Thu, Apr 18, 2013 - Page 9 News List

Financial sector reflects the nuances of the Thatcher inheritance

By Howard Davies

However, perhaps there is a deeper level on which we can see some connections between Thatcherism and the crisis. Her mantra, “You can’t buck the market,” did contribute to a mindset that led governments and central banks to be reluctant to question unsustainable market trends.

Thatcher was referring specifically to the dangers of fixed exchange rates, and can certainly not be counted as one of the principal architects of the so-called “efficient markets hypothesis.”

However, she was a strong believer in the expansion of private markets, and was instinctively suspicious of government intervention. As the late economist and European central banker Tommaso Padoa-Schioppa once put it, Thatcher “shifted the line dividing markets from government, enlarging the territory of the former at the expense of the latter.”

Padoa-Schioppa regarded this as a factor contributing to the US and UK authorities’ reluctance to step in at the right time before the 2007-2008 crisis.

Thatcher was certainly no friend of central bankers. She remained, to the end, hostile to central-bank independence, regularly rejecting the advice of her chancellors to allow the Bank of England to control interest rates. She feared that independent central banks would serve the interests of their banking “clients,” rather than those of the economy as a whole.

She was especially hostile to what she saw as the excessive independence of the European Central Bank (ECB). In her last speech in parliament as prime minister, she attacked the ECB as an institution “accountable to no one,” and drew attention to the political implications of centralizing monetary policy, accurately forecasting the dangers of a “democratic deficit,” which now worries many in Europe, and not just in Cyprus or Portugal.

So, in the financial arena, as elsewhere, there is light and shade in the Thatcher inheritance.

Her Alan Greenspan-like belief in the self-correcting features of financial markets, and her reverence for the integrity of the price mechanism, do not look as well-founded today as they did in the 1980s. So, in that sense, she can be seen as an enabler of the market hubris that prevailed until 2007.

On the other hand, it is difficult to imagine that a Thatcher government would have run a loose fiscal policy in the 2000s. And it is equally unlikely that, had she had her way, the eurozone would be the camel — a horse designed by committee — that it is today.

Howard Davies, former chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics, is a professor at Sciences Po in Paris.

Copyright: Project Syndicate

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