World’s freest economies managed to avoid banking crisis

IT is usually claimed that the financial crisis was caused by excessively free markets. Those of us who disagree – and emphasise governments’s role in distorting markets, including by subsidising risk via the moral hazard caused by insane taxpayer guarantees and by fuelling credit and property bubbles via excessively loose monetary policy – are in a tiny minority.

This is not the place for a detailed analysis of the real causes of the financial crisis – and there were of course many. But it is interesting to note that there is no correlation between economically free countries and those that suffered from a banking crisis. In this year’s Index of Economic Freedom, published by the Fraser Institute, Hong Kong retains the highest rating for economic freedom globally, graded 8.90 out of 10. The other top 10 nations are: Singapore (8.69 out of 10); New Zealand (8.36); Switzerland (8.24); Australia (7.97); Canada (7.97); Bahrain (7.94); Mauritius (7.90); Finland (7.88); and Chile (7.84).

The only country in this top ten list to have been genuinely caught up by mass banking problems was Switzerland. All nine others were remarkably immune; Australia didn’t even go into recession, though its economy was cushioned by exports of commodities to China. Those major countries that did suffer from the crisis (or variants of it) were all less free: Britain is ranked 12th freest (with a grade of 7.75), the US 18th (7.69); Japan 20th (7.64); Germany 31st (7.52); France 47th (7.32); Italy 83rd (6.77); and China, which is suffering from a massive crisis caused by centralised misallocation of credit, is 107th (6.35).

In fact, the high watermark for economic freedom in the US was in 2000, many years before the crisis, when it was graded 8.65 out of 10, having improved substantially and steadily starting in 1980 when Ronald Reagan became president. By 2005, when sub-prime lending was buoyant and the credit bubble blowing, America’s grade had already fallen to 8.21, with a global ranking of 8th; by 2010, it was down to 7.70 following the onset of the crisis in 2007-08 and the bailouts of large banks and car firms.

None of this “proves” anything but it shows there is no simple causal relationship between overall economic freedom and the financial crisis. Some of the freest economies in the world avoided the problems – and the biggest victims of the crisis were substantially less free than the likes of Canada, which escaped unscathed. Food for thought.

WHAT a mess the PPI crisis has become. Banks need to put in place structures to stop selling products to customers that are bad for them, and focus instead on selling basics, such as mortgages or bank accounts. Misselling or lying to consumers is fraud and should be severely punished. Victims must be compensated.

But in future customers must also make sure they don’t buy financial products they don’t understand. We need a return to caveat emptor: the buyer must beware. Nobody sues for “mis-selling” if they allow a salesperson to sell them an overly complex mobile phone with lots of functions they will never use, and sign them up to an excessively expensive contract with more minutes and megabytes of data than they will ever use. It’s called personal responsibility. It is also wrong that a small minority of ambulance-chasers are putting in fraudulent claims for compensation.

Retail banks disgraced themselves. But relying on regulators is naive – customers need to stop trusting anybody apart from themselves. When in doubt, don’t sign up.
Follow me on Twitter: @allisterheath

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