The Bank Of England.
The Bank Of England.
In November 2008, when the Queen visited the London School of Economics, she asked these distinguished academics a simple question: If you people are all so smart, how did you let the credit crunch happen? No, Her Majesty didn’t use those precise words, she is a diplomat as well as a monarch, but that was the bottom line.
It took over six months for a group of eminent economists and historians to respond to that question, and their answer was a long winded...we don’t know!
Now place yourself in a slightly different setting, imagine the Queen had asked a doctor why a whole team of specialists had failed to detect a patient’s cancer, or a team of meteorologists why they hadn’t seen a hurricane coming. Would she have had to wait a year for an answer? Certainly not, indeed heads would surely have rolled soon after the event. Why is economics so different?
It has been said that the economist was put on this planet to make the astrologer look respectable; sadly, this statement is less humorous than accurate.
The answer given to Her Majesty by Professor Tim Besley is sadly typical of economists, banksters, fund managers and all who work in this field. Again, let us use the doctor analogy. If say an elderly man is taken to hospital after falling over in the street, you would expect two, ten or a hundred doctors who examined the resultant x-rays to realise he had fractured his ankle or whatever, yet no one in his right mind would suggest that economics is a tougher discipline than medicine. Sadly though, if you were to ask a hundred economists how to “fix” the economy, you would have around a third who would tell you to do one thing, another third to do exactly the opposite, and the rest who would tell you to do nothing at all. In all probability, they would all be wrong, and they continue to get it wrong. What is true for economists is even more true for fund managers.
We have this month seen two fairly big companies go into administration. HMV has been around before anyone reading this article. Its first UK store was opened by the famous composer Sir Edward Elgar on July 20, 1921. Blockbuster is a smaller company, though still quite a large one. Home videos have been around only a fraction of the time gramophones have, and Blockbuster was founded in 1985. How many so-called professional investors saw their collapses coming?
With new and rapid developments in video technology, the demise of Blockbuster should have surprised no one. Betamax tapes were developed in 1975, but this medium was soon challenged by VHS. With the advent of CDs, DVDs and then on-line, the writing was on the wall, and cheap home computing with high speed broadband as good as killed it. How could they not have seen this coming?
With HMV and music generally, the picture was not quite so clear, though what was clear was the need to move on-line big time, which is what Apple did, but HMV did not. On August 10, 2009, HMV shares closed at 120.5; exactly one year later they closed at 63.5, losing almost half their value in 12 months. On August 10 last year they closed at 3.68p. Quite a collapse. Where was the smart money then? Where were all the fund managers, the banks, the speculators?
Now in one sense the role of economists and investment professionals is extremely difficult, because it involves predicting the future, which is always uncertain. But we all of us have to rely on predicting the future to some extent, and insuring against it. This is why there we have such things as burglar alarms, first aid kits, spare tyres, and backups for our hard drives. There is though little if any evidence that investment managers, economists, etc, are any better at predicting the future than the rest of us, including astrologers. Should they be?
Let’s stay with Blockbuster and HMV, they have suffered their fate because of exponential developments in technology. We can see this technology developing almost before our very eyes, so what other companies might be at risk? Clearly one like Snappy Snaps, or printers that fail to adapt to the new world of computers.
Back in the 1970s, a print run of less than about a thousand copies was not economically viable; printing a hundred copies of a book would have cost not much less than a thousand. Then, from about the early 1980s, the price began to come down. Now, literally anyone can publish a book; very small print runs are viable, and if you are prepared to rely on PDFs, you can publish and distribute even an encyclopaedia at no cost at all, which is good news for the reading public, but would not have been good news for a certain J.K. Rowling.
In short, we can see that any company which fails to keep abreast of new technology could fail financially as well. There are companies that have been around for longer than HMV and which will in all probability be around for generations to come. We all have to eat, so large supermarket chains are likely to endure, barring mergers, takeovers, etc. There are other companies, indeed other sectors where the smart money should find a long term home, but again there is no compelling evidence that so-called professionals are any smarter than the rest of us, they are simply paid a great deal more, whether they get it right or wrong.
There are a great many reforms that need to be carried out in the financial sector besides taking the power to create credit away from the banks and placing it in the hands of accountable governments; only today the government’s financial watchdog has begun another review of yet another rip off by the big banks, so-called interest rate swap mis-selling.
Outright dishonesty aside though, the biggest nettle the British Government and all governments should grasp is that of managed funds, including pension funds. As so-called professionals are unable to beat the market, and as this sort of so-called fund management amounts to mere gambling anyway, the best way to protect genuine investors is to wind up all these funds, every single one of them. Pension contributions in particular should be paid into a central pool that contributors can manage themselves, or failing which the government can manage on their behalf.
This would cut out all the management fees, all the expenses, all the churning, and all the vastly overpaid fund managers, advertisers, consultants and economists, whose employment benefits ultimately no one but themselves.
[The above op-ed was first published January 31, 2013.]
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