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The Actuary The magazine of the Institute & Faculty of Actuaries

Book review: The Trouble with Markets by Roger Bootle

Roger Bootle in The Trouble with Markets is vexed. How do we keep the capitalist, market system alive – save it from itself without the need for huge government support to bail it out? The $10trn question of the day. Bootle is lucid and fascinating, although sometimes repetitive. Despite having been inside the system for thirty years working in the City, he is now on the attack, against . . . well a lot of people. Professional investors who he claims are producing a negative-sum gain – perhaps lots of money for themselves and their clients but overall he says there is no contribution to society as somebody else is always making a large loss; he says finance theory has developed the maths of “ad absurdum”; criticises companies for a lack of investment and warns ‘orthodox’ economists have been complacent by not believing in bubbles; the Germans and Chinese also, sorry, get the Boot, for having surpluses that are far too large, while other governments have not saved enough in the good times for the current storm.

Bootle starts with a brief overview of the crisis, and then assesses the strengths (distributing benefits across society) and weaknesses (monopolies, distortion, immorality etc.) of the free market system. Bootle’s assessment of how human nature interacts with markets is refreshing – he describes those investment bankers as obsessing with making money as a “condition” which “often seems to amount to a mental disorder.”

As a City veteran he has the authority to make such a statement. He argues the financial market has grown too self-serving and unwieldy and is not structured in true favour of investors and shareholders, with managers often short-termist and looking after their own careers, and also questions whether the rise of the financial markets in the eighties and the nineties contributed much at all to the clear rise in overall prosperity.

Bootle becomes a philosopher in the book and struggles with how tensions between the individual, society, corporations and governments can best be resolved. He is a fan of printing money and expanding monetary policy to get through the bad times, with inflation a greater threat than prolonged deflation. He feels the current demands of the Bank of England interest rate setters are too strenuous and prices should be controlled over five years rather than two.

The best line in the book is possibly the following: “The crude model of the market system has profit as the driver, but in practice, even if profit is the ultimate motivation, it is probably best not to aim for it directly. Rather like unhappiness, it is most likely to emerge as the by-product of pursuing something else for its own sake.” This might be critique of bankers’ angling their work so they can ensure the maximum payout for that year.

Bootle gives a detailed description of one of the greatest economic changes in recent modern times – the rise of China, its cheap exports which have kept inflation low in the Western world and its huge trade surplus. Asian economies have been saving ever since the Asian financial crisis.

Bootle argues the Chinese surplus is a problem because they have provided us with cheap goods today to give us a higher standard of living, but one day we will need to pay back the debt. In order to rebalance this and reduce the number of Chinese goods we buy, we would need the Chinese to raise demand within their country, hope they allow their exchange rate to change or restrict imports. He also criticises an indefinite surplus as “madness”. He asks whether the Chinese feel their economy is best supported by the success of exports. Although he concedes real household spending in China is already at 9-10%, but still feels a fiscal stimulus should of say 5% of GDP should be introduced to increase domestic demand, Without this, he feels the West will increasingly resort to protectionist measures hitting the Chinese where it hurts.

Life is even more complex though – the more the Chinese continue buying treasury bonds, the more likely the US will default on them or the value of the dollar will depreciate. Who would be an economist? Or a President, or Treasury Secretary? Bootle wants China to spend more on healthcare, education, issue shopping vouchers, give every resident a share in a state-owned asset management company. However, sometimes Bootle repeats himself about the need for China to change, and should devote more time for how others such as the US should reform their ways.

There is still more time to reflect on the possibility of a world currency, make some predictions on property prices and ends positively ‘we can do so much better.’ but we need to ’use markets where we can, not worship them.‘ Let’s hope a sense of humility, responsibility and long term objectivity can prevail, and each individual country realises it has a stake in ensuring the smooth running of the new financial world; the market cannot be left alone any longer, and surely the recent economic crisis would have taught everybody that lesson.

Andrew Tjaardstra is editor of Professional Broking magazine

An extract from Roger Bootle’s book The Trouble with Markets can be found at www.the-actuary.org.uk/870181 and a Q&A with the author can be found at http://www.the-actuary.org.uk/870189