction dating from September.

One advantage Bootle has over other scribes is that his record on forecasting developments in the economy and in financial markets has been a good one. In 1996, his book The Death of Inflation was an early prognosis of the Nice (non-inflationary consistently expansionary) decade that we experienced until 2007. Then in 2003, Money for Nothing argued trenchantly that we were in the midst of a house-price bubble, the consequences of whose deflation would be very unpleasant for us all.

Clearly, Bootle was fundamentally right, though his timing was a little awry, and anyone who sold in 2003 missed another upward lurch. Yet he was much closer to the button than many others, and identified some of the unsustainable trends that caused the explosion. He is a persuasive advocate of the 'if a thing can't go on for ever it will one day stop' school of thought.

Bootle's second advantage is that he's an economist who has been close to the City for some years, and indeed for a time he was chief economist at HSBC, having earlier been at Samuel Montagu, which disappeared into the HSBC empire through Midland Bank.

He doesn't talk much about his financial-sector ancestry these days. Having eaten many lunches for Mammon, he's now ferociously biting the hands that used to feed him in the Square Mile.

He's convinced that bankers are paid far too much, on both sides of the Atlantic. He says they earn sums that are inexplicable in terms of the contribution they make to human welfare.

So far, so uncontroversial. But politicians everywhere are struggling to find a cure to overpayment that isn't worse than the disease. His solution lies in taxation, but not of the James Tobin foreign exchange variety. He recommends that 'entitlement to receive a dividend could be restricted by law to those who have held shares for a minimum period, say two years'. I cannot see how that would work, and if it did, it would trap innocent investors in high-yield stocks. The burden of proof on those who propose such an interference in investors' freedom is very high, and that test is not met here.

Bootle is more interesting and more persuasive on the problems of finance theorists, and indeed of his own economics profession. He praises Paul Krugman, who has said that much of the past 30 years of macro-economics was 'spectacularly useless at best, and positively harmful at worst'. And he swings a weighty demolition ball at the 'efficient markets' hypothesis. Indeed, one even begins to feel sorry for all those Chicago economists. Their theory is shot to pieces, and they have no Olympic Games to look forward to in consolation.

Bootle is less clear, though, on what might be put in its place. It is easy to demolish a tottering structure, but rather harder to rebuild. We do need a scientifically based theory of finance and of market behaviour. It is fine to talk of black swans, but where does that lead? We cannot all assume that the worst will happen all the time: no-one would ever invest again. Some academics are working assiduously to rebuild a theory - though their efforts are not recognised here. For example, a centre for the study of disfunctionality in capital markets at the London School of Economics is tilling that soil.

The Trouble with Markets is a good run across the desolate battlefield of financial markets after two years of meltdown. Bootle bayonets the wounded brutally and efficiently. He writes fluently, his instincts are sound and his criticisms mainly well-based. Rebuilding the damaged foundations of financial market capitalism will take a little longer, perhaps.

We can all agree that we need 'a more humane, rounded vision of the market system'. It's a phrase David Cameron might borrow for a speech. Drawing that rounded portrait will need much more effort and imagination.


The Trouble with Markets: Saving capitalism from itself

Roger Bootle
Nicholas Brealey Publishing £18.00

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