A price signal from the street...
A price signal from the street... Charles Mudede

The Financial Times article, "Debt relief for US consumers leaves investors flying blind," offers a view of the deepening economic crisis in the US from the perspective of those who want to put their money in places and activities that are profitable.

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Their problem is this: The "forbearance and payment deferral programmes that the government and lenders have put in place" are depriving "investors" (they are actually speculators) "of information about who is, and who is not, able to pay their debts." From this position, which is held by only a small number of people in our society, economic hardship has a very useful function. It provides a market a signal in the same way that prices do.

FT writes:

The federal bailout law permits mortgage holders up to 12 months of payment forbearance, without consequences for their credit score or for the lender’s delinquency rates. Other providers of consumer credit — credit card banks, auto lenders, and so on — are offering three months or more of payment deferrals. Consumers do not need to document that they are under duress; they just have to ask.

The result is that investors are left to look at lenders’ disclosures of forbearance take-up, and at loan volume trends, and make uneducated guesses about how these will translate into delinquencies and write-offs in the months and years to come.

The horror!

How is it even possible to write a nonsense (if not inhuman) article like this? Why did a "respectable" newspaper not do the right thing and kill this cruel story? The answer is that its central concern—the value of market transparency for the faithful transmission of actionable information—has been supported for decades, even centuries, by leading figures in academic economics. We can take it all the way back to Adam Smith's famous "invisible hand" idea, but for the sake of space, let's consider it from the Hayekian theory of market prices.


The Austrian-British pro-market economist Friedrich Hayek began his career in the 1920s doing actually interesting work on the business cycle—meaning, the market's movement from booms to busts.

The standard answer from the radical left was that the anomaly in the cycle was the falling rate of profit, which, for Marx, was connected with the growing displacement of workers with machines—the process is called the rising organic composition of capital. The philosopher Rosa Luxemburg argued in her masterpiece of 1913, Accumulation of Capital, that the anomaly was under-consumption, i.e. too much pricey stuff plus too many poor people. This view was adopted directly by the Polish socialist economist Michał Kalecki in 1933, and also the social democratic movement popularized by John Maynard Keynes in 1937.

Hayek blamed booms and busts on overconsumption, which resulted from weak or undisciplined monetary policy. If the state bank made money dear (high interest rates), and banks invested the money they actually had in their reserves, the business cycles would flat-line quickly.

Hayek, however, gave up on the serious work of the business cycle, and after the Second World War he shifted to a mystical preoccupation with market prices. What were they? And what exactly is a market? For Hayek, prices represented information held in the heads of market participants. Each knew one or two things that others did not. This information could be transmitted by prices, if the market was limpid.

You can see where this is going. All Hayek is saying with his theory of prices is exactly what Adam Smith's "invisible hand" said before him, and what Eugene Fama's "efficient market hypothesis" would say after him: The government should leave the market alone. Nothing good can ever come out of any kind of planning or intervention. State management of the capitalist economy disrupts flows, clouds matters, distorts actual prices, leaves "investors flying blind."

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And so the mysticism of the emergent properties of prices was nothing more than the recycling of concepts that appeared when the political power of industrialists surpassed that of the landowners in Victorian Great Britain. That moment is marked to the end on tariffs (or Corn Laws) on food from continental Europe and the US. These concepts are grouped beneath the French expression Laissez-faire.

The saddest thing about economics is it's not a science. If you study physics, you will learn that Newton's model of the universe is not as complete as Einstein's model. The latter improved upon the former. Nothing of the sort has happened in economics. There is instead a struggle between those who represent different classes in society.

One can argue that mainstream economics represents those at the top; heterodox (Keynsians) economics represents those in the middle; and Marxism represents those at the bottom. And so economics can only be about class-determined forms of morality. If your economic suffering is lessened by assistance, this is a bad thing according to the morality of those who want to place bets on the future course of the economy. These speculators have the right to always make money make more money.