George Owers of the Labour Club has an article in this week’s Varsity. I don’t wish to make this ad hominem, but his article is a such farrago of his typical economic and historical ignorance (not to mention rudeness) that I hardly know where to start. How about a good old-fashioned fisking?

Mr Sharpe does not address the fact that if the state had followed his prescriptions over the past two years and left the market to determine the fate of the actors within the world economic system, then it is improbable that there would be a financial sector left by now. When the US government let just one financial institution go bankrupt, namely Lehman Brothers, the resulting panic and market turbulence came close to collapsing the entire financial system. If the market had been allowed to determine the fate of every such troubled institution, the resulting carnage would have been the financial equivalent of a thermonuclear apocalypse.

On the contrary, there would be a financial sector left. Lehman Brothers did not come close to “collapsing the entire financial system”. It is simply not possible for everyone to go bankrupt. Debtors require creditors, and creditors require debtors. The financial sector might be smaller, requiring the dynamic “carnage” or “creative destruction” that any economic restructuring requires. And that would be a good thing. Leftism is essentially a collection of static doctrines, seeking to eliminate all risk, preferring stagnant security to dynamic change. That’s why people like Mr Owers chase after utopias like “full employment” where no one ever loses their job.

The same applies if governments around the world had not re-capitalised the banks (as suggested by Gordon Brown). The state is too enmeshed in economic life to simply withdraw at a stroke without massive consequences. In fact, if anything, only more emergency state action can save us. Most responsible economists realise that the only way to get the banks lending again is to nationalise the entire banking system now.

Crikey, that’s not even close to true. Not even the (actually irresponsible) neo-Keynesians that Owers adores advocate nationalising the banks.

Mr Owers is correct that if all the banks were nationalised they could be forced to start lending again. But that would be A Bad Thing. Indeed, nationalised Northern Rock already have been forced by the government to start lending again. “Chancellor Alistair Darling also suggested that some mortgages would be lent at up to 90% of the value of the property being bought”. That’s on top of the 10% bonuses they just received. And despite falling house prices putting these people at risk of going into negative equity.

Gordon Brown even wants to ban 100% mortgages, though he did once offer them himself through “HomeBuyDirect”. As Guido says, “No deposit was required, and it didn’t matter if you could not afford to repay the full cost of a mortgage for the property. Low-income earners were effectively encouraged by the government to buy over-priced new builds.”

No bank should be forced to lend money. Banks lend money to make a profit, and will do so at an interest rate that takes into account the risk of default. That’s why the government has been unsuccessful in getting to banks to lower interest rates as much as the Bank of England’s rate. The Bank of England’s rate is essentially a number plucked out of thin air, whereas commercial banks have to take into account risk.

Why does Mr Owers want banks to lend more? Because he believes that the economy is driven by spending: by consumption, not production. This is false. On the contrary, real growth is made by producing things. Houses changing hands will not create prosperity out of nothing.

Nationalising the banks would cost the taxpayer even more enormous amounts of money for no good reason. It would simply be a transfer of wealth from the poor to the rich, from the prudent to the imprudent.

Contrary to Mr Sharpe’s assertions, this catastrophe is the result of a dumb faith in the efficient market hypothesis, and only a result of the failure of the state insofar as the state did not act more firmly to prevent such madness.

Contrary to Mr Owers’ assertions, this catastrophe is the result of pervasive government intervention in the market for years. No one believes that markets clear instantly or that people have perfect information. But you don’t have to believe that to believe that the market would be a lot more efficient if we had a market-set interest rate and no central bank able to inflate the currency. Then the interest rate would reflect people’s time-preferences, capital would be allocated more efficiently, and knowledge about the changes in relative prices would not be drowned out in general price increases.

This catastrophe was not caused be a free market, because we didn’t and don’t have one.

Actors in a market are not rational calculating machines able to use data to efficiently determine the optimum allocation of resources. They are often driven by irrational exuberance, which leads to insane speculative bubbles that can destabilise the real economy. Surely that is apparent to everyone by now. The British Conservative Party seems to be just about the only institution in the entire world that attributes the current crisis to too little marketisation rather than too much. Only by state action to regulate economic activity can we manage these risks and prevent periodic financial crises.

The thing is, when speculators are successful, they make the market more efficient. Short-sellers contribute to the market signals which help reduce the price of over-valued things, for example. But when speculators do not help to make the market more efficient, they lose money. The market checks them.

I do not deny that speculation played a part in the recent bubble. But what caused speculation? Bubbles always pop. In a free market, they pop sooner rather than later. What allows bubbles to reach catastrophic proportions? Cheap credit, provided by the government. The solution is to abolish the Bank of England, and go back to a market-set (higher) interest rate. The solution is to prevent the government from fuelling bubbles through inflation. (A low interest rate doesn’t just cause isolated bubbles, such as house prices. It wrecks the whole economy by causing misallocation of resources on a massive scale.)

The regulators didn’t prevent this crisis, and the government encouraged it.

The hard empirical evidence for this truth exists – it’s called the past.

As far as I can tell from speaking to him, Mr Owers’ only knowledge of the Great Depression comes from reading the crypto-socialist John Kenneth Galbraith, and he believes that the Great Depression was caused entirely by speculation. The past doesn’t back him up, though. Before the era of central banking, widespread depressions did not occur, and indeed could not occur.

From 1945 until the 1970s the world had a well-regulated financial system operating within the framework of the Bretton-Woods settlement.

And what happened to Bretton Woods in ‘71? Mr Owers has a curious set of historical blind spots. On the contrary, Bretton Woods was an insane system of price controls, which required governments to pour money into the black hole of maintaining arbitrary exchange rates. A bit like the ERM. It was doomed to failure. It was tested to destruction and eventually collapsed, taking the gold standard with it.

I don’t mean to be rude, but in conversations with Mr Owers and others, it is apparent that he knows no economics. He should go and learn some.