Now we walk along the same street, in red pairs, and no man shouts obscenities at us, speaks to us, touches us. No one whistles.

There is more than one kind of freedom, said Aunt Lydia. Freedom to and freedom from. In the days of anarchy, it was freedom to. Now you are being given freedom from. Don’t overrate it.

That’s a much quoted passage from Margaret Atwood’s novel The Handmaid’s Tale.

The story is set in a dystopian American future in which women’s lives are strictly controlled and regulated by an authoritarian religious regime. But what does it tell us about today’s markets?

It’s a part of the idea I want to explore with you today: how much do you value your economic freedom? Are you willing for someone else to tell you what is and isn’t right for your money in return for a promise of “safety”?

Can anyone else even guarantee your safety?

 

There are two kinds of freedom – and one of them is under attack

I got to thinking about this after seeing Donald Trump’s administration announce its intention to dismantle the Dodd-Frank banking act, a piece of regulation designed in the aftermath of the 2008 financial crisis.

The idea is that the regulation is supposed to make the financial system safer. Not so, according to Gary Cohn, White House National Economic Council director and a former president of Goldman Sachs. He claimed that the repeal of the bill means “Americans are going to have better choices and Americans are going to have better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year”.

In other words, less regulation means the banks are freer to act according to their own interests, to create credit, take risks and fuel the growth of the economy. Put a pin in that idea, we’ll come back to it.

Firstly, reaction to the news. As you’d imagine banking shares soared. And just as predictably, pundits across the mainstream press criticised the move as dangerous and generally in keeping with Trump’s “crony-capitalist” image.

I’d challenge that idea. The argument that more regulation = good and less regulation = bad, is flawed.

The banks were regulated before the global financial crisis. It’s just that everyone – including the government and the regulators – were in each other’s pockets. Sub-prime debt securitised (bundled up) with higher quality debt was rated as AAA by the ratings agencies. Everyone remembers Gordon Brown claiming he’d eliminated boom and bust forever. How did that work out?

It wasn’t lack of regulation that caused the financial crisis. It was a failure of crony-capitalism.

And it was foreseeable. Plenty of people outside the industry foresaw the crisis. The regulators and the central banks had the power to do something about it. Did they? No! They kept allowing toxic debt to be rated highly, and kept interest rates too low for too long.

What all those pundits and state enthusiasts are selling you is freedom from something. In this case it’s a financial crisis. It’s a bastardised form of negative freedom: by reducing people’s freedom to act… they create a world supposedly free from financial collapse.

That’s the trade. Is it worth it?

We know that the best outcome for the economy – in terms of creating wealth – is when businesses are given the freedom to act in their interests. That’s truer of banks than most industries. In controlling what they can and can’t do tightly, we reduce their capacity to help the economy grow in order to “prevent” crisis.

But what if it doesn’t work?

What if the authorities aren’t as omnipotent as they think – maybe they’re just corruptible, emotional humans after all – and we get the financial crisis anyway? What then?

It all depends what you value most. Freedom to act, or the illusory idea that the state can prevent crises in the markets? I know what I think. I’m interested to know what you do. I’m on nick@southbankresearch.com.

The same idea is true on a micro level as well as a macro one. The move to ban cash is the same idea: give up some of your freedom to act and we’ll create a financial system that’s “safer” for you – where you’re free from worry about deflationary crises.

By the way, I’m not here to defend the banks out of any higher purpose. They’re by no means innocent parties: the financial crisis, rate fixing and money laundering scandals, PPI… there’s plenty of evidence to build your case that they’re out of control and must be tightly controlled.

My point is we already have a fantastic way of regulating a market. It doesn’t require the state. It’s called failure.

That’s how a free market is supposed to work. It’s why describing the financial crisis as “the failure of capitalism” is wrong. In a free market capitalist system the banks would have gone under.

Or rather, the banks wouldn’t have assumed they’d be bailed out – having seen countless other examples of the state doing so from the late 1980s onwards – and been less reckless.

The response to the 2008 crisis was the opposite of capitalism. It was the triumph of crony-capitalism!

If Trump wanted to be truly radical he’d cut banking regulations and at the same time issue a proclamation: you’re on your own now. If a bank goes to the wall… the state will let the free market run its course. No bailouts, free money or special deals.

The single greatest regulator would be the real and present danger of failure.

By the way, the banks becoming freer to create credit and fuel growth is exactly what Akhil Patel predicted would happen this year. That’s not because he’s a political pundit. He simply knows that it’d be consistent with the stage of the “Grand Cycle” we’re at. Understand the cycle and you understand the markets.

My question is: do you understand the cycle? If you don’t, go here now.

Free to save millions of lives

Let’s go back to the idea we’ve been discussing. What’s more important: freedom to, or freedom from?

I’ll give you another case study to help you figure out where you stand. This time, the argument in favour of maximum freedom is easier to understand.

We’ve spoken before about genetic editing technology like CRISPR, which enable scientists to engineer life on a genetic level in order to try and solve some of the world’s biggest problems. (If you want to know more… you should read The Exponentialist!)

Researchers believe CRISPR could ultimately be the answer to many medical problems, from creating new drugs that can “search and destroy” cancer to genetically immunising people against killer diseases.

I’ll go into just how many things it could accomplish another time. For now though, we just got another indication of how broad CRISPR’s applications are. Last week, scientists from a university in Shaanxi, China demonstrated that it is possible to genetically engineer cows that are resilient to bovine TB.

The implications of that could be huge. And not just for the cows. The development could ultimately mean the end of industrial scale antibiotics in cow feed (which contributes to the fact that many antibiotics are failing). If the animals are already immune, there’s no need to waste drugs on them.

It’s just one data point. But it has major implications. In the first order, this kind of technology – taken to its logical conclusion – could help us create healthier, more robust animals without industrial-scale drug use. I’d call that a good thing.

The second-order effects are even more profound. Researchers in both China and the US are already using CRISPR on humans – human genetic engineering could lead to a world where there’s no need for antibiotics at all because we’re able to give ourselves genetic immunity.

It’s not something that’s going to happen in the next decade – development and widespread adoption will take time. But in a generation… the benefits of CRISPR could be extensive.

Or will they?

Let’s go back to freedom. Should we give researchers the freedom to explore just how powerful CRISPR will be… or should we restrain them based on ethical concerns? And if so, whose ethical concerns?

Do we want the freedom to develop life-saving cures, treatments and solutions to the world’s biggest medical and social problems… or freedom from worrying about misuse of gene editing and the dangers it could pose?

How do we decide where the line is in order to stop overzealous use of the technology?

I’m still trying to work that out myself. What do you think? Reach me at nick@southbankresearch.com.

Until tomorrow,

Nick O’Connor
Associate Publisher, Capital & Conflict

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